AICPA CPA-TEST Online Practice Questions and Exam Preparation

AICPA CPA-TEST Online Questions & Answers

• Question 951:

  ABC sells to retail stores on credit terms of 2/10, net 30. Daily sales average 150 units at a price of $300 each. Assuming that all sales are on credit and 60 percent of customers take the discount and pay on Day 10 while the rest of the customers pay on Day 30, the amount of Jackson's accounts receivable is:

  A. $990,000
  B. $900,000
  C. $810,000
  D. $450,000
  C. $810,000

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  Choice "c" is correct. $810,000 accounts receivable. Choices "a", "b", and "d" are incorrect, per the above calculation.

• Question 952:

  How should the effect of a change in accounting estimate be accounted for?

  A. By restating amounts reported in financial statements of prior periods.
  B. By reporting pro forma amounts for prior periods.
  C. As a prior period adjustment to beginning retained earnings.
  D. In the period of change and future periods if the change affects both.
  D. In the period of change and future periods if the change affects both.

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  Choice "d" is correct, a "change in accounting estimate" affects only the current and subsequent (future) periods, if the change affects both. It does not affect "prior periods," nor "retained earnings." Choice "a" is incorrect. Restating prior years' financial statements is required when comparative financial statements are shown for prior period adjustments of "corrections of errors," "changes in entities," and changes in accounting principle. Choices "b" and "c" are incorrect. A "change in accounting estimate" does not affect prior periods.

• Question 953:

  In analyzing a company's financial statements, which financial statement would a potential investor primarily use to assess the company's liquidity and financial flexibility?

  A. Balance sheet.
  B. Income statement.
  C. Statement of retained earnings.
  D. Statement of cash flows.
  A. Balance sheet.

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  Choice "a" is correct. Liquidity ratios and coverage ratios focus on balance sheet account balances. Choice "b" is incorrect. Income statement information is primarily used for profitability analysis. Choice "c" is incorrect. The statement of retained earnings is primarily a reconciliation of the retained earnings account. Choice "d" is incorrect. The statement of cash flows assesses cash inflows and cash outflows.

• Question 954:

  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.

  

  ABC Industries' discounted annual depreciation tax shield for the year 1997 would be:

  A. $13,817
  B. $15,200
  C. $16,762
  D. $20,725
  A. $13,817

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  Explanation Explanation/Reference:Choice "a" is correct. $13,817 discounted annual depreciation tax shield for the year 1997. Choices "b", "c", and "d" are incorrect based on the above Explanation.

• Question 955:

  Fanny and John each own and manage their own companies. Fanny's business is manufacturing freight boxes of all types, and John's business is selling freight boxes to different industries. They decide to combine their expertise and knowledge to produce and sell freight boxes specifically designed for the new airline company that just formed in their city. Which of the following best describes the business formed by the parties?

  A. A general partnership.
  B. A limited liability partnership.
  C. A sole proprietorship.
  D. A joint venture.
  D. A joint venture.

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  Choice "d" is correct. A joint venture is formed for a single business undertaking such as building and designing freight containers to be sold specifically to one company. Each company coming together in this joint venture has its own business outside of this one endeavor. Choice "a" is incorrect. A general partnership is more broad in its business purpose than a joint venture is. Choice "b" is incorrect. A limited liability partnership is primarily designed for professionals who want to work as partners but with limited personal liability. Choice "c" is incorrect. Sole proprietorships have only one person in the business.

• Question 956:

  ABC Corporation had income before taxes of $60,000 for the year 1991. Included in this amount was depreciation of $5,000, a charge of $6,000 for the amortization of bond discounts, and $4,000 for interest expense. The estimated cash flow for the period is:

  A. $66,000
  B. $49,000
  C. $71,000
  D. $65,000
  C. $71,000

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  Explanation Explanation/Reference:Choice "c" is correct. Cash flow is computed from net income by adding back non-cash expenses like depreciation and amortization. Presumably, interest expense has been paid (i.e., is not "accrued" interest) and should not be added back. Choices "a", "b", and "d" are incorrect, per above Explanation.

