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Lesson 74
From: Joe
(1) - Nice note that I got recently from MG in Los Angeles: "I received the results from the Auditing exam over the weekend and I was so happy to find out that I got a score of 81!! I took this test 3 times already but it is only during this 4th time that I used your review questions. I also can't believe that my score is higher than the BEC and Financial which I passed last year! I regret those times when I should have started with this review rather than paying for the much more pricey review. But everything happens for a reason. I also want to THANK YOU for your encouraging emails. I really get a lot of inspiration from them. I even apply your tips by encouraging other friends to NOT GIVE UP!! I still have one more test to take - REGULATION and I will definitely be using your review as my starting point. ALL THE BEST TO YOU AND YOUR STAFF!!!"
And a note also from MV: "I received my score for AUD and got an 89. I know a lot of people say that is over-studying, but I'll gladly take it. Your site again was stellar at preparing for the exam. Since I have switched over in using your site for my review (I use both XX review program and your site, but your site is what I primarily use whenever I get stuck on a section or concept). I have been 3 in row in REG, BEC, and AUD. I'm taking FAR next and feel overwhelmed with the information in it. I'm going to continue review through your site and looking forward to another passing score. I also recommended this site to an old co-worker of mine who has failed two sections straight. He was amazed with the quality of your explanations and now is running through questions on his blackberry on the go. Thanks again for creating such a wonderful site. I look forward to passing my 4th in a row with your site."
(2) - As many of you might know, John Wooden died on June 4, just a few months short of being 100 years old. In my mind, he was the best basketball coach in history. And, he was the best because his teams (at UCLA) won by doing things the right way. He didn't rage up and down the side lines. He didn't scream and shout and curse. He calmly showed his players how to play basketball the right way so that they formed a team and got the most out of their talent. The way he coached basketball is the way I would love to teach accounting.
One of Coach Wooden's most famous statements is one that I really try to follow: "Don't let what you cannot do interfere with what you can do."
When I work with students or with CPA Exam candidates, they seem to invariably want to tell me what they cannot do, what they are not good at. It becomes confession time. There must be some human psychology that feels a need to list out personal weaknesses:
--I don't write very well.
--I don't read fast enough.
--I can never answer enough questions.
--I did not learn enough of this stuff in school.
What good does it do you to spend time thinking about what you cannot do?
Here's a suggestion. Stop right now and write down on a sheet of paper your three "favorite" weaknesses. That is those things that you tend to use most often as your excuse for not succeeding. Yeah, you know what they are. I sometimes call them conversation starters: "Hi, I'm Joe and I am awfully weak at .." Or "I just cannot seem to succeed because of .."
Write the top three on a sheet of paper. Then, tear that paper into small shreds and flush them all down the toilet. After that, NEVER MENTION THEM AGAIN IN YOUR WHOLE LIFE.
You'll be so much better off to throw off those self-imposed weaknesses. They do you no good. Why do you hang onto them with such devotion? Why are you so fond of your personal weaknesses?
Whether you have 4 points at the moment or 74 points, your only goal should be to add points. Get on with it. Forget about weaknesses. Life calls you to be successful. Holding onto your weaknesses is just a crutch. Throw them away and let's get this CPA Exam passed.
There is a famous line by Shakespeare in the play Othello: "go, make money." If I were writing the play, the line would be: "go, add points."
(3) - I had someone mention to me recently that our questions tend to have more words than the questions she had seen on the CPA Exam. The person who mentioned this seemed puzzled. My response was "well, of course - they have two entirely different purposes." CPA Exam questions only have one goal-to see what you know. If I want to see if you know the capital of Montana, the question only has to be: "What is the capital of Montana?"
At www.CPAreviewforFREE.com, though, we are trying to teach you what you need to know in order to get 75 points and pass. Our questions are for teaching. Our questions take a lot more thought: You drive 1,043 miles from the capital of Washington (Olympia) to the capital of North Dakota (Bismarck). Along the way, you stop at the capital of Montana. Where did you stop?
Yeah, our question has about 25 more words, but we have taught you four things: the capitals of three states and the distance from Olympia to Bismarck. (Plus, our questions are more interesting to work which is important when you have to sit there studying for hour after hour.)
Some people seem obsessed "I want to see something that looks exactly like the CPA Exam." Wrong goal. Wrong goal. Wrong goal. The correct goal is "I want to see something that will help me add enough points to pass the CPA Exam."
