BEC - 2017 AICPA Released Questions PDF

2017 AICPA Newly Released Questions—Business
BUSINESS
2017 AICPA Newly
Released MCQs
Page 1 of 33
Registered to Andrea Rosillo (#818104)

2017 AICPA Business Newly Released MCQs—Medium (Moderate) Rating
1. CPA-05000
Which of the following statements is true regarding internal control objectives of information systems?
a. Primary responsibility of viable internal control rests with the internal audit division.
b. A secure system may have inherent risks due to management's analysis of trade-offs identified by
cost-benefit studies.
c. Control objectives primarily emphasize output distribution issues.
d. An entity's corporate culture is irrelevant to the objectives.
Unit & Module to be Assigned To: B-1, M-1

Representative Task: BI-A1.1
Skill Level (Must be R&U or Application Only): R&U
Page Reference: 10
Correct Answer Choice: B
ANSWER:
Choice "b" is correct. One of the limitations of even a well-designed internal control system is
management's ability to override those controls. One reason management may override them is that the
benefit of doing so exceeds the cost, which represents an inherent risk of even the strongest systems.
Choice "a" is incorrect. Senior management and the board of directors have primary responsibility for
establishing, implementing, and enforcing internal controls. Internal Audit is a partner in the process, but
it does not have primary responsibility.
Choice "c" is incorrect. Objectives within the internal control integrated framework include operations,
reporting, and compliance objectives. Output distribution issues are just one aspect of what may be
covered through the establishment of these objectives.
Choice "d" is incorrect. The corporate culture (or "tone at the top") is extremely critical to the process of
establishing and enforcing objectives.
Page 2 of 33

2. CPA-05001
Employees of an entity feel peer pressure to do the right thing; management appropriately deals with
signs that problems exist and resolves the issues; and dealings with customers, suppliers, employees,
and other parties are based on honesty and fairness. According to the COSO, the above scenario is
indicative of which of the following?
a. Strategic goals.
b. Operational excellence.
c. Reporting reliability.
d. Tone at the top.

Skill Level (Must be R&U or Application Only): Application
Page Reference: 6
Correct Answer Choice: D
ANSWER:
Choice "d" is correct. The "tone at the top" represents the culture of an organization in terms of the
standards related to internal controls and conduct that senior management and the board of directors set
for an entity. When employees are focused on doing the right thing, when management quickly
addresses and resolves issues, and when fairness and honesty prevail in dealings with internal and
external people, a positive tone for the organization is established.
Choice "a" is incorrect. The items described in the question relate to the tone/culture of an organization
rather than specific short- or long-term goals.
Choice "b" is incorrect. Operational excellence relates to a desire to perform at the highest level, which is
more of an objective and a goal than the "tone at the top."
Choice "c" is incorrect. Reporting reliability is addressed as part of establishing reporting objectives
rather than setting the tone at the top.
Page 3 of 33

3. CPA-05002
According to the COSO, which of the following identifies the group directly responsible for the
implementation and development of the enterprise risk management framework?
a. Management.
b. The board of directors.
c. External auditors.
d. Internal auditors.

Representative Task: BI-B1.1
Page Reference: 13
Correct Answer Choice: A
ANSWER:
Choice "a" is correct. It is incumbent upon management to determine how the inevitable risks that an
entity faces must be balanced with the desire to grow stakeholder value. Management is responsible for
developing and implementing the enterprise risk management framework and process.
Choice "b" is incorrect. The board of directors is responsible for the oversight of management, which
includes assessing the work it is doing from an enterprise risk management standpoint and holding
management accountable for its work.
Choice "c" is incorrect. External auditors are parties from outside of an entity which will come in to
evaluate the risk management process, along with internal controls and many other operational and
reporting functions. External auditors are not tasked with developing and implementing an entity's risk
management framework.
Choice "d" is incorrect. Internal auditors are employees of an entity who serve to operate similarly to
external auditors from an evaluation standpoint; they are not tasked with developing and implementing a
risk management framework.
Page 4 of 33

4. CPA-05014
Which of the following organizations was established by the Sarbanes-Oxley Act of 2002 to control the
auditing profession?
a. Information Systems Audit and Control Foundation (ISACF).
b. IT Governance Institute (ITGI).
c. Public Company Accounting Oversight Board (PCAOB).
d. Committee of Sponsoring Organizations (COSO).

