Appendix C: 2014 Released AICPA Questions for Business Environment and Concepts

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1. A member of the board of directors of Central Communications Co. is offered a license by a third party to operate a cellular phone system. The director does not present this offer to the board of directors for approval but informally mentions it to a fellow board member, who does not think it will be a problem. The director buys the license. Which of the following statements is correct regarding the director's actions?

1. The director breached a duty of care by failing to use prudent business judgment.
2. The director breached the duty of due diligence.
3. The director breached a duty of loyalty by usurping a corporate opportunity.
4. The director acted properly in purchasing the license.

1. (c) The requirement is to evaluate the action of the board member. Answer (c) is correct because the director breached a duty of loyalty by usurping a corporate opportunity. Answers (a), (b), and (d) are incorrect because the director breached a duty of loyalty by usurping a corporate opportunity.

2. Company management completes event identification and analyzes the risks. The company wishes to assess its risk after management's response to the risk. According to COSO, which of the following types of risk does this situation represent?

1. Inherent risk.
2. Residual risk.
3. Event risk.
4. Detection risk.

2. (b) The requirement is to identify the type of risk that is described. Answer (b) is correct because the risk after management's response is the residual risk. Answer (a) is incorrect because it is the risk before management takes any action. Answer (c) is incorrect because it is the risk of loss from a particular event. Answer (d) is incorrect because it is not a risk related to enterprise risk management

3. A company implements an enterprise resource planning application to help improve its financial and operational reporting, while gaining other efficiencies related to sales and inventory management. For the implementation, the company hires an individual specializing in preparing the company for the changes through documenting new policies and procedures and developing new training. This is an example of

1. Change management.
2. A social event.
3. Segregation of duties.
4. An economic event.

3. (a) The requirement is to identify the item that is described in the stem. Answer (a) is corrected because this is an example of change management. Answer (b) is incorrect because a social event involves forming groups. Answer (c) is incorrect because segregation of duties involves allocation of duties to achieve effective internal control. Answer (d) is incorrect because an economic event is a transaction.

4. A significant decline in the exchange rate of the U.S. dollar generally will have which of the following effects?

1. It will hurt all U.S. business.
2. It will benefit U.S. importers.
3. It will benefit U.S. exporters.
4. It will make foreign goods cheaper for U.S. consumers.

4. (c) The requirement is to identify the effect of a significant decline in the exchange rate of the U.S. dollar. Answer (c) is correct. It will benefit U.S. exporters because it makes their products less expensive in other countries. Answer (a) is incorrect because it will hurt some U.S. businesses and help others. Answer (b) is incorrect because it will hurt importers. Imported items will be more expensive in U.S. dollars. Answer (d) is incorrect it will make foreign goods more expensive for U.S. consumers.

5. Blue Co. has current assets of $130 million, current liabilities of $50 million, and equity of $30 million. The current ratio for the company's peer group is 2.5. Which of the following statements is correct regarding Blue's current ratio?

1. Blue's current ratio is 2.6, which is more liquid than its peer group.
2. Blue's current ratio is 2.6, which is less liquid than average.
3. Blue's current ratio is 1.625, which is more liquid than its peer group.
4. Blue's current ratio is 1.625, which is less liquid than its peer group.

5. (a) The requirement is to identify the correct statement about Blue's current ratio. Answer (a) is correct because Blue's current ratio is 2.6 ($130 million/$50 million) which is more liquid than 2.5. Answer (b) is incorrect because Blue's current ratio of 2.6 makes the company more liquid than its industry. Answer (c) is incorrect because Blue's current ratio is 2.6. Answer (d) is incorrect because Blue's current ratio is 2.6.

6. Each of the following financial instruments is a derivative, except

1. A fixed interest, five-year note payable.
2. Interest rate futures.
3. An agreement to buy a piece of equipment in six months at a price determined today.
4. A contract to purchase a commodity in six months at a price determined today.

6. (a) The requirement is to identify the item that is not a derivative. Answer (a) is correct because a derivative is a financial contract that derives its value from the performance of an underlying, such as an asset, index, or interest rate. A fixed interest note does not meet this definition. Answers (b), (c), and (d) are incorrect because they are all derivatives.

7. A company is investing in a machine costing $365,000. The following table shows selected financial data for the company for the next five years:

What is the payback period on this machine?

1. 3.8 years.
2. 4.0 years.
3. 4.4 years.
4. 5.0 years.

