AICPA CPA-TEST Online Practice Questions and Exam Preparation

AICPA CPA-TEST Online Questions & Answers

• Question 791:

  As a company becomes more conservative with respect to working capital policy, it would tend to have a (n):

  A. Increase in the ratio of current liabilities to noncurrent liabilities.
  B. Decrease in the operating cycle.
  C. Decrease in the quick ratio.
  D. Increase in the ratio of current assets to noncurrent assets.
  D. Increase in the ratio of current assets to noncurrent assets.

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  Explanation Explanation/Reference:RULE: Working capital policy is deemed to be more conservative as an increasing portion of an organization's long-term assets, permanent current assets, and temporary current assets are funded by long-term financing. Choice "d" is correct. An increase in the ratio of current assets to non-current assets would be indicative of an increasingly conservative working capital policy. With no other information, an increase in current assets would indicate that a growing percentage of current assets are financed by non current liabilities and that, nominally, the absolute amount of working capital and the current ratio is improving. Choice "a" is incorrect. An increase in the ratio of current liabilities to noncurrent liabilities would indicate that an increasing portion of our assets are funded by current liabilities, a more aggressive approach to working capital management. Choice "b" is incorrect. A decrease in the operating cycle implies that the time to convert inventory into sales (receivables) and receivables into cash has decreased. Assuming no change in liabilities or sales, a decreased operating cycle infers declining current asset balances, greater funding of assets by current liabilities and a more aggressive rather than conservative working capital policy. Choice "c" is incorrect. A decrease in the quick ratio would indicate that either temporary current assets are decreasing (and are therefore increasingly funded by current liabilities, indicating a more aggressive working capital policy) or that current liabilities are increasing, signaling a decrease in the amount of noncurrent liabilities used to fund temporary current assets, a sign of an increasingly aggressive working capital policy.

• Question 792:

  In identifying matters for communication with those charged with governance, an auditor most likely would ask management whether:

  A. The turnover in the accounting department was unusually high.
  B. It consulted with another CPA firm about accounting matters.
  C. There were any subsequent events of which the auditor was unaware.
  D. It agreed with the auditor's assessed level of control risk.
  B. It consulted with another CPA firm about accounting matters.

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  Choice "b" is correct. The auditor is required to communicate to those charged with governance regarding certain matters, including management consultation with other auditors. Consequently, the auditor must ask management about this matter. Choice "a" is incorrect. Unusually high turnover in the accounting department is a negative factor in assessing control risk, but it is not a matter that needs to be communicated to those charged with governance. Choice "c" is incorrect. Inquiry of management concerning any subsequent events of which the auditor is unaware is a required audit procedure, which would also be confirmed as part of the management representation letter, but it is not a matter that needs to be communicated to those charged with governance. (They should already know!) Choice "d" is incorrect. The auditor alone has responsibility for judgments regarding the assessed level of control risk, and the auditor would not generally discuss this assessment with management.

• Question 793:

  Under properly designed internal control, the same employee most likely would match vendors' invoices with receiving reports and also:

  A. Post the detailed accounts payable records.
  B. Recompute the calculations on vendors' invoices.
  C. Reconcile the accounts payable ledger.
  D. Cancel vendors' invoices after payment.
  B. Recompute the calculations on vendors' invoices.

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  Choice "b" is correct. Matching vendor's invoices with receiving reports provides authorization for payment and is generally performed in the accounts payable department. Recalculation of vendor invoices is compatible with this authorization function. Choice "a" is incorrect. Posting the accounts payable records (recording) is incompatible with matching (authorization). Generally these functions would be performed by two different employees. Choice "c" is incorrect. This review procedure (independent verification) should be performed by someone independent of the employee who approved the invoice for payment. Choice "d" is incorrect. Payment and cancellation of vendor invoices should be performed by someone (generally the treasurer) other than the individual authorizing payment.

• Question 794:

  When an auditor tests a computerized accounting system, which of the following is true of the test data approach?

  A. Several transactions of each type must be tested.
  B. Test data are processed by the client's computer programs under the auditor's control.
  C. Test data must consist of all possible valid and invalid conditions.
  D. The program tested is different from the program used throughout the year by the client.
  B. Test data are processed by the client's computer programs under the auditor's control.

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  Choice "b" is correct. Test data consists of "dummy" data run through the client's computer system. The data should be processed under the auditor's control. Choice "a" is incorrect. Only transactions that the auditor wishes to test must be used. Choice "c" is incorrect. While the auditor will frequently use many valid and invalid conditions, it is not feasible to test every possible valid and invalid condition using a test data approach. Choice "d" is incorrect. The objective of the test data approach is to test programs that the client uses to process data. Using different programs defeats the primary purpose of the test.

• Question 795:

  Downs, Frey, and Vick formed the DFV general partnership to act as manufacturers' representatives. The partners agreed Downs would receive 40% of any partnership profits and Frey and Vick would each receive 30% of such profits. It was

  also agreed that the partnership would not terminate for five years. After the fourth year, the partners agreed to terminate the partnership. At that time, the partners' capital accounts were as follows: Downs, $20,000; Frey, $15,000; and Vick,

  $10,000. There also were undistributed losses of $30,000.

  Vick's share of the undistributed losses will be:

  A. $0
  B. $1,000
  C. $9,000
  D. $10,000
  C. $9,000

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  Rule: Where the partnership agreement is silent, losses are shared in the same proportion as profits. Choice "c" is correct. Vick was entitled to 30% of the profits and so will be responsible for 30% of the undistributed $30,000 loss, or $9,000. Choices "a", "b", and "d" are incorrect, per the above rule.

