CPA Sample Exam

1. According to the FASB and the IASB conceptual frameworks, useful information must exhibit the fundamental qualitative characteristics of:

2. According to the FASB and IASB conceptual framework, the objective of general purpose financial reporting is to:

3. Audit programs should be designed so that:

4. Which of the following events most likely would cause an auditor to have substantial doubt about an entity’s ability to going concern:

5. Instead of the usual cash dividend, Evie Corp. declared and distributed a property dividend from its overstocked merchandise. The excess of the merchandise’s carrying amount over its market value should be:

6. When financial statements contain a departure from US GAAP because, due to unusual circumstances, the statements would otherwise be misleading, the auditor should express an opinion that is:

7. Cyber Company’s current ratio is 3 to 1 and current liabilities total $62,000. What is Cyber’s net working capital:

8. Bren Company’s beginning inventory was understated by $26,000, and its ending inventory was overstated by $52,000. As a result, Bren’s cost of goods sold for the year was:

9. On January 2, 2001, West Co. issued 9% bonds in the amount of $500,000, which mature on January 2, 2008. The bonds were issued for $469,500 to yield 10%. Interest is payable annually on December 31. West uses the interest method of amortizing bond discount. In its June 30, 2001, balance sheet, what amount should West report as bonds payable?

10. On January 2, Year 3, ABC Co. purchased 10% of XYZ, Inc.’s outstanding common shares for $40,000. ABC is the largest single shareholder in XYZ, and ABC’s officers are a majority on XYZ’s board of directors. XYZ reported net income of $50,000 for Year 3 and paid dividends of $15,000. In its December 31, Year 3, balance sheet, what amount should ABC report as investment in XYZ?

11. To determine whether a particular assertion is relevant to a significant account balance or disclosure, the auditor should evaluate all of the following except:

12. Which of the following representations does an accountant make implicitly when issuing the standard report for the compilation of a nonpublic entity’s financial statements:

13. The nature and extent of CPA firm’s quality control policies and procedures will depend on various factors, including its:

14. Tod Corp. wrote off $100,000 of obsolete inventory on December 31, 20X1. The effect of this write-off was to decrease:

15. In assessing the competence of an internal auditor, an independent CPA most likely would obtain information about the:

16. Young Corp. purchased equipment by making a down payment $4,000 and issuing a note payable for $18,000. A payment of $6,000 is to be made and the end of each year for three years the applicable rate of interest is 8%. The present value of an ordinary annuity factor for three years at 8% is 2.58, and the present value for the future amount of a single sum of one dollar for three years at 8% is 0.79. Shipping charges for the equipment were $2,000, and installation charges were $3,500. What is the capitalized cost of the equipment?

17. At the beginning of the current year, Hayworth Co. sold equipment with a 2-year service contract for a single payment of $20,000. The fair value of the equipment was $18,000. Hayworth recorded this transaction with a debit of $20,000 to cash and a credit of $20,000 to sales revenue. Which of the following statements is correct regarding Hayworth’s current-year financial statements

18. Case cereal Co. frequently distributes coupons to promote new products. On October 1, 20X1, case mailed 1,000,000 coupons for $.45 off each box cereal purchased. Case expects 120,000 of these coupons to be redeemed before the December 31, 20X1, expiration date. It takes 30 days from the redemption date for Case to receive the coupons form the retailers. Case reimburses the retailers an additional $.05 for each coupon redeemed. As of December 31, 20X1, Case had paid retailers $25,000 related to these coupons and had 50,000 coupons on hand that had not been processed for payment. What amount should Case report as a liability for coupons in its December 31, 20X1, balance sheet

19. Porter Co. began its business last year and issued 10,000 shares of common stock at $3 per share. The par value of the stock is $1 per share. During January of the current year, Porter bought back 500 shares at $6 per share, which were reported by Porter as treasury stock. The treasury stock shares were reissued later in current year at $10 per share. Porter used the cost method to account for its equity transactions. What amount should Porter report as paid-in capital related to its treasury stock transactions on its balance sheet for the current year?

20. The original cost of an inventory item is below the net realizable value and above the net realizable value less a normal profit margin. The inventory item’s replacement cost is below the net realizable value less a normal profit margin. Under the lower of cost or market method, the inventory item should be valued at:

21. Tam Company is negotiating for the purchase of equipment that would cost $100,000, with the expectation that $20,000 per year could be saved in after-tax cash costs if the equipment were acquired. The equipment’s estimated useful life is 10 years, with no residual value, and would be depreciated by the straight-line method. Tam’s predetermined minimum desired rate of return is 12%. Present value of an annuity of 1 at 12% for 10 periods is 5.65. Present Value of 1 due in 10 periods at 12% is 0.322. What is the net present value?

22. An example of a preventive control activity would be:

23. Gartshore is a mail-order book company. The company recently changed its credit policy in an attempt to increase sales. Gartshore’s variable cost ratio is 70% and its required rate of return is 12%. The company projects that annual sales will increase from the current level of $360,000 to $432,000, but the average collection period on receivables will go from 30 to 40 days. Ignoring any tax implications, what is the cost of carrying additional investment in accounts receivable, using a 360-day year?

24. An agreement between small firm and a bank that permits the film to borrow varying amounts of funds as a needed over a specified time period is called a:

25. The “true” rate of interest is the same as the _______ rate.

26. In 2014, Strake Corp., an accrual-basis calendar-year corporation, reported book income of $380,000. Included in that amount was $50,000 municipal bond interest income, $170,000 for federal income tax expense, and $2,000 interest expense on the debt incurred to carry the municipal bonds. What amount should Strake’s taxable income be as reconciled on Strake’s Schedule M-1 of Form 1120, U.S. Corporation Income Tax Return?

27. Curry’s adjusted basis in Vantage Partnership was $5,000 at the time he received a nonliquidating distribution of land. The land had an adjusted basis of $6,000 and a fair market value of $9,000 to Vantage. What was the amount of Curry’s basis in the land?

28. Baker, and individual, owned 100% of Alpha, an S corporation. At the beginning of the year, Baker’s basis in Alpha Corp. was $25,000. Alpha realized ordinary income during the year in the amount of $1,000 and a long-term capital loss in the amount of $3,000 for this year. Alpha distributed $30,000 in cash to Baker during the year. What amount of the $30,000 cash distribution is taxable to Baker?

29. Smith filed his individual income tax return on April 15, 20X1. What is the time limit for the IRS to assess a deficiency if the return is fraudulent?

30. Johnson, and individual, has a 50% interest in DEF partnership. Johnson’s adjusted basis at the beginning of the year was $14,000. The partnership’s ordinary income for the current year was $6,000. Johnson received a nonliquidating distribution of $8,000 cash, and property with an adjusted basis of $12,000 and a fair market value of $15,000. What is the basis of the distributed property, other than cash, to Johnson?