Dreams Are Worth Pursuing -- CPA Review For FREE

What Does It Really Take To Be Successful

From: Joe

(1) - I realize that a lot of our readers are gearing up to take a part or two of the CPA Exam here at the end of the January-February window. A couple of last minute pieces of advice:

---Work as hard as you can here at the end. Every point you add might be the one point that gets you from 74 to 75.
---Try to review everything one final time between now and the exam so that it is all fresh in your mind. Anything you review now will still be in your head when you take the exam.
---Read the information carefully that came with your Notice To Schedule so you know everything you can about taking the exam. You don't want any surprises at the testing center.
---Think about how much time you have on the exam and how you want to allocate that time. Remember that time management is essential on the CPA Exam.
---Get as relaxed as you can. A small (very small) amount of tension can keep you focused. However, anything more than a small amount of tension ties you in knots and keeps you from doing your best.
---Get a normal amount of sleep the night before the exam. Taking the exam when you are groggy is not a smart move.
---Never think "tired" while you are going through the exam. Okay, that takes discipline but you can do it. You want to have as much energy and concentration on the last question as you had on the first.
---If you see a question that you don't know, don't get rattled. Eliminate as many answers as you can and make a guess. Remember that (except in BEC) about 15-20 percent of the questions are not even graded. They are being tested. Assume the weird questions are the ones not being graded.
---If you've put in the hours, have some confidence. There is no reason that you cannot pass. Confidence is one of the world's best characteristics. I always say that you want to be confident without being cocky.

Finally, if you do take the exam in the near future, or if you have taken it recently, hit reply and drop me a note and tell me how it went. You cannot talk about specific questions-just tell me about the experience in general.

And, tell me: what is the one piece of advice that you would give your best friend if he or she were getting ready to take the CPA Exam?


(2) - I have said this before but I find that I must say it again: last week was our most successful one yet on www.CPAreviewforFREE.com!!!! We had more visitors than in any other week of our entire history. Moreover, we have now had well over 1.7 million page views. We are not to our 10 million goal (yet) but we are certainly getting there. And, that is entirely thanks to you. We do not advertise; we have no money to advertise. That is the only way we can afford to stay free. We depend on you to spread the word. How did you hear about www.CPAreviewforFREE.com? More than likely someone was nice enough to tell you or forward one of our lessons to you or the like. Now, it is your turn. I do hope you'll take a second to tell someone else about us. We love providing thousands of questions for free but we have to depend on you to spread the word.

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(3) - I am currently reading a book that I find fascinating. It is "Born Standing Up," an autobiography written by the comedian Steve Martin. He talks about growing up in a working class family and, through years of hard work, becoming a famous entertainer.

In reading this book, Martin has said two things that I thought were so interesting that I stopped immediately and wrote them down.

"Perseverance is a great substitute for talent." Martin talks about how he performed his act in hundreds of tiny clubs for about a decade. In those places, a lot of the customers did not think he was funny at all. The feedback was not always encouraging. But he persevered and finally when he was almost broke and about ready to quit, he became a big star. How many of us would have worked for a short while and then gotten totally discouraged and said "I give up. I obviously do not have what it takes to make it as a comedian. I need to quit and get a real job and settle down."

As everyone knows by now, I have worked for nearly 30 years with thousands upon thousands of CPA candidates. I never fail to be surprised by how many people give up on their dreams so quickly. "I want to be a CPA but if I don't pass in a couple of months I'm just giving up." I've heard that line way too many times in my life.

Golly, with that type of attitude, Christopher Columbus would not have made it very far beyond the harbor.

I know everyone wants to get the exam out of the way but this is not a speed race. Failing the CPA Exam does not make you the subject of public ridicule. Taking awhile to pass the CPA Exam does not mean that you should give up on your dream of becoming a CPA and take up dog catching.

Dreams are worth pursuing.

I worry that people put too much pressure on themselves to pass the exam in record time. I have known people who have passed quickly and I have known people who passed slowly (very slowly, in some cases). To be honest, I have never noticed that the people who took longer to pass had a poorer career. In fact, in some cases, they moved on to become quite successful.

We have a fast-paced society, one that often moves at break-neck speed. At times, it is reassuring to know that "Perseverance is a great substitute for talent." I don't know how it is going for you at this very moment. Just remember: if you really want to pass the CPA Exam, then keep working at it because you will pass.

And, as soon as you pass, no one is ever going to ask you how long it took or how many points you got.

When you pass, people will simply come up to you and say: "Congratulations!!! I hear you passed the CPA Exam. I have always been told that the CPA Exam can be a bear; you must really be smart to have passed it when so many people fail." Trust me: that is going to feel good.


The other thing that Steve Martin said that I wrote down was the following. And, I really do think this applies to a lot of successful people. It is one of those weird situations where having problems in life can actually make you a better person. "I was not naturally talented. I did not sing, dance, or act. But working around that minor detail made me inventive." What a great attitude!!!

