CPA Exam : CPA

Study concepts, example questions & explanations for CPA Exam

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Example Questions

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Example Question #1 : Cpa

Which of the following could be considered as enhancing qualitative characteristics of financial reporting?

Possible Answers:

Comparability

All of these

Verifiability

Timeliness

Understandability 

Correct answer:

All of these

Explanation:

Enhancing qualitative characteristics are the attributes that make financial information useful. Qualitative attributes are the non-numerical characteristics that distinguish more useful information from less useful information. All of the following characteristics are considered to be enhancing qualitative characteristics: comparability (i.e. consistency), verifiability, timeliness, and understandability. 

Example Question #2 : Conceptual Framework, Standards, Standard Setting, And Presentation Of Financial Statements

Which of the following is not an accurate difference between the International Financial Reporting Standards (IFRS) and the Generally Accepted Accounting Principles (US GAAP)?

Possible Answers:

The US GAAP has no requirement regarding comparative information while the IFRS does.

None of these

The US GAAP uses a two-step impairment approach while the IFRS uses a one-step approach.

The IFRS permits the reevaluation of intangible assets other than goodwill while the US GAAP does not.

The US GAAP uses a principles based approach while the IFRS employs a rules based approach.

Correct answer:

The US GAAP uses a principles based approach while the IFRS employs a rules based approach.

Explanation:

"The US GAAP uses a principles based approach while the IFRS employs a rules based approach" is the correct answer. This is not an accurate difference between the IFRS and the USGAAP. The US GAAP typically employs a rules based approach while the IFRS follows a principles based approach. The other choices represent accurate differences between the IFRS and US GAAP according to the International Accounting Standards Committee. 

Example Question #1 : Financial Statement Accounts: Recognition, Measurement, Valuation, Calculation, Presentation, And Disclosures

Zeta Automotive ordered transmissions from the Alpha Transmission Company on May 7, 1990. The terms of sale were FOB destination. The Alpha Company shipped the transmissions on May 22, 1990, and Zeta Automotive received them on June 1, 1990. When should Zeta Automotive record the account payable?

Possible Answers:

May 7, 1990

June 1, 1990

June 8, 1990

Cannot be determined

May 22, 1990

Correct answer:

June 1, 1990

Explanation:

FOB stands for free onboard destination. This means that goods in transit should be considered as the seller's inventory because they have not yet reached the buyer. In other words, if issues were to incur during sipping, then responsibility would fall on the shipper rather than the buyer; therefore, the buyer would record the account payable upon arrival. 

Example Question #1 : Cpa

Which of the following are considered to be cash equivalents?

Possible Answers:

All of these

None of these

Money market funds 

Treasury bills

Commercial paper

Correct answer:

All of these

Explanation:

In order for an asset to be considered as cash equivalent, it needs to be readily convertible into cash; furthermore, they must be near maturity so that they carry little to no risk of value alteration due to changes in interest rates. Generally, cash equivalents include investments with maturities of three months or less from the date of purchase. All of these—Treasury bills, commercial paper, and money market funds—are cash equivalents. 

Example Question #1 : Financial Statement Accounts: Recognition, Measurement, Valuation, Calculation, Presentation, And Disclosures

All of the following conditions except which of the following must be met in order for an employer to accrue liability for employee compensation for future absences?

Possible Answers:

The employer's obligation is related to employee's rights to receive compensation for previous absences is attributable to the employee's services already rendered

Payment of the compensation is probable

The employer's obligation is related to employee's rights to receive compensation for future absences is attributable to the employee's services already rendered

The amount can be reasonably estimated 

The obligation relates to rights that vest or accumulate

Correct answer:

The employer's obligation is related to employee's rights to receive compensation for previous absences is attributable to the employee's services already rendered

Explanation:

In relation to compensated absences, the knowledge of the conditions that must be met in order to accrue loss contingency is helpful in accounting for compensated absences such as vacation, sick pay, and leave. In order for an employer to accrue liability for employee's compensation for future absences, several conditions must be met. These conditions include the following: the employer's obligation is related to employee's rights to receive compensation for future absences is attributable to the employee's services already rendered; the obligation relates to rights that vest or accumulate; payment of the compensation is probable; and the amount can be reasonably estimated.

