Professional Accounting (CPA style)

Questions in this quiz

1. 1. You bought a limousine for $98,000 and are planning to rent it for weddings, ceremonies and parties at $245 per hour. If you estimate the car will be hired for 2 hours a day on average, with daily costs at about $50, what is the estimated yearly yield on your investment if you work all year round, i.e. every day of the year, including any festivities and weekends?
   1. 164%
   2. 1.64%
   3. 0.45%
   4. 183%
2. 2. Arno Co. did not record a credit purchase of merchandise made prior to year end. However the merchandise was correctly included in the year-end physical inventory. What effect did the omission of reporting the purchase of merchandise have on Arno's balance sheet at year end? Assets Liabilities
   1. No effect No effect
   2. No effect Understated
   3. Understated No effect
   4. Understated Understated
3. 3. Which of the following statements about audit sampling risks is correct for a nonissuer?
   1. Nonsampling risk arises from the possibility that, when a substantive test is restricted to a sample, conclusions might be different than if the auditor had tested each item in the population.
   2. Nonsampling risk can arise because an auditor failed to recognize misstatements.
   3. Sampling risk is derived from the uncertainty in applying audit procedures to specific risks.
   4. Sampling risk includes the possibility of selecting audit procedures that are not appropriate to achieve the specific objective.
4. 4. Which of the following procedures would an auditor generally perform regarding subsequent events?
   1. Inspect inventory items that were ordered before the year end but arrived after the year end.
   2. Test internal control activities that were previously reported to management as inadequate.
   3. Review the client's cutoff bank statements for several months after the year end.
   4. Compare the latest available interim financial statements with the statements being audited.
5. 5. The FASB makes changes to the Accounting Standards Codification by issuing
   1. Accounting Standards Updates.
   2. Emerging Issues Task Force Releases.
   3. Statements of Financial Accounting Standards.
   4. Staff Technical Bulletins.
6. 6. An investment project costing $500 today will generate profits of $500 in year five and year ten. If the discount rate is 10%, what is the project’s NPV?
   1. −$3
   2. −$27
   3. $3
   4. $500
7. 7. On July 1 year 7 Dean Co. issued at a premium bonds with a due date of July 1 year 12. Dean incorrectly used the straight-line method instead of the effective interest method to amortize the premium. How were the following amounts affected by the error at June 30 year 12? Bond carrying Retained amount earnings
   1. Overstated Understated
   2. Understated Overstated
   3. Overstated No effect
   4. No effect No effect
8. 8. What is the price of a three-year bond (face value $100), paying 5% coupons, with a yield of 6%?
   1. $100
   2. $104.29
   3. $96.71
   4. $97.33
9. 9. A company recently moved to a new building. The old building is being actively marketed for sale, and the company expects to complete the sale in four months. Each of the following statements is correct regarding the old building, except:
   1. It will be reclassified as an asset held for sale.
   2. It will be classified as a current asset.
   3. It will no longer be depreciated.
   4. It will be valued at historical cost.
10. 10. Carson owned 40% of the outstanding stock of a C corporation. During a tax year, the corporation reported $400,000 in taxable income and distributed a total of $70,000 in cash dividends to its shareholders. Carson accurately reported $28,000 in gross income on Carson’s individual tax return. If the corporation had been an S corporation and the distributions to the owners had been proportionate, how much income would Carson have reported on Carson’s individual return?
    1. $28,000
    2. $132,000
    3. $160,000
    4. $188,000
11. 11. An investment will pay out $10 p.a. forever. What is that investment worth if the market discount rate is 5%?
    1. $100
    2. $2
    3. $500
    4. $200
12. 12. Smith has an adjusted gross income (AGI) of $120,000 without taking into consideration $40,000 of losses from rental real estate activities. Smith actively participates in the rental real estate activities. What amount of the rental losses may Smith deduct in determining taxable income?
    1. $0
    2. $15,000
    3. $20,000
    4. $40,000
13. 13. Which of the following is an element of a CPA firm's quality control policies and procedures applicable to the firm's accounting and auditing practice?
