2011 AICPA Newly Released Questions Business

Following are multiple choice questions and simulations recently released by the AICPA. These questions were released by the AICPA with letter answers only. Our editorial board has provided the accompanying explanation. Please note that the AICPA generally releases questions that it does NOT intend to use again. These questions and content may or may not be representative of questions you may see on any upcoming exams.

2011 AICPA Newly Released Questions Business

1. In order to comply with a director's duty of loyalty to a corporation, what action(s) should a director take when presented with a corporate opportunity? a. b. c. d. Reject the opportunity and not offer it to the corporation. Accept the opportunity and not offer it to the corporation. Accept the opportunity and disclose the acceptance to the corporation. Offer the opportunity to the corporation and accept it if the corporation rejects it.

Solution: Choice "d" is correct. The business law concept of "duty of loyalty" is a common ethical standard. The director's duty of loyalty requires that the director offer opportunities presented in the market place first to the corporation and only accept them if the corporation rejects it. A land developer might sit on the board of a land development company. If presented with the opportunity to purchase a building or land at a significant discount, the developer would be obligated to offer the opportunity to the corporation first but would not be barred from taking advantage of the opportunity if the corporation had no interest. Choice "a" is incorrect. The duty of loyalty does not require that a director ignore an opportunity by personally rejecting it and not offering it to the corporation. Choice "b" is incorrect. A director's duty of loyalty requires both disclosure and offering the opportunity to the director's corporation before accepting the opportunity. Choice "c" is incorrect. A director's duty of loyalty requires both disclosure and offering the opportunity to the director's corporation before accepting the opportunity

2011 AICPA Newly Released Questions Business

2. Which of the following types of variances would a purchasing manager most likely influence? a. b. c. d. Direct materials price. Direct materials quantity. Direct labor rate. Direct labor efficiency.

Solution: Choice "a" is correct. The purchasing manager is directly involved in the negotiation of materials prices and would have the greatest influence over the direct materials price variance. The direct materials price variance could be used to monitor purchasing manager performance. Choice "b" is incorrect. The direct materials quantity variance relates to the amount of materials used and would be influenced most significantly by the production manager. Choice "c" is incorrect. The direct labor rate variance is associated with compensation paid to the direct labor force. A human resource or other professional tasked with recruiting and hiring direct labor would have greater influence on this variance than the purchasing manager. Choice "d" is incorrect. The direct labor efficiency variance would largely be under the control of the production manager, not the purchasing manager.

2011 AICPA Newly Released Questions Business

3. Farrow Co. is applying for a loan in which the bank requires a quick ratio of at least 1. Farrow's quick ratio is 0.8. Which of the following actions would increase Farrow's quick ratio? a. b. c. d. Purchasing inventory through the issuance of a long-term note. Implementing stronger procedures to collect accounts receivable at a faster rate. Paying an existing account payable. Selling obsolete inventory at a loss.

Solution: Choice "d" is correct. Selling obsolete inventory at a loss would increase the quick ratio. The reduction of inventory values and recording of a loss would have no impact on quick assets. The addition of cash, however, would increase cash with no impact on current liabilities. The quick ratio would improve. Choice "a" is incorrect. Purchasing inventory through the issuance of a long term note would have no impact on the quick ratio. Inventory is excluded from the numerator and long term debt is excluded from the denominator. Choice "b" is incorrect. Collection rates of receivables would have no impact on the quick ratio. Although more rapid collections improve the quality of assets, they would not increase the total amount. The quick ratio would remain unchanged as accounts receivable are converted into cash. Choice "c" is incorrect. Paying existing accounts payable would serve to reduce the quick ratio. Reduction of the numerator and denominator of a fraction less than one serves to reduce its value. Assume the quick assets were equal to 80 and the current liabilities were equal to 100. The payment of an account payable equal to 20 would have the following impact (a reduction from .8 to .75): Beginning Quick Assets Current Liabilities Quick Ratio 80 100 .8 Payment (20) (20) Ending 60 80 .75

2011 AICPA Newly Released Questions Business

4. A corporation is considering purchasing a machine that costs $100,000 and has a $20,000 salvage value. The machine will provide net annual cash inflows of $25,000 per year and has a six-year life. The corporation uses a discount rate of 10%. The discount factor for the present value of a single sum six years in the future is 0.564. The discount factor for the present value of an annuity for six years is 4.355. What is the net present value of the machine? a. b. c. d. ($2,405) $8,875 $20,155 $28,875

Solution: Choice "c" is correct. The net present value of the project is $20,155. Net present value is computed as the difference between the present value of the initial cash outflows of the investment and the present value of the cash inflows from the project. Periodic cash flows are discounted using the present value of an annuity while single cash inflows are discounted using the present value of $1. The data required to compute net present value is provided in the fact pattern: Value Investment Annual Cash Inflow Salvage value Net present value ($100,000) $25,000 $20,000 x x x PV Factor 1.000 4.355 0.564 = = = Present Value ($100,000) $108,875 $ 1 1,280 $ 20,155 (Cash outflow) Cash inflow Cash inflow Positive

Choice "a" is incorrect. The proposed solution of ($2,405) anticipates that the salvage value will decrease rather than increase cash flows. Salvage value is a cash inflow at the end of the life of the machine. Choice "b" is incorrect. The proposed solution of $8,875 does not consider the salvage value. Choice "d" is incorrect. The proposed solution of $28,875 does not discount the salvage value.

2011 AICPA Newly Released Questions Business

5. A company has gathered the following information from a recent production run: Standard variable overhead rate Actual variable overhead rate Standard process hours Actual process hours $10 8 20 25

What is the company's variable overhead spending variance? a. b. c. d. $50 unfavorable. $50 favorable. $40 unfavorable. $40 favorable.

Solution: Choice "b" is correct. The company's variable overhead (VOH) spending variance is $50 favorable. The spending variance is equal to the difference between the actual amount spent and the standard rate times the actual cost driver. The fact pattern provides all the data required to compute the VOH spending variance as follows: Actual Actual process hours Actual VOH rate Total 25 x$8 $200 Budget based on actual Actual process hours Standard VOH rate Total 25 x$10 $250

The actual amount charged to the overhead account ($200) is less than the amount applied ($250) so the $50 variance is favorable. Overhead variances represent the analysis of the balance in the overhead account after application of overhead. Overapplied (more credit) is favorable because this means that actual is less than applied. Underapplied (more debit) is unfavorable because this means that actual is more than applied. Choice "a" is incorrect. The proposed solution of $50 unfavorable misinterprets the character of the variance. Amounts applied are greater than actual amounts incurred so the variance is favorable. Choice "c" is incorrect. Although the variance is favorable, the proposed solution uses the standard cost driver rather than the actual. The amount charged to the overhead account (debited) is based on actual. Choice "d" is incorrect. The proposed solution uses the standard cost driver rather than the actual. The amount charged to the overhead account (debited) is based on actual. In addition, the solution misinterprets the relationship as unfavorable.

