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Try 30 Free CPA Exam Practice Questions

Try CPA sample questions directly from our QBank covering the 6 sections of the CPA Exam. After you answer each question, you can review the detailed explanations for every answer choice and see why serious CPA candidates rely on UWorld to help them prepare for the exam.

Question

The quantity, type, and content of audit documentation depends on the auditor's professional judgment.  Which of the following is most likely to influence the auditor's conclusions?

A. The complexity of the accounting estimates involved.
B. The effectiveness of internal controls over financial reporting.
C. The susceptibility of account balances to fraud or manipulation.
D. The adequacy of the evidence obtained for the assertion tested.

Explanation

Diagram illustrating sufficient and appropriate audit evidence forming reasonable assurance

The main purpose of audit documentation is to provide appropriate, sufficient evidence to support the audit opinion.  When auditors decide how much and what kind of audit documentation to prepare, they rely on their professional judgment.  Documentation is considered sufficient when another experienced auditor can read it and understand how the audit work performed supports the audit opinion.  If the evidence is weak, inconsistent, or incomplete, it directly impacts the auditor's ability to reach a sound conclusion.

The quantity, type, and content of the audit documentation depend on the strength of the audit evidence found to support the F/S and may include a discussion of:

  • Assessed risks of material misstatement
  • Findings that arise during testing
  • Compliance with standards

(Choice A)  The complexity of accounting estimates influences the nature and extent of substantive testing, but it does not directly affect professional judgment regarding audit documentation.

(Choice B)  The effectiveness of internal controls over financial reporting influences audit risk and the nature, timing, and extent of audit procedures, not audit documentation.

(Choice C)  Susceptibility to fraud or manipulation directly influences the nature and extent of audit procedures performed but has no direct bearing on audit documentation.

Things to remember:
The quantity, type, and content of audit documentation depend on the strength of the audit evidence found to support the financial statements.

Question

The principle of due care requires an auditor to do which of the following?

A. Apply sensitive professional and moral judgment at all times.
B. Act in a manner that demonstrates a commitment to professionalism.
C. Perform professional responsibilities with diligence and competence.
D. Apply honesty and candor with an unwillingness to subordinate services.

Explanation

List of AICPA principles of professional conduct with descriptions

The AICPA Code of Professional Conduct (ie, the Code) establishes ethical standards that CPAs must follow in performing their professional responsibilities.  Violations of the Code result in the loss of AICPA membership.

The principle of due care requires auditors to observe the accounting profession's technical and ethical standards, while performing professional responsibilities with diligence.  Members should also seek to maintain and continually improve their competence.

(Choice A)  The application of sensitive professional and moral judgment reflects the obligations outlined in the Code under the responsibilities principle more directly than those under the principle of due care.

(Choice B)  Demonstrating a commitment to professionalism and acting in a manner that honors public trust reflects the obligation to serve the public interest, not the principle of due care.

(Choice D)  Applying the highest level of integrity through honesty and candor with an unwillingness to subordinate services reflects the integrity principle, not the principle of due care.

Things to remember:
The due care principle of the AICPA Code requires members to perform their duties with competence, diligence, and an adherence to technical and ethical standards.

Question

Which of the following controls most likely would reduce the risk of misstatements in the billing process?

A. Accounts receivable subsidiary ledger is reconciled to the general ledger on a monthly basis.
B. Shipping documents are matched with approved sales orders before invoices are prepared.
C. Customer credit is approved and agreed to authorized limits before orders are shipped.
D. Monthly statements are mailed to customers and differences reported are investigated.

Explanation

Invoice diagram illustrating steps to reduce billing errors

The revenue cycle is the company's process for receiving and fulfilling customer orders.  In the billing phase, customers are invoiced for purchases.  Accuracy and completeness are vital components of billing.  Invoices sent to customers should identify all of, and only, the products purchased.

Matching what was shipped (per shipping documents) to what was ordered (per approved customer sales orders) enables detection and correction of errors in filling orders.  By performing this step before invoices are prepared (ie, implementing a preventive control), invoices are more likely to be complete and accurate.

(Choice A)  Reconciling the accounts receivable (AR) subsidiary ledger to the general ledger AR account on a monthly basis will help to prevent errors in both ledgers.  It is a step performed after billing that helps to ensure the complete and proper recording of receivables.

(Choice C)  Credit verification before shipment helps to ensure that sales are made to customers with the ability to pay.  This, in turn, aids in the proper valuation of the receivables by reducing the need to increase the allowance for credit losses.

(Choice D)  Mailing monthly statements and investigating differences is a detective control rather than a preventive measure.  It will detect errors that have already been made.

Things to remember:
The risk of misstatements in the billing process is best reduced by preventing errors from occurring.  Matching shipping documents to customer sales orders before invoices are prepared helps to ensure invoice completeness and accuracy.

Question

Which of the following is a principal reason for establishing an audit trail for transaction processing?

A. To ensure the complete and timely processing of all transactions.
B. To ensure that all changes made to a record are identifiable.
C. To ensure transactions are entered accurately.
D. To ensure account balances are correct.

Explanation

Diagram of a transaction processing system with audit trail example

Audit trails are critical to financial and operational processes in an organization.  They enable transactions to be verified and activities to be validated.  The presence of audit trails helps to reduce fraud and errors by providing transparency and accountability for each transaction.

An audit trail details chronologically the events, procedures, or operating steps that have occurred.  It documents everything that has happened in a process (eg, all the changes made to a record).

(Choices A, C, and D)  Audit trails enable verification of the steps followed in processing transactions.  Other controls (eg, input controls, processing controls, reconciliation controls) would be utilized to ensure completeness, timeliness, and accuracy in transaction processing, as well as correct account balances.

Things to remember:
Audit trails provide a detailed chronological record of events, procedures, or steps in a process.  The transparency and accountability that result from establishing an audit trail help to reduce fraud and errors.

Question

The data life cycle begins when

A. a business activity occurs that triggers the data capture process.
B. data from a business activity is manually input into the system.
C. facts about business activities are processed into usable information.
D. system users and analysts determine what data the company should capture.

Explanation

Diagram of the data life cycle stages from capture to purging

Organizations depend on reliable data to support decision-making, evaluate performance, and ensure compliance.  The data life cycle describes the stages through which data moves, beginning with capture and maintenance and continuing through synthesis, usage, analytics, publication, archival, and eventual purging.  Each stage plays a key role in ensuring that data remains accurate, secure, and useful for transforming business activities into meaningful information.

The data life cycle begins when a business activity occurs that triggers the capture of data.  Data capture is the process of collecting information about the event.  Capture may occur through manual entry, automated sensors, or data transferred from external systems.  The business activity itself initiates the process, regardless of how the data is later entered into the system.

(Choice B)  Manual data input may be one method of capturing data, but the data life cycle begins when the activity occurs, not when it is entered into the system.

(Choice C)  Processing data into usable information occurs later in the data life cycle, after the data has been captured and stored.

(Choice D)  Decisions about what data to capture fall under data governance and system design, not the operational stages of the data life cycle.

Things to remember:
The data life cycle provides a structured process for transforming raw business events into meaningful information that supports planning, control, and performance evaluation.  Data capture marks the start of the data life cycle, collecting information from business activities to begin transforming raw events into actionable insights.

Question

Blue Co.'s net income for Year 4 is $125,000.  The following information is available:

Accounts payable $2,800 increase
Accounts receivable (gross) 4,000 increase
Allowance for credit losses 250 increase
Investment in available-for-sale debt securities 15,000 increase
Prepaid insurance 3,100 decrease

What amount should Blue include as net cash provided by operating activities in the statement of cash flows?

