Business Environment & Concepts Updating Supplement Version 36.

BUSINESS ENVIRONMENT & CONCEPTS

CPA 2904US1

TABLE OF CONTENTS

About Updating Supplement Version 36.1 ..............................................................................................................2

Study Options Available to Candidates...................................................................................................................2

Other Sources of Information for Candidates..........................................................................................................2

Simulations: Unchanged ........................................................................................................................................3

Errata.......................................................................................................................................................................3

Recently Released AICPA Questions .....................................................................................................................4

We wish to thank the American Institute of Certified Public Accountants and the Financial Accounting Standards Board for permission to
reprint the following copyright © materials:

1. Uniform CPA Examination Questions and Unofficial Answers, Copyright © American Institute of Certified Public Accountants, Inc.,
Harborside Financial Center, 201 Plaza Three, Jersey City, NJ 07311-3881

2. Accounting Research Bulletins, APB Opinions, APB Statements, and Code of Professional Conduct.

3. FASB Statements, Interpretations, and Statements of Financial Accounting Concepts (SFAC), Copyright © Financial Accounting
Standards Board, 401 Merritt 7, P.O. Box 5116, Norwalk, CT 06856, U.S.A. Reprinted with permission. Copies of the complete docu-
ments are available from the FASB.

4. Statements on Auditing Standards (SAS), Statements on Standards for Accounting and Review Services (SSARS), Statements on
Standards for Accountants’ Services on Prospective Financial Information, Statements on Standards for Attestation Engagements
(SSAE), and Statements on Quality Control Standards (SQCS).

Copyright © 2007 by Bisk Education, Inc. Tampa, FL 33631-3028

All rights reserved. Reproduction in any form is expressly prohibited.
Printed in the United States of America.

This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the
understanding that the publisher is not engaged in rendering legal, accounting or other professional service. If legal advice or other expert
assistance is required, the services of a competent professional person should be sought.—From a Declaration of Principles jointly adopted
by a Committee of the American Bar Association and a Committee of Publishers and Associations.

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Business Environment & Concepts Updating Supplement Version 36.1

ABOUT UPDATING SUPPLEMENT VERSION 36.1

Information that is only six months old is eligible to be tested on the CPA exam. Candidates with the 36th edition
and corresponding software (version 10) will find the information in the version 36.1 updating supplement more
than adequate for the July-August and October-November 2007 exam windows.

When new information first becomes available, the examiners tend to test new or changed portions of concepts
lightly. Coverage of information after that point may increase, if it is in a heavily tested area. Do not fall into the
trap of attaching undue significance to new information merely because it is new.

Remember, with the information and techniques in our material, passing the exam is an attainable goal. Adhere
to a reasonable study plan—and pass the first time!

__________________

STUDY OPTIONS AVAILABLE TO CANDIDATES

As every candidate’s needs are different, Bisk Education offers a variety of CPA Review formats and packages
that are guaranteed* to help you pass the CPA exam on your next sitting. Options include: our Online CPA
Review with structured Internet classes and our self-study CPA Review utilizing multimedia CD-ROM software,
video programs, audio lectures, and books.
*Purchase of software required. Call for complete details.

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OTHER SOURCES OF INFORMATION FOR CANDIDATES

Candidates choosing to use previous editions of our books must accept responsibility for adequately updating
their materials. Candidates should consider the strain that this will add to the already time-consuming process
of studying for the exam. (Material in earlier updating supplements is incorporated within the 36th edition and
the corresponding version 10 software, as appropriate.)

Candidates with editions earlier than the 35th are strongly encouraged to purchase new materials. At a
minimum, these candidates should read the supplements pertaining to the edition that they have. Each
supplement has information on the appropriate supplements for the edition previous to the one it updates.
Candidates choosing to use previous editions of our books must accept responsibility for adequately updating
their materials. Candidates should consider the strain that this will add to the already time-consuming process of
studying for the exam. Material in the related updating supplements may be reviewed to determine the nature
and quantity of information that has changed from one edition to another.

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Copyright © 2007 by Bisk Education, Inc. All rights reserved. Page 2 of 16

Business Environment & Concepts Updating Supplement Version 36.1

SIMULATIONS: UNCHANGED

There are no simulations in the BEC exam section in the 2007 exam windows. Bisk Education will include
notice of this and any other exam changes in the appropriate future updating supplements.

The AICPA examiners have not made an official announcement on when, if ever, they will add simulations to the
BEC exam. Our best estimate currently is: not before 2009. The examiners generally announce changes at
least six months in advance of the exam window that the changes affect.

__________________

ERRATA

The following errors are in the 36th edition printed book. If you find other items that you believe are ambiguous
or in error, please contact the Bisk Education editors (help@cpaexam.com) with details.

Chapter 50
Page 50-36, Example 11: The calculation at the end of the example should read, “(1 – 0.03) × N$2.00.” The end
result of this calculation (N$1.94) is correct. Also in the version 10 software. (Correct in the version 10.1
software.)

Chapter 51
Page 51-76, Q 89 (ID 7672): The letter answer should be “c” rather than “d.” The explanation is correct. Also
in the version 10 software. (Correct in the version 10.1 software.)

Appendix E
Page E-10, Explanation 23: The letter answer and calculation are correct. The second and third sentences
should read, “If the standard selling price is lower than the actual selling price, the variance is favorable (F).
If the standard selling price is higher than the actual selling price, the variance is unfavorable (U).” (Correct in
the version 10 software.)

__________________

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Business Environment & Concepts Updating Supplement Version 36.1

RECENTLY RELEASED AICPA QUESTIONS

In April 2007, the AICPA released several questions labeled as “Year 2006 Disclosed Questions.” The BEC
questions and the related unofficial solutions are reproduced here, along with the exclusive Bisk Education
explanations. The AICPA did not state whether these questions were used on an exam. These questions are
intended only as a study aid and should not be used to predict the content of future exams. It is extremely
unlikely that released questions will appear on future examinations.

Unlike some other exam sections, the AICPA made no reference to a difficulty rating for these questions.