Example Question #1 : Financial Statement Accounts: Recognition, Measurement, Valuation, Calculation, Presentation, And Disclosures

The Beta Company—consignee—paid the freight costs for goods shipped from the Foxtrot Incorporated—consigner. The freight costs are to be deducted from the Beta Company's payment to the Foxtrot Incorporated when the goods are sold. Until the Beta Company sells the goods, the freight costs should be included in which of the following?

Possible Answers:

Freight-out costs

Freight expense

Accounts receivable 

Selling expense

Cost of goods sold

Correct answer:

Accounts receivable 

Explanation:

In a consignment, the manufacturer—Foxtrot Incorporated—is known as the consignor and the retailer is the consignee—Beta Company. In this type of arrangement, title to the goods remains with the manufacturer until they are sold to a third or unrelated party; thus, the Beta Company's payment of reimbursable freight costs results in an account receivable from Foxtrot Incorporated. 

Example Question #1 : Business Law

Which of the following is not an essential element of a contract?

Possible Answers:

Consideration

Offer

Statute of frauds

Legality

Acceptance

Correct answer:

Statute of frauds

Explanation:

Contracts form the foundation of many law topics; furthermore, a contract is made up of several essential elements that include the following: offer, acceptance, consideration, legal capacity, and legality. It is important to note that acceptance refers to an agreement or mutual assent between the parties initiating a contract. On the other hand, a statute of frauds is not an essential element. Statutes of frauds are applied on a case-by-case basis depending on the factual situation of each contract. 

Example Question #2 : Regulation

An individual may exclude from income up to __________ of gain that is realized on the sale or exchange of a residence, if the individual owned and occupied the residence as a principle residence for an aggregate of at least __________ of the five years __________ the sale.

Possible Answers:

Correct answer:

Explanation:

The following choice is the correct answer:

This means that an individual may exclude from income up to two hundred and fifty thousand dollars of gain that is realized on the sale or exchange of a residence, if the individual owned and occupied the residence as a principle residence for an aggregate of at least two of the five years preceding the sale. The amount can be increased to five hundred thousand if married individuals file jointly. This applies if either spouse meets the ownership requirement and both spouses meet the use requirement. 

Example Question #6 : Cpa

Jack Snell named his wife—Angelica—the beneficiary of a  (face amount) life insurance policy. According to this policy, upon Jack's death, the proceeds would be paid to Angelica with interest over her current life expectancy. If Angelica's life expectancy was was calculated to be thirty years and she received a payment of  from the insurance company, then what amount should she include in her gross income for that year?

Possible Answers:

Cannot be determined

Correct answer:

Explanation:

We need to find the amount of the life insurance payments that need to be included in Angelica's gross income. It is important to note that life insurance payments paid by reason of death are excluded from income if they are paid in lump sums or installments. If the payments are received in installments, then then the principle amount of the policy divided by the number of annual payments is excluded each year. 

Let's start by calculating the principle amount of the policy to be received every year. 

In order to calculate the gross income to be reported, subtract this amount from the annual installment.

Example Question #7 : Cpa

Charlie Smith is filing a joint tax return with his wife. Charlie Smith's employer pays the entire cost of all the employee's group-term life insurance under a qualified plan. Under this plan, which of the following choices identifies the maximum amount of tax-free coverage that may be provided for Mr. Smith by his employer?

Possible Answers:

Cannot be determined 

Correct answer:

Explanation:

This question asks us to identify the maximum amount of tax-free group-term life insurance that can be provided to an employee by an employer. The cost of the first  of employer provided group-term life insurance coverage can be excluded from an employee's income.

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