A. $111,650
B. $112,150
C. $126,650
D. $127,150

Explanation

Diagram of indirect method cash flow from operating activities adjustments

The indirect method of preparing the operating activities section of the statement of cash flows starts with adjusting net income (NI) on an accrual basis.  NI is reconciled to net cash flow by adjusting for changes in certain operating accounts and noncash items on the balance sheet.

  • Noncash expenses (eg, credit loss expenses) reduce NI.  These expenses are added to NI.  Recording a noncash credit loss expense results in an increase in the allowance for credit losses, which is a contra account to accounts receivable.

  • A decrease in a current asset (eg, prepaid insurance) is a source of cash (added to NI) because all or part of the asset has been used up or converted to cash.  The opposite is true of an increase in a current asset (eg, accounts receivable), which represents a use of cash (deducted from NI) that is "tied up" until it is collected or the asset is consumed.

  • An increase in a current liability (eg, accounts payable) is a source of cash (added to NI) because a promise to pay has been incurred instead of a cash payment.

In this scenario, Blue Co.'s NI is provided, indicating that the indirect method is used.  When the nature and cash component of each transaction has been determined, the cash flow provided by operating activities is $127,150, as shown below.

Net income $125,000
+ Increase in accounts payable (source of cash, added) 2,800
− Increase in accounts receivable (use of cash, deducted) (4,000)
+ Increase in allowance for credit losses (noncash expense, added) 250
+ Decrease in prepaid insurance (source of cash, added) 3,100
Cash flow provided by operating activities $127,150

The increase in available-for-sale debt securities, a cash outflow, is reported as an investing activity, not an operating activity.

Things to remember:
The indirect method of preparing the operating activities section of the statement of cash flows starts with net income (NI).  NI is reconciled to net cash flow from operations by adjusting for changes in certain operating accounts (eg, accounts receivable, accounts payable, prepaid insurance) and noncash items (eg, credit loss expense) on the balance sheet.

Question

On January 1, Year 2, Union Co. purchased a machine for $528,000 and depreciated it by the straight-line method using an estimated useful life of eight years with no salvage value.  On January 1, Year 5, Union determined that the machine has a useful life of six years from the date of acquisition and a salvage value of $48,000.  What amount of accumulated depreciation should Union Co. report for this machine on its December 31, Year 5, balance sheet?

A. $292,000
B. $308,000
C. $320,000
D. $352,000

Explanation

Table of steps for calculating a change in depreciation estimate

Financial reporting often requires the use of estimates (eg, estimating salvage value, assets' useful life).  It is common to revise estimates as circumstances change, or new information becomes available.  A change in accounting estimate is applied prospectively to the current period and future periods.

The change is applied on the first day of the accounting period in which the revisions are made.  For depreciation changes, the carrying value of the asset is determined as of this date, and the new depreciable base (ie, carrying value minus revised salvage value) is used to recalculate depreciation expense.

In this scenario, the initial amount of annual depreciation is $66,000 ($528,000 / 8 years).  Thus, accumulated depreciation for Years 2 through 4 is $198,000 ($66,000 × 3 years), resulting in a carrying value of $330,000 ($528,000 − $198,000).

Beginning in Year 5, Union Co. will record depreciation of $94,000 [($330,000 carrying value − $48,000 salvage value) / 3 years remaining life] based on the prospective application of the revised estimates.  The calculated accumulated depreciation as of December 31, Year 5, is $292,000 ($198,000 + $94,000).

(Choice B)  Accumulated depreciation of $308,000 excludes the revised salvage value.

(Choice C)  Accumulated depreciation of $320,000 retroactively applies the revised useful life (6 years) and salvage value ($48,000) to the asset's original cost ($528,000).

(Choice D)  Accumulated depreciation of $352,000 retroactively applies the revised useful life (6 years) to the asset's original cost ($528,000) and original salvage value ($0)

Things to remember:
A change in an asset's salvage value or useful life is a change in accounting estimate and should be accounted for prospectively.  The revised estimates are applied on the first day of the accounting period in which the change was made and is used to recalculate depreciation [(Carrying value − Salvage value) / Remaining life] for current and future periods.

Question

A company reported the following for the current year:

Revenue $400,000
Operating expenses 175,000
Interest expense 60,000
Income before income tax $165,000

The company has a 30% effective tax rate.  What is the company's times interest earned ratio?

A. 1.9
B. 2.8
C. 3.8
D. 6.7

Explanation

Table of solvency ratio formulas including debt to equity and times interest earned

The times interest earned ratio, or interest coverage ratio, is a solvency measure that shows the degree to which a firm can pay the interest owed on its debt.  Lenders use this ratio to determine an entity's creditworthiness.

The formula is earnings before interest and taxes (EBIT) divided by interest expense.  EBIT is used as the numerator because it represents the income available to lenders.  The ratio shows the number of times (ie, not percentage) that annual interest on debt is covered by current income (ie, EBIT).  The greater the ratio, the greater the entity's long-term solvency.

In this scenario, EBIT can be calculated by adding back interest expense ($60,000) to income before income tax ($165,000), resulting in EBIT of $225,000.  Thus, the company's times interest earned ratio is 3.8, calculated as follows:

Times interest earned = EBITInterest expense = $225,000$60,000 = 3.8

(Choice A)  A ratio of 1.9 is calculated by incorrectly using net income instead of EBIT.

(Choice B)  A ratio of 2.8 is calculated by incorrectly using income before tax instead of EBIT.

(Choice D)  A ratio of 6.7 is calculated by incorrectly using revenue instead of EBIT.

Things to remember:
The times interest earned ratio is a solvency metric that shows the number of times an entity's annual interest on debt is covered by its earnings before interest and taxes (EBIT).  The formula is EBIT / Interest expense.

Question

Omicron Co.'s headquarters are located on a floodplain, and the company sustained significant losses as a result of a February Year 4 flood, the first such flood in 100 years.  The flood occurred prior to the issuance of Omicron's year-end Year 3 financial statements, and the associated losses are substantial.  How should the losses resulting from the flood be reported in Omicron's year-end Year 3 financial statements?

Accrued Disclosed
A. Yes Yes
B. Yes No
C. No Yes
D. No No

Explanation

Flowchart classifying subsequent events as type 1 or type 2

Subsequent events are conditions or transactions that occur after the financial statement (F/S) date but before the F/S are issued.  There are two types of subsequent events.

  • Type 1 events provide evidence of conditions that existed as of the F/S date and must be recognized and recorded in the F/S.

  • Type 2 events are not related to any condition that existed as of the F/S date and are not recognized but may require disclosure if material.

In this scenario, the flood is a subsequent event because it occurred after the F/S date but prior to F/S issuance.  Although Omicron Co.'s headquarters are located on a floodplain, the area has not flooded in a century.  On 12/31/Y3, it would have been nearly impossible to predict losses from a flood that had not yet occurred.  Because it was not related to any condition existing at the F/S date, the storm is a Type 2 (nonrecognized) event.

No accrual or balance sheet adjustment is recorded for a Type 2 event.  However, the flood is still material information that should be disclosed within the company's F/S notes.  An estimate of losses associated with property damaged or a potential disruption in business would be noteworthy to F/S users.

Things to remember:
There are two types of subsequent events.  Type 1 (recognized) events relate to a condition that existed at the financial statement (F/S) date.  Type 2 events are not related to any condition that existed at the F/S date and are not recognized but usually disclosed.

Question

As a result of an accident in Year 2, Invern Inc. is a defendant in a lawsuit.  Invern's attorney believes it is probable that Invern will lose the suit and estimates the loss to be $190,000.  What is the effect of the lawsuit on Invern's Year 2 financial statements?

