Business Environment and Concepts - CPA Exam Review

442 Pages·2015·3.21 MB·English

CPA R T
EVIEW EXTBOOK

BEC
Business Environment & Concepts
S 5000–5600
ECTIONS
Y 2017
EAR
Surgent CPA Review:
Editor-in-Chief: Liz Kolar, CPA, CGMA
Senior Editor: Susan Cox, M.Acc., CPA

This book contains material copyrighted © 1953 through 2017 by the American Institute of Certified Public Accountants, Inc., and
is used or adapted with permission.

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5116, Norwalk, CT 06856-5116, are reprinted with permission. Complete copies of these documents are available from the
Financial Accounting Foundation.

This book contains material from Freeman/Shoulders/Allison, Governmental & Nonprofit Accounting: Theory & Practice.
T T
Reprinted by permission of Prentice Hall, Inc., Englewood Cliffs, NJ.

Material from Uniform CPA Examination Questions and Unofficial Answers, copyright © 1976 through 2017, American Institute
of Certified Public Accountants, Inc., is used or adapted with permission.

The databanks contain material from Welsch/Newman/Zlatkovich, Intermediate Accounting. Reprinted by permission of Richard
T T
D. Irwin, Inc., Homewood, IL.

The databanks and textbooks contain quotations from Governmental Accounting, Auditing, and Financial Reporting,
copyright © 2005 Government Finance Officers Association of the United States and Canada. Reprinted with permission.

This book is written to provide accurate and authoritative information concerning the covered topics. It is not meant to take the
place of professional advice. The content of this book has been updated to reflect relevant legislative and governing body
modifications as of January 2017.

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© 2017 Surgent CPA Review, LLC
Acknowledgments
Surgent CPA Review was developed by a team of professionals who are experts in the fields of accounting, business
law, and computer science, and are also experienced teachers in CPA Review programs and continuing professional
education courses.
Surgent CPA Review expresses its sincere appreciation to the many individual candidates, as well as accounting
instructors, who took time to write to us about previous editions. The improvements in this edition are attributable to
all of these individuals. Of course, any deficiencies are the responsibilities of the editors and authors. We very much
appreciate and solicit your comments and suggestions about this year’s edition.
The editors and authors are also indebted to the American Institute of Certified Public Accountants, the Financial
Accounting Standards Board, and the Governmental Accounting Standards Board for permission to quote from their
pronouncements. In addition, the AICPA granted us permission to use material from previous Uniform CPA
Examination Questions and Answers. AICPA codification numbers are used throughout the Auditing portion of the
Review to indicate the source of materials.
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helping you pass the exam. Our thanks go out to the many individuals who have made contributions to both the
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Surgent CPA Review.
Good luck on the exam!

© 2017 Surgent CPA Review, LLC
Contributors

Paul Brown, CPA, is the Director of Technical Services for a large state CPA Society. One of Paul’s main duties is
to serve as the technical reviewer in the state society’s American Institute of Certified Public Accountants (AICPA)
Peer Review Program. The program administers approximately 450 reviews annually and oversees approximately
125 peer reviewers. Paul has previously been an instructor and author of continuing education programs, for which
he had received several outstanding discussion leader and author awards. He also served on the AICPA’s Technical
Reviewers Advisory Task Force to the Peer Review Board and serves as staff liaison to two committees and one
section at the state society level. Prior to joining the state society, Paul was an audit manager with a regional firm in
Florida. He holds a BS degree in Accounting and Finance from Florida State University.
Annhenrie Campbell, PhD, CPA, CMA, CGFM, is a professor of Accounting at California State University,
Stanislaus. A former governmental accountant, her teaching and research interests have included governmental and
not-for-profit accounting throughout her career. She completed her MBA at Humboldt State University in California
and her PhD at the University of Colorado in Boulder. After earning a CPA and CMA and starting her university
career, Dr. Campbell became a Certified Government Financial Manager at the start of the CGFM program. In
addition to numerous presentations, Dr. Campbell and her colleagues continue to publish research on accounting
education issues.

