CPA Business Environment and Concepts (BEC) : CPA Business Environment and Concepts (BEC)
Study concepts, example questions & explanations for CPA Business Environment and Concepts (BEC)
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Example Questions
Example Question #1 : Supply Chain/Reorder Point
Which one of the following represents methods for converting A/R to cash?
Trade discounts, collection agencies, and credit approval
Factoring, pledging, and electronic funds transfers
Trade discounts, cash discounts, and electronic funds transfers
Cash discounts, collection agencies, and electronic funds transfers
Cash discounts, collection agencies, and electronic funds transfers
These are methods for converting A/R to cash.
Example Question #2 : Supply Chain/Reorder Point
The reorder point for a firm is the point at which the firm should reorder more inventory and it is calculated as:
Safety stock * lead time + sales during lead time/sales per week
Safety stock + (Lead time * Sales during lead time)
Lead time + (Safety stock * orders)
Safety stock * lead time * orders
Safety stock + (Lead time * Sales during lead time)
The formula for reorder point needs to consider the amount of safety stock required by the firm, as well as the time it would take to acquire more inventory.
Example Question #1 : Return On Assets, Equity, & Investments
A stock priced at $50 per share is expected to pay $5 in dividends and trade for $60 per share in one year. What is the expected return on this stock?
10%
25%
30%
20%
30%
The expected return is $15, which consists of $5 in dividends and the $10 increase in stock value from $50 to $60. A $15 return on a $50 investment yields a return of 30%.
Example Question #1 : Return On Assets, Equity, & Investments
An analyst is reviewing a company with no net earnings. If the analyst wants to use a price multiples approach to valuation rather than a DCF method, the analyst would most likely select:
P/E ratio projections
Price-sales ratio projection
PEG ratio projections
Return on residual P/E ratio
Price-sales ratio projection
Price-sales ratio projection approaches can provide meaningful information in the event that net earnings data is not available.
Example Question #3 : Return On Assets, Equity, & Investments
An investor wants to buy shares of XYZ Corporation. If the investor uses a zero growth model, a desired rate of return of 20%, and a dividend of $10, what was XYZ's price?
$2
$50
$20
$100
$50
Using a zero growth model, the price of a company's stock is equal to the dividend divided by the discount rate. P=D/R. In this case P=$10/20%. P=$50.
Example Question #2 : Return On Assets, Equity, & Investments
Which of the following transactions does not change the current ratio or total current assets?
Equipment is purchased with a three year note and a 10 percent cash down payment
Short term notes payable are retired with cash
A cash advance is made to a divisional office
A cash dividend is declared
A cash advance is made to a divisional office
This does not change the current assets or the current ratio because the reduction of cash is offset by an increase in A/R.
Example Question #5 : Return On Assets, Equity, & Investments
The collection of A/R can be accelerated by the use of:
A lockbox system
Remittance advices
Bank drafts
Turnaround documents
A lockbox system
Lockbox systems are mailboxes in many locations where customers send payments. The bank checks these frequently.
Example Question #2 : Return On Assets, Equity, & Investments
The general formula for return on investment is calculated as:
Inflows/Outflows
Outflows/Inflows
Cash * Sales
Assets/Liabilities
Inflows/Outflows
To calculate the return on something purchased, whether a stock, machine or employee, divide the cash inflows divided by the cash outflows.
Example Question #1 : Cash Conversion Cycle
All of the following are valid reasons for a business to hold cash and marketable securities, except to:
Maintain a precautionary balance
Satisfy compensating balance requirements
Earn maximum returns on investment assets
Maintain adequate cash needed for transactions
Earn maximum returns on investment assets
The three primary motives for holding cash are transaction demand, precautionary demand, and speculative demand.
Example Question #2 : Cash Conversion Cycle
A company has total costs of $100,000, of which 40% is variable costs. What is the operating leverage?
2.5
0.4
0.6
1.5
1.5
Operating leverage is calculated as fixed costs divided by variable costs. If 40% of $100,000 are variable costs, the remaining $60,000 must be fixed costs. Thus, $60,000/$40,000=1.5.
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