Expenses Liabilities
A. Increase No effect
B. Increase Increase
C. No effect Increase
D. No effect No effect

Explanation

Table of GAAP disclosure and accrual rules for loss contingencies

A loss contingency exists when a situation may result in a future loss that depends on the outcome of an uncertain event outside the entity's control.  Under GAAP, a loss contingency must be accrued on the F/S if it is both probable and reasonably estimable, as it represents an existing obligation that will likely require payment.

In this scenario, the loss is both probable and estimable, so Invern should record a liability and a corresponding expense, as shown below:

Loss from lawsuit $190,000
Lawsuit liability $190,000

This entry increases both expenses and liabilities in the Year 2 F/S.

(Choices A and C)  Recording only an expense or only a liability fails to capture both sides of the transaction.  The proper accrual includes both the loss and the lawsuit liability.

(Choice D)  Invern would not accrue the loss if the chance of losing the suit were remote or reasonably possible, or if it were probable but not estimable.

Things to remember:
A loss contingency is an existing situation that may result in a future loss depending on the outcome of an event outside the entity's control.  A loss must be accrued on the F/S when it is both probable and reasonably estimable.

Question

Tera filed her tax return on time but did not pay her taxes until 4 months after the due date.  She owed $20,000.  What is the amount of her late payment penalty?

A. $400
B. $4,000
C. $4,600
D. $5,000

Explanation

Taxpayer penalties

Penalty

When it applies

Amount of penalty

Failure to file

Tax return not filed by the due date (includes extensions)
  • 5% per month, or part of a month, that the return is late, up to a total of 25% of the unpaid tax
  • If not filed within 60 days of the due date, the minimum penalty is the lesser of a statutory amount or 100% of the unpaid income taxes
  • If fraudulent, the penalty is increased to 15% per month up to a maximum of 75% of the tax due with the return

Failure to pay

Total tax liability not paid by the original due date (excludes extensions)*
  • 1/2 of 1% (0.5%) for each month, or part of a month, that the tax is not paid, up to a total of 25% of the unpaid tax

*Exception: If an extension was filed and, generally, the taxpayer paid at least 90% of the taxes owed, the failure-to-pay penalty may not apply as long as the balance is paid by the extension date.

Note: If both penalties apply for any month, the failure-to-file penalty is reduced by the failure-to-pay penalty. Maximum penalty is 5% per month, or part of a month. The minimum combined penalty if the tax return is not filed within 60 days of the due date (including extensions) is the lesser of a statutory amount or 100% of the unpaid tax.

To encourage taxpayer compliance with filing tax returns and paying taxes, the IRS imposes penalties for failure to file and failure to pay taxes on time.  The failure-to-pay penalty (a late payment penalty) is generally assessed if any portion of the total tax liability due is not paid by the original due date (ie, April 15).

This penalty is calculated as a percentage of the unpaid taxes as follows:

  • 1/2 of 1% (0.5%) for each month, or part of a month, after the due date (ie, April 15) that the tax is not paid.  (When calculating the penalty, remember that 0.5% is .005)
  • The maximum penalty is limited to 25% of the unpaid tax
  • This penalty may reduce the failure-to-file penalty, if applicable

In this case, the taxpayer filed the return on time but failed to pay the $20,000 taxes due.  Therefore, the failure-to-pay penalty is $400, as shown below:

Unpaid taxes $20,000
Penalty rate × .005
Penalty per month $100
Number of months   × 4
Total penalty $400*
*May not exceed 25% of tax due ($20,000 × 25% = $5,000) (Choice D)

(Choice B) A $4,000 penalty incorrectly uses .05 in the calculation ($20,000 × .05 × 4 = $4,000).

(Choice C) A $4,600 penalty erroneously assumes that both a failure-to-file and a failure-to-pay penalty apply ($20,000 × 25% failure to file = $5,000 − $400 failure to pay = $4,600).

Things to remember:
The penalty for failure to pay income taxes by the original due date of the return (ie, April 15) is calculated as a percentage of the unpaid taxes.  The penalty is 1/2 of 1% (0.5%) for each month, or part of a month, after the due date.  When calculating the penalty, remember that 0.5% is .005.

Question

For which of the following purchases would a purchase money security interest be automatically perfected upon attachment?

A. A television to be used in the buyer's restaurant.
B. A television to be held as inventory in the buyer's consumer electronics store.
C. A wood saw to be used in the buyer's home.
D. A wood saw to be used in a factory.

Explanation

Diagram comparing automatic perfection for PMSI in consumer versus business goods

A purchase money security interest (PMSI) is a security interest in which the creditor provides the funds for the purchase of the collateral.  Perfection is the process by which a secured creditor establishes priority over other creditors in the collateral.  While perfection usually requires filing a financing statement or taking possession of the collateral, the UCC allows for automatic perfection upon attachment in certain limited circumstances.

Automatic perfection generally applies when there is a PMSI in consumer goods.  Consumer goods are goods used primarily for personal, family, or household purposes.  PMSIs in non-consumer goods, such as inventory or equipment used in a business, are not automatically perfected.  In these situations, a creditor must generally file a financing statement or take possession to perfect a security interest in business property.

A wood saw purchased for use in a buyer's home is a consumer good because it is used for personal purposes.  Therefore, the PMSI in the saw is automatically perfected upon attachment.

(Choices A and D)  A television for a restaurant and a wood saw for a factory are considered equipment.  Because these items are for business use, a PMSI in them requires either the filing of a financing statement or possession to be perfected.

(Choice B)  The classification of an item as a consumer good depends on the buyer's use, not the ultimate use, of that item.  Goods sold to be held as inventory are not consumer goods, even if they will ultimately be sold for personal use.  Televisions become consumer goods only when an end consumer buys one for personal/household use, and that later sale is a different transaction with a different debtor and different security interest.

Things to remember:
A purchase money security interest (PMSI) in consumer goods is automatically perfected upon attachment.  Consumer goods are goods bought primarily for personal, family, or household purposes.  PMSIs in inventory or equipment do not qualify for automatic perfection and generally require the filing of a financing statement or possession by the secured party to be perfected.

Question

A taxpayer started a furniture-making business and converted their personal CNC router to business use.  The router originally cost $3,680 and, at the time of conversion to business use, had a fair market value of $2,200.  After claiming depreciation deductions of $1,320, the taxpayer sold the router for $550.  What amount of loss, if any, should the taxpayer recognize on the conversion date and the date of sale?

A. Conversion date, no gain or loss; sale date, loss of $330.
B. Conversion date, no gain or loss; sale date, loss of $1,810.
C. Conversion date, loss of $1,480; sale date, loss of $330.
D. Conversion date, loss of $1,480; sale date, no gain or loss.

Explanation

Flowchart for calculating tax basis of assets converted from personal to business use

When an individual begins a new business, they often convert personal assets to business-use assets.  No gain or loss is recognized by the taxpayer on the date of conversion, but determining the correct basis is important for the converted asset because it is used to determine depreciation deductions and the asset's tax basis upon eventual sale or disposition.  The tax basis for the converted asset is the lower of:

  • The asset's original cost or adjusted tax basis or
  • The asset's fair market value (FMV) on the conversion date.

Using the lower amount prevents the taxpayer from converting a potential nondeductible personal loss to a deductible business loss.

