When a company holds between 20% and 50% of the outstanding stock of an investee, which of the following statements applies?
The investor should always use the fair-value method to account for its investment.
The investor should use the equity method to account for its investment unless circumstances indicate that it is unable to exercise significant influence over the investee.
The investor should always use the equity method to account for its investment.
The investor must use the fair-value method unless it can clearly demonstrate the ability to exercise significant influence over the investee.
How can long-term assets best be tested for current present value?
Performing an analytical review
Applying time value of money analysis
Physically examining the assets and appraising the assets
Reviewing the depreciation schedule for accuracy and completeness
When an item of expense is paid and recorded in advance, it is normally called
an estimated expense.
a prepaid expense.
a cash expense.
an accrued expense
Auditing is based on the assumption that financial data are verifiable. Data are verifiable when two or more qualified individuals,
working together, agree on the data’s accuracy
working together, prove, beyond doubt, the data’s accuracy
working independently, prove, beyond doubt, the data’s truthfulness
working independently, reach similar conclusions
Whether the entity maintains effective controls to provide reasonable assurance that private customer information obtained because of e-commerce is protected is defined as
Because of the effects of circulation, some audit evidence is more reliable than other evidence. Which of the following is generally considered to be most reliable?
Cutoff bank statements
Receipted bank deposit slips
In computations of weighted average of shares outstanding, when a stock dividend or stock split occurs, the additional shares are
weighted by the number of months outstanding.
weighted by the number of days outstanding.
considered outstanding at the beginning of the earliest year reported.
considered outstanding at the beginning of the year.
Which of the following is a correct statement of the requirements for a bona fide occupational qualification?
Rationally based and evenly applied
Job related and cost effective
Job related and nondiscriminatory
Job related and a business necessity
The amount to be recorded as the cost of an asset under capital lease is equal to the
present value of the minimum lease payments.
present value of the minimum lease payments or the fair value of the asset, whichever is lower.
carrying value of the asset on the lessor’s books.
present value of the minimum lease payments plus the present value of any unguaranteed residual value
At the operating break-even point, ________ equals zero.
earnings before interest and taxes
variable operating costs
fixed operating costs
An effective accounting system should identify and record only the valid transaction of the entity that occurred in the current period, which relates to the
existence or occurrence assertion
rights and obligations assertion
valuation or allocation assertion
presentation and disclosure assertion
In a normal audit, the relationship between the level of materiality used to plan the engagement and the level of materiality used to evaluate evidence is that
they must be identical
the former is higher than the latter
the former may be higher or lower than the latter
the former is lower than the latter
During the current year, a corporation sells equipment for $300,000 that it had purchased and placed in service in 2007. The equipment cost $270,000, and $60,000 of depreciation deductions was allowed. The results of the sale are
ordinary income of $60,000 and LTCG of $30,000.
ordinary income of $60,000 and Sec. 1231 gain of $30,000.
ordinary income of $90,000.
Sec. 1231 gain of $90,000
The specific cost of each source of long-term financing is based on ________ and ________ costs.
before-tax; book value
Which of the following statements is true?
A corporation’s fiscal year generally ends on the last day of the month.
A new corporation can elect a fiscal year that runs from February 16 to February 15 of the following year.
A fiscal year may end on December 31.
A corporation’s first tax year must cover a full 12-month period.
Use of auditor judgment or of a risk matrix is necessary in revising planned detection risk whenever
assessed control risk at the account balance level does not support the planned level of control risk
control risk is assessed below the maximum
risk assessments are not quantified
control risk is assessed above the minimum
Disney’s variable costs are 30% of sales. The company is contemplating an advertising campaign that will cost $22,000. If sales are expected to increase $40,000, by how much will the company’s net income increase?
As used in governmental accounting, interperiod equity refers to a concept of
measuring whether current revenues are sufficient to pay for current services.
providing the same level of services to citizens each year.
requiring that general fund budgets be balanced each year.
levying property taxes at the same rate each year
The Committee of Sponsoring Organizations (COSO) report identified five interrelated components of internal control. Since then, a sixth category has been identified, which is
antifraud programs and controls
information and communication
In the audit risk model, audit sampling applies to
inherent risk and detection risk
inherent risk and control risk
control risk and detection risk
In traditional costing systems, overhead is generally applied based on
units of production
direct material dollars
Which of the following statements is true?
Formation of a partnership requires legal documentation.
The partnership form of business creates double-taxation because individual partners are taxed, and the partnership is also taxed as a separate legal entity.
