Certified Public Accountant (CPA) Exam 3 with Answers

Explanation: Direct materials are directly traceable to the production of goods, whereas factory rent, utilities, and equipment depreciation are indirect costs.

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.

Explanation: Managerial accounting focuses on internal decision-making, emphasizing future-oriented information and often involving non-financial data. Financial accounting focuses on external reporting.

Explanation: Internal control systems are designed to safeguard assets, ensure accurate and reliable financial reporting, and promote operational efficiency and compliance with laws and regulations.

Explanation: Contra revenue accounts, such as sales returns and allowances, reduce the total revenue

Explanation: The cost of goods sold (COGS) account records the direct costs of producing goods that have been sold, including direct materials, direct labor, and manufacturing overhead.

Explanation: The times interest earned ratio measures a company's ability to meet its interest obligations from operating income, indicating its solvency.

Explanation: The cost of land includes the purchase price, legal fees, and costs of grading and clearing. Interest on a mortgage is a financing cost, not a component of the land's cost.

Explanation: A capital lease, or finance lease, is treated as a purchase, transferring ownership of the asset to the lessee and is recorded on the balance sheet.

Explanation: Retained earnings represent the accumulated net income that has been retained in the company rather than distributed to shareholders as dividends.

Explanation: Product costs include direct materials, direct labor, and manufacturing overhead, all of which are incurred in the production of goods. Selling expenses are period costs.

Explanation: Capital expenditures create assets that provide benefits over multiple periods, unlike operating expenses, which are expensed immediately.

Explanation: The current ratio measures a company's ability to pay its short-term obligations with its short-term assets, indicating its liquidity.

Explanation: A subsidiary ledger contains the detailed data for a specific general ledger account, such as accounts receivable or accounts payable.

Explanation: LIFO (Last-In, First-Out) assumes that the latest items purchased are the first to be sold. In periods of rising prices, this results in lower ending inventory values and higher cost of goods sold.

Explanation: The cash flow statement provides information about a company’s cash inflows and outflows over a specific period, highlighting its liquidity and solvency.

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

Explanation: Bonds are a form of debt financing and affect a company's leverage by increasing its total liabilities. Bondholders are creditors of the company, and bonds can be issued at a premium or discount.

Explanation: Cash equivalents are short-term, highly liquid investments that are easily convertible to known amounts of cash and near their maturity, such as Treasury bills, money market funds, and commercial paper. Accounts receivable are not considered cash equivalents.

Explanation: The double-entry accounting system requires that each transaction be recorded in at least two accounts, with debits equaling credits, ensuring the accounting equation remains balanced.

Explanation: Depreciation allocates the cost of a tangible fixed asset over its useful life, matching expense recognition with the revenue generated by the asset.

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

Explanation: A classified balance sheet groups similar items together, such as current assets, long-term assets, current liabilities, and long-term liabilities, to provide a clearer and more useful presentation of a company's financial position.

Explanation: Contingent liabilities are potential liabilities that may become actual liabilities depending on the outcome of a future event, such as lawsuits.

Explanation: The statement of changes in equity shows the changes in a company's equity accounts, such as retained earnings, common stock, and additional paid-in capital, over a specific period.

Explanation: The accrual basis of accounting recognizes revenues when earned and expenses when incurred, providing a more accurate picture of financial performance and position.

Explanation: LIFO is an inventory costing method, not a depreciation method. Common depreciation methods include straight-line, double-declining balance, and units of production.

Explanation: The going concern assumption presumes that a business will continue to operate indefinitely and not be liquidated in the near future.

Explanation: Intangible assets, such as patents, lack physical substance but provide future economic benefits. Accounts receivable, equipment, and inventory are tangible assets.

Explanation: Liabilities are present obligations arising from past transactions or events that will result in future outflows of resources, not future economic benefits.

Explanation: Budgeting provides a forecast of future financial performance, helping organizations plan and control their operations and financial resources.

Explanation: Gross profit is calculated by subtracting the cost of goods sold from revenue. Operating expenses are deducted later to determine operating profit.

Explanation: Variance analysis compares planned (budgeted) performance with actual performance to identify and analyze the reasons for variances, aiding in management control.

Explanation: The matching principle requires that expenses be recorded in the same period as the revenues they help to generate, ensuring an accurate representation of financial performance.

Explanation: Financing activities include transactions that affect the equity and borrowings of a company, such as issuing common stock or borrowing funds.

Explanation: A trial balance ensures that the total debits equal total credits in the ledger, indicating that the books are balanced, though it does not prove the absence of errors.

Explanation: A flexible budget adjusts budgeted amounts based on actual activity levels, providing a more accurate comparison of actual performance against the budget.

Explanation: Preferred stockholders usually do not have voting rights. They do have a higher claim on assets and fixed dividends, and some preferred stocks can be convertible into common stock.

Explanation: The primary objective of financial reporting is to provide useful financial information to external users, such as investors and creditors, for decision-making purposes.

Explanation: The historical cost principle states that assets should be recorded at the cost paid to acquire them, not at their market or replacement values.