(4) - In case you are ready to stop receiving these email lessons, you can always scroll to the bottom of a lesson and click on the unsubscribe button. It is there; it is always there. We love having you but you are certainly free to unsubscribe. We have nearly 14,000 subscribers - we like having each of you. But, you have the right to unsubscribe. Please know that.
(5) - For no particularly good reason, I just went and checked my email and, lo and behold, got several more notes from CPA Exam candidates.
From SH: "Greetings from CA. I got my score today for my Regulations and I want you to know that I have been your avid follower in CPAReviewforfree since last year. I passed the Regulation exam with an 88 (with barely 2 hours of sleep before my exam.) I thank God that He has given you to us to give us moral support and motivation when we are down and struggling to study each of the sections of the CPA exam."
From LJ: "I just wanted to let you know that I have finally passed all 4 parts of the CPA exam. When my state license came I realized that it's really real. Your emails and words of wisdom and inspiration always helped. Especially when I was feeling down, one of your emails would come and remind me that a few extra minutes a day could help give me the extra point I needed to pass. I used your site many times to help understand the subject matter that is tested on the exam."
From AO: "I wanted to drop you a note and thank you again for your support and encouragement, as well as the great material on cpareviewforfree.com. I just received my passing grade on the last section of the exam [first try on BEC (80) AUD (81) REG (90) and second try on FAR (77)] and I can say with 100% confidence that without your material and your approach to readiness for the exam, I wouldn't have passed. Even though I did spend "thousands of dollars" on a review class, the questions from your site were the most effective way of learning the material. Your sound advice, encouraging e-mails and your ability to communicate the essence of the topics is simply brilliant. I have and will continue to promote "cpareviewforfree.com" and be a huge fan, but most of all I will always be a believer in Joe Hoyle's approach."
Before too much more time has passed, I want to hear from you that you have passed!!!!
(6) - Since I am in a mood to think about Coach John Wooden, here is another quote from him. One of the emails that I get the most is "I'm so discouraged; I keep missing questions." I know that can be tough but missed questions are the best way for you to learn. I know that can be painful but reading a question and getting it right does not make you one bit better. Here's what Coach Wooden said "If you're not making mistakes, then you're not doing anything. I'm positive that a doer makes mistakes."
When it comes to passing the CPA Exam, you want to be a "doer." That is a person who makes good things happen that can bring about improvement. Yeah, I can give you questions that you can get right ("What is two plus two? What is the name of the ocean off the coast of Virginia?") but what good is that? That doesn't stretch you; that doesn't make you better; that doesn't add points; that doesn't lead to improvement. I'd rather ask "how do you go about accounting for a derivative?" and, if you miss it, then you can learn something.
Don't worry about mistakes.
Don't worry about missing questions.
Don't let yourself get discouraged.
The whole game is about pushing forward and getting better.
BE A DOER!!
(7) - Practice
FAR
How do you go about accounting for a derivative?
A - All derivatives are recorded as assets at fair value
B - Derivatives are not reported on a company's balance sheet.
C - All derivatives are recorded as liabilities at fair value
D - All derivatives are reported as either assets or liabilities at fair value
Answer is D
Derivatives are financial instruments that derive their value from some other security or index. For example, a contract to buy gold at a specific point in the future at a specified price is a derivative because its value will be based on the market price of gold. If the price of gold rises, the contract has a positive value (you can buy the gold for less than its market price). If the price of gold falls, the contract has a negative value (you must pay more than market price for the gold). All derivatives (no exceptions) are carried on the balance sheet as either assets (positive value) or liabilities (negative value) at fair value.
BEC
The Tazem Company delivers donuts throughout the city of Chicago every day during the year to various outlets. The company has one truck and it was driven for 76,650 miles during the most recent year. On the average, the company delivered 720 dozen donuts per day. The company estimates that the cost of driving its truck for one mile is $.38. In setting its prices, what cost should the company use for delivering one dozen donuts?
A - $.1108
B - $.1288
C - $.1358
D - $.1478
Answer is A
The total delivery cost for the year is 76,650 miles times $.38 per mile or $29,127. The total number of dozen donuts delivered this year is 720 times 365 days or 262,800. If it cost the company $29,127 to deliver 262,800 dozen donuts, that is $.1108 per dozen.
Auditing and Attestation
The CPA firm of Donovan and Dempsey is auditing the financial statements for the Wynklin Corporation The auditors have decided to qualify the audit report for the current year because not enough evidence could be obtained to substantiate the balance reported for inventory. The CPA firm is also auditing the financial statements of Salander Corporation. The auditors have decided to qualify the audit report for the current year because the inventory account contains a material misstatement. Which of the following statements is not true?
