Business Environment and Concepts (BEC) Sample Questions


The following are actual retired questions from the Business Environment and Concepts (BEC) Section of the CPA Exam.

The answers are provided by Kaplan Schweser.

View questions for the other sections of the exam.


QUESTION: What is the backup facility that can be up and running at a short notice called?

  1. VAN.
  2. Remote site.
  3. Cold site.
  4. Hot site.

ANSWER: The correct answer is D. A hot site is a backup facility that can be up and running at a short notice. A cold site is a backup facility that can be up and running at a considerable effort. VAN stands for Value Added Network and is not a backup facility. Remote site is not specific about the speed of availability.


QUESTION: The application processing phase where the master file is updated is called:

  1. audit trail.
  2. edit routine.
  3. data capture.
  4. master file maintenance.

ANSWER: The correct answer is D. Master file maintenance involves updating the master file with new transaction(s). Data capture is the phase where data is recorded. Edit routine is validation of (previously) input data. Audit trail is an authentication control to verify integrity of transactions.


QUESTION: Which of the following factors would cause the demand curve for a given product to increase (shift to the right)?

  1. Changes in the price of the given product.
  2. Decrease in consumer income.
  3. Increase in the price of a substitute product.
  4. Increase in the price of a complimentary product.

ANSWER: The correct answer is C. An increase in the price of a substitute product would cause the demand curve for a given product to increase (shift to the right).


QUESTION: The purpose of a flexible budget is to:

  1. reduce the total time in preparing the annual budget.
  2. compare actual and budgeted results at virtually any level of production.
  3. eliminate cyclical fluctuations in production reports by ignoring variable costs.
  4. allow management some latitude in meeting goals.

ANSWER: The correct answer is B. This is the definition of a flexible budget. Compared to a static budget, which shows only one level of production, the flexible budget shows budgeted costs and revenues for any level of production. As levels of production change, the costs and revenues will change as well. The flexible budget provides that information. Variance analysis is made more meaningful with flexible budgets.


QUESTION: Spoilage occurring during a manufacturing process can be considered normal or abnormal. The proper accounting for each of these costs is:

Normal Abnormal
A. Product Period
B. Product Product
C. Period Product
D. Period Period

ANSWER: The correct answer is A. Normal spoilage is product deterioration expected to occur, especially in manufacturing, even under the best of conditions. Abnormal spoilage is spoilage beyond the normal spoilage rate. Normal spoilage is a product cost while abnormal spoilage is a period cost. The cost of normal spoilage is "absorbed" by the surviving units while the abnormal spoilage loss is recognized immediately; that is, in the current period.


 

 

QUESTION: The Public Company Accounting Oversight Board (PCAOB) was created by which of the following?

  1. Securities and Exchange Commission.
  2. Sarbanes-Oxley Act of 2002.
  3. Financial Accounting Standards Board.
  4. Institute of Certified Public Accountants.

ANSWER: The correct answer is B. The Sarbanes-Oxley Act of 2002 created the PCAOB.


QUESTION: The Committee of Sponsoring Organizations of the Treadway Commission (COSO) internal control framework consists of five interrelated components including control activities. Which of the following is NOT an example of a control activity?

  1. Risk assessment.
  2. Segregation of duties.
  3. Security of assets.
  4. Performance reviews.

ANSWER: The correct answer is A. Control activities include authorizations, performance reviews, security of assets, application controls, and segregation of duties. Risk assessment is one of the five interrelated components.


QUESTION: All of the following are risks of e-commerce EXCEPT:

  1. Applicability.
  2. Data integrity.
  3. Processing integrity.
  4. Security and authenticity.

ANSWER: A) Risks of e-commerce include security and authenticity, processing integrity, data integrity, and privacy.


