Solidify that Swiss Cheese Knowledge -- www.CPAreviewforFREE.com
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February 24, 2010
CPA Review for FREE
www.CPAreviewforFREE.com
86 Weeks of Operation and 9,407,858 Page Views (without a penny spent on marketing)
Lesson 64
From: Joe
QUICK NOTE ONE: If you are a graduate of the University of Richmond accounting program, we will be having an alumni reunion in Washington, DC on March 11. Send me an email at Jhoyle@cpareviewforfree.com and I’ll send you the invitation. Hope you can make it!!!
QUICK NOTE TWO: If you are a college professor and would like to get a complimentary desk copy of the new Financial Accounting textbook that I wrote with C. J. Skender, go to www.flatworldknowledge.com/printed-book/90996 and click on the request button.
(1) – Always pleased to hear from our candidates. Here is an email that I received a couple of days ago from SH: “I passed the BEC section today and I want to thank you for your help by providing CPA review questions for free. The website helped me in preparing for my exam. I have been using other review materials but your explanations are clearer. Your questions are well written which makes it easier for me to understand. I always look forward to reading you e-mails which inspire me to study hard every day. It's been 26 years since I graduated from college and I have forgotten most of the subjects that I took back then. I am now reviewing for the other 3 sections and I hope to pass these before the year ends.”
Love those success stories.
(2) – Last week was our single biggest week in our entire history (by far). www.CPAreviewforFREE.com had approximately one-quarter of a million page views. Yes, I do know that some of our competitors claim that people do not use our site. Pure nonsense. They are just desperate to keep us from succeeding. Ask them who was reading those quarter million pages of material in one seven day period of time. In fact, our number of visitors was 9.2 percent higher than our previous high week.
Thanks to everyone who helps to spread the word. And, remember, that is an awful lot of points and no one had to spend a penny to get them.
Put your money away and go get those points.
(2) – I was listening to the radio a few days ago and they spoke with one of the people who had just won a gold medal in the Olympics. What a thrill. The guy had worked for years and he had just seen his dreams come true. The announcer asked him how he had managed to get so good at his sport and he responded something like: “You do your practice over and over. You practice the same steps over and over. Even after you get where you can do them perfectly, you keep working. It can be boring but you have to keep doing your steps over and over until it is automatic. And, then you still keep doing them to make sure they stay automatic.”
On our website, we have approximately 2,100 free questions and answers. Work them all; they are free. Once you work them all, work them again. And again. (And again). You want to get where each rule is automatic for you. Yes, you’ll always miss a few—you are human. But the more you work, the more comfortable you will get with the terms, the processes, the calculations. Everything will just become clearer as you work more and more questions and read those answers. When you see a lease question or an itemized deduction question or a statistical sampling question or a cost accounting question, you want to understand how they work. The best way to gain that knowledge is to do as many questions as you can and work them over and over until they are just second nature. Once is never enough.
After the exam is over, if someone asks you “how did you pass the CPA Exam when so many other candidates fail?” you will be able to answer (somewhat like the Olympic gold medalist): I worked questions over and over until I could do them in my sleep. At that point, I knew I was ready to pass.
(3) – We love having you with us and we hope we can continue to add more and more points to your score. At the time, though, that you are ready to unsubscribe to these weekly lessons, just scroll to the bottom of the lesson and click on “unsubscribe.” Stay with us as long as we can be helpful.
(4) – Last week I gave my students their first test of the semester. Several of the students thought they could do the work until they got to the test. Then, suddenly, they couldn’t get the answers to work out. They were upset and frustrated. You may have felt that way at times.
I always tell students that their knowledge forms slowly like a piece of Swiss cheese. It looks solid but it has holes in it. Those holes exist all through their knowledge, often at very critical points. Any person who writes a lot of test questions knows where those holes are likely to be and will write questions to see if the holes actually exist.
So, the goal of anyone learning material should be to fill in the holes, to turn their Swiss cheese knowledge into solid knowledge.
How do you do that? For my students, the problem is often that they will see us work a question in class and they will follow the steps and then believe they can do it. But they never carry through and actually do it themselves. “I saw how you changed that tire so I don’t need to do it myself. I learned how by watching.” It doesn’t work that way. Accounting is never fully learned by watching.
I tell my students that, especially on numerical questions, they should try to come up with the answer. Then, once they read the answer, they should change some of the variables (change 10 years to 12 years and 5 percent to 8 percent interest and the residual value from $20,000 to $25,000) and then try again. Then, change the variables and try again. When you get the question correct two straight times, you know how to do the problem. At that point, you have closed the hole in that part of your Swiss cheese knowledge.
If you miss the question, the step that you miss points right at the hole in your knowledge. Find that point and concentrate on getting it right the next time. Close the hole.
You can never decide that you know how to do a problem simply because you have seen it explained. That’s like enjoying the taste of chocolate by watching someone else eat a piece of chocolate. It doesn’t work that way.
You know how to do a problem when you actually do that problem by yourself (probably twice).
(5) – Practice
FAR – We are doing leases in my intermediate class tomorrow. Seems like a logical place to begin our practice.
Jones buys widgets and marks them up 20 percent and sells them. On January 1, Year One, Jones buys a widget for $30,000 but this time Jones leases the item to another company for its entire 10 year life. Jones sets the annual payments (which begin immediately) at $5,300 in order to earn an annual interest rate of 10 percent. How much will net income increase for Jones during Year One because of this lease?
A - $2,470
B - $3,000
C - $6,000
D - $9,070
Answer is D
This is a capital lease because the life of the lease is 75 percent or more of the life of the asset. Because Jones usually sells the widget, it is a sales type lease for the lessor. The normal profit is recognized immediately. That is $6,000 or 20 percent of $30,000. In addition, interest is recognized for the year. The value of the lease receivable in a sales type lease begins as the sales value. That is $36,000 here ($30,000 cost plus $6,000 markup). However, the first payment of $5,300 reduces that receivable to $30,700. Interest at 10 percent gives revenue for Year One of $3,070 and a total profit for the first year of $9,070 ($6,000 plus $3,070).
