2006 business questions

Following are multiple choice questions recently released by the AICPA. These questions were released by the AICPA with letter answers only. Our editorial board has provided the accompanying explanations.

Please note that the AICPA generally releases questions that it does NOT intend to use again. These questions and content may or may not be representative of questions you may see on any upcoming exams.

2006 AICPA Newly-Released Business Questions

- 1 -

Under the Uniform Partnership Act, which of the following statements is(are) correct regarding the effect of the assignment of an interest in a general partnership? I. The assignee is personally responsible for the assigning partner's share of past and future

parthernship debts. II. The Assignee is entitled to the assigning partner's interest in partnership profits and surplus on

dissolution of the partnership.

a. I only. b. II only. c. Both I and II. d. Neither I nor II. ANSWER:

Choice "b" is correct. A partner may assign his or her interest in the partnership. The effect of such an assignment is to transfer the partner's right to receive the partner's share of profits or surplus only. Such an assignment does not cause dissolution or make the assignee a new partner. The assignor is still regarded as a partner and is liable for past and future partnership debts. The assignee, since he is not a partner, is not liable for past and future partnership debts.

Choice "a" is incorrect. The assignee of an interest in a general partnership is not personally responsible for the assigning partner's share of past and future partnership debts but is entitled to the assigning partner's interest in partnership profits and surplus on dissolution of the partnership. This answer is backwards.

Choice "c" is incorrect. The assignee of an interest in a general partnership is entitled to the assigning partner's interest in partnership profits and surplus on dissolution of the partnership but is not personally responsible for the assigning partner's share of past and future partnership debts.

Choice "d" is incorrect. The assignee of an interest in a general partnership is entitled to the assigning partner's interest in partnership profits and surplus on dissolution of the partnership but is not personally responsible for the assigning partner's share of past and future partnership debts.


- 2 -

Which of the following is a computer program that appears to be legitimate but performs an illicit activity when it is run? a. Redundant verification. b. Parallel count. c. Web crawler. d. Trojan horse. ANSWER:

Choice "d" is correct. A Trojan horse (like the wooden horse in Helen of Troy) is a program that appears to have a useful function but that contains a hidden and unintended function that presents a security risk (appears to be legitimate but performs an illicit activity when it is run).

Choice "a" is incorrect. It is unclear what redundant verification is. One possibility if that it means verifying something twice to make sure that it is done once. This term is probably just made up.

Choice "b" is incorrect. A parallel count appears to be the counting of bits in a parallel fashion. It appears to have something to do with digital circuits in digital clocks, watches, microwave ovens, VCRs, and the like. It is not a computer program.

Choice "c" is incorrect. A web crawler (also known as a web spider or web robot) is a program which browses the web in a methodical, automated manner. Web crawlers are mainly used to create a copy of visited web pages for later processing by a search engine. Web crawlers can also be used for automating maintenance tasks on a web site. Web crawlers can also be used to gather specific types of information from web pages. There is nothing illicit about a web crawler.


- 3 -

Which of the following parties generally has the most management rights? a. Minority shareholder in a corporation listed on a national stock exchange. b. Limited partner in a general partnership. c. Member of a limited liability company. d. Limited partner in a limited partnership. ANSWER:

Choice "c" is correct. Unless the articles or operating agreement provide otherwise, all members of the LLC have a right to participate in management. The members may decide to centralize management by selecting managers to run the LLC. A member of a limited liability company has the most management rights of any of the parties listed. A minority shareholder in a corporation has no management rights (and neither does a majority shareholder). A limited partner has no day-to-day management rights but may have some rights in extraordinary circumstances. It is unclear what a limited partner in a general partnership would even be; the existence of a limited partner would make a partnership a limited partnership and not a general partnership.

Choice "a" is incorrect. Stockholders have very limited rights to run the corporation. They generally only have the right to elect directors and to vote on fundamental changes in the corporation. Such fundamental changes would include dissolutions, amendments to the articles, mergers, consolidations, compulsory share exchanges, and sale of substantially all of the corporation's assets.

Choice "b" is incorrect. There are no limited partners in a general partnership. There are only general partners. Since there are no limited partners, there are no management rights for limited partners.

Choice "d" is incorrect. Limited partners in a limited partnership have very limited rights to participate in the management of the business. In fact, if they do participate in management, they face potential liability to those who thought they were a general partner (i.e., if a limited partner becomes involved in day-to-day management is some way (participating in control), she may be treated as a general partner and lose her limited liability).


- 4 -

In which type of business entity is the entire ownership interest most freely transferable? a. General partnership. b. Limited partnership. c. Corporation. d. Limited liability company. ANSWER:

Choice "c" is correct. Among the business entities listed, entire ownership interests are most freely transferable in a corporation. Unless transferability is restricted by contract (restricted shares or voting trusts or voting agreements), there are no restrictions on the sale of corporate stock (the common stock represents the stockholders' ownership interest). The right to transfer ownership interests freely is one of the advantages of the corporate form of business.

Choice "a" is incorrect. A general partner in a general partnership may assign his or her right to receive profits or surplus. A general partner cannot assign out his interest and confer partnership status on the assignee without unanimous consent of all other partners.

Choice "b" is incorrect. Both general partners and limited partners in a limited partnership may assign out the right to receive profits and surplus. Neither general nor limited partners can confer general or limited partnership status on the assignee without the unanimous consent of all general and all limited partners.

Choice "d" is incorrect. In most states, limited liability company (LLC) members may not sell and confer ownership interest without the consent of all LLC members.


- 5 -

Under the Revised Uniform Limited Partnership Act and in the absence of a contrary agreement by the partners, which of the following events is most likely to dissolve a limited partnership? a. A majority vote in favor by the partners. b. A two-thirds vote in favor by the partners. c. A withdrawal of a majority of the limited partners. d. Withdrawal of the only general partner. ANSWER:

Choice "d" is correct. Absent a contrary agreement of the partners, a limited partnership can be dissolved by written consent of all the general partners, withdrawal or death of a general partner, or judicial decree. Thus, withdrawal of the only general partner would cause dissolution. (There has to be at least one general partner in a limited partnership.)

Choice "a" is incorrect. It takes unanimous written consent of all general partners to dissolve the limited partnership, not majority vote.

Choice "b" is incorrect. It takes unanimous written consent of all general partners to dissolve the limited partnership, not two-thirds vote.

Choice "c" is incorrect. Death or withdrawal of a limited partner does not cause dissolution. Only death or withdrawal of a general partner causes dissolution.


- 6 -

Which of the following input controls would prevent an incorrect state abbreviation from being accepted as legitimate data? a. Reasonableness test. b. Field check. c. Digit verification check. d. Validity check. ANSWER:

Choice "d" is correct. A validity check (or valid code test) would prevent an incorrect state abbreviation from being accepted. The state abbreviation codes would be checked against valid values in a master file. Note the differences in terminology; different words may be used for the same thing. There is often no "standard" terminology in IT.

Choice "a" is incorrect. A reasonableness test (check) is a data validation check on whether a data value has a certain relationship with other data values. There is no "relationship" with state abbreviations, at least in this question. However, as an additional verification, after the state abbreviation was determined to be a correct value (i.e., TX), the state abbreviation might be checked against the zip code to determine if the state contained the zip code; if not, one of them would be incorrect. There is no way to tell which one is incorrect, but at least there would be an indication of some kind of error.

Choice "b" is incorrect. A field check is a data validation check performed on a data element to ensure that it is of the appropriate data type (alphanumeric, numeric, etc.). Unfortunately, a state abbreviation may be incorrect even if it is of the correct data type.

Choice "c" is incorrect. It is unclear what a digit verification check actually is. A Google search failed to turn up anything, as did reference to several of the texts that the examiners have provided as references in the IT area. Perhaps the examiners are making up good sounding combinations of words for some of the wrong answers.