Representative Task: BI-C1.1
Page Reference: 27
Correct Answer Choice: C
ANSWER:
Choice "c" is correct. Congress, through the Sarbanes-Oxley Act of 2002, created the PCAOB to oversee
public company and broker/dealer audits.
Choice "a" is incorrect. ISACF, which traces its origins to the 1970s, was developed for the purpose of
building knowledge related to information technology governance and control.
Choice "b" is incorrect. ITGI was formed in 1998 to serve as a think tank for global IT governance.
Choice "d" is incorrect. The COSO is a private sector initiative that was established in the mid-1980s for
the purpose of assessing fraudulent financial reporting. Both the Internal Control-Integrated Framework
and the Enterprise Risk Management-Integrated Framework are COSO initiatives.
Page 5 of 33

5. CPA-05021
A government is most likely to reduce taxes on investments when:
a. The real exchange rate is expected to be unusually high.
b. Inflation is expected to be unusually low.
c. The gross domestic product is expected to be unusually high.
d. Capital spending is expected to be unusually low.

Representative Task: BII-A1.1
Page Reference: 10
ANSWER:
Choice "d" is correct. Reducing taxes is a fiscal policy decision designed to increase disposable income
and facilitate future spending and economic growth. Lower-than-expected capital spending can be
addressed through lower taxes, which puts more money into the hands of businesses and consumers.
Choice "a" is incorrect. Given their unpredictability and volatility, exchange rate fluctuations are unlikely
to affect government decisions to raise or lower taxes.
Choice "b" is incorrect. Lower-than-expected inflation means that the costs of goods and services will be
more affordable for purchasers, implying that the government will not need to reduce taxes to generate
economic activity.
Choice "c" is incorrect. If GDP is growing faster than expected, the government does not need to reduce
taxes to spur higher spending.
Page 6 of 33

6. CPA-05024
Which of the following statements is correct regarding an economy at the peak of the business cycle?
a. The economy will be in a static equilibrium.
b. The economy will be at the natural rate of unemployment.
c. Incomes will be stable.
d. The rate of inflation will decrease.

Page Reference: 5
ANSWER:
Choice "b" is correct. At the natural rate of unemployment, there is frictional, structural, and seasonal
unemployment; cyclical unemployment is at 0 percent, which implies that the economy is operating at its
highest potential level.
Choice "a" is incorrect. The peak is a temporary state (to be followed by a contractionary phase), which
implies that the economy will not remain static.
Choice "c" is incorrect. Both costs and prices reach their highest levels at a peak. Although incomes are
potentially rising during a peak, they will either level off or decline as the cycle moves into the
contractionary phase.
Choice "d" is incorrect. Price levels are likely to still be rising during a peak. Once the peak shifts to a
contractionary phase, price levels may decline.
Page 7 of 33

7. CPA-05026
In which of the following situations would it be advantageous for a country to export a manufactured
product?
a. The country's government prefers to be self-sufficient.
b. The country has an absolute advantage in the production of a complementary product.
c. The country has a comparative advantage in the production of the item.
d. The country has a higher opportunity cost for production of the item.

Representative Task: BII-B1.1
Page Reference: 65
ANSWER:
Choice "c" is correct. A comparative advantage stems from specializing in the trade and production of
specific products. If a country is able to produce a product more efficiently and cost effectively than its
peers, selling these products overseas offers a potential for higher profits.
Choice "a" is incorrect. A self-sufficient government will not focus on exports and, in fact, may make it
more difficult and costly for a company to export its goods.
Choice "b" is incorrect. Absolute advantage refers to a company's ability to produce more output (relative
to a set amount of resources) than its peers. The extent to which a company exports a good that is
complementary will depend on the export strategy for the other good or goods with which it is sold.
Choice "d" is incorrect. The higher the opportunity cost, the more likely it is that the company will shift its
resources to other production options that will produce a greater return. Higher opportunity costs equate
to lower competitive advantage.
Page 8 of 33

8. CPA-05028
The consensus of economic forecasts indicates that consumer prices are likely to increase because of
increases in aggregate demand. Which of the following outcomes is most likely to occur as prices
increase?
a. Quantity of output increases if there is capacity to produce.
b. Unemployment increases.
c. Profits fall if all costs are fixed.
d. Profits rise even if costs increase.

Page Reference: 9
ANSWER:
Choice "a" is correct. With increases in aggregate demand, both output and prices will increase. The
demand curve shifts to the right, which results in a higher quantity of goods supplied.
Choice "b" is incorrect. Higher economic activity (output) will tend to cause unemployment to decrease,
as companies need more workers to meet the higher demand.
Choice "c" is incorrect. If costs are fixed and prices are rising, profits will rise rather than fall.
Choice "d" is incorrect. Profits may continue to rise, but only if sales exceed costs. If costs are
increasing, sales have to increase by more than costs for profits to rise.
Page 9 of 33

9. CPA-05030
A U.S.-based company decides to invest capital in an emerging market operation that has a lower
expected return rate compared to the expected return for an alternative domestic operation. Which of the
following statements correctly supports this decision?
a. Management expects the U.S. dollar to decline in value relative to the foreign location's currency.
b. Management expects inflation to increase in the emerging market compared to the U.S. inflation
rate.
c. Management expects inflation to decrease in the U.S. compared to the foreign location's inflation
rate.
d. Management expects the U.S. dollar to strengthen in value relative to the foreign location's
currency.