If two people (or business entities) work together to carry on any business or financial operation with the intention of making a profit and sharing that profit as co-owners, a partnership exists for federal income tax purposes.
An individual engaged in the active conduct of a business must elect not to be taxed as a partnership.
Joshua owns 100% of Steeler Corporation’s stock. Joshua’s basis in the stock is $8,000. Steeler Corporation has E&P of $40,000. If Steeler Corporation redeems 60% of Joshua’s stock for $50,000, Joshua must report dividend income of
The state has a legally separate State Building Authority, which has a board appointed by the Governor. The authority issues debt in its name, holds title to buildings in its name, and leases its building exclusively to the state. The authority would be considered a(n)
Audit sampling is involved whenever an auditor
makes an inference about a population characteristic based on a partial examination of that population
examines 100% of the population
performs tests of controls
performs tests of details
If standard costs are incorporated into the accounting system
the accounting system will produce information which is less relevant than the historical cost accounting system
it may simplify the costing of inventories and reduce clerical costs
it can eliminate the need for the budgeting process
approval of the stockholders is required
A table that shows the relationship between the price of a good and the quantity demanded of that good is called
an equilibrium schedule
a demand schedule
a complementary table
a price-quantity table
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 inventory should be eliminated in the consolidation workpaper for 2008?
As the interest rate increases for any given period, the future value interest factor will
move toward 1
Which of the following accounts in a merchandising company is affected by both the revenue cycle and another cycle?
Sales returns and allowances
Bianca is beneficiary of an $80,000 insurance policy on her father’s life. Upon his death, she may elect to receive the proceeds in 5 yearly installments of $17,500 or may take the $80,000 lump sum. She elects to take the lump sum payment. What are the tax consequences in year one?
All $17,500 each year is taxable.
There is no taxable income.
$1,500 of the $17,500 payment is taxable each year.
$7,500 interest is taxable in the first yea
Damages intended to punish a defendant and deter the defendant and others from engaging in the same tortious conduct in the future are called
Specific audit objectives are normally
developed for each item in the financial statements and derived from the categories of management’s financial statement assertions
the same as the categories of management’s financial statement assertions
management’s assertion of fairness.
broken down into eight types.
On December 31, 2008, Kean Company changed its method of accounting for inventory from weighted-average cost method to the FIFO method. This change caused the 2008 beginning inventory to increase by $420,000. The cumulative effect of this accounting change to be reported for the year ended December 31, 2008, assuming a 40% tax rate, is
The balance in Newsprint Corp.’s foreign exchange loss account was $10,000 on December 31, 2008, before any necessary year-end adjustment relating to the following:
(1) Newsprint had a $15,000 debit resulting from the restatement in dollars of the accounts of its wholly owned foreign subsidiary for the year ended December 31, 2008.
(2) Newsprint had an account payable to an unrelated foreign supplier, payable in the supplier’s local currency unit (LCU) on January 15, 2009. The U.S. dollar–equivalent of the payable was $50,000 on the December 1, 2008, invoice date and $53,000 on December 31, 2008.
In Newsprint’s 2008 consolidated income statement, what amount should be included as foreign exchange loss in computing net income, if the LCU is the functional currency and the translation method is appropriate?
Several years ago, Durham City issued $1 million in zero coupon bonds due and payable in 2010. The bonds were sold at an amount to yield investors 6% over the life of the bonds. During the current year, how much interest expenditures would Durham City recognize related to these bonds?
Face amounts of bonds times 6%
The present value of the bonds at the beginning of the period minus the present value of the bonds at the end of the period multiplied by 6%
Difference between the present value of the bonds at the beginning of the period and the present value of the bonds at the end of the period
Book value of bonds times 6%
The uniform law, issued in 1984 by the Committee on Corporate Laws of the American Bar Association, that regulates the formation, operation, and termination of corporations is
The Model Business Corporation Act
The Revised Model Business Commercial Code
The Uniform Commercial Code
The Standard Incorporation Act
Costs incurred internally to create intangibles are
expensed as incurred.
capitalized if they have an indefinite life.
expensed only if they have a limited life.
A company offers a cash rebate of $1 on each $4 package of batteries sold during 2007. Historically, 10% of customers mail in the rebate form. During 2007, 6,000,000 packages of batteries are sold, and 210,000 $1 rebates are mailed to customers. Assuming there is no beginning liability balance, what is the rebate expense and liability, respectively, shown on the 2007 financial statements dated December 31?
How can long-term assets best be tested for ownership?