QUESTION: What does a credit balance in a direct-labor efficiency variance account indicate?
  1. Actual total direct-labor costs incurred were less than standard direct-labor costs allowed for the units produced.
  2. The standard hours allowed for the units produced were greater than actual direct-labor hours used.
  3. The number of units produced was less than the number of units budgeted for the period.
  4. The average wage rate paid to direct labor employees was less than the standard rate.

ANSWER: B) A credit balance indicates a favorable variance, with standard hours allowed being greater than actual hours used.


QUESTION: Nile Co.’s cost allocation and product costing procedures follow activity-based costing principles. Activities have been identified and classified as being either value-adding or nonvalue-adding as to each product. Which of the following activities, used in Nile’s production process, is nonvalue-adding?
  1. Raw materials storage activity.
  2. Design engineering activity.
  3. Heat treatment activity.
  4. Drill press activity.

ANSWER: A) In the production process, storing raw materials until they are needed represents a non-value added step, whereas engineering, heat treatment or drilling represents improving the product. In addition, storage requires handling costs, cost of holding inventory, possible breakage or misappropriation, while inventory simply waits for use at a later time.


QUESTION: In an income statement prepared as an internal report using the direct (variable) costing method, fixed selling and administrative expenses would:

 

  1. Be used in the computation of the contribution margin.
  2. Be used in the computation of operating income but not in the computation of the contribution margin.
  3. Be treated the same as variable selling and administrative expenses.
  4. Not be used.

 

ANSWER: B) Under the direct or variable costing method, variable costs are deducted from revenue to determine contribution margin, and all fixed costs (manufacturing, selling, general and administrative) are then deducted to obtain net income or income from operations.

The contribution margin is calculated in two steps:

 

  1. Revenue less variable cost of goods sold = Contribution margin: manufacturing
  2. Contribution margin: manufacturing less other variable costs (S, G & A) = Contribution margin: final

 


QUESTION: Jago Co. has 2 products that use the same manufacturing facilities and cannot be subcontracted. Each product has sufficient orders to utilize the entire manufacturing capacity. For short-run profit maximization, Jago should manufacture the product with the:

 

 

  1. Lower total manufacturing costs for the manufacturing capacity.
  2. Lower total variable manufacturing costs for the manufacturing capacity.
  3. Greater gross profit per hour of manufacturing capacity.
  4. Greater contribution margin per hour of manufacturing capacity.

 

ANSWER: D) As both products can utilize full capacity, the greatest profit will result from the greatest contribution margin (selling price - variable costs) for capacity. Fixed costs are irrelevant as they are not affected by the decision.


QUESTION: Which of the following statements about capital budgeting evaluation methods is FALSE?

 

  1. NPV does not take the profit of an investment into account since it concentrates on a project’s effect on the value of the firm.
  2. The IRR and NPV will never disagree about whether or not a project is acceptable.
  3. The IRR and NPV methods both incorporate the firm’s WACC.
  4. The IRR can be defined as the discount rate that results in a project having an NPV equal to zero.
ANSWER: A) NPV does measure the effect of an investment on the value of the firm and does so by discounting future cash flows by the WACC. If the return of the project is greater than the WACC the NPV will be positive. Therefore, the return is greater than the cost and the project is profitable.


QUESTION: Residual income is income:
  1. from which dividends are deducted.
  2. from which an imputed interest charge for invested capital is deducted.
  3. to which dividends are added.
  4. to which an imputed interest charge for invested capital is added.
ANSWER: B) An investment's residual income is the accounting income from the investment less an allowance for a return on investment (invested capital).


QUESTION:
Which of the following is least likely an assumption of linear regression?
  1. The residuals are normally distributed.
  2. There is a linear relation between the dependent and independent variables.
  3. The independent variable is correlated with the residuals.
  4. The variance of the residuals is constant.
ANSWER: C) The assumption is that the independent variable is uncorrelated with the residuals.


