2013 AICPA BEC Release

2013 AICPA Newly Released Questions Business

1

Following are multiple choice questions and simulations recently released by the

AICPA. These questions were released by the AICPA with letter answers only. Our

editorial board has provided the accompanying explanation.

Please note that the AICPA generally releases questions that it does NOT intend to use

again. These questions and content may or may not be representative of questions you

may see on any upcoming exams.


2

AICPA QUESTIONS RATED MODERATE DIFFICULTY 1. CPA-08280

On January 1 Maples had two jobs in process: #506 with assigned costs of $10,500 and #507 with assigned costs of $14,250. During January three new jobs, #508 through #510, were started and three jobs, #506, #507, and #508, were completed. Materials and labor costs added during January were as follows:

Job number Materials Labor 506 $0 $2,000 507 0 1,500 508 4,000 3,600 509 3,800 2,000

510 2,600 3,100

Manufacturing overhead is assigned at the rate of 200 percent of labor. What is the January cost of goods manufactured and transferred from work-in-process?

a. $25,300 b. $35,850 c. $42,950 d. $50,050 Solution: Choice "d" is correct. The cost of goods manufactured is $50,050 and can be computed based on beginning and ending inventory balances and manufacturing costs incurred.

The CGM includes the cost of all jobs finished in January. Jobs 506 and 507 were finished in January, and Job 508 was started and finished in January. The total costs for each of these jobs are as follows:

Job 506: $10,500 (beg. WIP) + $2,000 (labor) + $4,000 (O'h) = $16,500 Job 507: $14,250 (beg. WIP) + $1,500 (labor) + $3,000 (O'h) = $18,750 Job 508: $4,000 (materials) + $3,600 (labor) + $7,200 (O'h) = $14,800

($50,050)

Choices "a", "b", and "c" are incorrect based on the above analysis.


3

2. CPA-08281

Which of the following choices shows the proper treatment of sales commissions and abnormal spoilage charges when calculating a manufactured good's inventoriable cost?

Sales Abnormal commissions spoilage a. Include Include b. Include Exclude c. Exclude Include d. Exclude Exclude Solution: Choice "d" is correct. Product (inventoriable) costs include direct labor, direct material, and applied overhead. Direct material costs anticipate a provision for normal spoilage. Sales commissions are selling and administrative expenses that are period (not product) costs, and abnormal spoilage is charged against income of the period as a separate component of cost of goods sold.

Choices "a", "b", and "c" are incorrect based on the above explanation.


4

3. CPA-08282

An entity has the following sales orders in a batch:

Invoice# Product Quantity Unit Price 101 K 10 50 $ 5.00 102 M 15 100 $10.00 103 P 20 150 $25.00 104 Q 25 200 $30.00 105 T 30 250 $35.00

Which of the following numbers represents the record count?

a. 5 b. 100 c. 105 d. 750 Solution: Choice "a" is correct. The fact pattern presents a collection of five records. Records are a collection of fields (e.g., invoice, product, quantity, and unit price). Five records are listed, representing invoices 101 through 105.

Choice "b" is incorrect. This proposed solution suggests that the sum of the product numbers is a record count. Records are a collection of fields (e.g., invoice, product, quantity, and unit price). Five records are listed, representing invoices 101 through 105.

Choice "c" is incorrect. This proposed solution sums the unit prices to obtain $105. This is not a record count. Records are a collection of fields (e.g., invoice, product, quantity, and unit price). Five records are listed, representing invoices 101 through 105.

Choice "d" is incorrect. This proposed solution suggests that the sum of the quantities is a record count. Records are a collection of fields (e.g., invoice, product, quantity, and unit price). Five records are listed, representing invoices 101 through 105.


5

4. CPA-08283

A manufacturing company that produces trivets has established the following standards for the current year:

Standard price per pound $3.00 Standard material usage per trivet 2.00

During April, the company purchased 10,000 pounds of material for $33,000 and used 9,400 pounds to produce 4,500 trivets. Four thousand trivets were sold during April. What amount should be reported as the materials' quantity (usage) variance?

a. $1,200 unfavorable. b. $1,320 unfavorable. c. $3,000 unfavorable. d. $4,200 unfavorable. Solution: Choice "a" is correct. The quantity usage variance applies the standard rate per unit to the difference between actual raw materials used and standard materials allowed to measure the efficient use of product in a manufacturing process. Standard materials allowed is computed by multiplying the actual output times the standard material allowed per unit. The manufacturing company produced 4,500 trivets and allows 2 units of materials per trivet. The standard quantity allowed is 9,000 units (4,500 x 2). Using the tabular format, the quantity usage variance is computed as follows:

Actual quantity used (given) 9,400 Standard price x $3 $28,200 Standard quantity allowed (computed above) 9,000 Standard price x$3 $27,000

Variance $(1,200)

Because the amount used was greater than the amount allowed, the variance is unfavorable.

Choice "b" is incorrect. The quantity usage variance uses standard rather than the actual rates as proposed by this choice.

Choice "c" is incorrect. This proposed solution correctly computes the price variance, but not the usage variance. [$33,000 / 10,000 units = $3.30 per unit actual price. Standard price per unit = $3.00. ($3.30 - $3.00) x 10,000 units purchased = $3,000 price variance.]

Choice "d" is incorrect. The proposed solution appears to compare units of materials purchased with units required for sales at standard usage at standard rate. [9,400 x $3 = $28,200. 4,000 x $3 x 2 = $24,000. $28,200 - $24,000 = $4,200.] The correct computation of the quantity variance is described above.


6

5. CPA-08284

At the end of its fiscal year, Krist, Inc. had the following account balances:

Cash $ 5,000 Accounts receivable 10,000 Inventory 20,000 Accounts payable 15,000 Short-term note payable 5,000 Long-term note payable 35,000

What is Krist's quick (acid-test) ratio?

a. 0.273 b. 0.636 c. 0.750 d. 1.750 Solution: Choice "c" is correct. Krist Inc.'s quick ratio is 0.75. The quick (or acid-test) ratio is a rigorous measure of liquidity. The formula is Quick Assets / Current Liabilities. Quick assets exclude inventory and prepaids from the current assets. Krist Inc.'s quick ratio follows:

Cash $5,000 Accounts payable $15,000 Accounts receivable 10,000 Short-term notes payable 5,000

Liquid current assets $15,000 Current liabilities $20,000

Quick ratio (15,000 / 20,000) 0.75

Choice "a" is incorrect. The proposed solution incorrectly divides liquid current assets by all liabilities presented.