None of us are as smart as we would like to be.
None of us remember as much from our college courses as we feel we should.
None of us is ever a perfect test-taker.

However, we can look at those minor details as huge road-blocks to prevent us from ever be successful. A lot of folks do look at themselves and their talents in that way.

Or

We can look at those minor details as something we recognize and understand and will just work around AND the working around will actually make us better at what we are doing. Too much talent can actually be bad because it makes us lazy and careless and can prevent us from developing strong habits. A little shortage of talent can actually make us stronger people. It makes us more inventive. Our strength can come from our weakness.

Yes, we have to learn to compensate; we have to learn how best to deal with our shortcomings but, as Steve Martin says, that just makes us more inventive.

So, as you are studying, think of ways that you can take notes in a better fashion or consider new ways of reviewing material that might help you become a better student. Don't just say "darn, I'm just no good at this." That attitude does not do you one bit of good. That is a road block that is going to keep you from success. Instead, ask yourself: "Okay, I missed this question. What can I do to make sure that I will get it right the next time? I know myself better than anyone else. What can I do to get this concept in my head? Be inventive.

Perseverance
And
Inventive

When you are thinking about passing the CPA Exam, those are two words that can go a long way in helping you gain the success that you want.


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(5) - In these lessons, I often say that the CPA Exam is a mile wide and an inch deep. Along those same lines, I have said that the questions on the CPA Exam are actually easier than the questions that I give in my intermediate accounting tests. So, even if you did not do great in your college classes, there is no reason why you cannot pass the CPA Exam. In all honesty, the Exam really is all about Perseverance more than any other skill or quality.

So, I thought I would show you my point today by giving a demonstration. I gave a test to my Intermediate Accounting II classes last week. I want to take the first two questions on that test (there were seven questions in total) and compare how I asked the question to how I think those same questions would have been asked on the CPA Exam. Remember, you are preparing for the CPA Exam, not for Intermediate Accounting. This comparison might well help you understand how to prepare yourself for the exam.

Question One on Intermediate Accounting Test: On January 1, Year One, the Robious Company issues a 5 year $50,000 bond that pays 5 percent interest each year starting on December 31, Year One. The negotiated rate is 8 percent per year. The bond is issued for $43,900. The accountant was informed of the transaction and the cash payment of $43,900 but was erroneously told that the negotiated rate had been 10 percent. The accountant made the December 31, Year One and Year Two entries based on that information. In Year Three, the error was discovered. Assume the present value of $1 in five years at 8 percent is .68 and at 10 percent is .45. Assume the present value of an ordinary annuity of $1 for five years at 8 percent is $3.96 and at 10 percent is $3.25. Assume the present value of an annuity due of $1 for five years at 8 percent is $4.28 and at 10 percent is $3.80. Circle any and all of the following that are correct. Some, all, or none may be correct.
A - Net income in Year One was misstated but by less than $632
B - Net income in Year One was misstated by between $631 and $883
C - Net income in Year One was misstated but by more than $882
D - Net income in Year Two was misstated but by less than $745
E - Net income in Year Two was misstated by between $744 and $977
F - Net income in Year Two was misstated but by more than $976
G - At the end of Year Two, the reported liability was misstated but by less than $1,346
H - At the end of Year Two, the reported liability was misstated by between $1,345 and $1,858
I - At the end of Year Two, the reported liability was misstated but by more than $1,857

ANSWER: Here is my quick explanation that I gave to my students for the answer to this question.

The accountant should have multiplied the $43,900 by 8 percent to get $3,512 to be recognized as interest expense in Year One. Since only $2,500 was paid ($50,000 times 5 percent), the extra $1,012 ($3,512 less $2,500) should have been compounded raising the liability from $43,900 to $44,912. In Year Two, the $44,912 should have been multiplied again by 8 percent to get interest expense of $3,593. Only $2,500 was paid so the extra $1,093 ($3,593 less $2,500) should have been compounded to bring the liability up to $46,005.

However, the accountant incorrectly used 10 percent and not 8 percent. The interest expense for Year One was reported as $4,390 ($43,900 times 10 percent). Because $2,500 was paid, the extra $1,890 ($4,390 minus $2,500) was compounded to raise the principal to $45,790. The interest expense for Year Two was then recognized as $4,579 based on the wrong 10 percent rate. Only $2,500 was paid so the extra $2,079 ($4,579 minus $2,500) was compounded to bring the principal up to $47,869.

---Year One expense: should have been $3,512 but was reported as $4,390. The misstatement was the difference of $878.
---Year Two expense: should have been $3,593 but was reported as $4,579. The misstatement was the difference of $986.
---December 31, Year Two liability: should have been $46,005 but was reported as $47,869. The misstatement was the difference of $1,864

CORRECT ANSWERS: B, F, I

CPA EXAM: I think the above question is a good one and in fact most of my students did fine on it. But it would never never never have been on the CPA Exam because there are way too many steps in the process. Questions on the CPA Exam (at least the ones that have been released) tend to focus on one or two steps and that is it. The examiners want to know if you know how to do a very particular task. They test you by setting up questions to address that task. In the above question, you had to read carefully and then do way too many different things and then also make comparisons. Too complicated for the CPA Exam.