In this scenario, the router's FMV of $2,200 is less than the original cost of $3,680.  The realized loss of $1,480 ($2,200 − $3,680) upon conversion is a nondeductible personal loss that is not recognized, and the taxpayer has an initial basis of $2,200 in the router.  Prior to the sale, the router's basis is adjusted for the $1,320 of depreciation deductions.  The loss on the sale is $330 [$550 sales price – ($2,200 initial basis − $1,320 depreciation)].

(Choice B)  A $1,810 loss incorrectly uses the original $3,680 cost of the asset as the tax basis, effectively converting $1,480 of preexisting nondeductible personal loss to a business loss, which is not allowed.

(Choices C and D)  No gain or loss is recognized on the date when personal assets are converted to business or investment use.

Things to remember:
The basis of an asset converted from personal use to business use is the lower of the asset's adjusted tax basis and fair market value (FMV) on the conversion date, and no gain or loss is recognized.  When it is lower than the asset's adjusted tax basis, the FMV is used as the basis to prevent a taxpayer from converting nondeductible personal losses to deductible business losses.

Question

An individual had the following capital gains and losses for the year:

Short-term capital loss $60,000
Long-term gain (unrecaptured Section 1250 at 25%)  42,000
Long-term gain on collectibles (at 28%) 11,000
Long-term gain (at 15%) 15,000

What will be the net gain (loss) reported by the individual and at which applicable tax rate(s)?

A. Long-term gain of $8,000 at 28%.
B. Short-term loss of $3,000 and long-term gains of $42,000 at 25%, $11,000 at $28%, and $15,000 at 15%.
C. Short-term loss of $3,000 and long-term capital gain of $11,000 at 28%.
D. Long-term gain of $8,000 at 15%.

Explanation

Diagram of the ordering procedure for netting capital losses against capital gains

Some long-term capital gains (LTCGs) may be subject to special tax rates (eg, 15%, 25%, 28%), depending on the nature of each gain.  To ensure that the LTCGs are taxed at the lowest preferential rate possible and provide the greatest benefit to taxpayers, an ordering procedure is followed.

When netting losses against long-term (LT) gains, the loss is offset as follows:

  • First, LTCGs on collectibles (eg, stamps, coins) are taxed at 28%.
  • Second, unrecaptured Section 1250 gains are taxed at 25%.
  • Third, any remaining LTCGs are generally taxed at 15%.

In this scenario, the $60,000 net short-term (ST) loss offsets the $68,000 LTCG, resulting in an LTCG of $8,000.  To determine which tax rate to apply to that gain, use the ordering procedure.  The ST loss offsets the various LT gains in order from the highest to the lowest tax rates, which results in taxing the $8,000 at 15%, as shown below.

LT gain Offsetting
ST loss		 Remaining
ST loss		 Remaining
balance
Collectible gain (28%) $ 11,000 ($11,000) $49,000 $0
Unrecaptured Section 1250 (25%) 42,000 (42,000) 7,000 0
Gain (15%) 15,000 (7,000) 0 8,000
Net $ 68,000 ($60,000) $0 $8,000

(Choice A)  An $8,000 gain taxed at 28% nets the losses from the lowest to the highest tax rate.

(Choice B)  A $3,000 ST loss and LT gains of $42,000, $11,000, and $15,000 fails to net the ST and LT transactions and limits the ST loss to $3,000.

(Choice C)  An ST loss of $3,000 and LT gain of $11,000 at 28% nets the losses from the lowest to the highest tax rate and does not fully offset the ST loss.

Things to remember:
Some long-term capital gains (LTCGs) are taxed at preferential rates.  To ensure that LTCGs are taxed at the lowest rate possible, an ordering procedure is followed.  Losses offset gains in order from the highest to the lowest tax rate.

Question

All of the following may be 501(c)(3) organizations for federal tax purposes except

A. Public charities.
B. Amateur athletic organizations.
C. Feeder organizations.
D. Religious organizations.

Explanation

Diagram illustrating how feeder organizations transfer earnings to charities

Section 501(c)(3) tax-exempt organizations—those that have been established to benefit the public interest—are classified by their funding as either private foundations or public charities.  Private foundations typically have a single major source of funding, such as an endowment from a family or corporation, receiving less than one-third of their support from members and the general public.

Organizations that are publicly supported (eg, public charities, amateur athletic organizations, religious organizations) normally receive at least one-third of their support from the general public and/or governmental entities.  These organizations must use donations exclusively for their exempt purpose (Choices A, B, and D).

A feeder organization operates as a business for profit but transfers all its net earnings to charitable organizations.  Due to the nature of their operations, feeder organizations do not qualify as 501(c)(3) exempt organizations.

Things to remember:
Both private foundations and organizations that are publicly supported (eg, public charities, amateur athletic organizations, religious organizations) are 501(c)(3) organizations for federal tax purposes.  A feeder organization does not qualify since it is operated as a business for profit.

Question

Which of the following is a benefit of using scatterplots to visualize data?

A. Scatterplots show the relationship between two variables.
B. Scatterplots show the proportion of data in each category of a categorical variable.
C. Scatterplots show the observations in a data set that fall into discrete categories.
D. Scatterplots show the quartiles for variables.

Explanation

Two scatterplots comparing linear versus curved data patterns

Data visualizations are graphical representations of information and data.  Visual elements such as charts, graphs, and maps simplify the presentation of large data sets so that patterns and trends are more easily discernible.

A scatterplot is the best practice for illustrating the relationship between two continuous variables.  For example, if one were developing an instructional website about rice cooking, one might want to know whether there is a relationship between the number of photos and the number of videos on the website.

The number of videos would be plotted on the y-axis and the number of photos would be plotted on the x-axis.  This visualization clearly shows the direction (positive or negative) and strength of the correlation, reveals patterns, and helps identify outliers, making it ideal for determining the typical relationship between the number of videos and photos.

(Choice B)  Pie charts show the proportion of data in each category of a categorical variable.

(Choice C)  Dot plots show the number of observations in a data set that fall into discrete categories.  They are similar to histograms.

(Choice D)  Boxplots show the distribution of numerical variables using quartiles for each variable.

Things to remember:
A scatterplot is a type of data visualization that is effective for showing how two variables are related, with each observation plotted on a graph in which one variable is displayed on the x-axis and the other is displayed on the y-axis.

Question

Nile Co.'s cost allocation and product costing procedures follow activity-based costing principles.  Activities have been classified as either value added or nonvalue added for each product.  Which of the following items is nonvalue adding?

A. Design engineering activity.
B. Warranties.
C. Customization options.
D. Compliance with regulatory requirements.

Explanation

Diagram comparing nonvalue added and value added activities

Activity-based costing (ABC) focuses on incorporating into product cost only those activities that add value to the product.  Costs ultimately add value if they result in specific outcomes that customers perceive as increasing the worth of a product or service, for which they would pay more.

Examples include:

  • Design engineering:  A fundamental activity needed to design a successful product (Choice A)
  • Warranties:  Offset risk of product malfunction (Choice B)
  • Customization options:  Allow customers to tailor the product to their specific needs (Choice C)

Nonvalue-added costs can be of two types.  The first consists of activities that customers are unwilling to pay for (eg, moving material, storage of work-in-process).  These items are generally considered to be "waste."  If a less expensive alternative is available from a more efficient company, customers will purchase that item.

The second type of nonvalue-added costs is also something customers are not willing to pay for but is unavoidable by the firm (eg, the cost of maintaining and documenting compliance with laws and regulations).  Although these costs cannot be eliminated, firms should attempt to streamline the process and reduce the costs.

Things to remember:
Activity-based costing focuses on incorporating into product cost only those activities that add value to the product.  Costs ultimately add value if they result in customers perceiving the cost as increasing the worth of a product or service, for which they would pay more.  Identifying and reducing nonvalue-added activities helps reduce production costs.