Representative Task: BII-C2.1
Page Reference: 49
ANSWER:
Choice "a" is correct. A declining local currency (here, the U.S. dollar) implies that the dollar becomes
less expensive relative to foreign currency. Even though the expected percentage return is higher for the
domestic operation, an investor will be able to take advantage of the strength of the foreign currency on
the international investment relative to the dollar.
Choice "b" is incorrect. Investors will want to purchase investments denominated in foreign currency
when domestic inflation is higher (not lower) relative to the emerging market.
Choice "c" is incorrect. Investors will want to purchase investments denominated in foreign currency
when domestic inflation is higher (not lower) relative to the emerging market.
Choice "d" is incorrect. An investor would be more inclined to purchase domestically if the expectation
was that the U.S. dollar would strengthen relative to a foreign currency.
Page 10 of 33

10. CPA-05051
Which of the following quantitative factors, when compared to its industry average, could be an indicator
of potential corporate failure?
a. High cash flow to total liabilities.
b. High retained earnings to total assets.
c. High fixed cost to total cost structure.
d. High fixed assets to non-current liabilities.

Representative Task: BIII-A1.1
Page Reference: 18
ANSWER:
Choice "c" is correct. When fixed costs are high relative to variable costs and total costs, the company's
operating leverage is high. What this implies is that the company must generate enough in sales in order
to meet its fixed obligations. This equates to higher risk and could cause the company to fail if sales are
not high enough.
Choice "a" is incorrect. High cash flow relative to liabilities would be a positive indicator for a corporation.
Choice "b" is incorrect. Higher retained earnings are not indicative of potential corporate failure.
Choice "d" is incorrect. Higher non-current assets (relative to noncurrent liabilities) are not indicative of
potential corporate failure.
Page 11 of 33

11. CPA-05052
The main reason that a firm would strive to reduce the number of days sales outstanding is to increase:
a. Accounts receivable.
b. Cash.
c. Cost of goods sold.
d. Contribution margin.

Representative Task: BIII-B1.1
Page Reference: 26
ANSWER:
Choice "b" is correct. Days sales outstanding represents the amount of time it takes for a company to
convert its accounts receivable into cash. Efforts to reduce this number are linked to a desire to increase
cash (to collect it faster).
Choice "a" is incorrect. A desire to increase accounts receivable would result in a days sales outstanding
number that would increase rather than decrease.
Choice "c" is incorrect. Cost of goods sold does not affect the days sales outstanding calculation.
Choice "d" is incorrect. The contribution margin is equal to sales less variable costs; this does not relate
to the days sales outstanding calculation.
Page 12 of 33

12. CPA-05053
A limitation of using the discounted payback method to evaluate a project is that it ignores which of the
following?
a. Cash flows after the payback period.
b. Duration of funds being tied up.
c. A project's cost of capital.
d. A project's breakeven point.

Representative Task: BIII-C1.2
Page Reference: 88
ANSWER:
Choice "a" is correct. For both the payback and discounted payback methods, cash flows that occur after
the payback period are not accounted for in the calculations. Once the initial investment is returned,
future cash flows are not considered.
Choice "b" is incorrect. The duration of funds being tied up are definitely considered, as this is what the
discounted payback method is designed to measure.
Choice "c" is incorrect. The cost of capital is considered, as this is used to discount each individual cash
flow to present value.
Choice "d" is incorrect. Determining the breakeven point (in terms of time) is the purpose of this method.
Page 13 of 33

13. CPA-05063
What should a company do when seeking competitive advantages in planning for the implementation of a
new software system?
a. Design an optimal process and then align the software.
b. Design the software to fit the existing processes.
c. Direct manpower to the non-bottleneck process areas.
d. Allow management to dictate processes.

Representative Task: BIV-E1.1
Page Reference: 52
ANSWER:
Choice "a" is correct. The implementation of new software is often a great opportunity to not only assess
the software's capabilities but also to revisit and ultimately optimize processes in order to align them with
the software.
Choice "b" is incorrect. Designing software to fit existing processes is often very costly and does not
accommodate revisiting and optimizing processes in order to align them with the new software.
Choice "c" is incorrect. Bottleneck process areas create more risk than non-bottleneck areas, which
implies that the most efficient use of manpower is to direct it toward bottlenecks.
Choice "d" is incorrect. A business process manager, along with subject matter experts, should
determine the processes and how the software can be aligned to those processes.
Page 14 of 33

14. CPA-05154
A company has two departments and allocates all overhead costs based on department revenues. The
following information applies:
Department 1 revenue $1,000,000
Department 2 revenue 1,500,000
Corporate overhead costs 250,000
Department overhead costs 175,000
What amount is the company's total overhead cost for Department 2?
a. $425,000
b. $255,000
c. $170,000
d. $105,000

