Wiley CPAexcel exam review 2014 focus notes business environment and concepts

2014 Wiley ® CPAexcel EXAM REVIEW FOCUS NOTES 2014 Wiley ® CPAexcel EXAM REVIEW FOCUS NOTES BUSINESS ENVIRONMENT AND CONCEPTS Cover Design by David Riedy Cover image: © turtleteeth/iStockphoto Copyright © 2014 by John Wiley & Sons, Inc All rights reserved Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-750-4470, or on the Web at www.copyright.com Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, 201-748-6011, fax 201-748-6008, or online at http://www.wiley.com/go/permission Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose No warranty may be created or extended by sales representatives or written sales materials The advice and strategies contained herein may not be suitable for your situation You should consult with a professional where appropriate Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages For general information on our other products and services, or technical support, please contact our Customer Care Department within the United States at 800-762-2974, outside the United States at 317-572-3993 or fax 317-572-4002 Wiley also publishes its books in a variety of electronic formats Some content that appears in print may not be available in electronic books For more information about Wiley products, visit our Web site at http://www.wiley.com ISBN: 978-1-118-81685-1 (paperback); 978-1-118-85429-7 (ebk); 978-1-118-87196-6 (ebk) Printed in the United States of America 10 CONTENTS Preface About the Author About the Contributor Module 40: Module 41: Module 42: Module 43: Module 44: Module 45: Module 46: Module 47: Index Corporate Governance, Internal Control, and Enterprise Risk Management Information Technology Economics, Strategy, and Globalization Financial Risk Management and Capital Budgeting Financial Management Performance Measures and Management Techniques Cost Measurement and Assignment Planning, Control, and Analysis vii ix ix 15 51 78 97 120 137 154 169 v PREFACE This publication is a comprehensive, yet simplified study program It provides a review of all the basic skills and concepts tested on the CPA exam, and teaches important strategies to take the exam faster and more accurately This tool allows you to take control of the CPA exam This simplified and focused approach to studying for the CPA exam can be used: • • • As a handy and convenient reference manual To solve exam questions To reinforce material being studied Included is all of the information necessary to obtain a passing score on the CPA exam in a concise and easy-to-use format Due to the wide variety of information covered on the exam, a number of techniques are included: • • • Acronyms and mnemonics to help candidates learn and remember a variety of rules and checklists Formulas and equations that simplify complex calculations required on the exam Simplified outlines of key concepts without the details that encumber or distract from learning the essential elements vii • • • Techniques that can be applied to problem solving or essay writing, such as preparing a multiple-step income statement, determining who will prevail in a legal conflict, or developing an audit program Pro forma statements, reports, and schedules that make it easy to prepare these items by simply filling in the blanks Proven techniques to help you become a smarter, sharper, and more accurate test taker This publication may also be useful to university students enrolled in Intermediate, Advanced and Cost Accounting; Auditing, Business Law, and Federal Income Tax classes; or Economics and Finance classes Good luck on the exam, Ray Whittington, PhD, CPA Preface viii Standard Costing (continued) Overhead Variances Overhead applied (Std hrs × Total POHR) – Actual overhead cost = Total overhead variance Overhead volume variance (OVV) + Overhead efficiency variance (OEV) + Overhead spending variance (OSV) = Total overhead variance Std hrs × POHR (fixed) – Budgeted fixed OH = OVV Std hrs × POHR (Variance) – Act hrs × POHR (Variance) = OEV Act hrs x POHR (total) + Budgeted fixed OH – Act OH = OSV Focus on Planning, Control, and Analysis—Module 47 160 