Question

Maple City Seedlings (MCS) works closely with the government of Maple City.  MCS operates a nursery that plants, nurtures, and then sells maple tree seedlings to the general public.  MCS is a component unit of the Maple City government if

A. MCS's offices are co-located in physical facilities with Maple City government entities, but MCS is fiscally independent.
B. MCS's governing board is elected by the general public.
C. The Maple City government appoints a majority of MCS's governing board and is able to impose its will on MCS.
D. The Maple City government's ownership of a majority equity interest in MCS is held as an investment.

Explanation

Diagram of a government financial reporting entity with component units

A government financial reporting entity consists of the primary government and its component units, the entities for which the government is financially accountable.

Financial accountability exists in any of the following scenarios:

  • The government appoints a majority of the entity's board AND is able to impose its will on the entity (Choice B)
  • The entity is fiscally dependent on the government AND is a financial benefit or burden to the government (Choice A)
  • The government's ownership of a majority equity interest in the entity is not held to be an investment (Choice D)

Things to remember:
Classification as a component unit of a government requires that the government be financially accountable for that entity.  A government is financially accountable if the government appoints a majority of the entity's board AND is able to impose its will on the entity or the entity is a financial benefit or burden to the government.  Financial accountability is also met if the entity is fiscally dependent on the government and is a financial benefit or burden to the government.

Question

A company issued 100,000 shares of its $1 par common stock at a price of $8 per share.  Upon issuing the stock, the company's

A. Debt-to-equity ratio decreased.
B. Earnings per share increased.
C. Asset turnover increased.
D. Financial ratios were unaffected.

Explanation

Table showing balance sheet impact of a common stock issuance

A corporation can finance its operations by issuing stock to raise funds.  All corporations issue some form of common stock, which normally has a par value assigned to it.  The stock issue price is typically greater than par.  The excess amount over par increases APIC.

Stock issuance affects the balance sheet by increasing assets and equity.  When evaluating company performance, users of financial statements can see the effect of stock issuance through calculating financial ratios (Choice D).  Key ratios include:

  • Debt to equity (Total debt / Stockholders' equity):  this shows creditors the corporation's ability to sustain losses.  Because debt (numerator) is unchanged by stock issuance, an increase in equity (denominator) decreases the ratio.

  • Earnings per share ([Net income − Preferred dividends] / Weighted shares outstanding):  this measures net income earned on each share of common stock.  Common stock issuance does not impact net income or preferred dividends (numerator), but it increases the weighted shares outstanding (denominator).  Therefore, the ratio decreases (Choice B).

  • Asset turnover (Net sales / Average total assets):  this measures how efficiently assets are used to generate sales.  Since net sales (numerator) are not impacted by stock issuance, an increase in assets (denominator) decreases the ratio (Choice C).

Things to remember:
Stock issuance impacts the balance sheet by increasing assets and equity.  Key financial ratios that use assets and equity (eg, debt to equity, earnings per share, and asset turnover) are all decreased from issuing common stock.

Question

Bareb Co. sells 20 televisions to a new customer for $20,000.  The customer is opening a sports bar, and Bareb is aware the sports bar will be subject to intense competition.  Upon delivery, a $5,000 nonrefundable down payment is collected and the remaining $15,000 is due evenly over the next two years.  If the customer defaults, Bareb's only recourse is to repossess the televisions.  Bareb is uncertain as to the collectability of the remaining payments.  What amount of revenue, if any, should Bareb recognize upon transfer of the televisions?

A. $0
B. $5,000
C. $15,000
D. $20,000

Explanation

revenue recognition process

Step 1 of the revenue recognition process involves identifying contracts with customers.  For a valid contract to exist, collection from a customer must be probable.  Collection is probable if a customer intends and is able to pay substantially all (ie, 90% or more) of the consideration due in exchange for goods or services provided by an entity.

In this scenario, there is uncertainty regarding the collectability of the remaining payments because the customer is new to Bareb Co. and sports bars face intense competition.  Because the customer's ability to pay for all the televisions is uncertain, the arrangement fails the collectability requirement and should not be accounted for under the revenue recognition process.

Given the circumstances, amounts received from the customer would generally be accounted for as a liability and no revenue would be recognized until the arrangement subsequently met all four contract criteria.  However, because the $5,000 down payment is nonrefundable and Bareb has satisfied the performance obligation (ie, customer already controls the televisions), Bareb can recognize the $5,000 received as revenue (Choice A).

(Choices C and D)  Total potential revenue from the agreement is $20,000 ($15,000 remaining); however, no additional revenue can be recognized until collection is deemed probable.

Things to remember:
If there is uncertainty regarding the collectability of payments in an agreement with a customer, the collectability requirement is not met, and the agreement should not be accounted for under the revenue recognition process.  An entity may recognize revenue from a customer's nonrefundable down payment if the entity has already satisfied its performance obligation.

Question

Which of the following statements best describes complementary user entity controls?

A. Controls implemented by a service organization to supplement controls at user entities.
B. Controls implemented by a user entity to supplement controls by a service organization.
C. Controls implemented by a subservice organization to supplement controls by a service organization.
D. Controls implemented by a subservice organization to supplement controls at user entities.

Explanation

Diagram showing how complementary user entity controls combine with service organization controls

In the design of a service organization's system, complementary user entity controls (CUECs) are supplemental controls that the organization assumes will be implemented by user entities.  CUECs, in combination with controls at the service organization, are necessary to provide reasonable assurance that the organization will achieve its objectives (Choice A).

It is essential that CUECs be identified in management's description of the system so that report users can understand the system and the responsibilities of user entities.  The description should explicitly state that certain control objectives (SOC 1®) or service commitments and system requirements (SOC 2®) cannot be achieved without the CUECs.

(Choices C and D)  Controls implemented by a subservice organization supplement the service organization's controls and are called complementary subservice organization controls.

Things to remember:
In a SOC 1®, SOC 2®, or SOC 3® engagement, management's description of the service organization's system must describe complementary user entity controls (CUECs), which are controls that the service organization, in the design of its system, assumes will be implemented by user entities.  CUECs, in combination with controls at the service organization, are necessary to provide reasonable assurance that the service organization will achieve its objectives.

Question

Which of the following most clearly illustrates a quantitative materiality factor that a service auditor would consider during a SOC 2®, type 2 engagement?

A. A deficiency in the suitability of design of controls that affects compliance.
B. A description misstatement related to intentionally distorted wording.
C. A description misstatement related to unintentionally omitted information.
D. A deviation in the operating effectiveness of change authorization control.

Explanation

Image showing qualitative and quantitative

In a SOC 2® type 2 engagement, a service auditor's opinion provides reasonable assurance in all material respects.  Materiality relates to qualitative and quantitative aspects of information presented by management.

A deviation in the operating effectiveness of controls is most typically a quantitative factor.  In a SOC 2®, type 2 engagement, management asserts that controls operated effectively throughout the period.  If, for example, the service auditor's testing reveals exceptions to established controls, the service auditor would use professional judgment to decide if the number of exceptions is material enough to issue a qualified (ie, modified) opinion.

(Choices A, B, and C)  Materiality regarding management's description and the suitability of the design of controls most often relates to qualitative factors.  For example, description misstatements, such as intentionally distorted wording (ie, fraud) or unintentional omissions (ie, errors), concern the quality of the information presented.  A deficiency in the suitability of the design of controls (eg, lack of controls over data privacy) relates to the strength of the controls.

Things to remember:
Quantitative materiality factors surround issues that are numerical (eg, the number of deviations in a sample).  Qualitative factors involve the quality of information presented (eg, the presence of distortion or omission).