__________________

Problem 1 MULTIPLE CHOICE QUESTIONS (50 to 63 minutes)

1. Pinecrest Co. had variable costs of 25% of 5. Which of the following is an electronic device
sales, and fixed costs of $30,000. Pinecrest’s break- that separates or isolates a network segment from
even point in sales dollars was the main network while maintaining the connection
a. $ 24,000 between networks?
b. $ 30,000 a. Query program
c. $ 40,000 b. Firewall
d. $ 120,000 (R/07, BEC, 0022M, 8466) c. Image browser
d. Keyword (R/07, BEC, 1827A, 8470)
2. Which of the following statements is correct
regarding the declaration of a stock dividend by a 6. Leslie, Kelly, and Blair wanted to form a busi-
corporation having only one class of par value stock? ness. Which of the following business entities does
a. A stock dividend has the same legal and practi- not require the filing of organization documents with
cal significance as a stock split. the state?
b. A stock dividend increases a stockholder’s pro- a. Limited partnership
portionate share of corporate ownership. b. Joint venture
c. A stock dividend causes a decrease in the c. Limited liability company
assets of the corporation. d. Subchapter S corporation
d. A stock dividend is a corporation’s ratable dis- (R/07, BEC, 5073L, 8471)
tribution of additional shares of stock to its
stockholders. (R/07, BEC, 0942L, 8467) 7. Which of the following partners of a limited
liability partnership (LLP) may avoid personal liability
3. What is the doctrine under which a corporation when a partner commits a negligent act?
is made liable for the torts of its employees, commit- a. All the partners
ted within the scope of their employment? b. The supervisor of the negligent partner
a. Respondeat superior c. All the partners other than the negligent partner
b. Ultra vires d. All the partners other than the supervisor of,
c. Estoppel and, the negligent partner
d. Ratification (R/07, BEC, 1087L, 8468) (R/07, BEC, 5159L, 8472)

4. Which of the following is usually a benefit of 8. Under the Revised Uniform Partnership Act,
transmitting transactions in an electronic data inter- which of the following have the right to inspect
change (EDI) environment? partnership books and records?
a. Elimination of the need to continuously update a. Employees
antivirus software b. Former partners
b. Assurance of the thoroughness of transaction c. Inactive partners
data because of standardized controls d. Transferees of partners’ interests
c. Automatic protection of information that has (R/07, BEC, 5304L, 8473)
electronically left the entity
d. Elimination of the need to verify the receipt of
goods before making payment
(R/07, BEC, 1431A, 8469)

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Business Environment & Concepts Updating Supplement Version 36.1

9. Card Bicycle Co. has prepared production and 12. Which of the following is a disadvantage of
raw materials budgets for next year. At the end of participative budgeting?
this year, the finished product inventory is expected a. It is more time consuming.
to include 2,000 bicycles, and raw material inventory b. It decreases motivation.
is expected to include 3,000 bicycle tires. Each c. It decreases acceptance.
finished bicycle requires two tires. The marketing d. It is less accurate. (R/07, BEC, A0382B, 8477)
department provided the following data from the
sales budget for the first quarter: 13. The optimal capitalization for an organization
usually can be determined by the
January February March a. Maximum degree of financial leverage (DFL)
Expected bicycle b. Maximum degree of total leverage (DTL)
sales (units) 12,000 16,000 18,000 c. Lowest total weighted-average cost of capital
(WACC)
The company inventory policy is to have finished d. Intersection of the marginal cost of capital and
product inventory equal to 20% of the following the marginal efficiency of investment
month’s sales requirements, and raw material equal (R/07, BEC, A0681B, 8478)
to 10% of the following month’s production require-
ments. In the January budget for raw materials, how 14. Ryan Co. projects the following monthly reve-
many tires are expected to be purchased? nues for next year:
a. 24,200
b. 26,120 January $100,000 July $250,000
c. 26,600 February 500,000 August 275,000
d. 26,680 (R/07, BEC, A0016B, 8474) March 425,000 September 300,000
April 450,000 October 350,000
10. A distributed processing environment would be May 575,000 November 400,000
most beneficial in which of the following situations? June 300,000 December 525,000
a. Large volumes of data are generated at many
locations and fast access is required. Ryan’s terms are net 30 days. The company typi-
b. Large volumes of data are generated centrally cally receives payment on 80% of sales the month
and fast access is not required. following the sale, and 17% is collected two months
c. Small volumes of data are generated at many after the sale. Approximately 3% of sales are
locations, fast access is required, and summaries deemed bad debt. What amount represents the
of the data are needed promptly at a central site. expected cash collection in the second calendar
d. Small volumes of data are generated centrally, quarter of next year?
fast access is required, and summaries are a. $1,450,000
needed monthly at many locations. b. $1,393,750
(R/07, BEC, A0240B, 8475) c. $1,325,000
d. $1,234,250 (R/07, BEC, A0824B, 8479)
11. Why would a firm generally choose to finance
temporary assets with short-term debt? 15. Which of the following budgets provides infor-
a. Matching the maturities of assets and liabilities mation for preparation of the owner’s equity section
reduces risk of a budgeted balance sheet?
b. Short-term interest rates have traditionally been a. Sales budget
more stable than long-term interest rates b. Cash budget
c. A firm that borrows heavily long term is more apt c. Capital expenditures budget
to be unable to repay the debt than a firm that d. Budgeted income statement
borrows heavily short term (R/07, BEC, A0851B, 8480)
d. Financing requirements remain constant
(R/07, BEC, A0292B, 8476)

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Business Environment & Concepts Updating Supplement Version 36.1

16. Super Sets, Inc. manufactures and sells tele- 20. Berry, Drake, and Flanigan are partners in a
vision sets. All sales are finalized on credit with terms general partnership. The partners made capital
of 2/10, n/30. Seventy percent of Super Set custom- contributions as follows: Berry, $150,000; Drake,
ers take discounts and pay on day 10, while the $100,000; and Flanigan, $50,000. Drake made a
remaining 30% pay on day 30. What is the average loan of $50,000 to the partnership. The partnership
collection period in days? agreement specifies that Flanigan will receive a 50%
a. 10 share of profits, and Drake and Berry each will
b. 16 receive a 25% share of profits. Under the Revised
c. 24 Uniform Partnership Act and in the absence of any
d. 40 (R/07, BEC, A1031B, 8481) partnership agreement to the contrary, which of the
following statements is correct regarding the sharing
17. Net present value as used in investment of losses?
decision-making is stated in terms of which of the a. The partners will share equally in any partner-
following options? ship losses.
a. Net income b. The partners will share in losses on a pro rata
b. Earnings before interest, taxes, and depreciation basis according to the capital contributions.
c. Earnings before interest and taxes c. The partners will share in losses on a pro rata
d. Cash flow (R/07, BEC, A1734B, 8482) basis according to the capital contributions and
loans made to the partnership.
18. To prevent interrupted information systems d. The partners will share in losses according to
operation, which of the following controls are typically the allocation of profits specified in the partner-
included in an organization’s disaster recovery plan? ship agreement. (R/07, BEC, A2267B, 8485)
a. Backup and data transmission controls
b. Data input and downtime controls 21. What is the cost of ending inventory given the
c. Backup and downtime controls following factors?
d. Disaster recovery and data processing controls
(R/07, BEC, A1829B, 8483) Beginning inventory $ 5,000
Total production costs 60,000
19. Which of the following is correct regarding the Cost of goods sold 55,000
consumer price index (CPI) for measuring the esti- Direct labor 40,000
mated decrease in a company’s buying power?
a. The CPI is measured only once every 10 years. a. $ 5,000
b. The products a company buys should differ from b. $ 10,000
what a consumer buys. c. $ 45,000
c. The CPI measures what consumers will pay for d. $ 50,000 (R/07, BEC, A2492B, 8486)
items.
d. The CPI is skewed by foreign currency transla- 22. Which of the following statements is true
tions. (R/07, BEC, A1979B, 8484) regarding Transmission Control Protocol and Internet
Protocol (TCP/IP)?
a. Every TCP/IP-supported transmission is an
exchange of funds.
b. TCP/IP networks are limited to large mainframe
computers.
c. Every site connected to a TCP/IP network has a
unique address.
d. The actual physical connections among the vari-
ous networks are limited to TCP/IP ports.
(R/07, BEC, C00458B, 8487)

