CPA becker business exam review 2014

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Business

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This textbook contains information that was current at the time of printing The eBook

and multimedia lectures in your course software will be updated on a regular basis

(through software updates) as the content that is tested on the CPA Exam evolves and as

we improve our materials Note the version reference above and click on Community

and Support at www.becker.com/cpa for a list of available updates for this version

or to see if a newer version of this book is available for ordering

PRO F E 5 5 ION AL E 0 U CAT I 0 N®

Timothy F Gearty, CPA, MBA, JD : Editor in Chief, Financial/Regulation (Tax) National Editor Angeline S Brown, CPA, MAC Director, Accounting Curriculum, Audit/Financial/BEC National Editor Teresa C Anderson, CPA, CMA Manager, Accounting Curriculum Tom Cox, CPA, CMA, CHFP • Financial (GASB & NFP) National Editor Steve levin, JD Regulation (law) National Editor John B Pillatsch, MAS, CPA Director, Course Development Operations Pete Console Director, Educational Technologies Katie Tran Director, Quality Assurance Stephen Bergens Manager, Curriculum Quality Assurance James McKimson Manager, Software Quality Assurance Anson Miyashiro Course Production Manager

AI Glodan Bookstore Purchasing Manager Michelle McCubbins, MBA Course Production Project Manager Jeff Rosier Course Production Project Manager Brian Cave Manager, Software Development Tim Munson Course Production Editor Linda Finestone • Course Production Editor

CONTRIBUTING EDITORS Eric J Brunner, PhD

Chris Cocozza, CPA, JD, llM

Robert A DeFilippis, CPA, MBA

Jennifer B Deutsch, CPA, MS

Mike Farrell, JD

Dennis J Green, CPA, MBA

John S Grayson, JD, CPA

Liliana Hickman-Riggs, CPA, CITP, CMA, CIA, CFE, MS

Patrice W Johnson, CPA

Donald A Kaniecki, CPA, MBA

John B Kushner, CPA

Cindy lawrence, CPA, MBA

Seth levine, CPA, MPrA, MBA, ABD

Edward McTague, CPA, MBA

Permissions

Michael Meriwether, CPA, MBA Peter Olinto, JD, CPA

Mike Potenza, JD Cheryl l Prachyl, Ph.D., CPA Ray Rigoli, CPA, MBA Joshua M Rosenberg, CPA, CFA, MBA Jonathan R Rubin, CPA, MBA Michael Rybak,CPA,CFA Christopher Severson, MPA Jeffrey Sherman, JD, CPA (inactive) Roberta Smith, CPA

Karen Tarbet, CPA, JD Lisa M Thayer, CPA

Material from Uniform CPA Examination Selected Questions and Unofficial Answers, 1989, 1990, 1991, 1992, 1993, 1994,

1995, 1996, 1997,1998,1999,2000,2001,2002,2003,2004,2005,2006,2007,2008,2009,2010, 2011,2012,and 2013 copyright © by American Institute of Certified Public Accountants, Inc., is reprinted and/or adapted with permission Any knowing solicitation or disclosure of any questions or answers included on any CPA Examination is prohibited

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BUSINESS program attendance record Student: _ _ _ _ Location:

IMPORTANT NOTES TO STUDENTS REGARDING "THE BECKER PROMISE"

• An overall percentage correct of 90% or higher is required of the homework to qualify for The Becker Promise

• Please fax documentation to 866-398-7375 no later than 45 days following the completion of each section

NOTES

BUSINESS table of contents

Program ottendance record v

Introduction Intro-1

BUSINESS 1: Corporate Governance and Operations Management

3 Operations management: Cost measurement methods and techniq ues 81-39

4 Class questions 81-67

BUSINESS 2: Strategic Planning

1 Planning techniques: Forecasting and projection 82-3

2 Planning techniques: Budgeting and analysis 82-24

3 Class questions 82-55

BUSINESS 3: Financial Management

2 Capital management, including working capital 83-20

3 Class questions 83-51

BUSINESS 4: Information Systems and Communications

2 Systems design and other elements 84-20

3 Security 84-34

4 The I nternet: Implications for business 84-40

6 Disaster recovery and business continuity 84-57

8 Class questions 84-75

BUS I N ESS S: Economic Concepts

1 Changes in economic and business cycles 85-3

2 Economic measure5!indicators 85-13

3 Market influence on business strategies 85-26

BUSINESS 6: Process and Project Management, Globalization, Financial Risk Management, Decisions, and Valuation

1 Operations management: Process management 86-3

2 Operations management: Project management 86-14

3 Globalization and local economies 86-24

4 Financial risk management 86-32

COURSE INTRODUCTION

and Written Communication Lecture '

1 Business environment & concepts content specification outline Intro-3

2 Becker's CPA Exam Review-Course introduction I ntro-S

Introduction I ntro-S

Lecture series Intro-S

Textbooks I ntro-S

Course software Intro-6

Study planner Intro-7

Study roadmap Intro-7

Flashcards Intro-8

Becker Community and Support I ntro-lO

Passing the CPA Exam I ntro-l2

Surviving the examination I ntro-lS

3 Written Communication- Lecture Intro-16

4 Written Communication-Additional tips Intro-32

NOTES

I B U SINE S S ENVIRONMENT & CONCEPTS CONTENT SPECIFICAT ION OUTLINE

I 40-45 minutes

Testlet #2 Testlet #3 Testlet #4

24

MC Questions

Questions Com Tasks

40-45 minutes I I 40-45 minutes 40-45 minutes

A Rights, duties, responsibilities, and authority of the board of

directors, officers, and other employees

1 Financial reporting

2 Internal control (including COSO or similar framework)

3 Enterprise risk management (including COSO or similar

framework)