A - The introductory paragraph for both reports will not be affected by these problems.
B - The score paragraph for both reports will need to be changed to reflect the problems.
C - The opinion paragraph for both reports will need to be changed to reflect the problems.
D - An explanatory paragraph will be added in both cases just before the opinion paragraph.
Answer is B
In qualified opinions, the introductory paragraphs are not changed. However, in both cases, an explanatory paragraph is added between the score paragraph and the opinion paragraph and the wording of the opinion paragraph is changed because of the qualification. In a scope qualification (such as with the Wynklin audit), the scope paragraph must also be changed. With a departure from GAAP (such as with the Salander audit), the scope paragraph is not affected.
Regulation
In Year One, Mr. and Mrs. Rothchild filed their federal income tax return. They had only salary income of $63,700. They had one itemized deduction, state income tax payments, of $7,200. Since that amount was larger than the standard deduction of $6,300, they subtracted the itemized deduction. In Year Two, they received a cash refund of $1,200 from the filing of their Year One state income tax return. Which of the following is true?
A - The $1,200 should be recognized as an addition to taxable income in Year Two.
B - $900 should be recognized as an addition to taxable income in Year Two.
C - The Year One tax return should be amended to report the standard deduction rather than the itemized deduction.
D - The refund causes no tax effect on either Year One or Year Two.
Answer is B
Under normal conditions, if itemized deductions are taken in one year but a state income tax refund is received in the following year, the refund is reported as income in that second year. However, here, the refund drops the tax benefit of the payments from $7,200 to $6,000 which is lower than the standard deduction amount. That creates less benefit than they are entitled to receive. So, the income to be recognized in Year Two is only the amount that reduces the benefit from $7,200 to $6,300. That $900 is income in the year received.
Have a great week - it is supposed to get to 104 degrees here in Richmond, Virginia today. That makes it a good day to stay inside and study!!!
Be a doer!!!
Joe Hoyle
Co-Founder
CPA Review for FREE
www.CPAreviewforFREE.com
Sunday, June 27, 2010
Thursday, June 17, 2010
Chase A Few Dreams
Try us FIRST before you spend your hard-earned money.
June 15, 2010
CPA Review for FREE
www.CPAreviewforFREE.com
Over 2,100 FREE CPA Review Questions and Answers Available for YOU
102 Weeks of Operation and 12,722,785 Page Views (without a penny spent on marketing)
Lesson 73
From: Joe
(a) - We have readers from around the world so I want to tell everyone who is following the World Cup: I hope your team goes all the way!! (You want them to win and they want you to pass the CPA Exam - seems like a fair trade.) I only wish I had a vuvuzela to use to cheer you on.
(1) - Nice email that I just got a few minutes ago. This is exactly what I want to hear from you. This note comes from S. D. "I want to thank all of your staff for building such a wonderful portal for all CPA candidates. I was initially using a well known review provider but they were not updated on most of the latest topics. I used your materials and got through the toughest parts of the exam. Again I thank you all for helping me become a CPA."
Yeah, that's a problem with those other courses - they charge you a lot of money and still are not well updated. You pay a lot for material that is mediocre at best and then blame yourself when you don't pass.
--OUR goal is to get you through the CPA Exam.
--THEIR goal is to get your money from your pocket into their pocket.
And, here's another note from a few days ago-another winner!!!! "I got my FAR score today. I got 80! Thanks for your great website, I would not be able to do well without it! I will notify other scores as soon as I receive them. Once again THANK YOU!"
(2) - Remember, if you want, that you can download all of our questions and answers for a small fee so that you can study 24/7 and not just when you are online. Just go to www.CPAreviewforFREE.com and click on "Store" in the upper right-hand corner. However, of course, the questions are always free and available on line.
(3) - As most of you probably know, we have a Facebook page (just search for CPAreviewforFREE and it'll pop up). A couple of days ago a person wrote in on Facebook to ask what percentage of the questions he should be getting correct to feel comfortable as he studied. That's a common question - people are tense and want some assurance that they are going to make it.
My response was the same one that I have given to this question since I first started in CPA review in 1980. On the CPA Exam some of the questions are relatively simple. You look at it and you wonder if you are misreading it because you automatically know the answer. Other questions are harder - some are almost impossibly hard. It is a wide-ranging test.
Here is my advice. If you are looking at a relatively easy question, you probably need to get 90 percent of those correct. You have to stay focused so that you don't make careless errors. It is easy to throw away points by missing questions that are easy. There is something about seeing an easy question that makes you stop paying close attention to it. You start thinking about what comes next. So, for the easy questions, I would want you to get close to 100 percent of them right - but let's say 90 percent. I think that is a "passing goal."
