Study your flashcards anywhere!

Download the official Cram app for free >

  • Shuffle
    Toggle On
    Toggle Off
  • Alphabetize
    Toggle On
    Toggle Off
  • Front First
    Toggle On
    Toggle Off
  • Both Sides
    Toggle On
    Toggle Off
  • Read
    Toggle On
    Toggle Off

How to study your flashcards.

Right/Left arrow keys: Navigate between flashcards.right arrow keyleft arrow key

Up/Down arrow keys: Flip the card between the front and back.down keyup key

H key: Show hint (3rd side).h key

A key: Read text to speech.a key


Play button


Play button




Click to flip

10 Cards in this Set

  • Front
  • Back
Under the position taken by a majority of the courts, to which third parties will an accountant who negligently prepares a client's financial report be liable?

a. Only those third parties in privity of contract with the accountant.
b. All third parties who relied on the report and sustained injury.
c. Any foreseen or known third party who relied on the report.
d. Any third party whose reliance on the report was reasonably foreseeable.
Choice "c" is correct.
Under the majority position an accountant is liable for negligence only to third parties whom the accountant knows or should foresee will be relying on the accountant's work.
A company engaged a CPA to perform the annual audit of its financial statements. The audit failed to reveal an embezzlement scheme by one of the employees. Which of the following statements best describes the CPA's potential liability for this failure?

a. The CPA's adherence to generally accepted auditing standards (GAAS) may prevent liability.
b. The CPA will not be liable if care and skill of an ordinary reasonable person was exercised.
c. The CPA may be liable for punitive damages if due care was not exercised.
d. The CPA is liable for any embezzlement losses that occurred before the scheme should have been
Choice "a" is correct.
A CPA will be liable in negligence if he or she fails to exercise the care and prudence that an ordinary CPA would exercise in performing an audit. An ordinary CPA would normally adhere to GAAS. Thus, proof of adherence to GAAS may prevent liability.
In which of the following types of action, brought against a CPA who issues an audit report containing an unqualified opinion on materially misstated financial statements, may a plaintiff prevail without proving reliance on the audit report?

a. An action for common law fraud.
b. An action for common law breach of contract.
c. An action brought under Section 11 of the Securities Act of 1933.
d. An action brought under Rule 10b-5 of the Securities Exchange Act of 1934.
Choice "c" is correct.
A plaintiff need only prove three elements to recover under section 11 – the plaintiff acquired the stock, the registration statement was signed by the CPA and contains a material misrepresentation or omission of fact, and damages. All of the other causes of action listed require proof of reliance.
Under the Negotiable Instruments Article of the UCC, the proper party to whom a check is presented for payment is:
a. The drawer.
b. The maker.
c. The holder.
d. The drawee
Choice "d" is correct.
A drawer (the check writer) draws a check payable to the payee from the drawee bank.
Under the Secured Transaction Article of the UCC, which of the following statements is correct regarding security interest that has not attached?
a. It is effective against the debtor, but not against third parties.
b. It is effective against both the debtor and third parties.
c. It is effective against third parties with unsecured claims.
d. It is not effective against either the debtor or third parties.
Choice "d" is correct.
A security interest is not effective against anyone before it attaches to the collateral. Thus, all of the other answer choices are incorrect.
Which of the following transactions is subject to registration requirements of the Securities Act of 1933?
a. The public sale of stock of a trucking company regulated by the Interstate Commerce Commission.
b. A public sale of municipal bonds issued by a city government.
c. The issuance of stock by a publicly-traded corporation to its existing shareholders because of a stock
d. The public sale by a corporation of its negotiable 10-year notes.
Choice "d" is correct.
No registration exemption is available for sales of long term notes.
In the current year, Essex sold land with a basis of $80,000 to Yarrow for $100,000. Yarrow paid $25,000 down and agreed to pay $15,000 per year, plus interest, for the next five years, beginning in the second year. Under the installment method, what gain should Essex include in gross income for the year of sale?
a. $25,000 b. $20,000 c. $15,000 d. $5,000
Choice "d" is correct.
Under the installment method, revenue is reported (recognized) over the period in which the cash payments are received. Included gross income is determined in 3 steps:
Step 1: Gross Profit: Sale on Installment Cost
Total Gross Profit
$100,000 $ 80,000 $ 20,000
Step 2: Gross Profit Percentage :
Gross Profit/Sale on Installment ($20,000/$100,000) = 20%
Step 3: Taxable Gross Profit:
Collections ($25,000) x Gross Profit Percentage (20%) = $5,000
Sam's year 2 taxable income was $175,000 with a corresponding tax liability of $30,000. For year 3, Sam expects taxable income of $250,000 and a tax liability of $50,000. In order to avoid a penalty for underpayment of estimated tax, what is the minimum amount of year 3 estimated tax payments that Sam can make?
a. $30,000 b. $33,000 c. $45,000 d. $50,000
Choice "b" is correct.
To avoid penalties, if a taxpayer owes $1,000 or more in tax payments beyond withholdings, such taxpayer will need to have paid in for taxes the lesser of:
90% of the current year's tax ($50,000 x 90%) = $45,000, or
100% of the previous year's tax ($30,000 x 100%) = $30,000
However, if the taxpayer had adjusted gross income in excess of $150,000 in the prior year, 110% of the prior year's tax liability is used to compute the safe harbor for estimated payments. (Previous year's tax $30,000 x 110% = $33,000).
On January 1, Fast, Inc. entered into a covenant not to compete with Swift, Inc. for a period of five years, with an option by Swift to extend it to seven years. What is the amortization period of the covenant for tax purposes?
a. 5 years.
b. 7 years.
c. 15 years.
d. 17 years.
Choice "c" is correct.
Intangibles such as goodwill, licenses, franchises, trademarks and covenants not to compete may be amortized using the straight line basis over a period of 15 years, starting with the month of acquisition. Note, the difference for GAAP purposes: Intangible assets with indefinite lives are subject only to an impairment test, and intangible assets with finite lives are amortized over those lives and also subject to an impairment test.
Decker sold equipment for $200,000. The equipment was purchased for $160,000 and had accumulated depreciation of $60,000. What amount is reported as ordinary income under Code Sec. 1245?
a. $0
b. $40,000 c. $60,000 d. $100,000
Choice "c" is correct. Under Sec. 1245, ordinary income is recognized on the gain to the extent of the accumulated depreciation. Any gain in excess of the original cost is capital gain.