Source: NINJA MCQ
1. The following information pertains to shipments of merchandise from Home Office to Branch during 20X1:
Home Office's cost of merchandise $160,000
Intracompany billing 200,000
Sales by Branch 250,000
Unsold merchandise at Branch on December 31, 20X1 20,000
In the combined income statement of Home Office and Branch for the year ended December 31, 20X1, what amount of the above transactions should be included in sales?
2. A not-for-profit voluntary health and welfare entity should report a contribution for the construction of a new building as cash flows from which of the following in the statement of cash flows?
A. Operating activities
B. Financing activities
C. Capital financing activities
D. Investing activities
3. On January 2 of the current year, Peace Co. paid $310,000 to purchase 75% of the voting shares of Surge Co. Peace reported retained earnings of $80,000, and Surge reported contributed capital of $300,000 and retained earnings of $100,000. The purchase differential was attributed to depreciable assets with a remaining useful life of 10 years. Peace used the equity method in accounting for its investment in Surge. Surge reported net income of $20,000 and paid dividends of $8,000 during the current year. Peace reported income, exclusive of its income from Surge, of $30,000 and paid dividends of $15,000 during the current year. What amount will Peace report as dividends declared and paid in its current year's consolidated statement of retained earnings?
1. When connecting two or more electronic mail systems, which of the following is a major security issue?
A. Inability to encrypt messages going between network gateways
B. Loss of critical text within messages
C. Inability of receiving users to automatically acknowledge receipt of messages
D. Inability to keep backup copies of messages
2. Under which one of the following conditions is the internal rate of return method less reliable than the net present value technique?
A. When the net present value of the project is equal to zero
B. When income taxes are considered in the analysis
C. When both benefits and costs are included, but each is separately discounted to the present
D. When there are net cash inflows of sizable amounts early in the project
3. Globalization is a process by which nations of the world become integrated through global networks of communication. Its current success is tied to a number of socioeconomic effects, with one of the key effects being:
A. an understanding that the success of the emerging economies is more than simply the cost advantage they have due to having relatively low-cost labor.
B. the relatively large labor force in emerging markets and declining birth rates that have historically been associated with dynamic positive economic change.
C. an undervalued currency in emerging economies that would stimulate exports and strong investment in infrastructure.
D. the fact that innovation blowbacks as the low-priced, high-quality products developed for the emerging economics now will be effectively marketed and sold in the developed world.
1. When an accountant becomes aware of a departure from the applicable financial reporting framework that is material to the financial statements and he or she concludes that modification of the standard report is appropriate, which of the following actions should be taken?
I. The report should include a separate paragraph that discloses the effects of the departure if such effects have been determined by management or are known as the result of the accountant's procedures.
II. The report should include a separate paragraph that discloses the effects of the departure are not known if such a determination has not been made by management.
A. I only
B. II only
C. Either I or II, depending on the particular circumstances
D. Neither I nor II
2. An independent accountant's report is based on a review of interim financial information. If this report is presented in a registration statement, a prospectus should include a statement clarifying that the:
A. accountant's review report is not a part of the registration statement within the meaning of the Securities Act of 1933.
B. accountant assumes no responsibility to update the report for events and circumstances occurring after the date of the report.
C. accountant's review was performed in accordance with standards established by the Securities and Exchange Commission.
D. accountant obtained corroborating evidence to determine whether material modifications are needed for such information to conform with GAAP.
3. According to the AICPA Code of Professional Conduct, which of the following actions by a CPA most likely involves an act discreditable to the profession?
A. Refusing to provide the client with copies of the CPA's workpapers
B. Auditing financial statements according to governmental standards despite the client's preferences
C. Accepting a commission from a non-attest function client
D. Retaining client records after the client demands their return
1. Many states require partnerships to file the partnership name under laws which are generally known as fictitious name statutes. These statutes:
A. require a proper filing as a condition precedent to the valid creation of a partnership.
B. are designed primarily to provide registration for tax purposes.
C. are designed to clarify the rights and duties of the members of the partnership.
D. have little effect on the creation or operation of a partnership other than the imposition of a fine for noncompliance.