Question

The intended users of a SOC 2® report include parties that have a direct relationship with the service organization and

A. Material risk in connection with the services provided.
B. Necessary contractual rights to receive the report.
C. Proper professional licenses to preserve confidentiality.
D. Sufficient knowledge to understand the report contents.

Explanation

Table outlining SOC 2 report type, purpose, and standards

SOC 2® reports provide assurance about controls relevant to security, availability, processing integrity, confidentiality, or privacy.  These reports help user entities understand a service organization's system and controls.

SOC 2® is a restricted report.  Intended users must have a direct relationship with the service organization and sufficient knowledge to understand the report.  Direct relationships include user entities and user auditors, business partners and their auditors, prospective user entities and business partners, and regulators.  The AICPA SOC 2® Guide describes sufficient knowledge as the ability to understand:

  • The type of services offered by the service organization
  • How the service organization's control system affects user entities, business partners, subservice organizations, and other parties
  • The limitations of internal control
  • The effect of complementary user entity controls (CUECs) and complementary subservice organization controls (CSOCs)
  • Risks that may interfere with the service organization's commitments and related controls

(Choices A, B, and C)  There are no standards that specify a level of risk, contractual terms, or professional licensing to receive a SOC 2® report.  The appropriateness depends on management's judgment of the intended user's relationship with the service organization, as well as the user's need and ability to understand the detailed report contents.

Things to remember:
SOC 2® is a restricted report.  Intended users must have a direct relationship with the service organization and sufficient knowledge to understand the report.  Direct relationships include user entities and user auditors, business partners and their auditors, prospective user entities and business partners, and regulators.

Question

In a SOC 3® examination, management would most appropriately assert that the controls stated in its description of the service organization's system

A. Operated effectively as of a specified date.
B. Operated effectively throughout a period.
C. Were suitably designed as of a specified date.
D. Were suitably designed throughout a period.

Explanation

Table outlining SOC 3 report type, purpose, and standards

SOC 3® reports provide assurance about the effectiveness of controls relevant to security, availability, processing integrity, confidentiality, or privacy.  It is a general use report that can be prepared only after a SOC 2® type 2 engagement is completed.  As the public does not have either sufficient knowledge to understand or a specific need for the detailed information in a SOC 2® type 2 report, SOC 3® reports contain less information and so may be distributed freely.

The only assertion that management makes in a SOC 3® engagement is that the controls included in its description of the system operated effectively throughout a period based on the trust services criteria.  The service auditor expresses an opinion only about the operating effectiveness of controls.  Thus, a SOC 3® is like a type 2 report by default because it flows from a SOC 2® type 2 engagement.

(Choice A)  A SOC 3® report is always throughout a period.  There is no need to classify it as a type 2 because this is self-evident.

(Choices C and D)  Management makes no specific assertion about the suitability of the design of controls in a SOC 3® report.  However, as a practical matter, controls cannot operate effectively if they are not suitably designed.

Things to remember:
The only assertion that management makes in a SOC 3® engagement is that the controls included in its description of the system operated effectively throughout a period based on the trust services criteria.

Question

Replication is generally less expensive than mirroring because replication

A. Duplicates data and database objects rather than the entire database system.
B. Operates without any synchronization between database systems.
C. Requires less data storage capacity.
D. Requires less database system configuration.

Explanation

Table comparing database mirroring and replication

Organizations that need continuous data availability can choose between two duplication techniques: mirroring or replication.  Both techniques keep a secondary copy of a database ready for failover but differ in the data copied, and that variation in scope is what drives the disparity in cost.

Replication is less expensive than mirroring because it focuses on copying selected data and database objects rather than the entire database system.  For example, a company might replicate key tables (eg, customer table), but not transaction logs and system configurations.

Mirroring, however, maintains a full, synchronized copy of the entire database system, including not only tables but also transaction logs and configurations.  Therefore, mirroring requires more resources (ie, storage, processing overhead, and synchronization bandwidth).  For example, mirroring includes not only all tables but also transaction logs and configurations.

(Choice B)  Replication still requires synchronization between database systems to keep data consistent, even if this occurs asynchronously rather than in real time.

(Choice C)  Replication may require substantial storage capacity when many copies are maintained across regions.  Its cost advantage lies not in storage volume but in the lower processing and synchronization overhead of copying only selected database objects rather than entire databases.

(Choice D)  Replication often requires more complex configuration to define what data is copied, how it is distributed, and how conflicts are handled.

Things to remember:
Replication is less expensive than mirroring because it copies selected data and database objects instead of the entire database.

Question

During the current year, an individual taxpayer who qualifies as a real estate professional reported the following items:

Income from wages $15,000
Income from freelance consulting 3,000
Loss from rental real estate property (20,000)

The taxpayer performed 800 hours of service and materially participated in the rental real estate activity during the current tax year.  What amount, if any, of the $20,000 loss is carried over to the following year?

A. $0
B. $2,000
C. $5,000
D. $20,000

Explanation

Flowchart of passive loss exceptions for rental real estate activities

Passive activity rules classify income and losses into three categories: active, portfolio, or passive.  Passive income includes trade or business activities in which the taxpayer does not materially participate (eg, partnerships, S corporations), as well as all rental activities.  Passive activity losses are deductible only to the extent of passive activity income.

Two exceptions exist regarding losses from rental real estate activities if certain requirements are met.  To qualify for the real estate professional exception, the taxpayer must provide more than 50% of their personal services (ie, work) in real property trades or businesses and materially participate (ie, more than 750 hours during the tax year) in the activity.

In this scenario, the taxpayer qualifies for the real estate professional exception, thereby allowing the full $20,000 loss to be utilized.  The loss reduces the $15,000 of wages and $3,000 of freelance consulting income (both active income).  A $2,000 NOL ($15,000 + $3,000 − $20,000), which can be used to reduce taxable income in future tax years, will be reported (Choice C).

(Choice A)  A carryover of $0 incorrectly assumes losses can be taken only to the extent of income.  Like a business owner, individuals who qualify for the real estate professional exception can have net losses from real estate activities that generate NOLs on their tax return.

(Choice D)  A carryover of $20,000 incorrectly assumes that the real estate exception does not apply and that none of the loss can be utilized in the current year.

Things to remember:
Passive activity losses are deductible to the extent of passive activity income.  The real estate professional exception treats the applicable activity as nonpassive.

Question

Orange Corporation, a U.S. corporation, has a $100,000 gain from the sale of inventory manufactured in the U.S. but sold in Mexico.  In addition, Orange reports $5,000 of interest income from a German bank and $50,000 of rental income from a U.S. rental property.

What is Orange's U.S. source income?

A. $5,000
B. $50,000
C. $150,000
D. $155,000

Explanation

Diagram of income sourcing rules comparing residence and location based tests

Generally, U.S. corporations are taxed on their worldwide income, which includes U.S. source income and foreign source income.  The sourcing rules determine whether income is treated as U.S. or foreign source for certain income, deduction, and credit calculations.

The sourcing rule applied depends on the type of income:

  • Income from services, sale of inventory, rental, royalties, and the sale of real property is sourced according to location.  Specifically, the sale of manufactured inventory is sourced to the location of the assets used to produce the inventory, whereas the sale of purchased inventory is sourced to the location where title to the inventory passes.  Rental income is sourced to the location of the property generating the rental income

  • Dividends, interest, and the sale of personal property are generally sourced according to residence.  Specifically, dividends and interest are sourced to the residence of the party paying the income (ie, the payor)

In this scenario, the gain of $100,000 from the sale of inventory is U.S. source income because the inventory is manufactured in the U.S.  The $5,000 of interest income is foreign source income because the account generating the interest is located in Germany.  The $50,000 of rental income is U.S. source income because the property generating the rental income is located in the U.S.