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Compared to batch processing, real-time processing has which of the following advantages? a. Ease of auditing. b. Ease of implementation. c. Timeliness of information. d. Efficiency of processing. ANSWER:

Choice "c" is correct. Compared to batch processing, real-time processing has the advantage of timeliness of information because data is updated more quickly.

Choice "a" is incorrect. Auditing is normally easier with a batch system than with an online system. With an online system, it is harder, although certainly not impossible, to build effective audit trails. With less effective audit trails, it is more difficult to audit, and sometimes considerably different approaches to auditing (auditing around a system instead of auditing through a system) must be taken.

Choice "b" is incorrect. There is no real difference in general between the ease of implementation of a batch system and of an online system; although, there might be a difference between a specific batch system and a specific online system.

Choice "d" is incorrect. There is no real difference in general between the efficiency of processing between a batch system and an online system; although, there might be a difference between a specific batch system and a specific online system. It is difficult to determine exactly what the examiners actually mean by "efficiency of processing."


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Which of the following statements is correct regarding both debt and common shares of a corporation? a. Common shares represent an ownership interest in the corporation, but debt holders do not have an

ownership interest. b. Common shareholders and debt holders have an ownership interest in the corporation. c. Common shares typically have a fixed maturity date, but debt does not. d. Common shares have a higher priority on liquidation than debt. ANSWER:

Choice "a" is correct. Common shares represent an investment in the corporation whereby the common shareholder becomes a part owner of the corporation. A debt holder is a creditor of the corporation. The corporation has borrowed money from the debt holder and promises to repay at a later date. A debt holder is not an owner of the corporation.

Choice "b" is incorrect. Unlike a common shareholder, a debt holder does not have an ownership interest in the corporation.

Choice "c" is incorrect. Common shares do not have a fixed maturity date, but debt securities do. This answer is backwards.

Choice "d" is incorrect. Upon liquidation of a corporation, the creditors of the corporation are paid first. After the creditors are paid, the shareholders are paid on a pro rata basis. Thus, debt holders (creditors) have a higher priority than stockholders.


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The capital structure of a firm includes bonds with a coupon rate of 12% and an effective interest rate is 14%. The corporate tax rate is 30%. What is the firm's net cost of debt? a. 8.4% b. 9.8% c. 12.0% d. 14.0% ANSWER:

Choice "b" is correct. The net cost of debt is computed as the effective interest rate net of tax, or 14% x .70 = 9.8%. The question is trying to trick the candidate into using the coupon rate of 12% rather than the effective interest rate. The coupon rate is used only if it is the same as the effective interest rate and there are no flotation costs.

Choice "a" is incorrect. The net cost of debt is computed as the effective interest rate net of tax, or 14% x .70 = 9.8%, not the coupon rate of 12% x .70 = 8.4%.

Choice "c" is incorrect. The net cost of debt is computed as the effective interest rate net of tax, or 14% x .70 = 9.8%, not the coupon rate of 12% by itself. The cost of debt is computed on an after-tax basis and uses the effective interest rate instead of the coupon rate.

Choice "d" is incorrect. The net cost of debt is computed as the effective interest rate net of tax, or 14% x .70 = 9.8%, not the effective interest rate of 14% by itself. The cost of debt is computed on an after-tax basis.


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Rodder, Inc. manufactures a component in a router assembly. The selling price and unit cost data for the component are as follows:

Selling price $15 Direct materials cost 3 Direct labor cost 3 Variable overhead cost 3 Fixed manufacturing overhead cost 2 Fixed selling and administration cost 1

The company received a special one-time order for 1,000 components. Rodder has an alternative use of production capacity for the 1,000 components that would produce a contribution margin of $5,000. What amount is the lowest unit price Rodder should accept for the component? a. $9 b. $12 c. $14 d. $24 ANSWER:

Note: This question is answered in the Required Homework Reading relating to Relevant Costs in Chapter B5.

Choice "c" is correct. The lowest unit price that Rodder should accept is the variable cost of producing the router ($3 + $3 + $3 = $9) plus the $5,000 contribution margin on a unit basis ($5,000 / 1,000 = $5) of the alternative use for the production capacity. The total of these amounts is $14 [$3 + $3 + $3 + $5 = $14].

Choice "a" is incorrect. The lowest unit price that Rodder should accept is the variable cost of producing the router ($3 + $3 + $3 = $9) plus the $5,000 contribution margin on a unit basis ($5,000 / 1,000 = $5) of the alternative use for the production capacity, not just the variable cost ($9) of producing the router.

Choice "b" is incorrect. The lowest unit price that Rodder should accept is the variable cost of producing the router ($3 + $3 + $3 = $9) plus the $5,000 contribution margin on a unit basis ($5,000 / 1,000 = $5) of the alternative use for the production capacity, not the variable and fixed cost ($9 + $2 + $1 = $12) of producing the router.

Choice "d" is incorrect. The lowest unit price that Rodder should accept is the variable cost of producing the router ($3 + $3 + $3 = $9) plus the $5,000 contribution margin on a unit basis ($5,000 / 1,000 = $5) of the alternative use for the production capacity, not the variable cost and selling price ($9 + $15 = $24) of producing the router.


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What is the primary disadvantage of using return on investment (ROI) rather than residual income (RI) to evaluate the performance of investment center managers? a. ROI is a percentage, while RI is a dollar amount. b. ROI may lead to rejecting projects that yield positive cash flows. c. ROI does not necessarily reflect the company's cost of capital. d. ROI does not reflect all economic gains. ANSWER:

Choice "b" is correct. The primary disadvantage of using return on investment (ROI) rather than residual income (RI) to evaluate the performance of investment center managers is that ROI may lead to rejecting projects that yield positive cash flows. Profitable investment center managers might be reluctant to invest in projects that might lower their ROI (especially if their bonuses are based only on their investment center's ROI), even though those projects might generate positive cash flows for the company as a whole. This characteristic is often known as the "disincentive to invest."

Choice "a" is incorrect. The primary disadvantage of using return on investment (ROI) rather than residual income (RI) to evaluate the performance of investment center managers is that ROI may lead to rejecting projects that yield positive cash flows, not that ROI is a percentage and RI is a dollar amount. The fact that one is a percentage and one is a dollar amount might make them a little harder to interpret, but this interpretation difficulty would certainly not seem to be the "primary" disadvantage.

Choice "c" is incorrect. The primary disadvantage of using return on investment (ROI) rather than residual income (RI) to evaluate the performance of investment center managers is that ROI may lead to rejecting projects that yield positive cash flows, not that ROI does not necessarily reflect the cost of capital.

Choice "d" is incorrect. The primary disadvantage of using return on investment (ROI) rather than residual income (RI) to evaluate the performance of investment center managers is that ROI may lead to rejecting projects that yield positive cash flows, not that ROI does not reflect all economic gains.


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Which of the following would be most impacted by the use of the percentage of sales forecasting method for budgeting purposes? a. Accounts payable. b. Mortgages payable. c. Bonds payable. d. Common stock. ANSWER:

Note: This question is answered in the Required Homework Reading regarding Annual Profit Plans in Chapter B5.

Choice "a" is correct. Of the items listed, accounts payable would be the most impacted by the use of the percentage of sales forecasting method for budgeting purposes. If sales increased or decreased, purchases would presumably increase or decrease, by whatever percentage was being used in the budgeting process. If purchases increased or decreased, accounts payable would presumably increase or decrease by approximately the same percentage. The other items listed have no relationship at all to sales and would thus not be affected by the method used to forecast sales.

Choice "b" is incorrect. Mortgages have no relationship to sales and mortgages payable would not be affected by the method used to forecast sales.

