AICPA CPA-TEST Online Practice Questions and Exam Preparation

AICPA CPA-TEST Online Questions & Answers

• Question 421:

  The rule limiting the allowability of passive activity losses and credits applies to:

  A. Partnerships.
  B. S corporations.
  C. Personal service corporations.
  D. Widely-held C corporations.
  C. Personal service corporations.

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  Choice "c" is correct. The rule limiting the allowability of passive activity losses and credits applies to personal service corporations. Choice "a" is incorrect. The passive activity limitations apply to the various partners in the partnership as opposed to the partnership itself. Choice "b" is incorrect. The passive activity limitations apply to the various shareholders in the S corporation as opposed to the corporation itself. Choice "d" is incorrect. The passive activity rules do not apply to widely-held C corporations.

• Question 422:

  The existence of audit risk is recognized by the statement in the auditor's standard report that the:

  A. Auditor is responsible for expressing an opinion on the financial statements, which are the responsibility of management.
  B. Financial statements are presented fairly, in all material respects, in conformity with GAAP.
  C. Audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.
  D. Auditor obtains reasonable assurance about whether the financial statements are free of material misstatement.
  D. Auditor obtains reasonable assurance about whether the financial statements are free of material misstatement.

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  Choice "d" is correct. The existence of audit risk is recognized by the statement in the standard report that the auditor obtained reasonable assurance about whether the financial statements are free of material misstatement. Audit risk is the risk that the auditor may unknowingly fail to appropriately modify the opinion on financial statements that are materially misstated. Choice "a" is incorrect. This statement defines the distinction between the responsibility of the auditor and that of management. Choice "b" is incorrect. The purpose of this section is to note that fair presentation is not necessarily impacted by immaterial errors. Choice "c" is incorrect. This statement explains the nature of an audit.

• Question 423:

  All of the following items are included in discounted cash flow analysis, except:

  A. Future operating cash savings.
  B. The current asset disposal price.
  C. The future asset depreciation expense.
  D. The tax effects of future asset depreciation.
  C. The future asset depreciation expense.

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  Explanation Explanation/Reference:Choice "c" is correct. The future asset depreciation expense is not included in discounted cash flow analysis. Choices "a", "b", and "d" are incorrect. All of these are included in discounted cash flow analysis: ?Future operating cash savings ?Current asset disposal price ?Tax effects of future asset depreciation ?Future asset disposal price

• Question 424:

  Which of the following statements concerning prospective financial statements is correct?

  A. Only a financial forecast would normally be appropriate for limited use.
  B. Only a financial projection would normally be appropriate for general use.
  C. Any type of prospective financial statements would normally be appropriate for limited use.
  D. Any type of prospective financial statements would normally be appropriate for general use.
  C. Any type of prospective financial statements would normally be appropriate for limited use.

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  Choice "c" is correct. Any type of prospective financial statements (financial forecasts and financial projections) would normally be appropriate for limited use. Choice "a" is incorrect. Both financial forecasts and financial projections are appropriate for limited use. Choice "b" is incorrect. Financial projections are appropriate for limited use only - not for general use. Choice "d" is incorrect. Normally financial projections are not appropriate for general use, but financial forecasts are.

• Question 425:

  The profitability index is a variation on which of the following capital budgeting models?

  A. Internal rate of return.
  B. Economic value-added.
  C. Net present value.
  D. Discounted payback.
  C. Net present value.

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  Choice "c" is correct. The profitability index is a variation on the net present value capital budgeting model. RULE: The profitability index is the ratio of the present value of net future cash inflows to the present value of the net initial investment. The profitability index is also referred to as the "excess present value index" or simply the "present value index." Companies hope that this ratio will be over 1.0, which means that the present value of the inflows is greater than the present value of the outflows. Choice "a" is incorrect. The profitability index is a companion computation to net present value, not internal rate of return, which measures percentage return. Choice "b" is incorrect. The profitability index is a companion computation to net present value, not economic value added. Choice "d" is incorrect. The profitability index is a companion computation to net present value, not the discounted payback method, which measures years to payback.

• Question 426:

  What is an auditor's responsibility for supplementary information which is outside the basic financial statements, but required by the FASB?

  A. The auditor has no responsibility for required supplementary information as long as it is outside the basic financial statements.
  B. The auditor's only responsibility for required supplementary information is to determine that such information has not been omitted.
  C. The auditor should apply certain limited procedures to the required supplementary information, and report deficiencies in, or omissions of, such information.
  D. The auditor should apply tests of details of transactions and balances to the required supplementary information, and report any material misstatements in such information.
  C. The auditor should apply certain limited procedures to the required supplementary information, and report deficiencies in, or omissions of, such information.