Inquiring with management
Examining documents of title
Reviewing prior year workpapers
Reviewing the ledger to ensure the item is listed
A report on internal control effectiveness by management of public companies is required by which of the following:
Only auditors are required to report on internal control effectiveness
The Sarbanes-Oxley Act of 2002
A married person who files a separate return can claim a personal exemption for his or her spouse if the spouse is not the dependent of another and has
adjusted gross income that is less than the personal exemption.
gross income that is less than the personal exemption.
no taxable income.
no gross income.
Antonio owns land held for investment with a basis of $28,000. The city of Lafayette exercises the right of eminent domain and Antonio receives a payment of $48,000. What is Antonio’s realized gain?
Which of the following is considered cash?
Money market savings certificates
Money market checking accounts
The auditor’s strategy in performing test counts during the inventory observation is to
randomly select all test items
test all high dollar items
concentrate tests in areas where employees seem to be disregarding the inventory instructions
concentrate tests on high-dollar items and take a representative sample of other items
What would be the best explanation for the absence of complete information on computer crime?
Most computer crime is not caught
Documentation of abuses hasn’t caught up with actual abuses
Abuse is handled as an internal matter
Hesitant disclosure of abuse due to embarrassment
Paul makes the following property transfers in the current year: $22,000 cash to his wife, $34,000 cash to a qualified charity, $120,000 house to his son, and $3,000 computer to an unrelated friend. The total of Paul’s taxable gifts, assuming he does not elect gift splitting with his spouse, subject to the unified transfer tax, is
A simple diagram that shows estimated completion times versus actual completion times for the various activities in a systems implementation project
a Gantt chart
a PERT chart
a Data flow diagram
an E-R diagram
Which of the following processes would be accounted for using a job order cost system?
Town home production
Canned spinach production
Justifying expenditures for new technologies is especially difficult because
many benefits are intangible and are not easily known or measured
expenses are often recurring and are difficult to estimate
you do not know how many jobs will be affected
justifying a new technology is no different from any other capital budgeting problem
Once sufficient predication has been established, what is the first step a fraud examiner following the fraud theory approach should take?
Interview the suspect.
Create a hypothesis.
Generally accepted accounting principles are
theories that are based on physical laws of the universe.
income tax regulations of the Internal Revenue Service.
standards that indicate how to report economic events.
principles that have been proven correct by academic researchers.
In April 2009 of this year, Emma acquired a machine for $50,000 for use in her business. The machine is classified as 7-year property. Emma elects out of bonus depreciation and does not expense the asset under Sec. 179. Emma’s depreciation on the machine this year is
Which of the following is a tort?
Breach of contract
A wrongful act that does not injure another person’s property, body, or reputation
Unintentional error where appropriate degree of care was exercised and no one was injured
Which of the following objectives is considered the cornerstone of financial reporting by a governmental entity?
Service efforts and accomplishments
The function of auditing is
to provide interested parties with added assurance that the financials are not materially inaccurate
to provide more precise accounting information for accurate tax reporting
to locate every dollar misappropriated
to locate every financial error
Ted’s Gifts and Sweets enters into a written contract with Bannon Candies to supply Ted’s with 60 boxes containing a dozen coconut clusters each month for sale to the public. The agreement contained an integration clause. Before the first delivery under the contract, Ted and his warehouse manager called Debbie, Bannon’s account representative, to request that the candies be delivered in special Valentine’s Day boxes. Debbie told Ted, “Don’t worry, I’ll tell the shipping department to take care of that.” When the candies were delivered, they were in standard cardboard boxes. Ted called Bannon and threatened to sue for breach of contract. Will Ted prevail in his suit?
No, Ted should have written a letter to change the type of boxes in the contract.
Yes, Ted will prevail because he has a witness to the telephone call.
Yes, Ted made a valid modification to the parties’ original agreement.
No, Ted will not prevail because his attempt to modify the agreement was not effective.
For a not-for-profit hospital, which of the following financial statements is required?
Statement of retained earnings
Statement of revenues
Statement of financial position
Statement of functional expenses
The primary purpose of the statement of cash flows is to provide information
that is useful in assessing cash flow prospects.
about the entity’s ability to meet its obligations, its ability to pay dividends, and its needs for external financing.
about the cash receipts and cash payments of an entity during a period.
about the operating, investing, and financing activities of an entity during a period.
One consequence of a property distribution by a corporation to a shareholder is
the shareholder’s basis in the distributed property is the same as the distributing corporation’s basis.
the holding period of the distributed property includes the holding period of the distributing corporation.
any liabilities assumed by the shareholder do not reduce the shareholder’s basis.
the amount of the distribution is increased by any liability assumed by the shareholder.
