Final Examination Study Guide - University of Phoenix



ACC/497 Final Examination Study Guide

This study guide will help to prepare you for the Final Examination you will complete in Week Five. The questions on this study guide and the final examination are related to the main content areas you have learned throughout your program.

BUSINESS ENVIRONMENT AND CONCEPTS EXAMINATION CONTENT

Section One: Business Structure (17–23%)

Topic: Business Organizations

Objective: Describe the formation and dissolution of a corporation.

1. A business entity that is established and set up according to federal or state statutes in which ownership is divided into shares of stock is called a

a. sole proprietorship

b. general partnership

c. unlimited partnership

d. corporation

Topic: Tax Law Basics, Business Structures, and Formation of a Corporation

Objective: Determine the tax consequences of forming a corporation.

2. Matt and Sheila form Krupp Corporation. Matt contributes property with a FMV of $55,000 and a basis of $35,000. Sheila contributes property with a FMV of $75,000 and a basis of $40,000. Matt sells his stock to Paul shortly after the exchange. The transaction will

a. not qualify under Sec. 351

b. qualify under Sec. 351 if Matt can show the sale to Paul was not part of a prearranged plan

c. qualify with respect to Sheila under Sec. 351 whether Matt qualifies or not

d. qualify under Sec. 351 only if an advance ruling has been obtained

Topic: Basics of Flow-Through Entities (S Corporations and Partnerships)

Objective: Compare the tax law requirements for the formations of an S corporation and partnership.

3. Which of the following statements is true?

a. Shareholders who acquire stock in an S corporation after the election date and prior to the election’s effective date must consent to the election.

b. S corporation consent by shareholders is binding on the current tax year and all future tax years.

c. Only shareholders who own stock on the date an S election takes effect must consent to the election.

d. Per the Internal Revenue Code, an organization must elect to become an S corporation if it meets certain criteria.

Topic: Business Organizations

Objective: Differentiate business entities by their advantages and disadvantages.

4. Which of the following is an important benefit of the corporate form of business entity?

a. Mutual agency

b. Limited liability

c. Simple capital structure

d. Government regulation

Section Two: Economic Concepts Essential to Obtaining an Understanding of an Entity’s Business and Industry (8–12%)

Topic: Principles of Economics

Objective: Explain how the principles of economics relate to decision-making, interaction, and the workings of the economy as a whole.

5. Economic models

a. cannot be useful if they are based on false assumptions

b. were once thought to be useful, but that is no longer true

c. must incorporate all aspects of the economy if those models are to be useful

d. can be useful, even if they are not particularly realistic

Topic: Principles of Economics

Objective: Determine how changes in supply and demand influence price, quantity, and market equilibrium.

6. A decrease in input costs to firms in a market will result in

a. a decrease in equilibrium price and an increase in equilibrium quantity

b. a decrease in equilibrium price and a decrease in equilibrium quantity

c. an increase in equilibrium price and no change in equilibrium quantity

d. an increase in equilibrium price and an increase in equilibrium quantity

Topic: Measuring Economic Health and Fiscal Policy

Objective: Describe the use of Gross Domestic Product (GDP) to measure the business cycle.

7. Gross domestic product serves as a measure of two things:

a. the total spending of everyone in the economy and the total saving of everyone in the economy

b. the total income of everyone in the economy and the total expenditure on the nation’s output of goods and services

c. the value of the nation’s output of goods and services for domestic citizens and the value of the nation’s output of goods and services for the rest of the world

d. the nation’s saving and the nation’s investment

Section Three: Financial Management (17–23%)

Topic: Time Value of Money (TVM)

Objective: Calculate present and future values.

8. Which table would you use to determine how much you would need to have deposited 3 years ago at 10% compounded annually in order to have $1,000 today?

a. Future value of 1 or present value of 1

b. Future value of an annuity due of 1

c. Future value of an ordinary annuity of 1

d. Present value of an ordinary annuity of 1

Topic: Overview of Finance and Financial Performance

Objective: Identify the financial management objectives of an organization.

9. Which of the following financial management objectives is most important in terms of an organization meeting its income objective for the year?

a. Accountability to the public

b. Accountability to oversight bodies such as the SEC

c. Budget preparation and budget management

d. Accuracy of financial reporting

Topic: Time Value of Money (TVM) and Capital Structure

Objective: Apply TVM techniques to financial decision-making.

10. If the interest rate is zero, what does the future value interest factor equal?

a. –1.0

b. 0.0

c. 1.0

d. 2.0

11. The future value of $200 received today and deposited at 8% for three years is

a. $248

b. $252

c. $265

d. $216

Topic: Time Value of Money (TVM) and Capital Structure

Objective: Calculate the cost of various debt and equity instruments.

12. When determining the after-tax cost of a bond, the face value of the issue must be adjusted to the net proceeds amounts by considering the

a. risks

b. flotation costs

c. approximate returns

d. taxes

Topic: Time Value of Money (TVM) and Capital Structure

Objective: Calculate an organization’s degree of operating and financial leverage.

13. If a firm’s fixed-financial costs decrease, the firm’s operating break-even point will

a. decrease

b. increase

c. remain unchanged

d. change in an undetermined direction

Section Four: Information Technology (IT) Implications in the Business Environment (22–28%)

Topic: Changing Dynamics of Accounting

Objective: Describe the impact of information systems on the accounting profession.

14. What has been the effect on accountants in organizations that have computerized their data processing functions?

a. The need for accountants has disappeared.

b. The accountants have become bookkeepers.

c. The accountants have become involved in more decision-making activities.

d. The accountants’ decision-making activities have drastically declined.