Choice "b" is incorrect. The proposed solution incorrectly divides all assets presented by all liabilities presented.

Choice "d" is incorrect. The proposed solution is the current ratio, not the quick ratio. Current ratio is current assets divided by current liabilities.


7

6. CPA-08285

When estimating cash flow for use in capital budgeting, depreciation is:

a. Included as a cash or other cost. b. Excluded for all purposes in the computation. c. Utilized to estimate the salvage value of an investment. d. Utilized in determining the tax costs or benefit. Solution: Choice "d" is correct. Depreciation is used in capital budgeting for determining tax costs or benefits of a decision. Asset value is determined based on the present value of its future after-tax cash flows. After-tax cash flows are the most relevant to cash flow decisions and consider the tax impact of depreciation deductions.

Choice "a" is incorrect. Depreciation is a noncash expense and is not included in cash or other costs. Depreciation is relevant from the standpoint of the cash flows it generates through its tax shielding effect.

Choice "b" is incorrect. Depreciation is not excluded from capital budgeting decisions. Its value in reducing taxes and impacting cash flows is included capital budgeting decisions.

Choice "c" is incorrect. Depreciation is not a component of salvage value.


8

7. CPA-08286

Which of the following performance measures is nonfinancial?

a. Percentage of defective products. b. Return on investment. c. Gross profit margin. d. Economic value-added. Solution: Choice "a" is correct. Computation and reporting of a percentage of defective products is a nonfinancial measure. Typically financial measures deal with costs, revenues, or financial reports. Nonfinancial measures generally focus on operational statistics (such as defective products) rather than items measured in dollars.

Choice "b" is incorrect. Return on investment is based on financial statement amounts and represents a financial measure, not a nonfinancial measure.

Choice "c" is incorrect. Gross profit margin is based on financial statement amounts and represents a financial measure, not a nonfinancial measure.

Choice "d" is incorrect. Economic value added is based on financial statement amounts and represents a financial measure, not a nonfinancial measure.


9

8. CPA-08287

Selected costs associated with a product are as follows:

Total standard hours for units produced 5,000.00

Total actual direct labor cost $111,625.00

Actual per hour labor rate $23.50

Standard per hour labor rate

$24.00

What amount is the total direct labor price variance?

a. $2,375 unfavorable. b. $2,375 favorable. c. $2,500 unfavorable. d. $2,500 favorable. Solution: Choice "b" is correct. The direct labor price variance is $2,375 favorable and is computed using the tabular approach as follows:

Actual hours Labor price Actual hours x Actual rate variance x Standard rate 4,750 hours1 4,750 x $23.50 x $24.00 $111,625 $2,375 F $114,000 1 The actual hours worked is computed from the actual direct labor costs and actual per hour direct labor cost given in the fact pattern as follows: $111,625 / $23.50.

The actual rate of pay for direct labor is less than the standard rate of pay. Because the labor rate is less than standard, the variance is favorable. The difference in rates is applied to the actual hours to arrive at the labor price variance. [4,750 hours x ($24.00 - $23.50)]

Mechanically, using the tabular format, if a figure on the left ($111,625) is larger than the figure on the right ($114,000), then the variance is unfavorable, but if the figure on the left is smaller (as is the case in this instance), the variance is favorable. However, it is recommended that you determine the "sign" of the variance by looking at the difference between the standard and actual rates, as explained above.

Choice "a" is incorrect. Although the amount of the price variance is properly computed, the variance is improperly classified as unfavorable. Because the actual rate is less than the standard rate, this variance is favorable.

Choice "c" is incorrect. The amount of the variance and its characterization as unfavorable are both incorrect. The amount is incorrectly computed based upon standard (5,000) rather than actual (4,750) hours.

Choice "d" is incorrect. The amount of the variance is incorrect. The amount is incorrectly computed on the basis of (5,000) rather than actual (4,750) hours.


10

9. CPA-08288

Which of the following techniques effectively measures improvements in product quality as a result of internal failure costs?

a. Inspection of in-process goods. b. Recording the number of products returned over time. c. Tracking the number of products reworked. d. Tracking warranty expenses over time. Solution: Choice "c" is correct. Measures of internal failure costs, a subset of nonconformance costs, include tracking the number of products reworked. Rework of products assumes errors are caught and corrected before delivery. Reduction of rework is an indication of improved efficiency and product quality.

Choice "a" is incorrect. Inspection of in-process goods is an appraisal cost, not an internal failure cost. It is a subset of conformance costs.

Choice "b" is incorrect. Product returns create nonconformance costs, but these are external failure costs, not internal failure costs.

Choice "d" is incorrect. Although warranty expense is a nonconformance cost, it is an external failure cost, not an internal failure cost.


11

10. CPA-08289

The following information is available for economic activity for year 1:

In billions Financial transactions $60 Second-hand sales 50 Consumption by households 40 Investment by businesses 30 Government purchases of goods and services 20 Net exports 10

What amount is the gross domestic product for year 1?

a. $210 billion. b. $160 billion. c. $100 billion. d. $90 billion. Solution: Choice "c" is correct. Gross Domestic Product, using the expenditure approach, is computed as follows:

Government spending $20 Investment (by private industry) 30 Consumer spending 40 Exports (net) 10 Gross Domestic Product $100

Choices "a", "b", and "d" are incorrect based on the above calculation.


12

11. CPA-08290

The cost of debt most frequently is measured as:

a. Actual interest rate. b. Actual interest rate adjusted for inflation. c. Actual interest rate plus a risk premium. d. Actual interest rate minus tax savings. Solution: Choice "d" is correct. Actual interest rates minus tax savings is the most frequently used measure for cost of debt (kdt). After-tax interest fully considers both the costs and tax shield advantages of financing charges which reduce the cost of debt to its most relevant amount.

Choice "a" is incorrect. Actual interest does not consider the relevant tax shielding impact of interest deductibility.