• Question 796:

  An American importer expects to pay a British supplier 500,000 British pounds in three months. Which of the following hedges is best for the importer to fix the price in dollars?

  A. Buying British pound call options.
  B. Buying British pound put options.
  C. Selling British pound put options.
  D. Selling British pound call options.
  A. Buying British pound call options.

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  Choice "a" is correct. To fix a price in dollars to buy British pounds, British pound call options should be purchased. Call options would allow, but not require, the purchaser of the call to acquire the currency (British pounds) for a specified price at or before a specified time in the future. If the price goes down, the purchaser (the importer) would exercise the options; if not, the purchaser (importer) would buy the British pounds in the market and let the options expire. British pound futures could also be used, but that was not one of the choices listed. Choice "b" is incorrect. Buying British pound put options would allow, but not require, the purchaser of the put to sell the currency for a specified price at a specified time in the future. Since the importer needs British pounds, buying put options would not work. The importer needs to end up with British pounds. Choice "c" is incorrect. Selling British pound put options would not work. The importer needs to end up with British pounds. Selling put options could work, but the option would be exercised, or not, by the purchaser and not by the importer. If the options were not exercised, the importer could end up with nothing (other than the option premium). Choice "d" is incorrect. Selling British pound call options would not work. The importer needs to end up with British pounds; if call options are sold, the other party can exercise the options or let them expire, and if the options were exercised, the importer would have to supply the British pounds. This answer is backwards.

• Question 797:

  The following items were among those that were reported on ABC Co.'s income statement for the year ended December 31, 1989:

  

  The office space is used equally by ABC's sales and accounting departments. What amount of the above listed items should be classified as general and administrative expenses in ABC's multiple-step income statement?

  A. $290,000
  B. $325,000
  C. $410,000
  D. $500,000
  A. $290,000

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  Explanation Explanation/Reference: Note: 1/2 of the office space of $240,000 was used by the sales department, which should be allocated to "selling expenses" (not general and administrative). Choice "a" is correct. $290,000.

• Question 798:

  An auditor is reporting on condensed financial statements for an annual period that are derived from the audited financial statements of a publicly-held entity. The auditor's opinion should indicate whether the information in the condensed financial statements is fairly stated in all material respects:

  A. In conformity with accounting principles generally accepted in the United States of America.
  B. In relation to the complete financial statements.
  C. In conformity with another comprehensive basis of accounting.
  D. In relation to supplementary filings under federal security statutes.
  B. In relation to the complete financial statements.

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  Choice "b" is correct. The auditor should report whether the information in the condensed financial statements is fairly stated, in all material respects, in relation to the financial statements from which it has been derived. Choice "a" is incorrect. Condensed financial statements do not include all of the disclosures required by GAAP, and therefore would not typically be presented in conformity with GAAP. Choice "c" is incorrect. Condensed financial statements are presented in less detail than complete financial statements, but the fact pattern gives no indication that any comprehensive basis of accounting other than GAAP has been used. Choice "d" is incorrect. The auditor should report whether the information in the condensed financial statements is fairly stated, in all material respects, in relation to the financial statements from which it has been derived, not in relation to supplementary filings under federal security statutes.

• Question 799:

  White, Grey, and Fox formed a limited partnership. White is the general partner and Grey and Fox are the limited partners. Each agreed to contribute $200,000. Grey and Fox each contributed $200,000 in cash while White contributed $150,000 in cash and $50,000 worth of services already rendered. After two years, the partnership is insolvent. The fair market value of the assets of the partnership is $150,000 and the liabilities total $275,000. The partners have made no withdrawals. If Fox is insolvent and White and Grey each has a net worth in excess of $300,000, what is White's maximum potential liability in the event of a dissolution of the partnership?

  A. $62,500
  B. $112,500
  C. $125,000
  D. $175,000
  C. $125,000

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  Rule: The liability of a limited partner for partnership debts is limited to the extent of the capital, which he has contributed or has agreed to contribute. A general partner, however, is liable for all partnership debts and liabilities. Choice "c" is correct. In this case, both Grey and Fox are limited partners and, thus, their respective maximum liability for partnership debts may not exceed their contributions ($200,000 each). Because White is a general partner, however, he will be personally liable for the excess of any debt remaining after assets have been applied upon a dissolution. Therefore, White will be liable for $125,000 (the difference between the fair market value of assets ($150,000) and partnership liabilities ($275,000) at dissolution). Choices "a", "b", and "d" are incorrect, per the above rule.

• Question 800:

  In which of the following situations should a company report a prior-period adjustment?

  A. A change in the estimated useful lives of fixed assets purchased in prior years.
  B. The correction of a mathematical error in the calculation of prior years' depreciation.
  C. A switch from the straight-line to double-declining balance method of depreciation.
  D. The scrapping of an asset prior to the end of its expected useful life.
  B. The correction of a mathematical error in the calculation of prior years' depreciation.

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  Choice "b" is correct. Prior period adjustments consist of: corrections of errors in the financial statements of prior periods, retroactive restatements required by new GAAP pronouncements, and changes from a non- GAAP method of accounting to a GAAP method of accounting (which are corrections of errors). Choice "a" is incorrect. This change is a change in accounting estimate. Choice "c" is incorrect. This change is a change for one GAAP method of depreciation to another GAAP method of depreciation. Under SFAS No. 154, it is treated as a change in accounting estimate effected by a change in accounting principle and is handled prospectively, and not as a prior-period adjustment. Choice "d" is incorrect. This is a business activity ordinary in nature.