Topic: Information Systems Infrastructure

Objective: Identify major hardware components.

15. Time cards, packing slips, reservation screens, and bank deposits screens best describe which of the following?

a. Point-of-sale devices

b. Source documents

c. Turnaround documents

d. Data transaction documents

16. A POS device is usually attached to a

a. printer

b. bank check

c. cash register

d. keyboard

Topic: Information Systems Infrastructure

Objective: Explain the use of accounting software applications.

17. Software used for preparing payrolls, maintaining accounts receivable files, and controlling inventory best describes

a. communication software

b. personal productivity software

c. project management software

d. accounting software

Topic: Business Modeling Processes and System Design

Objective: Explain the development of accounting information system requirements.

18. In conducting a feasibility study, operational feasibility refers to whether

a. a proposed system is attainable given the existing technology

b. a manager can coordinate and control the activities of the systems department

c. the proposed system will produce economic benefits which exceed the costs

d. the system will be used effectively within the operating environment of an organization

Topic: Technology and Its Ethical Implications

Objective: Analyze the limitations and risks of using technology in business activities.

19. Which of the following is the primary reason accountants should be concerned about computer crime and abuse?

a. They might lose their job if they don’t detect computer crime or abuse in their organization.

b. They might lose their professional credibility and license if computer crime or abuse continues for a long time in their organization and they do not detect it.

c. They are responsible for designing, implementing, and monitoring the control procedures for AISs.

d. The client could initiate legal actions against the accountant.

20. One of the major crimes identified by the Computer Fraud and Abuse Act of 1986 is intent to illegally obtain information or tangible property by using computers. Which of the following methods might accomplish this type of crime if the perpetrator can change data before, during, or after they are entered into a computer system?

a. Salami technique

b. Data diddling

c. Shoulder surfing

d. Trojan horse program

Section Five: Planning and Measurement (22–28%)

Topic: Fundamentals of Managerial and Cost Accounting

Objective: Compare and contrast process and job-cost systems.

21. Which of the following businesses would most likely use a process costing system?

a. Automobile repair shop

b. Law firm

c. Paint manufacturer

d. Custom furniture manufacturer

22. Which of the following businesses would most likely use a job order costing system?

a. Automobile manufacturer

b. Oil refinery

c. Meat processor

d. Construction contractor

Topic: Cost Allocation

Objective: Assess the advantages and disadvantages of an activity-based costing (ABC) system.

23. A well-designed activity-based costing system starts by

a. identifying the activity-cost pools

b. computing the activity-based overhead rate

c. assigning manufacturing overhead costs for each activity cost pool to products

d. analyzing the activities performed to manufacture a product

24. Which would be an appropriate cost driver for the ordering and receiving activity cost pool?

a. Purchase orders

b. Machine setups

c. Inspections

d. Machine hours

Topic: Variance Analysis

Objective: Explain the advantages and disadvantages of using standard costing.

25. When computing variances, the standard price and the standard quantity of raw materials are separated because

a. different departments are involved in purchasing versus using materials

b. standard prices change more often than standard quantities

c. standard quantities are more difficult to estimate than standard prices

d. it is faster and more efficient for accounting purposes

FINANCIAL ACCOUNTING AND REPORTING EXAMINATION CONTENT

Section One: Concepts and standards for financial statements (17–23%)

Topic: Basic Accounting Principles and Concepts

Objective: Identify the basic assumptions, principles, and constraints of accounting.

1. The SEC and FASB are two organizations that are primarily responsible for establishing generally accepted accounting principles. It is true that

a. they are both governmental agencies

b. the SEC establishes accounting principles and oversees the private sector standards-setting process

c. the SEC is a private organization of accountants

d. the SEC and FASB rarely cooperate in developing accounting standards

Topic: Basic Accounting Principles and Concepts

Objective: Explain the four basic financial statements and how they are interrelated with each other.

2. Which financial statement represents a single point of time?

a. Income statement

b. Retained earnings

c. Balance sheet

d. Statement of cash flows

Topic: Fundamentals of Managerial and Cost Accounting

Objective: Identify key components and terminology utilized within cost accounting.

3. When a job is completed, what happens to the cost of the job?

a. It is removed from work in process and included in cost of goods sold.

b. It is removed from finished goods and included in cost of goods sold.

c. It is removed from materials inventory and included in work in process.

d. It is removed from work in process and included in finished goods.

Topic: Cost-Volume-Profit (CVP)

Objective: Distinguish among fixed, mixed, and variable costs.

4. Rosen, Inc. has 10,000 obsolete calculators, which are carried in inventory at a cost of $20,000. If the calculators are scrapped, they can be sold for $1.10 each (for parts). If they are repackaged, at a cost of $15,000, they could be sold to toy stores for $2.50 per unit. What alternative should be chosen, and why?

a. Scrap; profit is $1,000 greater.

b. Repackage; revenue is $5,000 greater than cost.

c. Scrap; incremental loss is $9,000.

d. Repackage; receive profit of $10,000.

Topic: Cost-Volume-Profit (CVP)

Objective: Calculate a break-even point using the elements of Cost-volume-profit (CVP).

5. Hess, Inc. sells a single product with a contribution margin of $12 per unit and fixed costs of $74,400 and sales for the current year of $100,000. How much is Hess’s break-even point?

a. 4,600 units

b. $25,600

c. 6,200 units

d. 2,133 units

Section Two: Typical items in financial statements (27–33%)

Topic: Inventory

Objective: Describe the impact of different inventory valuation methods on ending inventory and cost of goods sold.