2011 AICPA Newly Released Questions Business

6. Which of the following is a limitation of the profitability index? a. b. c. d. It uses free cash flows. It ignores the time value of money. It is inconsistent with the goal of shareholder wealth maximization. It requires detailed long-term forecasts of the project's cash flows.

Solution: Choice "d" is correct. The profitability index is the ratio of the present value of net future cash inflows and the present value of the net initial investment. The profitability ratio requires detailed long-term forecasts of project's cash flows. For longer term projects, cash flow projections might be either unavailable or unreliable. Choice "a" is incorrect. Free cash flow contemplates cash flows that are available for distribution to securities holders such as debt or equity holders. Cash flows used for the profitability index specifically relate to project cash flows. Choice "b" is incorrect. The time value of money is considered in both the numerator and the denominator of the profitability index. The profitability index is the ratio of the present value of net future cash inflows and the present value of the net initial investment. Choice "c" is incorrect. The profitability index incorporates discounted cash flows based on hurdle rates that can be fully integrated with weighted average cost of capital or marginal cost of capital thresholds. Use of these concepts is fully compatible with maximization of shareholder value.

2011 AICPA Newly Released Questions Business

7. Which of the following metrics equates the present value of a project's expected cash inflows to the present value of the project's expected costs? a. b. c. d. Net present value. Return on assets. Internal rate of return. Economic value-added.

Solution: Choice "c" is correct. The internal rate of return (IRR) focuses the decision maker on the discount rate at which the present value of a project's cash inflows equals the present value of the cash outflows. The IRR is the rate used to arrive at a net present value of zero. Choice "a" is incorrect. Net present value is the difference in the amount of an investment and its related discounted cash inflows. Although the values are compared, they are not expected to be equal. They do not equate. Choice "b" is incorrect. Return on assets (ROA) is the product of gross margin and asset turnover. The ROA does not equate the investment with discounted cash inflows. Choice "d" is incorrect. Economic value added is a residual income measure that compares income with required return on investment. Positive amounts indicate objectives have been met, negative amounts indicate that objectives have not been met. The method does not equate investment cash outflows and cash inflows.

2011 AICPA Newly Released Questions Business

8. What is the primary objective of data security controls? a. To establish a framework for controlling the design, security, and use of computer programs throughout an organization. b. To ensure that storage media are subject to authorization prior to access, change, or destruction. c. To formalize standards, rules, and procedures to ensure the organization's controls are properly executed. d. To monitor the use of system software to prevent unauthorized access to system software and computer programs. Solution: Choice "b" is correct. The objective of data security controls is to ensure that storage media are only accessed, changed, or deleted after appropriate authorization. The objective is to protect information. Choice "a" is incorrect. Polices establish an overall approach to computer security and are sometimes referred to as the IT security strategy. Data security controls are designed to protect information, not to establish strategy or policy. Choice "c" is incorrect. Policy support documents, such as procedures, formalize standards, rules, and procedures to ensure the organization's controls are properly executed. Data security controls may be included in procedures, but development of procedures is not their objective. Choice "d" is incorrect. Change management and related control activities anticipate monitoring the use of system software to prevent unauthorized access to system software and computer programs.

2011 AICPA Newly Released Questions Business

9. Which of the following technologies is specifically designed to exchange financial information over the World Wide Web? a. b. c. d. Hypertext markup language (HTML). Extensible business reporting language (XBRL). Hypertext transfer protocol (HTTP). Transmission control program/internet protocol (TCP/IP).

Solution: Choice "b" is correct. Extensible business reporting language (XBRL) is specifically designed to exchange financial information over the World-Wide Web. The SEC's Interactive Data Rule requires public companies to present financial statements and related exhibits using XBRL. Choice "a" is incorrect. HTML is used to exchange information over the web however it has broader applications than purely financial information Choice "c" is incorrect. HTTP is the general communications protocol used to transfer web pages on the World Wide Web. It was not specifically designed for financial data. Choice "d" is incorrect. TCP/IP is the transmission protocol of the internet. TCP/IP was not specifically designed for financial data.

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2011 AICPA Newly Released Questions Business

10. Variations between business cycles most likely are attributable to which of the following factors? a. b. c. d. The law of diminishing returns. Comparative advantage. Duration and intensity. Opportunity costs.

Solution: Choice "c" is correct. Variations in business cycle are attributed or described in terms of how long they last (duration) and the degree of peak or trough (intensity). While a recession, for example, is defined as two consecutive quarters of negative economic growth, a depression is more qualitatively assessed after consideration of both severity (depth) and duration. Choice "a" is incorrect. The law of diminishing returns contemplates reduced output for each unit of input as industries either mature or become less efficient with size. Diminishing returns is not used to describe variations in business cycles. Choice "b" is incorrect. Comparative advantage results in specialization by market participants and does not describe variations in the business cycle. Choice "d" is incorrect. Opportunity costs represent implicit costs that evaluate the cost of alternate uses of resources. Business cycles are not attributed to opportunity costs

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2011 AICPA Newly Released Questions Business

11. A company has the following target capital structure and costs: Proportion of capital structure Debt Common stock Preferred stock 30% 60% 10% Cost of capital 10% 12% 10%

The company's marginal tax rate is 30%. What is the company's weighted-average cost of capital? a. b. c. d. 7.84% 9.30% 10.30% 11.20%

Solution: Choice "c" is correct. The weighted average cost of capital (WACC) is equal to 10.3%. WACC is the average cost of debt and equity financing associated with a firm's existing assets and operations and is computed after tax as follows: Financing category Debt Common Stock Preferred Stock Total WACC Weight x Rate x Tax affect 30% x 10% x (1-30%) = 60% x 12% 10% x 10% N/A N/A = = Product 2.10% 7.20% 1.00% 10.3%

Choice "a" is incorrect. The proposed solution incorrectly anticipates tax protection for the cost of equity. Choice "b" is incorrect. The proposed solution incorrectly uses the variables in the fact pattern. Choice "d" is incorrect. The proposed solution uses the pretax rather than after tax cost of debt.