Choice "c" is incorrect. Bonds have no relationship to sales and bonds payable would not be affected by the method used to forecast sales. Mortgages and bonds are just alternate forms of debt.

Choice "d" is incorrect. Common stock has no relationship to sales and would not be affected by the method used to forecast sales.


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A company produces widgets with budgeted standard direct materials of 2 pounds per widget at $5 per pound. Standard direct labor was budgeted at 0.5 hour per widget at $15 per hour. The actual usage in the current year was 25,000 pounds and 3,000 hours to produce 10,000 widgets. What was the direct labor usage variance? a. $25,000 favorable. b. $25,000 unfavorable. c. $30,000 favorable. d. $30,000 unfavorable. ANSWER:

Choice "c" is correct. The direct labor usage (efficiency) variance is computed as follows:

Direct labor usage variance = Difference in standard and actual hours x standard rate

Direct labor usage variance = ((10,000 units x .50 hour) – 3,000 hours) x $15 per hour

Direct labor usage variance = $30,000 favorable

The usage variance is favorable because the actual hours were less than the standard hours.

Choice "a" is incorrect. It is unclear how the $25,000 variance can be calculated in this question, but $25,000 favorable or unfavorable is certainly not correct.

Choice "b" is incorrect. It is unclear how the $25,000 variance can be calculated in this question, but $25,000 favorable or unfavorable is certainly not correct.

Choice "d" is incorrect. The variance was favorable, not unfavorable, because the actual hours were less than the standard hours.


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All of the following are components of the formula used to calculate gross domestic product, except: a. Household income. b. Foreign net export spending. c. Government spending. d. Gross investment. ANSWER:

Choice "a" is correct. Gross domestic product (GDP) is calculated in two different ways. The first, which is the expenditure approach and can be used to answer this question, is the mnemonic GICE, or government purchases plus private domestic investment plus personal consumption expenditures plus net exports. Household income is the only one of the answers that is not included in this mnemonic.

Choice "b" is incorrect. Foreign net export spending is included in the mnemonic (E) for GDP; although, it is called simply net exports in the mnemonic and not foreign net export spending.

Choice "c" is incorrect. Government spending is included in the mnemonic (G) for GDP.

Choice "d" is incorrect. Gross investment is included in the mnemonic (I) for GDP, although it is called private domestic investment in the mnemonic.


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During the current year, the following manufacturing activity took place for a company's products:

Beginning work-in-process, 70% complete 10,000 units Units started into production during the year 150,000 units Units completed during the year 140,000 units Ending work-in-process, 25% complete 20,000 units

What was the number of equivalent units produced using the first-in, first-out method? a. 138,000 b. 140,000 c. 145,000 d. 150,000 ANSWER:

Choice "a" is correct. Using the FIFO method of process costing, the equivalent units produced (EQU) are computed as follows:

EQU = EQU Beg WIP + EQU started and completed + EQU ending WIP

EQU = (10,000 x .30) + (130,000 x 1.00) + (20,000 x .25)

EQU = 3,000 + 130,000 + 5,000 = 138,000

Note that the .30 is the percentage of Beg WIP completed in the period. It is the complement of the percent complete.

Note that the 130,000 units started and completed is the 140,000 units started less the 10,000 units in the beginning inventory.

An alternate computation (different from the formula in the text) is as follows (some people may be more familiar with this alternate):

EQU = EQU End WIP + EQU completed - EQU ending WIP

EQU = (20,000 x .25) + (140,000 x 1.00) - (10,000 x .70)

EQU = 5,000 + 140,000 - 7,000 = 138,000

Choice "b" is incorrect. This answer apparently ignores the EQU in the beginning and ending inventories and utilizes only the 140,000 units started and completed in the period.

Choice "c" is incorrect. This answer apparently uses the units completed during the year as the EQU.

Choice "d" is incorrect. This answer apparently uses the units started into production during the year as the EQU.


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Gross domestic product includes which of the following measures? a. The size of a population that must share a given output within one year. b. The negative externalities of the production process of a nation within one year. c. The total monetary value of all final goods and services produced within a nation in one year. d. The total monetary value of goods and services including barter transactions within a nation in one

year. ANSWER:

Choice "c" is correct. Gross domestic product (GDP) is the total dollar (monetary) value of all new final products and services produced with the economy in a given time period. The emphasis is on the final goods and services.

Choice "a" is incorrect. The size of a population that must share a given output within one year is not a part of the GDP calculation.

Choice "b" is incorrect. The negative (or positive) externalities of the production process of a nation within one year are not a part of the GDP calculation. In economics, externalities are the effects that the acts of consumers or producers have on each other. Externalities range from pollution and technological changes to changes in the range of options available to consumers. Externalities may also be regarded as the unanticipated side effects of courses of action.

Choice "d" is incorrect. The total monetary value of goods and services, including barter transactions, is not a part of the GDP calculation. GDP includes only monetary value, not barter value.


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The CPA reviewed the minutes of a board of director's meeting of LQR Corp., an audit client. An order for widget handles was outsourced to SDT Corp. because LQR couldn't fill the order. By having SDT produce the order, LQR was able to realize $100,000 in sales profits that otherwise would have been lost. The outsourcing added a cost of $10,000, but LQR was ahead by $90,000 when the order was completed. Which of the following statements is correct regarding LQR's action? a. The use of resource markets outside of LQR involves opportunity cost. b. Accounting profit is total revenue minus explicit costs and implicit costs. c. Implicit costs are not opportunity costs because they are internal costs. d. Explicit costs are opportunity costs from purchasing widget handles from resource market. ANSWER:

Choice "a" is correct. The use of resource markets outside of LQR involves opportunity cost. Opportunity costs are costs that would have been saved or the profit that would have been earned if another decision alternative had been selected. Financial accounting records do not record opportunity costs.

Choice "b" is incorrect. Accounting profit is total revenue minus total explicit costs, not total explicit and implicit costs. Implicit costs are opportunity costs and are ignored in financial accounting.

Choice "c" is incorrect. Implicit costs are opportunity costs.

Choice "d" is incorrect. Explicit costs are not opportunity costs. Explicit costs are documented out-of-pocket costs.


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The benefits of debt financing over equity financing are likely to be highest in which of the following situations? a. High marginal tax rates and few noninterest tax benefits. b. Low marginal tax rates and few noninterest tax benefits. c. High marginal tax rates and many noninterest tax benefits. d. Low marginal tax rates and many noninterest tax benefits. ANSWER:

Choice "a" is correct. The benefits of debt financing over equity financing are likely to be highest if marginal tax rates are high (because interest on debt is deductible for tax purposes) and if there are few noninterest tax benefits (because there is little or no reason to depart from debt financing).

Choice "b" is incorrect. The benefits of debt financing over equity financing are likely to be highest if marginal tax rates are high, not low (because interest on debt is deductible for tax purposes), and if there are few noninterest tax benefits.

Choice "c" is incorrect. The benefits of debt financing over equity financing are likely to be highest if marginal tax rates are high (because interest on debt is deductible for tax purposes) and if there are few, not many, noninterest tax benefits.

Choice "d" is incorrect. The benefits of debt financing over equity financing are likely to be highest if marginal tax rates are high, not low (because interest on debt is deductible for tax purposes), and if there are few, not many, noninterest tax benefits.


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Which of the following is a critical success factor in data mining a large data store? a. Pattern recognition. b. Effective search engines. c. Image processing systems. d. Accurate universal resource locater (URL). ANSWER:

Choice "a" is correct. Data mining can be defined as the extraction of implicit, previously unknown, and potentially useful information from data. It is usually associated with an organization's need to identify trends. Data mining involves the process of analyzing the data to show patterns or relationships in that data. Thus, pattern recognition, or the ability of the data mining software to recognize the patterns (or trends), is the critical success factor for data mining (at least in the opinion of the examiners).