The applicable sourcing rules result in U.S. source income of $150,000 and foreign source income of $5,000, as shown below:

U.S. source
income		 Foreign source
income
Gain on sale of inventory 100,000
Interest paid by German bank 5,000
Rental income from U.S. property 50,000
Totals $150,000 $5,000

(Choice A)  Orange's foreign source income, not U.S. source income, is $5,000.

(Choice B)  An answer of $50,000 is incorrect because it excludes the $100,000 gain from the sale of manufactured inventory.  That gain is also considered U.S. source income since the assets used to produce the inventory were located in the U.S. and sourcing for manufactured inventory is based on the location of production, not the place of sale.

(Choice D)  Orange's total income, not solely its U.S. source income, is $155,000.

Things to remember:
Sourcing rules determine whether income is U.S. source or foreign source.  These rules are applied to each type of income based on residence (eg, dividends, interest, sale of personal property) or location of activity (eg, services, rental, royalties, sale of inventory, sale of real property).

Question

Which of the following items could decrease alternative minimum taxable income for an individual taxpayer?

A. State and local income tax refunds.
B. Income from exercising incentive stock options.
C. Interest income from qualified private activity bonds.
D. Gain on small business stock.

Explanation

Table of alternative minimum tax preferences and adjustments

The alternative minimum tax (AMT) ensures that the highest-income taxpayers do not excessively exploit tax deductions and benefits.  Affected taxpayers calculate both regular tax (RT) and AMT and pay the higher amount.

AMT is calculated as a percentage of AMT income (AMTI), which is RT income (RTI) adjusted for items designated by statute that differ for AMT purposes.  These items are:

  • Tax preferences (ie, permanent differences) always increase AMTI and do not reverse in later years
  • AMT adjustments (ie, temporary differences) may increase or decrease AMTI and may reverse in later years

If state and local taxes were deducted to calculate RTI, they are added back as an adjustment when calculating AMTI.  However, to prevent a double penalty, if refunds of state and local taxes are included in RTI, they decrease AMTI as an adjustment.

(Choice B)  Incentive stock options are taxed when exercised for AMT purposes but are taxed when the stock is sold for regular income tax.

(Choice C)  Qualified private activity bond interest is excluded from RTI but is added back for AMTI as a tax preference.

(Choice D)  Seven percent of the excluded gain on small business stock is added back as a tax preference when calculating AMTI.

Things to remember:
To calculate alternative minimum taxable income (AMTI), regular taxable income (RTI) is increased or decreased by preferences and adjustments.  Itemized deductions for state and local taxes increase AMTI.  State tax refunds included in RTI decrease AMTI.

Question

Mustafa is the sole beneficiary of an irrevocable trust that owns 60% of a C corporation's stock.  Mustafa and his brother each own 20% of the corporation's stock directly.  Under the Internal Revenue Code's constructive ownership rules for related parties, what percentage of the corporation is owned by Mustafa's daughter?

A. 20%
B. 40%
C. 80%
D. 100%

Explanation

Diagram illustrating constructive stock ownership attribution rules under IRC Section 267

A taxpayer may have constructive (ie, indirect) ownership of a stock through family members who are considered related parties or through a corporation, partnership, estate, or trust of which the taxpayer is a shareholder, partner, or beneficiary.  Any stock owned indirectly is combined with stock owned directly in determining whether related parties exist.

If a taxpayer has constructive ownership of stock, it may or may not be further attributed to other individuals, depending on how the taxpayer has indirect ownership:

  • Constructive ownership of stock through a corporation, partnership, estate, or trust is treated just as if the stock were directly owned by that taxpayer, in that it can be further attributed to other family members

  • Constructive ownership of stock through family members cannot be further attributed to other family members (ie, no double attribution)

In this scenario, Mustafa's daughter has constructive ownership of 80% of the corporation (60% indirectly owned by Mustafa through the trust + 20% directly owned by Mustafa) (Choices A and B).  The 20% owned by Mustafa's brother (Mustafa's daughter's uncle) is not treated as owned by the daughter, because aunts and uncles are not considered related parties and because Mustafa's constructive ownership through his brother is not attributable to Mustafa's daughter (Choice D).

Things to remember:
Stock constructively owned by an individual or entity through a corporation, partnership, estate, or trust can be further attributed to others.  Stock constructively owned by an individual through family members cannot be further attributed to that individual's other family members.

Question

An individual recently switched to a lower-paying career that will allow him more time with his family.  He has a substantial sum in a traditional 401(k) from his previous employer and expects to be in a higher tax bracket in retirement than he is currently.  He is willing and able to contribute the maximum allowable amount to one retirement plan, but his employer does not offer matching contributions.  Which of the following plans is likely to be most advantageous to the individual?

A. Roth 401(k).
B. Roth IRA.
C. Traditional 401(k).
D. Traditional IRA.

Explanation

Flowchart comparing traditional and Roth retirement account suitability

Both employer-sponsored 401(k)s and individual retirement accounts (IRAs) come in two forms: traditional and Roth.

Roth 401(k)s and Roth IRAs are funded with after-tax dollars, so contributions do not reduce current taxable income.  Because the investor pays taxes on the income contributed, distributions (ie, principal and earnings) are tax free so long as the account has been held at least 5 years and the owner is above a certain age.  Traditional 401(k)s and IRAs are funded with pre-tax dollars and grow tax deferred until they are distributed in retirement, when they are taxed as ordinary income.

Because earnings funding Roth 401(k)s and Roth IRAs are taxed before contribution instead of in retirement, they are generally preferable to traditional accounts if the investor's marginal tax rate will be higher in retirement, as in this case (Choices C and D).  Because 401(k)s have much higher limits than IRAs, 401(k)s are generally preferable if the investor is willing and able to make the maximum contribution.  Therefore, the most advantageous retirement plan in this case would be a Roth 401(k).

(Choice B)  The investor may be able to contribute funds to a Roth IRA in addition to making maximum contributions to his 401(k), but the higher limits of the 401(k) will make it the most beneficial.

Things to remember:
Roth 401(k)s and Roth IRAs are funded with after-tax dollars.  Because earnings funding them are taxed in the year of contribution instead of in retirement, Roth accounts are generally preferable to traditional accounts if the investor's marginal tax rate will be higher in retirement.  401(k)s have the advantage of higher contribution limits than IRAs.