6. Graham Co. uses a periodic inventory system. Details for the inventory account for the month of January 2011 are as follows:

| |Units |Per Unit Price |Total |

|Balance, 1/1/11 |300 |$5.00 |$1,500 |

|Purchase, 1/15/11 |150 |5.30 |795 |

|Purchase, 1/28/11 |150 |5.50 |825 |

An end of January 2011, inventory showed that 180 units were on hand. If the company uses FIFO, what is the value of the ending inventory?

a. $984

b. $900

c. $780

d. $2,136

Topic: Income Statement and Revenue Recognition

Objective: Apply the guidelines for revenue recognition to various business situations.

7. In selecting an accounting method for a newly contracted long-term construction project, the principal factor to be considered should be

a. the terms of payment in the contract

b. the degree to which a reliable estimate of the costs to complete and extent of progress toward completion is practicable

c. the method commonly used by the contractor to account for other long-term construction contracts

d. the inherent nature of the contractor’s technical facilities used in construction

Topic: Statement of Cash Flows

Objective: Prepare a statement of cash flows using the direct and indirect methods.

8. To arrive at net cash provided by operating activities, it is necessary to report revenues and expenses on a cash basis. This is done by

a. re-recording all income statement transactions that directly affect cash in a separate cash flow journal

b. estimating the percentage of income statement transactions that were originally reported on a cash basis and projecting this amount to the entire array of income statement transactions

c. eliminating the effects of income statement transactions that did not result in a corresponding increase or decrease in cash

d. eliminating all transactions that have no current or future effect on cash, such as depreciation, from the net income computation

9. An increase in inventory balance would be reported in a statement of cash flows using the indirect method (reconciliation method) as

a. addition to net income in arriving at net cash flow from operating activities

b. deduction from net income in arriving at net cash flow from operating activities

c. cash outflow from investing activities

d. cash outflow from financing activities

Topic: Cash, Receivables, and Inventory

Objective: Identify the components of cash and cash equivalents.

10. Bank overdrafts, if material, should be

a. reported as a deduction from the current asset section

b. reported as a deduction from cash

c. netted against cash and a net cash amount reported

d. reported as a current liability

Topic: Liabilities

Objective: Calculate various types of current liabilities.

11. Simson Company has 35 employees who work 8-hour days and are paid hourly. On January 1, 2006, the company began a program of granting its employees 10 days of paid vacation each year. Vacation days earned in 2006 may first be taken on January 1, 2007. Information relative to these employees is as follows:

|Year |Hourly Wages |Vacation Days Earned by Each Employee |Vacation Days Used by Each Employee |

|2006 |$25.80 |10 |0 |

|2007 |27.00 |10 |8 |

|2008 |$28.50 |10 |10 |

What is the amount of the accrued liability for compensated absences that should be reported at December 31, 2008?

a. $94,920

b. $90,720

c. $79,800

d. $95,760

Topic: Investments

Objective: Classify securities as available-for-sale, held-to-maturity, or trading.

12. Investments in debt securities should be recorded on the date of acquisition at

a. lower of cost or market

b. cost including accrued interest

c. market value paid for the bond

d. face value plus brokerage fees and other costs incident to the purchase

Topic: Foreign Currency Transactions and Translations

Objective: Prepare financial statements translated from foreign currency.

13. Infinity Corporation acquired 80% of the common stock of an Egyptian company on January 1, 2008. The goodwill associated with this acquisition was $18,350. Exchange rates at various dates during 2008 follow:

|Date |Exchange Rate |

|December 5, 2008 |1 riyal = $0.265 |

|December 31, 2008 |1 riyal = $0.262 |

|January 10, 2009 |1 riyal = $0.264 |

Goodwill suffered an impairment of 20% during the year. If the functional currency is the Egyptian Pound, how much goodwill impairment loss should be reported on Infinity’s consolidated statement of income for 2008?

a. $3,670

b. $3,700

c. $3,690

d. $3,680

Section Three: Specific types of transactions and events (27–33%)

Topic: Cost Allocation and Intangibles

Objective: Recognize asset impairments.

14. Under current accounting practice, intangible assets are classified as

a. amortizable or unamortizable

b. limited-life or indefinite-life

c. specifically identifiable or goodwill-type

d. legally restricted or goodwill-type

Topic: Accounting for Leases

Objective: Record leases from both the lessor and lessee perspectives.

15. In a lease that is appropriately recorded as a direct-financing lease by the lessor, unearned income

a. should be amortized over the period of the lease using the interest method

b. should be amortized over the period of the lease using the straight-line method

c. does NOT arise

d. should be recognized at the lease’s expiration

Topic: Owners’ Equity and Earnings per Share

Objective: Calculate basic and diluted earnings per share (EPS).

16. In computing earnings per share, the equivalent number of shares of convertible preferred stock are added as an adjustment to the denominator (number of shares outstanding). If the preferred stock is cumulative, which amount should then be added as an adjustment to the numerator (net earnings)?

a. Annual preferred dividend

b. Annual preferred dividend times (one minus the income tax rate)

c. Annual preferred dividend times the income tax rate

d. Annual preferred dividend divided by the income tax rate

17. Antidilutive securities

a. should be included in the computation of diluted earnings per share but NOT basic earnings per share

b. are those whose inclusion in earnings per share computations would cause basic earnings per share to exceed diluted earnings per share

c. include stock options and warrants whose exercise price is less than the average market price of common stock

d. should be ignored in all earnings per share calculations

Topic: Investments

Objective: Prepare journal entries for investments using the fair value and the equity method.