QUESTION: What is the market conversion price of a convertible security?
  1. the price that an investor pays for the common stock if the convertible bond is purchased and then converted into the stock.
  2. the price that an investor pays for the common stock in the market.
  3. the value of the embedded call option.
  4. the value of the security if it is converted immediately.
ANSWER: A) The market conversion price, or conversion parity price, is the price that the convertible bondholder would effectively pay for the stock if she bought the bond and immediately converted it. market conversion price = market price of convertible bond ÷ conversion ratio.


QUESTION: If the Federal Reserve (Fed) wanted to increase the money supply, it would:
  1. lower the discount rate.
  2. lower the required reserve ratio.
  3. buy government securities.
  4. any or all of these.
ANSWER: D) Expansionary monetary policy involves reducing reserve requirements, purchasing additional government securities, and/or lowering the discount rate.


QUESTION: A bank is considering building a branch on a piece of property it already owns. Which of the following cash flows should NOT be considered in the capital budgeting analysis?
  1. The $100,000 spent to determine whether there are any environmental issues regarding the property.
  2. The $50,000 the firm will forgo in lost revenue from the sale of the property if the company decides to build.
  3. The several hundred customers that will switch from alternative branches to the new branch if the bank makes the investment.
  4. The shipping and installation charges the bank must spend to get equipment in the new branch.
ANSWER: A. The $100,000 spent on an environmental analysis is a sunk cost and should not be considered in the analysis. The $50,000 lost from the sale of the property is an opportunity cost and should be considered. The transferred customers result in cash flows that are externalities/cannibalization for the bank and must be considered. Also, the shipping and installation charges are added to the depreciable basis and are counted.


QUESTION: All else equal, which of the following will help decrease a company’s total debt to equity ratio?
  1. Buying treasury stock.
  2. Paying cash dividends to stockholders.
  3. Converting long-term debt to short-term debt.
  4. Lowering the dividend payout ratio.
ANSWER: D. Buying treasury stock and paying cash dividends will decrease stockholders’ equity, and thus increase the debt/equity ratio. Converting long-term debt to short-term will have no effect on total debt or stockholders’ equity. Lowering dividend payout ratio will increase retained earnings, thus increasing stockholders’ equity and decreasing the debt/equity ratio.


QUESTION: If the exchange rate value of the euro goes from $0.95 to $1.10, then the euro has:
  1. appreciated and the Dutch will find U.S. goods more expensive.
  2. depreciated and the Dutch will find U.S. goods cheaper.
  3. appreciated and the Dutch will find U.S. goods cheaper.
  4. depreciated and the Dutch will find U.S. goods more expensive.
ANSWER: C. appreciated and the Dutch will find U.S. goods cheaper.
An exchange rate is a ratio that describes how many units of one currency you can buy per unit of another currency. The numerator will be in the currency in which the quote is made and the denominator is the other unit of the currency you are comparing. A currency appreciates when it rises in value relative to another foreign currency. Likewise, a currency depreciates when it falls in value relative to another foreign currency. An appreciation in value of a currency makes that country’s goods more expensive to residents of other countries. The depreciation of the value of a currency makes a country’s goods more attractive to foreign buyers.


QUESTION: Which of the following statements concerning the relationship of the quantity demanded or supplied with price is(are) correct?

I. The quantity supplied varies inversely with price.
II. The quantity demanded varies directly with price.
  1. I only.
  2. II only.
  3. Both I and II.
  4. Neither I nor II.
ANSWER: Neither I nor II.
The quantity supplied varies directly with price and the quantity demanded varies indirectly with price. Answer (a) is not correct because the quantity supplied varies directly with price. Answer (b) is not correct because the quantity demanded varies indirectly with price. Answer (c) is not correct because the quantity supplied varies directly with price and the quantity demanded varies indirectly with price.


