AICPA CPA-TEST Online Practice Questions and Exam Preparation

AICPA CPA-TEST Online Questions & Answers

• Question 731:

  When does competition not become an even stronger force impacting the profitability of a firm?

  A. Various firms use various types of strategic plans.
  B. Customers do not have strong brand preferences.
  C. The market is not growing fast.
  D. The costs of exiting the market are less than the costs of continuing to operate.
  D. The costs of exiting the market are less than the costs of continuing to operate.

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  Choice "d" is the proper choice, as it is not a factor that would cause market competitiveness to be even stronger. Choices "a", "b", and "c" are incorrect because they are all reasons that competition becomes an even stronger force that impacts the firm's profitability. Following are situations that would cause competition to be an even stronger force impacting the profitability of a firm: ?The market is not growing fast. ?There are several equal-sized firms in the market. ?Customers do not have strong brand preferences. ?The costs of exiting the market exceed the costs of continuing to operate. ?Some firms profit from making certain moves to increase market share. ?The various firms in the market use different types of strategic plans.

• Question 732:

  Considering the SCOR Model of supply chain operations, which of the following key management processes does managing accounts receivable and collections from customers fall into?

  A. Plan.
  B. Source.
  C. Make.
  D. Deliver.
  D. Deliver.

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  Choice "d" is correct. The "deliver" process encompasses all the activities of getting the finished product into the hands of the ultimate consumers to meet their planned demand. Managing accounts receivable and collections from customers falls into the "deliver" process. Choices "a", "b", and "c" are incorrect, per the above Explanation.

• Question 733:

  In order to increase production capacity, ABC Industries is considering replacing an existing production machine with a new technologically improved machine effective January 1, 1997. The following information is being considered by ABC

  Industries.

  ?The new machine would be purchased for $160,000 in cash. Shipping, installation, and testing would cost an additional $30,000.

  ?The new machine is expected to increase annual sales by 20,000 units at a sales price of $40 per unit. Incremental operating costs are comprised of $30 per unit in variable costs and total fixed costs of $40,000 per year.

  ?The investment in the new machine will require an immediate increase in working capital of $35,000. ?ABC uses straight-line depreciation for financial reporting and tax reporting purposes. The new machine has an estimated useful life of

  five years and zero salvage value. ?ABC is subject to a 40 percent corporate income tax rate.

  ABC uses the net present value method to analyze investments and will employ the following factors and rates.

  

  The overall discounted cash flow impact of ABC Industries' working capital investment for the new production machine would be:

  A. $(7,959)
  B. $(10,680)
  C. $(13,265)
  D. $(35,000)
  C. $(13,265)

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  Explanation Explanation/Reference:Choice "c" is correct. $(13,265) overall discounted cash flow impact of working capital investment.

• Question 734:

  Conner purchased 300 shares of Zinco stock for $30,000 in 1980. On May 23, 1994, Conner sold all the stock to his daughter Alice for $20,000, its then fair market value. Conner realized no other gain or loss during 1994. On July 26, 1994, Alice sold the 300 shares of Zinco for $25,000. What amount of the loss from the sale of Zinco stock can Conner deduct in 1994?

  A. $0
  B. $3,000
  C. $5,000
  D. $10,000
  A. $0

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  Choice "a" is correct. Even though Conner has a realized loss of $10,000 on this transaction he cannot deduct the loss since it was incurred in a transaction with his daughter, a related party. Choice "b" is incorrect. $3,000 is the limit on deductible net capital losses. However, Conner cannot deduct this loss, since it was incurred in a transaction with his daughter, a related party. Choice "c" is incorrect. Conner's realized loss on the sale is $10,000 ($20,000 proceeds less $30,000 basis). However, Conner cannot deduct this loss, since it was incurred in a transaction with his daughter, a related party. Choice "d" is incorrect. $10,000 is Conner's realized loss on the sale. However, Conner cannot deduct this loss, since it was incurred in a transaction with his daughter, a related party.

• Question 735:

  To address the problem of a recession, the Federal Reserve Bank most likely would take which of the following actions?

  A. Lower the discount rate it charges to banks for loans.
  B. Sell U.S. government bonds in open-market transactions.
  C. Increase the federal funds rate charged by banks when they borrow from one another.
  D. Increase the level of funds a bank is legally required to hold in reserve.
  A. Lower the discount rate it charges to banks for loans.