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  Choice "c" is correct. For additional supplementary information required by the FASB, the auditor should apply certain limited procedures to the information, and report deficiencies in or omissions of such information. Choice "a" is incorrect. Required supplementary information is considered an essential part of financial reporting, and therefore certain limited procedures should be applied by the auditor. Choice "b" is incorrect. For additional supplementary information required by the FASB, the auditor should apply certain limited procedures to the information, and report deficiencies in or omissions of such information. Choice "d" is incorrect. Certain limited procedures should be applied to required supplementary information, but this information need not be audited.

• Question 427:

  In assessing control risk for purchases, an auditor vouches a sample of entries in the voucher register to the supporting documents. Which assertion would this test of controls most likely support?

  A. Completeness.
  B. Occurrence.
  C. Accuracy.
  D. Rights and obligations.
  B. Occurrence.

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  Choice "b" is correct. Vouching to supporting documents tests the occurrence assertion. Choice "a" is incorrect. Tracing from supporting documentation to the voucher register would support the completeness assertion. Choice "c" is incorrect. The accuracy assertion would be tested by examining the details of the supporting documents. Choice "d" is incorrect. The rights and obligations assertion does not relate to transactions and events.

• Question 428:

  The average collection period for a firm measures the number of days:

  A. After a typical credit sale is made until the firm receives the payment.
  B. It takes a typical check to "clear" through the banking system.
  C. Before a typical account becomes delinquent.
  D. In the inventory cycle.
  A. After a typical credit sale is made until the firm receives the payment.

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  Choice "a" is correct. The average collection period for a firm measures the number of days after a typical credit sale is made until the firm receives the payment. Choice "b" is incorrect. "Float" measures the number of days it takes a typical check to "clear" through the banking system. Choice "c" is incorrect. "Credit period (term)" measures the number of days before a typical account becomes delinquent. Choice "d" is incorrect. "Average days sales in inventory" measures the number of days in the inventory cycle.

• Question 429:

  The benefits of debt financing over equity financing are likely to be highest in which of the following situations?

  A. High marginal tax rates and few noninterest tax benefits.
  B. Low marginal tax rates and few noninterest tax benefits.
  C. High marginal tax rates and many noninterest tax benefits.
  D. Low marginal tax rates and many noninterest tax benefits.
  A. High marginal tax rates and few noninterest tax benefits.

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  Choice "a" is correct. The benefits of debt financing over equity financing are likely to be highest if marginal tax rates are high (because interest on debt is deductible for tax purposes) and if there are few noninterest tax benefits (because there is little or no reason to depart from debt financing). Choice "b" is incorrect. The benefits of debt financing over equity financing are likely to be highest if marginal tax rates are high, not low (because interest on debt is deductible for tax purposes), and if there are few noninterest tax benefits. Choice "c" is incorrect. The benefits of debt financing over equity financing are likely to be highest if marginal tax rates are high (because interest on debt is deductible for tax purposes) and if there are few, not many, noninterest tax benefits. Choice "d" is incorrect. The benefits of debt financing over equity financing are likely to be highest if marginal tax rates are high, not low (because interest on debt is deductible for tax purposes), and if there are few, not many, noninterest tax benefits.

• Question 430:

  Locke and Vorst were general partners in a kitchen equipment business. On behalf of the partnership, Locke contracted to purchase 15 stoves from Gage. Unknown to Gage, Locke was not authorized by the partnership agreement to make such contracts. Vorst refused to allow the partnership to accept delivery of the stoves and Gage sought to enforce the contract. Gage will:

  A. Lose, because Locke's action was not authorized by the partnership agreement.
  B. Lose, because Locke was not an agent of the partnership.
  C. Win, because Locke had express authority to bind the partnership.
  D. Win, because Locke had apparent authority to bind the partnership.
  D. Win, because Locke had apparent authority to bind the partnership.

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  Choice "d" is correct. Every partner is an agent of the partnership and has apparent authority to bind the partnership to contracts that appear to carry on in the usual way the business of the partnership. It would be usual for a partner in a kitchen equipment business to have authority to purchase stoves. Thus, Gage will win because of Locke's apparent authority. Choice "a" is incorrect. Every partner is an agent for his partnership and has apparent authority to bind the partnership to contracts that appear to carry on in the usual way the business of the partnership. Choice "b" is incorrect. Every partner is an agent of the partnership. Choice "c" is incorrect. Locke did not have express authority to purchase the stoves. The facts state that Locke was not authorized to purchase the stoves and thus lacked express authority.