AICPA CPA-Business CPA Exam Questions Instant Access

Question 1

Commercial paper:

AHas a maturity date greater than one year.

BIs generally sold only through investment banking dealers.

CGenerally does not have an active secondary market.

DHas an interest rate lower than treasury bills.

Answer : C

Choice 'c' is correct. Although commercial paper has a secondary market available, it is generally not an active secondary market. Commercial paper is usually sold to the money markets by highly creditworthy companies.

Choice 'a' is incorrect. The maturity dates are generally less than 270 days.

Choice 'b' is incorrect. Commercial paper can be sold to the money markets through a variety of intermediaries including brokers, dealers, investment brokers, etC. It can also be sold direct from one company to another.

Choice 'd' is incorrect. The interest rate on commercial paper is below the prime rate, but generally above the Treasury bill rate.

Question 2

In order to sell at the rate of output in markets controlled by monopolists, price is set where:

APrice equals marginal cost.

BMarginal revenue equals marginal cost.

CMarginal revenue equals average total cost.

DPrice equals average total cost.

Answer : B

Choice 'b' is correct. In order to sell at the rate of output in markets controlled by monopolists, the price is set where marginal revenue equals marginal cost. No matter which model is representative of the industry in which the firm operates, the firm will maximize profits by producing at MR = MC. The monopolist's price will be higher than MR.

Choice 'a' is incorrect. Price exceeds both MR and MC.

Choices 'c' and 'd' are incorrect, which are far-out distractors.

Question 3

A company has daily cash receipts of $150,000. The treasurer of the company has investigated a lockbox service whereby the bank that offers this service will reduce the company's collection time by four days at a monthly fee of $2,500. If money market rates average four percent during the year, the additional annual income (loss) from using the lockbox service would be:

A$6,000

B$(6,000)

C$12,000

D$(12,000)

Answer : B

Choice 'b' is correct. $(6,000). A company's decision to commit to a lockbox plan is an example of marginal analysis. In other words, do the marginal benefits exceed the marginal costs of the plan?

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

Question 4

Kore Industries is analyzing a capital investment proposal for new equipment to produce a product over the next eight years. The analyst is attempting to determine the appropriate "end-of-life" cash flows for the analysis. At the end of eight years, the equipment must be removed from the plant and will have a net book value of zero, a tax basis of $75,000, a cost to remove of $40,000, and scrap salvage value of $10,000. Kore's effective tax rate is 40 percent. What is the appropriate "end-of-life" cash flow related to these items that should be used in the analysis?

A$27,000

B$12,000

C$(18,000)

D$(30,000)

Answer : B

Choice 'b' is correct. $12,000 'end-of-life' cash flow.

The $75,000 loss on disposal is a non-cash reduction in taxable income that will reduce taxes paid by $30,000 (75,000 40%).

The cost to remove the equipment is a cash expense that will reduce taxable income by $40,000 and reduce taxes paid by $16,000 (40,000 40%), resulting in a net cash expense of $24,000 ($40,000 minus $16,000, or $40,000 60%).

The $10,000 salvage value will increase after-tax cash flow by $6,000 (10,000 60%).

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

Question 5

In evaluating a capital budget project, the use of the net present value model is generally not affected by the:

AMethod of funding the project.

BInitial cost of the project.

CAmount of added working capital needed for operations during the term of the project.

DAmount of the project's associated depreciation tax allowance.

Answer : A

Choice 'a' is correct. The method of funding the project has no effect on the net present value model. NPV uses a hurdle rate to discount cash flows. If the NPV is positive, the project is acceptable. The method of financing the project, and the cost, are independent of the process of screening the project for acceptability.

Choice 'b' is incorrect. The initial cost is one of the most important items in the calculation of NPV.

Choice 'c' is incorrect. Added working capital requirements and salvage value affect cash flow. All cash flows are used in the NPV model.

Choice 'd' is incorrect. The tax depreciation allowance will provide a 'tax shield' or tax savings that impacts cash flow and must be considered in NPV analysis.

Question 6

Which of the following is not correct regarding best cost provider strategies?

AThe overall lowest cost in the industry is not a viable option in best cost strategies because the firm could not compete profit-wise with its differentiation strategy component.

BWhen generic products are not acceptable to buyers, yet they still remain price sensitive to the value they are receiving for their money, the best cost strategy may work well.

CThe best cost strategy is a combination of the benefits of the cost leadership and differentiation strategies.

DThe best cost strategy strives to have the firm evaluate and change its value chain such that it can achieve the highest cost among its closest competitors with a quality differentiated product in an effort to obtain the highest profits.

Answer : D

Choice 'd' is correct because it is not a correct statement. The best cost strategy strives to have the firm evaluate and change its value chain such that it can achieve the lowest (not highest) cost among its closest competitors while matching them on the features desired by consumers.

Choices 'a', 'b', and 'c' are incorrect, as they are all true statements regarding best cost provider strategies.

Question 7

In the pharmaceutical industry where a diabetic must have insulin no matter what the cost and where there is no substitute, the diabetic's demand curve is best described as:

APerfectly elastic.

BPerfectly inelastic.

CElastic.

DIndifferent.

Answer : B

Choice 'b' is correct. When a good is demanded, no matter what the price, demand is described as perfectly inelastic. The demand 'curve' is a vertical line at the quantity demanded with price making no difference.

Choices 'a' and 'c' are incorrect. There is no such thing as perfect elasticity. However, the more elastic demand is, the greater the change in quantity demanded for price changes.

Choice 'd' is incorrect. Diabetics are indifferent to changes in the price of insulin, and to economists, this is perfectly inelastic demand.

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