AICPA AICPA Certifications CPA-TEST Questions & Answers

• Question 951:

  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.

  Correct Answer: A

  Explanation:

  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 952:

  Selected data pertaining to ABC Co. for the calendar year 20X4 is as follows:

  

  ABC would use which of the following to determine the average day's sales in inventory?

  

  A. Option A

  B. Option B

  C. Option C

  D. Option D

  Correct Answer: B

  Explanation:

  Choice "b" is correct. Average number of days sales in inventory is defined as 365 days per year divided

  by the inventory turnover.

  Choice "a" is incorrect. The denominator used to determine average days sales in inventory is inventory

  turnover. Inventory turnover is cost of goods sold divided by average inventory, not simply average

  inventory.

  Choice "c" is incorrect. The days sales in inventory calculation uses the cost of goods sold figure, not the

  sales figure.

  Choice "d" is incorrect. The days sales in inventory calculation uses 365 in the numerator, not sales

  divided by 365.

• Question 953:

  Selected data pertaining to ABC Co. for the calendar year 20X4 is as follows: What was the inventory turnover for 20X4?

  

  A. 1.2 times.

  B. 1.5 times.

  C. 2.0 times.

  D. 3.0 times.

  Correct Answer: C

  Explanation:

  Choice "c" is correct. Inventory turnover equals cost of goods sold divided by average inventory.

  Beginning inventory ($6,000) plus purchases ($24,000) less ending inventory equals cost of goods sold

  ($18,000). Thus, ending inventory equals $12,000 and inventory turnover = $18,000 / [($6,000 +

  $12,000)/2] = 2.0.

  Choice "a" is incorrect. Inventory turnover equals cost of goods sold divided by average inventory.

  Choice "b" is incorrect. Cost of goods sold should be divided by average inventory, not by ending

  inventory.

  Choice "d" is incorrect. Cost of goods sold should be divided by average inventory, not by beginning

  inventory.

• Question 954:

  Selected data pertaining to ABC Co. for the calendar year 20X4 is as follows:

  

  The accounts receivable turnover for 20X4 was 5.0 times. What were ABC's 20X4 net credit sales?

  A. $105,000

  B. $107,000

  C. $110,000

  D. $210,000

  Correct Answer: A

  Explanation:

  Choice "a" is correct. The accounts receivable turnover ratio equals net credit sales divided by average

  accounts receivable. 5.0 = net credit sales / [($20,000 + $22,000)/2]. Net credit sales equal $105,000.

  Choice "b" is incorrect. The accounts receivable turnover ratio equals net credit sales divided by average

  accounts receivable.

  Choice "c" is incorrect. The accounts receivable turnover ratio equals net credit sales divided by average

  accounts receivable, not by year-end accounts receivable.

  Choice "d" is incorrect. The accounts receivable turnover ratio equals net credit sales divided by average

  accounts receivable, not by the sum of beginning and ending accounts receivable.

• Question 955:

  The following data pertain to ABC, Inc., for the year ended December 31, 20X4:

  

  What was ABC's rate of return on assets for 20X4?

  A. 5%

  B. 6%

  C. 20%

  D. 24%

  Correct Answer: B

  Explanation:

  Choice "b" is correct. Rate of return on assets is defined as the net income divided by the average total

  assets. In this case:

  $150,000 / [($2,000,000 + $3,000,000)/2]

  or [$150,000 / $2,500,000] = 6% rate of return.

  Choice "a" is incorrect. Average total assets ($2,500,000) should be used, not ending assets ($3,000,000).

  Choice "c" is incorrect. Net income ($150,000) and average total assets ($2,500,000) should be used, not

  net sales ($600,000) and ending assets ($3,000,000).

  Choice "d" is incorrect. Net income ($150,000) should be used, not net sales ($600,000).

• Question 956:

  What effect would the sale of a company's trading securities at their carrying amounts for cash have on each of the following ratios?

  A. Option A

  B. Option B

  C. Option C

  D. Option D

  Correct Answer: A

  Explanation:

  Choice "a" is correct. Trading securities are both current assets and quick assets. If they are sold for their

  carrying value, then both total current assets and total quick assets remain constant since one type of

  current asset and quick asset is traded for another. Thus, both the current ratio and the quick ratio would

  be unaffected by the sale of trading securities.

  Choices "b", "c", and "d" are incorrect, per the above Explanation: .

• Question 957:

  To measure how effectively an entity employs its resources, an auditor calculates inventory turnover by dividing average inventory into:

  A. Net sales.

  B. Cost of goods sold.

  C. Operating income.

  D. Gross sales.

  Correct Answer: B

  Explanation:

  Choice "b" is correct. The appropriate numerator for calculating inventory turnover is cost of goods sold.

  Cost of goods sold is the expense most clearly associated with the sale (turnover) of inventory, which is

  priced at acquisition cost, not selling price.

  Choice "a" is incorrect. Net sales is a measure of revenue that reflects the price at which inventory was

  sold, not its recorded inventoriable value.

  Choice "c" is incorrect. Operating income does not tie specifically to the recorded value of inventory sold

  because it reflects the sales price after all operating expenses.

  Choice "d" is incorrect. Gross sales is a measure of revenue that reflects the price at which inventory was

  sold, not its recorded inventoriable value.

• Question 958:

  Which of the following ratios would an engagement partner most likely calculate when reviewing the balance sheet in the overall review stage of an audit?

  A. Quick assets/current assets.

  B. Accounts receivable/inventory.

  C. Interest payable/interest receivable.

  D. Total debt/total assets.

  Correct Answer: D

  Explanation: Choice "d" is correct. During the final review stage of an audit, the auditor focuses on the overall presentation of the financial statements. Total debt/total assets indicates the portion of assets financed by creditors, which is a meaningful ratio to calculate during the final audit review. Choice "a" is incorrect. Quick assets/current assets simply indicates the percentage of current assets that are also "quick" assets. It is not a particularly meaningful ratio. Choice "b" is incorrect. Accounts receivable/inventory is not a meaningful ratio because it compares a

  figure based on retail dollars with a cost-based figure.

  Choice "c" is incorrect. Interest payable/interest receivable is not a meaningful ratio because these two

  amounts are not related.

• Question 959:

  For audits of financial statements made in accordance with generally accepted auditing standards, the use of analytical procedures is required to some extent:

  

  A. Option A

  B. Option B

  C. Option C

  D. Option D

  Correct Answer: C

  Explanation:

  Choice "c" is correct. Analytical procedures are required to be applied to some extent in planning and in

  the final review stage. In addition, although not required, analytical procedures may be used as a

  substantive test when they are more effective or efficient than tests of details.

  Choices "a", "b", and "d" are incorrect, per the above Explanation: .

• Question 960:

  Which of the following presumptions is correct about the reliability of audit evidence?

  A. Information obtained indirectly from outside sources is the most reliable evidential matter.

  B. To be reliable, audit evidence should be conclusive rather than persuasive.

  C. Reliability of audit evidence refers to the amount corroborative evidence obtained.

  D. An effective internal control structure provides more assurance about the reliability of audit evidence.

  Correct Answer: D

  Explanation:

  Choice "d" is correct. Reliability of audit evidence is enhanced by a satisfactory internal control structure.

  Choice "a" is incorrect. Information obtained directly from outside sources is more reliable than that

  obtained indirectly.

  Choice "b" is incorrect. In the great majority of cases, the auditor finds it necessary to rely on evidence that

  is persuasive rather than conclusive.

  Choice "c" is incorrect. The amount of corroborative evidence obtained refers to the sufficiency of the

  evidence, not its reliability.