Statement on Quality Control Standards No. 2 identifies certain quality control elements that should be considered when performing which types of services?
Auditing, accounting, and tax services
Auditing, accounting, and review services
Auditing, tax, and review services
Accounting, tax, and review services
Luca Company overapplied manufacturing overhead during 2006. Which one of the following is part of the year end entry to dispose of the overapplied amount assuming the amount is material?
A decrease to work in process inventory
An increase to finished goods
A decrease to applied overhead
An increase to cost of goods sold
If policymakers increase aggregate demand, the price level
and unemployment fall
rises, but unemployment falls
falls, but unemployment rises
and unemployment rise
The hardware of a computer system includes the computer itself and other devices that help the computer perform its tasks. These other devices are commonly also called
One of the six steps involved in performing analytical procedures includes the following:
Analyze data and identify significant differences.
Understand the role of analytical procedures in planning and performing the audit.
Perform the calculations using industry data.
Understand the relationship between materiality and audit evidence.
Which of the following statements accurately describes the workers’ compensation rules?
The employer is liable for employment-related injuries only if negligent.
The employer can avoid liability if the injured employee was contributory negligent.
The employee has the choice to sue or proceed under the workers’ compensation statute.
The employee will collect for all work-related injuries and will not need to prove negligence on the part of the employer.
Alex is a calendar-year sole proprietor. He began business on December 1 of this year. He uses the accrual method of accounting. Alex had the following collections in the same month: He collected $7,000 in December from clients who paid cash for services to be performed next year. He collected $5,000 in December for services performed during December, which he deposited in an operating account on December 31 of this year. He collected $9,000 in December on accounts receivable for services performed in December, which he deposited in an operating account on January 2 of next year. What is the amount Alex must include in his income for December?
What effect would a decrease in interest rates by the Federal Reserve most likely have in the nation’s manufacturing sector, all other factors remaining constant?
An increase in production but a decrease in employment
An increase in both production and employment
A decrease in production, but an increase in employment
A decrease in both production and employment
Which of the following best describes the weight of a revenue ruling?
Revenue rulings carry more weight than federal court decisions.
Revenue rulings should never be used as authority because they only apply to the taxpayer requesting the ruling.
Regulations carry more weight than revenue rulings.
Revenue rulings carry more weight than regulations.
The control of all funds during the count of cash on hand is meant primarily to prevent
transfers by the client
any chance of double counting
client personnel from viewing the count procedure
In computing the ordinary income of a partnership, a deduction is allowed for
foreign income taxes paid
net Sec. 1231 losses
The cost to produce Part A was $10 per unit in 2005. During 2006, it has increased to $11 per unit. In 2006, Supplier Company has offered to supply Part A for $9 per unit. For the make-or-buy decision,
incremental costs are $1 per unit
differential costs are $2 per unit
incremental revenues are $2 per unit
net relevant costs are $1 per unit
Where a contract calls for action that violates a statute, in a breach of contract case the court will
impose the appropriate criminal penalty.
order payments so that the parties to the illegal contract share any losses equally.
order both parties to return any consideration received.
ignore the contract and leave the parties where they are
involves the design and delivery of advice and financial products
is concerned with the duties of the financial manager
handles accounting activities related to data processing
provides guidelines for the efficient operation of the business
The retail inventory method is based on the assumption that the
ratio of cost to retail changes at a constant rate.
ratio of gross margin to sales is approximately the same each period.
proportions of markups and markdowns to selling price are the same.
final inventory and the total of goods available for sale contain the same proportion of high-cost and low-cost ratio goods.
The statement that the reviewer “is not aware of any material modifications that should be made to the statements in order for them to be in conformity with GAAP” is known as
Nonrefundable tax credits
have expired but may be reinstated with new tax legislation.
may only be used if the taxpayer is receiving a refund.
allow the excess over the taxpayer’s tax liability to be paid to the taxpayer.
only offset a taxpayer’s tax liability.
Software that enables businesses and government agencies to transmit and manipulate financial data on an organization-wide basis best describes
enterprise resource planning (ERP) software
Debt securities that are accounted for at amortized cost, NOT fair value, are
trading debt securities.
held-to-maturity debt securities.
never-sell debt securities.
available-for-sale debt securities.
Which table would show the largest factor for an interest rate of 8% for five periods?