QUESTION: The following information pertains to Roe Co.’s manufacturing operations:

Standard direct labor hours per unit 2
Actual direct labor hour 10,500
Number of units produced 5,000
Standard variable overhead per standard direct labor hour $3
Actual variable overhead $28,000


Roe’s unfavorable overhead efficiency variance was:
  1. $0.
  2. $1,500.
  3. $2,000.
  4. $3,500.
ANSWER: B. $1,500.
Overhead is generally applied based upon direct labor hours. The unfavorable overhead efficiency variance represents the number of actual hours required over the number of standard labor hours allowed for that level of output, multiplied by the standard variable overhead rate. Based on Roe’s operations, the unfavorable overhead efficiency for the 5,000 units produced is $1,500;

Hours allowed (5,000 units × 2 hrs/unit) 10,000
Actual hours 10,500
Excess hours over standard 500
Standard rate $3
Variance $1,500


QUESTION: In an income statement prepared as an internal report, total fixed costs normally would be shown separately under:

Absorption costing Variable costing
A. No No
B. No Yes
C. Yes Yes
D. Yes No

ANSWER: B. No; Yes
Under the direct or variable costing method, variable costs are deducted from sales revenue to determine contribution margin and all fixed costs (overhead, selling, general and administrative) are then deducted to obtain net income or income from operations. The contribution margin is calculated in two steps:
  • Sales revenue less (variable) cost of goods sold = Contribution margin: manufacturing.
  • Contribution margin: manufacturing less other variable costs (S, G & A) = Contribution margin: final.
Under the absorption costing method, each cost classification (cost of goods sold, selling, general and administrative, etc.) includes both its fixed cost and variable cost components.


QUESTION: An investor owns stock and is concerned that prices may fall in the future. Which strategy could help to hedge against adverse market conditions?
  1. Buy a futures contract.
  2. Buy a futures contract.
  3. Buy a put option.
  4. Buy a call option.
ANSWER: C. Buy a put option.

Buying a call, buying a futures contract, or buying a forward gives the investor the chance to buy more stock. However, neither of these strategies provides a way to hedge the existing equity position. A put option provides the opportunity to sell the stock.


QUESTION: For a given year, a company’s economic value added measure (EVA is a registered trademark of Stern Stewart & Co.) will be positive if the:
  1. firm has a net operating profit after tax greater than the market value of the debt capital employed.
  2. firm’s MVA is positive.
  3. earns a return greater than its cost of capital.
  4. firm has a net operating profit after tax greater than the book value of the capital employed.
ANSWER: C. firm earns a return greater than its cost of capital.
EVA is positive when a company earns a rate of return greater than its cost of capital. EVA is a financial performance measure that attempts to calculate true economic profit. The formula is net operating profit after tax reduced by a measure of the cost of all capital of the firm. Its focus is on maximizing shareholder wealth.
Market value added (MVA) is the difference between the market value of a company and the capital contributed by investors (both bondholders and shareholders). Higher MVA is better than lower MVA. A high MVA company is one that has created substantial wealth for its shareholders.


QUESTION: A bank is considering building a branch on a piece of property it already owns. Which of the following cash flows should not be considered in the capital budgeting analysis? The:
  1. $50,000 the firm will forgo in lost revenue from the sale of the property if the company decides to build.
  2. $100,000 spent to determine whether there are any environmental issues regarding the property.
  3. several hundred customers that will switch from alternative branches to the new branch if the bank makes the investment.
  4. shipping and installation charges the bank must spend to get equipment in the new branch.
ANSWER: B. $100,000 spent to determine whether there are any environmental issues regarding the property.
The $100,000 spent on an environmental analysis is a sunk cost and should not be considered in the analysis. The $50,000 lost from the sale of the property is an opportunity cost and should be considered. The transferred customers result in cash flows that are externalities/cannibalization for the bank and must be considered. Also, the shipping and installation charges are added to the depreciable basis and must be included.


QUESTION: Short-term interest rates are:
  1. generally lower than long-term rates.
  2. generally higher than long-term rates.
  3. lower than long-term rates during periods of high inflation only.
  4. not significantly related to long-term rates.
ANSWER: A. generally lower than long-term rates.
Short-term interest rates are generally lower than long-term interest rates. This is due to the higher interest rate risk and yield-curve risk associated with an increased time to maturity. Answer D is incorrect because short-term interest rates are related to long-term rates.


