AICPA CPA-TEST Online Practice Questions and Exam Preparation

AICPA CPA-TEST Online Questions & Answers

• Question 551:

  ABC Electric is contemplating new projects for the next year that will require $30,000,000 of new financing. In keeping with its capital structure, ABC plans to use debt and equity financing as follows:

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  Issue $10,000,000 of 20-year bonds at a price of 101.5, with a coupon of 10%, and flotation costs of 2.5% of par value.

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  Use internal funds generated from earnings of $20,000,000.

  The equity market is expected to earn 15%. U.S. treasury bonds currently are yielding 9%. The beta coefficient for ABC's common stock is estimated to be 8. ABC is subject to a 40% corporate income tax rate. ABC has a price/earnings ratio

  of 10, a constant dividend payout ratio of 40%, and an expected growth rate of 12%.

  An analysis of ABC's planned equity financing using Capital Asset Pricing Model (or Security Market Line) would incorporate only the:

  A. Expected market earnings, the current U.S. Treasury bond yield, and the beta coefficient.
  B. Expected market earnings and the price' earnings ratio.
  C. Current U.S. Treasury bond yield, the price/earnings ratio, and the beta coefficient.
  D. Current U.S. Treasury bond yield and the dividend payout ratio.
  A. Expected market earnings, the current U.S. Treasury bond yield, and the beta coefficient.

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  Choice "a" is correct. The capital asset pricing model formula is: R = RF + B (RM-RF) Where: R = Required return rate on equity RF = Risk free rate earned on U.S. treasury bonds. B = Beta coefficient RM = Expected market return (earnings). Choices "b", "c", and "d" are incorrect, per the above Explanation.

• Question 552:

  Clark bought Series EE U.S. Savings Bonds after 1989. Redemption proceeds will be used for payment of college tuition for Clark's dependent child. One of the conditions that must be met for tax exemption of accumulated interest on these bonds is that the:

  A. Purchaser of the bonds must be the sole owner of the bonds (or joint owner with his or her spouse).
  B. Bonds must be bought by a parent (or both parents) and put in the name of the dependent child.
  C. Bonds must be bought by the owner of the bonds before the owner reaches the age of 24.
  D. Bonds must be transferred to the college for redemption by the college rather than by the owner of the bonds.
  A. Purchaser of the bonds must be the sole owner of the bonds (or joint owner with his or her spouse).

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  Choice "a" is correct. One of the conditions that must be met for tax exemption of accumulated interest on the bonds is that the purchaser of the bonds must be the sole owner of the bonds (or joint owner with his or her spouse). Choice "b" is incorrect. The bonds must be bought and put in the name of the owner or co-owner, not in the name of the dependent child. Choice "c" is incorrect. The owner must be at least 24 years old before the bonds issue date. Choice "d" is incorrect. There is no requirement that the bonds must be transferred to the college for redemption by the college rather than by the owner of the bonds.

• Question 553:

  John and Mary were divorced in 1991. The divorce decree provides that John pay alimony of $10,000 per year, to be reduced by 20% on their child's 18th birthday. During 1992, John paid $7,000 directly to Mary and $3,000 to Spring College for Mary's tuition. What amount of these payments should be reported as income in Mary's 1992 income tax return?

  A. $5,600
  B. $8,000
  C. $8,600
  D. $10,000
  B. $8,000

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  Choice "b" is correct. Alimony would be income to Mary while child support would not. Funds qualify as child support only if 1) a specific amount is fixed or is contingent on the child's status (e.g., reaching a certain age), 2) it is paid solely for the support of minor children, and 3) it is payable by decree, instrument or agreement. The actual use of the funds is irrelevant to the issue. In this case, $2,000 (20% ?$10,000) qualifies as child support. The other $8,000 is alimony, which would be income to Mary. Choice "a" is incorrect. Take 80% of the $10,000 paid, not 80% of the $7,000 received by Mary. Choice "c" is incorrect. Only $8,000 would be alimony per the divorce decree (80% ?$10,000). Choice "d" is incorrect. The 20% reduction when the child turns 18 makes 20% of the $10,000 payment, or $2,000, child support, which is nontaxable to Mary.