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Not always written by CPAs, sometimes leading to imprecise framing
Answer Explanations
✦ Full Concept Explanations
Step-by-step logic for every answer choice
 ● Not Detailed
Shallow reasoning that leaves gaps in understanding
Visual Illustrations
✦ Original Visual Per Question
Charts and diagrams to simplify complex topics
 ● Majority Text-Only
No visuals, making abstract topics harder to grasp
Question Difficulty
✦ Exam-Appropriate
Calibrated to match or exceed actual CPA Exam difficulty
 ● Varies
Not calibrated to actual CPA Exam difficulty
Curriculum Alignment
✦ Aligned to Current AICPA Blueprints
Every question mapped to CPA Evolution requirements
 ● Outdated or Unverified
May include deprecated or irrelevant material
Performance Analytics
✦ SmartPath Analytics
Tracks MCQs & TBS to improve weak areas
 ● Basic Only
No data-driven insight to guide your study path
Question Authorship
UWorld CPA ✦ CPA-Written

Always written by licensed CPAs for real-exam precision

Other Providers ● Generalist Authors

Not always written by CPAs, sometimes leading to imprecise framing

Answer Explanations
UWorld CPA ✦ Full Concept Explanations

Step-by-step logic for every answer choice

Other Providers ● Not Detailed

Shallow reasoning that leaves gaps in understanding

Visual Illustrations
UWorld CPA ✦ Original Visual Per Question

Charts and diagrams to simplify complex topics

Other Providers ● Majority Text-Only

No visuals, making abstract topics harder to grasp

Question Difficulty
UWorld CPA ✦ Exam-Appropriate

Calibrated to match or exceed actual CPA Exam difficulty

Other Providers ● Varies

Not calibrated to actual CPA Exam difficulty

Curriculum Alignment
UWorld CPA ✦ Aligned to Current AICPA Blueprints

Every question mapped to CPA Evolution requirements

Other Providers ● Outdated or Unverified

May include deprecated or irrelevant material

Performance Analytics
UWorld CPA ✦ SmartPath Analytics

Tracks MCQs & TBS to improve weak areas

Other Providers ● Basic Only

No data-driven insight to guide your study path

Common Questions

CPA Practice Questions (FAQs)

There are a lot of CPA question banks out there and most look similar on the surface. The difference becomes clear the moment you start practicing UWorld’s CPA practice questions.

Explanations that actually teach: Most CPA practice questions tell you what the right answer is. UWorld’s CPA practice questions tell you why every answer choice is correct or incorrect, including the ones you did not pick. You stop pattern-matching and start understanding the material, which is exactly what the CPA Exam tests. Many CPA practice questions also include original flowcharts and diagrams so complex concepts stick faster.

Written by licensed CPAs: Every CPA practice question is written by licensed CPAs who understand how the American Institute of Certified Public Accountants (AICPA®) constructs exam content. The difficulty, distractors, and language are deliberately calibrated to mirror the real exam so nothing surprises you on test day.

Always current, always CPA Exam Blueprint-mapped: Every CPA practice question maps to the current AICPA Blueprints and updates as soon as changes are confirmed. With CPA Evolution reshaping several sections, you are never studying content that is no longer tested.

Performance tracking that tells you when you are ready: SmartPath tracks your performance across every CPA practice question you attempt and compares it against candidates who have already passed, so you always know where to focus next.

UWorld’s CPA Review QBank offers 9,000+ multiple-choice questions and task-based simulations across all 6 sections of the CPA Exam. Questions are distributed across AUD, FAR, REG, BAR, ISC, and TCP to ensure thorough, balanced preparation for every part of the exam. If you want to see what our CPA Exam sample questions look like before committing, you can get free access to all 6 parts of the CPA Exam for 7 days with ourfree trial.

Yes. The CPA QBank includes full-length practice exams via the “Exam Sim” mode, which replicates the CPA Exam’s 4-hour, 5-testlet structure for each section. Each CPA practice exam mirrors the real Prometric environment so exam day feels familiar. You can also generate shorter, customizable quizzes down to the sub-topic level to drill in on specific weak points or build a focused CPA practice test around a single topic you want to master.

Each question includes detailed answer explanations, often with visuals like flowcharts or diagrams, so you understand not just what the right answer is but why. Performance analytics show how you are doing by topic, so you always know where to focus next.

The “Exam Sim” mode is specifically designed to build stamina, sharpen time management, and familiarize you with the Prometric-style interface before exam day, so nothing feels unfamiliar when it counts. Many candidates use Exam Sim as their CPA mock test experience, running timed, full-length sessions to benchmark readiness before their actual exam date.

CPA mock exams are not included in the QBank. They are reserved for the Elite-Unlimited packages. The Mock exams provide a full CPA Exam-like experience with a unique set of questions: identical interface, format, difficulty, timing, and topic weighting. Critically, CPA mock exams use brand-new questions that have not appeared anywhere else in the QBank, so you can test your readiness under fresh, unseen conditions rather than questions you may have encountered during study.

The Elite-Unlimited packages include 2 full mock exams per core section, plus 1 per discipline section, giving you a realistic final checkpoint before sitting for each part of the exam.

Yes. UWorld’s CPA practice questions are fully accessible on smartphones and tablets through the UWorld CPA mobile app including every CPA Exam practice test in Exam Sim mode. The mobile experience is not a stripped-down version. You get the same questions, explanations, performance analytics, and customization tools available on desktop. You can seamlessly switch between devices and pick up exactly where you left off, making it easy to fit study sessions into your day no matter where you are.

Yes. Every question in the QBank comes with a comprehensive explanation covering the specific rule or standard being tested. Rather than simply telling you what the right answer is, UWorld walks you through the logic behind every option so you understand the concept, not just the answer. Many explanations also include visual aids such as flowcharts, tables, and diagrams to help you build a deeper, more durable understanding of the material. Every set of CPA questions and answers in our QBank is designed to teach, not just evaluate, so you leave each session knowing more than when you started.

Yes. Some of our CPA Exam sample questions come directly from past exams released by the AICPA, while others are written by our in-house team of licensed CPAs and accounting educators with direct experience developing questions for the AICPA. Every question is reviewed to ensure it reflects the style, difficulty, and format of what you will see on the actual exam, including the way answer choices are constructed and the concepts being tested. The sample CPA test questions on this page are representative of the full QBank experience.

Candidates looking for an AICPA sample test experience will find that UWorld’s questions closely mirror the style, structure, and difficulty of official AICPA exam content.

UWorld regularly reviews and updates the QBank to align with the latest CPA Exam Blueprints and any changes to the CPA Evolution exam structure. When the AICPA updates its Blueprints or testing standards, our team of licensed CPAs reviews the affected content and revises or replaces questions as needed. This ensures that every question you practice with reflects what is currently being tested, not what was tested in prior exam cycles. You will never find yourself studying outdated material or preparing for concepts that are no longer on the exam.

The CPA QBank includes multiple-choice questions (MCQs) and task-based simulations (TBSs), both modeled after the real CPA Exam format. MCQs test your knowledge and application of concepts, while TBS require you to work through realistic scenarios using documents, spreadsheets, and authoritative literature, just as you would on the actual exam. Together, they prepare you for every type of CPA test question you will encounter across all six exam sections. The free CPA practice questions on this page give you a sense of the MCQ format and explanation depth before you start your trial.

Yes. UWorld’s CPA QBank gives you full control over how you practice. You can build custom quizzes filtered by topic, subtopic, difficulty level, question type, or unused and previously incorrect questions. This means you can focus an entire session on a single concept you are struggling with, or mix question types to simulate a more varied study experience. The flexibility lets you study in a way that matches your schedule and your specific gaps, without wasting time on material you have already mastered. Think of each session as a targeted CPA practice test built around your weakest areas.

Yes. The CPA QBank is integrated with SmartPath Predictive Technology, which tracks your performance in real time across every topic and section. SmartPath analyzes your results to identify weak areas, adjusts your recommended study path accordingly, and helps you stay on pace with proven pass rate targets. Rather than guessing whether you are ready, you always have a data-driven picture of your exact readiness level so your CPA review questions are always focused on what actually moves your score. No other CPA review course offers this level of adaptive, personalized guidance built directly into the question bank.

Yes. All UWorld CPA course packages include full access to the QBank as a core part of the course. It is also available during your 7-day free trial, so you can explore the full question library, explanations, and analytics before making any commitment. There is no credit card required to start, and you get access to all six exam sections from day one.

*Based on responses to UWorld Net Promoter Score (NPS) surveys administered in 2026 among UWorld CPA prep users who self-reported their CPA Exam scores.

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