Representative Task: BV-B1.1
Page Reference: 31
ANSWER:
Choice "b" is correct. Total overhead costs are $425,000 (Corporate costs of $250,000 + Department
costs of $175,000). If overhead is allocated based on revenue, then Department 1 will receive 40% of the
overhead allocation ($1,000,000 / ($1,000,000 + $1,500,000) = 40%) and Department 2 will receive 60%
of the allocation ($1,500,000 / ($1,000,000 + $1,500,000) = 60%). So for Department 2, $425,000 x 60%
= $255,000.
Choice "a" is incorrect. This amount represents the total amount of overhead to be allocated between
both departments.
Choice "c" is incorrect. This amount represents the amount of overhead allocated to Department 1.
Choice "d" is incorrect. This amount is much less than the overhead to be allocated to both Departments
1 and 2.
Page 15 of 33

15. CPA-05155
Which of the following methods involves comparing a company's internal processes that need to be
improved to those of external companies identified as being best in class?
a. Balanced scorecard.
b. Benchmarking.
c. Economic value added.
d. Performance measurement.

Page Reference: 20
ANSWER:
Choice "b" is correct. Benchmarking involves a company taking its own business metrics and processes
and comparing them to those of other (similar) organizations that are considered the "best in class." The
goal would be to determine what a company needs to do to mirror those considered the best.
Choice "a" is incorrect. The balanced scorecard presents metrics covering multiple performance
dimensions within a company.
Choice "c" is incorrect. Economic value added (EVA) is used to determine whether performance is
meeting standards. The calculation takes net operating profit after taxes and subtracts a "required
return."
Choice "d" is incorrect. Performance measurement involves collecting, assessing, and presenting both
financial and nonfinancial data for an organization in order to determine whether its strategic goals are
being met.
Page 16 of 33

16. CPA-05156
When selecting suppliers before implementing a just-in-time (JIT) purchasing system, a company must
take extreme care because a JIT purchasing system:
a. Relies on suppliers to deliver products when needed.
b. Depends on a great number of highly motivated suppliers.
c. Shifts responsibility for order taking and fulfillment to the supplier.
d. Relies on competent suppliers, which eliminates the need for backflush costing.

Page Reference: 34
ANSWER:
Choice "a" is correct. Because JIT does not entail keeping a significant amount of inventory on hand,
suppliers must be ready to provide products as soon as there is a need.
Choice "b" is incorrect. JIT does not require a large number of very motivated suppliers in order to be
successful; the key is that the suppliers used by a company must be ready to deliver the products when
needed.
Choice "c" is incorrect. The responsibility for order taking and fulfillment is not shifted to the supplier any
more than it would be under a non-JIT system.
Choice "d" is incorrect. Competent suppliers are needed in order for JIT to work, but backflush costing as
a costing system is very common for JIT systems. Under backflush costing, the production of goods is
typically completed before the costing process begins (which eliminates the cumbersome need to track
costs throughout production).
Page 17 of 33

17. CPA-05157
Company management would like to calculate the breakeven point in sales dollars of its lone product, a
farm combine-planter. The following cost information is available:
Combine-planter unit selling price $ 1,000
Variable manufacturing expenses per unit 800
Other variable expenses 100
Fixed manufacturing expenses 15,000
Marketing expense (fixed) 7,000
What amount is the company's breakeven point in sales?
a. $70,000
b. $110,000
c. $150,000
d. $220,000

Representative Task: BV-D2.2
Page Reference: 18
ANSWER:
Choice "d" is correct. The contribution margin = $1,000 – 800 – 100 = $100. The contribution margin
ratio (10 percent) takes the contribution margin of $100 and divides it by the selling price of $1,000.
The breakeven point in sales can be calculated using the contribution margin ratio and the following
formula:
Total Fixed Costs $22,000
BE Point in Dollars = Contribution Margin Ratio
= 0.10
= $220,000
Choices "a", "b", and "c" are incorrect, per the explanation above.
Page 18 of 33

2017 AICPA Business Newly Released MCQs—Difficult (Hard) Rating
18. CPA-05158
According to the COSO, a primary purpose of monitoring internal control is to verify that the internal
control system remains adequate to address changes in:
a. Risks.
b. The law.
c. Technology.
d. Operating procedures.

Page Reference: 7
ANSWER:
Choice "a" is correct. Risks are fluid in that they regularly change in terms of likelihood and severity. In
addition, new risks can arise while old risks can disappear. Internal controls should always be monitored
for the purpose of addressing changes to risks.
Choice "b" is incorrect. Although changes in the law may ultimately require adjusting internal controls,
this is not a primary purpose for monitoring.
Choice "c" is incorrect. Technology changes regularly, but this is not a primary purpose for monitoring
internal controls.
Choice "d" is incorrect. Operating procedure changes are managed as part of the existing control
activities component of internal control.
Page 19 of 33

19. CPA-05159
The materials manager of a warehouse is given a new product line to manage with new inventory control
procedures. Which of the following sequences of the COSO internal control monitoring-for-change
continuum is affected by the new product line?
a. Control baseline but not change management.
b. Change management but not control baseline.
c. Neither control baseline nor change management.
d. Both control baseline and change management.

