AICPA CPA-TEST Online Practice Questions and Exam Preparation

AICPA CPA-TEST Online Questions & Answers

• Question 801:

  An independent auditor asked a client's internal auditor to assist in preparing a standard financial institution confirmation request for a payroll account that had been closed during the year under audit. After the internal auditor prepared the form, the controller signed it and mailed it to the bank. What was the major flaw in this procedure?

  A. The internal auditor did not sign the form.
  B. The form was mailed by the controller.
  C. The form was prepared by the internal auditor.
  D. The account was closed, so the balance was zero.
  B. The form was mailed by the controller.

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  Choice "b" is correct. The auditor should control the mailing of independent confirmations. Choice "a" is incorrect. It is appropriate for a member of management, such as the controller, to sign the confirmation request. Choice "c" is incorrect. It is acceptable for an internal auditor to provide direct assistance to the external auditor, such as by preparing confirmation forms. Choice "d" is incorrect. Confirmations may be sent to accounts that show a zero balance, to test for understatement errors or to obtain information about loans.

• Question 802:

  Which of the following is incorrect with regard to value chain analysis?

  A. Value chain analysis must be used in conjunction with the strategic plan of the organization.
  B. Value chain analysis is critical to assessing the competitive advantage of a firm.
  C. Value chain analysis is a strategic tool that assists the firm in determining how important the perceived value of the buyers is with respect to the market the firm operates in.
  D. The value chain starts with the firm and goes all the way through to the end users of the product.
  D. The value chain starts with the firm and goes all the way through to the end users of the product.

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  Choice "d" is an incorrect statement and the correct choice. The best description of a value chain is that value starts with the suppliers who provide the raw materials for a production process, continues with the firm and its strategic plan, continues with the value created by the customers, and then ends with the disposal and recycling of the materials. Choices "a", "b", and "c" are incorrect, as all are correct statements with regard to value chain analysis.

• Question 803:

  Of the following items, the one item that would not be considered in evaluating the adequacy of the budgeted annual operating income for a company is:

  A. Return on assets.
  B. Long-range profit objectives.
  C. Industry average for earnings on sales.
  D. Internal rate of return.
  D. Internal rate of return.

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  Choice "d" is correct. In evaluating the adequacy of the budgeted annual operating income, you would not use the internal rate of return calculation. The internal rate of return is used for capital budgeting. Choices "a", "b", and "c" are incorrect. Return on assets, long range profit objectives, industry average for earnings on sales, and earnings per share [not mentioned as an option] are all measures for evaluating the adequacy of the budgeted annual operating income.

• Question 804:

  ABC, Inc. is interested in measuring its overall cost of capital and has gathered the following data. Under the terms described below, the company can sell unlimited amounts of all instruments.

  ?ABC can raise cash by selling $1,000, 8 percent, 20-year bonds with annual interest payments. In selling the issue, an average premium of $30 per bond would be received, and the firm must pay floatation costs of $30 per bond. The after-tax cost of funds is estimated to be 4.8 percent. ?ABC can sell 8 percent preferred stock at par value, $105 per share. The cost of issuing and selling the preferred stock is expected to be $5 per share. ?ABC' common stock is currently selling for $100 per share. The firm expects to pay cash dividends of $7 per share next year, and the dividends are expected to remain constant. The stock will have to be underpriced by $3 per share, and floatation costs are expected to amount to $5 per share. ?ABC expects to have available $100,000 of retained earnings in the coming year; once these retained earnings are exhausted, the firm will use new common stock as the form of common stock equity financing. ?ABC' preferred capital structure is: Long-term debt 30% Preferred stock 20 Common stock 50

  If ABC, Inc. needs a total of $1,000,000, the firm's weighted-average cost of capital would be:

  A. 6.8 percent.
  B. 4.8 percent.
  C. 6.5 percent.
  D. 9.1 percent.
  A. 6.8 percent.

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  Choice "a" is correct. 6.8%. This question pertains to the manner in which changes in the required amount of capital will impact the weighted average cost of capital governed by the target capital structure. The rates are given, and you must derive the weights. The company needs a total of $1,000,000. The total Retained Earnings is $100,000, which will only represent 10% of the total amount needed. In J92-1.01, we computed the cost of new common share issues at 7.6%, and we know that we can issue unlimited amounts of each security. Based on these assumptions, we know that the target capital structure will remain unchanged but that the components of common equity will be priced differently because Retained Earnings only equals $100/$1,000 (or 10%). If the target capital structure calls for 50% common stock and only 10% is available from retained earnings, then 40% must come from the issuance of new common shares. The weighted average is computed as follows: Choices "b", "c", and "d" are incorrect, per the above calculation.

• Question 805:

  The ABC Corporation is considering the acquisition of a new machine. The machine can be purchased for $90,000; it will cost $6,000 to transport to ABC's plant and $9,000 to install. It is estimated that the machine will last 10 years, and it is expected to have an estimated salvage value of $5,000. Over its 10-year life, the machine is expected to produce 2,000 units per year with a selling price of $500 and combined material and labor costs of $450 per unit. Federal tax regulations permit machines of this type to be depreciated using the straight-line method over 5 years with no estimated salvage value. ABC has a marginal tax rate of 40 percent.