7. (a) The requirement is to calculate the payback period. Answer (a) is correct because the payback period is equal to 3.8 years ($50,000 + $125,000 + $150,000 + (.8 × $50,000) = $365,000). Answers (b), (c) and (d) are incorrect because the payback period is 3.8 years.

8. During which of the following periods will prices generally increase the fastest?

1. Deflation.
2. Recession.
3. Inflation.
4. Hyperinflation.

8. (d) The requirement is to identify the period in which prices will increase the fastest. Answer (d) is correct because prices will increase the most in a period of hyperinflation. Answers (a) and (b) are incorrect because in these periods prices will decrease. Answer (c) is incorrect because prices will increase but not as fast as during hyperinflation.

9. Mein Co.'s sales totaled $300,000 for the current year. Mein's cost of goods sold was $150,000. Mein's accounts receivable balance was $20,000 on January 1 and $30,000 on December 31. What was Mein's accounts receivable turnover rate for the current year?

1. 6 times.
2. 10 times.
3. 12 times.
4. 15 times.

9. (c) The requirement is to calculate the accounts receivable turnover rate. Answer (c) is correct because the accounts receivable turnover rate is equal to 12 times ($300,000 sales/(($30,000 + $20,000)/2). Answers (a), (b), and (d) are incorrect because the accounts receivable turnover rate is equal to 12 times.

10. A company has equity of $9,000. Long-term debt is $1,900. Net working capital, other than cash, is $2,500. Fixed assets are $2,200. What amount of cash does the company have?

1. 7,400
2. $6,800
3. $6,200
4. $2,400

10. (c) The requirement is to calculate the amount of cash. Answer (c) is correct because the amount of cash is equal to $6,200 ($9,000 (equity) + $1,900 (long-term debt) − $2,200 (fixed assets) − $2,500 (net working capital other than cash). Answers (a), (b), and (d) are incorrect because cash is equal to $6,200.

11. When calculating a company's cost of common stock, an analyst evaluates the following four components: risk-free rate, stock's beta coefficient, rate of return on the market portfolio, and required rate of return on the company's stock. Which of the following measurement models is being used?

1. Constant growth.
2. Weighted marginal cost of capital.
3. Capital asset pricing.
4. Overall cost of capital.

11. (c) The requirement is to identify the type of valuation model that is being used. Answer (c) is correct because the capital asset pricing model is calculated using the risk free interest rate, the stock's beta coefficient, and the estimated return on the market to calculate the cost of equity. Answers (a), (b), and (d) are incorrect because the factors are used in the capital asset pricing model.

12. Engaging in traditional electronic data interchange (EDI) provides which of the following benefits?

1. Enhanced audit trails.
2. Guaranteed payments from customers.
3. Added flexibility to entice new partners.
4. Reduced likelihood of stocks-out costs.

12. (d) The requirement is to identify the benefits of electronic data interchange. Answer (d) is correct because reduced likelihood of stock-out costs is a benefit. Less stock-outs are likely because EDI communicates needs to the company's suppliers. Answers (a), (b), and (c) are incorrect because a major benefit is less stock-outs.

13. A company began issuing handheld devices to key executives. Each of the following factors is a reason for requiring changes to the security policy, except

1. Storage of sensitive data.
2. Portability of the device.
3. Vulnerability of the device.
4. Convenience of the device.

13. (d) The requirement is to identify the item that does not affect security policy. Answer (d) is correct because the convenience of the device is not a security risk. Answers (a), (b), and (c) are incorrect because they all represent security risks

14. A company switches all processing to an alternate site, and staff members report to the alternate site to verify that they are able to connect to all major systems and perform all core business processes from the alternate site. Which of the following best identifies the activities performed by the staff?

1. Closed loop verification.
2. Disaster recovery planning.
3. Authentication validation.
4. Segregation control testing.

14. (b) The requirement is to identify what is described by the scenario. Answer (b) is correct because this scenario describes disaster recovery. Answers (a), (c), and (d) are incorrect because the scenario describes disaster recovery.

15. The following information for a company is given:

Fixed cost per month	$2,500
Unit selling price	100
Variable cost as a percentage of sales	60%

What amount of annual sales must the company achieve to break even?

1. $100,000
2. $75,000
3. $50,000
4. $30,000

15. (b) The requirement is to calculate break even. Answer (b) is correct because the amount of break even sales is equal to $75,000 ($100 sales price × ($30,000 annual fixed cost/$40 contribution margin)). Answers (a), (c), and (d) are incorrect because the amount of break even sales is equal to $75,000.

