Beyond Basic Accounting Debits and Credits

Beyond Basic Accounting Debits and Credits--CPA Exam Section Business Environment and Concepts
By Jim Prescott

Good accountants should know basic accounting debits and credits. But a CPA needs to have a broader view of business and that's why the AICPA along with each state Boards of Accountancy decided to add a new segment of the CPA exam called Business Environment and Concepts. This section replaced in part the less relevant Business Law segment.

The new section tests awareness of the general business environment and business constructs that exam candidates need to understand in order to interpret the underlying business causes for and the accounting implications of business transactions. What is more, the new section tests for skills needed to apply that awareness in performing financial statement audit and attestation work and other functions usually performed by certified public accountants that bear on the public interest.

The profession accepted the need for testing in this area of business knowledge because most look to certified public accountants to interpret business concepts. As is true for the entire CPA exam, these concepts are tested in the context of entry-level accountant practice.

There are five specific areas of Business Environment and Concepts that may be tested in detail on the CPA exam.

• Business Structures

• Economic concepts essential to understanding the entity's business and industry

• Financial Management

• Information technology and how it affects the business

• Planning and measurement

Below is summary by section that a CPA candidate will be asked to know:

Business Structures

A CPA examination candidate should be able to:

Identify the general characteristics of various business forms such as Limited Liability Corps or Corporations.

Determine the recommended business form based on given facts and circumstances.

Determine income available for distribution or be able to allocate profit and losses to the owners.

Identify the advantages and disadvantages of various business forms such as S-Corps or Limited Liability Corps.

Distinguish the factors supporting a fiscal vs a calendar year end for financial reporting and federal taxation purposes and List circumstances indicating when a business should be closed.

Differentiate between the rights, duties, legal obligations, and authority of owners and that of management.

Business Economic Concepts

The CPA exam candidate should be able to:

Recognize the effect of Federal Reserve Board actions on the national economy.

Determine the purpose of transfer pricing.

Differentiate between real, nominal, and effective interest rates.

Distinguish the components of the business cycle and recognize circumstances affecting economic cycles.

Recognize circumstances giving rise to changes in exchange rates.

Understand of exchange rate fluctuations on financial position and operations.

Point out the economic circumstances giving rise to inflation, deflation, expansion and recession.

Determine the effect on an entity’s net income and financial position from changes in supply and demand.

Understand economic events and the effect on the business cycle on an entity’s financial position and business operations.

Financial Management

The exam will test a candidate's ability to:

Apply capital budgeting tools to make appropriate business decisions. Demonstrate an understanding of inventory management techniques, such as just-in-time and economic order quantity. Calculate the effective interest rate.

Identify and define various business risks, such as credit risk or interest rate risk.

Utilize capital budgeting tools such as net present value, internal rate of return, payback method, discounted payback and discounted annual cash flows, including performing calculations.

Project periodic cash flows given certain facts and circumstances. Recognize the objectives and limitations of capital budgeting tools. Compute current and working capital ratios.

Differentiate between and determine when appropriate to use different forms of financing.

Analyze the trade-offs between risk and return.

Information Technology

Each applicant will be tested on their ability to:

Point out basic data validation or editing techniques and recognize basic security controls. Understand the role IT plays in financial reporting systems.

Point out the major players involved in a disaster recovery plan and determine how to set one up.

Describe & evaluate risks, limitations, and advantages of electronic commerce applications.

Apply the traditional concept of segregation of duties to IT functions. Distinguish risks associated with the use of an electronic business information system.

Planning And Measurement

A CPA examination candidate should be able to:

Define and calculate joint and by-product costing, variable and absorption costing.

Define and determine appropriate circumstances for using performance measures.

Differentiate between cost-volume-profit analysis, target costing, and transfer pricing.

Perform cost-profit-volume analysis.

Define and differentiate among job costing, process costing, and activity-based.

List the appropriate analytical tool in given circumstances.

Calculate the effect of depreciation in operating and capital budgeting.

Identify and calculate the components of a master budget.

Define calculate, and explain budget variances.

Business Environment and Concepts section of the CPA exam is intend to insure that even new CPAs will understand and think about more than just basic accounting debts and credits.

Jim Prescott, CPA business consultant for over 30 years specializing in small and medium size businesses that range from closely held to publicly traded companies. Jim is a Partner in CPA firm of Prescott Chatellier Fontaine & Wilkinson, LLP that offers audit, accounting, investment advice, tax planning services, estate plans, pension plans consulting and insurance advice. The firm also has a web site about the CPA Exam: TheCPAExam

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