Constant Improvement to Reach Maximum Potential

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Constant Improvement to Reach Maximum Potential

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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