AICPA CPA-TEST Online Practice Questions and Exam Preparation

AICPA CPA-TEST Online Questions & Answers

• Question 631:

  A disadvantage of the net present value method of capital expenditure evaluation is that it:

  A. Is calculated using sensitivity analysis.
  B. Does not provide the true rate of return on investment.
  C. Is difficult to apply because it uses a trial and error approach.
  D. Is difficult to adapt for risk.
  B. Does not provide the true rate of return on investment.

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  Choice "b" is correct. The net present value (NPV) method of capital expenditure evaluation does not provide the true rate of return on investment. The NPV indicates whether or not an investment will earn the "hurdle rate" used in the NPV calculation. If the NPV is positive, the return on investment will exceed the hurdle rate. If the NPV is negative, the return on investment will be less than the hurdle rate. If the NPV is zero, the return on investment will be exactly equal to the hurdle rate. Choice "a" is incorrect. Sensitivity analysis is a "what if" technique that asks how a given organization will change if the original estimates used in the capital budgeting model are changed. Choice "c" is incorrect. NPV calculations do not use a trial and error approach. Choice "d" is incorrect. NPV method is not difficult to adapt for risk. To adapt for increased risk, a higher hurdle rate is used. To adapt for less risk, a lower hurdle rate is used.

• Question 632:

  With respect to price elasticity of demand:

  A. The shorter the time period, the more product demand becomes elastic because less choices are available.
  B. Product demand is more elastic when fewer substitutes are available.
  C. Product demand is more inelastic when more substitutes are available.
  D. Product demand is more elastic when more substitutes are available.
  D. Product demand is more elastic when more substitutes are available.

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  Explanation Explanation/Reference:Choice "d" is correct. Product demand is more elastic when more substitutes are available. Choice "a" is incorrect. The longer the time period, the more product demand becomes elastic because more choices are available. Choice "b" is incorrect. Product demand is more elastic when more substitutes are available, not fewer substitutes. Choice "c" is incorrect. Product demand is more inelastic when few substitutes are available.

• Question 633:

  Karen Parker wants to establish an environmental testing company that would specialize in evaluating the quality of water found in rivers and streams. However, Parker has discovered that she needs either certification or approval from five

  separate local and state government agencies before she can commence business. Also, the necessary equipment to begin would cost several million dollars. However, Parker believes that if she is able to obtain capital resources, she can

  gain market share from the two major competitors.

  The large capital outlay necessary for the equipment is an example of a(n):

  A. Entry barrier.
  B. Minimum efficiency scale.
  C. Created barrier.
  D. External cost.
  A. Entry barrier.

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  Choice "a" is correct. Large capital (money) requirements are the basic example of barriers to entry. A barrier to entry effectively prevents firms from entering the market to compete against existing firms. Choice "b" is incorrect. Minimum efficient scale is the output level at which long run average costs are minimized. Here, Parker has not even been able to enter the industry. Choice "c" is incorrect. A created barrier is made by firms already in the industry. Here, Parker's barrier was not created. Choice "d" is incorrect. An external cost is a cost that the company does not account for, but passes on to the detriment of society.

• Question 634:

  The limited liability of the shareholders of a closely-held corporation will most likely be disregarded if the shareholders:

  A. Lend money to the corporation.
  B. Are also corporate officers, directors, or employees.
  C. Undercapitalized the corporation when it was formed.
  D. Formed the corporation solely to limit their personal liability.
  C. Undercapitalized the corporation when it was formed.

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  Choice "c" is correct. The "corporate veil" can be pierced in situations in which the corporation was undercapitalized at formation, where it is the alter ego of the shareholders, or when it used to perpetrate a fraud. Choice "a" is incorrect. Shareholders may lend money to their corporation. This does not make such shareholders personally liable for the corporation's debt. Choice "b" is incorrect. Officers, directors, and employees are not personally liable for the corporation's debt, and there is no reason to change this role merely because such persons also own shares. Choice "d" is incorrect. The desire to limit liability is a valid reason to adopt the corporate form and will not, by itself, allow the "corporate veil" to be pierced.

• Question 635:

  ABC Inc. grants credit terms of 1/15, net 30 and projects gross sales for next year of $2,000,000. The credit manager estimates that 40 percent of their customers pay on the discount date, 40 percent on the net due date, and 20 percent pay 15 days after the net due date. Assuming uniform sales and a 360-day year, what is the projected day's sales outstanding (rounded to the nearest whole day)?

  A. 20 days.
  B. 24 days.
  C. 27 days.
  D. 30 days.
  C. 27 days.

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  Explanation Explanation/Reference:Choice "c" is correct. 27 days projected day's sales outstanding.