Regulation
Tom Haynes lives in the top floor of a house owned by his mother who lives on the bottom floor. Of the total square footage, the bottom floor has 60 percent and the top floor has 40 percent. Haynes pays the county real estate tax on this house for the current year of $10,000. The tax amount was based on the assessed value. It was not overdue at the time of payment. What amount of this payment can Tom Haynes include as an itemized deduction for the current year?
A – Zero
B - $4,000
C - $5,000
D - $10,000
Answer is A
Taxes paid on real estate can normally be taken as an itemized deduction if the tax amount was based on the assessed value of the property. However, to be deductible, the taxpayer must be paying the tax on property that is owned by the taxpayer. Here, the mother owns the property. His payment is, therefore, not deductible. It is basically a gift to his mother.
Auditing
An independent auditor is looking at accounts receivable. More specifically, the auditor seeks to determine whether appropriate steps are taken when the company chooses to write off an account as uncollectible. The auditor expects errors to be made in 2 percent of these cases. The auditor can tolerate a rate as high as 5 percent. Based on these judgments, an appropriate sample size of 140 is computed. Which of the following statements is true?
A – If the expected rate changes to 1 percent, the sample size will be smaller.
B – If the tolerable rate changes to 4 percent, the sample size will be smaller.
C – Judgments cannot be used in a properly planned statistical sampling test.
D – This is an example of a variables sampling plan.
Answer is A
Judgments such as the expected error rate and the maximum tolerable rate are necessary to form the basis for a statistical sampling test. Since an error rate is being estimated, this testing falls under sampling for attributes. Sampling for variables attempts to estimate a total such as an account balance. Sample size varies directly with the expected error rate. Thus, the more expected errors, the larger the sample size, and the less expected errors, the smaller the sample size. Sample size varies inversely with the tolerable error rate. The larger the rate that you can tolerate, the smaller the sample size will be. The smaller the rate you can tolerate, the larger the sample size will be.
BEC
A bakery is opened this year and produces cakes. During the year, the company buys 50,000 pounds of flour for $4.00 per pound. Each cake takes 1 pound and 4 ounces of flour. The company produced 20,000 cakes this year. At the end of the year, another 5,000 cakes are still in process. They are 40 percent complete as to direct labor and factory overhead. Flour is added at the beginning of the process but eggs, milk, baking soda, and butter are added evenly throughout the process. What is the cost of the flour that is included in the reported amount for work-in-process at the end of the year?
A - $10,000
B - $12,500
C - $15,000
D - $25,000
Answer is D
Although the cakes remaining at the end of the year are only 40 percent complete as to direct labor, factory overhead, and most of the materials, the flour is added at the beginning of the process. Therefore, all 5,000 cakes in process have a full amount of flour (1 pound and 4 ounces). For 5,000 cakes, that is a total of 6,250 pounds of material. At $4.00 per pound, the cost of the flour in these in-process cakes is $25,000.
Have a great week – study hard, every point really does count.
Joe Hoyle
www.youtube.com/watch?v=LjwHxVbZq1o
Co-Founder
CPA Review for FREE
www.CPAreviewforFREE.com
Thursday, February 25, 2010
Friday, February 19, 2010
You Need to Win the 50-50 Battles
Try us FIRST before you spend your hard-earned money.
February 13, 2010
CPA Review for FREE
www.CPAreviewforFREE.com
84 Weeks of Operation and 8,983,803 Page Views (without a penny spent on marketing)
Lesson 63
From: Joe
(a) – Happy Valentine’s Day tomorrow!!! Make it a point of telling everyone you are fond of to have a Happy Valentine’s Day (and do it with gusto) – You’ll
be surprised at how many people you make smile. Life goes better when you make other people smile.
(b) – Unless something weird happens, we will go over 9 million page views this week. We have done this without one piece of paid advertising. We cannot
afford to provide a free site without your willingness to spread the word. We depend on you. That is the truth; we will go out of business without you and
your helping us to spread the word to others about www.CPAreviewforFREE.com.
That is not a threat nor a joke; it is the simple truth. We work hard and we do it all for free. None of our owners has made a penny for all their time and
effort. But, www.CPAreviewforFREE.com goes nowhere without you help in spreading the word. Thanks!!!
(c) – We have gotten a zillion or two requests for our 20 extra FAR questions over the last few days. Last call – if you would like these extra questions and
answers, just send me a note (no, we don’t have a secretary, I actually answer these emails all by myself) at jhoyle@cpareviewforfree.com.
(d) – I sent out our 43rd tip on our Facebook page yesterday. To read all 43, go to www.facebook.com and search for CPAreviewforFREE.
(e) – We have gotten several great emails recently. Here are just a few:
From CM: “Thank you for providing an excellent resource for CPA exam candidates through your website! I am preparing to take the FAR section in 3 weeks and
I've been using the questions provided on your site to reinforce concepts since a friend told me about it last week. Whether or not the actual exam questions
bear any resemblance to your questions, I feel I am making a lot of progress in my understanding of the concepts by working problems on your site. I have
another study system but I prefer your problems because they force me to draw upon more than one area of knowledge and they seem more realistic to actual
situations that may occur in real life. Furthermore, your answer explanations make more sense to me than those provided in my other system!”
From TR: “I just want to say how much I appreciate your website. It has been very helpful in my preparation for the CPA exam. In the fall I passed Regulation
on my first try and spent hours going through your practice multiple choice questions. On Monday I am taking FAR and really hope this is the only time I have
to take it.”
(1) – Probably, the question that I get asked the most is: what is the best way to use www.CPAreviewforFREE.com to pass the CPA Exam. If I were you, the
first thing I would do is go to www.cpareviewforfree.com/resources.cfm?name=article&article_id=4 and read my thoughts on how to use our 2,100 free
questions and answers to get the 75 points you need to pass.
(2) – I took a break the other night and watched a bit of a college basketball game. At the beginning of the game, the announcers said something that I found
very interesting: “We talked to the coach and asked him how his team could possibly win tonight. He told us that during every game there are a lot of 50-50
moments where two players are fighting for the ball or fighting to make a play. ‘If we are going to win,’ he said ‘we have to win those 50-50 situations.’”
