Free Certified Public Accountant (CPA) Questions And Answers

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The Certified Public Accountant (CPA) exam is a rigorous assessment designed to evaluate the skills and knowledge necessary for accounting professionals.

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Certified Public Accountant (CPA) Exam 1

Free Certified Public Accountant (CPA) Exam 1

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1 / 40

What is the purpose of closing entries?

To reconcile the cash account

To close temporary accounts

To correct errors

To allocate income and expenses to the correct period

Explanation: Closing entries are used to transfer the balances of temporary accounts (revenues, expenses, and dividends) to permanent accounts (retained earnings) at the end of an accounting period.

2 / 40

Which of the following is not a component of internal control?

Control activities

Monitoring

External audit

Risk assessment

Explanation: Internal control consists of five components: control environment, risk assessment, control activities, information and communication, and monitoring. External audit is not a component but rather an external evaluation of these controls.

3 / 40

Which of the following transactions would not be reported in the operating activities section of the statement of cash flows?

Cash paid for dividends

Cash paid for wages

Cash paid for inventory

Cash received from customers

Explanation: Cash paid for dividends is reported in the financing activities section of the statement of cash flows.

4 / 40

What is the purpose of a trial balance?

To list all accounts and their balances at a given time

To reconcile the cash account

To prepare financial statements

To record transactions

Explanation: A trial balance lists all ledger accounts and their balances to ensure that debits equal credits, serving as a check before preparing financial statements.

5 / 40

What is the effect of a stock dividend on total stockholders' equity?

Decrease

Cannot be determined

No effect

Increase

Explanation: A stock dividend reclassifies part of retained earnings to common stock and additional paid-in capital. It does not change the total stockholders' equity, just the composition.

6 / 40

Which of the following statements is true regarding a classified balance sheet?

It separates operating and non-operating items

All of the above

It shows the financial position at the end of the accounting period

It groups assets and liabilities into current and long-term categories

Explanation: A classified balance sheet organizes assets and liabilities into current and long-term categories, shows the financial position at the period's end, and separates operating from non-operating items.

7 / 40

Which of the following statements about the accrual basis of accounting is true?

It is required for tax reporting

It is simpler than the cash basis of accounting

Revenues and expenses are recognized when cash is received or paid

Revenues and expenses are recognized when they are earned or incurred, regardless of when cash is received or paid

Explanation: The accrual basis of accounting recognizes revenues and expenses when they are earned or incurred, not necessarily when cash is exchanged, providing a more accurate picture of financial performance and position.

8 / 40

What does the debt-to-equity ratio measure?

Profitability

Liquidity

Solvency

Efficiency

Explanation: The debt-to-equity ratio measures a company's financial leverage by comparing its total liabilities to its total equity, indicating its ability to meet long-term obligations.

9 / 40

Which financial statement shows the changes in retained earnings?

Statement of cash flows

Income statement

Balance sheet

Statement of shareholders' equity

Explanation: The statement of shareholders' equity includes a section showing the changes in retained earnings over a reporting period.

10 / 40

Which accounting concept requires that expenses be reported in the same period as the revenues they help to generate?

Materiality

Full disclosure

Revenue recognition

Matching principle

Explanation: The matching principle dictates that expenses should be recorded in the same period as the revenues they are associated with, ensuring an accurate representation of financial performance.

11 / 40

What is goodwill?

Recorded only when an entire business is purchased

All of the above

A form of intangible asset

The excess of the cost of an acquired entity over the fair value of its net assets

Explanation: Goodwill is an intangible asset recognized when one company acquires another for more than the fair value of its net identifiable assets.

12 / 40

Which of the following is not a qualitative characteristic of financial information according to the FASB conceptual framework?

Consistency

Relevance

Faithful representation

Comparability

Explanation: Consistency is an enhancing qualitative characteristic. The primary qualitative characteristics are relevance and faithful representation.

13 / 40

What is the primary purpose of an audit?

Prepare financial statements

Detect fraud

Provide assurance on the financial statements

Tax planning

Explanation: The main objective of an audit is to provide an independent opinion on whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework.

14 / 40

Which inventory costing method matches recent costs with current revenues?