  What is the net cash flow for the tenth year of the project that ABC Corporation should use in a capital budgeting analysis?

  A. $81,000
  B. $68,400
  C. $63,000
  D. $60,000
  C. $63,000

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  Choice "c" is correct. $63,000 net cash flow for the tenth year. Alternate Computation: In year 10, ABC will generate a $100,000 profit from the incremental sales (2000 units ?($500 - $450)). This profit will be taxed at 40%, so the net after-tax increase in cash flow is $60,000. The machine is fully depreciated in year 10 because it was depreciated over a 5-year life. The tax basis of the machine is zero on the date ABC receives a $5,000 salvage value for the machine. The gain on the machine of $5,000 ($5,000 SV - $0 Basis) is taxed at 40%, or $2,000 in total tax outflow for the gain, so the net inflows on the salvage is $3,000. Therefore, the total after-tax cash flows in year 10 for the new machine is $60,000 + $3,000 = $63,000.

• Question 806:

  All of the following are the rates used in net present value analysis, except for the:

  A. Cost of capital.
  B. Hurdle rate.
  C. Discount rate.
  D. Accounting rate of return.
  D. Accounting rate of return.

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  Choice "d" is correct. The accounting rate of return is a capital budgeting technique, not a rate. Choices "a", "b", and "c" are incorrect. All of these are rates used in net present value analysis: ?Cost of capital ?Hurdle rate ?Discount rate ?Required rate of return Cost of capital is the cost of borrowing. The hurdle rate, the discount rate, and the required rate of return are synonymous terms for an arbitrary rate set by management.

• Question 807:

  The articles of organization for a limited liability company must contain everything, except the following:

  A. The name of the entity that includes some indication it is a LLC.
  B. The name and address of the registered agent.
  C. Number of shares authorized and issued.
  D. If the company is to be manager managed, a statement to that effect.
  C. Number of shares authorized and issued.

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  Choice "c" is correct. Limited liability companies do not issue "shares" held by shareholders like in a corporation. Instead, members (the owners) are said to have "interests" in the LLC. Choices "a", "b", and "d" are incorrect. These are all required to be included in the articles of organization.

• Question 808:

  There are multiple active markets for a financial asset with different observable market prices:

  

  There is no principal market for the financial asset. What is the fair value of the asset?

  A. $71
  B. $72
  C. $74
  D. $76
  C. $74

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  Choice "c" is correct. When there is no principal market, the price in the most advantageous market is the fair value measurement. Although transaction costs are not included in the fair value measurement, they are used to determine the most advantageous market, as follows: Market A: Net Price = Quoted Price - Transaction Costs = $76 - 5 = $71 Market B: Net Price = Quoted Price - Transaction Costs = $74 - 2 = $72 Because the net price in Market B is higher than the net price in Market A, Market B is the most advantageous market and the quoted price in Market B ($74) is the fair value of the asset. Choice "a" is incorrect. This is the net price in Market A. Fair value does not include transaction costs. Choice "b" is incorrect. This is the net price in Market B. This net price indicates that Market B is the most advantageous market, but the net price is not the fair value because fair value does not include transaction costs. Choice "d" is incorrect. If Market A were the principal market for the asset, then this would be the fair value of the asset. However, because there is no principal market, the price in the most advantageous market (Market B) is the price of the asset.

• Question 809:

  When applying value chain analysis, a firm asks it accounting department to perform an analysis of the sources of profits and costs of activities that exist within the firm. The firm is performing which form of value chain analysis?

  A. Internal differentiation analysis.
  B. Internal costs analysis.
  C. Vertical linkage analysis.
  D. None of the above.
  B. Internal costs analysis.

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  Choice "b" is correct. Internal costs analysis includes analyzing the internal value-creating ability of a firm, so the sources of profit and costs of the internal activities of the firm must be analyzed. Choices "a", "c", and "d" are incorrect, per the above Explanation.

• Question 810:

  ABC Industries limits its operations to exports to foreign countries. What can be said about ABC's exposures to exchange rate risk?

  A. ABC is subject to potential transaction, economic and translation exposures to exchange rate risk.
  B. ABC is subject to potential transaction and economic exposures to exchange rate risk.
  C. ABC is subject to economic and translation exposures to exchange rate risk.
  D. ABC is subject transaction and translation exposures to exchange rate risk.
  B. ABC is subject to potential transaction and economic exposures to exchange rate risk.

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  Choice "b" is correct. ABC is subject to transaction risks associated with settlement of export transactions and is subject to economic risks associated with the satisfaction of domestic expenses denominated in domestic currencies with imported revenues denominated in a foreign currency. No translation exposure exists since there is no foreign investment or subsidiary. Choices "a", "c", and "d" are incorrect, per the above Explanation.