Page Reference: 7
ANSWER:
Choice "d" is correct. The COSO identifies four stages of the change continuum beginning with control
baseline, followed by change identification, change management, and then control validation/update. The
control baseline is the starting point at which management can understand the design of the internal
control system and whether controls have been put in place to accomplish the organization's internal
control objectives. Change management occurs as needed adjustments to the internal control system
are implemented. Because a new product line is now under the purview of the manager, this will affect
not only the baseline but also the change management sequence.
Choices "a", "b", and "c" are incorrect per the explanation above.
Page 20 of 33

20. CPA-05160
According to the COSO, which of the following differences relevant to the risk-assessment process is
most likely to exist between a large entity and a small entity?
a. The CEO of a small entity is more likely than the CEO of a large entity to be attuned to risks arising
from internal factors through hands-on involvement with all levels of personnel.
b. The risk-assessment process in a small entity is more structured than in a large one because of the
nature of some of the internal control components in a small entity.
c. An owner-manager of a small entity will not normally learn about risks arising from external factors
through direct contact with customers, suppliers, and other outsiders, whereas in large entities this
process is part of the entity's primary way of identifying new risk.
d. Risk assessment in a small entity, as opposed to that in a large entity, can be problematic to
implement because the in-depth involvement of the CEO and other key managers is a conflict of
interest that must be addressed separately in the internal control assessment process.

Page Reference: 20
ANSWER:
Choice "a" is correct. A CEO is much more likely to be familiar with individual people and processes
within a small entity. Along with that familiarity will be an understanding of risks associated with internal
factors. Larger entities are challenging to manage because a CEO is more likely to primarily work with
direct reports (CFO, CIO, etc.) rather than working hands-on with all personnel, simply because of the
scope of the operation.
Choice "b" is incorrect. A larger entity is more likely to have a structured risk-assessment process, as
smaller entities are easier to manage in more of a fluid, ad hoc manner.
Choice "c" is incorrect. With small entities, the owner-manager will often work directly with external
parties, such as suppliers and customers. Through these interactions, risks associated with external
factors can be identified and assessed.
Choice "d" is incorrect. Because conflicts of interest inherently represent risks, they would be identified
and managed as part of the risk-assessment process.
Page 21 of 33

21. CPA-05161
According to the COSO, the presence of a written code of conduct provides for a control environment that
can:
a. Override an entity's history and culture.
b. Encourage teamwork in the pursuit of an entity's objectives.
c. Ensure that competent evaluators are implementing and monitoring internal controls.
d. Verify that information systems are providing persuasive evidence of the effectiveness of internal
controls.

Page Reference: 30
ANSWER:
Choice "b" is correct. A written code of conduct helps management set the tone for the organization; its
existence promotes (among other things) honest/ethical conduct, teamwork, compliance, and appropriate
disclosure.
Choice "a" is incorrect. Overriding history and culture definitely is not the intent of having a code of
conduct.
Choice "c" is incorrect. A code of conduct will not help to ensure that a company has competent
evaluators implementing and monitoring internal controls.
Choice "d" is incorrect. Information systems are addressed independently, outside of a written code of
conduct.
Page 22 of 33

22. CPA-05162
Which of the following statements is correct regarding the requirements of the Sarbanes-Oxley Act of
2002 for an issuer's board of directors?
a. Each member of the board of directors must be independent from management influence, based on
the member's prior and current activities, economic and family relationships, and other factors.
b. The board of directors must have an audit committee entirely composed of members who are
independent from management influence.
c. The majority of members of the board of directors must be independent from management
influence.
d. The board of directors must have a compensation committee, a nominating committee, and an
audit committee, each of which is entirely composed of independent members.

Page Reference: 27
ANSWER:
Choice "b" is correct. Per Sarbanes-Oxley, an issuer's board must establish an audit committee
composed entirely of members who are independent and not influenced by management.
Choice "a" is incorrect. Independence is not required for every member of the board.
Choice "c" is incorrect. Per Sarbanes-Oxley, independence relates to compensation received from the
issuer and affiliation, not management influence.
Choice "d" is incorrect. An audit committee is a requirement, but "compensation" and "nominating"
committees are not required.
Page 23 of 33

23. CPA-05163
A country reduces its rate of monetary growth. Which of the following is the expected result for the
country's economy?
a. Higher net exports.
b. Higher investment.
c. Lower GDP growth.
d. Lower interest rates.

