Mixed Deck — All CPA Topics Flashcards

What is the purpose of data analysis in CPA practice?

Answer: Transforming raw data into insights for informed decision-making

Data analysis examines, cleans, and models data to discover useful information and support decision-making.

A company has a price-to-earnings ratio of 8x while its industry peers average 15x. A value investor would most likely:

Answer: Consider purchasing the stock as potentially undervalued

Value investors seek stocks trading below intrinsic value; a P/E significantly below peers may indicate an undervalued opportunity.

When performing risk assessment for a client with significant estimates, an auditor should:

Answer: Assess whether management has used reasonable assumptions and methods

The auditor must evaluate whether management's assumptions and methods for developing estimates are reasonable and consistent with applicable accounting standards.

A CPA's CAS client asks for a cash flow forecast for the next 12 months to present to a bank for a loan. Which document should the CPA prepare?

Answer: Prospective financial statements — forecast

A forecast uses management's best estimate assumptions about expected conditions and is appropriate when third parties like lenders will rely on it.

Under the at-risk rules, a partner's deductible loss from a partnership is limited to:

Answer: The amount the partner has at risk, including cash invested and recourse debt

IRC Section 465 limits loss deductions to amounts actually at risk—cash invested plus recourse liabilities for which the partner is personally liable.

What is accrual accounting?

Answer: Revenues and expenses are recognized when earned or incurred.

Accrual accounting is an accounting method where revenues and expenses are recorded when they are earned or incurred, regardless of when cash actually changes hands. This provides a more accurate picture of a company's financial performance over a period, as it matches revenues with the expenses that generated them. It contrasts with cash basis accounting, where transactions are recorded only when cash is received or paid.

How do regulations differ from standards in CPA practice?

Answer: Regulations are legally binding; standards are typically voluntary

Regulations are legally enforceable government rules; standards are industry-developed guidelines that may become requirements through adoption.

What is an internal control in CPA financial management?

Answer: A process providing assurance about financial reporting reliability

Internal controls safeguard assets, ensure accurate reporting, promote efficiency, and ensure compliance.

When a CPA performs analytical procedures as risk assessment procedures, unexpected relationships in financial data should:

Answer: Be investigated to determine if they indicate a risk of material misstatement

Unexpected results from analytical procedures performed as risk assessment procedures require investigation to understand the cause and to determine whether they indicate a risk of material misstatement.

Under the concept of 'independence in appearance,' a CPA should:

Answer: Avoid situations that a reasonable observer might question as compromising objectivity

Independence in appearance means avoiding circumstances that a reasonable, informed third party would view as compromising the CPA's objectivity.

A company capitalizes $500,000 of costs to internally develop a software product for sale. Under ASC 985-20, capitalization begins:

Answer: Once technological feasibility has been established

ASC 985-20 requires capitalization of software costs for products to be sold once technological feasibility is established, typically when a working model is complete.

Which of the following taxpayers may claim the Earned Income Tax Credit (EITC)?

Answer: A low-income worker with earned income below the applicable threshold

The EITC is available to taxpayers with earned income below specified thresholds; married filing separately, high-income earners, and nonresident aliens are generally disqualified.

Which of the following underwriting actions represents a 'risk improvement' technique?

Answer: Requiring a sprinkler system installation before issuing property coverage

Risk improvement involves requiring the insured to take actions that reduce the actual risk exposure before or as a condition of coverage, such as installing fire suppression systems.

When a financial model projects 'deferred revenue' on the balance sheet, what does an increase in deferred revenue imply for operating cash flow?

Answer: It is a source of cash and increases operating cash flow

An increase in deferred revenue means the company collected cash before recognizing it as revenue, providing a cash inflow that adds to operating cash flow.

Which ratio best measures a company's ability to meet short-term obligations using only its most liquid assets?

Answer: Cash ratio

The cash ratio (cash + cash equivalents divided by current liabilities) is the most stringent liquidity measure, excluding receivables and inventory.

Under the AICPA Code of Professional Conduct, which threat to independence arises when an auditor has a loan from an audit client?

Answer: Self-interest threat

A financial relationship such as a loan from an audit client creates a self-interest threat because the auditor has a personal financial stake in the client's outcome.

The contribution margin ratio is calculated as:

Answer: Contribution margin divided by sales revenue

The contribution margin ratio equals contribution margin (sales minus variable costs) divided by sales revenue, showing what percentage of each sales dollar covers fixed costs and profit.

Under agency law, which type of authority arises when a principal's conduct leads a third party to reasonably believe an agent has authority?

Answer: Apparent authority

Apparent authority arises when the principal's words or conduct reasonably cause a third party to believe the agent is authorized to act on the principal's behalf.

Under the installment sale method, gain is recognized:

Answer: Proportionally as payments are received, based on the gross profit percentage

The installment method spreads gain recognition over the payment period by applying the gross profit ratio (gross profit ÷ contract price) to each principal payment received.

A company reports net income of $200,000. Depreciation was $30,000, accounts receivable increased $15,000, and accounts payable decreased $10,000. What is operating cash flow (indirect method)?

Answer: $205,000

$200,000 + $30,000 – $15,000 – $10,000 = $205,000; increases in receivables use cash and decreases in payables use cash.