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Business Environment & Concepts Updating Supplement Version 36.1

23. Bander Co. is determining how to finance 25. Crisper, Inc. plans to sell 80,000 bags of potato
some long-term projects. Bander has decided it pre- chips in June, and each of these bags requires five
fers the benefits of no fixed charges, no fixed maturity potatoes. Pertinent data includes:
date and an increase in the credit-worthiness of the
company. Which of the following would best meet Bags of
Bander’s financing requirements? Potato Chips Potatoes
a. Bonds Actual June 1
b. Common stock inventory 15,000 bags 27,000 potatoes
c. Long-term debt Desired June 30
d. Short-term debt (R/07, BEC, C00479B, 8488) inventory 18,000 bags 23,000 potatoes

24. A city ordinance that freezes rent prices may What number of units of raw material should Crisper
cause plan to purchase?
a. The demand curve for rental space to fall a. 381,000
b. The supply curve for rental space to rise b. 389,000
c. Demand for rental space to exceed supply c. 411,000
d. Supply of rental space to exceed demand d. 419,000 (R/07, BEC, C01080B, 8490)
(R/07, BEC, C00968B, 8489)

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Problem 2 MULTIPLE CHOICE QUESTIONS (50 to 63 minutes)

26. The following is selected information from the 28. Which of the following nonvalue-added costs
records of Ray, Inc.: associated with manufactured work in process inven-
tory is most significant?
Purchases of raw materials $ 6,000 a. The cost of materials that cannot be traced to
Raw materials, beginning 500 any individual product
Raw materials, ending 800 b. The cost of labor that cannot be traced to any
Work-in-process, beginning 0 individual product
Work-in-process, ending 0 c. The cost of moving, handling, and storing any
Cost of goods sold 12,000 individual product
Finished goods, beginning 1,200 d. The cost of additional resources consumed to
Finished goods, ending 1,400 produce any individual product
(R/07, BEC, 0328M, 8493)
What is the total amount of conversion costs?
a. $5,500 29. Under which of the following circumstances is
b. $5,900 a shareholder who receives an illegal dividend not
c. $6,100 obligated to repay the dividend?
d. $6,500 (R/07, BEC, 0177M, 8491) a. The shareholder was not aware the dividend
was improper and the corporation was solvent at
27. Which of the following costing methods pro- the time of payment.
vide(s) the added benefit of usefulness for external b. The shareholder was not aware the dividend
reporting purposes? was improper and the corporation was insolvent
at the time of payment.
I. Variable c. The shareholder was aware the dividend was
II. Absorption improper and the corporation was solvent at the
time of payment.
a. I only
d. The shareholder was aware the dividend was
b. II only
improper and the corporation was insolvent at
c. Both I and II
the time of payment. (R/07, BEC, 1209L, 8494)
d. Neither I nor II (R/07, BEC, 0209M, 8492)

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Business Environment & Concepts
30. Fil and Breed are 50% partners in F&B Cars,
a used-car dealership. F&B maintains an average
used-car inventory worth $150,000. On January 5,
National Bank obtained a $30,000 judgment against
Fil and Fil’s child on a loan that Fil had cosigned and
on which Fil’s child had defaulted. National sued
F&B to be allowed to attach $30,000 worth of cars
as part of Fil’s interest in F&B’s inventory. Will
National prevail in its suit?
a. No, because the judgment was not against the
partnership
b. No, because attachment of the cars would dis-
solve the partnership by operation of law
c. Yes, because National had a valid judgment
against Fil.
d. Yes, because Fil’s interest in the partnership
inventory is an asset owned by Fil.
(R/07, BEC, 1484L, 8495)
31. Which of the following corporate actions is
subject to shareholder approval?
a. Election of officers
b. Removal of officers
c. Declaration of cash dividends
d. Removal of directors
(R/07, BEC, 5136L, 8496)
32. Which of the following configurations of
elements represents the most complete disaster
recovery plan?
a. Vendor contract for alternate processing site,
backup procedures, names of persons on the
disaster recovery team
b. Alternate processing site, backup and off-site
storage procedures, identification of critical
applications, test of the plan
c. Off-site storage procedures, identification of criti-
cal applications, test of the plan
d. Vendor contract for alternate processing site,
names of persons on the disaster recovery team,
off-site storage procedures
(R/07, BEC, A0746B, 8497)
33. What type of computerized data processing
system would be most appropriate for a company
that is opening a new retail location?
a. Batch processing
b. Real-time processing
c. Sequential-file processing
d. Direct-access processing
(R/07, BEC, A0756B, 8498)
Copyright © 2007 by Bisk Education, Inc. All rights reserved.
Updating Supplement Version 36.1
34. Which of the following terms represents the
residual income that remains after the cost of all
capital, including equity capital, has been deducted?
a. Free cash flow
b. Market value-added
c. Economic value-added
d. Net operating capital (R/07, BEC, A0919B, 8499)
35. What should be examined to determine if an
information system is operating according to pre-
scribed procedures?
a. System capacity
b. System control
c. System complexity
d. Accessibility to system information
(R/07, BEC, A0964B, 8500)
36. Which of the following formulas should be used
to calculate the economic rate of return on common
stock?
a. (Dividends + change in price) divided by begin-
ning price
b. (Net income – preferred dividend) divided by
common shares outstanding
c. Market price per share divided by earnings per
share
d. Dividends per share divided by market price per
share (R/07, BEC, A1231B, 8501)
37. Fargo, Mfg., a small business, is developing a
budget for next year. Which of the following steps
should Fargo perform first?
a. Forecast Fargo’s sales volume
b. Determine the price of Fargo’s products
c. Identify costs of Fargo’s forecasted sales volume
d. Compute the dollar amount of Fargo’s fore-
casted sales (R/07, BEC, A1366B, 8502)
38. What is the effect when a foreign competitor’s
currency becomes weaker compared to the U.S.
dollar?
a. The foreign company will have an advantage in
the U.S. market.
b. The foreign company will be disadvantaged in
the U.S. market.
c. The fluctuation in the foreign currency’s
exchange rate has no effect on the U.S. com-
pany’s sales or cost of goods sold.
d. It is better for the U.S. company when the value
of the U.S. dollar strengthens.
(R/07, BEC, A1379B, 8503)
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Business Environment & Concepts Updating Supplement Version 36.1

