AICPA CPA-TEST Online Practice Questions and Exam Preparation

AICPA CPA-TEST Online Questions & Answers

• Question 971:

  The Waymand family typically ate hamburger as a regular staple in their diet. In the last few years, the family income has doubled, and they have now replaced hamburger with steak as a regular staple in their diet. This is an example where the demand for hamburger:

  A. Is relatively elastic.
  B. Is perfectly elastic.
  C. Responds as an inferior good.
  D. Is perfectly inelastic.
  C. Responds as an inferior good.

  ---

  Choice "c" is correct. An inferior good is one for which the demand declines as income increases. A normal good would experience an increase in demand in response to an increase in income. Because the demand for hamburger went down as income increased, it is an inferior good. Choices "a", "b", and "d" are incorrect. The elasticity of demand for a good is calculated by measuring the change in quantity demanded over the change in price (not income). The question does not have sufficient information to calculate the elasticity of the demand for hamburger.

• Question 972:

  Which of the following statements is correct concerning significant deficiencies in internal control with respect to an audit of a nonissuer?

  A. An auditor is required to search for significant deficiencies during an audit.
  B. All significant deficiencies are also considered to be material weaknesses.
  C. An auditor may communicate significant deficiencies during an audit or after the audit's completion.
  D. An auditor may report that no significant deficiencies were noted during an audit.
  C. An auditor may communicate significant deficiencies during an audit or after the audit's completion.

  ---

  Choice "c" is correct. Because timely communication may be important, the auditor may choose to communicate significant deficiencies during the course of the audit rather than after the audit is concluded. Choice "a" is incorrect. The auditor is not obligated to search for significant deficiencies. Choice "b" is incorrect. All material weaknesses are significant deficiencies, but not all significant deficiencies are material weaknesses. Choice "d" is incorrect. Because of the potential for misinterpretation, the auditor should not issue a written report representing that no significant deficiencies were noted during the audit.

• Question 973:

  Because of the risk of material misstatement, an audit of financial statements in accordance with generally accepted auditing standards should be planned and performed with an attitude of:

  A. Objective judgment.
  B. Independent integrity.
  C. Professional skepticism.
  D. Impartial conservatism.
  C. Professional skepticism.

  ---

  Choice "c" is correct. The auditor should plan and perform the audit with an attitude of professional skepticism. This attitude includes a questioning mind and a critical assessment of audit evidence. Choices "a", "b", and "d" are incorrect. Objectivity, independence, integrity, and impartiality are basic ethical characteristics and professional qualities embodied in the general standards.

• Question 974:

  All of the following are valid reasons for a business to hold cash and marketable securities, except to:

  A. Satisfy compensating balance requirements.
  B. Maintain adequate cash needed for transactions.
  C. Maintain a precautionary balance.
  D. Earn maximum returns on investment assets.
  D. Earn maximum returns on investment assets.

  ---

  Choice "d" is correct. There are three primary motives for holding cash: 1. Transactions demand 2. Precautionary demand 3. Speculative demand However, cash is generally held in very short-term liquid investments which are low risk, low return.

• Question 975:

  A limited liability partnership must:

  A. File registration documents with the state in which it is formed.
  B. Hold all partners personally liable for all debts and liabilities of the partnership and partners.
  C. Carry no less than one hundred thousand dollars of property insurance.
  D. Not have partners with professional licenses.
  A. File registration documents with the state in which it is formed.

  ---

  Choice "a" is correct. Rule: To have limited liability, an LLP must file with the state a registration statement usually referred to as Articles of LLP. It is generally designed for professionals who desire to be partners with other like professionals and yet not have liability for the malpractice of their partners. Some states require that personal liability insurance (not property insurance) be carried to protect those harmed by the professionals' malpractice. Choices "b", "c", and "d" are incorrect, per the above rule.

• Question 976:

  Several sources of GAAP consulted by an auditor are in conflict as to the application of an accounting principle. Which of the following should the auditor consider the most authoritative?

  A. FASB Technical Bulletins.
  B. AICPA Accounting Interpretations.
  C. FASB Statements of Financial Accounting Concepts.
  D. AICPA Technical Practice Aids.
  A. FASB Technical Bulletins.