2. Mark Olds sold a delivery truck (business use) at a loss. The truck had been held for three years. The loss on the sale of the delivery truck is classified as a:
A. capital loss.
B. Section 1231 loss.
C. Section 1245 loss.
D. Section 1250 loss.
3. In a written trust containing no specific powers, the trustee will have all of the following implied powers except:
A. sell trust property.
B. pay management expenses.
C. accumulate income.
D. employ a CPA to prepare trust tax returns.
1. Answer A
Only the $250,000 of sales by Branch would be included in the combined income statement of Home Office and Branch for the year ended December 21, 20X1. The intracompany transactions would not affect combined income for 20X
1. They will only be recognized when a sale to an outside entity occurs.
2. Answer B
According to FASB ASC 958-230-55-3, a contribution to a not-for-profit restricted to long-term purposes like construction shall be reported as a cash flow from financing activities. Cash flows received from investment income restricted by donor stipulation to the same purposes also are reported as financing activities, not as operating activities. FASB ASC 958-230-55-3
3. Answer B
Only dividends paid to Peace shareholders will be reported as dividends paid. Dividends paid to Peace by Surge will be eliminated in consolidation. Dividends paid to shareholders other than Peace will be reported as an adjustment to the non-controlling interest account.
1. Answer A
The inability to encrypt messages going between network gateways is a major security issue. The security of the connection is the primary issue.
-Even if all systems are secured, the gateway, if not appropriately secured, can be a security exposure.
-The inability to keep backup copies of messages is not a major security issue.
2. Answer D
The real issue here is the reinvestment assumption applied to recovered funds. Net present value (NPV) assumes reinvestment at the cost of capital whereas internal rate of return (IRR) assumes reinvestment at the IRR.
NPV makes the more realistic assumption about the rate of return that can be earned on cash flows from the project.
3. Answer B
Socioeconomic effects are the social and economic experiences and realities that help mold one's personality, attitudes, and lifestyle. Declining birth rates reduce the dependency ratio, and the large labor force tends to keep wages low as economic activity expands. Most of the world's currently developed economies were in this phase of the demographic cycle when they began their economic expansion.
1. Answer C
AR-C 90.57 states, If the accountant concludes that modification of the standard report is adequate, the departure should be disclosed in a separate paragraph of the report under the heading “Known Departures From the [identify the applicable financial reporting framework], including disclosure of the effects of the departure on the financial statements if such effects have been determined by management or are known to the accountant as the result of accountant's procedures.
2. Answer A
In an independent accountant's review report on interim financial information included in a registration statement, a prospectus should include a statement clarifying that the accountant's review report is not a part of the registration statement within the meaning of the Securities Act of 1933. (AU-C 925.A6 states, If the registration statement includes the auditor's review report on interim financial information, then the requirements…assist the auditor in determining that the issuer discloses the fact that an interim review report is not a report on, or a part of, the registration statement prepared or certified by the auditor, within the meaning of Section 7 and Section 11 of the Securities Act of 1933, and that the auditor's liability under Section 11 does not extend to the auditor's review report.)
This statement describes the limited purpose of the accountant's review and the restricted degree of reliance that should be placed on the review report. An accountant does assume responsibility to update the report for subsequent events and circumstances, up to the effective date of the registration statement. The accountant's review is performed in accordance with the PCAOB Auditing Standards for a public entity and the AICPA Statements on Auditing Standards for a non-issuer. Obtaining corroborating evidence to determine whether material modifications are needed for such information to conform with GAAP is an audit procedure and is not required in a review engagement.
3. Answer D
When a client or former client makes a request for client-provided records that are in the custody of the CPA or the CPA's firm, the CPA must return those records to the client.
The CPA's workpapers are the CPA's property and need not be provided to the client under ET Sections 1, 2, and 3.
Commissions are not permitted when the CPA performs an audit, review, examination of prospective financial information, or a compilation when the CPA expects that a third party may use the information. Commissions are permitted for a non-attest client, but only when they are disclosed to the client.
The client's preference does not determine which standards are followed in an audit.
1. Answer D
The formation of a partnership is usually a very informal action. A statute to require a filing of a partnership name has little effect except to generate fine income for the states.
2. Answer B
Depreciable property used in a business is a Section 1231 asset. Section 1245 only applies to the sale of personal property at a gain. Section 1250 applies to the sale of real property at a gain.
3. Answer C
Generally, a trustee would have the power to sell trust property, pay management expenses, and employ a CPA to prepare trust tax returns. The trustee would not typically accumulate income because the income would then be taxed at a very high tax rate. For example, in 2015 the highest rate of 39.6% is reached when income is only $12,301.
Source: NINJA MCQ