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2011 AICPA Newly Released Questions Business

12. A company recently issued 9% preferred stock. The preferred stock sold for $40 a share with a par of $20. The cost of issuing the stock was $5 a share. What is the company's cost of preferred stock? a. b. c. d. 4.5% 5.1% 9.0% 10.3%

Solution: Choice "b" is correct. The cost of the company's preferred stock is 5.1%. The cost of preferred stock is computed in a manner consistent with computation of the effective rate of interest. The amount paid (dividend) is divided by the net proceeds (market price minus floatation costs) to arrive at the cost expressed as a percentage. The cost of preferred stock is computed for the company as follows: Dividend paid ($20 par value x 9% dividend) Net proceeds ($40 selling price - $5 floatation) Cost of preferred shares $ 1.80 $35 5.1%

Choice "a" is incorrect. The proposed answer incorrectly divides the dividend paid by the gross proceeds of $40 rather than the net proceeds of $35. Choice "c" is incorrect. The proposed answer incorrectly computes the dividend based on the selling price of the stock instead of the par value and uses gross rather than net proceeds as the denominator. Choice "d" is incorrect. The proposed answer incorrectly computes the dividend based on the selling price of the stock instead of the par value.

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2011 AICPA Newly Released Questions Business

13. A company produces and sells two products. The first product accounts for 75% of sales and the second product accounts for the remaining 25% of sales. The first product has a selling price of $10 per unit, variable costs of $6 per unit, and allocated fixed costs of $100,000. The second product has a selling price of $25 per unit, variable costs of $13 per unit, and allocated fixed costs of $212,000. At the breakeven point, what number of units of the first product will have been sold? a. b. c. d. 52,000 39,000 25,000 14,625

Solution: Choice "b" is correct. Product one unit sales of 39,000 will result in an overall breakeven for the company. The call of the question asks for the level of sales for an overall breakeven (not breakeven per product) so the company must generate a contribution margin equal to combined fixed costs of $312,000 ($100,000 for the first product + $212,000 for the second product) assuming the relative sales volumes given in the problem. Contribution margins (CM) are computed as follows: First product: Second product $10 selling price - $6 variable cost = $25 selling price - $13 variable cost = $4 contribution margin $12 contribution margin

Since the relative sales volume of product is 75% for the first product and 25% of the second product, total breakeven units can be algebraically expressed as follows: (First product CM X 75% of total units) + (Second product CM X 25% of total units) = Fixed costs ($4 x 75%x) + ($12 x 25%x) = 312,000 $3x +$3x = $312,000 $6x = $312,000 x = $312,000/$6 x = 52,000 The call of the question is for the number of units of the first product. The first product represents 75% of the total units. First product sales at breakeven = 52,000 x 75% = 39,000 Choice "a" is incorrect. Total units at breakeven is 52,000. The problem requires taking the extra step of computing the first product's percentage of the total. Choice "c" is incorrect. The first product would achieve break even at 25,000 unit sales, however, based on the assumptions of the problem, the second product would only generate sales of 8,333 units (consistent with the relative volume of 75% and 25%). The second product (and the entire company) would not break even. Choice "d" is incorrect. The solution of 14,625 does not weight the contribution margins by relative percentage of total sales to arrive at the total break even units.

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2011 AICPA Newly Released Questions Business

14. Which of the following types of risk can be reduced by diversification? a. b. c. d. High interest rates. Inflation. Labor strikes. Recessions.

Solution: Choice "c" is correct. The risk of labor strikes can be mitigated by diversification. Diversifiable risk, sometimes called unsystematic or firm specific risk can be mitigated by allocation of a portfolio of investments amongst various firms. Splitting a portfolio between investments in finance companies, which are less prone to strikes, vs. auto manufacturers, which have a higher percentage of organized labor, is an example of diversification to mitigate the risk of strikes. Choice "a" is incorrect. High interest rates are a risk encountered as a result of participation in the economy and represent a nondiversifable or systematic risk. Everyone is subject to the risk of high interest rates, regardless of industry. Diversification will not mitigate this risk. Choice "b" is incorrect. Inflation is a risk encountered as a result of participation in the economy and represents a nondiversifable or systematic risk. Everyone is subject to the risk of declining purchasing power, regardless of industry. Diversification will not mitigate this risk. Choice "d" is incorrect. Recessions are a risk encountered as a result of participation in the economy and represent a nondiversifable or systematic risk. Everyone is subject to the risk of economic downturns, regardless of industry. Diversification will not mitigate this risk.

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2011 AICPA Newly Released Questions Business

15. Which of the following solutions creates an encrypted communication tunnel across the Internet for the purpose of allowing a remote user secure access into the network? a. b. c. d. Packet-switched network. Digital encryption. Authority certificate. Virtual private network.

Solution: Choice "d" is correct. A virtual private network (VPN) provides an encrypted communication tunnel across the internet that allows remote users to secure access to a network. Choice "a" is incorrect. A packet switched network allows transmission of data across a shared network and not the internet. Choice "b" is incorrect. Digital encryption refers generically to the encoding of messages and does not contemplate the specific mechanisms used to transmit information across the internet from remote locations. Choice "c" is incorrect. Authority certificate may be a transposition of certificate authority, the group which issues encrypted digital certificates containing a public key. It is either a nonsense answer (authority certificate) or an issuer of digital certificates (certificate authority). At any rate, it is not the "tunnel" through which encrypted data will pass allowing remote access to a network.

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2011 AICPA Newly Released Questions Business

16. Each of the following is a limitation of enterprise risk management (ERM), except: a. b. c. d. ERM deals with risk, which relates to the future and is inherently uncertain. ERM operates at different levels with respect to different objectives. ERM can provide absolute assurance with respect to objective categories. ERM is as effective as the people responsible for its functioning.

