AICPA CPA-TEST Online Practice Questions and Exam Preparation

AICPA CPA-TEST Online Questions & Answers

• Question 961:

  Which of the following is a requirement for a small business corporation to elect S corporation status?

  A. It has only one class of stock.
  B. It has at least one partnership as a shareholder.
  C. It has international ownership.
  D. It has more than 75 shareholders.
  A. It has only one class of stock.

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  Choice "a" is correct. A corporation may elect to be taxed like a partnership under Subchapter S only if it has only one class of stock. Choice "b" is incorrect. A corporation can elect S corporation status only if its shareholders are individuals, estates, or certain types of trusts. Choice "c" is incorrect. Foreign shareholders generally are prohibited in an S corporation. Choice "d" is incorrect. An S corporation can have up to 100 shareholders, but it may have fewer.

• Question 962:

  All of the following are characteristics of the strategic planning process, except the:

  A. Emphasis on both the short and long run.
  B. Review of the attributes and behavior of the organization's competition.
  C. Analysis and review of departmental budgets.
  D. Analysis of consumer demand.
  C. Analysis and review of departmental budgets.

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  Choice "c" is correct. Analysis and review of departmental budgets is not a part of the strategic planning process. Budgets are operational and much more specific than the things that are part of strategic planning. Choices "a", "b", and "d" are incorrect. All of these are part of the strategic planning process: A. Emphasis on both the short and long run. B. A review of competition. D. Analysis of consumer demand.

• Question 963:

  Under the Revised Model Business Corporation Act, when a corporation's bylaws grant stockholders preemptive rights, which of the following rights is(are) included in that grant?

  

  A. Option A
  B. Option B
  C. Option C
  D. Option D
  C. Option C

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  Rule: Preemptive rights provide a shareholder with a right of first refusal to buy a share of newly issued shares sufficient to maintain the shareholder's proportionate share of rights in any newly issued shares. Rule: Preemptive rights do not provide a shareholder with the right to a proportionate share of corporate assets on dissolution. Choice "c" is correct. "No - Yes." Choices "a", "b", and "d" are incorrect, per the above rules.

• Question 964:

  The selection of the denominator in the return on investment (ROI) formula is critical to the measure's effectiveness. Which denominator is criticized because it combines the effects of operating decisions made at one level of the organization with financing decisions made at another organization level?

  A. Total assets available.
  B. Total assets employed.
  C. Working capital plus other assets.
  D. Shareholder's equity.
  D. Shareholder's equity.

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  Choice "d" is correct. Shareholders' equity is the ROI denominator that has been criticized because it combines the effects of operating decisions made at another organization level. Choices "a", "b", and "c" are incorrect, per the above Explanation.

• Question 965:

  In 1990, ABC Co. changed from the individual item approach to the aggregate approach in applying the lower of FIFO cost or market to inventories. The cumulative effect of this change should be reported in ABC's financial statements as a:

  A. Retrospective adjustment on the retained earnings statement, with separate disclosure.
  B. Component of income from continuing operations, with separate disclosure.
  C. Component of income from continuing operations, without separate disclosure.
  D. Component of income after continuing operations, with separate disclosure.
  A. Retrospective adjustment on the retained earnings statement, with separate disclosure.

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  Choice "a" is correct. A change in the composition of the elements of cost such as changing from the individual item approach to the aggregate approach in applying the lower of FIFO cost or market to inventories (LCM is covered in F4) is an example of a change in accounting principle. The cumulative effect of the change in accounting principle should now be shown on the retained earnings statement as an adjustment to the beginning balance of retained earnings, in what is called retrospective application. Choices "b", "c", and "d" are incorrect. The cumulative effect of a change in accounting principle is now reported on the retained earnings statement, not the income statement. Most of these types of changes (changes in accounting principle) used to be reported on the income statement. SFAS No. 154 changed that.

• Question 966:

  Which of the following would an auditor most likely use in determining the auditor's preliminary judgment about materiality?

  A. The anticipated sample size of the planned substantive tests.
  B. The entity's annualized interim financial statements.
  C. The results of the internal control questionnaire.
  D. The contents of the management representation letter.
  B. The entity's annualized interim financial statements.