• Question 636:

  ABC Co. is investing in a machine with a 3-year life. The machine is expected to reduce annual cash operating costs by $30,000 in each of the first 2 years and by $20,000 in year 3. Present values of an annuity of $1 at 14% are:

  

  Using a 14% cost of capital, what is the present value of these future savings?

  A. $59,600
  B. $60,800
  C. $62,900
  D. $69,500
  C. $62,900

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  Choice "c" is correct. The facts of the question provide annuity factors, yet the question only provides one "annuity" - the $30,000 for the first two years. Therefore, to calculate the present value of the savings for years 1 and 2, the factor for the present value of an annuity of $1 for two periods (1.65) is used. To calculate the present value of the savings for year 3, the factor for the lump sum of a present value of $1 for three periods is required; however, it is not directly provided. The factor must be calculated as the difference between the factors for the present value of an annuity of $1 for three periods (2.32) and for two periods (1.65), or .67. Review your knowledge of how the annuity and lump sum factors work together, as follows:

• Question 637:

  Using microcomputers in auditing may affect the methods used to review the work of staff assistants because:

  A. The audit fieldwork standards for supervision may differ.
  B. Documenting the supervisory review may require assistance of consulting services personnel.
  C. Supervisory personnel may not have an understanding of the capabilities and limitations of microcomputers.
  D. Audit documentation may not contain readily observable details of calculations.
  D. Audit documentation may not contain readily observable details of calculations.

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  Choice "d" is correct. When using microcomputers in an auditing task, audit documentation may not contain readily observable details of calculations (e.g., present value calculations). In order to review assistants' work, a supervisor may have to examine the formulas used on the microcomputer rather than simply examining the audit documentation. Choice "a" is incorrect. The standards of fieldwork, specifically planning and supervision, would not change with the use of microcomputers on the audit. Choice "b" is incorrect. Consulting service personnel should not be necessary to document the supervisory review. Choice "c" is incorrect. The familiarity of supervisory personnel with the capabilities and limitations of microcomputers would not have an effect on the review process.

• Question 638:

  Which of the following actions may be taken by a corporation's board of directors without stockholder approval?

  A. Purchasing substantially all of the assets of another corporation.
  B. Selling substantially all of the corporation's assets.
  C. Dissolving the corporation.
  D. Amending the articles of incorporation.
  A. Purchasing substantially all of the assets of another corporation.

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  Choice "a" is correct. Purchasing substantially all the assets of another corporation does not require approval of the buyer's stockholders. Such a transaction would be relatively insignificant if a large corporation purchased substantially all the assets of a much smaller corporation. Choice "b" is incorrect. Selling substantially all of the corporation's assets is considered to be a fundamental change to the corporation's structure that requires approval by a majority of the shareholders following the board of directors' approval. Choice "c" is incorrect. Dissolving the corporation is considered to be a fundamental change to the corporation's structure that requires approval by a majority of the shareholders following the board of directors' approval. Choice "d" is incorrect. Amending the articles of incorporation is considered to be a fundamental change to the corporation's structure that requires approval by a majority of the shareholders following the board of directors' approval.

• Question 639:

  All of the following are alternative marketable securities suitable for investment, except:

  A. Eurodollars.
  B. Commercial paper.
  C. Bankers' acceptances.
  D. Convertible bonds.
  D. Convertible bonds.

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  Choice "d" is correct. Convertible bonds. Temporarily idle cash should be inverted in very liquid, low risk short-term investments only. U.S. T-bills are basically risk-free. Banker's acceptances and Eurodollars are only slightly more risky. Commercial paper, the short-term unsecured notes of the most credit-worthy large U.S. corporations is a little riskier, but still relatively low risk. However, convertible bonds are subject to default risk, liquidity risk, and maturity (interest rate) risk, and as such are inappropriate securities for short- term marketable security investment.

• Question 640:

  Which of the following would lead to a reduction in inflation?

  A. Increasing aggregate demand and increasing aggregate supply.
  B. Decreasing aggregate demand and increasing aggregate supply.
  C. Decreasing aggregate demand and decreasing aggregate supply.
  D. Increasing aggregate demand and decreasing aggregate supply.
  B. Decreasing aggregate demand and increasing aggregate supply.

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  Choice "b" is correct. Decreasing aggregate demand and increasing aggregate supply will reduce the inflationary pressures. Choice "a" is incorrect. Increasing aggregate demand causes the price level to rise. Choice "c" is incorrect. Decreasing aggregate supply causes the price level to rise. Choice "d" is incorrect. Both of these would cause the price level to rise.