Choice "b" is incorrect, per the examiners. An effective search engine is a critical success factor in data mining especially when the data store (a nice techie word meaning the database) is really large (and it is in this question). Unless the search engine is effective, the data mining process might take a very, very long time, but it should eventually provide results. That may be the reason why the examiners did not think that this answer was correct. Not all of the questions on the CPA exam are good. The question asks for "a" critical success factor, not "the" critical success factor. In our opinion, both choice "a" and choice "b" should be correct.

Choice "c" is incorrect. An image processing system is not a critical success factor in data mining. Image processing systems are more oriented towards the gathering of data from images, and not towards the mining or interpretation of that data.

Choice "d" is incorrect. An accurate universal resource locator (URL) is not a critical success factor in data mining. A URL is a string of characters conforming to a standardized format which refers to a resource on the Internet. Data for data mining purposes is seldom, if ever, on the Internet. That would be way too slow.


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A company has two divisions. Division A has operating income of $500 and total assets of $1,000. Division B has operating income of $400 and total assets of $1,600. The required rate of return for the company is 10%. The company's residual income would be which of the following amounts? a. $0 b. $260 c. $640 d. $900 ANSWER: Choice "c" is correct. Residual income is the difference between net income and the required return. The required return is net book value (total assets) times the hurdle rate (required rate of return). The calculations are as follows:

Division Operating Income Total Assets x Required Rate = Residual income

A $500 $1,000 x .10 = $100 $400

B $400 $1,600 x .10 = $160 $240

Total $900 $260 $640

Choice "a" is incorrect. Residual income would certainly not be $0 in this question because the operating income is greater than the required return for both Division A and Division B.

Choice "b" is incorrect. The $260 is the total required return, not the total residual income.

Choice "d" is incorrect. The $900 is the total operating income, not the total residual income.


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In which of the following locations should a copy of the accounting system data backup of year-end information be stored? a. Secure off-site location. b. Data backup server in the network room. c. Fireproof cabinet in the data network room. d. Locked file cabinet in the accounting department. ANSWER:

Choice "a" is correct. The accounting system data backup of year-end information should certainly be stored in some kind of secure off-site location and not in any of the other listed locations.

Choice "b" is incorrect. The accounting system data backup would certainly not be stored (only) on a data backup server in the network room. What if the server crashed completely and the data could not be recovered? What if the network room burned down?

Choice "c" is incorrect. The accounting system data backup would certainly not be stored (only) in a fireproof cabinet in the data network room. The media to store the data might be more than would fit into a "cabinet" (many large corporations have hundreds of tapes of such data). It is nice that the cabinet is fireproof, but what about a flood or some other natural disaster?

Choice "d" is incorrect. The accounting system data backup would certainly not be stored (only) in a locked file cabinet in the accounting department. The accounting department is not immune to fires, floods, and other natural disasters.


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A manufacturing company that wanted to be able to place material orders more efficiently most likely would utilize which of the following? a. Electronic check presentment. b. Electronic data interchange. c. Automated clearinghouse. d. Electronic funds transfer. ANSWER:

Choice "b" is correct. A manufacturing company that wanted to be able to "place" material orders more efficiently would utilize EDI for placing those orders and probably also for other "paperwork" between the company and its vendors.

Choice "a" is incorrect. Electronic check presentment, whatever that is, would be used for making payments and would not do anything with regard to the placing of orders.

Choice "c" is incorrect. An automated clearinghouse presumably has to do with the automated clearing of checks and other payments. Again, it would be used for making payments and would not do anything with regard to the placing of orders.

Choice "d" is incorrect. Electronic funds transfer would again be used for making payments and would not do anything with regard to the placing of orders.


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Central Winery manufactured two products, A and B. Estimated demand for product A was 10,000 bottles and for product B was 30,000 bottles. The estimated sales price per bottle for A was $6.00 and for B was $8.00. Actual demand for product A was 8,000 bottles and for product B was 33,000 bottles. The actual price per bottle for A was $6.20 and for B was $7.70. What amount would be the total selling price variance for Central Winery? a. $3,700 unfavorable. b. $8,300 unfavorable. c. $3,700 favorable. d. $14,100 favorable. ANSWER:

Choice "b" is correct. The selling price variance (SPV) is computed as follows:

SPV = (Actual selling price per unit – Budgeted selling price per unit) x Actual sold units

SPV for product A = ($6.20 - $6.00) x 8,000 = $1,600

SPV for product B = ($7.70 - $8.00) x 3,300 = ($9,900)

Total SPV = ($8,300) or $8,300 unfavorable

Choice "a" is incorrect, per the above calculation.

Choice "c" is incorrect. This answer is the same as choice "b" except that it is favorable instead of unfavorable. The total variance is unfavorable due to the negative variance of product B.

Choice "d" is incorrect, per the above calculation.


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Which of the following ratios is appropriate for the evaluation of accounts receivable? a. Days sales outstanding. b. Return on total assets. c. Collection to debt ratio. d. Current ratio. ANSWER:

Choice "a" is correct. Among the ratios listed, the ratio that is appropriate for the evaluation of accounts receivable is the number of days sales are outstanding. Sales are related to accounts receivable, so the more days the sales are outstanding, the longer the receivables are outstanding.

Choice "b" is incorrect. Return on total assets is not appropriate for the evaluation of accounts receivable. It is appropriate for the evaluation of return and of total assets, but not for the evaluation of account receivable specifically.

Choice "c" is incorrect. The collection to debt ratio has nothing to do with the evaluation of accounts receivable.

Choice "d" is incorrect. The current ratio is appropriate for the evaluation of liquidity (one of the ways to evaluate liquidity) but has nothing to do with the evaluation of accounts receivable, other than that accounts receivable is in the numerator of the current ratio.


- 25 -

Which of the following balanced scorecard perspectives examines a company's success in targeted market segments? a. Financial. b. Customer. c. Internal business process. d. Learning and growth. ANSWER:

Choice "b" is correct. The financial perspective of a balanced scorecard is concerned with the capture of increased market share, which is another way of saying "success in targeted market segments."

Choice "a" is incorrect. The customer perspective of a balanced scorecard is concerned with becoming a low-price leader, not with the capture of increased market share.

Choice "c" is incorrect. The internal business process perspective of a balanced scorecard is concerned with maintaining low costs that are supported with low prices, not with the capture of increased market share.

Choice "d" is incorrect. The learning and growth (advanced learning and innovation) perspective of a balanced scorecard is concerned with linking strategy with reward and recognition, not with the capture of increased market share.


- 26 -

Harvey Co. is evaluating a capital investment proposal for a new machine. The investment proposal shows the following information:

Initial cost $500,000 Life 10 years Annual net cash inflows $200,000 Salvage value $100,000

If acquired, the machine will be depreciated using the straight-line method. The payback period for this investment is: a. 3.25 years. b. 2.67 years. c. 2.5 years. d. 2 years. ANSWER:

Choice "c" is correct. With even cash flows, payback period is calculated as initial cost / annual net cash inflows. That is, $500,000 / $200,000 = 2.5.

Choice "a" is incorrect. We could not determine an obvious approach to obtain this answer. It is incorrect per the calculation above.

Choice "b" is incorrect. This answer is calculated as follows: (initial cost - salvage value) / (annual net cash inflows - annual depreciation) or ($500,000 - $100,000) / ($200,000 - $50,000) = $400,000 / $150,000 = 2.67. With the payback period, depreciation should not be considered because the payback period is a cash-based calculation.

Choice "d" is incorrect. This answer appears to be the initial cost less salvage value divided by the annual net cash inflows (($500,000 - $100,000) / $200,000 = 2.0). Salvage value is not included in the correct calculation.