Page Reference: 28
ANSWER:
Choice "c" is correct. Monetary growth relates to an increase in the money supply. If the money supply
declines, this will lead to higher interest rates, a reduction in firm investment and household consumption,
a decrease in aggregate demand, and a reduction in GDP.
Choice "a" is incorrect. Higher net exports are indicative of an increase in GDP (economic growth). The
effect on GDP will be negative if monetary growth slows or declines.
Choice "b" is incorrect. A reduction in monetary growth will lead to lower rather than higher investment.
Choice "d" is incorrect. A reduction in monetary growth will lead to higher rather than lower interest rates.
Page 24 of 33

24. CPA-05164
Which of the following changes would most effectively halt a period of inflation?
a. Decreasing interest rates by a large amount.
b. Decreasing savings by a small amount.
c. Increasing interest rates by a large amount.
d. Increasing savings by a small amount.

Page Reference: 10
ANSWER:
Choice "c" is correct. Increasing interest rates reduces aggregate demand, which in turn will reduce
output (GDP) and lower prices.
Choice "a" is incorrect. Decreasing interest rates increases aggregate demand, which in turn will
increase output (GDP) and raise prices.
Choices "b" and "d" are incorrect. Changing savings by small amounts is unlikely to have a major effect
on price levels.
Page 25 of 33

25. CPA-05166
Which of the following is the most likely result of imposing tariffs to increase domestic employment?
a. A long-run reallocation of workers from export industries to protected domestic industries.
b. A short-run increase in domestic employment in import industries from export industries.
c. A decrease in the tariff rates of foreign nations.
d. A decrease in consumer prices in the domestic market.

Representative Task: BII-B1.2
Page Reference: 67
ANSWER:
Choice "a" is correct. A tariff is a tax imposed on imported goods and services. One of the desired
effects of implementing a tariff is that if imported goods and services become more expensive, companies
and individuals will be more likely to produce domestically—thereby increasing domestic employment.
Taxes will have a negative effect on international business, thereby increasing domestic business.
Workers will be needed to meet the demand domestically.
Choice "b" is incorrect. Tariffs on imported goods will likely result in a short-run decrease in domestic
employment in import industries.
Choice "c" is incorrect. An increase in tariffs implemented domestically will likely lead to an increase in
tariff rates of foreign nations.
Choice "d" is incorrect. If anything, higher tariffs and increases in domestic employment will lead to
higher consumer prices as costs increase and sales must increase in order to maintain profits.
Page 26 of 33

26. CPA-05167
A company considers investing $20 million in a foreign company whose local currency is under pressure.
The company suspects that the exchange rate may fluctuate soon. The exchange rate at the time of the
investment is 2.57 to $1.00. After the investment, the exchange rate changes to 3.15 to $1.00. What is
the change in the value of the company's investment in U.S. dollars?
a. 18.4 percent increase.
b. 18.4 percent decrease.
c. 22.6 percent increase.
d. 22.6 percent decrease.

Representative Task: BII-C1.1
Page Reference: 49
ANSWER:
Choice "b" is correct. An initial investment of $20 million is worth 51,400,000 in foreign currency based on
an exchange rate of 2.57 to $1.00. After the exchange rate change (3.15 to $1.00), 51,400,000 is worth
$16,317,460. A decline from $20,000,000 to $16,317,460 represents a decline of $3,682,540, or 18.4
percent.
Choice "a" is incorrect. The decline in the foreign currency relative to the U.S. dollar hurt the company, as
the investment denominated in the foreign currency lost value.
Choice "c" is incorrect. The foreign currency lost value relative to the U.S. dollar, which causes the
company's investment to decline.
Choice "d" is incorrect. This choice incorrectly compares the decline of $3,682,540 to the new value in
U.S. dollars of $16,317,460.
Page 27 of 33

27. CPA-05168
A corporation has $50,000 in equity and a debt-to-total-assets ratio of 0.5. The firm wants to reduce this
ratio to 0.2 by selling new common stock and using the proceeds to repay principal on outstanding long-
term debt. What amount of additional equity financing must the corporation obtain to accomplish this
objective?
a. $20,000
b. $30,000
c. $80,000
d. $100,000

Representative Task: BV-D2.3
Page Reference: 33
ANSWER:
Choice "b" is correct. Because Total assets = Debt + Equity, the debt-to-total assets ratio can be re-
stated as follows: Debt / (Debt + Equity). If the current ratio is equal to 0.5, then debt must be equal to
$50,000. $50,000 in Debt / ($50,000 in debt + $50,000 in equity) = 0.5. By issuing an additional $30,000
in equity and using the proceeds to pay down debt, equity increases to $80,000 and debt decreases to
$20,000. The ratio with the new numbers is calculated as follows:
$20,000
Debt − to − total − assets = ($20,000+$80,000)
= 0.2
Choice "a" is incorrect. Issuing $20,000 in equity and using the proceeds to pay down debt would result
in a debt-to-total-assets ratio of 0.3.
Choice "c" is incorrect. There is only $50,000 in debt to start, so issuing $80,000 in new equity and using
the proceeds would remove debt entirely such that the debt-to-total assets ratio would be 0.
Choice "d" is incorrect. There is only $50,000 in debt to start, so issuing $100,000 in new equity and
using the proceeds would remove debt entirely such that the debt-to-total assets ratio would be 0.
Page 28 of 33