• Question 554:

  Which of the following internal control activities is not usually performed in the vouchers payable department?

  A. Matching the vendor's invoice with the related receiving report.
  B. Approving vouchers for payment by having an authorized employee sign the vouchers.
  C. Indicating the asset and expense accounts to be debited.
  D. Accounting for unused prenumbered purchase orders and receiving reports.
  D. Accounting for unused prenumbered purchase orders and receiving reports.

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  Choice "d" is correct. Accounting for unused prenumbered purchase orders and receiving reports is an effective control, but it would not typically be performed in the vouchers payable department. Choice "a" is incorrect. Reconciling the vendor invoice with the related receiving report is typically performed by a vouchers payable clerk. Choice "b" is incorrect. The vouchers payable department is responsible for approving vouchers for payment. Choice "c" is incorrect. Indicating the asset and expense accounts to be debited is not an internal control procedure.

• Question 555:

  When companies use information technology (IT) extensively, evidence may be available only in electronic form. What is an auditor's best course of action in such situations?

  A. Assess the control risk as high.
  B. Use audit software to perform analytical procedures.
  C. Use generalized audit software to extract evidence from client databases.
  D. Perform limited tests of controls over electronic data.
  C. Use generalized audit software to extract evidence from client databases.

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  Choice "c" is correct. When companies use information technology (IT) extensively and evidence is available only in electronic form, generalized audit software packages generate the programs necessary to interrogate the files and extract and analyze the data. Choice "a" is incorrect. The use of information technology does not automatically imply that control risk is high. The auditor would need to evaluate the client's controls to make this determination. Choice "b" is incorrect. Although audit software might be used to perform analytical procedures, the data would first need to be extracted from the client's system. A generalized audit software package is the best way to do this. Choice "d" is incorrect. If information technology is used extensively, the auditor would likely perform more than limited tests of controls over electronic data.

• Question 556:

  Analytical procedures performed during an audit indicate that accounts receivable doubled since the end of the prior year. However, the allowance for doubtful accounts as a percentage of accounts receivable remained about the same. Which of the following client explanations would satisfy the auditor?

  A. A greater percentage of accounts receivable are listed in the "more than 120 days overdue" category than in the prior year.
  B. Internal control activities over the recording of cash receipts have been improved since the end of the prior year.
  C. The client opened a second retail outlet during the current year and its credit sales approximately equaled the older outlet.
  D. The client tightened its credit policy during the current year and sold considerably less merchandise to customers with poor credit ratings.
  C. The client opened a second retail outlet during the current year and its credit sales approximately equaled the older outlet.

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  Choice "c" is correct. If a second, similar retail outlet were opened, one would expect sales and accounts receivable to double. As long as the collection rates for the new outlet's receivables were expected to be similar to those of the original outlet, the allowance for doubtful accounts as a percentage of accounts receivable would remain the same. Choice "a" is incorrect. If more receivables are potentially uncollectible in the current year (as opposed to the prior year), the allowance for doubtful accounts as a percentage of receivables should increase to reflect the greater level of estimated bad debts. Choice "b" is incorrect. Improved control activities related to the recording of cash receipts might result in a decrease in accounts receivable in the current year as compared to the prior year, not an increase. In addition, improving such controls would not be likely to affect the allowance for doubtful accounts as a percentage of receivables. Choice "d" is incorrect. If the client sold less merchandise to customers with poor credit ratings, the allowance for doubtful accounts as a percentage of receivables should decrease to reflect the lower level of estimated bad debts.

• Question 557:

  Which one of the following most accurately describes the normal sequence of a business cycle?