Weighted average

Specific identification

First-in, first-out (FIFO)

Last-in, first-out (LIFO)

Explanation: LIFO matches the most recent inventory costs with current revenues, reflecting current cost levels in the cost of goods sold.

15 / 40

Which of the following costs are included in the cost of goods sold?

Interest expense

Direct materials

Selling expenses

Administrative expenses

Explanation: Cost of goods sold includes direct costs attributable to the production of goods, such as direct materials, direct labor, and manufacturing overhead.

16 / 40

Which of the following is true about preferred stock?

It has voting rights

It has the highest claim on assets in liquidation

Dividends are typically fixed

It can be converted to common stock

Explanation: Preferred stockholders receive fixed dividends and have a higher claim on assets than common stockholders in liquidation, but usually do not have voting rights.

17 / 40

Which of the following is not an example of a cash equivalent?

Commercial paper

Marketable securities

Treasury bills

Accounts receivable

Explanation: Cash equivalents are short-term, highly liquid investments that can be converted to cash quickly, such as treasury bills and commercial paper. Accounts receivable are not considered cash equivalents.

18 / 40

Which of the following would not be considered an intangible asset?

Trademark

Goodwill

Patent

Inventory

Explanation: Intangible assets are non-physical assets with value, such as patents, trademarks, and goodwill. Inventory is a physical asset and thus not intangible.

19 / 40

Which of the following is not included in the calculation of net income?

Revenue

Gains and losses

Expenses

Dividends

Explanation: Net income is calculated by subtracting expenses and losses from revenues and gains. Dividends are distributions to shareholders and do not affect net income.

20 / 40

What does the current ratio measure?

Profitability

Market performance

Liquidity

Solvency

Explanation: The current ratio measures a company's ability to pay off its short-term liabilities with its short-term assets. It is a key indicator of liquidity.

21 / 40

Which of the following best describes the term "liquidity"?

The ability to generate profits

The ability to produce goods and services

The ability to pay short-term obligations

The ability to control costs

Explanation: Liquidity refers to a company's ability to meet its short-term liabilities with its short-term assets.

22 / 40

In which section of the statement of cash flows would you find cash flows from issuing common stock?

Financing activities

Investing activities

Non-cash investing and financing activities

Operating activities

Explanation: Issuing common stock is a financing activity because it involves raising capital from shareholders.

23 / 40

When using the allowance method, which account is credited to recognize estimated uncollectible accounts?

Allowance for Doubtful Accounts

Cash

Accounts Receivable

Bad Debt Expense

Explanation: Under the allowance method, the company estimates uncollectible accounts and records an expense with a corresponding credit to Allowance for Doubtful Accounts.

24 / 40

What does the term "marketable securities" refer to?

Short-term, highly liquid investments

Long-term investments

Inventory

Accounts receivable

Explanation: Marketable securities are short-term investments that can easily be converted to cash, typically within one year.

25 / 40

What is the purpose of adjusting entries?

To close temporary accounts

To correct errors

To reconcile the cash account

To allocate income and expenses to the correct period

Explanation: Adjusting entries are made at the end of an accounting period to ensure that revenues and expenses are recognized in the period in which they occur, thus complying with the matching principle.

26 / 40

Which accounting principle states that revenue should be recognized when it is earned?

Revenue recognition principle

Consistency principle

Historical cost principle

Matching principle

Explanation: The revenue recognition principle dictates that revenue should be recognized when it is earned and realizable, regardless of when cash is received.

27 / 40

Which of the following describes a contingent liability?

A probable future obligation that arises from past events

An obligation that depends on a future event

An obligation that is certain and measurable

An obligation that has already been paid

Explanation: A contingent liability is a potential liability that may occur depending on the outcome of a future event, such as litigation or warranty claims.

28 / 40

What is the definition of revenue recognition?

Recording revenue when a sale is made

Recording revenue when it is earned and realizable

Recording revenue when the cash is received

Recording revenue when the invoice is sent

Explanation: Revenue is recognized when it is earned (the performance obligation has been satisfied) and realizable (the company has the right to receive payment).

