AICPA CPA-Business CPA Exam Questions Instant Access

Question 1

Which of the following documents would most likely contain specific rules for the management of a business corporation?

AArticles of incorporation.

BBylaws.

CCertificate of authority.

DShareholders' agreement.

Answer : B

Choice 'b' is correct. The bylaws are adopted by the incorporators or directors, are not required to be filed, and generally will contain rules desired regarding the operation of the corporation.

Choice 'a' is incorrect. Articles of incorporation are filed with the state and contain information regarding the formation of the corporation.

Choice 'c' is incorrect. A certificate of authority is filed with the foreign state that a business wishes to do business in and with permission from that state.

Choice 'd' is incorrect. A shareholder agreement is a contract between shareholders for any rights or duties agreed upon between the parties.

Question 2

Why would a firm generally choose to finance temporary assets with short-term debt?

AMatching the maturities of assets and liabilities reduces risk.

BShort-term interest rates have traditionally been more stable than long-term interest rates.

CA firm that borrows heavily long term is more apt to be unable to repay the debt than a firm that borrows heavily short term.

DFinancing requirements remain constant.

Answer : A

Choice 'a' is correct. Matching the maturities of current assets with liabilities as they come due is designed to ensure liquidity and reduce risk of cash shortages. Temporary assets (such as inventories, generally, and seasonal inventories, specifically) might be financed with short term debt such that the earnings from the sales of those temporary assets could be used to liquidate the related obligations as they come due and ensure that cash is available to meet cash flow requirements.

Choice 'b' is incorrect. Interest rate risks would likely motivate a firm to use longer term financing than short-term financing.

Choice 'c' is incorrect. Matching cash inflows with cash outflows are more influential in determining a firm's ability to repay debt rather than the length of the obligation.

Choice 'd' is incorrect. Long-term rather than short-term debt promotes consistent finance charges. The requirements for financing itself are driven by business practice, not by the maturity of financial instruments used.

Question 3

Entry into monopolistic competition is:

AFrequent, as no obstacles exist.

BDifficult, with significant obstacles.

CRare, as significant capital is required.

DRelatively easy, with only a few obstacles.

Answer : D

Choice 'd' is correct. The characteristics of monopolistic competition include:

* Numerous firms with differentiated products.

* Ease of entry - few barriers.

* Firms exact some influence over price and market.

* Non-price competition is frequent and critical.

Choice 'a' is incorrect. Monopolistic competition has a few obstacles. A market with no obstacles is in perfect competition.

Choice 'b' is incorrect. Significant obstacles are characteristic of oligopoly.

Choice 'c' is incorrect. Significant capital requirements represent a significant barrier to entry, which is characteristic of oligopoly.

Question 4

The net present value of a proposed investment is negative; therefore, the discount rate used must be:

AGreater than the project's internal rate of return.

BLess than the project's internal rate of return.

CGreater than the firm's cost of equity.

DLess than the incremental borrowing rate.

Answer : A

Choice 'a' is correct. If the NPV of a proposed investment is negative, the discount rate used must be greater than the project's internal rate of return (IRR).

The IRR is the discount rate that results in a NPV of zero.

If a discount rate used is greater than the project's IRR, the present value of future cash inflows will be lower resulting in a negative net present value.

If a discount rate used is less than the project's IRR, the present value of future cash inflows will be higher resulting in a positive net present value.

Choices 'b', 'c', and 'd' are incorrect, per the above discussion.

Question 5

What would be the primary reason for a company to agree to a debt covenant limiting the percentage of its long-term debt?

ATo cause the price of the company's stock to rise.

BTo lower the company's bond rating.

CTo reduce the risk for existing bondholders.

DTo reduce the interest rate on the bonds being sold.

Answer : D

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.

Question 6

With respect to price elasticity of demand:

AThe shorter the time period, the more product demand becomes elastic because less choices are available.

BProduct demand is more elastic when fewer substitutes are available.

CProduct demand is more inelastic when more substitutes are available.

DProduct demand is more elastic when more substitutes are available.

Answer : D

Choice 'd' is correct. Product demand is more elastic when more substitutes are available.

Choice 'a' is incorrect. The longer the time period, the more product demand becomes elastic because more choices are available.

Choice 'b' is incorrect. Product demand is more elastic when more substitutes are available, not fewer substitutes.

Choice 'c' is incorrect. Product demand is more inelastic when few substitutes are available.

Question 7

Which of the following might be considered the most expansionary set of fiscal policies?

AIncrease government purchases, increase in taxes.

BIncrease government purchases, decrease in taxes.

CDecrease in taxes, increase in the money supply.

DIncrease in government purchases, increase in the money supply.

Answer : B

Choice 'b' is correct. Expansionary fiscal policy involves increasing government purchases and/or decreasing taxes. Both increases in government spending and decreases in taxes cause the aggregate demand curve to shift right and thus cause real GDP (output) to increase.

Choice 'a' is incorrect. An increase in taxes is an example of contractionary fiscal policy.

Choice 'c' is incorrect. An increase in the money supply is expansionary monetary policy (not fiscal policy).

Choice 'd' is incorrect per above Explanation: .

AICPA CPA Business Environment and Concepts CPA-Business CPA Exam Questions