Solution: Choice "c" is correct. ERM provides a framework in which to manage risk within an organization's risk appetite to provide reasonable assurance regarding the achievement of entity objectives. The assertion that ERM can provide absolute assurance with respect to objective categories is not true but, if it were, it would represent a strength and not a weakness. Choice "a" is incorrect. ERM provides a framework in which to manage risk within an organization's risk appetite to provide reasonable assurance regarding the achievement of entity objectives. The uncertainty of future events or risks addressed by ERM potentially limits the effectiveness of the framework. Choice "b" is incorrect. ERM provides a framework in which to manage risk within an organization's risk appetite to provide reasonable assurance regarding the achievement of entity objectives. The complexity of ERM can limit its effectiveness. ERM components are applied to each objective from the entity through the subsidiary level. Choice "d" is incorrect. ERM provides a framework in which to manage risk within an organization's risk appetite to provide reasonable assurance regarding the achievement of entity objectives. Like any control mechanism, the effectiveness of the framework is limited by the capabilities of the individuals responsible for implementation.

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2011 AICPA Newly Released Questions Business

17. A manufacturing firm identified that it would have difficulty sourcing raw materials locally, so it decided to relocate its production facilities. According to COSO, this decision represents which of the following responses to the risk? a. b. c. d. Risk reduction. Prospect theory. Risk sharing. Risk acceptance.

Solution: Choice "a" is correct. Relocation of production facilities to assure an uninterrupted supply chain (e.g., sourcing raw materials) is an example of risk reduction. The Committee of Sponsoring Organization's (COSO) Enterprise Risk Management (ERM) framework identifies four methods of responding to risk, including avoidance, reduction, sharing and acceptance. The relocation of the plant reduces the risk of supply chain interruption. Risk avoidance techniques might involve discontinuing the product that uses the raw material altogether or replacing the raw material with a locally available product. Risk acceptance is typically associated with doing nothing. Risk sharing is often associated with purchasing insurance, however, in this instance, the company might chose to share risk by buying purchase options to ensure raw material availability from other sources or obtaining purchase commitments from local suppliers (with penalty clauses for nonperformance). Choice "b" is incorrect. The COSO ERM framework identifies four methods of responding to risk including avoidance, reduction, sharing and acceptance. Prospect theory, which seeks to describe how people decide between alternatives that involve risk, is not described by the COSO as a risk management technique. Choice "c" is incorrect. The COSO ERM framework identifies four methods of responding to risk including avoidance, reduction, sharing and acceptance. Risk sharing is often associated with purchasing insurance, however, in this instance, the company might chose to share risk by buying purchase options to ensure raw material availability from other sources or obtaining purchase commitments from local suppliers (with penalty clauses for nonperformance). Choice "d" is incorrect The COSO ERM framework identifies four methods of responding to risk including avoidance, reduction, sharing and acceptance Risk acceptance is typically associated with doing nothing.

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2011 AICPA Newly Released Questions Business

18. Which of the following is one of the four perspectives of a balanced scorecard? a. b. c. d. Just in time. Innovation. Benchmarking. Activity-based costing.

Solution: Choice "b" is correct. Innovation is a perspective defined by the balanced scorecard. The balanced scorecard typically defines organizational performance in four dimensions including innovation, customer satisfaction, internal business processes and finance. Choice "a" is incorrect. Just in time management anticipates achievement of efficiency by scheduling the deployment of resources just-in-time to meet customer or production requirements. It is not a perspective used in the balanced scorecard. The balanced scorecard typically defines organizational performance in four dimensions including innovation, customer satisfaction, internal business processes and finance. Choice "c" is incorrect. Benchmarking is a technique used to identify standards that define quality. Benchmarking is not a perspective used in the balanced scorecard. The balanced scorecard typically defines organizational performance in four dimensions including innovation, customer satisfaction, internal business processes and finance. Choice "d" is incorrect. Activity based costing is a cost assignment concept that uses activity level as the fundamental cost object. It is not a perspective used in the balanced scorecard. The balanced scorecard typically defines organizational performance in four dimensions including innovation, customer satisfaction, internal business processes and finance.

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2011 AICPA Newly Released Questions Business

19. The New Wave Co. is considering a new method for allocating overhead to its two products, regular and premium coffee beans. Currently New Wave is using the traditional method to allocate overhead, in which the cost driver is direct labor costs. However, it is interested in using two different drivers: machine hours (MH) for separating and roasting beans, and pounds of coffee for packing and shipping. Machine hours for the current month are 700 hours, direct labor cost per pound of coffee is $1.25, and direct materials cost per pound of coffee is $1.50. There are 1,000 pounds of coffee packed and shipped for the current month. The following data are also available: Regular Overhead for the current month Cost pool for separating and roasting beans Cost pool for packing and shipping $5,000.00 3,500.00 1,500.00 150 MH 500 pounds 550 MH 500 pounds Premium

What is the total cost per pound for the premium coffee using the new activity-based costing method? a. b. c. d. $5.00 $5.75 $7.75 $9.75

Solution: Choice "d" is correct. Activity based costing is a cost assignment concept that uses activity level as the fundamental cost object. Total cost per unit would be equal to the overhead allocated in accordance with the activity based cost object associated with each activity and the direct cost per unit. (Cost x Premium/Total) Pounds = Cost/Pound Separating and roasting Packing and shipping Direct Labor (given) Direct Materials (given) Total cost per pound for premium coffee
1 2 1

($3,500 x 550/700) 500 = $5.50 ($1,500 x 500/1,000) 500 = 1.50 1.25 1.50 $9.75

The separating and roasting cost pool is allocated based upon man hours: 550 divided by a total of 700 hours (550 for premium and 150 for regular)
2

The packing and shipping cost pool is allocated based on pounds. Both quality beans are produced in the same amount, 500 pounds. Half of the packing and shipping costs go to each quality of bean. Choices "a", "b" and "c" are incorrect per explanation above.