Susan Cox, M.Acc., CPA (FL) has worked in various fields of accounting for over 30 years. She began her career
with Arthur Andersen & Co. after graduating from Florida State University with a master’s degree in accounting. In
addition to her experience in public accounting, she has worked as a senior internal auditor for GTE and as a full-
time accounting instructor at the University of South Florida, where she developed and taught the first online
accounting course. Susan also has previous experience in valuation accounting and as an editor for a national CPA
review publication.
Joshua Dixon, CPA, is President of J Dixon Accounting Services, PC, a full-service tax, accounting, and business
consulting firm located in Frisco, Texas. He graduated from Metropolitan State University of Denver with dual
Bachelor of Science degrees in Accounting and Finance. Josh is a CPA licensed in both Colorado and Texas. He is a
member of the American Institute of Certified Public Accountants (AICPA) and the Texas Society of Certified
Public Accountants (TSCPA).
Tim Firch, JD, LLM, is an Adjunct Professor of accounting and business law. A graduate of the University of
California, Davis, King Hall School of Law, he is a member of the California State Bar, taxation section (inactive in
good standing). His research and teaching interests center on writing skills development for upper-division
accounting students. His writing skills courses include a major research component. He also teaches business law
along with financial, managerial, and tax accounting.
David P. Flanders, MBA, CPA, is an independent technical editor for CPA Examination reviews and tax and
accounting CPE courses. A native of Colorado, he received his MBA and undergraduate degrees from the
University of Colorado at Boulder. He is a CPA in Colorado. For over 20 years he was a corporate accountant and
controller for a variety of corporations, including subsidiaries of NYSE-listed companies. More recently he spent 14
years as a senior editor of accounting reviews and CPE courses for some of the largest publishing companies in the
United States.
© 2017 Surgent CPA Review, LLC
Al Francisco, PhD, is a Vice President of Accounting Institute Seminars, for which he has written and presented
CPA Review seminars in many locations around the United States since 1972. He passed the CPA Examination in
Montana in 1967, and received a BS in Accounting from Montana State University in 1968 and an MS in
Accounting from the University of Denver in 1969. He completed his PhD in Accounting at Michigan State
University in 1972 and joined the faculty at Idaho State University in that year. He has authored a number of CPA
Review texts.
LaMarion N. Green-Hughey, CPA, MBA currently serves as Director of Finance for the DeKalb County, Georgia,
Sheriff’s Office. Previously, she served as a Field Auditor for the Office of the Comptroller of the Currency.
LaMarion received both her BBA and MBA from Georgia Southern University and holds an active CPA license in
the state of Georgia.
Janel Greiman is an Assistant Professor at the Monfort College of Business at the University of Northern Colorado.
She teaches tax at the undergraduate level as well as in the Master of Accountancy program. Ms. Greiman earned
her Master of Taxation at the Sturm College of Law at the University of Denver. She is a CPA in Colorado with
recent experience practicing in taxation. She is a member of the AICPA, the Colorado Society of Certified Public
Accountants (CSCPA), the tax section of the CSCPA, and the American Accounting Association. Her research
includes recent publication in Practical Tax Strategies and the American Journal of Business Education.
Jeff Helton, PhD, CMA, CFE, FHFMA, is an Assistant Professor of Health Care Management at Metropolitan State
University of Denver, where he teaches courses in health care finance. He has over 25 years of financial
management experience in hospitals, health plans, and government entities. Jeff is a Certified Management
Accountant, Certified Fraud Examiner, Fellow of the Healthcare Financial Management Association, and a member
of the Board of Examiners for the Healthcare Financial Management Association. He has published articles on
health care accounting and budgeting in Strategic Finance, Healthcare Financial Management, and the American
Journal of Management. Jeff has a PhD in Health Care Management from the University of Texas, an MS in
Hospital Administration from the University of Alabama at Birmingham, and a BBA from Eastern Kentucky
University.
Cynthia Hollenbach, BBA, MS, CPA, CGMA, has been teaching at the collegiate level for the last 10 years. She
has also been and is currently a financial consultant to many corporate clients for over 25 years, involved with both
private and public companies. She received her BBA from Baylor University and her MS in Taxation from the
University of North Texas. Cynthia is licensed as a CPA in Texas and recently licensed as a CGMA, a new
designation by the AICPA to recognize skills as a global management accountant.