- 27 -

What term is used to describe a partnership without a specified duration? a. A perpetual partnership. b. A partnership by estoppel. c. An indefinite partnership. d. A partnership at will. ANSWER:

Note: The material tested in this question does not appear specifically on-point in our textbook, as the topic has rarely shown up on the CPA exam. The terms are covered in other parts of our textbook, so we believe that our students would have answered this question correctly given the information they had. However, we have expanded our explanation of this question to provide you with more detailed information.

Choice "d" is correct. A partnership at will is a partnership with no definite term (i.e., without specified duration). Such a partnership can be terminated at any time.

Choice "a" is incorrect. A partnership without a specified duration is called a partnership at will, not a perpetual partnership. There is no such thing as a perpetual partnership because a partnership is not perpetual. A partnership may be dissolved after a partner dies or otherwise dissociates from the partnership.

Choice "b" is incorrect. A partnership by estoppel is the appearance of a partnership when there is no formal partnership. If parties who are not partners give the appearance to third parties that they are partners, the law may deem the parties to be a partnership by estoppel. The parties will be treated as partners, even though they are not.

Choice "c" is incorrect. The legal term for a partnership of indefinite duration is a partnership at will, not an indefinite partnership.


- 28 -

In which type of business organization are income taxes always required to be paid by the entity on profits earned as well as by the owners upon distribution thereof? a. General partnership. b. Limited liability company. c. Subchapter C corporation. d. Subchapter S corporation. ANSWER:

Choice "c" is correct. A corporation is taxed as an entity for income tax purposes. Additionally, distributions made to stockholders are treated as taxable income to the stockholders. [Note that this type of corporation is more often called a C corporation instead of a Subchapter C corporation.]

Choice "a" is incorrect. A general partnership is not taxed as a separate entity for income tax purposes.

Choice "b" is incorrect. An LLC is not taxed as a separate entity for income tax purposes unless the LLC specifically elects to be taxed like a corporation. [Of course, the word "always" in the question takes care of that.]

Choice "d" is incorrect. A Subchapter S corporation is taxed as a partnership. Thus, it is not taxed as a separate entity for income tax purposes. [Note that this type of corporation is more often called an S corporation instead of a Subchapter S corporation.]


- 29 -

Under the Revised Model Business Corporation Act, following what type of corporate acquisition does the acquiring corporation automatically become liable for all obligations of the acquired corporation? a. A leveraged buyout of assets. b. An acquisition of stock for debt securities. c. A cash tender offer. d. A merger. ANSWER:

Choice "d" is correct. A merger involves one corporation merging into another corporation. The surviving corporation has all of the rights and liabilities of the merged corporation. Thus, the acquiring corporation automatically becomes liable for all obligations of the acquired corporation. Thus, in a merger (a Type A corporate reorganization transaction), the acquiring corporation automatically becomes liable for all obligations of the acquired corporation.

Choice "a" is incorrect. A leveraged buyout of assets does not cause the acquiring corporation to be automatically liable for the obligations of the acquired corporation. The acquiring corporation has simply bought the assets. In a leveraged buyout of assets, the acquiring corporation does not automatically become liable for all obligations of the acquired corporation. A leveraged buyout is a strategy involving the acquisition of another corporation using a significant amount of borrowed money (bonds or loans). Often, the assets of the corporation being acquired are used as collateral for the loans (in addition to the assets of the acquiring corporation). The purpose of leveraged buyouts is to allow corporations to make large acquisitions without having to commit a large amount of their own capital. The acquiring corporation does not automatically become liable for all (or any) obligations of the acquired corporation if the acquired corporation is not liquidated into the acquiring corporation. If the acquired corporation becomes a subsidiary of the acquiring corporation, the acquired corporation remains a separate entity and remains liable for its own obligations. The nature of the consideration (cash or debt) is irrelevant.

Choice "b" is incorrect. An acquisition of stock for debt securities does not make the acquiring corporation liable for the obligations of the acquired corporation. The acquiring corporation has simply purchased stock. In an acquisition of stock for debt securities (normally a purchase transaction), the acquiring corporation does not automatically become liable for all (or any) obligations of the acquired corporation if the acquired corporation is not liquidated into the acquiring corporation. If the acquired corporation becomes a subsidiary of the acquiring corporation, the acquired corporation remains a separate entity and remains liable for its own obligations.

Choice "c" is incorrect. A cash tender offer is an offer to purchase a corporation's stock directly from its shareholders at a specified price for a specified period of time. In a cash tender offer, the acquiring corporation does not automatically become liable for all obligations of the acquired corporation. In fact, if there is only an offer, there is no transaction at all. Certainly, the examiners meant a cash tender (offer and acceptance) and not just a cash tender offer. A cash tender would work the same as the acquisition of stock for debt securities except that it would be cash instead of debt. The acquiring corporation does not automatically become liable for all obligations of the acquired corporation if the acquired corporation is not liquidated into the acquiring corporation. If the acquired corporation becomes a subsidiary of the acquiring corporation, the acquired corporation remains a separate entity and remains liable for its own obligations. The nature of the consideration (cash or debt) is irrelevant.


- 30 -

A customer's order was never filled because an order entry clerk transposed the customer identification number while entering the sales transaction into the system. Which of the following controls would most likely have detected the transposition? a. Sequence test. b. Completeness test. c. Validity check. d. Limit test. ANSWER:

Choice "c" is correct. Of the choices listed, a validity check would most likely have detected a transposition in a customer identification number. In our text, we called that kind of edit check a valid code check or a validity check (Glossary). This kind of definition assumes that there is a master file of customer numbers somewhere to check customer numbers against. Of course, a check against such a file would not work to detect a transposition error if both the correct and the transposed customer numbers actually existed and were in the file. Often, a check digit that takes the order of the numbers or characters in the customer numbers into account can also be used.

Choice "a" is incorrect. It is difficult to determine exactly what a sequence test means in this question. A Google search did not come up with anything specifically called a sequence test in a data validation context. Obviously, it could be some kind of test for a "sequence" of numbers, but it certainly would not work for customer numbers. A validity check would certainly be better.

Choice "b" is incorrect. It is difficult to determine exactly what a completeness test means in this question. A Google search did not come up with anything specifically called a completeness test in data validation context. Obviously, it could be some kind of test for "completeness" of the customer numbers (e.g., are all of the digits there?), but it certainly would not be very effective for customer numbers. A validity check would certainly be better.

Choice "d" is incorrect. A limit test is a check to determine if a data value is within certain limits. There might conceivably be a lower limit and an upper limit on customer numbers, but this type of test would not be worth much in that circumstance. A validity check would certainly be better.


- 31 -

To meet its monthly budgeted production goals, Acme Mfg. Co. planned a need for 10,000 widgets at a price of $20 per widget. Acme's actual units were 11,200 at a price of $18.50 per widget. What amount reflected Acme's price variance? a. $7,200 unfavorable. b. $15,000 favorable. c. $16,800 favorable. d. $24,000 unfavorable. ANSWER:

Choice "c" is correct. Price variance is computed as follows:

Price variance = (Standard price – Actual price) x Actual units

Price variance = ($20 - $18.50) x 11,200

Price variance = $1.50 x 11,200 = $16,800 favorable

The price variance is favorable because the actual price is less than the standard price.

Choice "a" is incorrect. The price variance cannot be unfavorable because the actual price is less than the standard price. It is difficult to determine, however, where the $7,200 came from since there are 11,200 actual units; the price difference would have to be $.64 instead of $1.50, and there is nothing in the question that clearly generates that difference.

Choice "b" is incorrect. In this answer, it seems that the price difference of $1.50 is incorrectly multiplied by the 10,000 budgeted units rather than the 11,200 actual units.

Choice "d" is incorrect. The price variance cannot be unfavorable because the actual price is less than the standard price. It is difficult to determine, however, where the $24,000 came from; the price difference would have to be $2.14, and there is nothing in the question that clearly generates that difference.