  A. Expansion, contraction, trough, and peak.
  B. Expansion, peak, contraction, and trough.
  C. Peak, contraction, expansion, and trough.
  D. Trough, contraction, expansion, and peak.
  B. Expansion, peak, contraction, and trough.

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  Choice "b" is correct. The sequence of a typical business cycle includes an expansionary phase, a peak of economic activity, a contractionary phase, and a trough of economic activity. Choice "a" is incorrect. A peak does not follow a trough. Choice "c" is incorrect. A trough does not follow an expansion. Choice "d" is incorrect. A contraction does not follow a trough.

• Question 558:

  When a firm finances each asset with a financial instrument of the same approximate maturity as the life of the asset, it is applying:

  A. Working capital management.
  B. Return maximization.
  C. Financial leverage.
  D. Operating leverage.
  A. Working capital management.

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  Choice "a" is correct. Appropriate working capital management matches the maturity life of each asset with the length of the financial instrument used to finance that asset. Choice "b" is incorrect. Return maximization seeks to obtain the optimal return rate by asset utilization. It is not necessarily related to the maturity of the asset. Choice "c" is incorrect. Financial leverage is the amount of debt used to finance an asset. Higher leverage equals more debt. It is unrelated to the maturity life of an asset. Choice "d" is incorrect. Operating leverage is the degree that fixed costs are used in the production process. Operating leverage is unrelated to the methods used to finance assets.

• Question 559:

  Which of the following circumstances most likely would cause an auditor to suspect that material misstatements exist in a client's financial statements?

  A. The assumptions used in developing the prior year's accounting estimates have changed.
  B. Differences between reconciliations of control accounts and subsidiary records are not investigated.
  C. Negative confirmation requests yield fewer responses than in the prior year's audit.
  D. Management consults with another CPA firm about complex accounting matters.
  B. Differences between reconciliations of control accounts and subsidiary records are not investigated.

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  Choice "b" is correct. If control accounts in the general ledger do not reconcile to the subsidiary ledgers, there may be a problem in the way transactions were recorded and posted. Failure to investigate such differences implies that, if such a problem exists, it has not been identified and corrected. The auditor would therefore suspect that material misstatements exist in the client's financial statements. Choice "a" is incorrect. The assumptions used in developing accounting estimates generally do change as new information becomes available or as situations or conditions change. This would not necessarily indicate that a material misstatement exists. Choice "c" is incorrect. Since responses to negative confirmations are only received when there are discrepancies, a lower response rate likely would be indicative of fewer problems with accounts receivable. This corresponds to a reduced likelihood of material misstatement. Choice "d" is incorrect. Management's consultation with another CPA firm about complex accounting matters indicates proactive steps on the part of management to accurately address those matters. Material misstatements with respect to the complex accounting matters therefore would be less likely to exist.

• Question 560:

  An auditor's report that refers to the use of an accounting principle at variance with generally accepted accounting principles contains the words, "In our opinion, with the foregoing Explanation, the financial statements referred to above present fairly...." This is considered an:

  A. Adverse opinion.
  B. "Except for" qualified opinion.
  C. Unqualified opinion with an explanatory paragraph.
  D. Example of inappropriate reporting.
  D. Example of inappropriate reporting.

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  Choice "d" is correct. "In our opinion, with the foregoing Explanation, the FS referred to above present fairly" is an example of inappropriate reporting. When an auditor's report refers to the use of an accounting principle at variance with GAAP, the words, "in our opinion, except for the effects of the matters discussed in the preceding paragraph, the FS referred to above present fairly,..." should be used. Choice "a" is incorrect. An adverse opinion would include the phrase, "...do not present fairly..." Choice "b" is incorrect. A qualified opinion would include the phrase, "In our opinion, except for the [problem] discussed in the preceding paragraph,..." Choice "c" is incorrect. An unqualified opinion would not include the phrase "with the foregoing " in an explanatory paragraph.