Choice "b" is incorrect. Actual interest adjusted for inflation does not consider the relevant tax shielding impact of interest deductibility on the annual cash outflows associated with debt. In addition, the inflation is already a component of the interest rate added by the lender.

Choice "c" is incorrect. Actual interest plus a risk premium does not consider the relevant tax shielding impact of interest deductibility on the annual cash outflows associated with debt. In addition, the risk premium is already a component of the interest rate added by the lender.


13

12. CPA-08291

According to COSO, which of the following is the most effective method to transmit a message of ethical behavior throughout an organization?

a. Demonstrating appropriate behavior by example. b. Strengthening internal audit's ability to deter and report improper behavior. c. Removing pressures to meet unrealistic targets, particularly for short-term results. d. Specifying the competence levels for every job in an organization and translating those levels to

requisite knowledge and skills. Solution: Choice "a" is correct. According to the COSO, demonstrating appropriate behavior by example is the most effective method to transmit a message of ethical behavior throughout an organization. The commitment to ethical behavior begins with the tone at the top, and is best established by management's demonstrated commitment to ethical behavior.

Choice "b" is incorrect. Although detection of unethical behavior with improved internal audit resources is important, it is not as effective in transmitting a message of ethical behavior as leadership by example.

Choice "c" is incorrect. Realistic goals are an important component of a corporate culture that encourages ethical behavior; unrealistic goals may provide reasons for unethical behavior. But, according to COSO, they are no substitute for a strong commitment by management and an ethical tone at the top.

Choice "d" is incorrect. A competent work force supports ethical behavior and provides an environment where ethical behavior will thrive. However, a demonstrated commitment to ethical behavior by management is the most effective method for transmitting a message of ethical behavior throughout the organization.


14

13. CPA-08292

Within the COSO Internal ControlIntegrated Framework, which of the following components is designed to ensure that internal controls continue to operate effectively?

a. Control environment. b. Risk assessment. c. Information and communication. d. Monitoring. Solution: Choice "d" is correct. The monitoring component or function of the internal control framework is designed to ensure that internal controls continue to operate effectively. Monitoring of internal control effectiveness is done to provide an assessment of the performance of the system of internal control over time. Monitoring is designed to ensure that internal controls operate effectively.

Choice "a" is incorrect. The control environment is sometimes referred to as the "tone at the top." The control environment is the framework upon which all other principles are built. It is not as specifically designed to ensure that internal controls continue to operate effectively as is monitoring.

Choice "b" is incorrect. The risk assessment component of the COSO framework includes principles associated with management's consideration of the risk of material misstatement, not the assurance that internal controls continue to operate effectively.

Choice "c" is incorrect. The information and communication components of the COSO framework consider those systems that identify, capture, process, and distribute information supporting the accomplishment of financial reporting objectives, not the assurance that internal controls operate effectively.


15

14. CPA-08293

According to COSO, an effective approach to monitoring internal control involves each of the following steps, except:

a. Establishing a foundation for monitoring. b. Increasing the reliability of financial reporting and compliance with applicable laws and regulations. c. Designing and executing monitoring procedures that are prioritized based on risks to achieve

organizational objectives. d. Assessing and reporting the results, including following up on corrective action where necessary. Solution: Choice "b" is correct. Increasing the reliability of financial reporting and compliance with applicable laws and regulations is an approach to promoting a management philosophy and style that is congruent with effective financial reporting and control, not monitoring. Monitoring internal control may involve establishing a foundation for monitoring, prioritization of monitoring procedures based on risk to achieve organizational objectives, and assessing reporting results and following up as appropriate with corrective actions.

Choice "a" is incorrect. Embracing the attributes of the monitoring principle including establishing a foundation for monitoring is an effective approach to monitoring.

Choice "c" is incorrect. Designing procedures that are prioritized based on risks to achieving organization objectives is an effective approach to monitoring. Management might consider, for example, developing a list of control weaknesses that would seriously, rather than immaterially, threaten the reliability of financial reporting to establish standards for immediate reporting.

Choice "d" is incorrect. Assessing and reporting results, including following up on corrective actions, is an effective approach to monitoring. Management might consider, for example, establishing procedures that require reporting all deficiencies to a responsible manager.


16

15. CPA-08294

After reviewing the end-user computing (EUC) policy of an organization, an internal auditor audits the actuarial function and notices that some minimum control requirements are missing. Which of the following is a risk of using potentially incorrect end-user developed files?

a. Management places the same degree of reliance on the files as they do on files generated from mainframe systems.

b. Management receives limited information for decision making due to a lack of flexibility in EUC files. c. Management is unable to respond to competitive pressures quickly. d. Management continues to incur additional cost because it takes more hours to do the tasks using

EUC. Solution: Choice "a" is correct. Missing user controls in the end-user policy of an organization exposes the organization to using potentially incorrect end-user developed files and to incorrectly attributing the same credibility to those files as the organization places on their mainframe-generated data. End-user files operating independently of mainframe controls are subject to undetected errors. End-user files associated with highly complex computations, such as actuarial calculations, are particularly vulnerable to data integrity issues since the validity of amounts is not always intuitively or obviously right or wrong.

Choice "b" is incorrect. Management information is not necessarily limited by EUC files, but data may be compromised or incorrect.

Choice "c" is incorrect. Management's response time to competitive pressures will not be delayed but the quality of decision making may be compromised by bad data. Actuarially determined liabilities in an insurance environment based on flawed EUC files might result in bad pricing for an insured risk.

Choice "d" is incorrect. EUC files might be faster (more efficient) than mainframe data. Sadly, in this instance, the "efficiency" may be a byproduct of poor controls that produce bad data quickly.


17

16. CPA-08295

The fixed assets and related depreciation of a company are currently tracked on a password-protected spreadsheet. The information technology governance committee is designing a new enterprise-wide system and needs to determine whether the current fixed asset process should be included because the current system seems to be working properly. What long-term solution should the committee recommend?

a. Continuing to use the current spreadsheet process because there have been no issues in this area. b. Developing a new fixed asset system to manage the assets and related depreciation. c. Purchasing a stand-alone fixed asset program for managing the assets and related depreciation. d. Adopting the fixed-asset module of the new system for integration. Solution: Choice "d" is correct. Adopting a fully integrated fixed asset module meets the stated needs identified by the information technology governance committee for a new enterprise-wide system. The stand-alone or spreadsheet-based systems suggested by other alternatives do not interface with enterprise-wide data processing as well as an integrated module and would likely not be recommended.