B Control environment

1 Tone at the top-establishing control environment

2 Monitoring control effectiveness

3 Change control process

A Changes in economic and business cycles-economic measures/

indicators

B Globalization and local economies

1 Impacts of globalization on companies

2 Shifts in economic balance of power (e.g., capital) to/from

developed from/to emerging markets

C Market influences on business strategies

D Financial risk management

1 Market, interest rate, currency, liquidity, credit, price, and other risks

2 Means for mitigating/controlling financial risks

A Financial modeling, projections, and analysis C Capital management, including working capital

3 Impact of inflation/deflation 3 Asset effectiveness and/or efficiency

1 Debt, equity, leasing 1 Methods for calculating valuations

2 Asset a nd investment management 2 Evaluating assumptions used in valuations

E Financial transaction processes and controls

I IV Information systems and communications 15-19%

A Organizational needs assessment

1 Data capture

2 Processing

3 Reporting

4 Role of information technology in business strategy

B Systems design and other elements

1 Business process design (integrated systems, automated,

and manual interfaces)

2 Information technology (IT) control objectives

3 Role of technology systems in control monitoring

2 Opportunities for business process reengineering

3 Roles of Internet evolution on business operations and organization cultures

E Types of information system and technology risks

F Disaster recovery and business continuity

A Market and risk analysis

B Strategy development, implementation, and monitoring

C Planning techniques

1 Budget and analysis

2 Forecasting and projection

3 Coordinating information from various sources for integrated planning

A Performance management and impact of measures on behavior

1 Financial and nonfinancial measures

2 Impact of marketing practices on performance

2 Roles of shared services, outsourcing, and offshore

operations, and their implications on business risks and

controls

3 Selecting and implementing improvement initiatives

4 Business process reengineering

5 Management philosophies and techniques for performance

improvement such as just in time (liT), quality, lean, demand

flow, theory of constraints, and Six sigma

Intro-4

D Project management

1 Project planning, implementation, and monitoring

2 Roles of project managers, project members, and oversight

Passing the CPA Exam is difficult, but the professional rewards a CPA enjoys make this a challenge all accounting professionals should meet You will pass the CPA Examination if you prepare properly Keep this in mind as you work with our course materials We created our CPA Exam Review after evaluating the needs of CPA candidates and analyzing the CPA Exam over the years Those efforts have enabled us to produce a CPA Exam Review unparalleled in today's market Our course materials comprehensively present topics you must know to pass the examination, teaching you the most effective tactics for learning the material

L E C TU R E S E R I E S

Becker gives you the option of attending live classes or viewing the lectures on your own using the Becker online course platform or the desktop course software No matter what format you choose, you will see and hear the most dynamic CPA Exam Review lecturers in the country Our lecturers are exam-oriented and spend countless hours analyzing past exams and developing strategies to help you pass-this time

Each section of the Becker course includes a self-study, at-home lecture that is to be viewed by all students, including Live Classroom students In the Business course, the self-study lecture is the B6 lecture These lectures were added to improve the overall pace of the Becker course, to reduce the amount of work that you must complete with each lecture, and to allow us to better cover the topics currently tested on the CPA Exam You must view the self-study lectures in order to fully prepare for the CPA Exam

T E X T B O O K S

Our textbooks, written by our faculty and subject matter experts, are specifically designed to prepare you for the CPA Exam effectively and efficiently Written in outline form, they follow the same sequence as the lectures­providing reduced note-taking and allowing students to concentrate their attention on the presentation

This textbook contains information that was current at the time of printing The eBook and multimedia lectures

in your course software will be updated on a regular basis (through software updates) as the content that is tested on the CPA Exam evolves and as we improve our materials Note the version reference and click on Community and Support at http://www.becker.com/cpa/ for a list of available updates for this version or to see if

a newer version of this book is available for ordering

Textbook Icons

Throughout the Becker materials you will find icons that have been designed to assist with your preparation for the CPA Examination These icons are located in the margins of your textbook for easy identification of important information

Important items within the materials that should be memorized will

be identified with this icon in the margins

As part of the task-based simulation portion of the exam, candidates are required to search professional literature to find the solution to

a given question A keyword search of the relevant authoritative literature is a candidate's most time-effective tool Potential keywords

to search with will be identified with this icon in the margins

These numbers represent the location of this topic in the FASB Accounting Standards Codification These will be identified with this icon in the margins

When important notes, exceptions, etc., are included within the materials, it will be identified with this icon in the margins

When IFRS-specific information is included within the materials,

it will be identified with this icon in the margins

When international comparison information is included within the materials, it will be identified with this icon in the margins

An integral part of Becker's CPA Exam Review program is the use of the course software, which provides access to the nearly 100 hours of multimedia lecture content, thousands of multiple-choice questions, and hundreds of simulation tasks, including questions and tasks from prior exams The multiple-choice questions and simulations reinforce the concepts introduced in the materials, and is organized on a lecture-by-Iecture basis The software also provides two comprehensive final exams for each part The Business (BEC) section

of the CPA Exam includes simulations that test the candidate's writing skills We encourage you to watch the