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2011 AICPA Newly Released Questions Business

20. A company uses process costing to assign product costs. Available inventory information for a period is as follows: Inventory Material Conversion (in units) cost cost Beginning Started during the period Transferred out End of period 0 15,000 13,500 1,500 $75,000 $55,500

The ending inventory was 25% complete as to the conversion cost. 100% of direct material was added at the beginning of the process. What was the total cost transferred out? a. b. c. d. $130,500 $126,973 $121,500 $117,450

Solution: Choice "c" is correct. Total cost transferred out is $121,500. The problem requires careful attention to the assumptions in the fact pattern. 1. Computation of cost of materials transferred out: 100% of direct material was added at the beginning of the process. The cost per equivalent unit of material transferred out is computed as follows: $75,000 materials cost 15,000 inventory Units transferred out Materials cost transferred out 2. Computation of conversion costs transferred out Conversion costs of units started Equivalent Units transferred out 100% x 13,500 Equivalent Units in ending inventor 25% x 1,500 Total equivalent units Conversion cost per equivalent units Units transferred out (13,500) x Conversion cost per EU ($4.00) 3. Computation of total costs transferred out Direct materials transferred out Conversion costs transferred out Total costs transferred out Choices "a", "b", and "d" are incorrect per explanation above. $ 67,500 54,000 $121,500 13,500 375 13,875 units $4.00 per unit $54,000 $55,500 = = $5.00 per unit 13,500 units $67,500

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2011 AICPA Newly Released Questions Business

21. The ABC Company is trying to decide between keeping an existing machine and replacing it with a new machine. The old machine was purchased just two years ago for $50,000 and had an expected life of 10 years. It now costs $1,000 a month for maintenance and repairs due to a mechanical problem. A new machine is being considered to replace it at a cost of $60,000. The new machine is more efficient and it will only cost $200 a month for maintenance and repairs. The new machine has an expected life of 10 years. In deciding to replace the old machine, which of the following factors, ignoring income taxes, should ABC not consider? a. b. c. d. Any estimated salvage value on the old machine. The original cost of the old machine. The estimated useful life of the new machine. The lower maintenance cost on the new machine.

Solution: Choice "b" is correct. The original cost of the old machine is a sunk cost that will not change regardless of the decision that is made. Sunk costs are not relevant and would not be considered by ABC as part of their decision to keep or replace the current machine. Choice "a" is incorrect. The estimated salvage value of the old machine is relevant to the decision to keep or replace the machine. The salvage value will be realized if the machine is replaced but not realized if the old machine is not replaced. Choice "c" is incorrect. The estimated useful life of the new machine is relevant to the decision to keep or replace the old machine. The useful life of the new machine will impact the comparative productive capacity of the company and would be considered in the decision. Choice "d" is incorrect. The lower maintenance cost of the new machine is relevant to the decision to keep or replace the old machine. The maintenance cost of the new machine will impact the comparative operating costs of the company and would be considered in the decision.

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2011 AICPA Newly Released Questions Business

22. Black Co.'s breakeven point was $780,000. Variable expenses averaged 60% of sales, and the margin of safety was $130,000. What was Black's contribution margin? a. b. c. d. $364,000 $546,000 $910,000 $1,300,000

Solution: Choice "a" is correct. The contribution margin at the time the company achieves a $130,000 margin of safety is $364,000. The margin of safety is the excess of sales over break even sales. Assuming variable costs are 60% of selling price, contribution margin may be computed at 40% of selling price as follows: Cost component Sales Variable costs Contribution margin 100% 60% 40% Breakeven $780,000 468,000 $312,000 Margin of safety $130,000 78,000 $ 52,000 Total $910,000 546,000 $364,000

Choice "b" is incorrect. Total variable costs are $546,000 at breakeven plus margin of safety, not contribution margin. Choice "c" is incorrect. Total sales are $910,000 at breakeven plus margin of safety. Choice "d" is incorrect per computation above.

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2011 AICPA Newly Released Questions Business

23. The following information data pertains to a manufacturing company: Total sales Total variable costs Total fixed costs $80,000 20,000 30,000

What is the break-even level in sales dollars? a. b. c. d. $30,000 $40,000 $50,000 $80,000

Solution: Choice "b" is correct. Breakeven point in sales dollars may be computed as the ratio of total fixed costs to the contribution margin ratio. The contribution margin ratio is the contribution margin expressed as a percentage of revenue. In this instance, the contribution margin ratio is equal to the sales price of $80,000 less the variable costs of $20,000 divided by the sales price of $80,000. The contribution margin ratio is therefore: $60,000/$80,000 or 75% Breakeven point in dollars is computed using the following formula
Total fixed costs Contribution margin ratio = Breakeven point in dollars

Therefore in this instance, the breakeven point in dollars is:

$30,000 75% = $40,000

Choice "a" is incorrect. The breakeven point is not equal to fixed costs. Choice "c" is incorrect. The breakeven point is not equal to total costs from the fact pattern. Choice "d" is incorrect. The breakeven point is not equal to the total sales from the fact pattern.

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2011 AICPA Newly Released Questions Business

24. Limitations of an activity-based costing system include which of the following? a. b. c. d. Control of overhead costs is enhanced. Activity-based costing systems are less reliable. The expense of obtaining cost data is relatively high. It eliminates arbitrary assignment of overhead costs.

Solution: Choice "c" is correct. Activity based costs anticipates increased cost pools and increased allocation bases. The determination of the amounts that go in these pools and their related cost drivers will likely be more costly than traditional systems. Increased costs of ABC represent a limitation of the system. Choice "a" is incorrect. Improved control over overhead costs is a benefit, not a limitation of activity based costing Choice "b" is incorrect. Activity based costing systems tend to produce more accurate and more reliable information that traditional cost allocation systems. Choice "d" is incorrect. Activity based costing attempts to trace costs to activities that consume resources and thereby eliminate the arbitrary assignment of overhead costs. The enhanced traceability of costs is a benefit and not a limitation of ABC.

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2011 AICPA Newly Released Questions Business

25. What is the correct ascending hierarchy of data in a system? a. b. c. d. Character, record, file, field. Field, character, file, record. Character, field, record, file. Field, record, file, character.

Solution: Choice "c" is correct. The hierarchy of data in a system begins with the smallest component of data and ends with the most summarized. A character is a symbol such as a letter or number. A field is a collection of numbers or letters such as a name or a street address. A record is a group of fields such as a customer name and address and related accounts receivable amount. A file is a collection of records such as an account receivable subsidiary ledger. Choice "a" is incorrect. A field is a combination of characters and would be second and not last on the hierarchy. Choice "b" is incorrect. Character and field and record and file have been transposed in the answer provided. The correct hierarchy begins with the smallest component of data, the character in this instance and ends with a file in this case. Choice "d" is incorrect. The hierarchy incorrectly reverses and jumbles the sequence of data as per explanation above.

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2011 AICPA Newly Released Questions Business

26. Jackson Co. is considering a project that will use 2,000 square feet of storage space at one of its facilities to store used equipment. What will determine Jackson's opportunity cost? a. b. c. d. The net present value of the project. The internal rate of return of the project. The value of the next best use of the space. The depreciation expense on the space.