Choice "a" is incorrect. The continued use of the legacy spreadsheet-based system suggested by this response does not meet the identified needs of the company because it does not interface with enterprise-wide data processing as well as an integrated module.

Choice "b" is incorrect. Development of a new fixed asset system does not meet the identified needs of the company because it does not interface with enterprise-wide data processing as well as an integrated module.

Choice "c" is incorrect. Purchasing a stand-alone fixed asset system does not meet the identified needs of the company because it does not interface with enterprise-wide data processing as well as an integrated module.


18

17. CPA-08296

A company is considering two projects, which have the following details:

Project A Project B

Expected sales $1,000 $1,500

Cash operating expense 400 700

Depreciation 150 250

Tax rate 30% 30%

Which project would provide the largest after-tax cash inflow?

a. Project A because after-tax cash inflow equals $465. b. Project A because after-tax cash inflow equals $315. c. Project B because after-tax cash inflow equals $635. d. Project B because after-tax cash inflow equals $385. Solution: Choice "c" is correct. Project B has an after-tax cash inflow equal to $635, which is larger than the performance of Project A. The after-tax cash flows for Project A and Project B are computed as follows:

Project A Annual cash inflows after tax ($1,000 - $400) x (1 - 0.3) $420 Depreciation tax shield ($150 x 0.3) 45 Total after-tax cash flows $465 Project B Annual cash inflows after tax ($1,500 - $700) x (1 - 0.3) $560 Depreciation tax shield ($250 x 0.3) 75 Total after-tax cash flows $635 Choice "a" is incorrect. Although the after-tax cash flows of Project A are correctly computed in this option, they are smaller, not larger than Project B.

Choice "b" is incorrect. This solution incorrectly computes the after-tax cash flows by including depreciation as a cash outflow. In addition, Project A cash inflows are less than those of Project B.

Choice "d" is incorrect. Although Project B does have the largest after-tax cash inflows, this solution incorrectly computes the after-tax cash flows by including depreciation as a cash outflow.


19

18. CPA-08297

Trendy Co. produced and sold 30,000 backpacks during the last year at an average price of $25 per unit. Unit variable costs were the following:

Variable manufacturing costs $9 Variable selling and administrative costs 6

Total $15

Total fixed costs were $250,000. There was no year-end work-in-process inventory. If Trendy had spent an additional $15,000 on advertising, then sales would have increased by $30,000. If Trendy had made this investment, what change would have occurred in Trendy's pretax profit?

a. $3,000 increase. b. $4,200 increase. c. $3,000 decrease. d. $4,200 decrease. Solution: Choice "c" is correct. The additional expenditure of $15,000 in advertising would result in a $3,000 decrease in Trendy's pretax profit despite the $30,000 increase in sales. The increased contribution margin associated with additional sales is compared to the incremental cost of additional advertising as follows: Compute contribution margin in total: Selling price

variable costs =

contribution margin x units sold (sales / selling price) = Total contribution margin

$25 $15 = $10 x 1,200 units ($30,000 / $25) = $12,000 Less: Additional advertising costs (15,000) Decrease in pretax profit ($3,000)

Choices "a", "b", and "d" are incorrect based on the computation above.


20

19. CPA-08298

The demand curve for a product reflects which of the following?

a. The impact of prices on the amount of product offered. b. The willingness of producers to offer a product at alternative prices. c. The impact that price has on the amount of a product purchased. d. The impact that price has on the purchase amount of two related products. Solution: Choice "c" is correct. The demand curve illustrates the maximum quantity of a specific good that consumers are willing and able to purchase at each and every price, all else being equal. Thus, the demand curve reflects the impact that price has on the amount of a product purchased.

Choice "a" is incorrect. The supply curve, not the demand curve, measures the maximum quantity of a specific good that sellers are willing and able to produce at each and every price.

Choice "b" is incorrect. The movement of points along the supply curve, not the demand curve, represents a change in quantity supplied as a result of a change in price and is the measure of a willingness of producers to offer a product at alternative prices.

Choice "d" is incorrect. Cross elasticity, not the demand curve, measures the impact that price has on the purchased amount of two related goods (either substitute or compliment).


21

20. CPA-08299

Managers of the Doggie Food Co. want to add a bonus component to their compensation plan. They are trying to decide between return on investment (ROI) and residual income (RI) as the performance measure they will use. If Doggie adopts the RI performance measure, the relevant required rate of return would be 18%. One segment of Doggie is the Good Treats division, where the manager has invested in new equipment. The operating results from this equipment are as follows:

Assuming that there are no income taxes, what would be the ROI and RI for this equipment that has an average value of $100,000?

ROI RI

a. $2,000 20% b. 35% $3,600 c. $3,600 35% d. 20% $2,000 Solution: Choice "d" is correct. Return on investment and residual income measures are computed as follows:

Return on Investment (ROI) ROI = Income / Investment ROI = (Revenues Cost of goods sold General & administrative expense) / Investment ROI = ($80,000 $45,000 $15,000) / $100,000 ROI = $20,000 / $100,000 = 20% Residual Income (RI) RI = Income (Investment x Hurdle rate) RI = ($80,000 $45,000 $15,000) ($100,000 x 18%) RI = $20,000 $18,000 = $2,000 Choices "a", "b", and "c" are incorrect based on the computation above.

Revenues $80,000

Cost of goods sold 45,000

General and administrative expenses 15,000


22

AICPA QUESTIONS RATED HARD DIFFICULTY 21. CPA-08300

In using regression analysis, which measure indicates the extent to which a change in the independent variable explains a change in the dependent variable?

a. p-value. b. R-squared. c. Standard error. d. t-statistic. Solution: Choice "b" is correct. R-squared is the coefficient of determination and is the proportion of the total variation in a dependent variable (y) explained by the independent variable (x).

Choice "a" is incorrect. The p-value is a statistical measure of the likelihood that tested data could have occurred by chance.