Written Communication Lecture as it will help you gain an understanding of what the examiners are looking for

in a well-written response

Two other important features of the course software are the Study Planner and the Study Roadmap, both of which are described below

S T U D Y P L A N NER

It takes time to study for the CPA Exam However, all candidates face the challenge of fitting their CPA Exam studies into their busy lives The course software provides you with a Study Planner that will help you establish a study schedule and manage your study time efficiently and effectively You have the option of allowing the Study Planner

to prepare a study schedule for you, or you can create your own schedule The Study Planner will allow you to see what you need to accomplish each day and each week as you prepare to take the CPA Exam

S T U D Y R O A DM A P

With so many elements available to help you study, sometimes it is difficult to know where to begin and how much time should be spent on each element of the Becker Course Within the course software, each lecture provides you with a Study Roadmap based on Becker's Learn-Practice-Review methodology The Study Roadmap allows you to see, step-by-step, what you need to do to thoroughly study the information that will

be tested on the exam It also gives you an estimate of the time it will take to complete each step The Study Roadmap includes the following elements:

LEARN-View the lecture (Estimated time: 4 hours)

PRACTICE-Complete the multiple-choice homework and the practice simulations (Estimated time: 6-8 hours)

REVIEW-Review flashcards and take a progress test (Estimated time: 2-3 hours)

Lecture Study Roadmap Example

Becker also provides you with a Study Roadmap for your review before you take each section of the exam You should give yourself at least one week to do a final review before taking the exam Your final review should include reworking the multiple-choice questions and simulations, taking the two final exams, and completing as many comprehensive Progress Tests as possible

Review Before Exam Study Roadmap Example

The FASB "Accounting Standards Codification" (ASC)

The printed flashcards and digital mobile flashcards can be purchased by calling our National Student Service Center at 1-800-868-3900 or online by simply logging on to www.becker.com/cpa and select "Flashcards" from the Courses & Products drop-down menu

Intro-8 ro OeVry/Becker Educational Development Corp All rights reserved

If you want to supplement the preprinted flashcards, several blank cards are provided with the printed

flashcards If you want to prepare your own flashcards, we recommend the following:

• Prepare flashcards as you review your lecture notes prior to working the multiple-choice questions You can identify those flashcards you would like to create by making a mark, such as "Fe," in the margin of your outline while viewing the lecture

• Select major concepts from your class materials (outlines) Do not prepare flashcards for everything

in the outlines (the outlines are already in a summarized format) Only make a flashcard for the major concepts, general rules and exceptions, mnemonics, formulas, and important lists Items to consider:

./ Formulas

./ "Heavy on exam" notations

./ "Memorize" notations

./ Other major concepts (noted while reading the explanations to the multiple-choice questions)

./ General rules and exceptions

• Keep your flashcards as simple as possible, but do not sacrifice correctness for brevity

• Use 3" x 5" or 5" x 7" cards (whichever size is easiest for you to carry around) Write the question, the general rule, or the title of the list you are trying to memorize on the front, and write the answer, the exceptions, or the list, as applicable, on the back

E El'l'ec+ive povtic�s � CO\Sh plclN heJ.�es

R Rev",I",,,,Hc� s",.pl\.\Ses (lFRS c"ly)

A-I

A-I 1 -Code with class number

• After each class, review all of your flashcards for all of the previous classes When you believe that you have a concept memorized, place those cards in a separate pile Do not stop reviewing those cards, but

it is not necessary to review them as often The more frequently you can review all your cards, the better your retention will be

BECKER COMMUNITY AND SUPPORT

The Becker Community and Support area is your source for course updates, supplemental materials, and unlimited academic support Just click on Community and Support at:

http://www.becker.com/cpa/

You can also access customer serVice and technical support from Community and Support or by calling

1-877-CPA-EXAM (Outside the U.S + 1-630-472-2213)

THE UNIFORM CPA EXAM-OVERVIEW

Exam Sections

The CPA Examination consists of four sections:

Intro-10

The Financial section consists of a four-hour exam covering financial accounting and reporting,

including International Financial Reporting Standards (IFRS), governmental accounting, and not-for­profit accounting

The Auditing section consists of a four-hour exam This section covers all topics related to auditing, including audit reports and procedures, generally accepted auditing standards, attestation and other engagements, and government auditing

REGULATION

The Regulation section consists of a three-hour exam, combining topics from business law and federal taxation

BUSINESS ENVIRONMENT & CONCEPTS

The Business section consists of a three-hour exam, covering general business topics such as

economics, financial management, information technology, managerial accounting, and process and project management

© DeVry/Becker Educational Development Corp All rights reserved

Question Formats

The chart below illustrates the question format breakdown by exam section

I Task-based S i mulations or Written

M ultiple-choice Questions Comm unication Tasks

Each exam will contain testlets A testlet is either a series of multiple-choice questions (either 24 or 30

depending on the section), a set of task-based simulations, or a set of written communications For example, the Business examination will contain four testlets The first three testlets will be multiple-choice questions and the last one will contain three written communication tasks Each testlet must be finished and submitted before continuing to the next testlet Candidates cannot go back to view a previously completed testlet or go forward

to view a subsequent testlet before closing and submitting the earlier testlet Our final exam contains these types of restrictions so you can familiarize yourself with the functionality of the CPA Exam

