Certified Public Accountant (CPA) Exam 2 with Answers

Explanation: A contra asset account, such as accumulated depreciation, reduces the value of the related asset account.

Explanation: The weighted average cost method assigns an average cost to each unit, smoothing out price fluctuations over the accounting period.

Explanation: Long-term liabilities are obligations that are not due within the next year, such as notes payable due in five years.

Explanation: The gross margin ratio measures a company's profitability by comparing gross profit to net sales, indicating how efficiently a company produces and sells its goods.

Explanation: The fixed asset turnover ratio indicates how well a company uses its fixed assets to generate sales revenue.

Explanation: Operating activities include the primary revenue-generating activities of a business, such as paying wages to employees.

Explanation: Liabilities are obligations to transfer economic benefits, which can be in various forms, not just cash, such as services or goods.

Explanation: Long-term debt is a liability, not a component of stockholders' equity, which includes common stock, retained earnings, and additional paid-in capital.

Explanation: Common stockholders have voting rights, residual claims on assets, and limited liability, but they do not receive fixed dividends, which are typical for preferred stockholders.

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: Intangible assets, such as patents, lack physical substance but provide future economic benefits. Equipment, land, and inventory are tangible assets.

Explanation: Temporary accounts, like depreciation expense, are closed at the end of each accounting period to retained earnings.

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

Explanation: The income statement reports a company's financial performance over a specific period, including revenues, expenses, and net income or loss.

Explanation: Comprehensive income includes all changes in equity except those resulting from investments by owners and distributions to owners, such as dividends paid.

Explanation: Investing activities include transactions involving the acquisition and disposal of long-term assets, such as purchasing equipment.

Explanation: Non-cash investing activities involve transactions that do not require cash. Issuing stock to purchase assets is an example of such an activity.

Explanation: LIFO (Last-In, First-Out) is an inventory costing method, not a depreciation method. Depreciation methods include straight-line, double-declining balance, and units of production.

Explanation: The quick ratio measures a company's ability to meet its short-term obligations with its most liquid assets, excluding inventory.

Explanation: The equity method is applied when the investor has significant influence, typically indicated by ownership of 20% to 50% of the investee's voting stock.

Explanation: The statement of retained earnings reports the changes in retained earnings during a specific period, including net income and dividends.

Explanation: The primary objective of financial reporting is to provide financial information that is useful to investors, creditors, and other users in making economic decisions.

Explanation: An adverse opinion indicates that the financial statements are materially misstated and do not present fairly the financial position, results of operations, and cash flows of the entity.

Explanation: Contra revenue accounts, such as sales returns and allowances, reduce the total revenue to reflect true earnings.

Explanation: The cost of a building includes the purchase price, legal fees, and interest during construction, but not recurring costs like annual property taxes.

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

Explanation: Managerial accounting focuses on providing relevant information to managers for planning, controlling, and decision-making within the organization.

Explanation: The post-closing trial balance ensures that all temporary accounts have been closed and that total debits equal total credits.

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: The statement of cash flows provides information about a company's cash inflows and outflows over a specific period, highlighting its liquidity and solvency.

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

Explanation: The audit committee is responsible for overseeing the financial reporting process, selecting and overseeing external auditors, and ensuring the effectiveness of internal controls.

Explanation: The allowance for doubtful accounts is a contra account to accounts receivable, estimating the portion that may not be collectible.

Explanation: The work-in-progress inventory account tracks costs for products that are not yet completed, including materials, labor, and overhead.

Explanation: The cost of goods sold statement details the costs directly associated with producing goods sold, helping to determine the gross profit (sales minus cost of goods sold).

Explanation: Goodwill is an intangible asset that arises when a company acquires another and pays more than the fair value of the net assets. It is not amortized but is tested annually for impairment.

Explanation: Adjusting entries ensure that revenues and expenses are recognized in the period in which they occur, complying with the matching principle.

Explanation: Variable costs change in total in direct proportion to changes in the activity level, such as production volume.

Explanation: A perpetual inventory system continuously tracks inventory levels and updates records immediately upon sales and purchases, reducing the need for periodic physical counts.

Explanation: A bank reconciliation compares and adjusts the company's cash balance to match the bank statement, identifying any discrepancies due to timing or errors.