AICPA CPA-TEST Online Practice Questions and Exam Preparation

AICPA CPA-TEST Online Questions & Answers

• Question 1231:

  Which of the following should be disclosed in a summary of significant accounting policies?

  A. Management's intention to maintain or vary the dividend payout ratio. II. Criteria for determining which investments are treated as cash equivalents. III. Composition of the sales order backlog by segment.
  B. I only.
  C. I and III.
  D. II only.
  E. II and III.
  C. I and III.

  ---

  Choice "c" is correct. Il only. The criteria for determining which investments are treated as "cash equivalents" is a method of accounting policies that needs to be disclosed in the summary of significant accounting policies. Choice "a" is incorrect. Management's intention to maintain or vary the "dividend payout ratio" is not an "accounting policy." Choices "b" and "d" are incorrect. Composition of the sales order backlog by segment is not an "accounting policy."

• Question 1232:

  When an accountant examines projected financial statements, the accountant's report should include a separate paragraph that:

  A. Describes the limitations on the usefulness of the presentation.
  B. Provides an of the differences between an examination and an audit.
  C. States that the accountant is responsible for events and circumstances up to one year after the report's date.
  D. Disclaims an opinion on whether the assumptions provide a reasonable basis for the projection.
  A. Describes the limitations on the usefulness of the presentation.

  ---

  Choice "a" is correct. The accountant's standard report on an examination of projected financial statements should include a caveat that the projected results may not be achieved. This is included in a separate paragraph that describes the limitations on the usefulness of the presentation: "...there will usually be differences between the forecasted and actual results... [that] may be material." Choice "b" is incorrect. The accountant's report on the examination of projected financial statements would not include an of the differences between an examination and an audit. Choice "c" is incorrect. A statement is included which specifically states that the accountant assumes no responsibility to update the report for events and circumstances occurring after the date of the report. Choice "d" is incorrect. The accountant does express an opinion that "the underlying assumptions provide a reasonable basis for management's forecast."

• Question 1233:

  An extraordinary item should be reported separately on the income statement as a component of income:

  

  A. Option A
  B. Option B
  C. Option C
  D. Option D
  B. Option B

  ---

  Choice "b" is correct, Yes - No. An extraordinary item should be reported separately on the income statement as a component of income: Yes - net of income taxes. No - after (not before) "discontinued operations of a segment of a business."

• Question 1234:

  ABC Industries, a vertically integrated producer and retailer of high end audio visual equipment has mapped out its overall business process as beginning with product development followed by product testing then raw materials purchasing then manufacturing and assembly, and, finally, sales and service. Finance staff at ABC Industries are trying to evaluate the efficiency and the effectiveness of each process and the relationship between each process. This evaluation is often referred to as:

  A. Process improvement.
  B. Continuous quality improvement.
  C. Value chain analysis.
  D. Benchmarking.
  C. Value chain analysis.

  ---

  Choice "c" is correct. The process of developing macro level flow charts of business processes that produce products or services and then identifying the value added by each process is referred to as value chain analysis. Choice "a" is incorrect. Process improvement represents the results of total quality management efforts. Choice "b" is incorrect. Continuous quality improvement represents an unswerving focus on customer satisfaction and quality, not necessarily the specific steps associated with value chain analysis. Choice "d" is incorrect. Benchmarking relates to determining best practices and, often, using those practices as standards.

• Question 1235:

  All of the following actions are valid tools that the Federal Reserve Bank uses to control the supply of money, except:

  A. Selling government securities.
  B. Changing the reserve ratio.
  C. Raising or lowering the discount rate.
  D. Printing money when the money supply appears low.
  D. Printing money when the money supply appears low.

  ---

  Choice "d" is correct. The treasury prints money. The Fed must increase the money supply through: 1. Federal open market committee (FOMC) purchasing or selling government securities, 2. Raising or lowering the discount rate, or 3. Changing the reserve ratio. Choices "a", "b", and "c" are incorrect because they are all valid tools to control the supply of money.