Exam Schedule

The computer-based CPA Exam is offered during the first two months of each calendar quarter Once

determined to be eligible to sit, candidates can schedule an exam date directly with Prometric

(www.prometric.com/cpa)

Eligibility and Application Requirements

Each state sets its own rules of eligibility for the examination, so the requirements vary from state to state Please visit www.becker.com/state as soon as possible to determine your eligibility to sit for the exam

PA S S I N G T H E CPA E XAM

Strategy and Tactics for Taking the Examination

To ensure that you pass the CPA Exam, you should follow these tips

Tips for Multiple-choice Questions

The exam time limits mentioned above are overall time limits The recommended time to complete the task-based simulation testlet is 60 to 75 minutes As such, you'll be forced to closely control the amount of time you spend on multiple-choice questions For Financial and Auditing, you should spend approximately 1% to 2 minutes on each multiple-choice question For Regulation and

Business, you should spend approximately 1 to 1% minutes per question

The exam does not contain the typical multiple-choice format such as lettered answers (a, b, c, and d) Instead, candidates are required to click on the radio buttons or the text portion of the answer they are choosing as correct You will see this functionality in our final exams

TIP 3 Read all four choices before choosing one as your answer

Given that you're working under time constraints, you may be tempted to choose as your answer for any given question the first choice that seems right This can be a costly mistake because the examiners may include two or more "good" answers among the choices, one of which is the best answer You'll get no credit for choosing the wrong "good" answer

TIP 4 Answer every multiple-choice question

Intro-12

The examiners don't penalize you for guessing; they don't subtract wrong answers from right

answers Therefore, guess when you must, and realize that you always have at least a 25 percent chance of getting the right answer In fact, on some questions you may have a 50 percent chance

of guessing the right answer because you may immediately recognize that two of the four choices are wrong

If you're uncertain about an answer, you can mark that question for later review You will see this marking functionality in our final exams Prior to exiting the testlet, you should make sure you have answered all questions

When you're answering multiple-choice problems that require mathematical calculations and you're unable to arrive at one of the four given numerical answers, you should perform the following

procedure before you record a guess as an answer First, check the mathematical accuracy of your calculations; that alone may lead you to the correct answer If that doesn't produce a correct answer, check for an error in your logic by rereading the question If that doesn't clear the ambiguity, choose your guess to answer the question, and mark it for review at the end of the current testlet if time permits Remember though that once you submit a testlet, you cannot go back to review it

© DeWy/Becker Educational Development Corp All rights reserved

Tactics for Simulations

TIP 1 Work all homework simulations

We have developed extensive task-based simulations for you to work as homework You should familiarize yourself with the types of questions and functionalities covered by the tasks This

familiarity will save you time on the actual exam because you will understand how to navigate between tasks and use the various tools that are provided

It is important to have a basic approach when beginning a testlet We recommend the following:

/ Review each task's instructions

/ Allocate your time among the tasks Remember the approximate time frame of 60-75 minutes for all task-based simulations to be worked Be sure, however, to take into account any additional time you saved while completing earlier testlets and the difficulty of the particular simulation you are working

/ Be sure that you have answered all requirements for each task

TIP 3 Use the keyword search function when completing research tasks

The Research task requires the candidate to answer a question using the appropriate authoritative literature It should be noted that the most time efficient way to search the authoritative literature available on the exam is through the use of a keyword search

MANA G I N G Y OUR STRE S S BEFORE THE EXAM I NAT ION

Expect to feel tense and uncertain during the week before the examination You can manage stress by

following several tips

Take some comfort from that shared misery and do your best to manage your stress levels

TIP 2 Use those activities you usually employ to reduce stress

Get as much rest as you can, exercise regularly, and eat balanced nutritional meals The evidence is overwhelming that adequate rest, exercise, and nutrition minimize the harmful and disruptive physical and psychological effects of tension

TIP 3 Do not work until you drop

You'll impair your health and threaten your performance on the examination Treat yourself to time away from concentrated study Focus on the fact that the time to study and learn new material is behind you

TIP 4 You may want to try a technique called "imaging."

Some people report that they improve their performance on difficult or stressful tasks by visualizing that they've already succeeded at the task Imagine that you're taking the examination and handling its demands well Or, imagine you've received your passing grade This may boost your confidence

The examiners must limit the amount of detail they demand and the scope of topics on which they can focus during the time allowed for the examination

TIP 6 Remember, if a question pops up with which you are unfamiliar, don't panic

The odds are that it will be a surprise to most exam takers Simply gather your wits about you and prepare the best answer you can Do not omit the question simply because you are unfamiliar with the topic Most likely, the examiners are looking for you to exercise professional judgment in tackling the topic

Intro-14

You will be able to answer most of the questions on the examination easily, and you'll know how

to wrestle with the harder problems in ways that will earn you a passing grade Even if you've accomplished only most or some of your study goals, take comfort in the knowledge that you're better prepared than many other candidates

© DeVry/Becker Educational Development Corp All rights reserved

to be able to adjust to prevailing conditions

Additional test-center administration procedures are available on either the AICPA exam website

(www.cpa-exam.org) or at the Prometric test center website (www.prometric.com/cpa)

W RI TTE N C OM M UNIC AT I ON - LE C T U RE

INTRODUCTION

For the Business section of the CPA Exam candidates will be required to complete three written

communication tasks The written communication tasks will appear in the fourth testlet of the exam following the three multiple-choice question testlets

