September 24, 2008
CPA Review for FREE
www.CPAreviewforFREE.com
Lesson 10
Practice a Little Longer
From: Joe
I always love getting emails from candidates who are using our website. Here are two that I got earlier this week.
FROM LK: "I just wanted to send you a quick note. The CPA for free website is great. What a good idea! I did a lot of questions for the section that I most recently took and I received my score today: I got a 99 on the Auditing and Attestation section! Keep up the good work on that website. I know tons of new hires here at (Big CPA firm) who would love to have a free resource like that to use while studying."
FROM ERIK GREENAWALT IN PITTSBURGH: "I can't say enough just how beneficial cpareviewforfree.com has been for me in preparing for the CPA exam. This site helped me score a 98-yes, a 98!-on FAR. The question-and-answer format it provides is as good (if not better) than those competitors who charge hundreds-even thousands-of dollars. Plus, I can practice on questions wherever I am, whether in my
cubicle at work or on my deck at home. Thank you, thank you, thank you, cpareviewforfree.com! Now, on to AUD!"
Okay, I really do love getting 99s and 98s BUT always remember that the one and only goal is to get 75 and pass. It is great to see the super high scores but take your time, do the work, and just make sure you make 75. Only a few people can make a 98 but EVERYONE can make 75.
EVERYONE can make 75.
And, in the long run, no one is ever going to ask you your grade. They will just want to know that you passed. CPAreviewforFREE.com is here to help you reach that goal especially (in these tough economic times) if you just cannot afford to waste thousands of dollars on a program.
(1)-FREE STUFF. The people who create the CPA Exam at the AICPA send out information periodically about the exam. I got their regular email yesterday and they put in a reminder that I think is worth mentioning to you.
As probably most everyone knows, there are research questions on three of the parts of the CPA Exam (each part except for BEC). It somewhat resembles a Google search of the professional literature in order to find the appropriate answer to a question. From what can be told, the grade is relatively small but, indeed, as we all know, every point can be important. Here's some official guidance from the examiners:
"Large numbers of candidates continue to avail themselves of the free six-month subscriptions to authoritative literature used on the Uniform CPA Examination. . . , these subscriptions are available to candidates who are eligible to take the examination (i. e., those who have received Notices to Schedule). Subscriptions may be requested on the CPA Examination website, www.cpa-exam.org, under Prepare for the Exam/Access to Professional Literature.
"The free online package consists of AICPA Professional Standards and FASB Original Pronouncements. (FASB Current Text is not included as it is no longer used on the examination.) The Tax Code is not part of the package. Candidates seeking access to the Tax Code should contact publishers of the Code or search the Internet for versions that may be available on line.
"Candidates must perform online searches of professional literature databases in order to answer research questions on the CPA Examination. To become familiar with the authoritative literature search function in use on the live examination, candidates should view the Tutorial and Sample Tests, which are available on the CPA Examination website, www.cpa-exam.org. The Tutorial demonstrates the search features and the Sample Tests show the search functionality in action."
Quite obviously, we here at CPA Review for FREE believe in using as much free stuff as possible. For example, you can get free access to much of the professional literature and see how the research function works for free. Sounds like a good price to me. (However, as you can imagine, I don't think people should have to pay to learn how to pass the CPA Exam. I think passing the exam should be based on how much you are willing to work NOT how much you are willing to pay.)
(2)-If you need to unsubscribe from our weekly lessons, just scroll to the bottom of this email and click on the appropriate link.
As always, thanks to everyone who uses our site and tells others about us. Here are three interesting pieces of information about www.CPAreviewforFREE.com.
--Last week, our traffic increased by 18 percent over the previous week. And, indeed, that previous week was a 19 percent increase over the week before. The word is spreading that you don't need to pay thousands to pass the CPA Exam.
--Last week, we had visitors from 65 different countries (versus 48 in the previous week) with the Philippines, the United Arab Emirates, Canada, India, Japan, and Peru leading the way. www.CPAreviewforFREE.com is promoting world harmony (something we could all use at the moment) through the CPA Examination and free materials.
--Last week, the average visitor (the AVERAGE visitor) stayed on our site for 19 minutes and 51 seconds. We clearly have a lot of people who are sitting down and answering our questions and learning how to pass this exam. This is even more impressive because September is a dark month-no one is actually taking the exam right now.
(3)-KEEP PRACTICING. I have written email lessons like this one for about a dozen years, off and on. I have a million (well, several thousand) stories to tell. Here is my very favorite one. This is the one that means the most to me. I heard it on ESPN television about 8-10 years ago.
The NBA (the professional basketball league in North America) had its annual all-star game where the top 24 or so players are brought together to show their talents. On the night before the game, all of the players got together for a practice session since they were not used to playing with each other. After a couple of hours of tough practice, the coaches called a halt and the players went to the locker room to clean up and go out and relax.
However, four players stayed behind to practice their free throws. Each one went to a separate basket in a separate corner of the gym and simply began to shoot free throw after free throw, something that is just about as monotonous as possible. They were tired; they were ready to quit. But they stayed and shot those free throws. They kept on practicing even when they were exhausted.
The interesting part was that these were the four players who were leading the entire league at the time in free throw accuracy. They were already great; they just wanted to make sure they stayed at the top of their game. They found the time and the energy to keep on practicing.
You would have thought it would have been the poor free throw shooters who would have stayed behind in hopes of getting better. No, those folks were all out at the party. It was the people who wanted to excel who had the self-discipline to do even a bit more work.
How does this apply to the CPA Exam?
--There are going to be times when you are tired and ready to quit studying. Try to practice just a little bit longer.
--There are going to be times when you have something that you really want to do other than studying. Try to practice just a little bit longer.