29 / 40

In a manufacturing company, which of the following costs would be classified as a period cost?

Administrative salaries

Manufacturing overhead

Direct labor

Direct materials

Explanation: Period costs are not directly tied to production. They are expensed in the period they are incurred and include selling, general, and administrative expenses.

30 / 40

Which of the following is considered a financing activity in the statement of cash flows?

Sale of equipment

Payment to suppliers

Purchase of inventory

Payment of dividends

Explanation: Financing activities include transactions that affect a company’s equity and long-term liabilities. Payment of dividends is a financing activity because it involves distribution of earnings to shareholders.

31 / 40

Which accounting concept requires expenses to be reported in the same period as the revenues they help to generate?

Revenue recognition

Materiality

Matching principle

Full disclosure

Explanation: The matching principle dictates that expenses should be recorded in the same period as the revenues they are associated with, ensuring an accurate representation of financial performance.

32 / 40

Which of the following is not a principle of internal control?

Establishment of responsibility

Segregation of duties

Physical controls

External audits

Explanation: Principles of internal control include establishment of responsibility, segregation of duties, physical controls, independent internal verification, and documentation procedures. External audits evaluate the effectiveness of these controls but are not an internal control principle.

33 / 40

Which of the following is an example of a capital expenditure?

Repairing a roof

Purchasing a new machine

Paying for utilities

Buying office supplies

Explanation: Capital expenditures are costs incurred to acquire or improve long-term assets, such as purchasing a new machine, which will benefit the company for more than one accounting period.

34 / 40

Which of the following statements about depreciation is true?

Depreciation expense increases the asset's book value

Depreciation expense is an allocation of cost, not a valuation technique

Depreciation expense reflects a decrease in market value

Depreciation does not affect net income

Explanation: Depreciation allocates the cost of a tangible fixed asset over its useful life. It does not represent market value changes

35 / 40

What is the purpose of the Sarbanes-Oxley Act (SOX)?

To deregulate financial markets

To simplify accounting standards

To enhance corporate responsibility and financial disclosures

To eliminate taxes on corporations

Explanation: The Sarbanes-Oxley Act was enacted to protect investors by improving the accuracy and reliability of corporate disclosures and to prevent accounting fraud.

36 / 40

Which of the following methods is used for calculating depreciation under GAAP?

Double-declining balance

Units of production

All of the above

Straight-line

Explanation: GAAP allows multiple methods for calculating depreciation, including double-declining balance, straight-line, and units of production methods.

37 / 40

What is the primary purpose of financial accounting?

To plan for future operations

To manage and control operations

To prepare tax returns

To provide information useful for making investment and credit decisions

Explanation: Financial accounting aims to provide financial information that is useful to external users, such as investors and creditors, for decision-making purposes.

38 / 40

What is an example of a contra asset account?

Inventory

Accumulated depreciation

Prepaid expenses

Accounts receivable

Explanation: A contra asset account, like accumulated depreciation, reduces the value of the asset to which it relates, providing a net book value.

39 / 40

Which inventory costing method results in the highest ending inventory value during periods of rising prices?

Last-in, first-out (LIFO)

Specific identification

First-in, first-out (FIFO)

Weighted average

Explanation: Under FIFO, the oldest costs are assigned to the cost of goods sold, and the most recent costs are assigned to ending inventory. During periods of rising prices, the most recent costs are higher, resulting in a higher ending inventory value.

40 / 40

What is a contingent asset?

An asset that is certain to be received

An asset that will be realized depending on the outcome of a future event

An asset already recorded in the balance sheet

An intangible asset

Explanation: A contingent asset is a potential asset that depends on the occurrence of a future event, such as a favorable lawsuit outcome.

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2. Business Environment and Concepts (BEC) – This section covers business concepts, including economic and financial management, and corporate governance.
3. Financial Accounting and Reporting (FAR) – This section deals with financial accounting and reporting standards and practices.
4. Regulation (REG) – This section examines knowledge of federal taxation, business law, and ethics.

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Free Certified Public Accountant (CPA) Questions And Answers

Understanding the CPA Exam Structure

The Acadlly Exams Platform

FAQs about the Acadlly Exams Platform

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