In live review classes, I always tell people that there are three kinds of CPA Exam questions. About 20-30 percent are reasonably easy. You may have to
think for a bit but, if you are careful, you should get most of those questions correct. However, another 20-30 percent are just incredibly hard. Those are
for the people who feel an obsession to make 100. Based on the luck of the guess, you can expect to get 25 percent of those correct (and that 25 percent does
help).
But, in the middle, there are about 40-60 percent of the questions that really make a difference. The people who pass are able to get a reasonably high
percentage of those middle questions; the people who come close don’t get quite enough of those middle questions. You need to win the battle of those middle
40-60 percent of the questions. That is the difference in making a 65 and a 75.
People often ask me how I write the questions that I include in www.CPAreviewforFREE.com. Do I, they will ask, try to write really easy questions to make
people feel good or really hard questions to push people to learn everything possible? “Neither” is the answer. I’m trying to write questions that reflect
the middle 40-60 percent. Those are the questions that a person who makes 75 really needs to get right and the person who makes 65 probably won’t get right.
People occasionally ask me about some really difficult topic. They will pose a question that seems virtually impossible to get right and want to know how to
do it. They seem shocked when I don’t seem too concerned about that type of question. Well, of course, I’d like to see everyone get every question right.
But I really don’t think those far out questions are worth the time and energy. That is not the battlefield where you typically get your 75 points.
Yeah, you need to get virtually all of the easy ones right and at least 25 percent of the impossibly hard ones. But everyone does that. It doesn’t make a
huge difference. To pass, you have to get as many of the middle 40-60 percent as possible. The questions that basically take a straight-forward rule and
ask a question to see if you really do understand that rule.
As you work the questions on our site, we are trying to show you that middle section and the rules they are testing.
You need to win those 50-50 battles.
(2) – Unsubcribe? Surely not. But, if you must – go to the end of this email lesson and you’ll find a link. But, if you ask us, we’d prefer for you to
stay around.
(3) – Practice – Okay, I’m ready to see if we can add at least one point to your current CPA Review score. Yeah, let’s add one point—right now!!! Read
these four questions. Read them carefully. Think through the rule that is being tested and figure out your answer. Don’t guess. That is fine on the CPA
Exam but does you no good when you are studying. And, then read my answer. Is there anything in that answer that you didn’t know; anything that you can
add to your storehouse of knowledge that will help you get a similar question correct the next time?
Remember, in studying, it is not getting the questions right that counts—it is being able to get the questions right the NEXT TIME that makes all the
difference in the world.
FAR
Samattin Corporation borrows $800,000 on January 1, Year One from a bank on a five-year note that is supposed to pay cash interest of 10 percent per year.
Samattin fails to make the first interest payment on December 31, Year One. On the next day, the bank restructures the loan with Samattin so that the company
does not go bankrupt. The first year interest is forgiven and the face value of the note is reduced to $500,000. The interest rate is dropped from 10
percent to 6 percent. Instead of being due in four more years, the face value is now due in 9 years. The present value of these future cash flows at a 10
percent effective rate is $380,000. What gain does Samattin recognize on the restructuring of this loan?
A – Zero
B - $110,000 gain
C - $300,000 gain
D - $500,000 gain
Answer is B
In debt restructuring, the bank records its loss using the present value of the future cash payments. However, the debtor (Samattin) compares the amount of
the debt at this moment to the total of the future cash flows. That is the rule. After one year, the debtor owes $800,000 on the original note and $80,000
or one year of interest at 10 percent for a total of $880,000. The future cash flows are now $500,000 plus 6 percent interest ($30,000) for nine years.
That is $270,000 in interest plus $500,000 face value to arrive at total future cash flows of $770,000. The amount owed is dropped from $880,000 to the
total of the future cash flows of $770,000. As a result, the debtor records a gain of $110,000.
BEC
A company sells 20,000 widgets in Year One for $8 each. Variable costs are $4 each and the company made a net income of $50,000. In Year Two, the company
raises the sales price to $10 each because of a 50 percent increase in fixed costs. Variable cost is not impacted. How many units must the company sell
just to break-even?
A – 7,500 units
B – 10,000 units
C - 12,500 units
D – 15,000 units
Answer is A
The fixed cost for Year One must be determined first. Sales were $160,000 (20,000 x $8) and variable costs were $80,000 (20,000 x $4). Sales minus variable
cost minus fixed cost equals net income. Because net income was $50,000, fixed cost must have been $30,000: $160,000 - $80,000 – Fixed Cost = $50,000.
Fixed costs went up 50 percent or $15,000 ($30,000 x 50 percent) so it must be $45,000 in Year Two. The question here asks for the number of units to
breakeven (where there is no net income) so $10 x units sold minus $4 x units sold minus $45,000 is set equal to zero. Sales minus variable costs leaves a
contribution margin of $6 per unit. Six dollars is made on each unit and enough units must be sold to cover the fixed cost of $45,000. The number of units
sold to break even is 7,500 ($45,000 divided by $6).
Regulation
Josh Smith has a salaried job working for a local greenhouse. In addition, he runs a small business of his own where he mows and maintains lawns. Finally,
he invests his money in a number of stocks using an online brokerage service. During the current tax year, he paid $340 in cash for subscriptions to
investment publications to help him buy the right stocks. How should he handle the $340 when filing his federal income tax return?
A – It cannot be deducted.
B – He can reduce any taxable gains from the investments by the $340.
C – He can report the $340 as a deduction to arrive at his adjusted gross income.
D – He can include the $340 as a miscellaneous itemized deduction with only the aggregate amount over 2 percent of his adjusted gross income being deducted.
Answer is D
This cost is not related to a trade or business. It relates to the production of portfolio income and can only be deducted as a miscellaneous itemized
deduction. Only the total of such amounts that exceeds 2 percent of the taxpayer’s adjusted gross income is actually deducted.
Auditing
A company has 26 warehouses spread across the United States that are used to hold its inventory. The company has scheduled the physical inventory to take
place after the close of work on December 31. Which of the following is true?
A – The independent audit firm is responsible for the taking of the physical inventory to ensure that the resulting numbers are appropriate.
B – The independent audit firm need not be present at each location.
C – The independent audit firm must be present at a majority of the locations to provide the necessary oversight.
D – The independent audit firm should hire consultants who will take the physical count for the company so that the process will be done in a proper manner.
