CONTENTS

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Contents Study Manual – Business Environment & Concepts

Introduction............................................................................................................................... 8 Frequently Asked Questions........................................................................................................12 Exam Strategies and Types of Questions on the CPA Exam...........................................................15 BEC Writing Guide....................................................................................................................39 Ch. 1 Corporate Governance....................................................................................................67 Student Learning Outcomes....................................................................................................... 68 Rights, Duties, Responsibilities, and Authority of the Board of Directors, Officers, and Other Employees................................................................................................................. 68 Questions: Corporate Governance.............................................................................................. 80 Answers: Corporate Governance................................................................................................. 82 Ch. 2 Economics of the Firm....................................................................................................83 Business Cycles and Reasons for Business Cycles......................................................................... 84 Factors Affecting Business Cycle................................................................................................. 85 Causes of Shifts in Aggregate Demand and Aggregate Supply...................................................... 87 Effects of the Business Cycle on an Entity’s Financial Position and Business Operations............... 87 Laws of Supply and Demand...................................................................................................... 89 Shifts in and Movements Along Supply and Demand Curves...................................................... 90 Markets...................................................................................................................................... 91 Market Influences on Business Strategies..................................................................................... 93 Price and Income Elasticity of Demand....................................................................................... 99 Total Revenue, Total Expenditures, and Price Elasticity of Demand .......................................... 102 Questions: Economics of the Firm............................................................................................ 108 Answers: Economics of the Firm............................................................................................... 110

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Ch. 3 Economics: Competitive Environment of the Firm.........................................................111 The Stages of the Product Life Cycle and Competitive Advantage.............................................. 112 Supply Chain Management...................................................................................................... 131 Questions: Economics: Competitive Environment of the Firm.................................................. 133 Answers: Economics: Competitive Environment of the Firm..................................................... 135 Ch. 4 Economics: Sensitivity of the Firm to the Macroeconomy...............................................137 Economic Measures and Reasons for Changes in the Economy.................................................. 138 Gross Domestic Product (GDP)............................................................................................... 138 Gross National Product (GNP)................................................................................................. 138 Net Domestic Product (NDP).................................................................................................. 139 Measuring Gross Domestic Product (GDP).............................................................................. 139 Alternatives to GDP and GNP................................................................................................. 141 Labor Market Indicators........................................................................................................... 141 Inflation................................................................................................................................... 143 Deflation.................................................................................................................................. 145 Market Influences on Business Strategies................................................................................... 146 Page 3

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Study Manual – Business Environment & Concepts Chapter 10 – Finance: Capital Budgeting

Applying Capital Budgeting Techniques A. Accounting rate of return. This is a method of evaluating investments in which the rate of return is compared to the company’s cost of capital. 1. If the computed rate exceeds the cost of capital, the investment is acceptable. If the computed rate is lower, the investment is unacceptable, and if the computed rate equals the cost of capital, we are indifferent to the investment. 2. The accounting rate of return involves a simple computation in which the increase in accounting net income per year is divided by the amount of the investment. (The increase in accounting net income is that amount that is expected to be attributable to the new project that is being considered and evaluated.) 3. In some circumstances, the accounting rate of return may be computed based on the average investment, rather than the total investment. In this case, the annual increase in accounting net income is divided by the average investment, which is the initial investment plus the salvage value divided by two.

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4. The greatest advantage of using the accounting rate of return is that it is easy to compute. 5. There are two major weaknesses.

a. The accounting rate of return is based on the increase in accounting net income, rather than cash flows. It does not indicate the increase in funds available to the company.

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b. The accounting rate of return does not take into account the time value of money. Example: Accounting rate of return

Saratoga Company is planning to purchase a new machine for $600,000. The new machine will be depreciated on the straight-line basis over a 6-year period with no salvage, and a full year’s depreciation will be taken in the year of acquisition. The new machine is expected to produce a cash flow from operations, net of income taxes, of $150,000 a year in each of the next six years. Please assume for simplicity that the impact of any annual depreciation amount calculated is net of income tax savings. The accounting (book value) rate of return on the initial investment is expected to be: A. B. C. D.

8.3%. 12.0%. 16.7%. 25.0%.

Solution:

The answer is A.



Expected cash flow from operations $150,000 Less: depreciation ($600,000 / 6 years) 100,000 Average net income $ 50,000 net income $50, 000 = = 8.3% investment $600, 000

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Study Manual – Business Environment & Concepts

Chapter 6 – Economics: Global Currency Risk and Hedging

Questions: Economics: Global Currency Risk and Hedging Please use the following practice questions in conjunction with the corresponding online QBank multiple-choice and true/false questions. 1.

A depreciation in the value of the U.S. dollar on the foreign exchange market will: A. make U.S. exports cheaper to foreigners. B. make imports less expensive for U.S. consumers. C. make U.S. exports more expensive for foreign consumers. D. cause the United States to run a balance of payments surplus in the long run.

2.

