AICPA CPA-TEST Online Practice Questions and Exam Preparation

AICPA CPA-TEST Online Questions & Answers

• Question 241:

  A company has unlimited capital funds to invest. The decision rule for the company to follow in order to maximize shareholders' wealth is to invest in all projects having a(n):

  A. Present value greater than zero.
  B. Net present value greater than zero.
  C. Internal rate of return greater than zero.
  D. Accounting rate of return greater than the hurdle rate used in capital budgeting analyses.
  B. Net present value greater than zero.

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  Choice "b" is correct. Rule: If the net present value is positive (greater than zero), a project should be accepted, unless there is a better project. If, however, a company has unlimited funds, all projects with a net present value greater than zero should be accepted in order to maximize shareholder wealth. Choice "a" is incorrect. Considering only present value greater than zero accounts for future net cash inflows, but it ignores cash outflows from the initial capital investment. Choice "c" is incorrect. Considering only internal rate of return greater than zero may result in the acceptance of a project with an internal rate of return less than the company's minimum desired rate of return. Choice "d" is incorrect. Considering only accounting rate of return greater than hurdle rate ignores the time value of money.

• Question 242:

  During a period of high inflation, which of the following groups in society would be most likely to gain?

  A. Those with a fixed income.
  B. Those with a fixed amount of debt.
  C. Those holding a large amount of money.
  D. Workers under contract without a cost of living adjustment.
  B. Those with a fixed amount of debt.

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  Choice "b" is correct. During a period of high inflation, those with a fixed amount of debt will repay their debt with inflated dollars and are thus likely to gain. Choice "a" is incorrect. Those with a fixed income will see the purchasing power of their income erode and are thus likely to be hurt. Choice "c" is incorrect. Those holding a large amount of money will see the purchasing power of their money erode and are thus likely to be hurt. Choice "d" is incorrect. Cost of living adjustments take inflation into account, thus these individuals are likely to be unaffected.

• Question 243:

  Which of the following is not a typical characteristic of a just-in-time (JIT) production environment?

  A. Lot sizes equal to one.
  B. Insignificant setup times and costs.
  C. Push-through system.
  D. Balanced and level workloads.
  C. Push-through system.

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  Choice "c" is correct. Just-in-time has the goal to minimize the level of inventory carried. Typical characteristics include lot sizes equal to one, insignificant set-up times and costs, and balanced and level workloads. In a just-in-time environment, the flow of goods is controlled by a "pull" approach, where an item is produced only when it is needed down the line, and not a "push-through" system. Choices "a", "b", and "d" are incorrect based on the above Explanation.

• Question 244:

  When markets are perfectly competitive, consumers:

  A. Have goods and services produced at the lowest cost in the long run.
  B. Must choose the brands they buy solely on the basis of informational advertising.
  C. Do not receive any consumer surplus unless producers choose to overproduce.
  D. Must search for the lowest price for the products they buy.
  A. Have goods and services produced at the lowest cost in the long run.

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  Choice "a" is correct. Since price is barely sufficient to give a firm a normal profit and stay in business, the consumer obtains the product at as low a price as is economically feasible. In addition, every firm is forced to produce at the most efficient output rate. Choice "b" is incorrect. Brand differentiation is present in monopolistic competition, not perfect competition. Choice "c" is incorrect. This is a far-out distractor. Choice "d" is incorrect. Also far out. Individual consumers are also price takers at the market equilibrium price.

• Question 245:

  An auditor ordinarily uses a working trial balance resembling the financial statements without footnotes, but containing columns for:

  A. Cash flow increases and decreases.
  B. Audit objectives and assertions.
  C. Reclassifications and adjustments.
  D. Reconciliations and tickmarks.
  C. Reclassifications and adjustments.

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  Choice "c" is correct. The working trial balance generally contains a column for adjustments and reclassifications. Choice "a" is incorrect. The working trial balance does not ordinarily contain information about cash flows. Choice "b" is incorrect. Audit objectives and assertions are contained in the audit plan, which is generally kept separate from the working trial balance. Choice "d" is incorrect. Reconciliations and tickmarks are found in other parts of the audit documentation.

• Question 246:

  Which of the following procedures does a CPA normally perform first in a review engagement in accordance with Statements on Standards for Accounting and Review Services (SSARS)?