39. Which of the following factors is inherent in a 43. Which of the following artificial intelligence
firm’s operations if it utilizes only equity financing? information systems cannot learn from experience?
a. Financial risk a. Neural networks
b. Business risk b. Case-based reasoning systems
c. Interest rate risk c. Rule-based expert systems
d. Marginal risk (R/07, BEC, A1582B, 8504) d. Intelligent agents (R/07, BEC, A1973B, 8508)

40. What is strategic planning? 44. Which of the following allows customers to pay
a. It establishes the general direction of the for goods or services from a web site while maintain-
organization. ing financial privacy?
b. It establishes the resources that the plan will a. Credit card
require. b. Site draft
c. It establishes the budget for the organization. c. E-cash
d. It consists of decisions to use parts of the d. Electronic check (R/07, BEC, A2041B, 8509)
organization’s resources in specified ways.
(R/07, BEC, A1608B, 8505) 45. A project has an initial outlay of $1,000. The
projected cash inflows are:
41. The following table contains Emerald Corp.’s
quarterly revenues, in thousands, for the past three Year 1 $200
years. During that time, there were no major changes Year 2 200
to Emerald’s selling strategies and total capital Year 3 400
investment. Year 4 400

Year 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. What is the investment’s payback period?
Year 1 500 500 550 750 a. 4.0 years
Year 2 525 550 600 800 b. 3.5 years
Year 3 550 525 625 850 c. 3.4 years
d. 3.0 years (R/07, BEC, A2059B, 8510)
Which of the following statements best describes the
likely cause of the fluctuations in Emerald’s revenues 46. Which of the following is a requirement for a
and the best response to those fluctuations? small business corporation to elect S corporation
a. The fluctuations are from changes in the econ- status?
omy, and Emerald should examine its cost a. It has only one class of stock.
structure for potential changes. b. It has at least one partnership as a shareholder.
b. The fluctuations are from changes in the econ- c. It has international ownership.
omy, and Emerald should manage its inventories d. It has more than 75 shareholders.
and cash flow to match the cycle. (R/07, BEC, C00381B, 8511)
c. The fluctuations are from the seasonal demand
for Emerald’s products, and Emerald should 47. The president of a company has signed a $10
examine its cost structure for potential changes. million contract with a construction company to build
d. The fluctuations are from the seasonal demand a new corporate office. Which of the following cor-
for Emerald’s products, and Emerald should porate documents sets forth the scope of authority
manage its inventories and cash flow to match under which this transaction is governed?
the cycle. (R/07, BEC, A1656B, 8506) a. Certificate of Incorporation
b. Charter
42. The CFO of a company is concerned about c. By-laws
the company’s accounts receivable turnover ratio. d. Proxy statement (R/07, BEC, C00416B, 8512)
The company currently offers customers terms of
3/10, net 30. Which of the following strategies would 48. Which of the following effects would a lockbox
most likely improve the company’s accounts receiv- most likely provide for receivables management?
able turnover ratio? a. Minimized collection float
a. Pledging the accounts receivable to a finance b. Maximized collection float
company c. Minimized disbursement float
b. Changing customer terms to 1/10, net 30 d. Maximized disbursement float
c. Entering into a factoring agreement with a (R/07, BEC, C00494B, 8513)
finance company
d. Changing customer terms to 3/20, net 30
(R/07, BEC, A1716B, 8507)

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Business Environment & Concepts Updating Supplement Version 36.1

49. On June 30, 2003, a company is preparing
the cash budget for the third quarter. The collection
pattern for credit sales has been 60% in the month
of sale, 30% in the first month after sale, and the
rest in the second month after sales. Uncollectible
accounts are negligible. There are cash sales each
month equal to 25% of total sales. The total sales for
the quarter are estimated as follows: July, $30,000;
August, $15,000; September, $35,000. Accounts
receivable on June 30, 2003, were $10,000. What
amount would be the projected cash collections for
September?
a. $21,375
b. $28,500
c. $30,125
d. $37,250 (R/07, BEC, C01082B, 8514)
50. Quick Co. was analyzing variances for one of
its operations. The initial budget forecast production
of 20,000 units during the year with a variable
manufacturing overhead rate of $10 per unit. Quick
produced 19,000 units during the year. Actual vari-
able manufacturing costs were $210,000. What
amount would be Quick’s flexible budget variance
for the year?
a. $10,000 favorable
b. $20,000 favorable
c. $10,000 unfavorable
d. $20,000 unfavorable
(R/07, BEC, C05106B, 8515)

