AICPA CPA Business Environment and Concepts CPA-Business CPA Exam Practice Test

Answer : B

Choice 'b' is correct. The current level of inventory has no impact on the optimal level of inventory.

Choices 'a', 'c', and 'd' are incorrect. The optimal level of inventory is affected by:

1. The inventory usage rate.

2. The cost per unit of inventory - which will have a direct impact on inventory carrying costs.

3. The cost of placing on order impacts order frequency, which affects order size and optimal inventory levels.

Answer : C

Choice 'c' is correct. According to Michael Porter, the two major categories of business activities are primary activities and support activities.

Choices 'a', 'b', and 'd' are incorrect, per the above statement.

Answer : C

Choice 'c' is correct. A stock dividend means that the corporation issues its existing shareholders more stock. In essence, the corporation is merely diluting the proportional ownership interest of existing shares. This has no effect on the corporation's earnings and profits for federal income tax purposes.

Choice 'a' is incorrect. There is no requirement that stock dividends be registered with the SEC because no 'sale' is involved.

Choice 'b' is incorrect. The receipt of a stock dividend is not the recognition of income. It merely divides the stockholders' current ownership interests into more pieces; it does not increase proportional ownership interest in the corporation.

Choice 'd' is incorrect. The issuance of dividends, including stock dividends, is at the directors' discretion; shareholders do not vote on dividends.

Answer : C

Choice 'c' is correct. Historical cost is generally not relevant in a decision analysis situation.

All of the following costs are relevant in a decision analysis situation:

A Incremental cost

B Avoidable cost

D Opportunity cost

Answer : A

Choice 'a' is correct.

Rule: Members of an LLC are not personally liable for the LLC's obligations. Moreover, an agent is not liable on a contract the agent enters into on behalf of a disclosed principal. Here, the contract was entered into by Eller on behalf of Venture, an LLC, and Eller disclosed that he was acting only as an agent of Venture. Thus, Trent Corp. can collect from the LLC'S assets only.

Choices 'b', 'c', and 'd' are incorrect, per the above rule.

Answer : B

Choice 'b' is correct. The primary disadvantage of using return on investment (ROI) rather than residual income (RI) to evaluate the performance of investment center managers is that ROI may lead to rejecting projects that yield positive cash flows. Profitable investment center managers might be reluctant to invest in projects that might lower their ROI (especially if their bonuses are based only on their investment center's ROI), even though those projects might generate positive cash flows for the company as a whole.

This characteristic is often known as the 'disincentive to invest.'

Choice 'a' is incorrect. The primary disadvantage of using return on investment (ROI) rather than residual income (RI) to evaluate the performance of investment center managers is that ROI may lead to rejecting projects that yield positive cash flows, not that ROI is a percentage and RI is a dollar amount.

The fact that one is a percentage and one is a dollar amount might make them a little harder to interpret, but this interpretation difficulty would certainly not seem to be the 'primary' disadvantage.

Choice 'c' is incorrect. The primary disadvantage of using return on investment (ROI) rather than residual income (RI) to evaluate the performance of investment center managers is that ROI may lead to rejecting projects that yield positive cash flows, not that ROI does not necessarily reflect the cost of capital.

Choice 'd' is incorrect. The primary disadvantage of using return on investment (ROI) rather than residual income (RI) to evaluate the performance of investment center managers is that ROI may lead to rejecting projects that yield positive cash flows, not that ROI does not reflect all economic gains.

Answer : C

Choice 'c' is correct. A rise in the price of a complementary commodity would cause a shift to the left in any demand curve (representing decrease in demand, at all price levels, for that product). With respect to complementary goods, the demand for the primary product is directly impacted by the demand (and hence the price changes) for the complementary goods. For instance, if the price of gasoline goes up, the demand for cars will decrease, causing the demand curve for cars to shift left.

Choice 'a' is incorrect. A rise in the price of a substitute product will make the demand curve shift to the right.

Choice 'b' is incorrect. A rise in average household income would make the demand curve shift to the right, representing an increase in demand.

Choice 'd' is incorrect. A rise in population, or a change in consumers' tastes in favor of the commodity are also changes that may cause an increase in demand, making the demand curve shift to the right.