Responsibility Accounting and Performance Evaluation Company divisions may be: • • • Cost centers—manager responsible for costs incurred Profit centers—manager responsible for costs and revenues Investment centers—manager responsible for costs, revenues, and capital investments Focus on Planning, Control, and Analysis—Module 47 161 Transfer Pricing Transfer price—price at which products are transferred from one department to another within the same company Possible transfer prices: • • • • • Actual cost Market value Cost + profit Negotiated amount Standard cost Transfer from cost center to profit center—generally use standard variable cost • • Cost center evaluated based on comparing standard variable cost to actual cost Profit center not affected by performance of cost center Focus on Planning, Control, and Analysis—Module 47 162 Cost-Volume-Profit Analysis Sales price per unit – = Contrib margin per unit ÷ = Variable cost per unit Contrib margin per unit Units Breakeven ÷ = Sales price per unit Contrib margin ratio Dollars Fixed costs Contrib margin per unit Breakeven in units ÷ = Fixed costs Contrib margin ratio Breakeven in dollars Profit as fixed amount ÷ Fixed costs + Desired profit Contrib margin per unit ÷ Fixed costs + Desired profit Contrib margin ratio = Units required to earn desired profit = Sales dollars required to earn desired profit Profi t as percentage of sales ÷ Fixed costs Contrib margin – Profit per unit ÷ Fixed costs (Contrib margin – Profit) ÷ Sales price = Units required to earn profit ratio = Sales required to earn profit ratio Focus on Planning, Control, and Analysis—Module 47 163 Graphical Approach to Breakeven F C $ D O A AC B OA DE FG OA FG B G Volume E = Profit for product at various levels of production = Breakeven point = Fixed costs = Loss at production point D (below breakeven) = Profit at production point G (above breakeven) OB = Contribution margin BG = Contribution margin Focus on Planning, Control, and Analysis—Module 47 164 Joint Products and By-products Joint Product Costing Joint products—two or more products resulting from same process • • • • • Joint product costs—costs incurred before products separated Split-off point—earliest point at which products can be separated Sales value—amount each product can be sold for at earliest point of sale Separable costs—costs incurred after split-off point before products can be sold Relative sales value—Sales value—Separable costs Separable costs A Joint process B Split-off point C Focus on Planning, Control, and Analysis—Module 47 165 Joint Product Costing (continued) Allocating joint product costs—relative sales value method Calculate relative sales value for each joint product Add together to calculate total relative sales value Calculate ratio of relative sales value for each joint product to total relative sales value Multiply ratio for each product by joint product costs Result is amount of joint product costs to be allocated to each product Focus on Planning, Control, and Analysis—Module 47 166 Accounting for By-Products Revenues from sale of by-product generally reduce cost of other products Determine revenues from sale of by-products Reduce by separable costs, if any, and costs of disposal Net amount reduces cost of primary product or joint costs Focus on Planning, Control, and Analysis—Module 47 167 Product and Service Pricing Factors that affect price of product or service: • • • • Cost of manufacturing and delivering product or cost of delivering service Quality of product or service Life of product Customers’ preferences as to quality or price Pricing Models Profit based on sales price Profit based on cost Sales price 100% Sales price 100% + Profit % Cost 100% – Profit % Cost 100% Gross profit Profit % Gross profit Profit % Focus on Planning, Control, and Analysis—Module 47 168 INDEX Accounting for By-Products, 167 Accounting Process In An IT Environment, 33 Accounting Rate of Return, 92 Activity Based Costing, 146 Aggregate Demand and Supply, 64 Application Controls, 41 Asset Utilization Ratios, 126 Attributes of Paper vs Electronic Systems, 15 Average Returns, 79 Balance of Payments, 76 Balanced