Future value of an annuity due of 1
Present value of an annuity due of 1
Future value of an ordinary annuity of 1
Present value of an ordinary annuity of 1
Expenditures should be budgeted by character. An example of a character classification is
Financial statements for a church-supported college should be prepared according to standards set by the
Financial Accounting Standards Board (FASB).
Securities and Exchange Commission (SEC).
Government Accounting Standards Board (GASB).
American Institute of Certified Public Accountants (AICPA).
Which of the following would terminate a Subchapter S election?
Grantor trust becomes a shareholder.
Partnership becomes a shareholder.
Voting trust becomes a shareholder.
Estate becomes a shareholder.
Which of the following is a debt security?
Certificate of deposit
US treasury bill
Which of the following necessary controls would address a potential misstatement arising from a voucher being paid twice?
Separate duties for approving payment vouchers and signing checks
A computer comparing the sum of checks issued with the entry to cash disbursements
Electronic cancellation of vouchers and supporting information when a check is issued
Periodic independent bank reconciliations
Internal auditors are primarily involved with
compliance audits and operational audits
financial statement audits
Ricky has rented a house from Sarah since last year. The rent is usually $800 per month, but Sarah reduced the monthly rent down to $600 for all 12 months this year in exchange for Ricky constructing an addition to the house. The addition has a fair market value of $3,500. How much total rental income must Sarah report this year?
Which of the following serves as the highest authority for tax research, planning, and compliance activities?
Internal Revenue Code
Income Tax Regulations
Which of the following statements is true?
The repeal of Sec. 351 would result in more existing businesses being incorporated.
Section 351 was enacted to allow taxpayers to incorporate without incurring adverse tax consequences.
Section 351 is an example of a negative aspect of the corporate form of business organization.
The exchange of stock for services rendered is not a taxable transaction.
What agency has the ultimate authority in defining independence for publicly traded companies?
Department of Justice
Revenues of a not-for-profit organization should be reported as
increases in unrestricted net assets.
increases in permanently restricted net assets.
increases in temporarily restricted net assets.
increases in one of the three categories of net assets.
Jane and Bill are married. They purchase a house and lot as tenants by the entirety. Then Jane is killed in a car accident. Her will leaves everything to her sister, Ruth. What will happen to Jane’s interest in the property?
Ruth will own the property with Bill as joint tenants.
Bill will be the sole owner of the property.
Ruth will own the property with Bill as tenants by the entirety.
Bill will have to buy out Ruth’s interest in the property.
Kershaw Bookstore had 600 units on hand at January 1, costing $18 each. Purchases and sales during the month of January were as follows:
|Jan. 14||450 @||$28|
Kershaw does not maintain perpetual inventory records. According to a physical count, 450 units were on hand at January 31. The cost of the inventory at January 31, under the LIFO method is:
The process of formally recording or incorporating an item in the financial statements of an entity is
Which of the following best describes the objective of a fraud examination?
Determine whether financial statements are free of misstatements because of fraud.
Determine whether a crime has been committed, and if so, who is responsible.
Express an opinion on the guilt or innocence of a suspect.
Make recommendations to management about how to prevent fraud.
Which of the following funds is accounted for on the modified accrual basis of accounting?
Which one of the following analytical procedures may indicate possible inventory obsolescence problems when ratios are large?
Inventory growth to cost of sales growth
Finished goods produced to raw material used
Finished goods produced to direct labor
Susie owns a ranch in Wyoming, which Pat offers to purchase. Susie is not willing to sell the ranch but is willing to exchange the ranch for an apartment complex in Louisiana. The complex is available for sale. Pat purchases the apartment complex in Louisiana from Jody and transfers it to Susie in exchange for Susie’s ranch. The ranch and the complex each have a $1,000,000 fair market value. Which of the following is true?
The transaction qualifies as a like-kind exchange for both Pat and Susie.
The transaction qualifies as a like-kind exchange for Susie but not for Pat.
The transaction does not qualify as a like-kind exchange for either Pat or Susie.
The transaction qualifies as a like-kind exchange for Pat but not for Susie.
A lawyer’s refusal to respond to a letter of audit inquiry normally requires the auditor to
issue a qualified or adverse opinion
issue a qualified opinion or a disclaimer of opinion
issue an unqualified opinion with an explanatory paragraph
issue a standard three-paragraph unqualified opinion
The assessment of inherent risk requires considering matters that have a pervasive effect on assertions for all or many accounts and matters that may pertain only to assertions for specific accounts. Which of the following is an example of a pervasive effects matter?
Complexity of calculations
Management turnover, reputation, and accounting skills
Susceptibility to misappropriation
Sensitivity of operating results to economic factors