Solution: Choice "c" is correct. Opportunity cost is the next best use of productive capacity. The production that is forfeited to produce the special order is referred to as the next best alternative use of the facility. Choice "a" is incorrect. The net present value is the difference between the cost of an investment and the present value of its cash flows, not the opportunity cost. Choice "b" is incorrect. The internal rate of return is the computed rate at which net present value is zero. It is not the opportunity cost. Choice "d" is incorrect. Depreciation expense is reasonable and rational allocation of cost over time. It is not opportunity cost.

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2011 AICPA Newly Released Questions Business

27. Jones Corp. had an opportunity to use its capacity to produce an extra 5,000 units with a contribution margin of $5 per unit, or to rent out the space for $10,000. What was the opportunity cost of using the capacity? a. b. c. d. $35,000 $25,000 $15,000 $10,000

Solution: Choice "d" is correct. The opportunity cost is $10,000, the value of the next best use of the space. The alternative selected carries a contribution margin of $25,000 and the next best use is renting the space for $10,000. Choice "a" is incorrect. The opportunity cost is not the combined value of the alternative selected and the next best use. Choice "b" is incorrect. The opportunity cost is the next best use of the productive capacity ($10,000), not the best use of the capacity ($25,000) Choice "c" is incorrect. The opportunity cost the next best use of the productive capacity ($10,000), not the difference between the best and next best alternatives ($25,000 - $10,000)

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2011 AICPA Newly Released Questions Business

28. In a large firm, custody of an entity's data is most appropriately maintained by which of the following personnel? a. b. c. d. Data librarian. Systems analyst. Computer operator. Computer programmer.

Solution: Choice "a" is correct. A system librarian is the most appropriate position to maintain custody of an entity's data. As the name implies the librarian maintains custody of the "library" of data generated by an organization. Choice "b" is incorrect. A systems analyst is the position that designs the overall application system. The systems analyst has, effectively, an authorization role that should be segregated from the custody role. Choice "c" is incorrect. A computer operator is responsible for scheduling processing jobs, etc. and would not have actual custody of the data. Effectively the operator is in a recordkeeping function that should be segregated from custody. Choice "d" is incorrect. A computer programmer may be either an application programmer responsible for writing or maintaining application programs or a system programmer responsible for installing supporting monitoring and maintaining the operating system. Programmers have a recordkeeping function that should be segregated from the librarian's custody function.

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2011 AICPA Newly Released Questions Business

29. Yarrow Co. is considering the purchase of a new machine that costs $450,000. The new machine will generate net cash flow of $150,000 per year and net income of $100,000 per year for five years. Yarrow's desired rate of return is 6%. The present value factor for a five-year annuity of $1, discounted at 6%, is 4.212. The present value factor of $1, at compound interest of 6% due in five years, is 0.7473. What is the new machine's net present value? a. b. c. d. $450,000 $373,650 $181,800 $110,475

Solution: Choice "c" is correct. Net present value is computed as the difference between the invested amount and the present value of the cash flows from the investment computed as follows: Total Investment Cash Flows Present value of an annuity Present value of future cash flows Net present value 150,000 x 4.212 631,800 Inflow $181,800 ($450,000) Outflow

Choice "a" is incorrect. The net present value is not equal to the amount the investment per the computation above. Choice "b" is incorrect. The anticipated net income over five years times the present value of $1 for five years is not the net present value of the project. Net income numbers are not used in net present value computations. Choice "d" is incorrect per explanation above.

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2011 AICPA Newly Released Questions Business

30. A corporation obtains a loan of $200,000 at an annual rate of 12%. The corporation must keep a compensating balance of 20% of any amount borrowed on deposit at the bank, but normally does not have a cash balance account with the bank. What is the effective cost of the loan? a. b. c. d. 12.0% 13.3% 15.0% 16.0%

Solution: Choice "c" is correct. The effective rate of interest is 15%. The effective rate of interest or cost of financing arrangements is the amount paid on the loan divided by the net proceeds. The fact pattern tells us that interest is paid at 12% while cash available is reduced by a 20% compensating balance that was not otherwise required. The effective interest rate is, therefore: Interest paid ($200,000 x 12%) Net proceeds: $200,000 x 80% (100% - 20% compensating balance) Effective interest rate $160,000 15% $ 24,000

Choice "a" is incorrect. The effective rate of interest is not the stated rate of interest of 12%. Choices "b" and "d" are incorrect per computations above.

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2011 AICPA Newly Released Questions Business

31. A company has a policy of frequently cutting prices to increase sales. Product demand is significantly elastic. What impact would this have on the company's situation? a. b. c. d. Quantity increases proportionally more than the price declines. Quantity increases proportionally less than the price declines. Price increases proportionally more than the quantity declines. Price increases proportionally less than the quantity increases.

Solution: Choice "a" is correct. Quantity increases will be proportionally more than price declines if product demand is significantly elastic. Price elasticity of demand is measured as the ratio of % change in quantity divided by the % change in price. Values of the price elasticity of demand ratio greater than 1.0 are considered to be elastic. The demand elasticity presumed by the fact pattern equates with a price elasticity measure greater than 1.0 and, therefore, proportional changes in quantity are greater than changes in price. Choice "b" is incorrect. Quantity increases will be proportionally more than price declines if product demand is significantly elastic. Price elasticity of demand is measured as the ratio of % change in quantity divided by the % change in price. The demand elasticity presumed by the fact pattern equates with price elasticity measures greater than 1.0 and, therefore, proportional changes in quantity greater than changes in price. Choice "c" is incorrect. Price changes will be proportionately less than quantity changes in instances where price elasticity of demand is determined to be elastic. Choice "d" is incorrect. Price changes will be proportionately less than quantity changes in instances where price elasticity of demand is determined to be elastic. Price increases, however, would typically result in quantity decreases, not increases.

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2011 AICPA Newly Released Questions Business

32. Which of the following types of unemployment typically results from technological advances? a. b. c. d. Cyclical. Frictional. Structural. Short-term.

