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. Portions of various FASB and GASB documents, copyrighted by the Financial Accounting Foundation, 401 Merritt 7, P.O. Box 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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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. We recognize the work and dedication of our team of software designers and developers. Their vision has made this the best product possible. They contributed countless hours to deliver this package and are each fully dedicated to helping you pass the exam. Our thanks go out to the many individuals who have made contributions to both the software and textbook portions of the CPA Review. We extend our gratitude to our team of software testers who ensure that you receive only the highest quality product. Finally, we express appreciation to the editorial teams who have devoted their time to review this product. They have provided invaluable aid in the writing and production of the 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 © 2017 Surgent CPA Review, LLC This page intentionally left blank. © 2017 Surgent CPA Review, LLC ______________________________________________ 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 2 This page intentionally left blank. Section 5000 © 2017 Surgent CPA Review, LLC