• Written Communication represents 1 5 percent of your score on the Business exam

• Each Written Communication task will give you a situation a request for a response and a series of instructions Your answer will be typed in the designated response area using a simple word processor

• The general format will appear as follows:

[Situation and request for a response]

Instructions:

Your response will be graded for both technical content and writing skills:

Technical content will be evaluated for information that is helpful to the intended reader and clearly relevant to the issue

Writing skills will be evaluated for development, organization, and appropriate expression of ideas in

[Signature (cannot be edited)]

The response area will be used to complete the communication task The word processor has the appearance and the functions of a simple word processor Many of the standard features and icons of popular word­processing software are reproduced in a tool bar to allow you such functions as:

o n

CUT

[] n

In addition a spell check feature is embedded in the software Misspelled words are underscored in red in

a manner consistent with many popular word-processing software packages A right click on your mouse as you hover over the word will enable you to correct potential spelling errors The number of spelling errors can adversely impact your written communication score so be sure to run the spell check

ANALYZING COMM UNICATION TASK SITUATIONS

All AICPA written communication questions take the following format:

1 Background information will be provided to you in the form of a brief scenario or situation

a The background may actually provide the content that should be included in the response

b The background will define the topic that you must explicitly address in your response

c Specific understanding of an area will make responses more effective

2 You will be assigned a role in the situation

a The role assigned to you should influence your response

b Although you are assumed to be a CPA, the roles can vary and may include:

(2) CPA in private industry

Note: The situation may actually provide the content that will be included in the response

4 Your job is to create a writing sample that exemplifies good development, masterful expression, and strong topic knowledge

A sample question might appear as follows:

U.S.-owned Multinational Company A manufactures and sells inventory in both the United States and Country X While Country X has already adopted IFRS, Multinational Company A continues to report using U.S GAAP The LIFO inventory valuation method is used in the United States while FIFO is used in Country X Jack Connelly, the controller of Multinational Company A, has expressed concerns about implementing IFRS In particular, he does not understand why this change is necessary and how the implementation of IFRS will be beneficial to his company As the engagement manager, write a memo to Jack Connelly explaining the purpose of IFRS, and how applying IFRS to inventory will benefit Multinational Company A by eliminating redundancy and increasing transparency and access to capital

Analysis of the question produces the scenario, the target audience, and your role as follows:

U.S owned Multinational Company A manufactures and sells The SCENARIO suggests that you will be writihg on the inventory in both the United States and Country X While subject of IFRS and inventory

Country X has already adapted I FRS, Multinational Company Furthermore, it includes conten t with regard to the

A continues to report using U.S GAAP The LIFO inventory differences between U S GAAP and IFRS

valuation method is used i n the United States while FIFO is

It is expected that you will use some of the given technical

used in Country X

material in your response

Jack Connelly, the controller of Multinational Company A,has Your AUDIENCE is a controller, so you can tailor your

expressed concerns about implementing IFRS response to a sophisticated reader Use a formal tone i n your

response

In particular, he does not understand why this change is The SCENARIO expands the requirements to tip you off as to necessary and how the implementation of I FRS will be the tone of the communication; our recipient is confused and

beneficial to his company possibly upset that there is one more thing to do In addition

to including facts, you will need to persuade your reader as to the value of IFRS

As the engagement manager, write a memo to Jack Your ROLE is revealed as the engagement manager So you Connelly explaining the purpose of IFRS and how applying are likely a contemporary or at least an administrative peer IFRS to inventory will benefit Multinational Company A by of the recipient The requirement focuses you on the points eliminating redundancy and increasing transparency and to emphasize

access to capital The purpose of your written communication is to explain the

benefits derived from i mplementing I FRS

RESPON DING TO WRITTEN COMM U NICATION TASKS

Your ideal response will be:

• A well-developed, cohesive expository response with an introduction, main body, and a conclusion

• On topic, as evidenced by the use of key vocabulary words

• Free of grammar and spelling errors

• Do not use bullet points or abbreviations

o Do not use text messaging language

The AICPA has not released a grading sheet in more than 40 years Our best information comes from the instructions the organization has published and our experience analyzing CPA Exam questions

A full credit response might appear as follows:

RESPONSE

The purpose of this memo is to provide a brief overview of

IFRS and to describe some of the ways that your company,

Multinational Company A, might benefit from early

implementation of IFRS

I nternational Financial Reporting Standards ( I FRS) are

a principles-based approach to recording accounting

transactions where economic substance determines how a

transaction will be treated In creating I FRS, the I nternational

Accounting Standards Board intended to create one universal

set of accounting standards throughout the world that would

promote reporting consistency, enhance global competition,

and improve financial reporting transparency

As more and more countries consider implementing I FRS,

one of the benefits may be a significant cost savings i n

infrastructure required to sustain two o r more reporting

processes

For example, Multinational Company A currently maintains

two systems that enable the company to value inventory

under both FIFO and LIFO models Under I FRS, LIFO is not

an acceptable inventory valuation method Consequently,

Multinational Company A could streamline its reporting

process by eliminating the LIFO method and relying

exclusively on FI FO In doing so, the company may reduce its

closing time because inventory valued in Country X would not

h ave to be revalued u sing LIFO in the U.S

Another benefit might include the wider availability of access

to capital With only one inventory valuation model, a lender

has an easier time evaluating the profitability of M u lti­

national Company A This transparency eliminates some of

the obstacles that companies frequently encounter as they

seek bank financing when the lender does not understand

the conflicting valuation models Thus, Multinational

Company A may have access to a larger pool of international

lenders resulting in lower cost of capital as more lenders

compete for your business

I would be happy to discuss additional questions you may

h ave regarding implementation of I FRS at your earliest

convenience

co DeVry/Becker Educational Development Corp All rights reserved

Direct, business-like i ntroduction that addresses the themes described in the situation Supporting paragraphs are organized around the ideas presented in the situation