    1. Engagement performance.
    2. Risk analysis.
    3. Safeguarding of assets.
    4. Information processing.
14. 14. A company predicted that it would manufacture 10,000 units of finished goods during March. The direct labor standards indicated that each unit of finished goods requires 2.4 direct labor hours at a standard wage of $20 per hour, totaling $48.00 per finished good unit. During March, the company actually made 9,000 units of finished goods. Production used 2.5 labor hours per finished unit, and the company actually paid $21 per hour, totaling $52.50 per unit of finished product. What amount is the company's direct labor rate variance for March?
    1. $18,000
    2. $22,500
    3. $25,000
    4. $40,500
15. 15. The full-employment gross domestic product is $1.3 trillion, and the actual gross domestic product is $1.2 trillion. The marginal propensity to consume is 0.8. When inflation is ignored, what increase in government expenditures is necessary to produce full employment?
    1. $100 billion
    2. $80 billion
    3. $20 billion
    4. $10 billion
16. 16. Which of the following types of audit evidence provides the least assurance of reliability?
    1. Receivable confirmations received from the client’s customers.
    2. Prenumbered receiving reports completed by the client’s employees.
    3. Prior months’ bank statements obtained from the client.
    4. Municipal property tax bills prepared in the client’s name.
17. 17. During year 2 Pipp Co. incurred the following costs to develop and produce a routine low-risk computer software product: Completion of detailed program design $10000 Costs incurred for coding and testing to establish technological feasibility $15000 Other coding and testing costs incurred after establishment of technological feasibility $44000 In Pipp's December 31 year 2 balance sheet what amount should be capitalized as software cost?
    1. $10,000
    2. $25,000
    3. $44,000
    4. 59000
18. 18. During an engagement to compile the financial statements of a nonissuer an accountant becomes aware that management had stated land at appraised value and that if GAAP had been followed both the land account and stockholders' equity would have been decreased by $1 million a material amount. The accountant decides to modify the standard compilation report because management will not revise the financial statements. Under these circumstances the accountant should
    1. Issue either an adverse opinion or a qualified opinion depending on materiality because of the departure from GAAP.
    2. Add a separate paragraph to the accountant's report that restricts the distribution of the financial statements to “internal use only.”
    3. Add a separate paragraph to the accountant's report that discloses the departure from GAAP and its effects on the financial statements.
    4. Add a separate paragraph to the accountant's report that explains the underlying purpose of recording assets at historical cost.
19. 19. Under the Sales Article of the UCC, which of the following circumstances best describes how the implied warranty of fitness for a particular purpose arises in a sale of goods transaction?
    1. The buyer is purchasing the goods for a particular purpose and is relying on the seller’s skill or judgment to select suitable goods.
    2. The buyer is purchasing the goods for a particular purpose and the seller is a merchant in such goods.
    3. The seller knows the particular purpose for which the buyer will use the goods and knows the buyer is relying on the seller’s skill or judgment to select suitable goods.
    4. The seller knows the particular purpose for which the buyer will use the goods and the seller is a merchant in such goods.
20. 20. Before accepting an audit engagement a CPA should evaluate whether conditions exist that raise questions as to the integrity of management. Which of the following conditions most likely would raise such questions?
    1. There are significant differences between the entity's forecasted financial statements and the financial statements to be audited.
    2. The CPA will not be permitted to have access to sensitive information regarding the salaries of senior management.
    3. There have been substantial inventory write-offs just before the year end in each of the past four years.
    4. The CPA becomes aware of the existence of related party transactions while reading the draft financial statements.
21. 21. In an e-commerce environment that requires that the information technology (IT) system be available on a continuous basis, more emphasis will be placed on which of the following aspects of the planning than in a traditional organization?
    1. Maintain appropriate written source documents so the data can be re-entered if it is lost or compromised
    2. Maintain redundant systems for instant availability to assure the flow of transactions
    3. Review additional expenses to obtain the required amount of business interruption insurance coverage for the organization
    4. Assure that appropriate data backups are stored in an off-site location
22. 22. Spark Co. buys cordless phones for $125 each and sells them for $200 each. Spark pays a sales commission of $25 per phone sold and monthly fixed costs are $3000. Assuming Spark desired a profit of 10% of sales how many units must Spark sell?