Liz Kolar, CPA, CGMA, has been teaching CPA Review for more than 25 years in the United States, has
personally taught more than 2,500 live sessions, and has helped thousands of candidates pass the CPA Exam. She
founded Pinnacle CPA Review and co-founded Surgent Kolar CPA Review. She is a recipient of the ASWA
Business Woman of the Year Northeast Region, Distinguished Faculty Member of the Year, and PICPA
Outstanding Educator of the Year. Liz began her career in Public Accounting with a Big Four accounting firm
auditing financial service clients after graduating from Pace University with an MBA in Public Accounting. Liz’s
teaching career spans almost 30 years. She has taught at the undergraduate and graduate levels at Pace University
and Seton Hall University, and is currently a professor at Delaware Valley University.
Lola Neudecker is an Internal Auditor employed at the University of New Mexico. Lola has over 20 years of
financial accounting experience in subjects including auditing, fraud investigations, taxation, contracts and grants,
purchasing, budgeting, payroll, and banking. She has worked in public accounting, higher education, and
government. Lola graduated from the University of Texas at El Paso with a Bachelor’s degree in Business
Administration with a major in Accounting and a Master of Accountancy degree. Lola is a Certified Public
Accountant (CPA), Certified Management Accountant (CMA), Certified Financial Manager (CFM), Certified
Government Auditing Professional (CGAP), Certified Internal Auditor (CIA), Certified Fraud Examiner (CFE), and
Chartered Global Management Accountant (CGMA) and is Certified in Financial Forensics (CFF). She is a member
of the American Institute of Certified Public Accountants (AICPA), The Institute of Internal Auditors (IIA), the
Association of Certified Fraud Examiners, and the Institute of Management Accountants (IMA).
© 2017 Surgent CPA Review, LLC
Paul E. Pierson, CPA, is Director of Professional Standards and Peer Review for the Illinois CPA Society. In this
capacity, he oversees the administration of the Peer Review Program for approximately 1,500 CPA firms in Illinois
and Iowa. Paul has served as a discussion leader at the AICPA’s Annual Peer Review Conference and Advanced
Reviewer Training Course as well as several state CPA society conferences and chapter events. He is also
responsible for monitoring the continuing professional education and licensing rules in Illinois and Iowa and
responding to member inquiries regarding those matters. Paul has served on the Technical Reviewers Advisory Task
Force to the AICPA Peer Review Board, and currently serves as staff liaison to the Peer Review Report Acceptance
and Employment Benefits Committees of the Illinois CPA Society. He also oversees the Society’s Accounting
Principles, Audit and Assurance Services, Not-for-Profit, Governmental, and Ethics Committees. Paul graduated
from Illinois State University with a BS in Accounting and was an audit manager with a large, local CPA firm in
East Peoria, Illinois, prior to joining the Society.
Darlene A. Pulliam, PhD, CPA, joined the faculty of West Texas A&M in 1997. A native of eastern New Mexico,
Dr. Pulliam received a BS in Mathematics in 1976 and an MBA in 1978 from Eastern New Mexico University and
joined the accounting firm of Peat, Marwick, Mitchell and Co. (now KPMG) in Albuquerque. After five years in
public accounting, she completed her PhD at the University of North Texas and joined the faculty of the University
of Tulsa in 1987. As a Regents Professor and McCray Professor of Business at WTAMU, her responsibilities
include teaching tax and financial accounting, and advising the students in the Master of Professional Accounting
program. Her publications include many articles appearing in Tax Advisor; the Journal of Accountancy; Practical
Tax Strategies; Oil, Gas and Energy Quarterly; CPA Journal; and the Journal of Forensic Accounting as an author
or coauthor.
Ken Smith, PhD, CPA-Retired, is the President of Accounting Institute Seminars, for which he has written and
presented CPA Review seminars in many locations around the United States since 1972. He received his BS in
Accounting from the University of Montana and his PhD from the University of Texas–Austin. Ken is a professor of
accounting at Idaho State University, where he has taught since 1970. He has served as accounting department chair,
associate dean of the College of Business, and College of Business dean. He is actively involved with the AICPA
and the American Accounting Association.
Strategic Solutions for Business (SSB) is a management consulting firm based in Denver, Colorado, specializing in
accounting and information technology. Bryan Smith, CPA, is a managing partner of SSB with over 12 years of
experience assisting clients with business intelligence, data conversions, revenue/cost assurance, data and process
analytics, internal audit, operational metrics, mergers and acquisitions, and financial and regulatory compliance.
Amy Weisbender, CPA, previously a staff accountant at one of the Big Four, has worked in audit, finance, and
consulting for over 11 years. She has worked in various industries including restaurants, telecommunications,
manufacturing, technology, energy, real estate, and travel management. Amy’s focus is on business analysis and
project management with an emphasis on IT and accounting projects.
Geri B. Wink, BBA, MBA, CPA, joined the faculty at Colorado State University–Pueblo in 2004 after serving over
20 years on the accounting faculty at the University of Texas at Tyler. She received both her BBA and MBA from
Sam Houston State University and holds CPA licenses in both Texas and Colorado. She maintained a tax practice
for over 20 years while in Texas. Her publications include articles and cases appearing in Oil and Gas Quarterly,
Management Accounting, The Business Review, Journal of International Society of Business Disciplines, and
Journal of International Academy of Case Studies. She also has written a book with a coauthor, Intermediate
Accounting DeMystified. She is very active in the Colorado Society of CPAs.