QUESTION: On December 31, year 7, North Park Co. collected a receivable due from a major customer. Which of the following ratios would be increased by this transaction?
  1. Current ratio.
  2. Receivable turnover ratio.
  3. Quick ratio.
  4. Inventory turnover ratio.
ANSWER: Receivable turnover ratio.

Accounts receivable turnover = sales/average accounts receivable

Collection of accounts receivable would reduce the accounts receivable balance and resulting average accounts receivable. This reduction in the denominator of the AR turnover ratio would result in an increase in the fraction calculation.

The current ratio is current assets/current liabilities and the quick ratio is (cash + receivables)/current liabilities. For both calculations, the collection of the receivable would result in a $0 net effect (as AR decreased, cash increased).

The inventory turnover ratios is COGS/average inventories which is not affected by the collection of the receivable.


QUESTION: The partners of College Assoc., a general partnership, decided to dissolve the partnership and agreed that none of the partners would continue to use the partnership name. Under the Revised Uniform Partnership Act, which of the following events will occur on dissolution of the partnership?

Each partner’s
existing liability
would be discharged
Each partner’s
apparent authority
would continue
A. Yes Yes
B. Yes No
C. No Yes
D. No No

ANSWER: C. No; Yes
Partners are agents of the partnership and each other. Thus, agency rules apply. If a partnership dissolves, partners must give actual notice to old customers and published notice to new ones. Failure of a partner to give proper notice would give a partner apparent authority to act on behalf of the partnership with customers who were unaware of the dissolution. Although dissolution would discharge a partner’s actual authority, it does not discharge a partner’s apparent authority. Additionally, a dissociated partner remains liable for pre-dissolution obligations. Only Answer (c) reflects that a partner’s liability is not automatically discharged by dissolution and that apparent authority would continue.


QUESTION: The corporate veil is most likely to be pierced and the shareholders held personally liable if:
  1. the corporation has elected S corporation status under the Internal Revenue Code.
  2. an ultra vires act has been committed.
  3. a partnership incorporates its business solely to limit the liability of its partners.
  4. the shareholders have commingled their personal funds with those of the corporation.
ANSWER: D. the shareholders have commingled their personal funds with those of the corporation.
A stockholder may be held personally liable for corporate debts (piercing the corporate veil). Specifically this may be done by a showing of fraud, undercapitalization of the corporation, and commingling of corporate and personal funds by the stockholder. Thus, the corporate veil may be pierced if the stockholder commingled their personal funds with those of the corporation. Choosing S corporation status, commission of an ultra vires act, and incorporation to obtain limited personal liability are all insufficient grounds to pierce the corporate veil.


QUESTION: An accounting information system (AIS) must include certain source documents in order to control purchasing and accounts payable. For a manufacturing organization, the best set of documents should include:
  1. purchase requisitions, purchase orders, inventory reports of goods needed, and vendor invoices.
  2. purchase orders, receiving reports, and inventory reports of goods needed.
  3. purchase orders, receiving reports, and vendor invoices.
  4. purchase requisitions, purchase orders, receiving reports, and vendor invoices.
ANSWER: D. purchase requisitions, purchase orders, receiving reports, and vendor invoices.
The AIS functions include ensuring an entity’s resources are protected and accurately documented in a reliable manner. For a manufacturing organization, the transaction cycle should be controlled and documented to protect the reliability of the process. The purchase requisition is evidence that some user needs the goods. The purchase order specifies the price and quantity authorized by the purchasing department. The receiving report is evidence of the quantity actually received. The vendor invoice is evidence of the vendor’s request to be paid for the specified quantity (which should be matched with the receiving report and purchase order) and price (which should be matched with the purchase order).