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  Choice "a" is correct. During a recession, real GDP has fallen and unemployment has risen. To stimulate the economy, the Fed can lower the discount rate. This causes the money supply to increase, which, in turn, causes aggregate demand to shift right. As a result, real GDP would increase and unemployment would decrease. Choice "b" is incorrect. If the Fed sells U.S. government bonds in the open market, the money supply will decrease. This causes aggregate demand to shift left. As a result, real GDP would decrease and unemployment would increase. Choice "c" is incorrect. Increasing the federal funds rate would increase interest rates. Higher interest rates cause the aggregate demand curve to shift left. As a result, real GDP would decrease and unemployment would increase. Choice "d" is incorrect. An increase in the required reserve ratio causes the money supply to decrease. This causes aggregate demand to shift left. As a result, real GDP would decrease and unemployment would increase.

• Question 736:

  The internal rate of return for a project can be determined:

  A. Only if the project cash flows are constant.
  B. By finding the discount rate that yields a net present value of zero for the project.
  C. By subtracting the firm's cost of capital from the project's profitability index.
  D. Only if the project's profitability index is greater than one.
  B. By finding the discount rate that yields a net present value of zero for the project.

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  Explanation Explanation/Reference:Choice "b" is correct. The internal rate of return (IRR) is the discount rate that produces a NPV of zero. Choice "a" is incorrect. IRR valuation does not require cash flows that are constant. Choice "c" is incorrect. Cost of capital is a percentage, profitability index is a ratio; this won't work. Choice "d" is incorrect. IRR can be determined even if the profitability index is less than 1.0. A profitability index of less than 1.0 means a negative NPV, which means the IRR is less than the discount rate being used.

• Question 737:

  An example of a carrying cost is:

  A. Disruption of production schedules.
  B. Quantity discounts lost.
  C. Handling costs.
  D. Obsolescence.
  D. Obsolescence.

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  Choice "d" is correct. Obsolescence is an example of a carrying cost. Choices "a", "b", and "c" are incorrect. Carrying cost is not: A. Disruption of production schedules. B. Quantity discounts lost. C. Handling costs.

• Question 738:

  Initially the nominal interest rate is 8 percent and the inflation rate is 6 percent. One year later, the nominal interest rate rises to 12 percent while the inflation rate rises to 10 percent. It follows that the real rate of interest:

  A. Has remained the same.
  B. Has fallen.
  C. Has risen.
  D. Insufficient information given for an answer.
  A. Has remained the same.

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  Choice "a" is correct. The real interest rate equals the nominal interest rate minus the inflation rate. Thus, the real interest rate in the first year is: real interest rate = 8 - 6 = 2 and the real interest rate in the next year is: real interest rate = 12 10 = 2.

• Question 739:

  Which payment(s) is(are) included in a recipient's gross income?

  A. Payment to a graduate assistant for a part-time teaching assignment at a university. Teaching is not a requirement toward obtaining the degree. II. A grant to a Ph.D. candidate for his participation in a university-sponsored research project for the benefit of the university.
  B. I only.
  C. II only.
  D. Both I and II.
  E. Neither I nor II.
  C. II only.

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  Choice "c" is correct. I. A payment to a student for a part-time teaching assignment is taxable income just as a payment for any other campus job would be. This is not a scholarship or fellowship. II. There is no exclusion in the tax law for amounts paid to a degree candidate for participation in university-sponsored research.

• Question 740:

  A company with $4.8 million in credit sales per year plans to relax its credit standards, projecting that this will increase credit sales by $720,000. The company's average collection period for new customers is expected to be 75 days; and the payment behavior of the existing customers is not expected to change. Variable costs are 80 percent of sales. The firm's opportunity cost is 20 percent before taxes. Assuming a 360-day year, what is the company's benefit (loss) on the planned change in credit terms?

  A. $28,800
  B. $144,000
  C. $120,000
  D. $126,000
  C. $120,000

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  Choice "c" is correct. $120,000 benefit on the planned change in credit standards. This question pertains to the economic benefit associated with a change in credit terms. The question tells us that the credit sales will increase by $720,000 if we relax our credit terms. We know variable costs are 80%, so we will earn $144,000 as a result of the expanded sales. The 20% contribution margin is equal to the 20% opportunity cost so there is no better investment of our resources for the expanded credit sales relative to its margin. What about the variable costs? We have $576,000 in variable costs that will be outstanding, pro rata, 75 days of the year. So the resources we will use to produce our sales is 75/360ths of $576,000, or $120,000 at any given time during the year. These $120,000 in resources could earn 20% annual return or $24,000. The $24,000 opportunity cost, compared to the $144,000 margin results in a $120,000 benefit in relaxing credit terms. Choices "a", "b", and "d" are incorrect, per the above calculation/ discussion.