• Question 1236:

  Earnings per share data should be reported on the income statement for: A. Option A

  

  B. Option B

  C. Option C

  D. Option D

  Correct Answer. B
  B

  ---

  Choice "b" is correct. Yes - Yes. Both the "extraordinary items" and "income before extraordinary items" should be shown with an earnings per share number on the income statement.

• Question 1237:

  The following data pertain to ABC, Inc., for the year ended December 31, 20X4: What was ABC's rate of return on assets for 20X4?

  

  A. 5%
  B. 6%
  C. 20%
  D. 24%
  B. 6%

  ---

  Explanation Choice "b" is correct. Rate of return on assets is defined as the net income divided by the average total assets. In this case: $150,000 / [($2,000,000 + $3,000,000)/2] or [$150,000 / $2,500,000] = 6% rate of return. Choice "a" is incorrect. Average total assets ($2,500,000) should be used, not ending assets ($3,000,000). Choice "c" is incorrect. Net income ($150,000) and average total assets ($2,500,000) should be used, not net sales ($600,000) and ending assets ($3,000,000). Choice "d" is incorrect. Net income ($150,000) should be used, not net sales ($600,000).

• Question 1238:

  Management accountants are frequently asked to analyze various decision situations including the following.

  A. The cost of a special device that is necessary if a special order is accepted. II. The cost proposed annually for the plant service for the grounds at corporate headquarters. III. Joint production costs incurred, to be considered in a sell-at-split versus a process-further decision. IV. The costs associated with alternative uses of plant space, to be considered in a make/buy decision.
  B. The cost of obsolete inventory acquired several years ago, to be considered in a keep-versusdisposal decision. The cost described in situation II above is a:
  C. Prime cost.
  D. Sunk cost.
  E. Discretionary cost.
  F. Relevant cost.
  C. Prime cost.

  ---

  Choice "c" is correct. Discretionary cost. The proposed cost for plant service for the grounds at corporate headquarters is an example of an avoidable cost that is discretionary. Choice "a" is incorrect. Prime costs are direct materials and direct labor. Choice "b" is incorrect. Sunk costs are costs previously incurred and not relevant. Choice "d" is incorrect. Relevant costs are expected future costs that vary with the action taken.

• Question 1239:

  Which of the following would be used on a review engagement?

  A. Examination of board minutes.
  B. Confirmation of cash and accounts receivable.
  C. Comparison of current-year to prior-year account balances.
  D. Recalculation of depreciation expense.
  C. Comparison of current-year to prior-year account balances.

  ---

  Choice "c" is correct. A review consists of inquiries and analytical procedures. Comparison of current year and prior year account balances is an analytical procedure that would often be performed as part of a review. Choice "a" is incorrect. Examining board minutes is an audit procedure that would not typically be performed in a review. Choice "b" is incorrect. Confirmations of cash and accounts receivable are audit procedures that would not typically be performed in a review. Choice "d" is incorrect. Recalculation of expenses is an audit procedure that would not typically be performed in a review.

• Question 1240:

  An entity with a large volume of customer remittances by mail could most likely reduce the risk of employee misappropriation of cash by using:

  A. Employee fidelity bonds.
  B. Independently prepared mailroom prelists.
  C. Daily check summaries.
  D. A bank lockbox system.
  D. A bank lockbox system.

  ---

  Choice "d" is correct. An entity with a large volume of customer remittances by mail could most likely reduce the risk of employee misappropriation of cash by using a bank lockbox system. With this system the remittances are mailed directly to the bank where they are immediately deposited. The bank sends the remittances and deposit detail to the entity on a daily basis. Most larger companies use a lockbox system. Choice "a" is incorrect. Employee fidelity bonds may cover some of the losses suffered by misappropriation, but they do nothing to prevent the embezzlement in the first place. Choices "b" and "c" are incorrect. Independently prepared mailroom prelists and daily check summaries are good controls over cash receipts, but they are not as effective at reducing the risk of employee misappropriation as a lockbox system. With a lockbox system, employees have no access to cash receipts and therefore no opportunity to misappropriate cash.