Free AICPA CPA Business Environment and Concepts CPA-Business Exam Questions

Choice 'c' is correct. Gross domestic product (GDP) is the total dollar (monetary) value of all new final products and services produced with the economy in a given time perioD. The emphasis is on the final goods and services.

Choice 'a' is incorrect. The size of a population that must share a given output within one year is not a part of the GDP calculation.

Choice 'b' is incorrect. The negative (or positive) externalities of the production process of a nation within one year are not a part of the GDP calculation. In economics, externalities are the effects that the acts of consumers or producers have on each other. Externalities range from technological changes to changes in the range of options available to consumers. Externalities may also be regarded as the unanticipated side effects of courses of action.

Choice 'd' is incorrect. The total monetary value of goods and services, including barter transactions, is not a part of the GDP calculation. GDP includes only monetary value, not barter value.

Choice 'c' is correct. The cost to issue the commercial paper is the $20,000 original issue discount ($1 million - $980,000), plus transaction costs of $1,200 for a total of $21,200. Therefore, it costs $21,200 to borrow $980,000 for 3 months. The 3-month interest cost is 2.16% ($21,200 / $980,000).

The annual interest cost is 8.65%

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

Choice 'c' is correct. If lead times became more variable, the amount of safety stock needed to reduce the risk of stock outs will increase.

Choice 'a' is incorrect. A high carrying cost would decrease safety stock.

Choice 'b' is incorrect. A lower stockout cost would decrease safety stock.

Choice 'd' is incorrect. If order costs decrease, then inventory will be ordered more frequently and less safety stock will be needed.

Choice 'a' is correct. The expenditure approach to computing GDP includes:

Consumption

Net exports

Government expenditures

Capital investment

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

Choice 'c' is correct. The annual tax depreciation expense reduces income taxes by an amount equal to the firm's marginal tax rate (the tax on the next dollar of income) times the depreciation amount.

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

Choice 'b' is correct. Deflation is a general decline in the overall price level (i.e., when the inflation rate is negative). Increasing the money supply causes the overall price level to rise. As a result, it helps eliminate deflation.

Choice 'a' is incorrect. Increasing interest rates causes aggregate demand to shift left. As a result, the aggregate price level will fall even further. This will exasperate deflation.

Choice 'c' is not wrong but it is not as good an answer as 'b'. A decrease in interest rates causes the aggregate demand curve to shift right. As a result, the aggregate price level will rise. This helps eliminate deflation. However, there are times when interest rates are already so low that lowering interest rates is not an option. Thus, the preferred or 'acknowledged' preventative measure for deflation is increasing the money supply.

Choice 'd' is incorrect. Decreasing the money supply causes the overall price level to fall. This would obviously exasperate deflation.

Choice 'd' is correct. When calculating the turnover, total assets may need to be refined by the elimination of assets that do not relate to sales as the inclusion of these items could distort the measure.

Choice 'a' is incorrect. This option pertains to gross profit margin.

Choice 'b' is incorrect. This option pertains to return on the investment in assets.

Choice 'c' is incorrect. This option pertains to residual income.

Choice 'b' is correct. The required rate of return must be less than the project's internal rate of return (IRR). The IRR is the rate earned by an investment that equates to a net present value (NPV) of zero. By definition, a project with a positive NPV will have an IRR greater than the required rate of return used to compute that NPV.

Choice 'a' is incorrect. Typically, a company will use its own weighted-average cost of capital (WACC) as the hurdle rate for computing net present value (NPV). A positive NPV would not likely give any indication of the relationship between required rate of return and WACC. The required rate of return and WACC are likely equal.

Choice 'c' is incorrect. Typically, a company will use its own weighted-average cost of capital (WACC) as the hurdle rate for computing net present value (NPV). A positive NPV would not likely give any indication of the relationship between required rate of return and WACC. The required rate of return and WACC are likely equal.

Choice 'd' is incorrect. The required rate of return must be less than the project's internal rate of return (IRR). The IRR is the rate earned by an investment that equates to a net present value (NPV) of zero. By definition, a project with a positive NPV will have an IRR greater than the required rate of return used to compute that NPV.

Choice 'c' is correct. The expected value of a decision is computed by multiplying the probability of each outcome by its value or profit. Each outcome is then added.

There is a 60% probability that Dough will sell 60 of the 100 additional boxes through regular stores and that means that Dough would have a 60% chance of making a profit of $20 (60 boxes at a $1 profit ($3 - $2) sold through the regular stores and 40 boxes at a $1 loss ($1 - $2) sold through the thrift stores).

There is a 40% probability that Dough will have a profit of $40 (100 boxes at a $1 profit through the regular store sales and zero boxes sold at a loss through the thrift store).

Choice 'a' is incorrect. The expected value of a decision is computed by multiplying the probability of each outcome by its value or profit.

Choice 'b' is incorrect. The expected value of a decision is computed by multiplying the probability of each outcome by its value or profit.

Choice 'd' is incorrect. The expected value of a decision is computed by multiplying the probability of each outcome by its value or profit.

Choice 'b' is correct. The net cost of debt is computed as the effective interest rate net of tax, or 14% x .70 = 9.8%. The question is trying to trick the candidate into using the coupon rate of 12% rather than the effective interest rate. The coupon rate is used only if it is the same as the effective interest rate and there are no flotation costs.

Choice 'a' is incorrect. The net cost of debt is computed as the effective interest rate net of tax, or 14% x .70 = 9.8%, not the coupon rate of 12% x .70 = 8.4%.

Choice 'c' is incorrect. The net cost of debt is computed as the effective interest rate net of tax, or 14% x .70 = 9.8%, not the coupon rate of 12% by itself. The cost of debt is computed on an after-tax basis and uses the effective interest rate instead of the coupon rate.

Choice 'd' is incorrect. The net cost of debt is computed as the effective interest rate net of tax, or 14% x .70 = 9.8%, not the effective interest rate of 14% by itself. The cost of debt is computed on an after-tax basis.

Choice 'a' is correct. The inflation rate is measured as:

Choice 'c' is correct.

Rule: A tender offer is a general invitation by a bidder to the shareholders of a target company to tender their shares to the bidder at a specified price during a specified time. A target of a takeover may ward off a tender offer by offering to repurchase shares from its shareholders. If a takeover will violate federal antitrust law, a court will enjoin the takeover.

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

Choice 'c' is correct. II only - Average daily sales ($27,397) Average collection period (36.5) = $1,000,000 Avg gross A/R

Not I Days' sales in receivables (36.5) AR turnover 10 = 365 days in year.

Not III Net sales ($10,000,000) Avg gross receivables ($1,000,000) = 10 AR turnover.

Choice 'a' is correct. The cost of carrying accounts receivable now is the variable cost of creating the account receivable times the cost of that capital during the collection period. The cost of the investment in accounts receivable is now:

Choice 'c' is incorrect. This considers the entire account receivable as a cost.

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

Choice 'd' is correct; neither statement I nor statement II are correct. Statement I is incorrect, as an increase in the minimum wage will move employers up, not down, the labor demand curve, causing the quantity of labor demanded to fall. Statement II is incorrect, as an increase in the minimum wage leads to a decrease in the quantity demanded of labor and an increase in the quantity supplied of labor. It does not increase the supply of labor, only the quantity supplied of labor.

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