Latest PDF of BEC: CPA Business Environment and Concepts

CPA Business Environment and Concepts Practice Test

BEC Exam Format | Course Contents | Course Outline | Exam Syllabus | Exam Objectives

Business Environment and concept section is treated as one of the most challenging exams because of its extensive material and it deals with business and economic concepts. The CPA BEC section will help you to move one step further in business knowledge and help them apply the knowledge in real-world scenarios.

Business Environment and concepts covers:

Business environment in general, and its core concepts.
Foundational grounding in accounting and are exposed to underlying reasons for accounting implications
Financial management information technology, and business strategies in addition to accounting concepts.
Economic concepts, financial management, information systems and communications, strategic planning and operations management.
Testing to determine different business strategies with their knowledge in strategic planning and market risks.
Making financial decisions, forecasting trends in the market, and understanding internets implication in business.

Topic Percentage
Corporate Governance 16% – 20%
Economic Concepts and Analysis 16% – 20%
Financial Management 19% – 23%
Information Systems and Communications 15% – 19%
Strategic Planning 10% – 14%
Operations Management 12% – 16%

BEC1 Business Environment and Concepts (BEC)
BEC2 Section introduction
BEC6 Summary blueprint
BEC7 Area I — Corporate Governance
BEC9 Area II — Economic Concepts and Analysis
BEC11 Area III — Financial Management
BEC13 Area IV — Information Technology
BEC16 Area V — Operations Management

The Business Environment and Concepts (BEC) section of the Uniform CPA
Examination (the Exam) tests knowledge and skills that a newly licensed CPA
must demonstrate when performing:
• Audit, attest, accounting and review services
• Financial reporting
• Tax preparation
• Other professional responsibilities in their role as certified public accountants
The content areas tested under the BEC section of the Exam encompass five
diverse subject areas. These content areas are corporate governance, economic
concepts and analysis, financial management, information technology and
operations management. Reference materials relevant to the BEC section of the
Exam are included under References at the conclusion of this introduction.
Content organization and tasks
The BEC section blueprint is organized by content AREA, content GROUP and
content TOPIC. Each group or topic includes one or more representative TASKS
that a newly licensed CPA may be expected to complete when performing audit,
attest, accounting and review services, financial reporting, tax preparation or
other professional responsibilities.
The tasks in the blueprint are representative. They are not intended to be (nor
should they be viewed as) an all-inclusive list of tasks that may be tested in the
BEC section of the Exam. Additionally, it should be noted that the number of
tasks associated with a particular content group or topic is not indicative of
the extent such content group, topic or related skill level will be assessed
on the Exam. Similarly, examples provided within the task statements should
not be viewed as all-inclusive.

Area II of the BEC section blueprint covers several topics related to Economic
Concepts and Analysis, including the following:
• Knowledge of economic concepts and analysis that would demonstrate an
understanding of the impact of business cycles on an entitys industry or
business operation
• Determining market influences on the business environment, such as
globalization
• Determining the business reasons for, and the underlying economic substance
of, transactions and their accounting implications
• Understanding financial risks and the methods for mitigating the impact of
these risks
Area III of the BEC section blueprint covers several topics related to Financial
Management, including the following:
• Assessing the factors influencing a companys capital structure, such
as risk, leverage, cost of capital, growth rate, profitability, asset structure and
loan covenants
• Calculating metrics associated with the components of working capital, such
as current ratio, quick ratio, cash conversion cycle, turnover ratios
• Determining the impact of business decisions on working capital
• Understanding commonly used financial valuation and decision models and
applying that knowledge to assess assumptions, calculate the value
of assets and compare investment alternatives
Area IV of the BEC section blueprint covers several topics related to
Information Technology (IT), including the following:
• Understanding the role of IT and systems, including the use of data in
supporting business decisions.
• Identifying IT-related risks associated with an entitys information systems
and processes, such as processing integrity, protection of information and
system availability, including those risks introduced by the relationships with
third-parties.
• Identifying application and IT general control activities, whether manual,
IT dependent or automated, that are responsive to IT-related risks, such
as access and authorization controls, system implementation testing and
incident response plans.
Area V of the BEC section blueprint covers several topics related to Operations
Management, including the following:
• Understanding business operations and use of quality control initiatives and
performance measures to improve operations
• Application of cost accounting concepts and use of variance analysis
techniques
• Utilizing budgeting and forecasting techniques to monitor progress and
enhance accountability
The Exam focuses on testing higher order skills. Based on the nature of the task,
each representative task in the BEC section blueprint is assigned a skill level.
BEC section considerations related to the skill levels are discussed below.
• Remembering and Understanding is tested in all five areas of the BEC section.
Remembering and understanding tasks focus on the knowledge necessary
to demonstrate an understanding of the general business environment and
business concepts, such as those involving enterprise risk management.
• Application is also tested in all five areas of the BEC section. Application
tasks focus on general topics such as those found in the subjects of
economics and information technology, and the day-to-day financial
management tasks that newly licensed CPAs perform, such as those
involving calculations involving ratios, valuation and budgeting.
• Analysis skills, tested in Areas II, III and V involve tasks that require a
higher level of analysis and interpretation. These tasks, such as comparing
investment alternatives using calculations of financial metrics, financial
modeling, forecasting and projection, frequently require newly licensed CPAs
to gather evidence to support inferences.
The representative tasks combine both the applicable content knowledge
and the skills required in the context of the work that a newly licensed CPA
would reasonably be expected to perform. The BEC section does not test any
content at the Evaluation skill level as newly licensed CPAs are not expected to
demonstrate that level of skill in regards to the BEC content.
References — Business Environment and Concepts
• The Committee of Sponsoring Organizations of the Treadway Commission (COSO):
– Internal Control – Integrated Framework
– Enterprise Risk Management – Integrating with Strategy and Performance
– COSO-issued application material, thought papers and guides related to the above frameworks
• Sarbanes-Oxley Act of 2002:
– Title III, Corporate Responsibility
– Title IV, Enhanced Financial Disclosures
– Title VIII, Corporate and Criminal Fraud Accountability
– Title IX, White-Collar Crime Penalty Enhancements
– Title XI, Corporate Fraud Accountability
• Current business periodicals
• Current textbooks on:
– Accounting Information Systems
– Budgeting and Measurement
– Corporate Governance
– Economics
– Enterprise Risk Management
– Finance
– Management
– Management Information Systems
– Managerial Accounting
– Production Operations

