BEC Sample CPA Exam Questions

Weekly Review Quiz #421 – BEC: Financial Management

Thank you for taking our Business Environment and Concepts (BEC) review quiz. Check back again for five new sample BEC CPA questions to help you prepare for the exam.

Question 1:

Bander Co. is determining how to finance some long-term projects. Bander has decided it prefers the benefits of no fixed charges, no fixed maturity date, and an increase in the creditworthiness of the company. Which of the following would best meet Bander’s financing requirements?

  1. Bonds.
  2. Common stock.
  3. Long-term debt.
  4. Short-term debt.

The correct answer is: B.

A. Incorrect… This answer is incorrect because it involves the issuance of debt which will not achieve the desired benefits.

B. Correct! This answer is correct because the issuance of common stock involves no fixed charges, no fixed maturity dates and will increase the creditworthiness of the company.

C. Incorrect… This answer is incorrect because it involves the issuance of debt which will not achieve the desired benefits.

D. Incorrect… This answer is incorrect because it involves the issuance of debt which will not achieve the desired benefits.

Question 2:

When calculating the cost of capital, the cost assigned to retained earnings should be

  1. Zero.
  2. Lower than the cost of external common equity.
  3. Equal to the cost of external common equity.
  4. Higher than the cost of external common equity.

The correct answer is: B.

A. Incorrect… This answer is incorrect. The cost assigned to retained earnings is not zero.

B. Correct! This answer is correct. New common equity has floatation costs that increase its cost above retained earnings.

C. Incorrect… This answer is incorrect. Floatation costs must be considered.

D. Incorrect… This answer is incorrect. Floatation costs must be considered.

Question 3:

Spotech Co.’s budgeted sales and budgeted cost of sales for the coming year are $212,000,000 and $132,500,000, respectively.  Short-term interest rates are expected to average 5%.  If Spotech could increase inventory turnover from its current 8.0 times per year to 10.0 times per year, its expected cost savings in the current year would be

  1. $165,625.
  2. $0.
  3. $3,312,500.
  4. $828,125.

The correct answer is: A.

A. Correct! This answer is correct. If cost of sales is $132,500,000 and inventory turnover is 8 times per year, average inventory is $16,562,500 ($132,500,000 ÷ 8) If turnover increases to 10 times, average inventory would decrease to $13,250,000 ($132,500,000 ÷ 10). Average inventory would decrease by $3,312,500 ($16,562,500 – $13,250,000), which would save Spotech $165,625 ($3,312,500 × 5%) in interest.

B. Incorrect… This answer is incorrect. Interest would be saved on the reduction in the average amount of inventory on hand.

C. Incorrect… This answer is incorrect. This is the decrease in average inventory.

D. Incorrect… This answer is incorrect. This is the amount of interest on the current average inventory.

Question 4:

What would be the primary reason for a company to agree to a debt covenant limiting the percentage of its long-term debt?

  1. To cause the price of the company’s stock to rise.
  2. To lower the company’s bond rating.
  3. To reduce the risk for existing bondholders.
  4. To reduce the interstate on the bonds being sold.

The correct answer is: D.

A. Incorrect… This answer is incorrect because it is difficult to determine the effect on share price.

B. Incorrect… This answer is incorrect because it would likely raise the company’s bond rating, if anything.

C. Incorrect… This answer is incorrect because it has no effect on the risk of existing bondholders.

D. Correct! This answer is correct because such a covenant would reduce the interest rate on the debt being issued.

Question 5:

If a firm increases its cash balance by issuing additional shares of common stock, working capital

  1. Remains unchanged and the current ratio remains unchanged.
  2. Increases and the current ratio remains unchanged.
  3. Increases and the current ratio decreases.
  4. Increases and the current ratio increases.

The correct answer is: D.

A. Incorrect… This answer is incorrect. Issuance of common stock increases cash.

B. Incorrect…  This answer is incorrect. Issuance of common stock increases cash.

C. Incorrect… This answer is incorrect. Issuance of common stock increases cash.

D. Correct! This answer is correct. Issuance of common stock increases cash and equity. Since cash is increased the current ratio is also increased.

End of Quiz

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