Answer is B.
The independent audit firm must observe the taking of the physical inventory which is carried out by the reporting company. However, depending on the
auditor’s assessment of the internal control and the manner by which the count is taken, the independent auditor only needs to observe a sample of this work.
The exact size of this sample is up to the judgment of the auditor and depends on the assessment of the control procedures being followed.
You can do it – you can add a point by just making sure you know the rules that are demonstrated in these four questions.
HAPPY VALENTINE’S DAY!!!
Joe Hoyle
Co-Founder
CPA Review for FREE
www.CPAreviewforFREE.com
3351 Lady Marian Court
Midlothian, VA 23113
February 13, 2010
CPA Review for FREE
www.CPAreviewforFREE.com
84 Weeks of Operation and 8,983,803 Page Views (without a penny spent on marketing)
Lesson 63
From: Joe
(a) – Happy Valentine’s Day tomorrow!!! Make it a point of telling everyone you are fond of to have a Happy Valentine’s Day (and do it with gusto) – You’ll
be surprised at how many people you make smile. Life goes better when you make other people smile.
(b) – Unless something weird happens, we will go over 9 million page views this week. We have done this without one piece of paid advertising. We cannot
afford to provide a free site without your willingness to spread the word. We depend on you. That is the truth; we will go out of business without you and
your helping us to spread the word to others about www.CPAreviewforFREE.com.
That is not a threat nor a joke; it is the simple truth. We work hard and we do it all for free. None of our owners has made a penny for all their time and
effort. But, www.CPAreviewforFREE.com goes nowhere without you help in spreading the word. Thanks!!!
(c) – We have gotten a zillion or two requests for our 20 extra FAR questions over the last few days. Last call – if you would like these extra questions and
answers, just send me a note (no, we don’t have a secretary, I actually answer these emails all by myself) at jhoyle@cpareviewforfree.com.
(d) – I sent out our 43rd tip on our Facebook page yesterday. To read all 43, go to www.facebook.com and search for CPAreviewforFREE.
(e) – We have gotten several great emails recently. Here are just a few:
From CM: “Thank you for providing an excellent resource for CPA exam candidates through your website! I am preparing to take the FAR section in 3 weeks and
I've been using the questions provided on your site to reinforce concepts since a friend told me about it last week. Whether or not the actual exam questions
bear any resemblance to your questions, I feel I am making a lot of progress in my understanding of the concepts by working problems on your site. I have
another study system but I prefer your problems because they force me to draw upon more than one area of knowledge and they seem more realistic to actual
situations that may occur in real life. Furthermore, your answer explanations make more sense to me than those provided in my other system!”
From TR: “I just want to say how much I appreciate your website. It has been very helpful in my preparation for the CPA exam. In the fall I passed Regulation
on my first try and spent hours going through your practice multiple choice questions. On Monday I am taking FAR and really hope this is the only time I have
to take it.”
(1) – Probably, the question that I get asked the most is: what is the best way to use www.CPAreviewforFREE.com to pass the CPA Exam. If I were you, the
first thing I would do is go to www.cpareviewforfree.com/resources.cfm?name=article&article_id=4 and read my thoughts on how to use our 2,100 free
questions and answers to get the 75 points you need to pass.
(2) – I took a break the other night and watched a bit of a college basketball game. At the beginning of the game, the announcers said something that I found
very interesting: “We talked to the coach and asked him how his team could possibly win tonight. He told us that during every game there are a lot of 50-50
moments where two players are fighting for the ball or fighting to make a play. ‘If we are going to win,’ he said ‘we have to win those 50-50 situations.’”
In live review classes, I always tell people that there are three kinds of CPA Exam questions. About 20-30 percent are reasonably easy. You may have to
think for a bit but, if you are careful, you should get most of those questions correct. However, another 20-30 percent are just incredibly hard. Those are
for the people who feel an obsession to make 100. Based on the luck of the guess, you can expect to get 25 percent of those correct (and that 25 percent does
help).
But, in the middle, there are about 40-60 percent of the questions that really make a difference. The people who pass are able to get a reasonably high
percentage of those middle questions; the people who come close don’t get quite enough of those middle questions. You need to win the battle of those middle
40-60 percent of the questions. That is the difference in making a 65 and a 75.
People often ask me how I write the questions that I include in www.CPAreviewforFREE.com. Do I, they will ask, try to write really easy questions to make
people feel good or really hard questions to push people to learn everything possible? “Neither” is the answer. I’m trying to write questions that reflect
the middle 40-60 percent. Those are the questions that a person who makes 75 really needs to get right and the person who makes 65 probably won’t get right.
People occasionally ask me about some really difficult topic. They will pose a question that seems virtually impossible to get right and want to know how to
do it. They seem shocked when I don’t seem too concerned about that type of question. Well, of course, I’d like to see everyone get every question right.
But I really don’t think those far out questions are worth the time and energy. That is not the battlefield where you typically get your 75 points.
Yeah, you need to get virtually all of the easy ones right and at least 25 percent of the impossibly hard ones. But everyone does that. It doesn’t make a
huge difference. To pass, you have to get as many of the middle 40-60 percent as possible. The questions that basically take a straight-forward rule and
ask a question to see if you really do understand that rule.
As you work the questions on our site, we are trying to show you that middle section and the rules they are testing.
You need to win those 50-50 battles.
(2) – Unsubcribe? Surely not. But, if you must – go to the end of this email lesson and you’ll find a link. But, if you ask us, we’d prefer for you to
stay around.
(3) – Practice – Okay, I’m ready to see if we can add at least one point to your current CPA Review score. Yeah, let’s add one point—right now!!! Read
these four questions. Read them carefully. Think through the rule that is being tested and figure out your answer. Don’t guess. That is fine on the CPA
Exam but does you no good when you are studying. And, then read my answer. Is there anything in that answer that you didn’t know; anything that you can
add to your storehouse of knowledge that will help you get a similar question correct the next time?
Remember, in studying, it is not getting the questions right that counts—it is being able to get the questions right the NEXT TIME that makes all the
difference in the world.
FAR
Samattin Corporation borrows $800,000 on January 1, Year One from a bank on a five-year note that is supposed to pay cash interest of 10 percent per year.