Choice "c" is incorrect. The standard error is a measure of the standard deviation or average variability of a sampling distribution.

Choice "d" is incorrect. The t-statistic is used in hypothesis testing and the computation of confidence levels.


23

22. CPA-08301

LM Enterprises produces two products in a common production process, each of which is processed further after the split-off point. Joint costs incurred for the current month are $36,000. The following information for the current month was also gathered:

Product Units produced Units sold Separable costs Selling price per unit L 10,000 9,500 $20,000 $ 8 M 5,000 4,000 40,000 20

Assuming that LM Enterprises uses the estimated net realizable value method to allocate costs, what amount would be the joint cost allocated to product M?

a. $20,000 b. $12,000 c. $15,000 d. $18,000 Solution: Choice "d" is correct. The joint cost allocated to product M, using the estimated net realizable value method is $18,000.

The estimated net realizable value method assumes that the actual net realizable value of products is unknown at the split-off point. The net realizable value is estimated based on the difference between the final selling prices of the goods, net of the identifiable costs associated with each product after split-off. The ratio of the estimated net realizable value of each product to the total of all estimated net realizable values of all joint products is the basis for allocation.

LM Enterprises would compute its allocation as follows:

Compute estimated net realizable value (NRV) Product Units x Selling price = Total Disposal cost = Net realizable value L 10,000 x $8.00 = $80,000 $20,000 = $60,000 M 5,000 x $20.00 = $100,000 $40,000 = $60,000 Total estimated net realizable value $120,000 Compute the ratio of product M's NRV to all NRV x joint cost $60,000 / $120,000 x $36,000 = $18,000 Choice "a" is incorrect. This proposed choice incorrectly uses total sales value rather that net realizable value to allocate joint costs. ($100,000 / $180,000 x $36,000 = $20,000)

Choice "b" is incorrect. This proposed choice incorrectly uses total units rather that net realizable value to allocate joint costs. (5,000 / 15,000 x $36,000 = $12,000)

Choice "c" is incorrect. This proposed choice incorrectly uses the units sold (9,500 and 4,000) rather than the units produced (10,000 and 5,000) to allocate costs.


24

23. CPA-08302

Which of the following pricing policies results in establishment of a price to external customers higher than the competitive price for a given industry?

a. Collusive pricing. b. Dual pricing. c. Predatory pricing. d. Transfer pricing. Solution: Choice "a" is correct. Collusive pricing anticipates that competitors will collude or conspire to maintain prices and mutual profitability. Collusive pricing undermines competitive pricing and maintains prices to external customers at levels higher than they would be in a competitive market place.

Choice "b" is incorrect. Dual pricing involves appropriately assigning different prices to the same product in different market settings. Dual pricing is a sophisticated extension of competitive pricing. The prices are simply established at the levels appropriate for each market and would not result in higher prices than would be experienced in competitive markets.

Choice "c" is incorrect. Predatory pricing strategies typically result in lower prices to external customers than competitive pricing. Predatory pricing (below market or even below cost) is undertaken by larger organizations that can absorb losses and deliberately do so in an attempt to drive smaller, less capitalized, competitors from the market place.

Choice "d" is incorrect. Transfer pricing is the charge made between affiliates for products or services. Transfer prices may be at any level including cost and market and do not relate to the establishment of prices to external customers.


25

24. CPA-08303

A company's web server has been overwhelmed with a sudden surge of false requests that caused the server to crash. The company has most likely been the target of:

a. Spoofing. b. Piggybacking. c. An eavesdropping attack. d. A denial of service attack. Solution: Choice "d" is correct. In a denial of service attack, one computer bombards another computer with a flood of information intended to keep legitimate users from accessing the target computer or network. A sudden surge of false requests that cause a company's server to crash is a denial of service attack.

Choice "a" is incorrect. A spoofing attack is a breach of network security resulting from a person or program successfully impersonating a legitimate network user for illegitimate purposes.

Choice "b" is incorrect. Piggybacking is the practice of using another person or organization's wireless network connection without the express permission of the subscriber or owner of the network.

Choice "c" is incorrect. An eavesdropping attack seeks to access a network and steal or eavesdrop on communications in an attempt to illicitly obtain passwords or other confidential or sensitive information.


26

25. CPA-08304

A company invested in a new machine that will generate revenues of $35,000 annually for seven years. The company will have annual operating expenses of $7,000 on the new machine. Depreciation expense, included in the operating expenses, is $4,000 per year. The expected payback period for the new machine is 5.2 years. What amount did the company pay for the new machine?

a. $145,600 b. $161,200 c. $166,400 d. $182,000 Solution: Choice "c" is correct. The company paid $166,400 for the machine based on the payback data provided. The payback value (in years) is the amount of the capital investment divided by the after-tax cash flows of the project. By extension, the amount of the investment, the amount the company paid for the new machine) is the after-tax cash flow times the payback period computed as follows:

Compute after-tax cash flows Revenues $35,000 Total operating expenses (7,000) Noncash expenses (depreciation) 4,000 Total cash flows (note, no tax rate provided) $32,000

(Note: No tax rate is provided, so the only cash flow amount is the pretax amount which, we must assume, approximates the after-tax cash flows)

Compute investment Cash flows x Payback period = Investment (amount paid for new machine) $32,000 x 5.2 years = $166,400 Choices "a", "b", and "d" are incorrect based on the explanation above.


27

26. CPA-08305

A company's new time clock process requires hourly employees to select an identification number and then choose the clock-in or clock-out button. A video camera captures an image of the employee using the system. Which of the following exposures can the new system be expected to change the least?

a. Fraudulent reporting of employees' own hours. b. Errors in employees' overtime computation. c. Inaccurate accounting of employees' hours. d. Recording of other employees' hours. Solution: Choice "b" is correct. Controls over time and attendance will not be effective in preventing or detecting errors in the computation of employee overtime. Miscalculation of the wage or overtime premium amount could occur even if hours worked are accurately controlled and captured by the time and attendance system.

Choice "a" is incorrect. Controls over time and attendance systems would be designed to be effective in preventing fraudulent reporting of an employee's own hours. The video image would be very helpful in this regard.

Choice "c" is incorrect. Controls over time and attendance systems would be designed to be effective in preventing inaccurate accounting for employees' hours. The video image would be very helpful in this regard.

