TheoryFree CPA Practice Test
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CPA Questions
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Q1The financial accounts of Lager Corporation are prepared using IFRS. Of the following, which information must be shown on the income statement?
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✓ Correct answer: Finance costs, tax expense, and income.
The income statement can be made by listing expenses either by type or by function, thus this is the right answer. Income, finance expenses, the equity method portion of profits and losses, tax expense, discontinued operations, profit or loss, noncontrolling interests in profits and losses, and net profit (loss) attributable to parent equity holders are the bare minimum disclosures that must be made on the income statement.
Q2Which of the following is NOT an example of Deferred Inflows of Resources?
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✓ Correct answer: Deferred loss from sale and leaseback
Examples of Deferred Inflows of Resources include grant amounts received in advance of meeting timing requirements, deferred amounts from refunding debt (credits), and proceeds from sale of future revenue. Other samples include <em>deferred gain</em> from a sale-leaseback transaction, positive fair value of government hedge of a future transaction, and advance of revenue from imposed non-exchange transactions.
Q3Au auditor would express an unmodified opinion with an emphasis-of-matter paragraph added to the auditor's report for a <code>________</code>.
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✓ Correct answer: justified change in accounting principle
An auditor would express an unmodified opinion with an emphasis-of-matter paragraph added to the auditor's report for a justified change in accounting principle. The emphasis-of-matter paragraph should be placed after the opinion paragraph. A material weakness must be reported to management and those charged with governance, but it would not be disclosed in an emphasis-of-matter paragraph added to an otherwise unmodified opinion.
Q4According to the cost recovery method of accounting, gross profit on an installment sale is recognized in income <code>________</code>.
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✓ Correct answer: After cash collections equal to the cost of sales have been received
Installment methods of recognizing revenue are appropriate only when "collection of the sale price is not reasonably assured." Under the cost recovery method, gross profit is deferred and recognized only when the cumulative receipts exceed the cost of the asset sold.
Q5Which of the following is true regarding the difference between book value and shareholder’s equity?
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✓ Correct answer: Book value excludes intangibles such as goodwill.
Book value differs from shareholder’s equity in that book value excludes intangibles, such as goodwill.<br/><br/><b>Key Takeaway: </b>Shareholder’s equity is Total Assets − Total Liabilities. Book value is the net tangible assets of a corporation and does not include items such as goodwill, patents, etc., that are considered intangible. The terms are not synonymous.
Q6Which of the following special reports provides negative assurance?
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✓ Correct answer: Auditor's report on compliance with aspects of contractual agreements
Negative assurance is provided in reports on compliance with aspects of contractual agreements and reports on regulatory requirements related to audited financial statements. Saying, "We are not aware of any instances of noncompliance" is considered giving negative assurance. Cash basis, tax basis, and other non-GAAP reports provide positive rather than negative assurance. The emphasis-of-matter paragraph in the report indicates that the financial statements (elements, accounts, items) were prepared in accordance with the applicable special purpose framework (positive assurance).
Q7Receivables turnover measures which of the following?
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✓ Correct answer: the number of times per year the balance of receivables is collected
Receivables turnover measures the number of times per year the balance of receivables is collected. This is a very important measure of the efficiency with which management is managing accounts receivable.
Q8Use the below facts to calculate basic EPS for ABC Corp: <br/><br/>Net Income $300,000 <br/><br/>Stockholders Equity $500,000 <br/><br/>Preferred Dividends $30,000 <br/><br/>Weighted average common shares outstanding 200,000
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✓ Correct answer: 1.35
Basic EPS = Income Available to common shareholders / Weighted average number of common shares outstanding <br/><br/>Income available to common shareholders = Net Income - Preferred Dividends <br/><br/>Basic EPS = (300,000-30,000)/200,000 = <strong>1.35</strong>
Q9Calculate the amount of depreciation in year 3 of the assets useful life assuming the following facts. <ol><li>Cost of asset $11,000</li><li>Salvage Value $1,000</li><li>Useful life is four years</li><li>Sum of years digit method is used to calculate </li></ol>
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✓ Correct answer: 2,000
The sum of years digits is calculated based on the useful life (1+2+3+4) = 10 <br/><br/>The depreciable base is Cost of asset - salvage value (11,000-1,000) = 10,000 <br/><br/><strong>Depreciation Schedule: </strong> <br/><br/>1st year (4/10) x 10,000 = 4,000 <br/><br/>2nd year (3/10) x 10,000 = 3,000 <br/><br/>3rd year (2/10) x 10,000 = 2,000 <br/><br/>4th year (1/10) x 10,000 = 1,000.
Q10On January 1, year 1, the first day of business, Kate Company spent $115,000 on a machine. The machine's price at the end of the year was $125,000. The machine depreciates using the straight-line method, has a five-year life, and no salvage value.<br/><br/>What is the amount of the current cost depreciation expenditure that would appear in supplemental current cost financial statements for the year ended December 31, year 1?
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✓ Correct answer: $24,000
The average current cost of the asset during the term of usage should be used to calculate depreciation. This machine will typically cost $120,000 [($115,000 + $125,000) ÷ 2] at year one's current prices. Therefore, year 1 depreciation expense is $24,000 ($120,000 ÷ 5-year useful life).
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