__________________

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Business Environment & Concepts
Legend for Cognitive CBT Skills:
CBT Skill 1: Understanding
CBT Skill 2: Judgment
CBT Skill 3: Analysis
Solution 1
1. (c) If S = sales, variable costs = 0.25 S.
The break-even point is the point at which costs
equal sales: S – 0.25S – $30,000 = $0 and S =
$30,000 / 0.75 = $40,000. (Chapter 52-2-4, CBT
Skill: 3, CSO: 5.1.1)
2. (d) Stock dividends are additional shares
issued to shareholders in proportion to their existing
holdings. The effect of a stock dividend is to reduce
retained earnings and increase legal capital; there is
no impact on assets. A stock split simply increases
the number of shares of outstanding and proportion-
ately decreases the stock’s par value; there is no
change in the total dollar amount of capital stock,
retained earnings, or total stockholders’ equity.
(Chapter 49-6-1, CBT Skill: 1, CSO: 1.3.0)
3. (a) Respondeat superior is a doctrine that
the master is liable in certain cases for the wrongful
acts of the servant when committed within the cope
of the agency. Ultra vires acts are acts by the cor-
poration or its management that are beyond the cope
of corporate authority as granted by its charter,
bylaws, and state law. Estoppel refers to a party’s
own acts preventing him or her from a contrary claim
to the detriment of another who reasonably relied on
those acts. Ratification is the subsequent confirma-
tion of a previous act, such as the validation of the
actions of an agent who exceeded actual authority.
(Chapter 49-1-6, CBT Skill: 1, CSO: 1.4.0)
4. (b) EDI involves electronic communication
among two or more entities; these entities need a
common standard transmission format. As EDI
transactions are transmitted electronically, use of
EDI could expose an entity to greater risk of con-
tracting virus-infected files without continuously
updated antivirus software. Protections for EDI infor-
mation are considered carefully; protection does not
occur automatically. While electronics may facilitate
inventory management, an entity needs to verify
goods are received before making payment whether
using EDI or another means to conduct transactions.
(Chapter 55-3-1, CBT Skill: 1, CSO: 4.1.2)
5. (b) A firewall is hardware or software
designed to prevent unauthorized access to data by
separating one segment from another. A query
program is an application that counts, sums, and
retrieves items from a database based on user
criteria. An image browser is a program that dis-
Copyright © 2007 by Bisk Education, Inc. All rights reserved.
Updating Supplement Version 36.1
plays the contents of an electronic image file. A
keyword can be either a word used in a text search,
one of several words within a text document coded
to generate an index referencing the content, or a
word reserved for a specific use in a programming or
command language. (Chapter 55-1-3, CBT Skill: 1,
CSO: 4.3.1)
6. (b) The formation of a general partnership
does not require the filing of organization documents
with the state; a joint venture is a type of partnership
that is formed for only one transaction or series of
transactions, rather than for a general purpose. One
must file organization documents with the state to
form a limited partnership, limited liability company
or corporation. (Chapter 48-1-3, CBT Skill: 1, CSO:
1.1.1)
7. (d) Members of a LLP who were not
involved in a negligent act may avoid personal liability
when another partner commits a negligent act. The
supervisor of the negligent partner may be considered
to be involved in the negligence, due to negligent
supervision. (Chapter 48-7-1, CBT Skill: 1, CSO:
1.4.0)
8. (c) In the absence of a contrary agreement,
RUPA gives all partners and their legal represen-
tatives the right to access books and information
regarding all things affecting the partnership, whether
active or inactive. Former partners have rights to
books only for the period for which they were part-
ners, not for continuing business. Employees and
transferees of partners’ interests have no rights to
inspect partnership books and records. (Chapter
48-3-3, CBT Skill: 1, CSO: 1.4.0)
9. (d) As Card plans to sell 18,000 bicycles in
March, the budgeted February ending balance (EB)
for finished goods (FG) will be 18,000 bicycles ×
20% = 3,600 bicycles. As Card plans to sell 16,000
bicycles in February, the budgeted January EB [the
same as February beginning balance (BB)] for FG
will be 16,000 bicycles × 20% = 3,200 bicycles. With
a February BB of 3,200 bicycles and sales of 16,000
bicycles, February production finished and trans-
ferred to FG must be 16,400 bicycles to have an EB
of 3,600 bicycles. To budget 16,400 bicycles in
February production requires that 16,400 bicycles ×
10% × 2 tires / bicycle = 3,280 tires be budgeted in
the raw material (RM) inventory at the end of
Page 11 of 16
Business Environment & Concepts Updating Supplement Version 36.1

January. January production is budgeted at January 11. (a) Temporary debt needs are well
sales less January beginning finished goods inven- matched by short-term debt; while long-term debt
tory plus 20% of February sales: 12,000 bicycles – may be repaid early, expensive pre-payment penal-
2,000 bicycles + (20% × 16,000 bicycles) = 13,200 ties usually result. Short-term interest rates typically
bicycles. 13,200 bicycles × 2 tires / bicycle = 26,400 fluctuate more than long-term debt, with greater
tires budgeted for use in January production, so RM unpredictability. A firm that borrows heavily short-
available for use in January is budgeted at 26,400 term while planning to refinance when the short-term
tires + 3,280 tires = 29,680 tires. As the January BB debt is due may not be able to refinance, if it is
of RM is budgeted at 3,000 tires, January RM pur- financially weak at that time; the same firm holding
chases are budgeted at 29,680 tires – 3,000 tires = long-term debt has more flexibility to improve its
26,680 tires. Editor’s Note: To arrive at this answer, financial position before needing to court lenders. If
one must assume work-in-process (WIP) levels financing requirements remain constant yet financial
remain constant. Candidates may have to make simi- strength fluctuates, a firm generally would do better
lar assumptions on other exam questions; note that using long-term financing so that it could secure
this assumption is not contradicted by any given financing during a time of relative financial strength.
facts. (Chapter 54-1-2, CBT Skill: 3, CSO: 5.1.1) Editor’s Note: Remember that the examiners instruct
candidates to select the best answer. (Chapter 51-
January February 4-4, CBT Skill: 3, CSO: 3.2.0)
Beg. RM 3,000
RM Purchases 26,680 12. (a) Participative budgeting uses the input
Available for Use 29,680 of many people; this process typically is more time
Less: RM Used (13,200 × 2) (26,400) consuming than a process involving few people.
End. RM (10% of next) 3,280 With many people in the budget process, details are
better known so greater accuracy is possible.
Beg. WIP* 0 0
RM Used (26,400 / 2) 13,200 16,400
Participants have greater acceptance and motivation
Available to Finish 13,200 16,400 as they are assured that their concerns are consid-
Goods Finished (13,200) (16,400) ered. (Chapter 54-1-1, CBT Skill: 1, CSO: 5.1.3)
End. WIP* 0 0
13. (c) An optimal capital structure maximizes
* assumed constant
the price of the stock by balancing risks and returns;
Beg. FG 2,000 3,200 there is no widely accepted model that states what
Goods Finished 13,200 16,400 an optimal capital structure in precise values is for a
Available for Sale 15,200 19,600 given entity. Entities typically work toward a target
Less: Goods Sold (12,000) (16,000) capital structure, in the hope that it is close to the
End. FG (20% of next) 3,200 3,600 optimal capital structure. A structure with a low total
WACC tends to reduce risk and, hence, the required
10. (a) A distributed system is a network of rate of return. Generally, the greater the financial
remote computers connected to a main computer leverage that exists, the greater business risk will be;
system. A reduced work load on the main computer a greater rate of return will be required to compen-
system results as information is entered and edited sate investors for this risk. The degree of operating
locally. Transmissions are minimized; if local infor- leverage, financial leverage, and total leverage are
mation is incomplete or in error, it will be completed means to evaluate a capitalization situation, rather
or corrected before being transmitted rather than than methods used to describe optimal capitalization.
being transmitted, rejected, and re-transmitted. A The “marginal efficiency of investment” is not a widely
distributed system is more beneficial when large used term. Editor’s Note: The editors recommend
volumes of data as opposed to small volumes of that candidates avoid responses with unfamiliar
data are generated. A distributed system is more terms, as they rarely are correct. (Chapter 51-6-4,
beneficial when data is generated at many locations CBT Skill: 1, CSO: 3.2.0)
as opposed to data that is generated centrally. In a
multiple-location situation, a distributed system is 14. (b) Collections in April are 80% of March
more beneficial when fast access is needed as sales plus 17% of February sales: (80% × $425,000)
opposed to when fast access is not needed. In a + (17% × $500,000) = $425,000. Collections in May
multiple-location situation, a distributed system is are 80% of April sales plus 17% of March sales:
more beneficial when large volumes of data are (80% × $450,000) + (17% × $425,000) = $432,250.
accessed rather than when summarized data is Collections in June are 80% of May sales plus 17%
accessed. (Chapter 55-7-2, CBT Skill: 2, CSO: 4.1.2) of April sales: (80% × $575,000) + (17% × $450,000)
= $536,500. $425,000 + $432,250 + $536,500 =