The q uestion requires that you explain IFRS purpose and then gives you the purpose Your response purely complies with the requirement and demonstrates your knowledge of I FRS Note that International Financial Reporting Standards was not abbreviated in order to get points for " keywords." Once

I FRS is fully defined, it is acceptable to use the acronym

The response uses data from the fact pattern to satisfy

a discussion of specific benefits to the company The elimination of redundancy from maintaining mUltiple accounting systems and approaches should be obvious The question tells you that the inventory systems are different You do not have to know the I FRS restrictions but you do have to apply what it will mean The implied cost and time savings persuade the controller as to value

Good development is evidenced by reference to the two inventory systems, as well as the use of transition words such

as "for example" or "consequently."

Making life easier for bankers and lenders, and thereby reducing the time and effort in obtaining capital, is a logical extension of the AICPA's guidance There is no technical issue in this comment, purely common business sense The paragraph addresses the issue identified by the question and persuades the controller as to the benefits

A direct, business-like close offering opportunities for further communication is standard in most business communications ,

Intro-19

CONCLUSION

The following chart links the analysis of our question with a full-credit response as follows:

What do you want your audience to think and do as a result The controller should understand that I FRS is a positive step

time and money

Organization implied by situation Describe the benefits of I FRS as:

• I ncreasing transparency

Development Assert that I FRS is a benefit to the company and explain the

benefits in terms of:

• Increasing transparency

I nformation in each paragraph should be both helpful and

relevant in persuading the controller of the benefit of I FRS

• Ability to communicate plainly without use of protocol

language for boss or superior

Although an academic essay may have asked you to describe the advantages and disadvantages of IFRS, the communication task is an opportunity to demonstrate practical written business communications skills

The situation largely dictates your position You see advantages that outweigh disadvantages regarding IFRS implementation

The situation demands that you express ideas in a logical format, and there are numerous clues about how to rearrange the situational facts and use them to intelligently describe the benefits of IFRS

Some released questions have asked the candidates to recall some key points of subject matter Although typically the amount of technical material to recall is limited, you will need to be able to organize information from memory as part of your response

",

POINTERS

Where to start:

Analyze the situation or scenario

• Identify the format

o Memo, e-mail, letter, etc

• Identify the roles implied by the question

o Are you communicating with a superior, peer, subordinate?

o Is your audience knowledgeable, technically sophisticated, etc.?

• Ask yourself what you want your reader to think and do as a result of the communication you are about to write (The point of view should be given.)

o What information might be helpful?

• Identify potential technical requirements not fully described in the situation

o Are the organization points defined by the question?

o Do you need to formulate your own keyword framework?

What to say:

Prepare an outline based on keywords or situation facts

• Make sure that ideas are presented clearly

o Start with the point of view or position on the topic

o Organize your main points (frequently as separate paragraphs) in a manner that develops ideas in support of your position

• Ensure that concise presentation does not use bullets or tables

• Use standard business English appropriate for the audience

• Verify that you have answered the question

When you are done:

Check the compositional accuracy of your response

• Verify spelling is correct

• Reread the response to ensure that grammar and punctuation are correct

• Make sure you have addressed the requirements of the situation

Include all relevant facts, even if you believe that they are obvious

Avoid absolutes Use words such as generally, usually, etc

Do not abbreviate

© DeVry/Becker Educational Development Corp All rights reserved

E X A M P L E 1

The new staff person at your company is confused about the underlying assumptions of net present value ( N PV) and internal

rate of return ( I RR) calculations As the manager, develop a written communication to the staff person describing the

difference between the two techniques as well as the advantages and disadvantages

Type your communication in the response area below using the word processor provided

� P O I N T E R = - - A P P L I C A T I O N

Identify the roles implied by the question Manager to subordinate

Ask yourself what you want your reader to think and do as The staff member should understand that N PV and I R R h ave

a result of the communication you are about to write (The the same objective but use two different measures The

point of view should be given.) preference of most toward the N PV method and the limiting

• What information might be helpful? assumptions of I R R would influence the staff member's understanding

Identify potential technical requirements not fully described Make the point that the general preference of analysts is to

framework?