Choice "d" is incorrect. Controls over time and attendance systems would be designed to be effective in preventing recording of other employees' hours. The video image would be very helpful in this regard.


28

27. CPA-08306

Which of the following is most useful when risk is being prioritized?

a. Low and high probability exposures. b. Low and high-degree loss exposures. c. Expected value. d. Uncontrollable risks. Solution: Choice "c" is correct. Expected value computations that assign probabilities to potential outcomes quantify both the likelihood (percentage) and outcome (amounts) into a single value. Expected value is therefore the most useful of the listed statistics when risk is being prioritized.

Choice "a" is incorrect. Low and high probability exposures identify ranges of likelihood but do not consolidate findings into a single expected value.

Choice "b" is incorrect. Low and high degree loss exposures identify ranges of impact but do not consolidate findings into a single expected value.

Choice "d" is incorrect. Uncontrollable risks are, by definition, not within the ability of the manager to mitigate. Like sunk costs that will not change regardless of priorities, uncontrollable risk is not useful when prioritizing risk.


29

28. CPA-08307

A manufacturing company has several product lines. Traditionally, it has allocated manufacturing overhead costs between product lines based on total machine hours for each product line. Under a new activity-based costing system, which of the following overhead costs would be most likely to have a new cost driver assigned to it?

a. Electricity expense. b. Repair and maintenance expense. c. Employee benefits expense. d. Depreciation expense. Solution: Choice "c" is correct. Activity-based costing seeks to assign overhead costs in a manner that identifies consumption of resources. Employee salaries or even head count are more appropriate cost drivers than machine hours for employee benefits expense. Machine hours would be more likely identified as cost drivers for electric, repairs and maintenance, and depreciation expense.

Choice "a" is incorrect. Machine hours are likely an appropriate cost driver for electricity expense.

Choice "b" is incorrect. Machine hours are likely an appropriate cost driver for repairs and maintenance expense.

Choice "d" is incorrect. Machine hours are likely an appropriate cost driver for depreciation expense.


30

29. CPA-08308

In an e-commerce environment that requires that the information technology (IT) system be available on a continuous basis, more emphasis will be placed on which of the following aspects of the planning than in a traditional organization?

a. Maintain appropriate written source documents so the data can be re-entered if it is lost or compromised.

b. Maintain redundant systems for instant availability to assure the flow of transactions. c. Review additional expenses to obtain the required amount of business interruption insurance

coverage for the organization. d. Assure that appropriate data backups are stored in an off-site location. Solution: Choice "b" is correct. E-commerce environments are more highly dependent upon robust communications systems than traditional organizations to ensure continuous service. Maintenance of redundant systems for instant availability to assure the flow of transactions would require more emphasis in an e-commerce environment than a traditional organization.

Choice "a" is incorrect. Traditional systems will place more emphasis on written source documents to provide data redundancy than e-commerce environments.

Choice "c" is incorrect. Both traditional and e-commerce organizations will invest in business interruption insurance to ensure business survival.

Choice "d" is incorrect. Both traditional and e-commerce organizations will make appropriate arrangements for system backup and safeguarding of data.


31

30. CPA-08309

As part of a benchmarking process, a company's costs of quality for the current month have been identified as follows:

Employee training $20,000

Product recalls 8,000

Scrap 4,500

Quality inspectors 48,000

Preventive maintenance 19,500

Supplier education expense 17,500

Materials inspection expense 60,000

Processing product returns 2,500

What amount is the company's prevention cost for the current month?

a. $39,500 b. $57,000 c. $165,000 d. $175,500 Solution: Choices "b" is correct. The company's prevention costs total $57,000, as computed below:

Cost Conforming costs Nonconforming costs Prevention Appraisal Internal External Employee training $20,000 Product recalls $8,000 Scrap $4,500 Quality inspectors $48,000 Preventive maintenance

$19,500

Supplier education expense

$17,500

Materials inspection exp.

$60,000

Processing product returns

$2,500

Total $57,000 $108,000 $4,500 $10,500 Choices "a", "c", and "d" are incorrect based on the above analysis.


32

31. CPA-08310

A company is considering outsourcing one of the component parts for its product. The company currently makes 10,000 parts per month. Current costs are as follows:

Per unit Total

Direct materials $4 $40,000

Direct labor 3 30,000

Fixed plant facility cost 2 20,000

The company decides to purchase the part for $8 per unit from another supplier and rents its idle capacity for $5,000/month. How will the company's monthly costs change?

a. Decrease $15,000. b. Decrease $10,000. c. Increase $5,000. d. Increase $10,000. Solution: Choice "c" is correct. Monthly costs of the company would increase by $5,000 if the company elects to buy rather than make its component part. Change in cost is computed as follows:

Cost of purchased component (10,000 parts x $8 per part) $80,000 Rental of idle capacity (5,000) Net cost $75,000 Avoidable costsdirect materials ($40,000) Avoidable costsdirect labor ( 30,000) Total costs avoided $(70,000) Cost increase $ 5,000

Choice "a" is incorrect. A decrease of $15,000 appears to include fixed plant facility costs as part of the incremental reduction in expenses.

Choice "b" is incorrect. A decrease of $10,000 appears to include fixed plant facility costs as part of the incremental reduction in expenses while ignoring the benefit of the rental of idle space.

Choice "d" is incorrect. An increase of $10,000 appears to ignore the benefit of the rental of idle space.


33

32. CPA-08311

Which of the following methods should be used if capital rationing needs to be considered when comparing capital projects?

a. Net present value. b. Internal rate of return. c. Return on investment. d. Profitability index. Solution: Choice "d" is correct. The profitability index is used for capital rationing. The profitability index is the ratio of the present value of net future cash inflows to the present value of the net initial investment. Ranking and selection of investments is made by listing projects in descending order. Limited capital resources are applied in the order of the index until resources are either exhausted or the investment required by the next project exceeds remaining resources.

Choice "a" is incorrect. The net present value method is a technique to screen investments for compliance with capital investment policy or criteria, not a capital rationing method.

Choice "b" is incorrect. The internal rate of return method is a technique to screen investments for compliance with capital investment policy or criteria, not a capital rationing method.

