Appendix B: Sample Business Environment and Concepts Testlet Released by AICPA

1. In which of the following situations would there be inelastic demand?

1. A 5% price increase results in a 3% decrease in the quantity demanded.
2. A 4% price increase results in a 6% decrease in the quantity demanded.
3. A 4% price increase results in a 4% decrease in the quantity demanded.
4. A 3% decrease results in a 5% increase in the quantity demanded.

1. (a) The requirement is to identify the situation in which there is inelastic demand. Demand elasticity is measured by the change in the quantity demanded divided by the change in the price. If the ratio is greater than one, demand is said to be elastic. If the ratio is less than one, demand is inelastic, and if the ratio is equal to one, demand is unitary. Accordingly, answer (a) is correct because it is the only situation that results in a ratio less than one, 3/5 = 0.60. Answer (b) is incorrect because it indicates elastic demand, 6/4 = 1.5. Answer (c) is incorrect because it indicates unitary demand, 4/4 = 1. Answer (d) is incorrect because it indicates elastic demand, 5/3 = 1.67.

2. A project should be accepted if the present value of cash flows from the project is

1. Equal to the initial investment.
2. Less than the initial investment.
3. Greater than the initial investment.
4. Equal to zero.

2. (c) The requirement is to identify the decision rule for acceptance of a project. Answer (c) is correct because if a project's present value of cash flows is greater than the initial investment, the investment is expected to cover the cost of capital plus provide some additional return. Answer (a) is incorrect because it is not as desirable as answer (c). Answer (b) is incorrect because if management invests using this rule it will not cover the firm's cost of capital. Answer (d) is incorrect because acceptance of this project would result in losses.

3. Which of the following cash management techniques focuses on cash disbursements?

1. Lockbox system.
2. Zero-balance account.
3. Preauthorized checks.
4. Depository transfer checks.

3. (b) The requirement is to identify the cash management technique that focuses on cash disbursements. Answer (b) is correct because the zero-balance account technique involves establishing regional bank accounts to which just enough funds are transferred daily to pay the checks presented. It is a cash management technique for cash disbursements. Answer (a) is incorrect because a lockbox system is one in which customer payments are sent to a post office box that is maintained by the bank. Therefore, it involves cash receipts. Answer (c) is incorrect because use of preauthorized checks is not a cash management technique. Answer (d) is incorrect because depository transfer checks are used in conjunction with concentration banking which is a cash receipts management technique.

4. A customer intended to order 100 units of product Z96014, but incorrectly ordered nonexistent product Z96015. Which of the following controls would detect this error?

1. Check digit verification.
2. Record count.
3. Hash total.
4. Redundant data check.

4. (a) The requirement is to identify the control that would detect the error. Answer (a) is correct because check digit verification involves use of an extra (redundant) digit added to an identification number to detect errors in inputting or processing a transaction. The check digit allows the computer to detect and reject items that are not valid. Answer (b) is incorrect because a record count is simply a control total of the number of records processed. It would not detect an invalid part number. Answer (c) is incorrect because a hash total is a control total with a total that is meaningless. It would not detect an invalid part number. Answer (d) is incorrect because a redundant data check uses two identifiers in each transaction record (e.g., customer account number and the first five letters of the customer's name). While this control might be established to detect the error, it would not be as effective as a check digit.

5. The greatest financial threat to an organization that implemented the financial accounting module of an enterprise resource planning (ERP) system from a major vendor exists from errors detected during which of the following times?

1. Project initiation.
2. Requirements determination.
3. Table configuration.
4. Implementation.

5. (d) The requirement is to identify the phase in which there is the greatest financial threat to an organization that implemented an ERP system. Answer (d) is correct because in the implementation phase the system is operating with real data that could be corrupted by operation of the new system. Answers (a), (b), and (c) are incorrect because they all involve development phases where real data is not being used.

6. Which of the following procedures would an entity most likely include in its disaster recovery plan?

1. Convert all data from EDI format to an internal company format.
2. Maintain a Trojan horse program to prevent illicit activity.
3. Develop an auxiliary power supply to provide uninterrupted electricity.
4. Store duplicate copies of files in a location away from the computer center.

6. (d) The requirement is to identify the item most likely included in a disaster recovery plan. A disaster recovery plan should include priorities, insurance, backup approaches, specific assignments, periodic testing and updating, and documentation. As a part of backup approaches the plan would include procedures for storing backup files. Therefore, answer (d) is correct. Answer (a) is incorrect because conversion of data is not a part of disaster recovery. Answer (b) is incorrect because Trojan horses are not part of disaster recovery. Answer (c) is incorrect because developing an auxiliary power supply is not part of disaster recovery. Normal power interruption is not considered a disaster.

7. Which of the following definitions best characterizes benchmarking?

1. A technique that examines product and process attributes to identify areas for improvements.
2. The comparison of existing activities with the best levels of performance in other, similar organizations.
3. The development of the most effective methods of completing tasks in a particular industry.
4. The complete redesign of a process within an organization.

7. (b) The requirement is to identify the best characterization of benchmarking. Answer (b) is correct because benchmarking involves comparison of existing activities with the best levels of performance in other or similar organizations. Answer (a) is incorrect because it describes continuous improvement. Answer (c) is incorrect because it describes best practices. Answer (d) is incorrect because it describes process reengineering.

8. Which of the following is true about activity-based costing?

1. It should not be used with process or job costing.
2. It can be used only with process costing.
3. It can be used only with job costing.
4. It can be used with either process or job costing.

8. (d) The requirement is to identify the true statement about activity-based costing. Activity-based costing involves assigning costs to products or cost centers based on activities and cost drivers. Answer (d) is correct because it can be used in conjunction with either process or job order costing. Answer (a), (b), and (c) are incorrect because they can be used in conjunction with either process or job order costing.