Samattin fails to make the first interest payment on December 31, Year One. On the next day, the bank restructures the loan with Samattin so that the company
does not go bankrupt. The first year interest is forgiven and the face value of the note is reduced to $500,000. The interest rate is dropped from 10
percent to 6 percent. Instead of being due in four more years, the face value is now due in 9 years. The present value of these future cash flows at a 10
percent effective rate is $380,000. What gain does Samattin recognize on the restructuring of this loan?
A – Zero
B - $110,000 gain
C - $300,000 gain
D - $500,000 gain
Answer is B
In debt restructuring, the bank records its loss using the present value of the future cash payments. However, the debtor (Samattin) compares the amount of
the debt at this moment to the total of the future cash flows. That is the rule. After one year, the debtor owes $800,000 on the original note and $80,000
or one year of interest at 10 percent for a total of $880,000. The future cash flows are now $500,000 plus 6 percent interest ($30,000) for nine years.
That is $270,000 in interest plus $500,000 face value to arrive at total future cash flows of $770,000. The amount owed is dropped from $880,000 to the
total of the future cash flows of $770,000. As a result, the debtor records a gain of $110,000.
BEC
A company sells 20,000 widgets in Year One for $8 each. Variable costs are $4 each and the company made a net income of $50,000. In Year Two, the company
raises the sales price to $10 each because of a 50 percent increase in fixed costs. Variable cost is not impacted. How many units must the company sell
just to break-even?
A – 7,500 units
B – 10,000 units
C - 12,500 units
D – 15,000 units
Answer is A
The fixed cost for Year One must be determined first. Sales were $160,000 (20,000 x $8) and variable costs were $80,000 (20,000 x $4). Sales minus variable
cost minus fixed cost equals net income. Because net income was $50,000, fixed cost must have been $30,000: $160,000 - $80,000 – Fixed Cost = $50,000.
Fixed costs went up 50 percent or $15,000 ($30,000 x 50 percent) so it must be $45,000 in Year Two. The question here asks for the number of units to
breakeven (where there is no net income) so $10 x units sold minus $4 x units sold minus $45,000 is set equal to zero. Sales minus variable costs leaves a
contribution margin of $6 per unit. Six dollars is made on each unit and enough units must be sold to cover the fixed cost of $45,000. The number of units
sold to break even is 7,500 ($45,000 divided by $6).
Regulation
Josh Smith has a salaried job working for a local greenhouse. In addition, he runs a small business of his own where he mows and maintains lawns. Finally,
he invests his money in a number of stocks using an online brokerage service. During the current tax year, he paid $340 in cash for subscriptions to
investment publications to help him buy the right stocks. How should he handle the $340 when filing his federal income tax return?
A – It cannot be deducted.
B – He can reduce any taxable gains from the investments by the $340.
C – He can report the $340 as a deduction to arrive at his adjusted gross income.
D – He can include the $340 as a miscellaneous itemized deduction with only the aggregate amount over 2 percent of his adjusted gross income being deducted.
Answer is D
This cost is not related to a trade or business. It relates to the production of portfolio income and can only be deducted as a miscellaneous itemized
deduction. Only the total of such amounts that exceeds 2 percent of the taxpayer’s adjusted gross income is actually deducted.
Auditing
A company has 26 warehouses spread across the United States that are used to hold its inventory. The company has scheduled the physical inventory to take
place after the close of work on December 31. Which of the following is true?
A – The independent audit firm is responsible for the taking of the physical inventory to ensure that the resulting numbers are appropriate.
B – The independent audit firm need not be present at each location.
C – The independent audit firm must be present at a majority of the locations to provide the necessary oversight.
D – The independent audit firm should hire consultants who will take the physical count for the company so that the process will be done in a proper manner.
Answer is B.
The independent audit firm must observe the taking of the physical inventory which is carried out by the reporting company. However, depending on the
auditor’s assessment of the internal control and the manner by which the count is taken, the independent auditor only needs to observe a sample of this work.
The exact size of this sample is up to the judgment of the auditor and depends on the assessment of the control procedures being followed.
You can do it – you can add a point by just making sure you know the rules that are demonstrated in these four questions.
HAPPY VALENTINE’S DAY!!!
Joe Hoyle
Co-Founder
CPA Review for FREE
www.CPAreviewforFREE.com
3351 Lady Marian Court
Midlothian, VA 23113
Sunday, February 7, 2010
Constant Improvement to Reach Maximum Potential
CPA Review for FREE
www.CPAreviewforFREE.com
Constant Improvement to Reach Maximum Potential
83 Weeks of Operation and 8,810,800 Page Views (without a penny spent on marketing)
Lesson 62
From: Joe
(a) - Four or five months ago, I sat down one day and wrote 20 FAR questions and made them available to our readers so they could test themselves. I realize that we have added a lot of new subscribers since then so I wanted to make these available once again. Here is how I described what I was doing at that time:
“CPA Exam candidates are always asking how they can tell what areas they need to study. You always want to put your time on the subjects where you are the weakest.
“So, I took the 20 subject categories that we have for Financial Accounting at www.CPAreviewforFREE.com and wrote one basic question for each. I didn’t try to get too hard but I didn’t try to get too easy either. Just tried to cover the basic rules.
“If you want a copy of these questions and answers, drop me an email at Jhoyle@cpareviewforfree.com and I’ll send them to you by attachment.
“Go through these 20 – I’d recommend between 35-50 minutes to get them all done. I’ll include my answers in a separate file. This should help you determine where to start your studies. Any of these that you get right means that you have a pretty good knowledge of that subject area already.”
And, yes, we are currently working on a similar project for the other four parts of the exam.
(b) – My new Introduction to Financial Accounting textbook has been published. If you want to see what a genuine online book looks like (rather than a traditional textbook that is simply put online) go to
www.flatworldknowledge.com/pub/1.0/financial-accounting
If you know any accounting professors, please pass along the link.
(1) – The Super Bowl is being played tomorrow evening. It must be a wonderful feeling to practice and play games for months and months and suddenly you are playing for the championship. It is easy to sit and watch on television and think “geez, it must be fun to compete for the title.”
As you watch the game, keep two things in mind.