Choice "c" is incorrect. The return on investment method is a technique to screen investments for compliance with capital investment policy or criteria, not a capital rationing method.


34

33. CPA-08312

The full-employment gross domestic product is $1.3 trillion, and the actual gross domestic product is $1.2 trillion. The marginal propensity to consume is 0.8. When inflation is ignored, what increase in government expenditures is necessary to produce full employment?

a. $100 billion b. $80 billion c. $20 billion d. $10 billion Solution: Choice "c" is correct. Government expenditures must increase by $20 billion in order to increase the GDP by $100 billion (from $1.2 trillion to $1.3 trillion). Government expenditures will benefit from the multiplier effect, i.e., the multiplied increase in the level of economic activity that results from increased spending in the economy. The multiplier effect results from the marginal propensity to consume. The level of spending required to achieve a $100 billion increase in the economy, assuming a 0.8 marginal propensity to consume, is as follows:

Spending = Change in GDP (1 - MPC) Spending = $100,000,000,000 (1 - 0.8) Spending = $100,000,000,000 x (1 - 0.8) Spending = $20,000,000,000 Choices "a", "b", and "d" are incorrect based on the above calculation.


35

34. CPA-08313

Which of the following performance measures may lead a manager of an investment center to forgo investments that could benefit the company as a whole?

a. Return on investment. b. Residual income. c. Profitability index. d. Economic value added. Solution: Choice "a" is correct. Return on investment (ROI) measures may discourage mangers from avoiding investments that could benefit the company as a whole. Use of the ROI exclusively as a measure of performance can inadvertently focus managers purely on maximizing short-term returns. Profitable units are reluctant to invest in additional productive resources because their short-term result will be to reduce ROI.

Choice "b" is incorrect. Residual income methods (including economic value added) focus on target return and amount and encourage managers to invest in projects that exceed the hurdle rate. As a result, divisions with high rates of return do not fear dilution of their rates and are not discouraged from making investments that demonstrate strong residual income performance.

Choice "c" is incorrect. The profitability index is a method for ranking previously screened investments and rationing available capital. It would not discourage a manager from making an investment.

Choice "d" is incorrect. Residual income methods (including economic value added) focus on target return and amount and encourage managers to invest in projects that exceed the hurdle rate. As a result, divisions with high rates of return do not fear dilution of their rates and are not discouraged from making investments that demonstrate strong residual income performance.


36

35. CPA-08314

A company has income after tax of $5.4 million, interest expense of $1 million for the year, depreciation expense of $1 million, and a 40% tax rate. What is the company's times-interest-earned ratio?

a. 5.4 b. 6.4 c. 7.4 d. 10.0 Solution: Choice "d" is correct. The times interest earned ratio is 10.0, based the following formula:

Earnings before interest and taxes (EBIT) Times interest earned = Total interest expense Compute pretax income from data provided as follows: After-tax income of $5.4 million = Pretax income x (1 40% tax rate) $5.4 million / 60% = Pretax income $9,000,000 = Pretax income Add interest to pretax income to arrive at EBIT Pretax income + Interest = EBIT $9,000,000 + $1,000,000 = $10,000,000 Compute times interest earned $10,000,000 (EBIT) Times interest earned = $1,000,000 (Interest expense) Times interest earned = 10.0

Choice "a" is incorrect. After-tax income, unadjusted for interest, was incorrectly used in the numerator for the proposed solution. The numerator of the times interest earned ratio should be EBIT.

Choice "b" is incorrect. After-tax income, adjusted for interest, was incorrectly used in the numerator for the proposed solution. The numerator of the times interest earned ratio should be EBIT.

Choice "c" is incorrect. After-tax income, adjusted for interest and depreciation, was incorrectly used in the numerator for the proposed solution. The numerator of the times interest earned ratio should be EBIT.


37

36. CPA-08315

According to COSO, which of the following is a compliance objective?

a. To maintain adequate staffing to keep overtime expense within budget. b. To maintain a safe level of carbon dioxide emissions during production. c. To maintain material price variances within published guidelines. d. To maintain accounting principles that conform to GAAP. Solution: Choice "b" is correct. Maintaining safe (mandated by regulation) carbon dioxide emissions during production is a compliance objective. Compliance objectives include adherence to the laws, rules, and regulations associated with operations, including environmental regulations and other laws.

Choice "a" is incorrect. Maintaining adequate staffing to keep overtime expense within budget is likely an operations rather than compliance objective.

Choice "c" is incorrect. Maintaining material price variances within published guidelines is likely an operations objective.

Choice "d" is incorrect. Maintaining accounting principles that conform to GAAP is likely a reporting objective.


38

37. CPA-08316

The factor for present value of an annuity for five years at 10% is 3.791. The factor for present value of $1 for five years at 10% is 0.621. The factor for future value of $1 at 10% for five years is 1.611. The factor for future value of an annuity for five years at 10% is 6.1053.

Given a 10% discount rate with cash inflows of $3,000 at the end of each year for five years and an initial investment of $11,000, what is the net present value?

a. $(9,500) b. $370 c. $4,000 d. $11,370 Solution: Choice "b" is correct. The present value of the cash inflows of $3,000 per year for five years at 10% is $3,000 x 3.791 = $11,373. The original investment is $11,000. The net present value (NPV) is the difference of $373. The closest answer is $370.

Choices "a", "c", and "d" are incorrect based on the above explanation.


39

38. CPA-08317

A senior executive of an international organization who wishes to demonstrate the importance of the security of company information to all team members should:

a. Visibly participate in a global information security campaign. b. Allocate additional budget resources for external audit services. c. Review and accept the information security risk assessments in a staff meeting. d. Refer to the organization's U.S. human resources policies on privacy in a company newsletter. Solution: Choice "a" is correct. A senior executive of an international organization who wishes to demonstrate the importance of the security of company information to all team members should visibly participate in a global information security campaign. It is the role of project sponsors at the executive level of management to participate in high-level planning and leading the development of projects, such as information security.

Choice "b" is incorrect. Additional external audit services may detect weaknesses in the security of company information, but it will not be as effective in demonstrating the importance of the issue to all team members as the participation of senior management in a global information security campaign.

