AICPA CPA-TEST Online Practice Questions and Exam Preparation

AICPA CPA-TEST Online Questions & Answers

• Question 871:

  How should the effect of a change in accounting principle that is inseparable from the effect of a change in accounting estimate be reported?

  A. As a component of income from continuing operations.
  B. By restating the financial statements of all prior periods presented.
  C. As a correction of an error.
  D. By footnote disclosure only.
  A. As a component of income from continuing operations.

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  Choice "a" is correct. When the effect of a change in accounting principle is inseparable from the effect of a change in accounting estimate, the reporting treatment for the overall effect is as a change in estimate. Thus, the effect is reported prospectively as a component of income from continuing operations. Under SFAS No. 154, this type of change is now called a change in accounting estimate affected by a change in accounting principle. Choice "b" is incorrect. Restatement of all prior periods is the retroactive accounting treatment that is applied to the correction of an error and the retrospective accounting treatment given to changes in accounting principle. However, a change in accounting principle that is inseparable from the effect of a change in accounting estimate is now treated as a change in accounting estimate. Choice "c" is incorrect. Correction of an error is given retroactive treatment as a prior period adjustment to retained earnings with restatement of prior periods. This is not the treatment appropriate for the effect of a change in accounting principle that is inseparable from the effect of a change in accounting estimate. Choice "d" is incorrect. While footnote disclosure is always appropriate for an accounting change, such disclosure alone is never the appropriate accounting treatment.

• Question 872:

  A firm with a higher degree of operating leverage when compared to the industry average implies that the:

  A. Firm has higher variable costs.
  B. Firm's profits are more sensitive to changes in sales volume.
  C. Firm is more profitable.
  D. Firm uses a significant amount of debt financing.
  B. Firm's profits are more sensitive to changes in sales volume.

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  Rule: Operating leverage is the presence of fixed costs in operations, which allows a small change in sales to produce a larger relative change in profits. Choice "b" is correct. A firm with a higher degree of operating leverage when compared to the industry average implies that the firm's profits are more sensitive to changes in sales volume. Choice "a" is incorrect. Higher variable costs imply a lower degree of operating leverage. Choice "c" is incorrect. Profits will depend upon sales. Choice "d" is incorrect. A firm using a significant amount of debt financing has a higher degree of "financial leverage."

• Question 873:

  An auditor should obtain knowledge of a client's information and communication system in order to understand each of the following, except:

  A. How transactions are initiated, processed, and reported.
  B. The process used to prepare financial statements.
  C. The means used by an entity to communicate financial reporting roles to its staff.
  D. The means used by an entity to ensure that management directives are carried out.
  D. The means used by an entity to ensure that management directives are carried out.

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  Choice "d" is correct. Control activities (not the information and communication system) are the policies and procedures that help ensure that management directives are carried out. Choices "a", "b", and "c" are incorrect. The auditor obtains an understanding of an entity's information and communication system to understand how transactions are initiated, processed, and reported, the financial reporting process, and the means used by an entity to communicate financial reporting roles and responsibilities.

• Question 874:

  The authority to accept incoming goods in receiving should be based on a (an):

  A. Vendor's invoice.
  B. Materials requisition.
  C. Bill of lading.
  D. Approved purchase order.
  D. Approved purchase order.

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  Choice "d" is correct. The authority to accept incoming goods in receiving should be based upon an approved purchase order. Choice "a" is incorrect. A vendor's invoice does not serve as an authority to accept incoming goods since it is generated by the vendor, not a responsible employee in the purchasing department. Choice "b" is incorrect. A materials requisition, which is prepared by the ultimate user of the goods, does not serve as an authority to accept incoming goods since it has not been approved by the purchasing department. Choice "c" is incorrect. A bill of lading does not serve as an authority to accept incoming goods since it is generated by the carrier, not a responsible employee in the purchasing department.

• Question 875:

  The marketable securities with the least amount of default risk are:

  A. Federal government agency securities.
  B. U.S. treasury securities.
  C. Repurchase agreements.
  D. Bankers' acceptances.
  B. U.S. treasury securities.

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  Choice "b" is correct. Default risk is the risk that the security will not be repaid because the issuing entity is insolvent or illiquid. U.S. Treasury securities are issued by the Treasury Department, which has virtually no risk of being insolvent or illiquid. Choice "a" is incorrect. Securities issued by certain federal government agencies carry slightly more default risk than U.S. treasuries because these agencies are (usually) not as large or liquid as the U.S. Treasury. Choice "c" is incorrect. Repurchase agreements are sales by dealers in government securities who agree to repurchase these securities at a specific time and price. The risk of default is high because it is based upon the ability of the dealer to repurchase the securities. Choice "d" is incorrect. Bankers' acceptances are drafts drawn on a bank, which guarantees payment at maturity. The default risk is higher because the execution of the acceptance is based upon the solvency of the bank.