16. A company with limited production resources that is currently using strategy C provides the following production information:

The company would encounter what opportunity cost if it doubled its production of Product X?

1. The cost of Product X would decrease by 50%.
2. Production of Product Y would double.
3. Production of Product Y would be eliminated.
4. Production of Product Y would not be affected.

16. (c) The requirement is to indicate the opportunity cost of doubling the production of product X. Answer (c) is correct because if the company doubled its production of product X it would pursue strategy E with an opportunity cost the entire production of product Y. Answers (a), (b), and (d) are incorrect because the opportunity cost is the complete elimination of the production of product Y.

17. A company manufactures a product using one material per unit. The following information for the upcoming budget year is available:

What amount is the total direct materials purchasing budget?

1. $67,500
2. $72,500
3. $77,500
4. $80,000

17. (c) The requirement is to calculate the direct materials purchasing budget. Answer (c) is correct because the direct materials purchasing budget is equal to $77,500 ($5 per unit (14,500 sales + 3,000 budgeted ending finished goods − 1,500 budgeted beginning finished goods + 1,500 budgeted ending direct materials inventory − 2,000 budgeted beginning direct materials inventory)). Answers (a), (b), and (d) are incorrect because the direct purchasing budget is equal to $77,500.

18. Which of the following ratios should be used to compare the profitability of two electronics companies that differ in size?

1. Quick (acid-test) ratio.
2. Return on assets.
3. Asset turnover.
4. Inventory turnover.

18. (b) The requirement is to identify the ratio that should be used compare the profitability of two electronics companies that differ in size. Answer (b) is correct because the return on assets is a measure of profitability that can be used to compare firms of different size. Answers (a), (c), and (d) are incorrect because they are not measures of profitability.

19. Which of the following statements is correct regarding variable costing and absorption costing income statements for a company that has no beginning inventory and whose production exceeds sales for the current period?

1. Net income is higher if absorption costing is used.
2. The ending inventory amount is lower if absorption costing is used.
3. The cost of goods sold amount is lower if absorption costing is used.
4. The selling and administrative expense is higher if absorption costing is used.

19. (a) The requirement is to identify the true statement about variable and absorption costing income statements. Answer (a) is correct because when production exceeds sales absorption net income exceeds variable cost net income. Under absorption costing fixed costs are carried over to the next period in inventory. Answer (b) is incorrect because ending inventory is higher if absorption costing is used. Answer (c) is incorrect because the cost of goods sold amount is higher if absorption costing is used. Answer (d) is incorrect because selling and administrative expenses are unaffected by the inventory costing method.

20. A manufacturer that wants to improve its staging process compares its procedures against the check-in process for a major airline. Which of the following tools is the manufacturer using?

1. Total quality management.
2. Statistical process control.
3. Economic value-added.
4. Benchmarking.

20. (d) The requirement is to identify the item that describes the strategy being employed. Answer (d) is correct because benchmarking involves comparing a company's processes to firms in the same or other industries. Answers (a), (b), and (c) are incorrect because the strategy being employed involves benchmarking

21. The Enterprise Risk Management-Integrated Framework of the committee of sponsoring organizations (COSO) is best defined as a

1. Process effected by an entity's board of directors, management, and other personnel.
2. Serial process in which one component affects only the next component.
3. Process that takes a control-based approach to an organization.
4. Process that replaces the COSO internal control framework.

21. (d) The requirement is to identify the appropriate behavior. Answer (d) is correct because the appropriate action is to wait to bid until the deliverables are clearly defined. Answers (a), (b), and (c) are incorrect because the appropriate behavior is to wait to bid until the deliverables are clearly defined.

22. According to COSO, the position or internal entity that is best suited, as part of the enterprise risk management process, to devise and execute risk procedures for a particular department is

1. The internal audit department.
2. The chief executive officer.
3. A manager within the department.
4. The audit committee.

22. (a) The requirement is to select the business function that is not part of the value chain. Answer (a) is correct because the value chain is the activities required for a firm to deliver a product or service to market. The accounting function is not part of the value chain. Answers (b), (c), and (d) are incorrect because they are all functions that are part of the value chain.