• Question 957:

  FASB Interpretations of Statements of Financial Accounting Standards have the same authority as the FASB:

  A. Statements of Financial Accounting Concepts.
  B. Emerging Issues Task Force Consensus.
  C. Technical Bulletins.
  D. Statements of Financial Accounting Standards.
  D. Statements of Financial Accounting Standards.

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  Choice "d" is correct. FASB interpretations of the "statements of financial accounting standards" (SFAS) have the same authority as the FASB statements of financial accounting standards (SFAS), which by themselves determine GAAP. Choice "a" is incorrect. Statements of financial accounting concepts (FAC's) have much less authority (fifth floor) and do not by themselves determine GAAP as is the case with SFASs and interpretations of SFASs. Choice "b" is incorrect. Emerging issues task force (EITF) consensus is in the nature of a "third floor" authority. The EITF was established in 1984 to aid the FASB in identifying and implementing emerging issues before they become widespread and ultimately require action by the FASB. After discussing the issues and the relevant accounting pronouncements, the group can sometimes reach a consensus on an issue, in which case no action by the FASB is usually needed. Choice "c" is incorrect. Technical bulletins of the FASB (second floor) do not by themselves determine GAAP.

• Question 958:

  Gearty and Duffy, certified public accountants, have been engaged to perform a single audit of Sleepy Knoll Township, a local government receiving substantial federal financial assistance for community development and housing assistance. A single audit represents:

  A. An audit of annual activity of only federal financial assistance programs over the course of the town's fiscal year.
  B. An inception to date audit of only federal financial assistance programs over the course of the grant year specified by the grant award.
  C. An audit of the township's financial statements and of compliance with federal regulations relating to federal financial assistance as prescribed by the Single Audit Act and OMB Circular A-133.
  D. An audit of the township's financial statements and the fair presentation of the revenues derived from federal financial assistance.
  C. An audit of the township's financial statements and of compliance with federal regulations relating to federal financial assistance as prescribed by the Single Audit Act and OMB Circular A-133.

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  Choice "c" is correct. A single audit represents a combined audit of both an entity's financial statements and federal financial assistance programs. The single audit provides audited organizations with the opportunity to capitalize on the efficiency of satisfying their audit requirements with a single audit. Auditors are governed by the Single Audit Act and OMB Circular A-133. Choice "a" is incorrect. A single audit is not simply an audit of federal financial assistance. Choice "b" is incorrect. A single audit is not simply an audit of federal financial assistance. Choice "d" is incorrect. A single audit is not limited to expression of an opinion on the fair presentation of financial statements. It also is designed to report on compliance with laws, rules, and regulations.

• Question 959:

  When auditing an entity's financial statements in accordance with Government Auditing Standards (the Yellow Book), an auditor is required to report on:

  A. Noteworthy accomplishments of the program. II. The scope of the auditor's testing of internal controls.
  B. I only.
  C. II only.
  D. Both I and II.
  E. Neither I nor II.
  B. I only.

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  Choice "b" is correct. When auditing an entity's financial statements in accordance with Government Auditing Standards, an auditor is required to report on the scope of the auditor's testing of internal control, but not on noteworthy accomplishments of the program. Choices "a", "c", and "d" are incorrect, based on the above Explanation.

• Question 960:

  A transaction that is unusual, but not infrequent, should be reported separately as a(an):

  A. Extraordinary item, net of applicable income taxes.
  B. Extraordinary item, but not net of applicable income taxes.
  C. Component of income from continuing operations, net of applicable income taxes.
  D. Component of income from continuing operations, but not net of applicable income taxes.
  D. Component of income from continuing operations, but not net of applicable income taxes.

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  Choice "d" is correct. A transaction that is unusual, but not "infrequent" should be reported separately as a component of continuing operations, (gross) but not net of applicable income taxes. Choices "a" and "b" are incorrect. An extraordinary item has to be both "unusual" and "infrequent." Choice "c" is incorrect, per "d" above.