If the exchange rate value of the English pound goes from $1.75 to $1.50, determine if the pound depreciates or appreciates relative to the dollar and if the English will find U.S. goods cheaper or more expensive. Pound U.S. goods A. Depreciated Cheaper B. Appreciated More expensive C. Appreciated Cheaper D. Depreciated More expensive

3.

Other things equal, the financing of a U.S. import transaction: A. increases the supplies of foreign currency held by U.S. banks. B. increases U.S. interest rates. C. decreases the supplies of foreign currency held by U.S. banks. D. increases GDP in the United States.

4.

Which of the following would contribute to a U.S. balance of payments deficit? A. Kawasaki builds a motorcycle manufacturing plant in Kansas City. B. U.S. tourists travel in large numbers to Europe. C. A wealthy Mexican citizen builds a mansion in Beverly Hills. D. Zaire pays interest on its debt to the United States.

5.

The U.S. demand for euros is: A. downsloping because at lower dollar prices for euros, Americans will want to buy more European goods and services. B. downsloping because at higher dollar prices for euros, Americans will want to buy more European goods and services. C. downsloping because the dollar price of euros and the euro price of dollars are directly related. D. upsloping because a higher dollar price of euros makes European goods and services more attractive to Americans.

6.

Which of the following will generate a demand for country X’s currency in the foreign exchange market? A. Travel by citizens of country X in other countries. B. The desire of foreigners to buy stocks and bonds of firms in country X. C. The imports of country X. D. Charitable contributions by country X’s citizens to citizens of developing nations.

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Study Manual – Business Environment & Concepts

Chapter 6 – Economics: Global Currency Risk and Hedging

Answers: Economics: Global Currency Risk and Hedging 1. A A depreciation of a currency makes a country’s goods more attractive to foreign buyers.

Answers (b) and (c) would be true if the dollar was appreciating. The balance of payments equation should always equal 0. Balance of payments (balance of international payments) is an overall accounting of a nation’s international economic activity, summarizing a period’s transactions between a nation and the rest of the world. Its component parts (current, capital, and financial accounts) will balance each other out.

2. D An exchange rate is a ratio that describes how many units of one currency you can buy per unit of another currency. The numerator will be in the currency in which the quote is made and the denominator is the other unit of the currency you are comparing. A currency appreciates when it rises in value relative to another foreign currency and likewise, a currency depreciates when it falls in value relative to another foreign currency. An appreciation in value of a currency makes that country’s goods more expensive to residents of other countries. The depreciation of the value of a currency makes a country’s goods more attractive to foreign buyers. 3. C An import transaction will cause a reduction in foreign currency held by U.S. banks as dollars are given and foreign currency is received from the bank to effect the import transaction. Answer (a) is not correct because the domestic company that needs the foreign currency to effect the importation of goods will take foreign currency out of the U.S. banks. Answer (b) is not correct because there is no relationship between U.S. interest rates and the financing of a U.S. import transaction. Answer (d) is not correct because an import implies that there has been no increase in domestic production as a result of the transaction.

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4. B Tourists traveling to Europe are the same as imports of services from Europe. Answer (a) is not correct because Kawasaki would be paying domestic contractors with U.S. currency and thus, there would be no impact on the U.S. balance of payments. Answer (c) is not correct because the Mexican citizen would be paying the domestic contractors with U.S. currency. Answer (d) is not correct because the payment by Zaire would not result in the decrease of Zaire’s currency held by the United States.

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5. A A downward sloping demand curve implies that a larger quantity will be demanded at a lower price. Answer (b) is not correct because at higher prices for euros, Americans will want to buy fewer European goods and services. Answer (c) is not correct because the relationship between dollars and euros is the inverse of the relationship between euros and the dollar. Answer (d) is not correct because the higher dollar price of euros will make European goods and services more expensive and less attractive to Americans. 6. B As foreigners seek to buy stocks and bonds of firms in country X, those foreigners will have to acquire the currency of country X. Answer (a) is not correct because such travel would cause the demand for the currencies of other countries to increase. Answer (c) is not correct because as country X imports from other countries, it will increase the demand for the currencies of other countries. Answer (d) is not correct because such contributions would be in the currencies of the developing nations. 7. D Answer (a) is not correct because this answer is only one of the reasons. Answers (b) and (c) are not correct because this answer is only one of the reasons. 8. C The limitation is on imports into Country A. Answer (a) is not correct because there is no mention of a tariff to limit imports. Answers (b) and (d) are not correct because the question describes an import, not an export, situation. 9. C Direct investment by U.S. companies in foreign plants is included in the capital account, not the current account. Answer (a) is not correct because U.S. imports of foreign goods is included in the current account. Answer (b) is not correct because U.S. government spending in foreign countries is included in the current account. Answer (d) is not correct because U.S. purchases of services from foreigners are included in the current account. 10. B Negative balances in the current and capital accounts cause a loss of official reserves, here totaling $400 billion. Answer (a) is not correct because the negative balance in the capital account is not subtracted from the negative balance in the current account. Answers (c) and (d) are not correct because both the capital account and the current account indicate a reduction in official reserves. Page 190

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