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CPA Business Environment and Concepts
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QUESTION: 245
The imputed interest rate used in the residual income approach to performance
evaluation can best be described as the:
A. Historical weighted average cost of capital for the company.
B. Target return on investment set by the company's management.
C. Average return on investments for the company over the last several years.
D. Marginal after-tax cost of capital on new equity capital.
Answer: B
Explanation:
Choice "b" is correct. The imputed interest rate used in the residual income approach can
best be described as the target return on investment set by the company's management.
Choice "a" is incorrect, but it is a close second. The historical weighted average cost of
capital may be how management sets the target return on investment.
Choice "c" is incorrect. The average return on investments for past years may not be a
good indication of management's future intentions.
Choice "d" is incorrect. Marginal after-tax cost of capital on new equity may be how
management sets its targets, but it may not be, too.
QUESTION: 246
One approach to measuring divisional performance is return on investment. Return on
investment is expressed as operating income:
A. Divided by the current year's capital expenditures plus cost of capital.
B. Divided by fixed assets.
C. Divided by current assets.
D. Divided by total assets.
Answer: D
Explanation:
Choice "d" is correct. Return on investment is operating income divided by total assets.
Choice "a" is incorrect. Current year's capital expenditures plus cost of capital would be
a meaningless denominator.
Choice "b" is incorrect. This omits the current assets employed by the division. Choice
"c" is incorrect. This omits fixed assets.
QUESTION: 247
The following selected data pertain to the Darwin Division of Beagle Co. for 1994:
What was Darwin's 1994 residual income?
A. $0
B. $4,000
C. $10,000
D. $30,000
Answer: D
Explanation:
Choice "d" is correct. Residual income is income less the imputed interest rate times
average invested capital. Capital turnover is equal to sales / average invested capital.
Choice "a" is incorrect. Residual income is greater than zero. The imputed interest rate
times average invested capital needs to be compared with operating income.
Choice "b" is incorrect. Residual income is not simply the imputed interest rate times
operating income. The imputed interest rate times average invested capital needs to be
compared with operating income. Choice "c" is incorrect. Residual income is not
simply imputed interest rate times average invested capital. The operating income must
be considered.
QUESTION: 248
Select Co. had the following 1994 financial statement relationships: Asset turnover 5
Profit margin on sales 0.02 What was Select's 1994 percentage return on assets?
A. 0.1 percent.
B. 0.4 percent.
C. 2.5 percent.
D. 10.0 percent.
Answer: D
Explanation:
Choice "d" is correct. Return on assets equals income divided by average assets. This
formula can be further divided into the components of profit margin times asset turnover
(referred to as the Dupont formula):
Choices "a", "b", and "c" are incorrect, per the above calculation.
QUESTION: 249
The following information pertains to Quest Co.'s Gold Division for 1993:
Quest's return on investment was:
A. 10.00 percent.
B. 13.33 percent.
C. 27.50 percent.
D. 30.00 percent.
Answer: C
Explanation:
Choice "c" is correct. Return on investment equals net income divided by average
invested capital: Choices "a", "b", and "d" are incorrect, per the above calculation.
QUESTION: 250
Williams, Inc. is interested in measuring its overall cost of capital and has gathered the
following data. Under the terms described below, the company can sell unlimited
amounts of all instruments.
. Williams can raise cash by selling $1,000, 8 percent, 20-year bonds with annual
interest payments.
In selling the issue, an average premium of $30 per bond would be received, and the
firm must pay floatation costs of $30 per bond. The after-tax cost of funds is estimated
to be 4.8 percent.
. Williams can sell 8 percent preferred stock at par value, $105 per share. The cost of
issuing and selling the preferred stock is expected to be $5 per share.
. Williams' common stock is currently selling for $100 per share. The firm expects to
pay cash dividends of
$7 per share next year, and the dividends are expected to remain constant. The stock will
have to be underpriced by $3 per share, and floatation costs are expected to amount to
$5 per share.
. Williams expects to have available $100,000 of retained earnings in the coming year;
once these retained earnings are exhausted, the firm will use new common stock as the
form of common stock equity financing.
. Williams' preferred capital structure is: Long-term debt 30%
Preferred stock 20 Common stock 50
The cost of funds from retained earnings for Williams, Inc. is:
A. 7.0 percent.
B. 7.4 percent.
C. 8.1 percent.
D. 7.8 percent.
Answer: A
Explanation:
Choice "a" is correct. 7.0 percent cost of funds from retained earnings.
The cost of retained earnings is equal to the rate of return required by the firm's common
shareholders (or, in effect, the return "lost" by them when the firm chooses to fund with
retained earnings). While oftentimes this rate is somewhat subjective, we are given the
facts to exactly answer the question in this case. The stock is currently selling for
$100/share, and the dividend is given at $7/share.
$7 / $100 = 7%
Choices "b", "c", and "d" are incorrect, per the above Explanation:/calculation.

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