Solidify that Swiss Cheese Knowledge

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February 24, 2010

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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
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