Solution: Choice "c" is correct. Technological advances would likely result in structural employment. Structural unemployment is characterized by available jobs that do not match the skill sets of the workforce. Technological advances could create jobs that simultaneously make the skills of the workforce obsolete. Choice "a" is incorrect. Cyclical unemployment results from declining GDP and would not likely be created by technological advances. Choice "b" is incorrect. Frictional unemployment is normal unemployment resulting from workers routinely changing jobs. Frictional unemployment would likely not result from technological advances. Choice "d" is incorrect. Short term unemployment is a broad description that relates to the duration of an unemployment condition. The duration of unemployment can be caused by any number of factors, however, structural influences such as technological advancement that require workforce retraining would likely not be short term.

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2011 AICPA Newly Released Questions Business

33. A corporation manages inventory performance by monitoring its inventory turnover. Selected financial records for the corporation are as follows: Year 1 Annual sales Gross annual profit percentage $1,262,500 45% Year 2 $1,062,500 30% Year 3 $1,459,000 40%

The beginning finished goods inventory for year 2 was 20% of year 2 sales. The ending finished goods inventory for year 2 was 18% of year 3 sales. What was the corporation's inventory turnover for year 2? a. b. c. d. 1.34 2.83 3.03 3.13

Solution: Choice "d" is correct. Inventory turnover is the ratio of cost of goods sold to average inventory balances. Cost of goods sold for year 2 is equal to sales times the cost of goods sold percentage(1 - gross annual profit percentage) computed as follows: Cost of goods sold = $1,062,500 x (1 - .3) = $743,750 Average inventory is computed based on the fact pattern: Beginning year 2 inventory = 20% of year 2 sales: 20% x $1,062,500 = $212,500 Ending year 2 inventory = .18% of year 3 sales 18% x $1,459,000 = $262,620 Average inventory = ($212,500 + $262,620) / 2 = $237,560 Inventory turnover = $743,750 / $237,560 = 3.13 Choice "a", "b", and "c" are incorrect per the calculation above.

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2011 AICPA Newly Released Questions Business

34. Which of the following costing methods will yield the lowest inventory value? a. b. c. d. Absorption. Hybrid. Process. Variable.

Solution: Choice "d" is correct. Variable costing typically produces the lowest inventory values since only variable costs are capitalized. Other methodologies of inventory accounting will account for fixed costs in inventory and result in greater values than variable costing. Choice "a" is incorrect. Absorption costing accounts for fixed manufacturing overhead costs in inventory and produces inventory values greater than variable costing. Choice "b" is incorrect. Hybrid costing methods may blend different inventory methodologies but would likely include valuations greater than pure direct cost approaches that only include variable costs. Choice "c" is incorrect. Process costing methods represent a cost accumulation approach that uses any number of assumptions. Process costing will normally include fixed costs in the valuation of inventory and would thereby result in higher amounts than direct costing approaches.

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2011 AICPA Newly Released Questions Business

35. Each of the following periods is included when computing a firm's target cash conversion cycle, except the: a. b. c. d. Inventory conversion period. Payables deferral period. Average collection period. Cash discount period.

Solution: Choice "d" is correct. The cash conversion cycle does not include the cash discount period. Cash discounts would be considered as a component of receivables collections and payables deferrals. The cash conversion cycle is the sum of the inventory conversion and receivable collection periods minus the payables deferral period shown as follows:

Cash Inventory Conversion = Conversion Cycle Period

Receivables Payables Collection Deferral Period Period

Choice "a" is incorrect. The inventory conversion period is included in the cash conversion cycle as illustrated in the formula above. Choice "b" is incorrect. The payables deferral period is included in the cash conversion cycle as illustrated in the formula above. Choice "c" is incorrect. The average (receivables) collection period is included in the cash conversion cycle as illustrated in the formula above.

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2011 AICPA Newly Released Questions Business

36. An enterprise resource planning system is designed to: a. b. c. d. Allow nonexperts to make decisions about a particular problem. Help with the decision-making process. Integrate data from all aspects of an organization's activities. Present executives with the information needed to make strategic plans.

Solution: Choice "c" is correct. Enterprise resource planning (ERP) is designed to integrate data from all aspects of an organizations activity. ERP is defined as a cross-functional system that integrates and automates the many business processes that must work together in manufacturing, logistics, distribution, accounting, etc. Choice "a" is incorrect. Although ERP systems can provide cross functional information across the organization to assist managers in decision making, the system assumes a high level of sophistication among users and does not automate decision making. The focus of ERP is cross functional information integration. Choice "b" is incorrect. ERP provides integrated information that can assist with decision making; however, it is designed to automate the accumulation of cross functional information. Choice "d" is incorrect. ERP is primarily meant to provide integrated information for operational managers, not strategic information to executives.

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2011 AICPA Newly Released Questions Business

37. According to COSO, the use of ongoing and separate evaluations to identify and address changes in internal control effectiveness can best be accomplished in which of the following stages of the monitoringfor-change continuum? a. b. c. d. Control baseline. Change identification. Change management. Control revalidation/update.

Solution: Choice "b" is correct. The COSO identifies four stages of the change continuum beginning with control baseline, followed by change identification and change management and concluding with control validation/ update. Change identification considers the risk assessment component of internal control and identifies changes in process or risk and verifies that the design of underlying controls remains effective. Monitoring through the use of ongoing and separate evaluations should consider the ability to identify and address changes in the change identification stage of the monitoring for change continuum. Choice "a" is incorrect. Monitoring starts with a control baseline that supports the understanding of an internal control system's design and whether controls have been implemented to accomplish internal control objectives. The base line is the starting point and does not address the methods of control monitoring. Choice "c" is incorrect. Change management contemplates the establishment of a new control baseline in response to changes that either occur or are implemented in response to revised needs. Change management does not contemplate the selection of ongoing or separate evaluations. Choice "d" is incorrect. Control revalidation and update contemplates confirmation of control effectiveness. Ongoing procedures routinely revalidate and create a continuous baseline while separate evaluations provide periodic revalidation. The revalidation verifies or challenges of the baseline. The use of ongoing or separate evaluations is determined, however, as part of change identification.

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2011 AICPA Newly Released Questions Business

38. Which of the following is necessary to be an audit committee financial expert according to the criteria specified in the Sarbanes-Oxley Act of 2002? a. b. c. d. A limited understanding of generally accepted auditing standards. Education and experience as a certified financial planner. Experience with internal accounting controls. Experience in the preparation of tax returns.