Copyright © 2007 by Bisk Education, Inc. All rights reserved. Page 12 of 16

Business Environment & Concepts
$1,393,750. (Chapter 54-1-2, CBT Skill: 3, CSO:
5.1.2)
15. (d) While all the responses have at least
an indirect impact on the owner’s equity portion of
the balance sheet, the amount of budgeted income
generally would be a line item in the calculation of
retained earnings. Editor’s Note: Remember that
the examiners instruct candidates to select the best
answer. (Chapter 54-1-2, CBT Skill: 1, CSO: 5.1.1)
16. (b) 70% × 10 days + 30% × 30 days =
16 days (Chapter 51-4-2, CBT Skill: 3, CSO: 3.3.1)
17. (d) Net present value is the present value
of future cash inflows from a project less the cost of
the initial investment. (Chapter 51-5-2, CBT Skill: 1,
CSO: 3.1.2)
18. (c) Backup controls facilitate system
restoration. Some downtime is inevitable; planned
downtime allows maintenance so that unplanned
downtime doesn’t interrupt system operations. Data
transmission controls, data input controls, and data
processing controls are not typically considered part
of a disaster recovery plan; they are part of normal
operations. (Chapter 55-4-2, CBT Skill: 1, CSO:
4.4.0)
19. (b) The consumer price index (CPI) is a
comparison of the price of items in a typical con-
sumer’s shopping cart to a base value. To the
extent that company’s purchases would be different
from a consumer’s purchases, the CPI can be
misleading when used for a analysis of a company’s
buying power. The CPI is determined frequently as a
measure of the impact of inflation on consumers. As
an index, the CPI doesn’t determine a value for any
item; further, few consumers probably will buy exactly
the same shopping cart of goods as is used to com-
pute the CPI. To the extent that foreign currency
translations impact the CPI, those translations would
be valid inputs to the CPI and so would not skew it.
Editor’s Note: The editors find the use of the word
“should” in this context rather odd. Remember that
the examiners instruct candidates to select the best
answer. (Chapter 50-2-7, CBT Skill: 1, CSO: 2.2.0)
20. (d) In the absence of an agreement to the
contrary, RUPA allows for the distribution of losses
on the same basis as the distribution of profits.
(Chapter 48-3-3, CBT Skill: 1, CSO: 1.3.0)
21. (b) Assuming that the finished goods inven-
tory level remains constant, beginning inventory plus
total production costs less cost of goods sold equals
ending inventory. $5,000 + $60,000 – $55,000 =
__________________
Copyright © 2007 by Bisk Education, Inc. All rights reserved.
Updating Supplement Version 36.1
$10,000. Direct labor is a component of total pro-
duction costs. (Chapter 52-1-1, CBT Skill: 3, CSO:
5.1.2)
22. (c) An IP number is a unique number (like
an address) assigned to a computer in a network.
TCP/IP-supported transmissions include such activi-
ties as viewing web pages. Personal computers
may access the Internet. TCP/IP is a communica-
tions protocol designed to network dissimilar
systems. An IP port is a number assigned to user
sessions and server applications rather than hard-
ware. Editor’s Note: The editors recommend that
candidates avoid responses with unfamiliar terms,
as they rarely are correct. (Chapter 55-1-3, CBT
Skill: 1, CSO: 4.3.1)
23. (b) Issuing common stock would result in
no fixed charges, no fixed maturity date and, gener-
ally, an increase in the credit-worthiness of the
company. Issuing any debt generally decreases the
credit-worthiness of a company. Bonds, other long-
term debt, and short-term debt generally have fixed
charges and maturity dates. (Chapter 51-6-2, CBT
Skill: 1, CSO: 3.2.0)
24. (c) Assuming that the period is one of
inflation, a rent freeze is essentially a price ceiling set
below market rates. This constraint generally results
in a shortage; in other words, buyers want more
space at the low price, but landlords want to rent less
space at the low price (demand for rental space
exceeds supply). The demand and supply curves
would stay the same; it is the point at which the price
level meets the curves that changes. In a period of
deflation, supply would exceed demand. Editor’s
Note: Candidates encountering what they believe
are errors or ambiguities in questions during their
actual exams should bring them to the attention of
the examiners in accordance with the procedures
outlined on the AICPA’s exam web site. (Chapter
50-1-5, CBT Skill: 1, CSO: 2.2.0)
25. (c) Finished goods (FG) beginning inven-
tory (15,000 bags) plus total goods finished
(unknown) less cost of goods sold (80,000 bags)
equals ending inventory (18,000 bags), so total
goods finished must equal 83,000 bags. Assuming
that work-in-process inventory levels remain con-
stant, 83,000 bags of FG finished means 5 potatoes
/ bag × 83,000 bags = 415,000 potatoes must be
drawn from raw material inventory. To reduce raw
material inventory by only 4,000 potatoes when
415,000 potatoes are used, 411,000 potatoes must
be purchased. (Chapter 52-1-4, CBT Skill: 3, CSO:
5.1.3)
Page 13 of 16
Business Environment & Concepts
Solution 2
26. (d) Direct labor and overhead are the only
conversion costs. An analysis of finished goods
inventory reveals that goods finished and removed
from work in process (WIP) cost $12,200: beginning
balance of $1,200 + goods finished of $12,200 –
cost of goods sold of $12,000 = ending balance of
$1,400. As beginning WIP and ending WIP are the
same, all costs for goods finished and removed from
WIP are the material and conversion costs added to
WIP. An analysis of raw material (RM) inventory
reveals that RM added to WIP cost $5,700: begin-
ning balance of $500 + purchases of $6,000 – RM
added to WIP of $5,700 = ending balance of $800.
All WIP costs less RM costs equal conversion costs:
$12,200 – $5,700 = $6,500. (Chapter 52-1-1, CBT
Skill: 3, CSO: 5.1.3)
27. (b) Variable (or direct) costing is not
acceptable for external financial reporting (GAAP) or
federal income tax reporting. Absorption costing
inventories both fixed and variable costs, in accor-
dance with GAAP. (Chapter 52-4-1, CBT Skill: 1,
CSO: 5.3.1)
28. (c) Moving, handling, and storage rarely
adds value to a product from a customer’s viewpoint;
the product would be as valuable regardless of the
amount it was moved or handled, or the length of
time it was stored. The cost of materials and labor
that cannot be traced to an individual product typi-
cally are overhead costs; while untraceable, most
overhead costs are recognized as essential for