The other questions, though, are harder-often extremely hard. Obviously, if you just guess randomly you should get 25 percent of the remaining multiple-choice questions. You clearly need to do better than that. My goal, if I were taking the exam again at the current time, would be to shoot for 60 percent of the hard questions correct. Oh, it would be nice to get 90 percent of these right also but I doubt that is a reasonable goal for most of us. As I always say, I just want you to pass; I don't need for you to seek perfection. I think getting 60 percent of the tough questions would probably get you to a grade of about 75.
90 percent of the relatively easy questions
60 percent of the relatively hard questions
--I think that is a good benchmark
--And, I think it is something that you can do with enough time and effort.
--Yeah, you may have to fight for every possible point. You may have to work and think and try to squeeze out a point here and there.
--But, there is no reason why you cannot get 90 percent of the easy ones and 60 percent of the hard ones.
Go for it!!!
(4) - I got a note from a candidate (A. E.) a few days ago who said something like "I passed the CPA Exam using www.CPAreviewforFREE.com and I'm going to unsubscribe to the email lessons now but I just couldn't leave without saying thanks." As always, the kind words are very much appreciated.
We are delighted for you to stay on our subscription list forever. Delighted to have you. However, like A. E. who wrote in, you certainly have the right to unsubscribe. She had passed and was ready to move on. Wonderful!!! I was proud of her. So, please know that you can stay with us or you can unsubscribe whenever you wish. Just scroll to the bottom of any email lesson and click on the appropriate link.
(5) - I was driving through Williamsburg a couple of days ago, one of the real homes of American freedom. At the time, I was listening to one of my favorite songs on my iPod-"Virginia" by a singer named Page Wilson. (Of course, I have lived in the state of Virginia since 1976 so I am biased toward the state.) The song has one line that I like especially when the singer is talking about life: "in the end, it's just a gamble; at least you chased a few dreams."
I think people ought to chase more dreams. Life becomes too ho-hum without some dreams to chase. I like chasing dreams even if I don't really expect to catch them. (That is probably why I put $2 on the lottery every week.)
What are your dreams? What dreams are you chasing at the moment?
I think that is a great question to ask yourself - and demand a serious answer.
Here at www.CPAreviewforFREE.com, we have one overriding dream. We would like, within a couple of more years, for every single person in the entire world who takes the CPA Exam to use our questions and answers to help them pass. I think that is a great goal and one that deserves to be chased. And, I see no reason why it cannot happen.
But that is our goal-what is your goal? Why dreams are you chasing?
Obviously, I hope that one of your top dreams is passing the CPA Exam. If it is a real dream of yours, that alone will give you the energy and courage needed to do the work.
--If you view this whole process as drudgery, it is awfully hard to do the work necessary.
--If you are really not enthusiastic about passing, it is hard to get up the excitement needed to push forward.
--If the CPA Exam for you is more of a nightmare than a dream, you are going to have troubles. No one chases nightmares.
I want passing the CPA Exam to be a dream that you chase. I want passing the CPA Exam to be a desire that burns in your belly. I want this to be real to you.
All over the world, people recognize what it means to pass the CPA Exam. Many people major in accounting but only a few make it all the way through the CPA Exam. It is the pinnacle of the profession. It is the Mt. Everest of accounting. If you are an accountant, passing the CPA Exam really should be a dream that you chase.
In life, attitude is everything.
If you have dreams to chase, you'll be surprised by how many of them you eventually catch and you'll have a wonderful life chasing them.
(6) - When I wrote the line above "In life, attitude is everything" I was reminded of a story that I have told before. My uncle used to tell me about joining the Marines in World War II and being sent to Parris Island, South Carolina to train. He and all the young recruits were scared to death of the obstacle course they had to run there during training. It was supposed to be impossibly hard and it was all they could talk about-how much they dreaded it.
However, after they had all been there for several weeks, they would sneak out of the barracks in the middle of the night and go run the obstacle course just for fun. After a little practice, it went from impossibly hard to something they did for fun.
The only thing that changed was their attitude toward it. Many, many people start the CPA Exam with nothing but dread. But eventually the feeling will change. I cannot possibly tell you how many people over the years have told me (about half way through the exam) "I'm actually getting to enjoy learning this material. I never understood a lot of this stuff before but now as I work through these questions, it feels good to see how much I can learn. I hated it at first but, now, I don't mind studying for a couple of hours each night. It actually feels good."
Marine obstacle course.
CPA Exam.
