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BEC Sample CPA Exam Questions - Wiley CPAexcel

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.

Most candidates tend to shrug off the written communications section - don’t be one of them. This section is comprised of 3 questions requiring you to respond in some form of business writing, such as a memo to a client. Don’t waste time engaging in flowery statements - just be succinct, concise and stay relevant. Using vocabulary and accounting jargon relevant to the topic is a sure way to increase your score. I remember having only 5 minutes left to finish this section due to poor time management. I was not completely familiar with any of the 3 questions, however, I managed to rapidly type 3-4 fluffy sentences for each of them using vocabulary I hoped might make me sound somewhat competent. I thought I would completely fail this section but it in the end I got an “average” grade. When in doubt, use fancy lingo!

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.

The BEC CPA exam has 62 multiple choice questions instead of the previous 72 with a reduced weighting of 50% from the previous 85%. In addition, the BEC will now include 4-5 task-based simulations going forward which are weighted at 35%. The remaining 15% comes from a written communications section where you are required to answer 3 separate questions about relevant BEC topics. You will also be allocated 4 hours instead of the traditional 3 to accommodate the new format. You need to score a 75% or higher in order to pass.

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.

There will be 3 Written Communication questions that you will encounter on the BEC which basically tests your ability to write and construct professional, business documents in the event that you need to communicate any issues or concerns you may have with your potential clients in writing. This portion of the BEC exam is not meant to measure how flowery or fluffy you can make your writing; lets save that for those of us who are looking to do creative writing on the side or want to publish our own short novel someday. In actuality, the Written Communication portion of the BEC not only tests your proficiency in articulating a problem and solution in well-thought-out content, but also your technical use of standard English and professional documentation creation.

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.

I am beginning to study for BEC and trying to figure out how to prepare for the writing portion of BEC. There isn't really a way to practice this part and have it actually graded. I am a pretty decent writer as far as my wording, punctuation, and grammar skills. My biggest issue is knowing the content well enough to write memo's and letters. I can work my way through MCQ's and SIMS without much issue, but when I have to explain the advantages and concerns. I just kind of freeze up. Part of it is that I have never done well with timed essays. I always have needed time to think things through and research my topics.

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.

So to make sure that youre answering the questions in a way that encompasses all the above components, follow our tips below to get the most out of your written responses and earn a high score. Remember, 1 out of the 3 Written Communications questions is a pretest, meaning you have to put your best foot forward in answering all 3 questions since only 2 of them will account for 15% of your total BEC score.

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).

The Business Environment and Concepts (BEC) test covers many topics that CPA candidates study in business school. BEC is also the only test on the CPA exam that includes written communication (essay) questions. Now, keep in mind that you need to mentally “shift gears” to do well on these questions. Use these tips to succeed on the BEC writing section and written communication questions.

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.

Your BEC test will also ask questions about economic concepts. You’ll see questions about the impact of currency exchange rates and the economic cycle of a product.

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.

Finally, the BEC test covers financial decision-making. As a CPA, you’ll need to analyze alternatives and make business decisions. You’ll be asked questions about whether a company should make a component part or buy it from a vendor, for example. This section also asks questions about discontinuing a particular product line or department.

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.

CPAs write many different types of documents. You may write a memo to explain the accounting treatment of a particular transaction to senior management. Every company should maintain an updated procedure manual. To keep the manual updated, you need to write clear and concise procedures that your staff can understand. So, let’s agree that writing is something you need to do as a CPA.

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.

Do not fear the Written Communication portion of the CPA Exam - Roger Philipp, CPA, CGMA, is here to help! You are not expected to be a literary genius or Pulitzer Prize-winning journalist, your job is simply to draft a mock response to a client using good grammar and punctuation.

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.

Your BEC test may ask you to perform financial analysis. That analysis may require you to identify trends in a set of financial statements. As an example, maybe you notice that accounts receivable are increasing at a much faster rate than sales. That may indicate that the business is selling to more customers with a higher risk of not paying their invoices.

Since cash is increased the current ratio is also increased.

End of Quiz

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The best way to prepare for the BEC exam is to study consistently rather than lumping the required study material together during the last few days before the exam, concentrate on tackling each topic one at a time. Don’t underestimate the BEC exam at any cost. Make sure you study consistently and start weeks if not months before your actual test date.

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Professor
Dan Stone, Ph.D., CPA, MBA

University of Kentucky:

  • Gatton Endowed Chair, Von Allmen School of Accountancy and the Department of Management (Business Analytics)
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