AICPA CPA-Business CPA Exam Questions Instant Access

Question 1

The method that divides a project's annual after-tax net income by the average investment cost to measure the estimated performance of a capital investment is the:

AInternal rate of return method.

BAccounting rate of return method.

CPayback method.

DNet present value method.

Answer : B

Choice 'b' is correct. Accounting rate of return divides annual after-tax net income by average investment amount.

Choices 'a', 'c', and 'd' are incorrect. IRR, NPV and payback all use cash flows, not net income.

Question 2

A depreciation tax shield is:

AAn after-tax cash outflow.

BA reduction in income taxes.

CThe expense caused by depreciation.

DCaused by the fact that depreciation does not affect cash flow.

Answer : B

Choice 'b' is correct. Whenever depreciation protects income from taxation, it is known as a depreciation tax shield.

Choice 'a' is incorrect. A depreciation tax shield may result in after-tax cash inflow, but not outflow.

Choice 'c' is incorrect, per above.

Choice 'd' is incorrect. A depreciation tax shield is caused by the tax deductibility of the depreciation expense, not by the fact that depreciation does not affect cash flow.

Question 3

In a decision analysis situation, which one of the following costs is generally not relevant to the decision?

AIncremental cost.

BAvoidable cost.

CHistorical cost.

DOpportunity cost.

Answer : C

Choice 'c' is correct. Historical cost is generally not relevant in a decision analysis situation.

All of the following costs are relevant in a decision analysis situation:

A Incremental cost

B Avoidable cost

D Opportunity cost

Question 4

Unless there is an agreement to the contrary, the voting power of members in a limited liability company is determined by:

AEach member's salary.

BEach member's share of profits.

CWhen the member was admitted to the company.

DEach member's capital contribution.

Answer : D

Choice 'd' is correct.

Rule: Absent an agreement otherwise, all members generally participate in management, and their voting strength is determined in proportion to ownership interest. This is calculated by comparing each member's capital contribution to that of the other members.

Choices 'a', 'b', and 'c' are incorrect, per the above rule.

Question 5

In order to increase production capacity, Gunning Industries is considering replacing an existing production machine with a new technologically improved machine effective January 1, 1997. The following information is being considered by Gunning Industries.

* The new machine would be purchased for $160,000 in cash. Shipping, installation, and testing would cost an additional $30,000.

* The new machine is expected to increase annual sales by 20,000 units at a sales price of $40 per unit. Incremental operating costs are comprised of $30 per unit in variable costs and total fixed costs of $40,000 per year.

* The investment in the new machine will require an immediate increase in working capital of $35,000.

* Gunning uses straight-line depreciation for financial reporting and tax reporting purposes. The new machine has an estimated useful life of five years and zero salvage value.

* Gunning is subject to a 40 percent corporate income tax rate.

Gunning uses the net present value method to analyze investments and will employ the following factors and rates.

Gunning Industries' net cash outflow in a capital budgeting decision would be:

A$190,000

B$195,000

C$204,525

D$225,000

Answer : D

Choice 'd' is correct. $225,000 net cash outflow.

Choices 'a', 'b', and 'c' are incorrect, per the above calculation.

Note: This question is the first from a series of questions on a prior exam. The last in the series is presented for you in the regular homework questions (not the supplemental questions) for this chapter.

Question 6

To decrease the money supply, the Fed might:

ASell government securities on the open market.

BBuy government securities on the open market.

CDecrease the required reserve ratio.

DLower the discount rate.

Answer : A

Choice 'a' is correct. To decrease the money supply, the Fed can: (1) sell government securities in the open market, (2) increase the discount rate, and (3) increase the required reserve ratio.

Choice 'b' is incorrect. The Fed should sell (not buy) securities on the open market.

Choice 'c' is incorrect. The Fed should increase (not decrease) the required reserve ratio.

Choice 'd' is incorrect. The Fed should increase (not decrease) the discount rate.

Question 7

Case Corp. is incorporated in State A . Under the Revised Model Business Corporation Act, which of the following activities engaged in by Case requires that Case obtain a certificate of authority to do business in State B?

AMaintaining bank accounts in State B .

BCollecting corporate debts in State B .

CHiring employees who are residents of state B .

DMaintaining an office in State B to conduct intrastate business.

Answer : D

Choice 'd' is correct. A domestic corporation is one created under the laws of a given state. A foreign corporation is a corporation created under the laws of another state. A foreign corporation must obtain a certificate of authority from each state in which it does intrastate business.

Choices 'a', 'b', and 'c' are incorrect because maintaining a bank account, collecting debts, and hiring employees who live within a state are not considered to be 'doing business' within the state.

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