LC Business common mistakes
LC Business · Understand the traps and how to avoid them.
When a question asks for the impact of a transaction on a company's financial statements, the candidate records the entry in the wrong direction (e.g., treating a cash outflow as an increase in cash or a liability as a debit) and then selects the answer choice that follows from that reversed entry.
Under time pressure, candidates jump straight to the answer choices and reason from memory instead of writing the journal entry or the accounting equation effect. Debit/credit direction errors then propagate silently through the rest of the calculation, and the reversed result often appears as a distractor.
What to do instead
Before looking at the options, write the entry or state the effect on assets, liabilities, and equity in one line. Apply the rule that every transaction keeps the accounting equation balanced, and only then match to an option. If no option matches, re-check direction before re-checking arithmetic.
The candidate calculates a ratio or margin correctly but then interprets it in isolation, declaring a company 'more profitable' or 'more liquid' without comparing it to the industry benchmark, prior period, or the other ratios provided in the same question.
Ratio questions look like arithmetic problems, so candidates stop once the number is computed. They forget that the exam is testing interpretation, and that a high current ratio can signal inefficient idle assets rather than strength.
What to do instead
For every ratio computed, state in one sentence what it measures, what direction is good, and what a benchmark comparison would require. When a question supplies comparative or industry data, treat the comparison as part of the required work, not optional context.
The candidate treats a sunk cost, an allocated fixed overhead, or a non-incremental cost as relevant when evaluating a decision such as accepting a special order, making versus buying, or discontinuing a product line, and so recommends rejecting a profitable opportunity.
Allocated costs appear in the accounting records and feel 'real'. Candidates default to the income statement rather than building an incremental analysis, and they overlook opportunity cost and unused capacity.
What to do instead
Rewrite the decision as: what changes if we say yes? Include only future cash flows that differ between alternatives, add opportunity cost explicitly, and exclude sunk and allocated costs. Check capacity first, because whether the special order displaces existing sales determines the correct answer.
The candidate answers a time-value-of-money question using simple interest, or mixes up present value and future value, or uses the wrong number of periods (e.g., monthly payments with an annual rate and annual period count).
Candidates memorise one formula and apply it mechanically. The compounding convention and the timing of cash flows (ordinary annuity versus annuity due) are the parts most often skipped when reading the stem quickly.
What to do instead
Before computing, write down three things: the rate per period, the number of periods, and whether cash flows occur at the beginning or end of each period. Convert annual rates and period counts consistently, and sanity-check that a present value is smaller than its future value at a positive rate.
The candidate confuses the roles of the balance sheet, income statement, and statement of cash flows, for example classifying a purchase of equipment as an operating cash outflow or treating a gain on sale of an asset as an operating cash inflow in the indirect method.
The indirect method starts from net income, so candidates carry non-cash and investing items straight through instead of removing them. Depreciation, gains and losses on disposals, and changes in working capital are the usual casualties.
What to do instead
Build the indirect-method reconciliation in a fixed order: start with net income, add back non-cash expenses, subtract gains and add back losses on investing or financing items, then adjust for working capital changes with the sign rule that an increase in an asset is a use of cash. Classify the actual cash flow separately from the accrual item.
The candidate applies a generic 'increase revenue' or 'cut costs' recommendation to a case or scenario question without tying it to the specific constraint stated in the stem, such as limited machine hours, a capacity ceiling, or a contractual price floor.
Case-style stems are long, and candidates skim for keywords and then answer from a template. The binding constraint is usually stated once, in a subordinate clause, and it is exactly what the question is testing.
What to do instead
Read the stem twice: the first pass to identify the decision and the constraint, the second to extract the numbers. Write the constraint at the top of your scratch work and test every proposed action against it. If an option would violate the constraint, eliminate it regardless of how attractive the general principle sounds.
The candidate computes cost of goods sold or ending inventory using the wrong cost-flow assumption, or applies a weighted-average unit cost that was computed before the current period's purchases were included.
Inventory questions combine a cost-flow method, a physical flow, and a period-end adjustment. Candidates compute the average cost early and then fail to update it, or they mix FIFO layers with LIFO layers within one question.
What to do instead
State the cost-flow method explicitly at the top of your work. For weighted average, compute the unit cost only after all purchases for the period are in the pool. For FIFO and LIFO, track layer quantities and unit costs separately, and check that units in beginning inventory plus units purchased equals units sold plus ending inventory.
The candidate ignores the tax effect of a decision or of an adjustment, reporting an interest expense, a gain, or a depreciation change at its pre-tax amount when the question asks for the effect on net income or on cash flow.
Tax is mentioned in a single line of the stem and is easy to drop. Candidates also forget that interest is tax-deductible while dividends are not, which changes the after-tax cost comparison.
What to do instead
After computing any pre-tax figure, ask whether the question asks for a pre-tax or after-tax amount. Apply the tax rate to deductible items only, and remember that non-deductible items such as dividends and most fines carry no tax shield. State the after-tax figure explicitly in your working.
The candidate answers a question about internal controls, governance, or professional ethics by choosing the option that best serves the company's short-term result, rather than the option that satisfies the control objective or the professional standard.
Business exams mix technical and judgement questions. Candidates switch into a 'help the business' mindset and pick the pragmatic-sounding option, missing that segregation of duties, documentation, and independence requirements override commercial convenience.
What to do instead
For governance and ethics items, identify the principle being tested first (segregation of duties, authorization, independence, confidentiality, integrity) and eliminate any option that violates it, even if it is operationally convenient. The correct answer is usually the one that preserves the control or escalates the issue.
The candidate runs out of time because they spend equal effort on every question, doing long multi-step calculations on early items and then guessing on later ones that carry the same weight.
Business exams often have more questions than the time comfortably allows, and calculation items are front-loaded. Candidates also refuse to abandon a calculation they have already invested in.
What to do instead
Do a first pass answering conceptual and short items, flag any calculation expected to take more than about ninety seconds, and return to flagged items with the remaining time. If a calculation stalls, estimate the answer's rough magnitude, eliminate options outside that range, and move on.