18. A requirement for a security to be classified as held-to-maturity is:

a. Ability to hold the security to maturity

b. Positive intent

c. The security must be a debt security

d. All of these are required.

Topic: Less Than 100% Ownership

Objective: Record consolidation and elimination journal entries under conditions of less than 100% ownership and economic unit, parent company, and proportionate consolidation concepts.

19. On January 1, 2008, Colorado Corporation acquired 75% of Denver Company’s voting common stock for $90,000 cash. At that date, the fair value of the noncontrolling interest was $30,000. Denver’s balance sheet at the date of acquisition contained the following balances:

Denver Company Balance Sheet

January 1, 2008

|Cash |$10,000 |Accounts Payable |$35,000 |

|Accounts Receivable |$20,000 |Notes Payable |$50,000 |

|Land |$40,000 |Common Stock |$100,000 |

|Building and Equipment |$165,000 |Additional Paid-In Capital |$20,000 |

|Less: Accumulated Depreciation |($50,000) |Retained Earnings |($20,000) |

|Total Assets |$185,000 |Total Liabilities and Stockholders’ Equity |$185,000 |

At the date of acquisition, the reported book values of Denver’s assets and liabilities approximated fair value. Eliminating entries are being made to prepare a consolidated balance sheet immediately following the business combination. Based on this information, in the entry to eliminate the investment balance,

a. retained earnings will be credited for $20,000

b. additional paid-in-capital will be credited for $20,000

c. differential will be credited for $10,000

d. noncontrolling interest will be debited for 30,000

20. Elvis Company purchases inventory for $70,000 on March 19, 2008, and sells it to Graceland Corporation for $95,000 on May 14, 2008. Graceland still holds the inventory on December 31, 2008, and determines that its market value (replacement cost) is $82,000 at that time. Graceland writes the inventory down from $95,000 to its lower market value of $82,000 at the end of the year. Elvis owns 75% of Graceland. Based on this information, what amount of cost of goods sold should be eliminated in the consolidation workpaper for 2008?

a. $82,000

b. $70,000

c. $95,000

d. $60,000

Section Four: Accounting and reporting for governmental entities (8–12%)

Topic: Environment of Government/Not-for-Profit Accounting

Objective: Compare and contrast governmental (GASB) and proprietary (FASB) accounting.

21. Which of the following is an objective of financial reporting by governmental entities, as established by the Governmental Accounting Standards Board (GASB)?

a. Financial reporting should assist users in assessing the management skills of top management.

b. Financial reporting should assist users in determining if current revenues were sufficient to pay for current services.

c. Financial reporting should assist users in evaluating the cash management operations of the governmental entity for the year.

d. Financial reporting should assist users in assessing whether the government provided appropriate services to its constituents in the current year.

Topic: Environment of Government/Not-for-Profit Accounting

Objective: Describe how the modified accrual accounting basis differs from full accrual accounting.

22. Which of the following funds would use the modified accrual basis of accounting in preparing its fund financial statements?

a. City Electric Utility Enterprise Fund

b. City Motor Pool Internal Service Fund

c. City Hall Capital Project Fund

d. City Employee Pension Trust Fund

Topic: Fund Accounting Part I

Objective: Differentiate between government-wide financial statements and fund statements.

23. As used in defining the modified accrual basis of accounting, the term available means

a. received in cash

b. will be received in cash within 60 days of year’s end

c. collection in cash is reasonably assured

d. collected within the current period or expected to be collected soon enough to pay liabilities of the current period

Section Five: Accounting and reporting for nongovernmental and not-for-profit organizations (8–12%)

Topic: Overview of Not-for-Profit Accounting

Objective: Differentiate between the revenue resources of not-for-profit organizations.

24. Restricted gifts to not-for-profit organizations

a. must be shown as an increase in restricted net assets

b. must be shown as an increase in unrestricted net assets

c. may be shown as an increase in unrestricted net assets if the restriction is met in the same period

d. may be shown as an increase in unrestricted net assets at the discretion of management

Topic: Overview of Not-for-Profit Accoun

Objective: Assess SFAS 116 and 117 and its impact on the financial statements.

25. In 2006, a hospital received a $50,000 cash gift to buy supplies and other items for the pediatric department of the hospital. In 2007, the hospital purchased puppets and other items to be used in explaining medical procedures to young children. The acquisition of the items causes a net decrease in which class (or classes) of net assets?

a. Unrestricted

b. Temporarily restricted

c. Both unrestricted and temporarily

d. Neither unrestricted nor temporarily restricted

REGULATION EXAMINATION CONTENT

Section One: Business Structure (17–23%)

Topic: Ethics and the Accounting Profession

Objective: Distinguish the differences among governing organizations such as the Financial Accounting Standards Board (FASB), the Securities and Exchange Commission (SEC), and the Public Company Accounting Oversight Board (PCAOB).

1. The AICPA Council has designated the following bodies to pronounce accounting principles under Rule 203, EXCEPT

a. Financial Accounting Standards Board

b. Auditing Procedures Board

c. Opinions of the Accounting Principles Board

d. Governmental Accounting Standards Board

Topic: Ethics and the Accounting Profession

Objective: Examine current accounting regulations, specifically the Sarbanes-Oxley Act.