production, leaving only an insignificant amount of
non-value added costs. The “cost of additional
resources consumed” to produce any individual
product apparently are marginal costs; this does not
make them any less essential. (Chapter 54-3-2,
CBT Skill: 1, CSO: 5.3.3)
29. (a) A shareholder may keep an improper
dividend only when both the shareholder was
unaware that a dividend was improper and the
corporation was solvent at the time of payment.
Shareholders who receive illegally declared divi-
dends, knowingly or unknowingly, are liable for
repayment to an insolvent corporation. (Chapter
49-4-2, CBT Skill: 1, CSO: 1.3.0)
30. (a) Under RUPA, all property acquired by
a partnership becomes partnership property and
belongs to the partnership as an entity, rather than
to the individual partners. A partner’s interest is the
partner’s share of the profits and losses of the
partnership and the partner’s right to receive distri-
butions. (Chapter 48-1-2, CBT Skill: 3, CSO: 1.1.1)
Copyright © 2007 by Bisk Education, Inc. All rights reserved.
Updating Supplement Version 36.1
31. (d) Shareholders have the right to vote for
the directors and their removal. The appointment
and removal of officers as well as the declaration of
dividends are at the board of directors’ discretion;
shareholders have no direct voice in such actions.
(Chapter 49-4-1, CBT Skill: 1, CSO: 1.4.0)
32. (b) Without backup and off-site storage
procedures, an alternate processing site is of limited
use. Without an alternate processing site, off-site
storage procedures are of limited use. A plan with
critical applications identified is more complete than
one without this identification. (Chapter 55-4-2, CBT
Skill: 3, CSO: 4.4.0)
33. (b) A system is operating in real time if the
data is processed fast enough to get a response in
time to influence the process. A retail location would
need inventory changes and credit card verifications
in real time. Batch processing periodically processes
several similar transactions together; this does not
provide responses quickly enough for retail transac-
tions. A sequential file is a file that consists of
ordered records, typically on a secondary storage
device, typically used for batch processing; the term
“sequential-file processing” is not commonly used.
Direct access is the capability to access data to or
from a storage device independent of the sequence
of the relative positions of the data by means of
addresses which indicate the physical location of the
data; the term “direct-access processing” is not com-
monly used. (Chapter 55-1-6, CBT Skill: 2, CSO:
4.3.2)
34. (c) Economic value added is the net
operating profit after tax less the opportunity cost of
capital. Free cash flow is an entity’s net increase in
cash from operations less expenditures necessary to
maintain assets and preferred dividends. Market
value added is the share price times the number of
shares less the capital contributed by investors. Net
operating capital is not a commonly used term.
(Chapter 51-5-6, CBT Skill: 1, CSO: 3.1.1)
35. (b) Control refers to the conformity with
prescribed procedures. Capacity refers to the volume
a system is capable of handling. Complexity refers
to the number of dimensions or degree of integration
in a system. Accessibility refers to the ease or speed
of reaching desired information. (Chapter 55-1-5,
CBT Skill: 1, CSO: 4.3.2)
36. (a) Economic rate of return on common
stock (also known as total return) measures income
and capital appreciation, calculated as the sum of
dividends and the change in the stock price divided
Page 14 of 16
Business Environment & Concepts
by the price the investor paid. (Chapter 51-1-1, CBT
Skill: 1, CSO: 3.2.0)
37. (a) Generally, the sales volume will be the
first step of those listed. The sales volume may
determine the price set for products. The costs of
sales and the dollar amount of forecasted sales are
dependent on sales volume. (Chapter 54-1-2, CBT
Skill: 1, CSO: 5.1.3)
38. (a) The effect of a foreign currency becom-
ing weaker compared to the U.S. dollar is that a
foreign competitor’s products will be less expensive
than previously to people holding U.S. dollars; this
generally results in higher U.S. sales for a foreign
competitor and loss of market share for domestic
companies. The foreign company rarely will be dis-
advantaged in selling its product in the U.S. market.
The U.S. dollar strengthening has the same effect as
when the foreign currency weakens. (Chapter 50-3-
3, CBT Skill: 2, CSO: 2.4.0)
39. (b) Business risk is the riskiness of an
entity’s operations without any debt; in other words,
risk inherent in operations. Financial risk is the
additional risk that owners bear due to an entity’s
decision to carry debt. Interest rate risk is applicable
only when using debt. Marginal risk is not a com-
monly used term. (Chapter 51-6-4, CBT Skill: 1,
CSO: 3.2.0)
40. (a) Strategic decisions set the stage for
future decisions and actions. Strategic planning con-
centrates on broad decisions that map an entity’s
long-run operations; rather than details of imple-
mentation. A strategic plan may outline required
resources and, thus, influence budget decisions.
(Chapter 54-4-1, CBT Skill: 1, CSO: 5.1.1)
41. (d) The revenues are relatively low in the
first and second quarters, moderate in the third
quarter, and high in the fourth quarters of all three
years, indicating seasonal fluctuations. Managing
inventories and cash flow to match a seasonal cycle
frequently reduces costs dramatically. Given that
Emerald had no major changes to total capital
investment during the three year period, apparently
Emerald was not managing inventories and cash
flow to match a seasonal cycle. Cost structure
generally refers to the costs of operations; given no
reason to assume Emerald’s operations are ineffi-
cient, savings resulting from an examination of the
cost structure are likely to be minimal. (Chapter
51-4-1, CBT Skill: 2, CSO: 2.1.0)
42. (c) The accounts receivable (A/R) turnover
ratio is net credit sales divided by average net receiv-
ables. To increase A/R turnover, either net credit
Copyright © 2007 by Bisk Education, Inc. All rights reserved.
Updating Supplement Version 36.1
sales must be increased or average net receivables
must be decreased. Factoring accounts receivable
is similar to a sale of receivables because it generally
is without recourse (i.e., the financing institution
assumes the risk of collectivity). Factored A/R are
removed from the A/R account. Pledging A/R gen-