23. Each of the following statements is correct regarding the existence and implementation of codes of conduct, except:

1. Employees understand what behavior is acceptable or unacceptable and know what to do if they encounter improper behavior.
2. The codes of conduct are comprehensive, addressing conflicts of interest, illegal or other improper payments, anticompetitive guidelines, and insider trading.
3. The codes of conduct are periodically acknowledged by all employees.
4. The codes of conduct must be in writing and displayed in public areas, such as a break room.

23. (c) The requirement is to calculate the return on equity after the refinancing. Answer (c) is correct because the return on equity is 14.7%. Spear's current profit is $220,000 (11% × $2,000,0000) and its return on equity before the refinancing is equal to 17.6% ($220,000/($2,500,000 × 50%)). Return on equity after the refinancing is equal to 14.7% ($220.000/($2,500,000 × 60%)). Answers (a), (b), and (d) are incorrect because the return on equity is equal to 14.7%

24. Each of the following is an effect from opening markets to foreign investment, except

1. An increase in the correlation of emerging stock markets with world markets.
2. A change in the volatility of emerging stock market returns.
3. A decrease in local firms' cost of capital.
4. A decrease in investment growth rates.

24. (d) The requirement is to identify the appropriate sequence of preparing a budget. Answer (d) is correct because the appropriate sequence is production budget, material purchases budget, budgeted income statement, and budgeted balance sheet. Answer (a) is incorrect because the sales budget would have to be prepared before the cost of goods sold budget is prepared. Answer (b) is incorrect because production budget would have to be prepared before the material purchases budget is prepared. Answer (c) is incorrect because the budgeted income statement would have to be prepared before the budgeted balance sheet is prepared.

25. Global companies that deal with the political and financial risks of conducting business in a particular foreign location face which of the following types of risk?

1. Country risk.
2. Principal risk.
3. Interest rate risk.
4. Commodity price risk.

25. (c) The requirement is to identify the product that Blue would prefer to sell. Answer (c) is correct because the contribution from the sale of $40,000 of product C would be $17,600 (($40,000/$50) × ($50 − $28)). Answers (a), (b), and (d) are incorrect because the highest contribution would result from the sale of only product C

26. Which of the following concepts can best be used to understand oligopoly behavior?

1. Concentration ratio.
2. Interindustry competition.
3. Game theory model.
4. Herfindahl index.

26. (d) The requirement is to identify the internet tool that would not be useful to the research-based firm for collaboration. Answer (d) is correct because electronic data interchange is used for transaction processing with suppliers or customers. It is appropriate for a firm that sells products. Answers (a), (b), and (c) are incorrect because they are all tools that would be appropriately used by a research-based firm.

27. A U.S. parent company is reviewing the cash flows from its international subsidiaries. In addition to exchange rate risk, which of the following items would be a primary consideration in the company's cash flow analysis?

1. Repatriation restrictions.
2. American depository receipts.
3. Default risk premium.
4. Foreign trade deficit.

27. (c) The requirement is to compute the expected annual loss from user error. Answer (c) is correct because the expected loss is equal to $13,950 (($30,000 + $1,000)/2 × 90%). Answers (a), (b), and (d) are incorrect because the expected loss is equal to $13,950.

28. A company has a required rate of return of 15% for five potential projects. The company has a maximum of $500,000 available for investment and cannot raise any capital. Details about the five projects are as follows:

The company should choose which of the following projects?

1. Project 1 only.
2. Projects 2, 3, and 4 only.
3. Projects 2, 4, and 5 only.
4. Projects 3, 4, and 5 only.

28. (a) The requirement is to determine the error that would most likely be detected by batch financial totals. Answer (a) is correct because a batch total compares the total of the transactions to the sum of the individual items. If a transposition error occurred on an individual item, the batch total would detect this error. Answer (b) is incorrect because it would be detected with a hash total. Answer (c) is incorrect this item would not be detected by a batch total. Answer (d) is incorrect because it would not be detected by a batch total.

29. A company purchased property that it expects to sell for $14,000 next year. The net present value of the investment is $1,000. The company is guaranteed an interest rate of 12% by the bank. What amount did the company pay for the property?

1. $11,500
2. $12,500
3. $13,000
4. $13,500

29. (a) The requirement is to compute the amount of additional fixed assets that are needed to generate $3,000,000 in sales. Answer (a) is correct because the additional amount of fixed assets is equal to $425,000 (($3,000,000 × ((95% × $1,000,0000)/$2,000,000)) − $1,000,000). Answers (b), (c), and (d) are incorrect because the additional investment is equal to $425,000.