2. Generally accepted auditing standards (GAAS) give auditors considerable discretion to decide the amount of work required to satisfy the second fieldwork standard (internal control evaluation and related audit planning). Which of the following descriptions accurately expresses the minimum amount of work permitted by GAAS for nonpublic companies?

a. Do not obtain an understanding of client environment, accounting, or control procedures. Do not document the decision to assess control risk at maximum. Perform a 100% substantive audit on all financial statement transactions and balances.

b. Obtain an understanding of client environment, accounting, and control procedures. Document the decision to assess control risk at maximum. Perform an extensive, but not 100% substantive, audit on financial statement transactions and balances.

c. Obtain an understanding of client environment, accounting, and control procedures, and perform detail tests of controls. Document the decision to assess control risk below the maximum. Perform restricted substantive audit on financial statement transactions and balances, considering the control risk assessment.

d. Obtain an understanding of client environment, accounting, and control procedures, and perform detail tests of controls. Document the decision to assess control risk at zero. Do not perform a substantive audit on financial statement transactions and balances, as zero control risk means that no errors or fraud can reach the accounts.

Topic: Risks of Unethical Behavior in Business

Objective: Identify the methods used to mitigate unethical behavior in the workplace.

3. Samantha Lewis, CFE, is conducting an investigation into possible skimming of the accounts receivable at Southwest Paint and Supply Co. If Lewis plans to interview all of the following parties, whom should she interview first?

a. Marie Riley, the primary suspect

b. Jose Rodriguez, an accounts receivable clerk who filled in for Riley when she was on vacation

c. Sean Miles, a regular customer of the company whose complaint about his account balance prompted the investigation

d. Thomas Banks, Riley’s supervisor, who is suspected of helping Riley cover the fraud in exchange for a portion of the proceeds

Topic: Establishing Ethical Business Practices

Objective: Explain the ethical challenges presented in the different business cycles, including the revenue and collection, acquisition and expenditure, and production cycles.

4. In the revenue and collection cycle, the auditor checks the numerical sequence of shipping documents. This procedure is related to which of the following assertions?

a. Existence

b. Completeness

c. Rights and obligations

d. Valuation or allocation

Section Two: Business Law (20–25%)

Topic: Torts

Objective: Assess business situations for tort liability and defenses.

5. What is the definition of a tort?

a. Any violation of an ethical duty

b. Any crime or misdemeanor

c. Any action, done in violation of a prior agreement, that allows the victim to recover damages

d. Any civil wrong that allows the injured person to recover damages

Topic: Contracts and Commerce

Objective: Describe the elements of a valid contract.

6. Which of the following accurately describes how e-mail contracts are viewed under the law?

a. E-mail contracts for goods can be valid, but not e-mail contracts for services.

b. E-mail contract are valid only for contracts for less than $500.

c. E-mail contracts are valid so long as both parties sign a written copy printed out from the e-mail.

d. E-mail contracts are generally treated similarly to contracts negotiated by other means.

Topic: Contracts and Commerce

Objective: Explain the application of the Uniform Commercial Code to commercial transactions.

7. Melinda is home one afternoon when a PaverSaver truck pulls up outside her house. Several workers exit the truck and proceed to dig up her driveway. They completely remove her old driveway and pour a new concrete driveway. She observes the entire process, but says nothing to the workers. Later, Melinda’s next-door neighbor complains that the workers who were supposed to come and replace her driveway failed to arrive. How much will PaverSaver be able to recover in court if Melinda refuses to pay the bill they send her for the driveway?

a. PaverSaver will not recover anything because Melinda did not order a driveway replacement.

b. PaverSaver will be able to recover its regular fee for a new driveway.

c. PaverSaver will be able to recover the reasonable value of the driveway.

d. PaverSaver will not recover anything and will have to pay Melinda for destroying her driveway.

Topic: Contracts and Commerce

Objective: Differentiate between types of interests in property.

8. Huey, Dewey, and Louie own a building as tenants in common. Huey lives in the building. Without consulting the other two owners, Dewey deeds his interest in the building to Joe. What will be the outcome of this situation?

a. Huey will own the property as tenants in common with Joe and Louie.

b. Huey and Louie will still own the property as tenants in common, but Joe will have a reversionary interest.

c. The transfer of the interest to Joe will be ineffective because the other two did not consent.

d. Joe will make Huey pay rent.

Topic: Employment Law Government Regulation

Objective: Explain government regulation of employer-employee relationships.

9. Which of the following accurately describes the employment-at-will doctrine?

a. Employees remain employed only if the employer wants them to be employed.

b. Employees remain employed only if the employee wants to be employed.

c. Employees remain employed only if both the employer and the employee want the employment relationship to continue.

d. Whether an employment relationship continues is based on the will of the government.

Section Three: Federal Tax Procedures and Accounting Issues (8–12%)

Topic: Investments

Objective: Determine when to use the fair value and equity methods of accounting for investments.

10. Byner Corporation accounts for its investment in the common stock of Yount Company under the equity method. Byner Corporation should ordinarily record a cash dividend received from Yount as

a. a reduction of the carrying value of the investment

b. additional paid-in capital

c. an addition to the carrying value of the investment

d. dividend income

Topic: Basics of Tax Law and Income Determination

Objective: Apply the concept of tax law as used by tax advisors.

11. Regulations are

a. equal in authority to legislation

b. equal in authority to legislation if statutory

c. presumed to be valid and to have almost the same weight as the IRC

d. equal in authority to legislation if interpretative

Topic: The Accounting Environment

Objective: Explain the overall accounting cycle.

12. When an item of revenue is collected and recorded in advance, it is normally called ___________ revenue.

a. an accrued

b. a prepaid

c. an unearned

d. a cash

Section Four: Federal Taxation of Property Transactions (8–12%)

Topic: Taxable Property Transactions, Cost Recovery, and Recapture

Objective: Calculate adjusted basis, amount realized, realized and recognized gain or loss, basis of property, and holding period for property transactions including Section 1231 property.