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  Choice "b" is correct. The auditor's preliminary judgment about materiality is generally based on either annualized interim financial statements or annual financial statements from a prior period. Choice "a" is incorrect. The anticipated sample size for substantive tests is irrelevant in making a preliminary judgment about materiality. Choice "c" is incorrect. The results of the internal control questionnaire would be relevant for making a preliminary assessment of control risk; however, these results are irrelevant for determining a preliminary level of materiality. Choice "d" is incorrect. The management representation letter is obtained at the end of the audit and would not be available when preliminary assessments of materiality are made during planning.

• Question 967:

  A recession can be caused by:

  A. An increase in aggregate demand.
  B. A decrease in aggregate supply.
  C. A decrease in aggregate demand.
  D. Both "b" and "c".
  D. Both "b" and "c".

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  Choice "d" is correct. Both choices "b" and "c" can cause a recession. A recession is defined as a period of falling GDP and rising unemployment. GDP will fall if there is a decrease in aggregate demand or a decrease in aggregate supply. Choice "a" is incorrect. An increase in aggregate demand will cause GDP to increase NOT decrease. Choice "b" is incorrect, per the above Explanation. Choice "c" is incorrect, per the above Explanation.

• Question 968:

  On January 2, 20X5, to better reflect the variable use of its only machine, ABC, Inc. elected to change its method of depreciation from the straight-line method to the units of production method. The original cost of the machine on January 2,

  20X3, was $50,000, and its estimated life was 10 years. ABC estimates that the machine's total life is 50,000 machine hours. Machine hours usage was 8,500 during 20X4 and 3,500 during 20X3.

  ABC's income tax rate is 30%. ABC should report the accounting change in its 20X5 financial statements as a(n):

  A. Cumulative effect of a change in accounting principle of $2,000 in its income statement.
  B. Adjustment to beginning retained earnings of $2,000.
  C. Cumulative effect of a change in accounting principle of $1,400 in its income statement.
  D. None of the above.
  D. None of the above.

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  Choice "d" is correct. A change in the method of depreciation is now considered to be both a change in method and a change in estimate. These changes should be accounted for as changes in estimate and handled prospectively. The new depreciation method should be used as of the beginning of the year of change and should start with the current book value of the underlying asset. No retroactive or retrospective calculations should be made, and no adjustment should be made to retained earnings. The cumulative effect treatment on the income statement was the treatment of most changes in accounting principle prior to SFAS No. 154. The adjustment to beginning retained earnings is the treatment now given to changes in accounting principle by SFAS No. 154. However, a change in depreciation method is no longer accounted for as a change in accounting principle. Choices "a", "b", and "c" are incorrect, per the above explanation.

• Question 969:

  The annual tax depreciation expense on an asset reduces income taxes by an amount equal to:

  A. The firm's average tax rate times the depreciation amount.
  B. One minus the firm's average tax rate times the depreciation amount.
  C. The firm's marginal tax rate times the depreciation amount.
  D. One minus the firm's marginal tax rate times the depreciation amount.
  C. The firm's marginal tax rate times the depreciation amount.

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  Choice "c" is correct. The annual tax depreciation expense reduces income taxes by an amount equal to the firm's marginal tax rate (the tax on the next dollar of income) times the depreciation amount. Choices "a", "b", and "d" are incorrect, per above.

• Question 970:

  An auditor decides to issue a qualified opinion on an entity's financial statements because a major inadequacy in its computerized accounting records prevents the auditor from applying necessary procedures. The opinion paragraph of the auditor's report should state that the qualification pertains to:

  A. A client-imposed scope limitation.
  B. A departure from generally accepted auditing standards.
  C. The possible effects on the financial statements.
  D. Inadequate disclosure of necessary information.
  C. The possible effects on the financial statements.

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  Choice "c" is correct. When an auditor qualifies his opinion because of a scope limitation, the wording in the opinion paragraph should indicate that the qualification pertains to the possible effects on the financial statements and not to the scope limitation itself. Choice "a" is incorrect. When an auditor qualifies his opinion because of a scope limitation, the wording in the opinion paragraph should indicate that the qualification pertains to the possible effects on the financial statements and not to the scope limitation itself. Choice "b" is incorrect. A scope limitation is a departure from generally accepted auditing standards. However, when an auditor qualifies his opinion because of a scope limitation, the wording in the opinion paragraph should indicate that the qualification pertains to the possible effects on the financial statements and not to the scope limitation itself. Choice "d" is incorrect. Inadequate disclosure of necessary information is a departure from GAAP, rather than a scope limitation.