28. CPA-05170
What does beta measure in the capital asset pricing model?
a. The volatility of a stock relative to its competitors.
b. The volatility of a stock relative to the market.
c. The additional return required over the risk-free rate.
d. Unsystematic risk.

Page Reference: 10
ANSWER:
Choice "b" is correct. Beta (also referred to as beta coefficient) represents the risk (volatility) of an
individual stock relative to the volatility of the overall market. A beta of 1 means the stock and the overall
market have equal volatility, and a beta greater (less) than 1 means the stock is more (less) volatile than
the market.
Choice "a" is incorrect. Beta is not used to measure the volatility of a stock relative to its competitors.
Choice "c" is incorrect. The risk premium (with beta as a component) is used to measure the additional
return required over the risk-free rate; beta by itself does not equate to this return.
Choice "d" is incorrect. Beta is used in the cost-of-equity calculation, which provides the expected return
taking into account systematic (rather than unsystematic) risk.
Page 29 of 33

29. CPA-05180
A company issued common stock and preferred stock. Projected growth rate of the common stock is 5
percent. The current quarterly dividend on preferred stock is $1.60. The current market price of the
preferred stock is $80 and the current market price of the common stock is $95. What is the expected
rate of return on the preferred stock?
a. 2 percent
b. 7 percent
c. 8 percent
d. 13 percent

Page Reference: 9
ANSWER:
Choice "c" is correct. The preferred stock pays dividends of $1.60 per quarter, or $6.40 per year. $6.40
annual dividends / $80 current market price = 8 percent.
Choice "a" is incorrect. This choice uses the $1.60 quarterly dividend payment as an annual amount.
Choice "b" is incorrect. This choice incorrectly uses the $95 common stock price as the denominator in
the calculation.
Choice "d" is incorrect. This choice assumes a much higher dividend or much lower stock price than
appropriate.
Page 30 of 33

30. CPA-05195
A customer notified a company that the customer's account did not reflect the most recent monthly
payment. The company investigated the issue and determined that a clerk had mistakenly applied the
customer's payments to a different customer's account. Which of the following controls would help to
prevent such an error?
a. Checksum.
b. Field check.
c. Completeness test.
d. Closed-loop verification.

Representative Task: BIV-B1.2
Page Reference: 25
ANSWER:
Choice "d" is correct. Closed-loop verification is a validation method that takes data entered into a
system and uses it to retrieve and display other information to verify the accuracy of input data. In this
scenario, the customer and the company can both receive system confirmation that the payment was
made and applied to the correct place.
Choice "a" is incorrect. This automatically calculates totals for data transmitted. This would not prevent
the error of a clerk entering a payment into the wrong account.
Choice "b" is incorrect. A field check is an edit check that examines characters in a field to make sure
that they reflect the correct field type. This would not prevent the error of a clerk entering a payment into
the wrong account.
Choice "c" is incorrect. This is a data entry control whereby a system determines whether all of the data
necessary for a specific transaction have been entered. This would not prevent the error of a clerk
entering a payment into the wrong account.
Page 31 of 33

31. CPA-05270
Which of the following is a financial measure of success in a balanced scorecard?
a. Market share.
b. Sales growth.
c. Cycle time.
d. Staff morale.

Representative Task: BV-A1.1
Page Reference: 43
ANSWER:
Choice "b" is correct. Sales are reported on company financial statements and are often used as a
measure of financial performance.
Choice "a" is incorrect. Market share represents a goal or tactic (to grow market share) rather than a
financial measure.
Choice "c" is incorrect. Cycle time is a throughput measure captured as an internal business process on
a balanced scorecard.
Choice "d" is incorrect. Staff morale is definitely not a financial measure, but it may be captured on a
balanced scorecard as a human resources/learning and innovation measure.
Page 32 of 33

32. CPA-05284
In order to increase the profit margin for a certain product, a company is planning to purchase a custom-
made machine for $5,000,000. It is anticipated that the introduction of the new machine will reduce the
product's variable costs of labor and maintenance by $5.50 per unit and $0.95 per unit, respectively. The
product manager estimates that 500,000 units of the product will be manufactured and sold each year
with a product life cycle of two years, at which time the machine will be discarded with no salvage value.
What is the company's total cost savings over the product's life cycle?
a. $725,000
b. $1,450,000
c. $3,225,000
d. $6,450,000