13. Joan bought a business machine for $10,000 on January 1, 2006, and later sold the machine for $7,800 when the total allowable depreciation is $3,500. The depreciation actually taken on the tax returns totaled $3,000. Joan must recognize a gain (or loss) of

a. no gain or loss

b. ($3,200)

c. $800

d. $1,300

Topic: Taxable Property Transactions, Cost Recovery, and Recapture

Objective: Apply the appropriate depreciation method to property transactions.

14. For real property placed in service after 1986, depreciation under the MACRS system is calculated using the

a. straight-line method and a half-year convention in the year of acquisition and in the year of disposition

b. straight-line method and a mid-month convention in the year of acquisition and in the year of disposition

c. 200% DB method and a mid-month convention in the year of acquisition and in the year of disposition

d. 200% DB method and a half-year convention in the year of acquisition and in the year of disposition

Topic: Losses and Bad Debt, Nontaxable Property Transactions, and Tax Credits

Objective: Apply the passive activity loss rules in the determination of taxable income.

15. Joy reports the following income and loss:

|Source |Income or Loss |

|Salary |$180,000 |

|Income from activity A* |$120,000 |

|Loss from activity B* |($70,000) |

|Loss from activity C* |($110,000) |

*Activities A, B, and C are all passive activities.

a. Adjusted gross income of $120,000

b. Salary of $180,000 and net losses of $60,000

c. Salary of $180,000 and passive losses of $60,000 that will be carried over

d. Salary of $180,000, passive income of $120,000 and passive loss carryovers of $180,000

Section Five: Federal Taxation – Individuals (12–18%)

Topic: Basics of Tax Law and Income Determination

Objective: Compute taxable income.

16. Taxable income for an individual is defined as

a. AGI reduced by itemized deductions.

b. AGI reduced by personal and dependency exemptions.

c. total income reduced by the standard deduction.

d. AGI reduced by deductions from AGI and personal and dependency exemptions.

Topic: Basics of Tax Law and Income Determination

Objective: Determine what constitutes gross income for tax purposes.

17. Ms. Marple’s books and records reflect the following information:

|Salary earned this year |$65,000 |

|Interest on savings account (credited to her account this year, withdrawn next year) |$1,800 |

|Interest on county bonds earned and collected this year |$2,000 |

|Interest on savings account (credited to her account last year, withdrawn this year) |$200 |

What is the amount Ms. Marple should include in her gross income this year?

a. $66,800

b. $67,000

c. $67,200

d. $69,000

Topic: Basics of Tax Law and Income Determination

Objective: Calculate the basic components of the tax formula including filing status, dependency exemptions, and personal exemptions.

18. Sarah, who is single, maintains a home in which she, her 15-year-old brother, and her 21-year-old niece live. Sarah provides the majority of the support for her brother and her niece. She also provides the majority of support for her cousin, age 18, who is enrolled full-time at the university and lives in an apartment. While the niece and cousin have no income, her brother has a part-time job and earns $4,000 per year. How many personal and dependency exemptions may Sarah claim?

a. One

b. Two

c. Three

d. Four

Topic: Exclusions, Deductions, and Losses

Objective: Distinguish between deductions for adjusted gross income and deductions from adjusted gross income.

19. A taxpayer had the following income and losses in the current year:

|Source |Income or Loss |

|Salary |$55,000 |

|Sold company stock at a loss |($ 5,000) |

|Lottery prize |$ 4,500 |

|Gambling winnings |$ 8,000 |

|Gambling losses |($ 5,000) |

What is the taxpayer’s adjusted gross income (not taxable income)?

a. $57,500

b. $59,500

c. $62,500

d. $64,500

Section Six: Federal Taxation – Entities (22–28%)

Topic: Tax Law Basics, Business Structures, and Formation of a Corporation

Objective: Describe the sources of tax law and the role of the IRS and courts in interpreting and shaping tax law.

20. Which of the following statements regarding proposed regulations is correct?

a. Proposed and temporary regulations are generally issued simultaneously.

b. Proposed regulations do not provide any insight into the IRS’s interpretation of the tax law.

c. Proposed regulations expire after 5 years.

d. Practitioners do not comment on proposed regulations.

Topic: Corporate Tax Elections and Operations

Objective: Analyze the basic tax elections available to the corporation.

21. Identify which of the following statements is false.

a. A corporation’s fiscal year generally must end on the last day of the month.

b. A fiscal year may not end on December 31.

c. A corporation’s first tax year may not cover a full 12-month period.

d. A new corporation can elect a fiscal year that runs from February 16 to February 15 of the following year.

Topic: Corporate Distributions

Objective: Determine the tax consequences of nonliquidating property distributions and stock dividends.

22. A corporation distributes land and the related liability to Meg, its sole shareholder. The land has a FMV of $60,000 and is subject to a liability of $70,000. The corporation has current and accumulated Earnings & Profit of $80,000. The corporation’s adjusted basis for the property is $70,000. What effect does the transaction have on the corporation?

a. A recognized loss of $10,000, and its E&P is reduced by $70,000.

b. A recognized loss of $10,000, and its E&P is unchanged.

c. No recognized gain or loss, and its E&P is reduced by $60,000.

d. No recognized gain or loss, and its E&P is unchanged by the distribution.

Topic: Corporate Distributions

Objective: Determine the tax consequence of the redemption of stock.