---(1) – Those two teams are there because they started working and working incredibly hard back last summer. They got themselves into great physical shape and they ran those plays over and over until they knew them perfectly. Being a champion does not happen by accident. To be a champion, you don’t do half the work and hope the other person does even less. To be a champion, you do all the work and then challenge the other person to try to keep up with you. There is no luck in being this good. It takes a lot of work and a lot of determination. It takes being willing to sacrifice your time and your energy.
My guess is that these guys would have preferred to have partied rather than practice. But they kept practicing. Parties and the like provide temporary pleasure. Championships provide permanent pleasure. One of the hardest things in life is to skip the temporary pleasures so you can attain the permanent pleasures.
---(2) – For the accountant, the CPA Exam is pretty close to the equivalent of the Super Bowl. You study for months to get the best out of yourself. You put all of that time and energy and effort in and then on the big day, you go in there and do your very best to get the points that it will take to win.
Unless a person has taken the CPA Exam, no one realizes what you are having to sacrifice in order to get yourself ready to answer all those questions on the big day. No one fully appreciates how difficult it is to sit in your study on Friday night and answer questions when you would prefer to be having a party.
However, on Sunday evening, one of those teams is going to hold that trophy above their heads and cheer and dance.
And, one of these days, you are going to look at a score and see 75 or more and you are going to have that exact same feeling. You will be ready to cheer and dance.
And, it will all have been worthwhile.
(2) – Some years ago my elder son gave me a book titled “Leading With the Heart” by Mike Krzyzewski (basketball coach at Duke University). Coach K is one of the most successful coaches in the business and I’m always interested in what successful people have to say. It is not a bad idea to keep a motivational book around. It can really help when you get sick of the CPA Exam and just need a bit of encouragement. We are all human beings. No one can keep pushing and pushing forever without some support. It is not bad to set aside 10-15 minutes per day just for such reading.
The underlying theme of Coach K’s book is about how you should always seek to do things the right way – a philosophy in which I truly believe. The book makes a strong point about having the right goals. Coach K said that he always has a goal for his team and that the goal is not winning championships. He said that his goal for each team was “constant improvement in order to reach maximum potential.”
Wow! What a great philosophy. Probably, if you are serious about passing, you have already started to become a bit obsessed with the CPA Exam. Being a bit obsessed is okay but don’t put too much of your focus on passing. That may seem like very odd advice but it is important to have the right goal. Passing the CPA Exam is a goal that cannot be achieved at the current moment; that is a goal can only be achieved when you walk into the exam site and start answering those questions. Your goal today should focus on what you can do right now in the current moment. When it comes to the CPA Exam, I cannot think of a better goal than:
Constant improvement in order to reach maximum potential.
Now, that is a goal that you can, indeed, do something about right now. Work a question on www.CPAreviewforFREE.com, read the answer, ask yourself whether you understand the basic rule being tested, make a 10-word note that will help you remember that basic rule. Those are things you can do today. That is where your focus should be.
If you are able to get anywhere near your maximum potential, you’ll pass the CPA Exam easily. You know that and I know that. You have more than enough potential to pass; it is just making good use of that potential that counts.
Your goal each day should be to work to make the improvement that’s going to move you along. That is going to get you closer. That is one goal that you can always apply to the current moment, the one moment that you can actually use to achieve success.
(3) – We send these email lessons out to approximately 11,000 accountants and other folks about every 7-10 days. We do this for free to help motivate you to do the work that is needed to pass the CPA Exam. We do this to encourage you to use www.CPAreviewforFREE.com to prepare rather than waste your money on some over-priced (and often inefficient) review program.
However, if you ever decide that you would prefer not to receive these email lessons, just scroll to the bottom of any lesson and you’ll find a link that will allow you to unsubscribe. Stay as long as you want, we are glad to have you. But you can certainly unsubscribe whenever you wish.
(4) – Okay it is snowing in Richmond today (again). So, let’s take a few seconds and see if we can add a point or two to your score. If I can help you learn a rule that will get you that much closer to passing, it has been well worth my time and your time both.
FAR
A corporation has 100,000 shares of common stock outstanding and 20,000 shares of nonconvertible preferred stock. A dividend of $1 per share is distributed on the common stock and one of $2 per share is distributed on the preferred stock. Net income is $400,000 and the tax rate is 20 percent. The corporation also has 10,000 bonds with a face value of $100 and an interest rate of 4 percent. Each bond is convertible into two shares of common stock although none have yet been converted. The bonds were issued several years ago at face value. What is reported as diluted earnings per share (rounded)?
A - $2.80
B - $3.27
C - $3.33
D - $3.60
Answer is B
Primary earnings per share must be computed first. That is net income ($400,000) less the dividends to preferred stock (20,000 x $2 or $40,000) to arrive at the income ($360,000) that can be assigned to the common stockholders. That is then divided by the number of outstanding shares of common stock (100,000) to arrive at primary earnings per share of $3.60. To get to diluted earnings per share, the convertible bond is then assumed to have been converted. If converted, 20,000 additional shares would be outstanding (10,000 bonds x 2 shares). If converted, the interest could have been saved ($100 x 4% x 10,000 or $40,000) increasing net income. However, that rise in income would also have increased the amount of income tax expense ($40,000 x 20 percent or $8,000). This assumed conversion brings the income assigned to common stock up to $392,000 ($360,000 + $40,000 - $8,000) and the number of shares up to 120,000 so that diluted earnings per shares is $3.27
($392,000 divided by 120,000).
Regulation
Kasemi is a single taxpayer who has $4,000 in long-term capital gains, $7,000 in short-term capital gains, and $2,000 in short-term capital losses. He is also a 50 percent partner in the OK partnership which had a long-term capital loss this year of $20,000. Kasemi is currently preparing his tax return for the year. Which of the following statements is correct?
A – He can deduct a capital loss for the year on his tax return of $1,000
B – He can deduct a capital loss for the year on his tax return of $3,000
C – He can deduct a capital loss for the year on his tax return of $3,000 but must also report a short-term capital gain of $5,000.