  ---

  Choice "a" is correct. In accordance with the GAAP hierarchy, FASB Technical Bulletins are considered the most authoritative of the sources listed in the question. Choice "b" is incorrect. Of the sources listed, AICPA Accounting Interpretations would be considered the second most authoritative. Choice "c" is incorrect. FASB Statements of Financial Accounting Concepts are among the least authoritative sources of GAAP available to auditors. Choice "d" is incorrect. AICPA Technical Practice Aids are among the least authoritative sources of GAAP available to auditors.

• Question 977:

  In evaluating a capital budget project, the use of the net present value model is generally not affected by the:

  A. Method of funding the project.
  B. Initial cost of the project.
  C. Amount of added working capital needed for operations during the term of the project.
  D. Amount of the project's associated depreciation tax allowance.
  A. Method of funding the project.

  ---

  Choice "a" is correct. The method of funding the project has no effect on the net present value model. NPV uses a hurdle rate to discount cash flows. If the NPV is positive, the project is acceptable. The method of financing the project, and the cost, are independent of the process of screening the project for acceptability. Choice "b" is incorrect. The initial cost is one of the most important items in the calculation of NPV. Choice "c" is incorrect. Added working capital requirements and salvage value affect cash flow. All cash flows are used in the NPV model. Choice "d" is incorrect. The tax depreciation allowance will provide a "tax shield" or tax savings that impacts cash flow and must be considered in NPV analysis.

• Question 978:

  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 $200,000, the firm's weighted-average cost of capital would be closest to:

  A. 4.8 percent.
  B. 6.6 percent.
  C. 6.8 percent.
  D. 7.3 percent.
  B. 6.6 percent.

  ---

  Choice "b" is correct. 6.6%. ABC' after tax cost of debt is 4.8% and cost of preferred stock is 8.4% ($105/ share less issue costs of $5/share). The cost of equity (as calculated in a prior question) is 7.0%. 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 $200,000. The question gives you the amount of Retained Earnings at $100,000, the source of 7% dividend payments on common shares. If all that is needed is $200,000, then, by definition, the target capital structure is "priced out" as shown with 7% common equity of $100,000 being equal to 50% of the target capital structure totaling $200,000 without any modification: Choices "a", "c", and "d" are incorrect, per the above Explanation.

• Question 979:

  Which of the following qualifies as an operating segment?

  A. Corporate headquarters, which oversees $1 billion in sales for the entire company.
  B. North American segment, whose assets are 12% of the company's assets of all segments, and management reports to the chief operating officer.
  C. South American segment, whose results of operations are reported directly to the chief operating officer, and has 5% of the company's assets, 9% of revenues, and 8% of the profits.
  D. Eastern Europe segment, which reports its results directly to the manager of the European division, and has 20% of the company's assets, 12% of revenues, and 11% of profits.
  B. North American segment, whose assets are 12% of the company's assets of all segments, and management reports to the chief operating officer.

  ---

  Choice "b" is correct. Assets of the North American segment exceed 10% combined assets of all operating segments. Choice "a" is incorrect. Corporate headquarters in not considered a segment. Choice "c" is incorrect. The South American segment does not meet any of the 10% minimums (Revenue, PandL or Assets). Choice "d" is incorrect. Eastern Europe segment does not report to the chief operating officer.

• Question 980:

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

  ---

  Choice "a" is correct. Assertions about valuation and allocation deal with whether asset, liability, revenue, and expense components have been included in the financial statements at appropriate amounts, and any resulting valuation adjustments are appropriately recorded. For example, management asserts that trade accounts receivable included in the balance sheet are stated at net realizable value. Choice "b" is incorrect. Assertions about understandability and classification deal with whether financial information is appropriately presented and described, and disclosures are clearly expressed. Reviewing credit ratings of delinquent customers does not provide evidence about this type of assertion. Choice "c" is incorrect. Assertions about existence deal with whether assets, liabilities, and equity interest of the entity exist at a given date. Reviewing credit ratings of delinquent customers does not provide evidence about this type of assertion. Choice "d" is incorrect. Assertions about rights and obligations deal with whether assets are the rights of the entity and liabilities are the obligations of the entity at a given date. Reviewing credit ratings of delinquent customers does not provide evidence about this type of assertion.