AICPA CPA-TEST Online Practice Questions and Exam Preparation

AICPA CPA-TEST Online Questions & Answers

• Question 151:

  Which of the following factors is inherent in a firm's operations if it utilizes only equity financing?

  A. Financial risk.
  B. Business risk.
  C. Interest rate risk.
  D. Marginal risk.
  B. Business risk.

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  Choice "b" is correct. Business risk represents the risk associated with the unique circumstances of a particular company, as they might affect the shareholder value of that company. If an entity purely uses its own cumulative earnings in capitalizing its operations, it is exposed to the risks of its own unique circumstances. Choice "a" is incorrect. Financial risk, also called default risk, relates to the exposure of lenders to the failure of borrowers to repay principal and interest on debt. An entity using its own cumulative earnings in capitalizing its operations is not exposed to default risk. Choice "c" is incorrect. A business that exclusively uses equity capitalization would not be exposed to the risk that the value of its financial instruments will change because of changes in interest rates. Choice "d" is incorrect. Incremental changes in risk would be limited if a firm exclusively used its own equity financing to capitalize its operations. Financial Statement and Business Implications of Liquid Asset Management

• Question 152:

  Which of the following is not true about accounting estimates?

  A. Accounting estimates measure the effects of past transactions or events that cannot be determined in a timely cost-effective manner.
  B. Accounting estimates measure the effects of the present status of an asset or liability.
  C. An accounting estimate is an approximation of an account pending the outcome of a future event.
  D. An accounting estimate is an approximation of past events that can be determined on a timely cost- effective basis.
  D. An accounting estimate is an approximation of past events that can be determined on a timely cost- effective basis.

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  Choice "d" is correct. An accounting estimate pertains to determining the approximation of past events that cannot be determined on a timely, cost-effective basis. If the effect of a past event can be determined on a timely, cost-effective basis, there would be no reason to make an estimate. Choices "a", "b", and "c" are incorrect. Accounting estimates may: A. Measure the effects of past transactions that cannot be determined in a timely cost-effective manner. B. Measure the effects of the present status of an asset or liability. C. Be used to approximate an account pending the outcome of a future event (e.g., uncollectible accounts receivable).

• Question 153:

  In 1992, hail damaged several of ABC Co.'s vans. Hailstorms had frequently inflicted similar damage to ABC's vans. Over the years, ABC had saved money by not buying hail insurance and either paying for repairs, or selling damaged vans and then replacing them. In 1992, the damaged vans were sold for less than their carrying amount. How should the hail damage cost be reported in ABC's 1992 financial statements?

  A. The actual 1992 hail damage loss as an extraordinary loss, net of income taxes.
  B. The actual 1992 hail damage loss in continuing operations, with no separate disclosure.
  C. The expected average hail damage loss in continuing operations, with no separate disclosure.
  D. The expected average hail damage loss in continuing operations, with separate disclosure.
  B. The actual 1992 hail damage loss in continuing operations, with no separate disclosure.

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  Choice "b" is correct. Actual hail damage must be reported. Since the hailstorms are frequent, the damage is not considered an extraordinary gain/loss. Thus, the damages would be shown in continuing operations. No separate disclosure is necessary since hail damage is a common occurrence. Choice "a" is incorrect. Hailstorms are not unusual and infrequent so the loss could not be classified as extraordinary. APB 30 para. 20 Choice "c" is incorrect. Actual hail damage must be reported. Estimated hail damage may be probable but is not estimable; so it should not be included in income calculations. Choice "d" is incorrect. Estimated hail damage may be probable but is not estimable; so it should not be included in income calculations.

• Question 154:

  Heather, Erika, and Shelby are members in ABC LLC. Heather works 40 hours per week and Erika and Shelby work 20 hours per week. Heather contributed $30,000 to the LLC and Erika and Shelby contributed $60,000 each. Erika and Shelby have each originated 45% of the LLC's business and Heather has originated the other 10%. Absent an agreement to the contrary, how will the LLC's $120,000 profits be divided among the members?

  

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

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  Rule: Absent an agreement to the contrary, the LLC's profits will be divided among the members in proportion to their contributions. Here, Heather's, Erika's and Shelby's contributions were $30,000, $60,000, and $60,000, respectively. Thus, the profits will be divided in a 1:2:2 ratio (20% of $120,000 to Heather; 40% of $120,000 to Erika; and $120,000 to Shelby). Choice "d" is correct. Heather Erika Shelby D. $24,000 $48,000 $48,000 Choices "a", "b", and "c" are incorrect, per the above rule.

• Question 155:

  Conner purchased 300 shares of Zinco stock for $30,000 in 1980. On May 23, 1994, Conner sold all the stock to his daughter Alice for $20,000, its then fair market value. Conner realized no other gain or loss during 1994. On July 26, 1994,

  Alice sold the 300 shares of Zinco for $25,000.