Solution: Choice "c" is correct. The financial expert serving on the audit committee of an issuer must have experience with internal controls. The financial expert qualifies through education or past experience as an auditor or finance officer for an issuer of similar complexity. Choice "a" is incorrect. The financial expert qualifies through education or past experience as an auditor or finance officer for an issuer of similar complexity. The expert should have an understanding of GAAP, application of GAAP, an understanding of internal controls and an understanding of audit committee functions. There is no requirement to have a limited understanding of GAAS. Choice "b" is incorrect. The financial expert qualifies through education or past experience as an auditor or finance officer for an issuer of similar complexity. The expert should have an understanding of GAAP, application of GAAP, an understanding of internal controls and an understanding of audit committee functions. There is no requirement to have education and experience as a certified financial planner. Choice "d" is incorrect. The financial expert qualifies through education or past experience as an auditor or finance officer for an issuer of similar complexity. The expert should have an understanding of GAAP, application of GAAP, an understanding of internal controls and an understanding of audit committee functions. There is no requirement to have experience in tax return preparation.

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2011 AICPA Newly Released Questions Business

39. Which of the following positions best describes the nature of the Board of Directors of XYZ Co.'s relationship to the company? a. b. c. d. Agent. Executive. Fiduciary. Representative.

Solution: Choice "c" is correct. The board of directors has a fiduciary responsibility to act on behalf of an in the best interest of the corporation. Choice "a" is incorrect. The board of directors is not primarily charged with acting as an agent of the corporation. Employees, for example, act as agents. Choice "b" is incorrect. The board of directors is not primarily charged with acting as an executive in fulfilling their fiduciary responsibility to the corporation. Officers, for example, act as executives. Choice "d" is incorrect. The board of directors is not primarily charged with acting as representatives in fulfilling their fiduciary responsibility to the corporation. Corporate attorneys or employees, for example, fulfill the role of representative.

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2011 AICPA Newly Released Questions Business

40. Which of the following indicates that the economy is in a recessionary phase? a. b. c. d. The rate of unemployment decreases. The purchasing power of money declines rapidly. Potential national income exceeds actual national income. There is a shortage of essential raw materials and costs are rising.

Solution: Choice "c" is correct. When potential national income (potential Gross Domestic Product, also referred to as the Long Run Aggregate Supply) is greater than the achieved national income, the short run aggregate supply curve is shifting to the left indicating a contraction or recession. Choice "a" is incorrect. Declining unemployment (increasing employment) is indicative of a growing economy, not a recession. Choice "b" is incorrect. Declining purchasing power is usually a sign of inflation. Inflation and, usually, the related occurrence of increased money supply are typically indicative of economic growth and not recession. Choice "d" is incorrect. Shortages of raw materials are generally indicative that the economy is growing, not shrinking, and is placing greater demand on limited raw material resources than available capacity.

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2011 AICPA Newly Released Questions Business

AICPA 2011 Released BEC Simulations Task 201_01

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2011 AICPA Newly Released Questions Business

To: Subject:

Senior Manager Sarbanes-Oxley Act

The following memorandum formally responds to your inquiry regarding the changing roles and responsibilities of audit committees since the passage of the Sarbanes-Oxley Act in 2002. The establishment of an audit committee as a subcommittee of the board of directors has long been regarded as a "best practice" for corporate governance. Typically audit committees are composed of outside directors (non-employees) who act as a liaison between the board of directors and the auditors. The audit committee is meant to enhance internal control by ensuring auditor independence, moderating disputes between the auditor and management, and evaluating internal controls. The Sarbanes-Oxley Act does not change the long-established best practice idea of the audit committee, but does make the existence of a committee a legal requirement and makes qualification for membership on the committee and the minimum activities of the committee more specific and a matter of law and regulation. Under Sarbanes-Oxley, publically traded companies are required to maintain an audit committee that is directly responsible for the appointment, compensation and oversight of the auditor engaged by the publically traded company. Audit committee members must meet independence standards established by the law and at least one member of the committee must be a financial expert within the meaning of the law. Failure to include a financial expert requires self-disclosure by the audit committee. Audit committees must also develop whistleblower procedures to ensure opportunities for communication of audit abuses to the committee for evaluation and possible action. In addition, the audit committee is recipient of numerous disclosures from management and the external auditor and is responsible for specific reporting. The various sections of the Sarbanes-Oxley Act are rigorous and place significant reporting burdens on management and the board of directors in the name of improved internal control. The existence of the audit committee is meant to serve as tangible evidence that those charged with governance are actively engaged in monitoring internal controls and the audit of their company's financial statements. I would be glad to discuss the specific requirements of the Sarbanes-Oxley Act at any time convenient to you.

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2011 AICPA Newly Released Questions Business

Task 161_01

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2011 AICPA Newly Released Questions Business

To: Subject:

Controller Percentage of accounts receivable balance vs. percentage of sales

The following communication has been prepared to assist you in evaluating the percentage of accounts receivable and percentage of sales methods of computing the annual provision for bad debts. It will also provide support for my recommendation that you change to the percentage of sales method. Computation of the allowance and expense for bad debts can either emphasize the fair presentation of the balance sheet or emphasize the fair presentation of the income statement. The percentage of accounts receivable method emphasizes the balance sheet. Using this approach, periodic bad debt expense is the amount needed to adjust accounts receivable to its appropriate net realizable value through the allowance for doubtful accounts. The bad debt expense is the amount needed to adjust the allowance. The approach assumes a stable volume of transactions and predictable allowance requirements. This is the approach currently used and, until the recent change in credit policy, was ideal. The percentage of sales approach emphasizes the income statement and the appropriate matching of bad debt expense. Using this approach, bad debt is computed and recorded based upon a percentage of credit sales. The bad debt expense recognized is adjusted for any change in the estimated net realizable value of the trade receivables. The approach is better suited for changing sales volumes and less predictable changes in the allowance for doubtful accounts. In the past year, the company has elected to make a significant change in its credit policy that has both increased sales volume and increased the number and amount of uncollected accounts. The importance of matching bad debt expense with sales revenue has never been more important and the associated evaluation of the net realizable value of receivables has become increasing more subjective as the volume of bad debts increases. The differences between the two methods are very clear. Estimating bad debt through accounts receivable and estimating bad debt as a percentage of credit sales are equally acceptable methods. However, the enhanced matching features of the percentage of credit sales method is the most logical fit with the increased sales and bad debt volume that the company has experienced since adopting a more liberal credit policy. I am available to discuss this issue with you at your convenience.

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