Here is how I think this question would have appeared on the CPA Exam:

On January 1, Year One, the Robious Company issues a 5 year $50,000 bond that pays 5 percent interest each year starting on December 31, Year One. The negotiated rate is 8 percent per year. The bond is issued for $43,900.

Question One: What amount of interest expense will the company report on its income statement for Year Two?
A - $2,195
B - $2,500
C - $3,512
D - $3,593

Question Two: What will be the reported balance of the liability on the balance sheet at the end of Year Two?
A - $43,900
B - $44,912
C - $45,775
D - $46,005

Now, these questions really look like CPA Exam questions. The variables and the complexity have been removed. The examiners want to see if you understand how to do a specific task: use the effective rate method to record a bond or note over two years.

The answers to both questions are D and the explanation is as follows:

The accountant should have multiplied the $43,900 by 8 percent to get $3,512 to be recognized as interest expense in Year One. Since only $2,500 was paid ($50,000 times 5 percent), the extra $1,012 ($3,512 less $2,500) should have been compounded raising the liability from $43,900 to $44,912. In Year Two, the $44,912 should have been multiplied again by 8 percent to get interest expense of $3,593. Only $2,500 was paid so the extra $1,093 ($3,593 less $2,500) should have been compounded to bring the liability up to $46,005.


Question Two on Intermediate Accounting Test: Ace Company is a local fitness center in Richmond. To boost sales, it sells a package to its customers which is made up of two pieces of paper. Paper One is the right to a free massage with a retail value of $100. Paper Two is the right to a second massage at a reduced price. The first massage is taken in Year One when the package is bought. The second massage is taken in Year Two. Assume $100 is paid to Ace for the package. Paper Two gives $10 off the retail price of the second massage (a relatively minor amount). Paper Two cannot be transferred so it has no sales value. United States GAAP is fuzzy in this area. Describe three ways that the "$10 off" coupon can be reported.

ANSWER: The $10 off coupon can be ignored completely. No expense is recorded and no liability is recorded. Revenue is recorded for $100 for the first massage and for $90 for the second massage. (This is my preference.)

Or, the company can record the $10 off as a liability in Year One along with an expense of $10. Thus, the $10 reduction in income is associated with the first massage and not the second.

Or, the company can record the $10 off as a liability in Year One along with a $10 deferred expense which is not reclassified as an expense until Year Two. Thus, the reduction in income is associated with the second massage and not the first.

CPA EXAM: This is an interesting question but there is absolutely no way that it could have been given on the CPA Exam because there is no definitive answer. The examiners give questions where there is one and only one right way to handle the problem and that way is usually found in an authoritative pronouncement. If they can help it, there are no gray areas on the CPA Exam. If there are alternative possibilities, they must be based on well-known methods. For example, if they ask about inventory costing, they want to be able to tell you to use FIFO or, possibly, LIFO. On the CPA Exam, every question needs a clear cut and obviously correct answer.

Here is how I think this question would have appeared on the CPA Exam:

Ace Company is a local fitness center in Richmond. To boost sales, it sells a package to its customers which is made up of two pieces of paper. Paper One is the right to a massage. Paper Two is a coupon that can be presented for a $10 cash rebate. One hundred packages are sold for $100 each in Year One. All 100 massages are taken in Year One. The company expects 70 percent of the coupons to be redeemed but not until Year Two. What is net income for Year One?

A - $9,000
B - $9,300
C - $9,500
D - $10,000

Answer is B

Answer: The earning process for the massages is substantially complete in Year One so the $10,000 revenue is recognized at that point. However, because cash must be paid based on the cash rebate, the company also records a liability. The cash payout is estimated based on a 70 percent return rate. The total amount of these cash rebates could be as high as $1,000 (100 times $10) but since only 70 percent are anticipated, the expense and liability are only $700. That amount is recognized in Year One when the debt is incurred. Thus, net income for Year One is $10,000 minus $700 or $9,300.

Notice, here that there are clear rules for handling cash payments where an obligation has been accepted. To the examiners, there is one correct answer and the question is structured to see if you know how to derive that one correct answer.


I hope this demonstration gives you a better feel for how the CPA Exam might be structured a bit differently than the tests you took in college. At least in my opinion, the questions on the CPA Exam are not nearly as complex. If you know the rule, you can almost always get the question correct.

When I run live classes, I almost always start asking the candidates: What rule are they testing in this particular question? That is not a bad way to look at the questions as you go through our questions at www.CPAreviewforFREE.com.


Have a great week.

Remember---every point you get may be the one that moves you from 74 to 75 so go get those points.