Make sure that ideas are presented clearly Presenting NPV and I R R as methods with distinct advantages

• Start with the point of view or position on the topic and disadvantages helps organize the middle two paragraphs

of the response, one for NPV and one for I R R

• Organize your main points (freq uently as separate

paragraphs) in a manner that develops ideas in

support of your position

situation itself

Ensure concise presentation that does not use bullets or Paragraphs to be organized around N PV and IRR

tables

Use standard business English appropriate for the audience Tone will be geared to a new staff member

Verify spelling is correct U se the spell check button in the application

Defi ning those abbreviations will make them acceptable

for use

EXAMPLE 1 RESPONSE: F",n cve�lt

To: Staff Person

From: Accounting Manager

Net present value and internal rate of return are two techniques that we can use to evaluate investment

opportunities and justify the decision to accept or reject an opportunity based on quantified benefits and costs

The net present value technique (NPV) discounts cash flows at the opportunity cost of capital, which is

generally the weighted-average cost of capital to the organization The NPV compares the value of one dollar today with the value of one dollar in the future It assumes that projects or investments with positive cash flow greater than zero are acceptable and those with negative cash flow are not acceptable One of the strengths of this method is the fact that it considers the time value of money In addition, it also recognizes that there is risk associated with any kind of future cash flow, as the company may not be viable in the future A disadvantage however, involves the underlying assumption wherein there is a never-ending supply of capital We also don't know exactly when a project becomes profitable For example, a project may have a positive cash flow at the end of 10 years, but it may have negative cash flows for the first eight years of the project life

The internal rate of return (IRR) technique is similar to the net present value method in that it also relies on the time value of money IRR is the discount rate that results in an NPV equal to zero Often, this can result

in multiple discount rates IRR presumes reinvestment of funds at the IRR, an assumption that may not

be realistic

NPV is generally the preferred method because it allows for risk adjustments (different rates) in different periods and is more reliable when cash flows fluctuate significantly from period to period Despite its relative flexibility, both the NPV and IRR methods give us a means of evaluating whether a proposed capital project meets the minimum return requirements of management

Please feel free to contact me at any time so we can review specific examples

# # #

EXAMPLE 1 RESPONSE: \ ess tl-\t'\\\ .pv.n cveJ.lt

To: Staff Person

From: Accounting Manager

NPV and IRR are things you probably learned in school

NPV is investment minus present value of cash flows It measures an amount The IRR is where the rate gives you an NPV = 0 so it measures a percentage

NPV is good because you can:

• Change the amounts

• Change the rates

IRR is bad because:

• You can't change the amounts, and

• You can't change the rates

This is a lot easier with numbers, so see me and we'll go over it together

# # #

• A well-developed, cohesive expository response with • Use of keywords is present

an i ntroduction, a middle, and a conclusion

Spelling and grammar errors are limited, h owever, " " is

•

• On topic as evidenced by the use of key vocabulary not standard punctuation

words

• Bullet points are used to convey ideas, abbreviations are

·

0 Do not use text messaging language

E X A M P L E 2

M rs Kelly Smith, CFO of Sunshine , Inc (a small- to medium-sized company), has been told that B2B (Business to Business) e-Commerce sites make purchasing decisions faster, simpler, safer, more reliable, and more cost effective because companies can use websites to do more research and transact business with many d ifferent vendors

M rs Smith is interested in taking Sunshine, I nc., online and she would like to learn more about these benefits As an

e-Commerce specialist, d raft a memo to Mrs Smith discussing the d ifferent benefits of B2B e-Commerce Also explain how its transactions can be made secure by adding SSL encryption to the Web browser and by providing digital signatures

Type your communication in the response area below using the word processor provided

Identify the roles implied by the question Client/business owner

Ask yourself what you want your reader to think and do as Mrs Smith is wise to seek out B2B as an option Mrs Smith

a result of the communication you are about to write (The needs to understand that there are security risks and other point of view should be given) business model issues that come from B2B

• What information might be helpful?

• What information might be relevant?

Identify potential technical requirements not fully described Encryption techniques may not be understood

in the situation

• Are the organization points defined by the question?

• Do you need to formulate your own keyword

framework?

Make sure that ideas are presented clearly • The position is that B2B is a great idea but the business

· Start with the point of view or position on the topic owner must act prudently

Organize your main points (frequently as separate • Security risks and changes in the business model will

•

paragraphs) in a manner that develops ideas in represent the major paragraph ideas

support of your position

• Be a lert to points of organization provided in the

situation itself

Ensure concise presentation that does not use bullets or Planned use of security risk and business profitability

Use standard business English appropriate for the audience Tone will reflect the client/service provider relationship Verify spelling is correct Use the spell check button in the application

Reread response to ensure that grammar and punctuation Rereading is crucial because the capabilities of the software

Make sure you have add ressed the requirements of the Rereading will focus on tone and message

situation

Include all relevant facts, even if you believe that they are The unlimited hours of the Web create a larger customer

Avoid absolutes Use words such as generally, usually, etc Emphasize the positive and negative aspects of e-Commerce

the response in a manner that defines any acronym that is used will require careful attention

EXAMPLE 2 RESPONSE: FvJ\ cvetAit

To: Kelly Smith, CFO

The purpose of this memo is to present you with the different benefits of taking Sunshine, Inc., online and to explain how Internet transactions can be kept secure

An e-Commerce site would enable your company to conduct its business via the Internet regardless of whether

it has a preexisting relationship with its vendors or customers and thereby expand potential market share Implementation of e-Commerce allows businesses to expedite transactions resulting in faster sale of products

in the marketplace In fact, e-Commerce allows for transactions to occur during all hours of the day or night Transactions are not limited by time zone differences across the country or around the world Doing business

on the Web increases the productivity of the business

Although there are many benefits of e-Commerce, the convenience of the Web also brings security risks

In order for Sunshine's Web transactions to be secure, all data transmission would have to be encrypted Encryption or message scrambling protects both customer information and Sunshine's data in the event that the transmission is intercepted Encryption of the information makes it unreadable and therefore useless to the interceptor Encryption techniques such as secure socket layer (SSL), commonly used for e-Commerce transactions, could be implemented on Sunshine's Web page to ensure data security on the Web browser