- 32 -

In considering the payback period for three projects, Fly Corp. gathered the following data about cash flows:

Cash Flows by Year Year 1 Year 2 Year 3 Year 4 Year 5

Project A ($10,000) $3,000 $3,000 $3,000 $3,000 Project B (25,000) 15,000 15,000 (10,000) 15,000 Project C (10,000) 5,000 5,000

Which of the projects will achieve payback within three years? a. Projects A, B, and C. b. Projects B and C. c. Project B only. d. Projects A and C. ANSWER:

Choice "b" is correct. Projects B and C achieve payback in three years. The payback period for Project A is somewhere between the end of Year 4 and Year 5. For all three projects, Year 1 appears to be a combination of cash outflows (initial cost) and cash inflows (return of investment), but it really does not make any difference. When the cumulative cash flow (both inflow and outflow) is zero, the project has paid back.

Choice "a" is incorrect. Project A does not pay back within 3 years even though Projects B and C do.

Choice "c" is incorrect. Projects B and C, not just Project B, pay back within 3 years.

Choice "d" is incorrect. Project A does not pay back within 3 years even though Project C does.


- 33 -

An American importer expects to pay a British supplier 500,000 British pounds in three months. Which of the following hedges is best for the importer to fix the price in dollars? a. Buying British pound call options. b. Buying British pound put options. c. Selling British pound put options. d. Selling British pound call options. ANSWER:

Choice "a" is correct. To fix a price in dollars to pay British pounds, British pound call options should be purchased. Call options would allow, but not require, the purchaser of the call to acquire the currency (British pounds) for a specified price at or before a specified time in the future. If the price goes down, the purchaser (the importer) would exercise the options; if not, the purchaser (importer) would buy the British pounds in the market and let the options expire. British pound futures could also be used, but that was not one of the choices listed.

Choice "b" is incorrect. Buying British pound put options would allow, but not require, the purchaser of the put to sell the currency for a specified price at a specified time in the future. Since the importer needs British pounds, buying put options would not work. The importer needs to end up with British pounds.

Choice "c" is incorrect. Selling British pound put options would not work. The importer needs to end up with British pounds. Selling put options could work, but the option would be exercised, or not, by the purchaser and not by the importer. If the options were not exercised, the importer could end up with nothing (other than the option premium).

Choice "d" is incorrect. Selling British pound call options would not work. The importer needs to end up with British pounds; if call options are sold, the other party can exercise the options or let them expire, and if the options were exercised, the importer would have to supply the British pounds. This answer is backwards.


- 34 -

Which of the following statements best characterizes the function of a physical access control? a. Protects systems from the transmission of Trojan horses. b. Provides authentication of users attempting to log into the system. c. Separates unauthorized individuals from computer resources. d. Minimizes the risk of incurring a power or hardware failure. ANSWER:

Choice "c" is correct. The function of a physical access control is to separate unauthorized individuals from computer resources. Examples are locks on doors to computer rooms, etc. which limit physical access to computer resources to people who need such access in the performance of their job responsibilities.

Choice "a" is incorrect. The function of a physical access control is not to protect systems from the transmission of Trojan horses. Trojan horses are software, and physical access controls would not have anything to do with them.

Choice "b" is incorrect. The function of a physical access control is not to provide authentication of users attempting to log into the system; that would be done by some kind of a security system.

Choice "d" is incorrect. The function of a physical access control is not to minimize the risk of incurring a power or hardware failure. A physical access control will do nothing to minimize the risk of power or hardware failures.


- 35 -

Which of the following is assigned to goods that were either purchased or manufactured for resale? a. Relevant cost. b. Period cost. c. Opportunity cost. d. Product cost. ANSWER:

Choice "d" is correct. Product cost is assigned to goods (products) that were either purchased or sold.

Choice "a" is incorrect. Relevant costs are costs that are relevant to a particular decision.

Choice "b" is incorrect. Period costs are costs that are expensed during a period. They are not charged to a product (capitalized), which is why they are expensed.

Choice "c" is incorrect. Opportunity costs are costs that would have been saved or profits that would have been earned if another decision alternative had been selected.


- 36 -

Which of the following actions is required to ensure the validity of a contract between a corporation and a director of the corporation? a. An independent appraiser must render to the board of directors a fairness opinion on the contract. b. The director must disclose the interest to the independent members of the board and refrain from

voting. c. The shareholders must review and ratify the contract. d. The director must resign from the board of directors. ANSWER:

Choice "b" is correct. Directors owe their corporation a duty of loyalty and must act solely in the best interests of the corporation. The duty of loyalty does not preclude directors from buying from or selling to the corporation. A director may profit from a transaction with his own corporation if the transaction is approved by a disinterested majority of the board of directors. Therefore, to ensure the validity of a contract between a corporation and a director of the corporation, the director must disclose the interest to the independent members of the board and refrain from voting (on the contract itself, which must be approved by an independent majority of the board, but not from voting in general).

Choice "a" is incorrect. To ensure the validity of a contract between a corporation and a director of the corporation, it is not necessary for an independent appraiser to render a fairness opinion on the contract to the board.

Choice "c" is incorrect. Shareholders do not ordinarily participate in management. They only have the right to vote on the selection or removal of directors and on fundamental changes in the corporations. Therefore, to ensure the validity of a contract between a corporation and a director of the corporation, it is not necessary for the shareholders to review and ratify the contract.

Choice "d" is incorrect. To ensure the validity of a contract between a corporation and a director of the corporation, it is not necessary for the director to resign from the board (i.e., a director is not required to resign because of a conflict of interest). The corporation can approve the conflict if it is disclosed and the director does not participate in the approval process.


- 37 -

Amicable Wireless, Inc. offers credit terms of 2/10, net 30 for its customers. Sixty percent of Amicable's customers take the 2% discount and pay on day 10. The remainder of Amicable's customers pay on day 30. How many days' sales are in Amicable's accounts receivable? a. 6 b. 12 c. 18 d. 20 ANSWER:

Choice "c" is correct. Days' sales in accounts receivable is normally calculated as Days' sales = Ending accounts receivable / Average daily sales. However, that formula will not work in this case because the necessary information is not provided. However, enough information about payments is provided so that the total days' sales can be determined on a weighted average basis. In this question, nobody pays before the 10th day and 60% of the customers pay on the 10th day, so there are 10 x .60, or 6 day's sales there. The other 40% of the customers pay on the 30th day so there are 30 x .40, or 12 day's sales there. The total is 18 days sales.

Choice "a" is incorrect. This answer is apparently calculated from just the 60% of the customers who pay on the 10th day. The others have to be included also.

Choice "b" is incorrect. This answer is apparently calculated from just the 40% of the customers who pay on the 30th day. The others have to be included also.

Choice "d" is incorrect. This answer is apparently calculated by as the difference between the 30th day and the 10th day. The answer does not take into account how many customers pay when.


- 38 -

What would be the primary reason for a company to agree to a debt covenant limiting the percentage of its long-term debt? a. To cause the price of the company's stock to rise. b. To lower the company's bond rating. c. To reduce the risk for existing bondholders. d. To reduce the interest rate on the bonds being sold. ANSWER:

Note: The material tested in this question does not appear specifically on-point in our textbook, as the topic has rarely shown up on the CPA exam. The topics are covered in general in parts of our textbook, so we believe that our students would have answered this question correctly given the information they had. However, we have expanded our explanation of this question to provide you with more detailed information.