Scorecard, 121 Benchmarking, 129 Benefits of IT, 16 Bond Interest Rates, 111 Budgeting Material Purchases & Payments, 157 Business Cycle, 69 Calculating Total Costs, 137 Capital Budgeting, 90 Capital Structure, 107 Cash Management, 99 Common Stock, 113 Components of Enterprise Risk Management, 11 Consumer Demand and Utility, 56 Contingency Planning, 40 Control Totals, 46 Controls in an IT Environment, 38 Corporate Governance and Enterprise Risk Management, Cost Classifications, 140 Cost Drivers, 138 Cost Estimation, 137 Cost Measurement, 137 Cost of Capital, 116 Cost of Quality, 131 169 Costing Methods, 143 Cost-push inflation, 67 Cost-Volume-Profit Analysis, 163 Data Entry Devices, 28 Data Structure, 30 Debt Covenants, 108 Debt Utilization Ratios, 127 Demand Curve, 51 Demand Curve Shifts, 52 Demand-Pull Inflation, 66 Derivatives, 85 Economic Concepts, 51 Edit Tests, 43 Effects of Price Inflation, 64 Elasticity of Demand, 55 Electronic Commerce, 19 Expected Returns, 78 Factors Causing a Supply Curve Shift, 59 Financial Management, 97 Flexible Budgeting, 154 Flowcharts, 50 Foreign Exchange Rates, 77 General Controls, 39 Government Involvement in the Economy, 73 Graphical Approach to Breakeven, 164 Hardware, 25 High-Low Method, 138 Incentives to Defeat Agency Problem, Indicators of Business Cycles, 70 Information Technology, 15 Input Controls, 42 Interest Rates, 72 Internal Controls, COSO definition of, Internal Rate of Return, 93 Index 170 International Trade, 74 Internet, 22 Inventory Management, 102 Job Order Costing, 148 Joint Product Costing, 165 Joint Products & By-Products, 165 Just-In-Time (JIT) Purchasing, 104, 105 Leverage, 115 Limitations of Enterprise Risk Management, 14 Liquidity Ratios, 127 Loan Risks, 83 Long-Run Costs of Production, 62 Long-Term Debt, 107 Manufacturing Overhead, 144, 145 Market Equilibrium, 60 Market Ratios, 128 Marketable Securities, 100 Master & Static Budgets, 155 Measurement Frameworks, 120 Measures of Economic Activity, 63 Measuring Price Inflation, 65 Mergers, 118 Multiplier Effect, 68 Negative Demand Curve Shift, 54 Net Present Value, 94 Networks, 21 Networks and Control Risk, 24 Obstacles to Free Trade, 75 Operations in an IT Function, 36 Organization in a Segregated Department, 35 Organization of an IT Environment, 34 Other Technical Services, 37 Output Controls, 45 Payback Method, 91 Index 171 Performance Measures, 120 Planning, Control, & Analysis, 154 Portfolio Risk, 82 Positive Demand Curve Shift, 53 Preferred Stock, 114 Preparing a Master Budget, 156 Probability Analysis, 95 Process Costing, 149 Processing Controls, 44 Product & Service Pricing, 168 Profitability Ratios, 125 Provisions Affecting Repayment of Bonds, 110 Quality Control, 130 Receivables Management, 106 Regression Analysis, 139 Relevant Costing, 96 Reorder Point & Safety Stock, 103 Responsibility Accounting, 161 Risk Management, 78 Risks Associated with Derivatives, 86 Risks of E-Commerce, 20 Risks of IT, 17 Secured and Unsecured Bonds, 109 Short-Run Costs of Production, 61 Size and Power of Computers, 26 Software, 29 Special Analyses for Decision Making, 95 Spoilage & Scrap, 142 Standard Costing, 158 Standard Deviation, 80 Storage Devices, 27 Supply Curve, 57 Supply Curve Shifts, 58 Time Value of Money, 89 Index 172 Transfer Pricing, 162 Types of Computer Systems, 18 Unemployment, 71 Use of Microcomputers, 47 Using Derivatives as Hedges, 87 Value-Based Management, 122 Valuing Derivatives, 88 Variable & Absorption Costing, 153 Variations on Bond Interest, 112 Working Capital Management, 98 World Wide Web, 23 Yield Curve, 84 Index 173 ... 2014 Wiley ® CPAexcel EXAM REVIEW FOCUS NOTES 2014 Wiley ® CPAexcel EXAM REVIEW FOCUS NOTES BUSINESS ENVIRONMENT AND CONCEPTS Cover Design by David Riedy... skills and concepts tested on the CPA exam, and teaches important strategies to take the exam faster and more accurately This tool allows you to take control of the CPA exam This simplified and focused... the CPA exam in a concise and easy-to-use format Due to the wide variety of information covered on the exam, a number of techniques are included: • • • Acronyms and mnemonics to help candidates