AICPA CPA-TEST Online Practice Questions and Exam Preparation

AICPA CPA-TEST Online Questions & Answers

• Question 11:

  If a company is not presenting comparative financial statements, the correction of an error in the financial statements of a prior period should be reported, net of applicable income taxes, in the current:

  A. Retained earnings statement after net income but before dividends.
  B. Retained earnings statement as an adjustment of the opening balance.
  C. Income statement after income from continuing operations and before extraordinary items.
  D. Income statement after income from continuing operations and after extraordinary items.
  B. Retained earnings statement as an adjustment of the opening balance.

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  Choice "b" is correct. The correction of an error in the financial statements of a prior period should be reported, net of tax, in the current statement of retained earnings as an adjustment of the opening balance. Choice "a" is incorrect. The adjustment is before net income, not after net income. Choices "c" and "d" are incorrect. Corrections of errors of prior periods go to retained earnings and do not affect the income statement.

• Question 12:

  Which of the following is correct regarding the consumer price index (CPI) for measuring the estimated decrease in a company's buying power?

  A. The CPI is measured only once every 10 years.
  B. The products a company buys should differ from what a consumer buys.
  C. The CPI measures what consumers will pay for items.
  D. The CPI is skewed by foreign currency translations.
  B. The products a company buys should differ from what a consumer buys.

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  Choice "b" is correct. The consumer price index measures the costs of a market basket of specific goods commonly purchased by consumers. It measures consumer buying power and is not distorted by items generally bought by industry. Choice "a" is incorrect. The Consumer Price Index (CPI) represents monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services. Choice "c" is incorrect. The Consumer Price Index measures what has been paid for items, not what consumers will pay for items. Choice "d" is incorrect. The Consumer Price Index measures what has been paid by consumers in over eighty urban areas in the United States. The amounts paid are denominated in US dollars and would not be skewed by foreign currency translations.

• Question 13:

  When unaudited financial statements of a nonissuer are presented in comparative form with audited financial statements in the subsequent year, the unaudited financial statements should be clearly marked to indicate their status and:

  A. The report on the unaudited financial statements should be reissued. II. The report on the audited financial statements should include a separate paragraph describing the responsibility assumed for the unaudited financial statements.
  B. I only.
  C. II only.
  D. Both I and II.
  E. Either I or II.
  D. Both I and II.

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  Choice "d" is correct. When audited financial statements are presented in comparative form with unaudited financial statements from a prior year, the auditor should either reissue his or her report on the unaudited statements or include a separate paragraph in the current year report describing the responsibility assumed for the unaudited statements. Choices "a", "b", and "c" are incorrect, per above explanation.

• Question 14:

  In markets that are imperfectly competitive, such as monopoly and monopolistic competition, firms produce at an output where:

  A. Price equals marginal cost.
  B. Average costs are minimized.
  C. Price equals average cost.
  D. Marginal cost equals marginal revenue.
  D. Marginal cost equals marginal revenue.

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  Choice "d" is correct. Firms produce up to the point where marginal cost equals marginal revenue, whether the markets are perfectly competitive or imperfectly competitive. Choice "a" is incorrect. Very close, but it's actual marginal revenue, not price. It is assumed that revenue is not fixed on a unit basis. Choice "b" is incorrect. Beyond the point of average costs being minimized, marginal cost will rise. Still, it will make sense to increase production until marginal cost equals marginal revenue. Choice "c" is incorrect. Marginal revenue, not price, as revenue is assumed to vary on a per unit basis, and not average cost, since it will increase profits to expand production until marginal revenue equals marginal cost.

• Question 15:

  All of the following are inventory carrying costs, except:

  A. Insurance.
  B. Opportunity cost on inventory investment.
  C. Obsolescence and spoilage.
  D. Inspections.
  D. Inspections.

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  Choice "d" is correct. Inspections. Inspections are part of order costs, not carrying costs. Choices "a" and "c" are incorrect. Inventory carrying costs include all costs associated with warehousing (storing) inventory (e.g., storage, insurance, obsolescence, and spoilage associated with holding inventory). Choice "b" is incorrect. The economic cost of holding inventory includes the implicit (opportunity) cost of foregoing a return on the money invested in inventory.

• Question 16:

  Which paragraphs of an auditor's standard report on financial statements should refer to generally accepted auditing standards (GAAS) and generally accepted accounting principles (GAAP)?