--There are going to be times when you feel like you know enough. Try to practice just a little bit longer.
--There are going to be times when you are so frustrated with yourself that you want to give up. Try to practice just a little bit longer.
--There are going to be times when you are so optimistic that you feel nothing can stop you. Try to practice just a little bit longer.
When it comes to studying for the CPA Exam, most of the times the person who says "Stop" is you. The person who says "That's enough" is you. Before you stop, if you truly want to excel, try to practice just a little bit longer.
The race doesn't go to the swift or the smart or the rich or the lucky. I truly believe the race goes to the person who has the inner fortitude so that when they are really exhausted, they try to practice just a little bit longer.
(4)-Speaking of practicing. Here are four more questions that I just wrote and am getting ready to add to our database at www.CPAreviewforFREE.com. See how you do.
FINANCIAL ACCOUNTING AND REPORTING
Idelton Company buys 30 percent of Waynwrought Corporation on January 1, Year One. Several officers of Idelton are on the board of directors for Waynwrought so the company believes that it holds the ability to significantly influence the operating and financing decisions of Waynwrought and has decided to apply the equity method to account for the investment. In making this investment, Idelton paid a premium of $40,000 because Waynwrought held a valuable database that had not been included on its balance sheet since it did not have an historical cost. The database should be usable for five more years. In Year One, Waynwrought reported net income of $90,000 and paid dividends of $30,000. What amount of investment income should Idelton report on its own Year One income statement?
A - $9,000
B - $19,000
C - $27,000
D - $36,000
Answer is B
Dividends are not viewed as income when the equity method is applied (they reduce the balance of the investment). Instead, the income of the investee is accrued by the investor as it is earned. Waynwrought reported net income of $90,000 so this 30 percent owner should have recognized $27,000. However, when a portion of the original investment price was paid because the value of some investee assets were not properly reflected, then that cost must also be amortized unless the life cannot be determined. Here, there is a database and an additional $40,000 has been paid as a result. Because this value is only expected to last for five years, it is amortized over that period at the rate of $8,000 per year. Idelton should recognize $27,000 as its share of the investee's reported income but also subtract $8,000 because of the amortization of the excess amount paid because of the database when these shares were bought. The investment income is $27,000 minus $8,000 or $19,000.
REGULATION
Julia sold her stock in ABC Company to her sister Hannah for $30,000. Julia's tax basis in this investment was $33,000. Sixteen months later, Hannah sold the stock to an unrelated third party for $32,000 in cash. What is the income tax effect of Hannah's sale?
A - Neither a gain or a loss
B - Gain of $2,000
C - Gain of $1,000
D - Loss of $1,000
Answer is A
The first transaction results in a disallowed loss of $3,000 ($30,000 less $33,000) because the investment was sold to a related party. The second transaction was to an unrelated party and results in a gain of $2,000 ($32,000 less $30,000). The disallowed loss of $3,000 can then be used to reduce this gain for tax purposes to zero. However, a disallowed loss of this type cannot be used to create a taxable loss. Therefore, although the loss of $3,000 is greater than the eventual gain of $2,000, it can only reduce the gain to zero. That is its limit.
AUDITING AND ATTESTATION
An independent auditor is currently attempting to gain evidence about a reporting company's accounts receivable. According to the records, the company is owed $760 by Arnold Alexander Wilson. Which of the following is true?
A - Confirmation is primarily an evidence gathering technique to substantiate the valuation assertion made by management.
B - Confirmations tend to be done late in the fiscal year so that the balance being confirmed is close to the balance sheet date.
C - If internal control is weak, negative confirmations are more likely to be used than positive confirmations.
D - Subsequent payment of the account after the end of the year can be used as evidence that the balance is properly stated at the balance sheet date.
Answer is D
The most important purpose in an audit of confirmation is to prove that the balance actually does exist. Many frauds have been created by recording false receivables to boost reported revenues (and net income). Confirmation attempts to gain evidence that the balance (and the debtor) do exist. Because confirmation generally takes a considerable period of time, it is usually performed early in an audit unless serious problems are expected. Positive confirmations ask for a response in all cases and is viewed as a better testing technique than negative confirmations which only ask for communication if a problem is found. Thus, positive confirmations are more likely to be used when additional risk is involved such as when internal control risk is assessed as high. Finally, the collection of a balance does help to indicate that the balance did exist and is collectible. Auditors often spend considerable time in the period right after the end of the year reviewing cash
collections for that reason.
BUSINESS ENVIRONMENT AND CONCEPTS
A company has a rule that an investment must earn an annual effective income rate of 10 percent or more before the investment can be made. Currently, the company is looking at two investments. Investment A has a cost of $20,000 and its expected cash flows have a present value based on a 10 percent annual income rate of $19,000. Investment B has a cost of $34,000 and its expected cash flows have a present value based on a 10 percent annual income rate of $33,000. Which of the following statements is true?
A - Both investments meet the company's criteria.
B - Only Investment A meets the company's criteria.
C - Only Investment B meets the company's criteria.
D - Neither investment meets the company's criteria.
Answer is D
Investments should be made when they have a net present value that is positive. The net present value is the present value of the future cash flows to be generated (computed at a desired rate) less the cost to make the investment. Both of these investments have a negative net present value of $1,000 ($19,000 less $20,000 and $33,000 less $34,000). They are not earning an annual income rate of 10 percent because the resulting figure is negative.
Have a great rest of the week.
Try to keep practicing as long as you can. I fully understand that you are probably getting tired and would love to do something else. It will all be over relatively soon and if you stick with it, you will have the CPA Exam passed and you will feel GREAT!!!!
Joe Hoyle
Co-Founder
CPA Review for FREE
www.CPAreviewforFREE.com
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