SSL may sound complex, but its function is nothing more than to scramble messages for anyone other than the intended reader It is a standard protocol that is available to you

Digital signatures are also a good option for e-Commerce transactions, allowing business to provide and/or accept electronic signatures Electronic signatures imprint a person's name to an electronic document The software used attaches the signee's name in cursive font to the document, and because it is legally binding, it would be just as if the user had really "signed" a paper copy of the document This would allow your business

to close business deals from a distance, to accept the terms of purchases and/or sales, and to increase the productivity of many other business-to-business (828) transactions

I would be delighted to discuss these issues in greater depth with you at your earliest convenience

# # #

EXAMPLE 2 RESPONSE: Less H"t'\\\ plAn cve&A.H

Re: Sunshine, Inc

The web is a really cool way to grow your business with IT

The web is needs good security though to make sure that you don't lose money The SSL is the best option for that

Even so, you can still make a lot of money with the web because of all the time you can save and not have to close up at any particular time just because it's either to late or too early someplace where you are selling

But the security is really important still and encryption is something you will need to do

Please call This sounds like an exciting idea

# # #

Your ideal response will be: • Ideas are not well developed and are repetitive

A well-developed, cohesive expository response with Advantages of Web business are countered with security

•

issues, which are countered with more advantages of

an introduction, a middle, and a conclusion Web business and countered again with security issues

• On topic as evidenced by the use of key vocabulary • Key vocabulary words are used but not defined in an

• Free of grammar and spelling errors • The phrase "its either to early or too late" is not well

· Free of bullet points or abbreviations constructed and is grammatically flawed The phrase

should read, " it's either too early or too late "

0 Do not use text messaging language

• The response is flawed with use of undefined abbreviations ( IT and SSL) as well as slang (really cool)

,

E X A M P L E 3

A peer manager is interested in learning more about the Committee on Sponsoring Organization's enterprise risk

management (ERM) integrated framework, particularly internal environment

I n a written communication to your peer, describe two key aspects of the internal environment according to the enterprise risk management integrated framework

Type your communication in the response area below using the word processor provided

Ask yourself what you want your reader to think and do as • Reader should be motivated to learn more about ERM

a result of the communication you are about to write (The and embrace its principles

point of view should be given.)

• The reader should feel as if this is the beginning

· Do you need to formulate your own keyword · Organizational structure might also be the focus

framework?

M ake sure that ideas are presented clearly • I nternal environment is the fou ndation of the ERM Start with the point of view or position on the topic framework

•

decision making

paragraphs) i n a manner that develops ideas in support of

Ensure concise presentation that does not use bullets or Four to five paragraphs form themselves around two internal

Use standard business English appropriate for the audience Tone will be adjusted i n peer-to-peer communications Less

formality is needed

Verify spelling is correct Use the spell check button in the application

M ake sure you have addressed the requirements of the Rereading will focus on tone and message

situation

Include all relevant facts, even if you believe that they are N oting that internal environment is the first component of

interpreted

!O DeVry/Secker Educational Development Corp All rights reserved Intro-29

EXAMPLE 3 RESPONSE: F'L\n cve�it

From: Accounting Manager

I was delighted to hear about your interest in learning more about the Committee on Sponsoring Organizations (COSO) enterprise risk management integrated framework Enterprise risk management (ERM) is a

comprehensive organizational approach to evaluating and accepting risk There are many components of ERM, starting with the internal environment that sets the tone for the organization

Setting the tone of our organization begins with our commitment to integrity and ethical values Indeed,

the effectiveness of ERM is limited by the integrity and ethical commitment of our management team The responsibility that we bear to our owners, our customers and even our suppliers is summed up in our code of ethics and related code of conduct Our commitment to ethical behavior influences our decisions to only accept responsible risk and to operate in compliance with the law and in a manner that emphasizes mutual respect and fairness

Directly related to our commitment to ethical behavior is our commitment to competence Our commitment is reflected in hiring practices that screen potential job candidates in search of individuals who are most qualified and in training programs that ensure our staff members continuously update their skills for top efficiency and effectiveness

ERM is an approach to risk and organization management that begins with the tone of the organization It

is much more a journey than a list of procedures I look forward to contributing to this effort with you and encourage you to meet with me in person on this issue

# # #

EXAM PLE 3 RESPONSE: Less tL-\t'\\\ plAll CV'e�lt

From: Financial Manager

The COSO's ERM frame work has eight different features Internal Environment is just one The framework includes:

The Internal Environment has eight things in it as follows:

• Risk Management Philosophy

• Assignment of Authority and Responsibility

• Human Resources Standards

If you want to know about just two of them, I'd pick Risk Management Philosophy, which is about our

philosophy about managing risk and the ethical values which is about knowing about wrong and right

ERM has a lot of interesting things in it that help run the business

I look forward to working with you on this some more

# # #

Your ideal response will be: • The response never develops; it only lists components of

The response has no introduction, no development of

an introduction, a middle, and a conclusion ideas i n the middle, and no conclusion

· On topic as evidenced by the use of key vocabulary •

The response is arguably on topic with outstanding use

• Free of bullet points or abbreviations • Although there are few grammar or spelling errors, the

Do not use text messaging language commentary does not present sentences It presents lists