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

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  Choice "c" is correct. The auditor states that the audit was conducted in accordance with GAAS in the scope paragraph. The auditor expresses an opinion on the financial statements' conformity with GAAP in the opinion paragraph. Choices "a", "b", and "d" are incorrect, per the above explanation.

• Question 17:

  Which one of the following statements about trade credit is correct? Trade credit is:

  A. Not an important source of financing for small firms.
  B. A source of long-term financing to the seller.
  C. Subject to risk of buyer default.
  D. Usually an inexpensive source of external financing.
  C. Subject to risk of buyer default.

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  Choice "c" is correct. Trade credit is subject to risk of buyer default. Choice "a" is incorrect. Trade credit is an important source of financing for small firms. Choice "b" is incorrect. Trade credit is not a source of long-term financing to the seller. Choice "d" is incorrect. Trade credit is usually an expensive source of external financing.

• Question 18:

  Under the Revised Uniform Partnership Act, which of the following have the right to inspect partnership books and records?

  A. Employees.
  B. Former partners.
  C. Inactive partners.
  D. Transferees of partners' interests.
  C. Inactive partners.

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  Choice "c" is correct. Every partner in a partnership - whether active or inactive - has the right to inspect the partnership's books and records. Choice "a" is incorrect. Only a partner has a right to inspect the partnership's books and records; an employee of the partnership has no such right. Choice "b" is incorrect. Only current partners have a right to inspect the partnership's books and records; former partners do not have such a right. Choice "d" is incorrect. Only partners have a right to inspect a partnership's books and records. A transferee of a partner's interest has only the partner's right to distributions.

• Question 19:

  What is the primary disadvantage of using return on investment (ROI) rather than residual income (RI) to evaluate the performance of investment center managers?

  A. ROI is a percentage, while RI is a dollar amount.
  B. ROI may lead to rejecting projects that yield positive cash flows.
  C. ROI does not necessarily reflect the company's cost of capital.
  D. ROI does not reflect all economic gains.
  B. ROI may lead to rejecting projects that yield positive cash flows.

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  Choice "b" is correct. The primary disadvantage of using return on investment (ROI) rather than residual income (RI) to evaluate the performance of investment center managers is that ROI may lead to rejecting projects that yield positive cash flows. Profitable investment center managers might be reluctant to invest in projects that might lower their ROI (especially if their bonuses are based only on their investment center's ROI), even though those projects might generate positive cash flows for the company as a whole. This characteristic is often known as the "disincentive to invest." Choice "a" is incorrect. The primary disadvantage of using return on investment (ROI) rather than residual income (RI) to evaluate the performance of investment center managers is that ROI may lead to rejecting projects that yield positive cash flows, not that ROI is a percentage and RI is a dollar amount. The fact that one is a percentage and one is a dollar amount might make them a little harder to interpret, but this interpretation difficulty would certainly not seem to be the "primary" disadvantage. Choice "c" is incorrect. The primary disadvantage of using return on investment (ROI) rather than residual income (RI) to evaluate the performance of investment center managers is that ROI may lead to rejecting projects that yield positive cash flows, not that ROI does not necessarily reflect the cost of capital. Choice "d" is incorrect. The primary disadvantage of using return on investment (ROI) rather than residual income (RI) to evaluate the performance of investment center managers is that ROI may lead to rejecting projects that yield positive cash flows, not that ROI does not reflect all economic gains.

• Question 20:

  Managers that anticipate greater return for greater risk are referred to as having what attitude toward risk?

  A. Risk indifferent.
  B. Risk averse.
  C. Risk seeking.
  D. Cautious.
  B. Risk averse.

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  Choice "b" is correct. Risk averse behavior describes managers who demand more return on an investment as risk increases. These managers expect to be compensated for increased risk. Choice "a" is incorrect. Risk indifferent behavior describes a manager who is neutral with regard to the return associated with a particular investment. Typically, the amount of a risk free rate of return associated with an investment of a given amount compared to a higher return associated with higher risk is viewed as having equal value. Choice "c" is incorrect. Risk seeking behavior describes managers who seek reduced return for higher risk. Choice "d" is incorrect. The term "cautious" is a distracter. Although caution is an attitude, it is not a technical term.