  A. Inquiry regarding the client's principles and practices and the method of applying them.
  B. Inquiry concerning the effectiveness of the client's system of internal control.
  C. Inquiry to identify transactions between related parties and management.
  D. Inquiry of the client's professional advisors, including bankers, insurance agents, and consultants.
  A. Inquiry regarding the client's principles and practices and the method of applying them.

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  Choice "a" is correct. In performing a review engagement in accordance with SSARS, the accountant should inquire of management regarding the accounting principles and practices used, and the method of applying them. Choice "b" is incorrect. When performing a review under SSARS, the accountant is not required to make inquiries concerning the client's system of internal control. Choice "c" is incorrect. The accountant may inquire about the existence of related party transactions, but would likely make a more basic inquiry, about the client's accounting principles and practices, first. Choice "d" is incorrect. In performing a review engagement in accordance with SSARS, the accountant generally directs his/her inquiries to members of management, not to external parties.

• Question 247:

  Which of the following is an advantage of forming a limited liability company (LLC) as opposed to a partnership?

  A. The entity may avoid taxation.
  B. The entity may have any number of owners.
  C. The owner may participate in management while limiting personal liability.
  D. The entity may make disproportionate allocations and distributions to members.
  C. The owner may participate in management while limiting personal liability.

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  Choice "c" is correct. A member in a limited liability company has limited liability and the ability to manage, while a partner in a general partnership has full liability and the ability to manage. Choice "a" is incorrect. Generally, both entities' profits are taxable at the ownership level, but a Limited Liability Company may be taxed as an entity if it so elects. Choice "b" is incorrect. Both entities may have any number of owners. Choice "d" is incorrect. Both entities may make disproportionate allocations and distributions to their owners.

• Question 248:

  An auditor's analytical procedures most likely would be facilitated if the entity:

  A. Segregates obsolete inventory before the physical inventory count.
  B. Uses a standard cost system that produces variance reports.
  C. Corrects material weaknesses in internal control before the beginning of the audit.
  D. Develops its data from sources solely within the entity.
  B. Uses a standard cost system that produces variance reports.

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  Choice "b" is correct. An auditor's analytical procedures are facilitated when an entity uses a standard cost system with variance reports because the comparison of actual to budget will already have been performed. In addition, it is likely that management will already be aware of significant variations from budget and will be better able to address any questions the auditor may have. Choice "a" is incorrect. Segregation of obsolete inventory would not be an important factor in determining whether analytical procedures would be effective. Choice "c" is incorrect. Correction of internal control weaknesses prior to the beginning of the audit would not affect analytical procedures. Choice "d" is incorrect. Analytical procedures using data developed solely within the entity are not as reliable as analytical procedures using data developed externally.

• Question 249:

  Which of the following effects would a lockbox most likely provide for receivables management?

  A. Minimized collection float.
  B. Maximized collection float.
  C. Minimized disbursement float.
  D. Maximized disbursement float.
  A. Minimized collection float.

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  Choice "a" is correct. A lockbox system expedites cash inflows (minimizes collection float) by having a bank receive payments from a company's customers directly, via mailboxes to which the bank has access. Payments that arrive in these mailboxes are deposited into the company's account immediately. Choice "b" is incorrect. Lockboxes minimize rather than maximize collection float. Choices "c" and "d" are incorrect. Lockbox systems relate to collection rather than disbursement float.

• Question 250:

  Which of the following procedures would an auditor most likely perform in searching for unrecorded payables?

  A. Reconcile receiving reports with related cash payments made just prior to year-end.
  B. Contrast the ratio of accounts payable to purchases with the prior year's ratio.
  C. Vouch a sample of creditor balances to supporting invoices, receiving reports, and purchase orders.
  D. Compare cash payments occurring after the balance sheet date with the accounts payable trial balance.
  D. Compare cash payments occurring after the balance sheet date with the accounts payable trial balance.

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  Choice "d" is correct. When performing a search for unrecorded payables, an auditor most likely would compare cash payments occurring after the balance sheet date with the accounts payable trial balance to determine that disbursements that pertain to the prior year's business (year under audit) have been properly accrued. This procedure is commonly known as an "out-of-period-search." Choice "a" is incorrect. If the cash payment is made just prior to year-end, then the related liability would have been paid/relieved as of the year-end balance sheet date. Choice "b" is incorrect. An analytical review procedure that contrasts the ratio of accounts payable to purchases with the prior year's ratio would not provide the best evidence, since payable balances are not predictable and may vary at management's discretion. Choice "c" is incorrect. Vouching a sample of creditor balances already recorded does not provide any evidence concerning unrecorded payables.