    1. 600
    2. 400
    3. 200
    4. 100
23. 23. Inherent risk and control risk differ from detection risk in which of the following ways?
    1. Inherent risk and control risk are calculated by the client.
    2. Inherent risk and control risk exist independently of the audit.
    3. Inherent risk and control risk are controlled by the auditor.
    4. Inherent risk and control risk exist as a result of the auditor’s judgment about materiality.
24. 24. Ultra Co. uses a periodic inventory system. The following are inventory transactions for the month of January: 1/1 Beginning inventory 20000 units at $13 1/20 Purchase 30000 units at $15 1/23 Purchase 40000 units at $17 1/31 Sales at $20 per unit 50000 units Ultra uses the LIFO method to determine the value of its inventory. What amount should Ultra report as cost of goods sold on its income statement for the month of January?
    1. $710,000
    2. $750,000
    3. $830,000
    4. 1000000
25. 25. On day 1, Jackson, a merchant, mailed Sands a signed letter that contained an offer to sell Sands 500 electric fans at $10 per fan. The letter was received by Sands on day 3. The letter contained a promise not to revoke the offer but no expiration date. On day 4, Jackson mailed Sands a revocation of the offer to sell the fans. Sands received the revocation on day 6. On day 7, Sands mailed Jackson an acceptance of the offer. Jackson received the acceptance on day 9. Under the Sales Article of the UCC, was a contract formed?
    1. No contract was formed because the offer failed to state an expiration date.
    2. No contract was formed because Sands received the revocation of the offer before Sands accepted the offer
    3. A contract was formed on the day Jackson received Sands’ acceptance
    4. A contract was formed on the day Sands mailed the acceptance to Jackson
26. 26. Elan Co. has two employees. Each employee receives two weeks of paid vacation each year. Vacation rights accumulate. One employee whose weekly salary is $600 took a two-week vacation during the year but the other employee who earns $800 per week took no vacation during the year. In its year-end financial statements what amount should Elan report as vacation liability and expense? Liability Expense
    1. $1600 $1200
    2. $1600 $2800
    3. $0 $1200
    4. $0 $2800
27. 27. Which of the following statements is correct regarding the Federal Unemployment Tax Act?
    1. An employee who resigns regardless of cause is eligible for unemployment benefits.
    2. The federal unemployment system is funded by both employer and employee taxes.
    3. The Act is intended to assist workers who are permanently out of work and need assistance in supporting themselves.
    4. The unemployment insurance system is administered by the states through their employment laws.
28. 28. When the AQR partnership was formed, partner Acre contributed land with a fair market value of $100,000 and a tax basis of $60,000 in exchange for a one-third interest in the partnership. The AQR partnership agreement specifies that each partner will share equally in the partnership’s profits and losses. During its first year of operation, AQR sold the land to an unrelated third party for $160,000. What is the proper tax treatment of the sale?
    1. Each partner reports a capital gain of $33,333.
    2. The entire gain of $100,000 must be specifically allocated to Acre.
    3. The first $40,000 of gain is allocated to Acre, and the remaining gain of $60,000 is shared equally by the other two partners.
    4. The first $40,000 of gain is allocated to Acre, and the remaining gain of $60,000 is shared equally by all the partners in the partnership.
29. 29. The purpose of establishing quality control policies and procedures for deciding whether to accept or continue a client relationship is to
    1. Provide reasonable assurance that personnel are adequately trained to fulfill their responsibilities.
    2. Minimize the likelihood of associating with clients whose management lacks integrity.
    3. Document the matters that are required to be communicated to the audit committee.
    4. Enhance the auditor's understanding of the client's business and its industry.
30. 30. What is the price of a five-year bond (face value $100) that pays no coupons, if its yield is 4%?
    1. $100
    2. $85
    3. $82
    4. $75