AICPA CPA-TEST Online Practice Questions and Exam Preparation

AICPA CPA-TEST Online Questions & Answers

• Question 691:

  Investment managers develop portfolios of different investments to combine, offset, and thereby reduce overall risk. Not all risks can be eliminated by development of a portfolio. Risks that cannot be eliminated through a portfolio are called:

  A. Non-market risks.
  B. Unsystematic risks.
  C. Firm-specific risks.
  D. Systematic risks.
  D. Systematic risks.

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  Rule: Portfolio theory is concerned with construction of an investment portfolio that efficiently balances its risk with its rate of return. Risk is often reduced by diversification, the process of mixing investments of different or offsetting risks. The broad categories of risk are summarized in the following mnemonic to get us DUNS. Diversifiable Unsystematic (non market/firm-specific) Non-diversifiable Systematic (market) Choice "d" is correct. Non-diversifiable risk cannot be eliminated by the application of portfolio theory. Non- diversifiable risk is also referred to as systematic risk. (DUNS) Choice "a" is incorrect. Diversifiable risk can be eliminated through effective application of portfolio theory. Diversifiable risks are also termed non-market risk. Choice "b" is incorrect. Diversifiable risk can be eliminated through effective application of portfolio theory. Diversifiable risks are also termed unsystematic risk. Choice "c" is incorrect. Diversifiable risk can be eliminated through effective application of portfolio theory. Diversifiable risks are also termed firm-specific risk.

• Question 692:

  ABC outlet, a relatively new store, is a cafe that offers customers the opportunity to browse the Internet or play computer games at their tables while they drink coffee. The customer pays a fee based on the amount of time spent signed on to the computer. The store also sells books, tee shirts, and computer accessories. ABC has been paying all of its bills on the last day of the payment period, thus forfeiting all supplier discounts. Shown below are data on ABC's two major vendors, including average monthly purchases and credit terms.

  

  Should ABC use trade credit and continue paying at the end of the credit period?

  A. No, if the cost of alternative short-term financing is more.
  B. Yes, if the firm's weighted average cost of capital is equal to its weighted average trade credit.
  C. No, if the cost of alternative long-term financing is more.
  D. Yes, if the cost of alternative short-term financing is more.
  D. Yes, if the cost of alternative short-term financing is more.

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  Choice "d" is correct. Yes, ABC should use trade credit and continue paying at the end of the credit period, if the cost of alternative short-term financing is more. Choices "a", "b", and "c" are incorrect, per the above Explanation.

• Question 693:

  Capital assets include:

  A. A corporation's accounts receivable from the sale of its inventory.
  B. Seven-year MACRS property used in a corporation's trade or business.
  C. A manufacturing company's investment in U.S. Treasury bonds.
  D. A corporate real estate developer's unimproved land that is to be subdivided to build homes, which will be sold to customers.
  C. A manufacturing company's investment in U.S. Treasury bonds.

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  Choice "c" is correct. Investment assets of a taxpayer that are not inventory are capital assets. The manufacturing company would have capital assets including an investment in U.S. Treasury bonds. Choice "a" is incorrect. Accounts receivable generated from the sale of inventory are excluded from the statutory definition of capital assets. Choice "b" is incorrect. Depreciable property used in a trade or business is excluded from the statutory definition of capital assets. Choice "d" is incorrect. Land is usually a capital asset, but when it is effectively inventory, as when it is used by a developer to be subdivided, it is excluded from the statutory definition of capital assets.

• Question 694:

  The following information regarding inventory policy was assembled by the ABC Corporation. The company uses a 50-week year in all calculations.

  

  The reorder point is:

  A. 3,300 units.
  B. 2,100 units.
  C. 1,300 units.
  D. 5,200 units.
  B. 2,100 units.

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  Choice "b" is correct. A 50-week year would mean that 200 units are sold per week (10,000 units per year over 50 weeks). Therefore, 800 units are sold during the lead-time (4 weeks ?200 units per week). Required safety stock is 1,300 units, which means that no less than 1,300 units must be on hand at any time. The reorder point is then 2,100 units (1,300 safety stock plus the 800 units used during lead time). Choices "a", "c", and "d" are incorrect, per the above Explanation.

• Question 695:

  According to the FASB conceptual framework, predictive value is an ingredient of:

  

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

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  Choice "d" is correct. Yes - No. Predictive value is an ingredient of relevance but not of reliability. Memorize: Bud's relevance to "PFT." Bud's reliability to "VRN."

• Question 696:

  ABC Cleaning Services is a newly established janitorial firm, and the owner is deciding which type of checking account to open. ABC is planning to keep a $500 minimum balance in the account for emergencies and plans to write an average of 80 checks per month. The bank charges $10 per month plus a $0.10 per check charge for a standard business checking account with no minimum balance. ABC also has the option of a premium business checking account, which requires a $2,500 minimum balance but has no monthly fees or per check charges. If ABC's cost of funds is 10 percent, which account should ABC choose?

