Business Environment and Concepts Practice Questions for the CPA Exam

By Kenneth W. Boyd

The business environment and concepts (BEC) test on the CPA exam covers many topics that students learn in an undergraduate business curriculum. The BEC test covers economics and business decision tools. You’ll also see questions on using technology and on IT security issues. As you take the BEC test, approach the questions from a business manager’s point of view.

  1. If internal control is properly designed, the same employee should not be permitted to

    A. Sign checks and cancel supporting documents.

    B. Receive merchandise and prepare a receiving report.

    C. Prepare disbursement vouchers and sign checks.

    D. Initiate a request to order merchandise and approve merchandise received.

Answer: C. This answer is correct because the preparation of disbursement vouchers and signing of checks places an individual in a position in which he or she can both prepare erroneous vouchers and then pay them.

  1. Hartwell Company distributes service department overhead costs directly to producing departments without allocation to the other service department. Information for the month of January 2014 is as follows:

    image0.jpg

    The amount of utilities department costs distributed to producing department B for January 2014 should be

    A. $3,600

    B. $4,500

    C. $5,400

    D. $6,000

Answer: D. This answer is correct because under the direct method, service department costs are allocated directly to the producing departments based on relative services provided, and services to other service departments are ignored. Therefore, even though maintenance used 10 percent of the utilities department services, the 10 percent is ignored and no utilities cost is allocated to maintenance.

The $9,000 of utilities cost is allocated to departments A and B based on relative service performed: 30/90 to A and 60/90 to B, where 90 = 30 + 60. Department B would be allocated $6,000 of utilities cost:

A: (30/90)($9,000) = $3,000

B: (60/90)($9,000) = $6,000

  1. The law of diminishing marginal utility states that

    A. Marginal utility will decline as a consumer acquires additional units of a specific product.

    B. Total utility will decline as a consumer acquires additional units of a specific product.

    C. Declining utilities cause the demand curve to slope upward.

    D. Consumers’ wants diminish with the passage of time.

Answer: A. Marginal utility determines how much of a product or service a customer will buy, based on his or her perception of the product’s value. A customer’s use of the product is referred to as the product’s utility.

Marginal utility measures the change in utility when a customer buys and uses one more unit of product. The law of diminishing marginal utility states that marginal utility declines with each additional unit the consumer receives.

  1. The market value of a firm’s outstanding common shares will be higher, everything else equal, if

    A. Investors have a lower required return on equity.

    B. Investors expect lower dividend growth.

    C. Investors have longer expected holding periods.

    D. Investors have shorter expected holding periods.

Answer: A. Investors value common shares more highly if they have a lower required return because then they apply a lower discount rate to the expected future dividend stream of the company.

  1. The ability to add or update documentation items in data dictionaries should be restricted to

    A. Database administrators.

    B. System programmers.

    C. System librarians.

    D. Accounting managers.

Answer: A. Access must be controlled to ensure integrity of documentation, although “read” access should be provided to other parties because it’s important for applications development and maintenance.

  1. A company reports the following account balances at year-end:

    Account Balance
    Long-term debt $200,000
    Cash $50,000
    Net sales $600,000
    Fixed assets (net) $320,000
    Tax expense $67,500
    Inventory $25,000
    Common stock $100,000
    Interest expense $20,000
    Administrative expense $35,000
    Retained earnings $150,000
    Accounts payable $65,000
    Accounts receivable $120,000
    Cost of goods sold $400,000
    Depreciation expense $10,000

    Additional Information:

    1. The opening balance of common stock was $100,000.

    2. The opening balance of retained earnings was $82,500.

    3. The company had $10,000 common shares outstanding all year.

    4. No dividends were paid during the year.

    For the year just ended, the company has times interest earned of

    A. 3.375 times.

    B. 6.75 times.

    C. 7.75 times.

    D. 9.5 times.

Answer: C. You calculate times interest earned as earnings before interest and taxes divided by interest expense:

image1.jpg

  1. Spring Co. had two divisions, A and B. Division A created Product X, which could be sold on the outside market for $25 and used variable costs of $15.

    Division B could take Product X and apply additional variable costs of $40 to create Product Y, which could be sold for $100. Division B received a special order for a large amount of Product Y. If Division A were operating at full capacity, which of the following prices should Division A charge Division B for the Product X needed to fill the special order?

    A. $15

    B. $20

    C. $25

    D. $40

Answer: C. The requirement is to determine the appropriate transfer price for Product X. Choice (C) is correct because if Division A is operating at full capacity, it can sell all that it can make. Therefore, it should transfer the product at its opportunity cost of $25, the price at which it could sell the product to another buyer.

  1. Net present value (NPV) and internal rate of return (IRR) differ in that

    A. NPV assumes reinvestment of project cash flows at the cost of capital, while IRR assumes reinvestment of project cash flows at the internal rate of return.

    B. NPV and IRR make different accept-or-reject decisions for independent projects.

    C. IRR can be used to rank mutually exclusive investment projects, but NPV cannot.

    D. NPV is expressed as a percentage, while IRR is expressed as a dollar amount.

Answer: A. Net present value (NPV) assumes that cash inflows from the investment project can be reinvested at the cost of capital, whereas internal rate of return (IRR) assumes that cash flows from each project can be reinvested at the IRR for that particular project. This underlying assumption is considered to be a weakness of the IRR technique.