  What was Alice's recognized gain or loss on her sale?

  A. $0
  B. $5,000 long-term gain.
  C. $5,000 short-term loss.
  D. $5,000 long-term loss.
  A. $0

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  Choice "a" is correct. Alice has a realized gain of $5,000 on the transaction: $25,000 sales price less $20,000 purchase price. However, she can reduce the gain, but not below zero, by the amount of loss her father could not deduct on the sale to her. Thus, Alice can reduce her gain by up to $10,000, but not below zero. Here, the gain is $5,000, so it is reduced to zero. Conner should have sold the stock in the open market so that he could deduct the entire loss. Alice could then have purchased the stock in the open market. Choice "b" is incorrect. $5,000 is Alice's realized long-term gain on the sale. However, she can reduce the gain, but not below zero, by the amount of loss her father could not deduct on the sale to her. Choice "c" is incorrect. Alice has a realized gain of $5,000 on the sale. However, since she is related to Conner, her holding period includes his holding period. Therefore, her realized gain is long-term. In addition, she can reduce the gain, but not below zero, by the amount of loss her father could not deduct on the sale to her. Choice "d" is incorrect. Alice can reduce the gain by the amount of loss her father could not deduct on the sale to her. However, she cannot reduce the gain below zero.

• Question 156:

  Which of the following best describes the responsibility of the auditor to report significant deficiencies and material weaknesses in an attest engagement to examine the effectiveness of a nonissuer's internal control?

  A. The auditor must communicate both significant deficiencies and material weaknesses.
  B. The auditor must communicate material weaknesses, but need not disclose significant deficiencies.
  C. The auditor must communicate significant deficiencies, but need not separately identify material weaknesses.
  D. Neither significant deficiencies nor material weaknesses are required to be communicated.
  A. The auditor must communicate both significant deficiencies and material weaknesses.

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  Choice "a" is correct. In an attest engagement to examine the effectiveness of an entity's internal control, the auditor must communicate both significant deficiencies and material weaknesses to management and those charged with governance. Choice "b" is incorrect. The auditor is required to communicate significant deficiencies. Choices "c" and "d" are incorrect. Both significant deficiencies and material weaknesses are required to be communicated to management and those charged with governance.

• Question 157:

  While auditing the financial statements of a nonissuer, a CPA was requested to change the engagement to a review in accordance with Statements on Standards for Accounting and Review Services (SSARS) because of a scope limitation. If the CPA believes the client's request is reasonable, the CPA's review report should:

  A. Refer to the scope limitation that caused the change. II. Describe the auditing procedures that have already been applied.
  B. I only.
  C. II only.
  D. Both I and II.
  E. Neither I nor II.
  D. Both I and II.

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  Choice "d" is correct. If the CPA believes the client's request is reasonable, he/she must comply with the standards for a review and issue an appropriate report. The report should not refer to the original engagement, to any auditing procedures performed, or to the scope limitation. Choices "a", "b", and "c" are incorrect, based on the above .

• Question 158:

  On December 31, 1989, a building owned by ABC Corp. was totally destroyed by fire. The building had fire insurance coverage up to $500,000. Other pertinent information as of December 31, 1989 follows:

  

  During January 1990, before the 1989 financial statements were issued, ABC received insurance proceeds of $500,000. On what amount should ABC base the determination of its loss on involuntary conversion?

  A. $520,000
  B. $530,000
  C. $550,000
  D. $560,000
  B. $530,000

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  Explanation Explanation/Reference:Choice "b" is correct. $530,000 basis of involuntary converted building.

• Question 159:

  Formation of which of the following types of business does not require the filing of documents with the state?

  

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

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  Choice "c" is correct. A sole proprietorship can be formed without filing with the state. Formation of either a corporation or a limited partnership requires a filing. Choices "a", "b", and "d" are incorrect per theabove.

• Question 160:

  ABC, Inc. made some changes in operations and provided the following information:

  

  What percentage represents the return on investment for year 3?

  A. 28.57%
  B. 25%
  C. 20.31%
  D. 20%
  B. 25%

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  Explanation Choice "b" is correct. Return on investment is the ratio of operating income to average operating assets and is computed as follows based on Year 2 and Year 3 data: Choice "a" is incorrect per the above computation. Choice "c is incorrect. The year 3 return on investment is not computed by combining revenues, expenses, and assets for all year's presented. Choice "d" is incorrect. The year 3 return on investment is based on the average assets (($1,200,000 + $2,000,000)/2 = $1,600,000), not simply on the total assets at the end of year 3 ($2,000,000).