2016 Wiley CPAexcel ® exam review FOCUS NOTES 2016 Wiley CPAexcel ® exam review FOCUS NOTES Business Environment and Concepts Cover Design: Wiley Cover image: © turtleteeth/iStockphoto Copyright © 2016 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 & 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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: 978-1-119-12006-3 (paperback); 978-1-119-24063-1 (ebk); 978-1-119-24062-4 (ebk) Printed in the United States of America 10 9 8 7 6 5 4 3 2 1 Contents Preface vii About the Author ix About the Contributor ix Module 40: Module 41: Module 42: Module 43: Module 44: Module 45: Module 46: Module 47: Corporate Governance, Internal Control, and Enterprise Risk Management Information Technology 15 Economics, Strategy, and Globalization 52 Financial Risk Management and Capital Budgeting 80 Financial Management 99 Performance Measures and Management Techniques 122 Cost Measurement and Assignment 139 Planning, Control, and Analysis 156 Index 171 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 47 162 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 47 163 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 47 164 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 47 165 Graphical Approach to Breakeven F C $ O A AC B OA DE FG OA FG D 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 47 166 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 47 167 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 47 168 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 47 169 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 47 170 Index Accounting for By-Products, 169 Accounting Process In An IT Environment, 27 Accounting Rate of Return, 94 Activity Based Costing, 150 Aggregate Demand and Supply, 65 Application Controls, 44 Asset Utilization Ratios, 128 Attributes of Paper vs Electronic Systems, 15 Average Returns, 81 Balance of Payments, 77 Balanced Scorecard, 123 Benchmarking, 131 Benefits of IT, 16 Bond Interest Rates, 113 Budgeting Material Purchases and Payments, 159 Business Cycle, 70 Calculating Total Costs, 152 Capital Budgeting, 92 Capital Structure, 109 Cash Management, 101 Common Stock, 115 Components of Enterprise Risk Management, 11–13 Consumer Demand and Utility, 57 Contingency Planning, 43 Control Totals, 49 Controls in an IT Environment, 41 Controls Over Microcomputers, 50 Corporate Governance and Enterprise Risk Management, 1, Cost Classifications, 139 Cost Drivers, 153 Cost Estimation, 152 Cost Measurement, 139 Cost of Capital, 118 171 Cost of Quality, 133 Costing Methods, 141 Cost-push inflation, 68 Cost-Volume-Profit Analysis, 165 Data Entry Devices, 23 Data Structure, 25 Debt Covenants, 110 Debt Utilization Ratios, 129 Demand Curve, 52 Demand Curve Shifts, 53 Demand-Pull Inflation, 67 Derivatives, 87 Economic Concepts, 52 Edit Tests, 46 Effects of Price Inflation, 65 Elasticity of Demand, 56 Electronic Commerce, 28 Expected Returns, 80 Factors Causing a Supply Curve Shift, 60 Financial Management, 99 Flexible Budgeting, 156 Flowcharts, 51 Foreign Exchange Rates, 78 General Controls, 42 Government Involvement in the Economy, 74 Graphical Approach to Breakeven, 166 Hardware, 20 High-Low Method, 153 Incentives to Defeat Agency Problem, 1–5 Indicators of Business Cycles, 71 Information Technology, 15 Input Controls, 45 Interest Rates, 73 Internal Controls, 6–10 COSO definition of, Index 172 Internal Rate of Return, 95 International Trade, 75 Internet, 31–33 Inventory Management, 104 Job Order Costing, 144 Joint Product Costing, 167, 168 Joint Products & By-Products, 167 Just-In-Time (JIT) Purchasing, 106, 107 Leverage, 117 Limitations of Enterprise Risk Management, 14 Liquidity Ratios, 129 Loan Risks, 85 Long-Run Costs of Production, 63 Long-Term Debt, 109 Manufacturing Overhead, 142, 143 Market Equilibrium, 61 Market Ratios, 130 Marketable Securities, 102 Master and Static Budgets, 155 Measurement Frameworks, 122 Measures of Economic Activity, 64 Measuring Price Inflation, 66 Mergers, 120 Multiplier Effect, 69 Negative Demand Curve Shift, 55 Net Present Value, 96 Networks, 30 Networks and Control Risk, 34 Obstacles to Free Trade, 76 Operations in an IT Function, 39 Organization in a Segregated Department, 38 Organization of an IT Environment, 37 Other Technical Services, 40 Output Controls, 48 Index 173 Payback Method, 93 Performance Measures, 122 Planning, Control, & Analysis, 156 Portfolio Risk, 84 Positive Demand Curve Shift, 54 Preferred Stock, 116 Preparing a Master Budget, 158 Probability Analysis, 97 Process Costing, 145 Processing Controls, 47 Product and Service Pricing, 170 Profitability Ratios, 127 Provisions Affecting Repayment of Bonds, 110 Quality Control, 132 Receivables Management, 108 Regression Analysis, 154 Relevant Costing, 98 Reorder Point & Safety Stock, 105 Responsibility Accounting, 163 Risk Management, 78 Risks Associated with Derivatives, 88 Risks of E-Commerce, 29 Risks of IT, 17 Secured and Unsecured Bonds, 111 Short-Run Costs of Production, 62 Size and Power of Computers, 21 Software, 24 Special Analyses for Decision Making, 97 Spoilage and Scrap, 149 Standard Costing, 160 Standard Deviation, 82 Storage Devices, 22 Supply Curve, 58 Supply Curve Shifts, 59 Index 174 Time Value of Money, 91 Transfer Pricing, 164 Types of Computer Systems, 26 Unemployment, 72 Use of Microcomputers, 21 Using Derivatives as Hedges, 89 Value-Based Management, 124 Valuing Derivatives, 90 Variable and Absorption Costing, 155 Variations on Bond Interest, 114 Working Capital Management, 100 Yield Curve, 86 Index 175 WILEY END USER LICENSE AGREEMENT Go to www.wiley.com/go/eula to access Wiley’s ebook EULA ... 2016 Wiley CPAexcel ® exam review FOCUS NOTES 2016 Wiley CPAexcel ® exam review FOCUS NOTES Business Environment and Concepts Cover Design: Wiley Cover image: © turtleteeth/iStockphoto... 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... 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