D – He must report a net short-term capital gain of $1,000
Answer is A
Capital gains and losses pass through from a partnership directly to the tax return of the individual partners. Therefore, 50 percent of the partnership long-term capital loss passes through to Kasemi (or $10,000). After that, his long-term capital items net to a $6,000 loss ($10,000 loss and $4,000 gain). His short-term capital items net to a $5,000 gain ($7,000 gain and $2,000 loss). The long-term loss and short-term gain are then netted to arrive at a $1,000 loss ($6,000 loss and $5,000 gain). That amount is below the $3,000 maximum and can be deducted.
Auditing
An independent auditor is performing an audit examination of the Haynesworth Corporation. Currently, the auditor is analyzing the cash payments received from customers for several weeks right after the end of the year. Which of the following is the least likely to be the purpose of this testing?
A – The auditor wants to make sure that sales made near the end of the year did not get recorded in the subsequent year by accident.
B – The auditor is attempting to verify the value reported for the company’s accounts receivable.
C – The auditor is attempting to verify that the accounts receivable at year’s end have not been sold to a bank for financing purposes.
D – The auditor wants to make sure that discounts for quick payment are properly recorded.
Answer is C
When a company sells its receivables, customers are rarely informed. They continue to pay the company which then forwards the money to the buyer. Reviewing collections is not likely to yield any evidence of such a sale. However, cash collections after the end of the year can indicate whether sales were recorded in the right period of time (if the collection period is either longer or shorter than expected, that might signify that the recording date of the original transactions was moved by a few days). If a receivable is collected, that certainly verifies its value. And, the review of collections can be used to make sure that cash discounts are properly recorded.
BEC
Which of the following is the best explanation of a futures contract?
A – Any contract based on anticipated changes in future prices
B - A contract to buy or sell a specified commodity at a certain date in the future, at a market-determined price
C – It is a term used in currency exchanges to signify the acquisition of a currency to be delivered within 90 days to a broker.
D – It is a contract whereby a dealer is allowed to buy a product in the future but is not required to buy that product.
Answer is C.
An example of a futures contract would be an agreement to buy 10,000 barrels of light, sweet crude oil (a particular grade of crude oil) on August 12 of the current year at the price being quoted today in the futures market.
Hope you have less snow than we have in Richmond.
Work hard so that you can win the Super Bowl of the accounting profession: the CPA Exam.
Joe Hoyle
Co-Founder
CPA Review for FREE
www.CPAreviewforFREE.com
Constant Improvement to Reach Maximum Potential
83 Weeks of Operation and 8,810,800 Page Views (without a penny spent on marketing)
Lesson 62
From: Joe
(a) - Four or five months ago, I sat down one day and wrote 20 FAR questions and made them available to our readers so they could test themselves. I realize that we have added a lot of new subscribers since then so I wanted to make these available once again. Here is how I described what I was doing at that time:
“CPA Exam candidates are always asking how they can tell what areas they need to study. You always want to put your time on the subjects where you are the weakest.
“So, I took the 20 subject categories that we have for Financial Accounting at www.CPAreviewforFREE.com and wrote one basic question for each. I didn’t try to get too hard but I didn’t try to get too easy either. Just tried to cover the basic rules.
“If you want a copy of these questions and answers, drop me an email at Jhoyle@cpareviewforfree.com and I’ll send them to you by attachment.
“Go through these 20 – I’d recommend between 35-50 minutes to get them all done. I’ll include my answers in a separate file. This should help you determine where to start your studies. Any of these that you get right means that you have a pretty good knowledge of that subject area already.”
And, yes, we are currently working on a similar project for the other four parts of the exam.
(b) – My new Introduction to Financial Accounting textbook has been published. If you want to see what a genuine online book looks like (rather than a traditional textbook that is simply put online) go to
www.flatworldknowledge.com/pub/1.0/financial-accounting
If you know any accounting professors, please pass along the link.
(1) – The Super Bowl is being played tomorrow evening. It must be a wonderful feeling to practice and play games for months and months and suddenly you are playing for the championship. It is easy to sit and watch on television and think “geez, it must be fun to compete for the title.”
As you watch the game, keep two things in mind.
---(1) – Those two teams are there because they started working and working incredibly hard back last summer. They got themselves into great physical shape and they ran those plays over and over until they knew them perfectly. Being a champion does not happen by accident. To be a champion, you don’t do half the work and hope the other person does even less. To be a champion, you do all the work and then challenge the other person to try to keep up with you. There is no luck in being this good. It takes a lot of work and a lot of determination. It takes being willing to sacrifice your time and your energy.
My guess is that these guys would have preferred to have partied rather than practice. But they kept practicing. Parties and the like provide temporary pleasure. Championships provide permanent pleasure. One of the hardest things in life is to skip the temporary pleasures so you can attain the permanent pleasures.
---(2) – For the accountant, the CPA Exam is pretty close to the equivalent of the Super Bowl. You study for months to get the best out of yourself. You put all of that time and energy and effort in and then on the big day, you go in there and do your very best to get the points that it will take to win.
Unless a person has taken the CPA Exam, no one realizes what you are having to sacrifice in order to get yourself ready to answer all those questions on the big day. No one fully appreciates how difficult it is to sit in your study on Friday night and answer questions when you would prefer to be having a party.
However, on Sunday evening, one of those teams is going to hold that trophy above their heads and cheer and dance.
And, one of these days, you are going to look at a score and see 75 or more and you are going to have that exact same feeling. You will be ready to cheer and dance.
And, it will all have been worthwhile.
(2) – Some years ago my elder son gave me a book titled “Leading With the Heart” by Mike Krzyzewski (basketball coach at Duke University). Coach K is one of the most successful coaches in the business and I’m always interested in what successful people have to say. It is not a bad idea to keep a motivational book around. It can really help when you get sick of the CPA Exam and just need a bit of encouragement. We are all human beings. No one can keep pushing and pushing forever without some support. It is not bad to set aside 10-15 minutes per day just for such reading.
The underlying theme of Coach K’s book is about how you should always seek to do things the right way – a philosophy in which I truly believe. The book makes a strong point about having the right goals. Coach K said that he always has a goal for his team and that the goal is not winning championships. He said that his goal for each team was “constant improvement in order to reach maximum potential.”