23. Elijah owns 20% of Park Corporation’s single class of stock. Elijah’s basis in the stock is $8,000. Park’s E&P is $28,000. If Park redeems all of Elijah’s stock for $48,000, Elijah must report dividend income of

a. $0

b. $28,000

c. $40,000

d. $48,000

Topic: Basics of Flow-Through Entities (S Corporations and Partnerships)

Objective: Determine which items are separately stated and items included in ordinary income of an S corporation and partnership.

24. Matt and Joel are equal partners in the MJ Partnership. For the current year ended December 31, the partnership has book income of $80,000, which includes the following deductions:

(1) guaranteed payments (salaries) to partners: Matt, $35,000; and Joel, $25,000; and

(2) charitable contributions: $6,000.

The book income amount does not include any sales of capital assets or Sec. 1231 assets or any tax-exempt income. Based on the preceding information, what amount should be reported as ordinary income on the partnership return?

a. $60,000

b. $80,000

c. $86,000

d. $140,000

Topic: Distributions and Termination of Interests in S Corporations and Partnerships

Objective: Explain the process of terminating an S election and the tax consequences of the termination.

25. On June 30 of the current year, the S election of Great Corporation is terminated, thus creating a 6-month S short year and a 6-month C short year. Great Corporation is a calendar-year taxpayer. The S short year return is due

a. September 15

b. March 15 of the next year

c. June 30 of the next year

d. December 15

AUDITING AND ATTESTATION EXAMINATION CONTENT

Section One: Plan the Engagement, Evaluate the Prospective Client and Engagement, Decide Whether to Accept or Continue the Client and the Engagement, and Enter into an Agreement with the Client (22–28%)

Topic: Auditing and Assurance

Objective: Explain the nature and functions of auditing.

1. Auditing by nature is

a. the activities that are necessary to assure there are no financial errors or fraud

b. the guarantee that the financial statements are materially correct

c. a process that produces workpapers for the auditor and an opinion on the financial statements to interested persons

d. undesirable to the accounts receivable department

Topic: Auditing and Assurance

Objective: Describe the elements of Generally Accepted Auditing Standards.

2. Within generally accepted auditing standards, general standards relate primarily to

a. qualifications of the auditor and the quality of the auditor’s work

b. qualifications of the auditor

c. the relationship between generally accepted auditing standards and accounting principles

d. the fairness of the financial statements

Topic: Auditing and Assurance

Objective: Explain the Sarbanes-Oxley Act and its application to audits.

3. Which of the following accurately describes the Sarbanes-Oxley Act?

a. A uniform act adopted in the 1970s to establish the need for audits

b. A federal legislative act adopted in the early 1990s to clarify audit rules

c. A post-2000 act adopted to reduce certain conflicts of interest that were common in audits

d. A 2006 act adopted to establish a new type of audit known as internal audit

4. The Sarbanes-Oxley Act (2002)

a. gives the AICPA power to make rules and regulations to carry out the objectives of SOX

b. provides power to the SEC to make rules

c. permits the AICPA to impose sanctions

d. provides that PCAOB cannot impose sanctions

5. The Sarbanes-Oxley Act (2002) established

a. Regulation D to deal with the problems of small firms

b. Section 404 requiring auditors to determine whether functioning internal controls are in place

c. case law providing auditors with statutory defenses

d. the repeal of the Securities and Exchange Act of 1934

Topic: Materiality, Audit Risk, and Evidence

Objective: Explain how an auditor assesses an entity’s business risks.

6. An auditor assesses an entity’s business risks by

a. reperforming the control

b. writing proposal documents

c. reviewing a competitor’s statement of changes

d. observing the application of the control

Section Two: Consider Internal Control in Both Manual and Computerized Environments (11–18%)

Topic: Materiality, Audit Risk, and Evidence

Objective: Explain the application of materiality, audit risk, and evidence to an audit.

7. Generally accepted auditing standards recognize two categories of evidential matter: underlying accounting data and corroborating information. In making an audit in accordance with generally accepted auditing standards,

a. corroborating information is required, whereas underlying accounting data may be gathered under certain circumstances

b. underlying accounting data must be gathered, whereas corroborating information need only be obtained when accounting records are not reliable

c. both categories are required

d. the auditor may choose the category to use, and omit the other

Topic: Audit Planning and Internal Controls

Objective: Assess control risk.

8. Which of the following activities would be most effective in testing controls designed to prevent checks from being issued or recorded for the wrong amount?

a. Observing bank reconciliations

b. Observing segregation of duties

c. Computer-assisted audit techniques

d. Observing documents being marked or cancelled as paid

Topic: Audit Planning and Internal Controls

Objective: Analyze tests of controls.

9. Which of the following special consideration of risks that may arise from changed circumstances should be included in management’s risk assessment?

a. New external audit personnel

b. Slow growth

c. Domestic operations

d. New technology

Section Three: Obtain and Document Information to Form a Basis for Conclusions (32–38%)

Topic: Audit Planning and Internal Controls

Objective: Use the auditing analytical procedures.

10. Professional standards recognize that a misstatement that is quantitatively immaterial may be qualitatively material. In regards to these items, professional standards require the auditor to

a. be alert for them

b. plan the audit to search for them

c. design explicit procedures to detect them

d. report them to the audit committee

11. In planning the audit, the auditor should assess materiality at two levels:

a. account balance and detailed item

b. financial statement and account balance

c. company and divisional

d. preliminary and final

Topic: Statistical Tools for Auditing

Objective: Explain the importance of sampling techniques in an audit.

12. An auditor has computed the revised level of detection risk by direct use of the audit risk model. This means that the auditor must have

a. assessed control risk at the maximum

b. used a flowchart to document the understanding of the complete internal control structure

c. used the primarily substantive approach in planning the audit

d. quantified all the relevant risk assessments

Topic: Statistical Tools for Auditing

Objective: Perform sampling tests.