Choice "d" is correct. The primary reason for a company to agree to a debt covenant limiting the percentage of its long-term debt is to reduce the interest rate on NEW bonds being sold. A debt covenant is a provision in a bond indenture (contract between the bond issuer and the bond holders) that the bond issuer will either do (affirmative covenants) or not do (negative covenants) certain things. In this question, the issuer would agree not to issue bonds in the future over a certain percentage of its long-term debt. Such a provision would be good for the potential bondholders and would probably reduce the interest rate on the bonds being sold.

Choice "a" is incorrect. The primary reason for a company to agree to a debt covenant limiting the percentage of its long-term debt is not to cause the price of the company's stock to rise. Bond covenants affect bonds, not equity (at least not directly).

Choice "b" is incorrect. The primary reason for a company to agree to a debt covenant limiting the percentage of its long-term debt is not to lower the company's bond rating. Such a covenant might raise, not lower, a company's bond rating because there would be less risk. Besides, why would a bond covenant be signed if it would lower the company's bond rating?

Choice "c" is incorrect. The primary reason for a company to agree to a debt covenant limiting the percentage of its long-term debt is not to reduce the risk of existing bondholders, although a reduction in the risk of the existing bondholders certainly might result from such a covenant. As a general rule, more debt means more risk, less debt means less risk. So less debt would reduce the risk of all bondholders. This answer is a very close second.


- 39 -

What is the required unit production level given the following factors?

Units Projected sales 1,000 Beginning inventory 85 Desired ending inventory 100 Prior-year beginning inventory 200

a. 915 b. 1,015 c. 1,100 d. 1,215 ANSWER:

Choice "b" is correct. Required production can be calculated from a normal Account Analysis Format, where production takes the place of purchases, sales takes the place of cost of goods sold, and everything is expressed in units (not dollars). Beginning and ending inventory are given in the question. The calculation is as follows:

Beginning inventory 85

Add: Production "plug"

Subtract: Sales (1,000)

Ending inventory 100

The plug for production is thus 1,015 units.

Choice "a" is incorrect. This answer appears to use the prior-year beginning inventory (200 units) in place of, and instead of, the ending inventory (100 units). The "plug" will then be 100 units less.

Choice "c" is incorrect. This answer appears to add the sales (1,000 units) and the ending inventory (100 units) and to ignore the beginning inventory.

Choice "d" is incorrect. This answer appears to add the prior-year beginning inventory (200 units) to the ending inventory (100 units). The "plug" will then be 200 units more.


- 40 -

In business information systems, the term "stakeholder" refers to which of the following parties? a. The management team responsible for the security of the documents and data stored on the

computers or networks. b. Information technology personnel responsible for creating the documents and data stored on the

computers or networks. c. Authorized users who are granted access rights to the documents and data stored on the computers

or networks. d. Anyone in the organization who has a role in creating or using the documents and data stored on the

computers or networks. ANSWER:

Note: The material tested in this question does not appear specifically on-point in our textbook, as the topic has rarely shown up on the CPA exam. However, this answer is essentially common sense, and we believe that our students would have answered this question correctly given the information they had. Regardless, we have expanded our explanation of this question to provide you with more detailed information.

Choice "d" is correct. In business information systems, the term "stakeholder" could refer to anyone in the organization who has a role in creating or using data stored on the computers or networks. This term is not covered anywhere in the Becker materials, but the question can almost be answered entirely by using common sense. The description in choice "d" is the most inclusive of the descriptions listed. It certainly should include anyone who "uses" the information because users would certainly have some interest in the data being correct and complete. So would the people who created the data in the first place. Management certainly would also.

Choice "a" is incorrect. The management team responsible for security certainly would be stakeholders, but so would others.

Choice "b" is incorrect. Information technology personnel responsible for creating the data certainly would be stakeholders, but so would others.

Choice "c" is incorrect. Authorized users who use the data certainly would be stakeholders, but so would others.


- 41 -

Which of the following statements is correct if there is an increase in the resources available within an economy? a. More goods and services will be produced in the economy. b. The economy will be capable of producing more goods and services. c. The standard of living in the economy will rise. d. The technological efficiency of the economy will improve. ANSWER:

Choice "b" is correct. If there is an increase in the resources available in an economy, the economy will be capable of producing more goods and services. This increase is really an increase in the long-run aggregate supply (potential GDP). On the aggregate supply and demand chart, the long-run aggregate supply line (LRAS) is the vertical line that represents the potential or equilibrium level of output. If that line shifts to the right, then the economy is capable of expanding, but it will not automatically expand just because the line shifts to the right.

Choice "a" is incorrect. Just because there is an increase in the resources available in an economy, it does not mean that more goods and services will automatically be produced. There would have to be increased demand (a shift upward in the aggregate demand line) for more goods and services to actually be produced.

Choice "c" is incorrect. If there is an increase in the resources available in an economy, the standard of living in the economy will not necessarily rise. It could rise, but it will not necessarily do that.

Choice "d" is incorrect. If there is an increase in the resources available in an economy, the technological efficiency of the economy will not automatically improve. This statement is backwards. An increase in technological efficiency of an economy will normally increase the resources available in the economy by increasing productivity.


- 42 -

Which of the following cycles does not have accounting information that recorded into the general ledger reporting system? a. Expenditure. b. Production. c. Planning. d. Revenue. ANSWER:

Choice "c" is correct. A planning cycle does not necessarily have information recorded in the general ledger system. The planning cycle does not normally result in real transactions. The general ledger system (the general ledger system is not just a reporting system) records real transactions (or at least real Journal Entries).

Choice "a" is incorrect. Expenditures (at least the Journal Entries for those expenditures) are recorded in the general ledger system.

Choice "b" is incorrect. Production (at least the expenditures necessary for the production to occur and the Journal Entries for those expenditures) is recorded in the general ledger system.

Choice "d" is incorrect. Revenue (at least the Journal Entries resulting from that revenue) is recorded in the general ledger system.


- 43 -

At the beginning of year 1, $10,000 is invested at 8% interest, compounded annually. What amount of interest is earned for year 2? a. $800.00 b. $806.40 c. $864.00 d. $933.12 ANSWER:

Choice "c" is correct. This question is a compound interest question because the interest is to be determined at the end of the second year. The calculation is as follows and uses different symbols than the SI = PIN formula in the text to show candidates the PRT formula as well (the CPA exam often uses different terminology):

Interest = PRT (for the first year)

Interest = $1,000 x .08 x 1 = $800 and adding the $800 to the beginning principal

Interest = PRT (for the second year)

Interest = $1,800 x .08 x 1 = $864

It is obvious from the answer that the interest earned in year 2 is interest earned on the original principal ($10,000 x .08 = $800) plus interest on the year 1 interest ($800 x .08 = $64).

Choice "a" is incorrect. This answer is interest only on the original principal, and not on the year 1 interest.

Choice "b" is incorrect. This answer has a decimal point error in calculating the year 2 interest on year 1 interest.

Choice "d" is incorrect. This answer is apparently made up. It is sometimes difficult to come up with 3 decent wrong answers, especially with simple questions.


- 44 -

Jonathon Mfg. adopted a job-costing system. For the current year, budgeted cost driver activity levels for direct labor hours and direct labor costs were 20,000 and $100,000, respectively. In addition, budgeted variable and fixed factory overhead were $50,000 and $25,000, respectively. Actual costs and hours for the year were as follows:

Direct labor hours 21,000 Direct labor costs $110,000 Machine hours 35,000

For a particular job, 1,500 direct-labor hors were used. Using direct-labor hours as the cost driver, what amount of overhead should be applied to this job? a. $3,214 b. $5,357 c. $5,625 d. $7,500 ANSWER:

Choice "c" is correct. Using direct labor hours, the overhead applied consists of both variable overhead and fixed overhead. The calculation is as follows:

Variable overhead rate = $50,000 / 20,000 hours = $2.50 per direct labor hour

Fixed overhead rate = $25,000 / 20,000 hours = $1.25 per direct labor hour

Total overhead rate = $2.50 + $1.25 = $3.75

Overhead applied to the job = $3.75 x 1,500 = $5,625

Choice "a" is incorrect, per the above calculation.