Representative Task: BV-B1.1
Page Reference: 7
ANSWER:
Choice "b" is correct. Variable cost savings total $6,450,000 (500,000 units x ($5.50 + $0.95) x 2 years =
$6,450,000). The machine will cost $5,000,000 to purchase, so the net savings = $6,450,000 –
$5,000,000 = $1,450,000.
Choice "a" is incorrect. This choice takes the net savings and equates it to an annual amount rather than
the full cycle.
Choice "c" is incorrect. This choice only calculates the annual variable cost savings.
Choice "d" is incorrect. This choice only takes into account the total variable cost savings, without
considering the cost of the machine.
Page 33 of 33

2017 AICPA Newly Released Simulations—Business
BUSINESS
2017 AICPA Newly
Released Sims
Page 1 of 5

Task 85882_01
Unit & Sim # / Task Position B2_Sim 1 (69) / Task 4

Sim Task Name: Written Communication (AICPA R-2017)
Skill Level: Analysis
Web Repo ID: 2092
Page 2 of 5

Task 85882_01 (Solution)
As you know, our provider for general liability insurance has offered us two payment options for coverage
during this upcoming policy year. It is important to note that our policy year is aligned with both our fiscal year
and, of course, the calendar year. There are advantages and disadvantages to both options from a working
capital and financial statement perspective, which I will cover below.
The first option is to pay the entire annual amount at the time of commitment, which for us would be
approximately one month prior to the beginning of the policy period. So we will owe the full amount on
December 1, with the policy year beginning on January 1. Paying the full premium up front has a negative
impact to working capital from a pure cash flow perspective. We will book a prepaid asset for the full amount of
the premium paid for up front on our balance sheet, and over the course of the year the prepaid asset will be
reduced on a monthly basis as we expense the cost on the income statement.
The second option entails paying 30 percent of the annual premium owed up front, with the remaining 70
percent payable (along with a 2 percent premium surcharge) over the full 12-month policy period. So in this
scenario, we would pay 30 percent of the annual premium on December 1 and then we would pay the
remaining 70 percent (plus a 2 percent surcharge) across the next 12 months. The benefit to this option
relative to the first option is that we are able to conserve cash and protect working capital in the early part of
the period, allowing us to use that excess cash in other places. However, we will end up paying more over the
course of the year because of the premium surcharge. This premium surcharge will lead to greater monthly
expenses and, therefore, lower net income relative to the first option.
If we are looking at this purely from a cash flow and financial statement perspective, we have two very
reasonable options. If we are in a good position from a cash flow perspective, then we can go with the first
option as it will ultimately save us money in terms of pure outflows and lead to higher net income. If we need to
conserve our cash up front or we have better places to deploy it, the second option would be best. I am
available whenever you would like to discuss this further.
Page 3 of 5

Task 88237_01
Unit & Sim # / Task Position B6_Sim 1 (71) / Task 3

Sim Task Name: Written Communication (AICPA R-2017)
Skill Level: Remembering and Understanding
Representative Task: BV-C2.1
Web Repo ID: 2093
Page 4 of 5

Task 88237_01 (Solution)
After a thorough investigation into the increase in customer returns over the last six months, we have identified
the primary driver as poor product quality. There are myriad causes for poor quality, and all need to be
addressed, but there are also many solutions we can put into place that should help to reverse this trend and
put the company into a better competitive position going forward.
Poor product quality can result from problems in many places within a production process. From a human
capital perspective, actions and behaviors by both management and by those who work for management can
lead to poor quality. Poor planning, misguided incentives, lack of motivation, flawed decision making, and skill
deficiencies are all examples of human capital issues that can negatively affect product quality. Machines can
harm product quality because of wear and tear, poor maintenance, or improper utilization. Also, quality will
suffer when poor-grade materials or the wrong materials are used for a given process. Failure to follow
established procedures and/or outdated and inaccurate procedures are another cause of poor quality.
In order to move forward and reverse this trend, we need to identify each of these problem areas and come up
with effective and reasonable solutions. Investments in training, staff development, higher-quality machines
and materials, and better defined processes are all issues that can be fixed. From an overall, entity-wide
perspective, we should consider implementing total quality management. Within this process, we need to
ensure that we are focusing on satisfying our customers. Key components of this process are continuous
improvement, involving our workforce, delegating and empowering our workforce, and conducting quality
audits and gap analysis.
Improvement in quality will be reflected in a reduction in returns and will also help us reduce conformance
costs (such as prevention and appraisal costs) and nonconformance costs (both internal and external failure
costs). We can discuss the root causes of these poor-quality issues, as well as next steps toward solving them,
when we next meet.
Page 5 of 5

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2017 AICPA Newly Released Questions—Business

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