erally involves using A/R as security for a loan.
While disclosure is made, the pledged A/R remain in
the A/R account. (Editor’s Note: More information
on factoring and pledging is included in the FAR
volume; this question illustrates why the editors
suggest that candidates sit for the BEC exam
section last.) Net credit sales are gross credit sales
less discounts for prompt payment; increasing the
discount without increasing overall sales will reduce
net credit sales. Terms of 3/10, net 30 mean that
customers have 10 days to make the payment
discounted 3% or 30 days to pay in full. Terms of
1/10, net 30 mean that customers have 10 days to
make the payment discounted 1% or 30 days to pay
in full, providing even less of an incentive to pay
within 10 days; this likely will increase A/R without
necessarily increasing net credit sales by an
equivalent amount. Terms of 3/20, net 30 mean that
customers have 20 days to make the payment
discounted 3% or 30 days to pay in full, providing
even less of an incentive to pay promptly at a larger
cost to the collecting company; this decreases net
credit sales and increases average A/R. (Chapter
51-4-2, CBT Skill: 1, CSO: 3.3.1)
43. (c) A rule-based expert system is based
on the same set of rules that a human expert follows
in diagnosing a problem. A neural network is a
collection of software and hardware resources that
loosely models brain structure. Neural networks are
self-adaptive systems (trainable systems that can
generalize from sets of problems and solutions and
then apply the acquired knowledge to solve new
problems). Case-based reasoning is the process of
solving new problems based on solutions that solved
similar problems in the past. Case-based reasoning
systems allow for adding cases without the com-
plexity of adding new rules. An intelligent agent is
software that has some form of artificial intelligence;
it differs from simple data mining in that data mining
typically has preprogrammed algorithms, but intelli-
gent agents have an ability to adapt and learn from
experience. One example of an intelligent agent is a
buyer agent—a ‘shopping bot’ that retrieves infor-
mation about goods and services based on what the
user is buying currently or has bought in the past.
(Chapter 55-1-3, CBT Skill: 3, CSO: 4.3.1)
44. (c) E-cash (an abbreviation of electronic
cash) is an electronic payment option through finan-
cial cyber-mediaries (for example, PayPal) that aims
Page 15 of 16
Business Environment & Concepts
to be secure and untraceable; note that there are
several potential security problems associated with
using E-cash. Use of a credit card or electronic check
on a web site generally involves disclosing financial
information, unless some special situation exists;
thus, they cannot be said to be maintaining financial
privacy. The term “site draft” is not commonly used;
the homophone term “sight draft” means a draft pay-
able on delivery and presentment to the drawer.
Editor’s Note: Remember, the examiners instruct
candidates to select the best answer. More informa-
tion on sight drafts is included in the REG volume;
this question illustrates why the editors suggest that
candidates sit for the BEC exam section last.
(Chapter 55-3-1, CBT Skill: 1, CSO: 4.3.2)
45. (b) The payback period is the length of
time required to recover the initial cash outflow from
the incremental cash benefits after tax. At the end
of Year 3, the project is projected to have total net
cash inflows of $800 (Year 1, $200; Year 2, $200;
Year 3, $400); $200 more is required to recoup the
initial cash outlay. Assuming that the Year 4 cash
inflow is even throughout the year, another half a
year is added to the three previous years to get
another $200 added to the previous $800, making
the payback period 3.5 years. (Chapter 51-5-2, CBT
Skill: 3, CSO: 3.1.2)
46. (a) To elect S corporation status, a corpora-
tion may have only one class of stock. S corporation
status is designed to simplify income tax reporting
and payment; there are no minimum levels of com-
plexity. All shareholders may be domestic individuals.
There need be no more than one shareholder.
(Chapter 49-6-2, CBT Skill: 1, CSO: 1.1.3)
47. (c) Officers are granted the express
authority to contract by virtue of statute, articles of
incorporation, and bylaws. Articles of incorporation
are sometimes referred to as a certificate of incor-
poration or a corporate charter. Bylaws are the rules
that govern the internal operations of a corporation.
________________
Copyright © 2007 by Bisk Education, Inc. All rights reserved.
Updating Supplement Version 36.1
Given the specific nature of the purchase contract, it
most likely would be addressed explicitly in the
bylaws, which are the most detailed of the listed
documents that award authority to officers. A proxy
statement is a statement sent to shareholders when
seeking shareholder votes. It doesn’t award any
authority to officers. Editor’s Note: Remember, the
examiners instruct candidates to select the best
answer. (Chapter 49-2-2, CBT Skill: 1, CSO: 1.4.0)
48. (a) Float is the difference between the
amount on the depositor’s books and the balance
according to the bank. A lockbox arrangement
involves payment checks mailed directly to a bank
that is nearby the payer’s location; the local bank
clears the check and writes funds to the recipient’s
primary bank. Disbursement float is concerned with
payments to other entities. Entities generally try to
speed their collections; an arrangement resulted in
maximized collection float most likely would be
ended quickly. (Chapter 51-4-1, CBT Skill: 1, CSO:
3.3.1)
49. (c) The estimate for September cash sales
is $35,000 × 25% = $8,750. September collections
of September credit sales are estimated at 60% ×
($35,000 – $8,750) = $15,750. September collec-
tions of August credit sales are estimated at 30% ×
(75% × $15,000) = $3,375. September collections
of July credit sales are estimated at 10% × (75% ×
$30,000) = $2,250. $8,750 + $15,750 + $3,375 +
$2,250 = $30,125 (Chapter 54-1-2, CBT Skill: 1,
CSO: 5.1.2)
50. (d) The flexible overhead budget (or spend-
ing) variance is the difference between actual and
standard price times the actual quantity. The
standard price times the actual quantity is $10 / unit
× 19,000 units – $190,000. The actual price times
the actual quantity is given as $210,000. $210,000
– $190,000 = $20,000. As the actual is greater than
the standard, the variance is unfavorable. (Chapter
53-6-7, CBT Skill: 3, CSO: 5.1.3)
Page 16 of 16