Choice "b" is incorrect, per the above calculation.

Choice "d" is incorrect. This answer appears to use $5.00 as the overhead application rate. Possibly the variable overhead rate was used twice, instead of the variable and the fixed overhead rates being used once each.


- 45 -

A company manufactures two products, X and Y, through a joint process. The joint (common) costs incurred are $500,000 for a standard production run that generates 240,000 gallons of X and 160,000 gallons of Y. X sells for $4.00 per gallon, while Y sells for $6.50 per gallon. If there are no additional processing costs incurred after the split-off point, what is the amount of joint cost for each production run allocated to X on a physical-quantity basis? a. $200,000 b. $240,000 c. $260,000 d. $300,000 ANSWER:

Choice "d" is correct. Using a physical quantity basis with no additional processing costs after the split-off point, product X is 240,000 gallons and product Y is 160,000 gallons, for a total of 400,000 gallons. That means that product X is allocated 60% (240,000 / 400,000) of the joint costs and product Y is allocated 40% (160,000 / 400,000) of the joint costs. Product X is thus allocated 60% of the $500,000 joint costs, or $300,000. The data about selling costs is a distracter because the joint costs are allocated on a physical quantity basis.

Choice "a" is incorrect. $200,000 is the amount of the joint cost that is allocated to product Y, not product X.

Choice "b" is incorrect, per the above calculation. [$240,000 is $1 for each gallon of product X. However, it is difficult to determine where the $1 comes from.]

Choice "c" is incorrect, per the above calculation. [$260,000 is a nice round number, and $260,000 plus the $240,000 adds to the $500,000 joint cost. However, that is about all it is worth.]


- 46 -

Smith and James were partners in S and J Partnership. The partnership agreement stated that tall profits and losses were allocated 60 percent to Smith and 40 percent to James. The partners decided to terminate and wind up the partnership. The following was the balance sheet for S and J on the day of the windup:

Cash $40,000 Accounts receivable 12,000 Property and equipment 38,000 Total assets $90,000 Accounts payable $24,000 Smith, capital 30,000 James, capital 36,000 Total liabilities and capital $90,000

Of the total accounts receivable, $10,000 was collected and the remainder was written off as bad debt. All liabilities of S and J were paid by the partnership. The property and equipment are sold for $32,000. Under the Uniform Partnership Act what amount of cash was distributed to Smith? a. $25,200 b. $26,000 c. $30,000 d. $34,800 ANSWER:

Choice "a" is correct. Upon termination of the partnership creditors are paid first. After payment of creditors, each partner is deemed to have an account that is charged or credited an amount equal to the partner's contribution plus or minus the partner's share of any profits or losses.

The agreement between Smith and James was that profits and losses would be allocated 60% to Smith and 40% to James. The partnership had $82,000 in assets ($40,000 in cash, $10,000 in accounts receivable, and $32,000 in property and equipment). The partnership had $90,000 in liabilities and capital. Of the $82,000 in assets, $24,000 is paid first to creditors. This leaves a balance of $58,000. Smith contributed $30,000 in capital and James contributed $36,000 in capital. With $66,000 owed in capital and only $58,000 available, there is a deficit of $8,000. By agreement, Smith is responsible for 60% of the $8,000 deficit or $4,800.

Smith would be credited an amount equal to his capital ($30,000) minus his share of the loss ($4,800) or $25,200. Only answer "a" reflects this amount.

Choices "b", "c", and "d" are incorrect, per the above calculation.


- 47 -

An organization relied heavily on e-commerce for its transactions. Evidence of the organization's security awareness manual would be an example of which of the following types of controls? a. Preventative. b. Detective. c. Corrective. d. Compliance. ANSWER:

Note: It is very much unclear what the word "manual" means in this question. For that reason, the question will be answered ignoring the word. Possibly it means that the organization's security awareness is documented in some manual. Also, "preventative" controls in Choice "a" should probably be "preventive" controls. Even Google did not like the word "preventative." We did, however, use the word "preventative" in the Glossary, so we will stick with that spelling.

Choice "a" is correct. Preventative controls are controls that are designed to prevent potential problems from occurring. An organization that relied heavily on e-commerce would probably want as many preventative controls as possible because it might be difficult or impossible to correct errors after the fact.

This question is more an Audit question than an IT question; even though, preventative controls, detective controls, and corrective controls are all defined in the Glossary of the BEC text.

Choice "b" is incorrect. An organization that relied heavily on e-commerce would probably want as many preventative controls as possible because it might be difficult or impossible to correct errors after the fact. Of course, detective controls should not be ignored because it is difficult to prevent all errors.

Choice "c" is incorrect. An organization that relied heavily on e-commerce would probably want as many preventative controls as possible because it might be difficult or impossible to correct errors after the fact. Of course, corrective controls should not be ignored, because, if errors are detected, they must be corrected properly.

Choice "d" is incorrect. Compliance controls appears to be a made-up term.


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Spring Co. had two divisions, A and B. Division A created Product X, which could be sold on the outside market for $25 and used variable costs of $15. Division B could take Product X and apply additional variable costs of $40 to create Product Y, which could be sold for $100. Division B received a special order for a large amount of Product Y. If Division A were operating at full capacity, which of the following prices should Division A charge Division B for the Product X needed to fill the special order? a. $15 b. $20 c. $25 d. $40 ANSWER:

Choice "c" is correct. This question is on transfer pricing. The best transfer pricing model is based on market price, which, in this question, is $25.

Choice "a" is incorrect. The best transfer pricing model is based on market price ($25), not the variable costs of $15.

Choice "b" is incorrect. The best transfer pricing model is based on market price ($25). This answer apparently starts with the selling price ($100) and subtracts the total of the market price ($25), the variable costs ($15), and additional variable costs ($40), a total subtract of $80.

Choice "d" is incorrect. The best transfer pricing model is based on market price ($25), not the total of the market price ($25) and the variable cost ($15).


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An auditor was examining a client's network and discovered that the users did not have any password protection. Which of the following would be the best example of the type of network password the users should have? a. trjunpqs. b. 34787761. c. tr34ju78. d. tR34ju78. ANSWER:

Choice "d" is correct. Of the choices listed, the best one is "tR34ju78" because it contains a combination of small letters, capital letters, and numbers. This would be the most difficult to "crack."

Choice "a" is incorrect. "trjunpgs" is not the best password because it is all small letters and not a combination of small letters, capital letters, and numbers.

Choice "b" is incorrect. "34787761" is not the best password because it is all numbers and not a combination of small letters, capital letters, and numbers.

Choice "c" is incorrect. "tr34ju78" is not the best password because it is just small letters and numbers and not a combination of small letters, capital letters, and numbers.


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In which of the following phases of computer system development would training occur? a. Planning phase. b. Analysis phase. c. Design phase. d. Implementation phase. ANSWER:

Note: The material tested in this question does not appear specifically on-point in our textbook, as the topic has rarely shown up on the CPA exam. However, this answer is essentially common sense, and we believe that our students would have answered this question correctly given the information they had.

Choice "d" is correct. Training should certainly not occur before the implementation phase. Before that, the system is not necessarily finalized. Besides, until something at least is developed, there is nothing to train on.

Choice "a" is incorrect. Training should certainly not occur in the planning phase. There is no system yet.

Choice "b" is incorrect. Training should certainly not occur in the analysis phase. There is no system yet.

Choice "c" is incorrect. Training should certainly not occur in the design phase. There is no system yet.

2006 business questions

Documents

partnership profits

general partnership

future partnership debts

assigning partners

uniform partnership

multiple choice questions

choice b

choice d