Choice "c" is incorrect. Acceptance of risk assessments at staff meetings may document the process of evaluating weaknesses in the security of company information, but it will not be as effective in demonstrating the importance of the issue to all team members as the participation of senior management in a global information security campaign.

Choice "d" is incorrect. Referencing the organization's human resources policies on privacy in a company newsletter may notify employees of policies related to the security of company information, but it will not be as effective in demonstrating the importance of the issue to all team members as the participation of senior management in a global information security campaign.


40

39. CPA-08318

An accountant has been retained by a company as an investment advisor for its employees. Research of historical rates of return yields the following information:

Type of Investment Mean Return Standard Deviation

Common stocks 12% 20% Long-term corporate bonds 6% 8% Intermediate-term government bonds 5% 5% U.S. Treasury bills 4% 3%

Which of the following investments has the greatest reward/risk ratio if a return's standard deviation is an accurate assessment of investment risk?

a. Common stocks. b. Long-term corporate bonds. c. Intermediate-term government bonds. d. U.S. Treasury bills. Solution: Choice "d" is correct. U.S. Treasury bills with a mean return of 4% and risk of loss of 3% represent the greatest reward/risk ratio or relationship presented. The ratio compares the amount of reward or return to the risk of loss assumed. At 4:3, the U.S. Treasury bill will always return a positive 1% to the investor.

Choice "a" is incorrect. Common stock with a mean return of 12% and a risk of loss of 20% represents a reward/risk ratio (12:20) that is less than the U.S. Treasury bill option computed at 4:3 above.

Choice "b" is incorrect. Long-term corporate bonds with a mean return of 6% and a risk of loss of 8% represents a reward/risk ratio (6:8) that is less than the U.S. Treasury bill option computed at 4:3 above.

Choice "c" is incorrect. Intermediate-term government bonds with a mean return of 5% and a risk of loss of 5% represents a reward risk ratio (5:5) that is less than the U.S. Treasury bill option computed at 4:3 above.


41

40. CPA-08319

The accountant for Champion Brake Inc. applies overhead based on machine hours. The budgeted overhead and machine hours for the year are $260,000 and 16,000, respectively. The actual overhead and machine hours incurred were $275,000 and 20,000. The cost of goods sold and inventory data compiled for the year is as follows:

Direct Materials $ 50,000 COGS 450,000 WIP (units) 100,000 Finished Goods (units) 150,000

What is the amount of over/underapplied overhead for the year?

a. $15,000 b. $50,000 c. $65,000 d. $67,000 Solution: Choice "b" is correct. Overhead was over applied by $50,000. Champion Brake would have charged $275,000 to its actual overhead account (given) and applied $325,000 for a difference of $50,000. The amount applied is computed as follows:

Compute the standard rate per driver (machine hour) Total standard costs / Total standard hours = Application rate per hour $260,000 / 16,000 = $16.25 per hour Compute amount applied Total actual hours x Application rate per hour = Total applied overhead 20,000 x $16.25 = $325,000

Other data useful in computing cost of goods manufactured (e.g., prime costs, inventory values, etc.) are not relevant to the computation.

Choices "a", "c", and "d" are incorrect per the computations above.

BEC Released by AICPA

2013

Task 1455_01

SOLUTION AND EXPLANATION:

To: Management

Re: Data security and accessibility for a mobile workforce

The following memorandum is intended to outline various options for data storage for 3WAT, Inc.'s mobile workforce and address data safety, data integrity, and data access issues.

The company's current approach allows for storage of data on the individual laptops of 3WAT's highly mobile workforce. The somewhat obvious weaknesses in doing business this way include compromised data safeguarding, loose controls over data, and uneven access to information.

Data safeguarding issues should be initially addressed with a mobile device security policy specifically addressing handheld devices. Information technology policies should include an educational component and be joined with companion human resources policies that address the consequences of noncompliance with the mobile device security policy.

Effective policies will mirror controls that remove users from security decisions. Users must, for example, be required to use passwords for access to company networks, be limited to using only company-owned devices for company data, and take responsibility for assigned hardware.

Improved controls and uniform access to data can be accomplished in a range of ways. Connections to company networks may take the form of virtual private networks (VPNs) that connect to 3WAT's internal network or the use of cloud computing. VPNs are more secure but more expensive. The cloud will be less expensive; however, the company's security requirements may require more rigorous controls than those afforded by the cloud.

The mobile workforce is an important tactic in modern business. An enterprise architecture that addresses data safety, data integrity, and data access issues is vitally important. I have outlined a few issues and solutions or action steps in the preceding memorandum and look forward to the opportunity to assist in the revisions to the company's infrastructure and to incorporate these approaches into a revised policy.

Task 273_01

SOLUTION AND EXPLANATION:

To: Management of Purft, Inc.

Re: Segregation of dutiesaccountant

The following memorandum has been prepared in response to your request that I discuss the internal control issues related to the tasks assigned to the staff accountant in his job description.

The control weaknesses are significant.

Internal controls rely heavily on segregation of incompatible duties that could potentially allow an employee to process a transaction from beginning to end without any effective oversight. Segregation of duties helps prevent fraud by requiring that multiple parties collude in order to process transactions either incorrectly (commit errors) or fraudulently (commit irregularities).

Generally speaking, transaction authorization should be segregated from transaction recordkeeping. And the underlying custody of assets associated with authorization and record keeping should be segregated from both.

In multiple instances, the job description of the staff accountant combines incompatible functions. For example, the endorsement, coding, and recording of checks received for deposit should not be combined with accounts receivable subledger reconciliations. The opportunity for misapplication of receipts to incorrect accounts increases as one person handles the custody (coding) and record keeping (recoding and reconciliation) of this end of the revenue cycle. In addition, the custody of accounts payable checks mailed to vendors should not be combined with the record-keeping function associated with reconciliation of accounts payable and various asset (fixed asset and investment) subsidiaries. Falsified transactions could go undetected for significant periods if checks are handled inappropriately and no adjustment is made to the underlying accounting records.

The discussion above is not exhaustive; however, the job description of the staff accountant includes a number of incompatible duties that compromise and weaken internal controls. I would be delighted to meet with you further and discuss options to separate duties more effectively among members of your finance group.

Documents

2013 AICPA BEC Release