• Question 876:

  An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning management's assertions about:

  A. Understandability and classification.
  B. Existence.
  C. Rights and obligations.
  D. Valuation and allocation.
  D. Valuation and allocation.

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  Choice "d" is correct. An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning management's assertions about valuation or allocation, which pertain to the presentation of assets, liabilities, and equity interests at appropriate amounts. The auditor is concerned with the proper valuation of those receivables. Choice "a" is incorrect. Understandability and classification deals with whether the components of the financial statements are properly presented, described, and disclosed, not whether they are properly valued. Choice "b" is incorrect. Existence relates to whether assets, liabilities, and equity interests exist. Choice "c" is incorrect. Rights and obligations pertain to ownership of assets and liabilities, not to the valuation of those accounts.

• Question 877:

  During 1994, ABC Corp. decided to change from the FIFO method of inventory valuation to the weightedaverage method. Inventory balances under each method were as follows:

  

  ABC's income tax rate is 30%.

  ABC should report the cumulative effect of this accounting change as a(n):

  A. Adjustment to beginning retained earnings.
  B. Component of income from continuing operations.
  C. Extraordinary item.
  D. Component of income after extraordinary items.
  A. Adjustment to beginning retained earnings.

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  Choice "a" is correct. The cumulative effect of a change in accounting principle is shown as an adjustment to beginning retained earnings. Choice "b" is incorrect. The cumulative effect of a change in accounting principle is now presented as a separate category on the retained earnings statement and is not a component of net income. Choice "c" is incorrect. Extraordinary items are unusual and infrequent in nature. Extraordinary items have nothing to do with changes in accounting principle. Choice "d" is incorrect. A change in accounting principle affects retained earnings, not the income statement, under SFAS No. 154.

• Question 878:

  The method that recognizes the time value of money by discounting the after-tax cash flows over the life of a project, using the company's minimum desired rate of return is the:

  A. Accounting rate of return method.
  B. Net present value method.
  C. Internal rate of return method.
  D. Payback method.
  B. Net present value method.

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  Explanation Explanation/Reference: Choice "b" is correct. The net present value method recognizes the time value of money and discounts cash flows over the life of a project, using the minimum desired (hurdle) rate. Choice "a" is incorrect. The accounting rate of return is the accrual accounting increase compared to the initial investment. Choice "c" is incorrect. IRR is similar to NPV, but does not assume a desired rate of return. The rate is calculated that produces a NPV of zero. Choice "d" is incorrect. Payback method does not recognize the time value of money.

• Question 879:

  Which of the following rights is a holder of a public corporation's cumulative preferred stock always entitled to?

  A. Conversion of the preferred stock into common stock.
  B. Voting rights.
  C. Dividend carryovers from years in which dividends were not paid, to future years.
  D. Guaranteed dividends.
  C. Dividend carryovers from years in which dividends were not paid, to future years.

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  Choice "c" is correct. Cumulative preferred dividends are dividends that must be paid before any dividend can be paid to holders of non-preferred shares. The right to the dividend accumulates if it is not paid in a particular year. Choice "a" is incorrect. There is no right to convert preferred shares into common stock unless that right is specifically granted. Choice "b" is incorrect. Preferred stock need not have voting rights. Choice "d" is incorrect. Preferred dividends are not guaranteed. They must be paid before any common shareholder can be paid a dividend, but no dividend might ever be paid.

• Question 880:

  Six months after issuing an unqualified opinion on audited financial statements, an auditor discovered that the engagement personnel failed to confirm several of the client's material accounts receivable balances.

  The auditor should first:

  A. Request the permission of the client to undertake the confirmation of accounts receivable.
  B. Perform alternative procedures to provide a satisfactory basis for the unqualified opinion.
  C. Assess the importance of the omitted procedures to the auditor's ability to support the previously expressed opinion.
  D. Inquire whether there are persons currently relying, or likely to rely, on the unqualified opinion.
  C. Assess the importance of the omitted procedures to the auditor's ability to support the previously expressed opinion.

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  Choice "c" is correct. When an auditor discovers the omission of an audit procedure related to a previously issued report, the auditor should first assess the importance of the omitted procedure to the auditor's ability to support the previously expressed opinion. Choice "a" is incorrect. The auditor would request the permission of the client to undertake the confirmation of accounts receivable only after determining that the procedure was necessary to support the previously expressed opinion and no other alternative procedure had been performed. Choice "b" is incorrect. Alternative procedures would be performed only after the auditor determined that the procedure was necessary to support the previously expressed opinion. Choice "d" is incorrect. The auditor needs to be able to support (or revise) the previously issued opinion regardless of whether or not there are persons currently relying on it.