13. In PPS sampling plans, the effect population book value has on sample size is

a. direct

b. indirect

c. negligible

d. inverse

14. In PPS sampling,

a. every dollar in the population has an equally likely chance of being selected

b. every logical sampling unit must have an equally likely chance of being selected

c. the auditor examines only the individual dollars selected

d. the sampling unit is usually a document

Topic: Substantive Testing of Current and Long-Term Assets, Long-Term Liabilities, and Equity

Objective: Develop audit procedures that include substantive tests of transactions and tests of account balances for current and long-term assets, long-term liabilities, and equity.

15. How can accounts payable accrual balances be best tested?

a. Review the general ledger and compare it with prior-year balances.

b. Review the year-end and post-year-end invoices received with recalculation of any prorating balances applicable at the cut-off point.

c. Conduct an analytical review of the accounts payable and expense accounts.

d. Conduct a management inquiry of the reasonableness of the accruals.

16. How can accounts receivable valuation be best tested?

a. Conduct a management inquiry regarding the accrual of receivables.

b. Conduct a review the aging schedules and inspect for doubtful accounts, and then physically sample invoices and individual customer accounts.

c. Conduct a physical examination of the accounts receivable.

d. Conduct a time value of money analysis.

17. How can merchandise inventory be best tested for existence at year end?

a. Management inquiry

b. Physical inventory count and review of year-end inventory counts

c. Blue book valuation or other independent valuation technique

d. Analytical review

18. How can supply inventory best be tested for ownership at year end?

a. Analytical procedures

b. Management inquiry

c. Receiving documents review

d. Pre-year-end invoices review

Section Four: Review the Engagement to Provide Reasonable Assurance That Objectives Are Achieved and Evaluate Information Obtained to Reach and to Document Engagement Conclusions (8–12%)

Topic: Revenue and Payroll Cycles

Objective: Evaluate the types of transactions, documents, and key internal controls for the revenue and payroll cycles.

19. The audit objective “the accounts receivable balance represents gross claims on customers and agrees with the sum of the accounts receivable subsidiary ledger” is derived from the assertion of

a. existence or occurrence

b. completeness

c. rights and obligations

d. valuation or allocation

Topic: Revenue and Payroll Cycles

Objective: Evaluate test of controls, substantive tests of transactions, analytical procedures, and tests of account balances for revenue and payroll-related accounts.

20. Testing the inventory pricing relates primarily to the

a. existence or occurrence assertion

b. completeness assertion

c. rights and obligations assertion

d. valuation or allocation assertion

Topic: Substantive Testing of Current and Long-Term Assets, Long-Term Liabilities, and Equity

Objective: Analyze the results of test of controls, substantive tests, analytical procedure results, and tests of account balances.

21. In performing tests of details of balances, the auditor would obtain the bank statement directly from the bank, prepare the bank reconciliation, and verify all reconciling items and mathematical accuracy if detection risk was

a. very high

b. high

c. moderate

d. very low

Section Five: Prepare Communications to Satisfy Engagement Objectives (12–18%)

Topic: Issuing the Audit Report

Objective: Identify types and purposes of audit reporting.

22. Whether the system processing is complete, accurate, timely, and authorized defines

a. system integrity

b. system security

c. system availability

d. system maintainability

Topic: Issuing the Audit Report

Objective: Explain the reasons why an auditor would express an opinion other than unqualified on the financial statements.

23. The auditor relies on the client representation letter to

a. confirm written representations given to the auditor

b. document the continuing materiality of client representations

c. guarantee the absence of management fraud

d. reduce the possibility of misunderstanding concerning management’s representations

Topic: Auditor’s Professional Ethics and Legal Liability

Objective: Examine the auditor’s legal liability.

24. The auditor’s legal liability to third parties under common law extends to

a. all third parties for all acts of negligence

b. select third parties for fraud, gross negligence, and ordinary negligence

c. all third parties for acts of fraud and gross negligence and select third parties for ordinary negligence

d. all third parties for acts of fraud and select third parties for gross and ordinary negligence

25. Who is responsible for establishing the process and controls for preparing accounting estimates?

a. The independent auditor

b. The internal auditor

c. Management

d. The audit committee

Answer Key:

BUSINESS ENVIRONMENT AND CONCEPTS EXAMINATION CONTENT

1. d

2. b

3. b

4. b

5. b

6. a

7. b

8. a

9. c

10. c

11. b

12. b

13. c

14. c

15. b

16. c

17. d

18. d

19. c

20. b

21. c

22. d

23. b

24. a

25. a

FINANCIAL ACCOUNTING AND REPORTING EXAMINATION CONTENT

1. b

2. c

3. d

4. b

5. c

6. a

7. b

8. c

9. b

10. d

11. a

12. c

13. d

14. b

15. a

16. a

17. d

18. d

19. a

20. b

21. b

22. c

23. d

24. a

25. b

REGULATION EXAMINATION CONTENT

1. b

2. b

3. c

4. b

5. d

6. d

7. c

8. a

9. c

10. a

11. c

12. c

13. d

14. b

15. c

16. d

17. a

18. c

19. d

20. a

21. d

22. d

23. a

24. c

25. b

AUDITING AND ATTESTATION EXAMINATION CONTENT

1. c

2. a

3. c

4. b

5. b

6. d

7. c

8. c

9. d

10. a

11. b

12. d

13. a

14. a

15. b

16. b

17. b

18. c

19. d

20. d

21. d

22. a

23. d

24. c

25. c

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