30. A company purchases inventory on terms of net 30 days and resells to its customers on terms of net 15 days. The inventory conversion period averages 60 days. What is the company's cash conversion cycle?

1. 15 days
2. 45 days
3. 75 days
4. 105 days

30. (b) The requirement is to determine the most attractive terms. Answer (b) is correct because the most attractive option would be to purchase from Brandy, pay in 15 days, and borrow from the bank. The nominal annual benefit of taking Brandy's terms is equal to 36.5% (1.5%/(100% − 1.5%) × 360 days/(30 days − 15 days)). Answer (a) is incorrect because the nominal annual cost of not taking Platt's terms is equal to 14.7% (2%/(100% − 2%)) × (360 days − (60 days − 10 days)), which is less than the benefit from taking Brandy's terms. Answer (c) is incorrect because the nominal annual cost of not taking Carryl's terms is equal to 18.2% (1%/(100% − 1%) × 360 days − (30 days − 10 days)) which is less than the benefit from taking Brandy's terms. Answer (d) is incorrect because the company would benefit from taking Brandy's discount terms.

31. Three suppliers offer Ruby Co. different credit terms. Bandy Co. offers terms of 1.5/15, net 30. Carryl Co. offers terms of 1/10, net 30. Platt Co. offers terms of 2/10, net 60. Ruby Co. would have to borrow from a bank at an annual rate of 10% to take any cash discounts. Based on a 360-day year, which of the following options would be most attractive for Ruby Co.?

1. Purchase from Platt Co., pay in 60 days, and do not borrow from the bank.
2. Purchase from Bandy Co., pay in 15 days, and borrow from the bank.
3. Purchase from Carryl Co., pay in 10 days, and borrow from the bank.
4. Purchase from Bandy Co., pay in 30 days, and do not borrow from the bank.

31. (b) The requirement is to determine the cash conversion cycle. Answer (b) is correct because the cash conversion cycle is equal to the inventory conversion period plus the receivables conversion period minus the payables deferral period (45 days = 60 days + 15 days − 30 days). Answer (a) is incorrect because the cash conversion cycle is equal to 45 days. Answers (c) and (d) are incorrect because the cash conversion cycle is equal to 45 days.

32. A company uses its fixed assets of $1,000,000 at 95% capacity to generate sales of $2,000,000. The company wishes to generate sales of $3,000,000. What amount of additional fixed assets must be acquired, assuming that all fixed assets will operate at maximum capacity?

1. $425,000
2. $475,000
3. $500,000
4. $578,000

32. (a) The requirement is to determine the amount that the company paid for the property. Answer (a) is correct because the amount paid is $11,500. The present value of the sales price of $14,000 discounted at 12% for one year is equal to $12,500 ($14,000/1.12). If the net present value of the investment is equal to $1,000, the purchase price must be equal to $11,500 ($12,500 − $1,000). Answer (b) is incorrect because this is the present value of the selling price. Answers (c) and (d) are incorrect because the correct amount is $11,500.

33. Which of the following errors most likely would be detected by batch financial totals?

1. A transposition error on one employee's paycheck on a weekly payroll run.
2. A missing digit in an invoice number in a batch of daily sales.
3. A purchase order mistakenly entered into two different batches.
4. Malfeasance resulting from a receivable clerk's pocketing of a customer's payment and altering of the related records.

33. (c) The requirement is to identify the projects the company should choose for investment. Answer (c) is correct because projects 2, 4, and 5 have the largest net present value. Answers (a), (b), and (d) are incorrect because they do not produce the largest net present value.

34. A company has an online order processing system. The company is in the process of determining the dollar amount of loss from user error. The company estimates the probability of occurrence of user error to be 90%, with evenly distributed losses ranging from $1,000 to $30,000. What is the expected annual loss from user error?

1. $13,050
2. $13,500
3. $13,950
4. $14,400

34. (a) The requirement is to identify the item that would be of concern for a parent company in analyzing cash flow from international subsidiaries. Answer (a) is correct because repatriation restrictions affect the parent's ability to get access to the cash of subsidiaries. Answer (b) is incorrect because American depository receipts are negotiable certificates issued by a U.S. bank representing a specific number of shares in a foreign stock. Answer (c) is incorrect because default risk premium is the additional amount a borrower must pay to compensate a lender for the risk of default. Answer (d) is incorrect because foreign trade deficit is a measure of the excess of imports over exports for a country.