  A. Standard account, since the savings is $34 per year.
  B. Premium account, since the savings is $34 per year.
  C. Standard account, since the savings is $16 per year.
  D. Premium account, since the savings is $16 per year.
  D. Premium account, since the savings is $16 per year.

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  Explanation Explanation/Reference:Choice "d" is correct. The total cost for a standard account is: Cost per year for premium is cost of the extra amount ($2,000) that ABC must maintain in the account. Total per year premium (10% ?$2,000) = $200 The premium account will save $16. Choices "a", "b", and "c" are incorrect, per the above calculation.

• Question 697:

  An auditor is engaged to report on selected financial data that are included in a client-prepared document containing audited financial statements. Under these circumstances, the report on the selected data should:

  A. Be limited to data derived from the audited financial statements.
  B. Be distributed only to senior management and the board of directors.
  C. State that the presentation is a comprehensive basis of accounting other than GAAP.
  D. Indicate that the data are not fairly stated in all material respects.
  A. Be limited to data derived from the audited financial statements.

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  Choice "a" is correct. An auditor's report on selected information included in a client-prepared document containing audited financial statements should be limited to data derived from audited financial statements. Choice "b" is incorrect. It is not necessary to limit distribution of such a report. Choice "c" is incorrect. Selected financial data is not an "other comprehensive basis of accounting." Choice "d" is incorrect. The auditor indicates whether the selected financial data is fairly stated, in all material respects, in relation to the financial statements from which it has been derived.

• Question 698:

  In 1992, Anchor, Chain, and Hook created ABC Associates, a general partnership. The partners orally agreed that they would work full time for the partnership and would distribute profits based on their capital contributions. Anchor

  contributed $5,000; Chain $10,000; and Hook $15,000. For the year ended December 31, 1993, ABC Associates had profits of $60,000 that were distributed to the partners. During 1994, ABC Associates was operating at a loss. In September

  1994, the partnership dissolved.

  In October 1994, Hook contracted in writing with XYZ Co. to purchase a car for the partnership. Hook had previously purchased cars from XYZ Co. for use by ABC Associates partners. ABC Associates did not honor the contract with XYZ Co.

  and XYZ Co. sued the partnership and the individual partners.

  A. Anchor's capital account would be reduced by 1/3 of any 1994 losses.
  B. Hook's capital account would be reduced by 1/2 of any 1994 losses.
  B. Hook's capital account would be reduced by 1/2 of any 1994 losses.

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  Choice "b" is correct. If the partnership agreement is silent on how losses will be shared, they are shared in the same manner as profits. Here, the partners agreed to share profits on the basis of their contributions, which were in a ratio of 1:2:3 respectively for Anchor, Chain, and Hook. Thus, Anchor is liable for one-sixth of the loss, Chain is liable for 1/3 of the loss, and Hook is liable for 1/2 of the loss.

• Question 699:

  Which of the following procedures most likely would be considered a weakness in an entity's internal controls over payroll?

  A. A voucher for the amount of the payroll is prepared in the general accounting department based on the payroll department's payroll summary.
  B. Payroll checks are prepared by the payroll department and signed by the treasurer.
  C. The employee who distributes payroll checks returns unclaimed payroll checks to the payroll department.
  D. The personnel department sends employees' termination notices to the payroll department.
  C. The employee who distributes payroll checks returns unclaimed payroll checks to the payroll department.

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  Choice "c" is correct. If the employee who distributes payroll checks returns unclaimed checks to the payroll department, an unscrupulous payroll department employee might be able to set up a fictitious employee and convert the checks once they are returned to the payroll department. Unclaimed checks should be turned over to the cashier in the treasurer's department. Choices "a", "b", and "d" are incorrect. All of the following procedures are good controls over the payroll system: A. A voucher for the amount of the payroll is prepared in the general accounting department based on the payroll department's payroll summary. B. Payroll checks are prepared by the payroll department and signed by the treasurer. D. The personnel department sends employees' hire and termination notices to the payroll department.

• Question 700:

  Jeb, a member in A and B LLC, sold his interest in the LLC to Chris without obtaining the other members' consent. Absent an agreement to the contrary, Chris:

  A. May participate in the management of A and B. II. May receive Jeb's share of A and B's profits. III. Is not entitled to anything since Jeb did not obtain the other members' consent.
  B. I only.
  C. I and II only.
  D. II only.
  E. III only.
  C. I and II only.

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  Choice "c" is correct. Absent an agreement to the contrary, if a member in the LLC sells his interest in an LLC without obtaining the other members' consent, the assignee is only entitled to receive the assignor's share of profits. Choices "a", "b", and "d" are incorrect, because, absent an agreement to the contrary, although a member of an LLC is allowed to assign his interest in profits and losses, an assignee of a membership interest may not participate in the management of the LLC.