Wow! What a great philosophy. Probably, if you are serious about passing, you have already started to become a bit obsessed with the CPA Exam. Being a bit obsessed is okay but don’t put too much of your focus on passing. That may seem like very odd advice but it is important to have the right goal. Passing the CPA Exam is a goal that cannot be achieved at the current moment; that is a goal can only be achieved when you walk into the exam site and start answering those questions. Your goal today should focus on what you can do right now in the current moment. When it comes to the CPA Exam, I cannot think of a better goal than:
Constant improvement in order to reach maximum potential.
Now, that is a goal that you can, indeed, do something about right now. Work a question on www.CPAreviewforFREE.com, read the answer, ask yourself whether you understand the basic rule being tested, make a 10-word note that will help you remember that basic rule. Those are things you can do today. That is where your focus should be.
If you are able to get anywhere near your maximum potential, you’ll pass the CPA Exam easily. You know that and I know that. You have more than enough potential to pass; it is just making good use of that potential that counts.
Your goal each day should be to work to make the improvement that’s going to move you along. That is going to get you closer. That is one goal that you can always apply to the current moment, the one moment that you can actually use to achieve success.
(3) – We send these email lessons out to approximately 11,000 accountants and other folks about every 7-10 days. We do this for free to help motivate you to do the work that is needed to pass the CPA Exam. We do this to encourage you to use www.CPAreviewforFREE.com to prepare rather than waste your money on some over-priced (and often inefficient) review program.
However, if you ever decide that you would prefer not to receive these email lessons, just scroll to the bottom of any lesson and you’ll find a link that will allow you to unsubscribe. Stay as long as you want, we are glad to have you. But you can certainly unsubscribe whenever you wish.
(4) – Okay it is snowing in Richmond today (again). So, let’s take a few seconds and see if we can add a point or two to your score. If I can help you learn a rule that will get you that much closer to passing, it has been well worth my time and your time both.
FAR
A corporation has 100,000 shares of common stock outstanding and 20,000 shares of nonconvertible preferred stock. A dividend of $1 per share is distributed on the common stock and one of $2 per share is distributed on the preferred stock. Net income is $400,000 and the tax rate is 20 percent. The corporation also has 10,000 bonds with a face value of $100 and an interest rate of 4 percent. Each bond is convertible into two shares of common stock although none have yet been converted. The bonds were issued several years ago at face value. What is reported as diluted earnings per share (rounded)?
A - $2.80
B - $3.27
C - $3.33
D - $3.60
Answer is B
Primary earnings per share must be computed first. That is net income ($400,000) less the dividends to preferred stock (20,000 x $2 or $40,000) to arrive at the income ($360,000) that can be assigned to the common stockholders. That is then divided by the number of outstanding shares of common stock (100,000) to arrive at primary earnings per share of $3.60. To get to diluted earnings per share, the convertible bond is then assumed to have been converted. If converted, 20,000 additional shares would be outstanding (10,000 bonds x 2 shares). If converted, the interest could have been saved ($100 x 4% x 10,000 or $40,000) increasing net income. However, that rise in income would also have increased the amount of income tax expense ($40,000 x 20 percent or $8,000). This assumed conversion brings the income assigned to common stock up to $392,000 ($360,000 + $40,000 - $8,000) and the number of shares up to 120,000 so that diluted earnings per shares is $3.27
($392,000 divided by 120,000).
Regulation
Kasemi is a single taxpayer who has $4,000 in long-term capital gains, $7,000 in short-term capital gains, and $2,000 in short-term capital losses. He is also a 50 percent partner in the OK partnership which had a long-term capital loss this year of $20,000. Kasemi is currently preparing his tax return for the year. Which of the following statements is correct?
A – He can deduct a capital loss for the year on his tax return of $1,000
B – He can deduct a capital loss for the year on his tax return of $3,000
C – He can deduct a capital loss for the year on his tax return of $3,000 but must also report a short-term capital gain of $5,000.
D – He must report a net short-term capital gain of $1,000
Answer is A
Capital gains and losses pass through from a partnership directly to the tax return of the individual partners. Therefore, 50 percent of the partnership long-term capital loss passes through to Kasemi (or $10,000). After that, his long-term capital items net to a $6,000 loss ($10,000 loss and $4,000 gain). His short-term capital items net to a $5,000 gain ($7,000 gain and $2,000 loss). The long-term loss and short-term gain are then netted to arrive at a $1,000 loss ($6,000 loss and $5,000 gain). That amount is below the $3,000 maximum and can be deducted.
Auditing
An independent auditor is performing an audit examination of the Haynesworth Corporation. Currently, the auditor is analyzing the cash payments received from customers for several weeks right after the end of the year. Which of the following is the least likely to be the purpose of this testing?
A – The auditor wants to make sure that sales made near the end of the year did not get recorded in the subsequent year by accident.
B – The auditor is attempting to verify the value reported for the company’s accounts receivable.
C – The auditor is attempting to verify that the accounts receivable at year’s end have not been sold to a bank for financing purposes.
D – The auditor wants to make sure that discounts for quick payment are properly recorded.
Answer is C
When a company sells its receivables, customers are rarely informed. They continue to pay the company which then forwards the money to the buyer. Reviewing collections is not likely to yield any evidence of such a sale. However, cash collections after the end of the year can indicate whether sales were recorded in the right period of time (if the collection period is either longer or shorter than expected, that might signify that the recording date of the original transactions was moved by a few days). If a receivable is collected, that certainly verifies its value. And, the review of collections can be used to make sure that cash discounts are properly recorded.
BEC
Which of the following is the best explanation of a futures contract?
A – Any contract based on anticipated changes in future prices
B - A contract to buy or sell a specified commodity at a certain date in the future, at a market-determined price
C – It is a term used in currency exchanges to signify the acquisition of a currency to be delivered within 90 days to a broker.
D – It is a contract whereby a dealer is allowed to buy a product in the future but is not required to buy that product.
Answer is C.
An example of a futures contract would be an agreement to buy 10,000 barrels of light, sweet crude oil (a particular grade of crude oil) on August 12 of the current year at the price being quoted today in the futures market.
Hope you have less snow than we have in Richmond.
Work hard so that you can win the Super Bowl of the accounting profession: the CPA Exam.
Joe Hoyle
Co-Founder
CPA Review for FREE
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