35. A research-based firm in the medical field could use each of the following Internet-based tools for collaboration, except

1. An e-mail application.
2. Videoconferencing.
3. Groupware systems.
4. Electronic data interchange.

The following data pertains to Blue Co.:

35. (c) The requirement is to identify the concept that might be used to understand oligopoly behavior. Answer (c) is correct because an oligopoly is an industry that is dominated by a small number of sellers. It is best described by game theory which models conflict and cooperation among decision makers. Answer (a) is incorrect because it is measure of the total output by a group of firms in an industry. Answer (b) is incorrect because it is the competition created by firms in different industries. Answer (d) is incorrect because the Herfindahl index is a measure of industry concentration.

36. A customer of Blue is going to spend a total of $40,000 on one product only. Which of the following products would Blue prefer to sell to the customer?

1. A.
2. B.
3. C.
4. Either A or C.

36. (a) The requirement is to identify the type of risk that results from conducting business in a foreign location. Answer (a) is correct because such action opens the company to country risk. Answer (b) is incorrect because principle risk is risk of default by the other party to a contract. Answer (c) is incorrect because interest rate risk is the risk of loss due to changes in interest rates. Answer (d) is incorrect because commodity price risk is the risk of loss due to changes in commodity prices.

37. Which of the following options lists the correct sequence for preparing budgets?

1. Cost of goods sold budget, sales budget, budgeted income statement, budgeted balance sheet.
2. Material purchases budget, production budget, cost of goods sold budget, cash receipts budget.
3. Sales budget, production budget, budgeted balance sheet, budgeted income statement.
4. Production budget, material purchases budget, budgeted income statement, budgeted balance sheet.

37. (d) The requirement is to identify the statement that is not true regarding the effect of opening markets to foreign investment. Answer (d) is correct because opening the market would cause and increase in investment growth rates. More investment would occur due to the open market. Answers (a), (b), and (c) are incorrect because they are all true regarding the effects of opening a market to foreign investment.

38. Spear Corp. had sales of $2,000,000, a profit margin of 11%, and assets of $2,500,000. Spear decided to reduce its debt ratio to 0.40 from 0.50 by selling new common stock and using the proceeds to repay principal on some outstanding long-term debt. After the refinancing, what is Spear's return on equity?

1. 3.5%
2. 5.3%
3. 14.7%
4. 22.9%

38. (d) The requirement is to identify the statement that is not correct with respect to the existence and implementation of codes of conduct. Answer (d) is correct because codes of conduct do not have to be displayed in public areas. Answers (a), (b), and (c) are incorrect because they are all true statements about codes of conduct.

39. Each of the following business functions is considered part of a company's value chain, except

1. Accounting.
2. Customer service.
3. Marketing.
4. Research and development.

39. (c) The requirement is to identify the position or internal entity that is best suited to devise and execute risk procedures for a particular department. Answer (c) is correct because the manager of the department is most suited to devise and execute risk procedures for the department. Answers (a), (b), and (d) are incorrect because the manager is best suited.

40. For a fixed-price proposal, the deliverables due on the contract are not clearly defined. As a result, the potential contractor should

1. Submit the bid because the client's price seems more than adequate to meet the contract requirements.
2. Modify the terms to account for unforeseen difficulties that may arise.
3. Build in a cost escalator to adjust for materials price increases during the execution of the contract.
4. Wait to bid until the deliverables are clearly defined.

40. (a) The requirement is to identify the phrase that best defines the Enterprise Risk Management-Integrated Framework. Answer (a) is correct because the framework is a process effected by an entity's board of directors, management, and other personnel. Answer (b) is incorrect because it is an integrated process in which all components affect the others. Answer (c) is incorrect because the framework deals with risk management and is not control-based. Answer (d) is incorrect because the framework does not replace the internal control framework.

Written Communication Task 1

Situation

In the past, XYZ Co. has used forward contracts effectively to offset price volatility for the purchase of raw materials. The CEO is considering extending this practice for the purchase of additional raw materials. Write a memo to the CEO describing the factors that should be considered in deciding whether to extend this practice.

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

Solution to Written Communication Task 1

Written Communication Task 2

Situation

The CEO of ABC, Inc. has asked for your advice about changing the company's inventory method from FIFO to LIFO. As the controller, you believe that LIFO is the best methodology for the company. Write a memo to the CEO supporting your recommendation to change to LIFO for inventory costing purposes. In your memo, explain the advantages and disadvantages of each method and identify conditions under which LIFO might produce advantages over FIFO.

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

Solution to Written Communication Task 2