Pearl Zeiler, MBA, has worked in various fields of accounting for over 20 years. She began her career with an
accounting certificate from Trinidad State Junior College, and when she arrived in Denver, Colorado, she finished
her Master of Business Administration at Regis University with an emphasis in accounting. In her 20+ years she has
worked her way from accounts payable clerk to controller. She has worked as a part-time accounting instructor at
Metropolitan State University of Denver. Pearl has also contributed as an editor and has been a controller for a
national CPA review publication.

© 2017 Surgent CPA Review, LLC
Table of Contents
Business Environment & Concepts
Section 5000 Overview of the Business Environment and Concepts Examination .......................................... 1
Section 5100 Corporate Governance ................................................................................................................... 3
Section 5200 Economic Concepts and Analysis ................................................................................................ 21
Section 5300 Financial Management ................................................................................................................. 97
Section 5400 Information Systems and Communications .............................................................................. 215
Section 5500 Strategic Planning ....................................................................................................................... 319
Section 5600 Operations Management ............................................................................................................ 381
Index ............................................................................................................................................. 421

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Section 5000
Overview of the Business Environment and
Concepts Examination
5010 The Business Environment and Concepts Section of the CPA Examination
5011 Purpose of the Business Environment and Concepts Examination

5010 The Business Environment and Concepts Section of
the CPA Examination

5011 Purpose of the Business Environment and Concepts
Examination
5011.01 The Business Environment and Concepts section tests a candidate’s knowledge of general
business environment and business concepts that candidates need to know in order to
understand the underlying business reasons for and accounting implications of transactions,
and the skills needed to apply that knowledge in performing financial statement audit and
attestation engagements and other functions normally performed by CPAs that affect the
public interest.
5011.02 The scope of the content covered in the Business Environment and Concepts section includes
knowledge of:
a. corporate governance,
b. economic concepts essential to understanding the global business environment and its
impact on an entity’s business strategy and financial risk management,
c. financial management processes,
d. information systems and communications,
e. strategic planning, and
f. operations management.
These concepts are tested in the context of entry-level CPA practice.
5011.03 The Business Environment and Concepts section contains three testlets comprised of a total of
72 questions. Also included in the Business Environment and Concepts section are three
written communication tasks.
5011.04 References for the Business Environment and Concepts section include AICPA Audit Risk
Alerts and current textbooks on business law, managerial accounting, management, finance,
economics, accounting and management information systems, and budgeting and
measurement. Business periodicals provide background material that is helpful in gaining an
understanding of business environment and concepts.
© 2017 Surgent CPA Review, LLC Section 5000
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Section 5000 © 2017 Surgent CPA Review, LLC