Same thing (well, kind of).
Don't let your attitude ruin the experience. If you tell yourself that you are going to be miserable and will only study under pain of death, then you are going to have a terrible time and probably fail. But, if you will tell yourself, I'm chasing a dream, I'm adding points, I'm actually learning some interesting stuff, the chance of passing goes way up because you won't mind putting in the work.
It is not about the exam; it is about YOU and what kind of attitude you bring to the exam.
(7) - PRACTICE - Let's have some fun practicing on a couple of questions and adding a few points.
FAR
The Markoff Company buys inventory costing $11,000 from Montclair Corporation. Markoff plans to sell this merchandise for $19,000. The goods are shipping by Montclair on December 28, Year One and received by Markoff on January 3, Year Two. They were listed as FOB shipping point. Markoff uses a periodic inventory system and, on December 28, debited Purchases of Inventory for $11,000 and credited Accounts Payable for the same amount. Markoff failed to count this inventory when it took its December 31, Year One physical count because it had yet arrived. In making its Year One financial statements, which of the following is true for Markoff?
A - Liabilities on the balance sheet is understated by $8,000.
B - Retained earnings on the balance sheet is correctly stated.
C - Net income for the period is overstated by $11,000.
D - Net income for the period is understated by $11,000.
Answer is D
Because of the FOB point, the inventory belongs to Markoff at the end of the year and the journal entry that was recorded was appropriate. However, the inventory was not counted in determining the ending inventory balance. In a periodic system, cost of goods sold is calculated by taking beginning inventory and adding purchases and then subtracting ending inventory. Purchases (as well as accounts payable) are correct because of the entry that was made. Ending inventory, though, is understated because it was not included in the count. Ending inventory is too low and it is a subtraction so the resulting cost of goods sold is too high. Cost of goods sold is an expense so the resulting net income is too low by the $11,000 cost. Because net income is too low, retained earnings is also too low by the same amount.
Regulation
Skiba is a lawyer who does work for one of her clients in Year One. The invoice price for the work done was $2,000 but she agreed to accept shares of another company as payment in full. These shares had cost the client $600 when bought two years earlier as an investment but were worth $1,900 at the time of conveyance. In Year Two, Skiba sells the shares for $2,500 in cash. What gain does Skiba have for income tax purposes at the time of sale?
A - Zero
B - $500
C - $600
D - $2,500
Answer is C
When the shares are received, Skiba records the investment at its fair value of $1,900 and reports taxable revenue of $1,900. She did work and received compensation of $1,900-that is taxable revenue. The shares have a tax basis to her of $1,900 so that when sold for $2,500, she must report a gain for tax purposes of $600.
Auditing and Attestation
The CPA firm of Bryant and Rondo are auditing the financial statements of Rivers, Inc. The CPAs send out positive confirmations of a sample of the accounts receivable being reported by the client. One confirmation of $8,000 is returned from the Jackson Company indicating that the amount is correct. However, the confirmation was returned by fax. Which action is the CPA firm most likely to take?
A - Send another confirmation to Jackson.
B - Call Jackson to confirm that the confirmation was sent by the company.
C - Accept the confirmation and do nothing further.
D - Send another confirmation to a different company that owes approximately $8,000.
Answer is B
The confirmation sent by fax is okay but there needs to be follow up to provide more assurance that the fax was actually sent by the debtor company and came from the proper representative. Usually, the CPA will call and verify that the fax copy is appropriate and also ask for the original confirmation to be mailed so that it is held by the CPA.
BEC
Carmichael Corporation needs to raise $50 million for a major construction project. The company is trying to decide whether to issue bonds to raise this money or common stock. Which of the following is the most likely reason to issue the bonds rather than the stock?
A - There is less risk involved with the debt.
B - Interest is tax deductible whereas dividend distributions are not.
C - Earnings per share will go up and, hence, stock prices will rise.
D - Interest payments can be avoided but dividend payments cannot.
Answer is B
Creditors can force a company into bankruptcy and shareholders cannot so debt is viewed as a more risky method to raise funds. Bankruptcy is possible if interest and principal payments cannot be made when due. It is hard to predict what will happen to earnings per share because the interest drives the net income down but, hopefully, the additional revenue from the completed project will push net income up. However, that rise may not happen for a number of years, if at all. The cost of interest, though, is reduced because interest expense can be deducted from income for tax purposes but dividend payments cannot.
Have a great week - it is too hot to be outside so go somewhere cool and study (and add points)!!!
Joe Hoyle
Co-Founder
CPA Review for FREE
www.CPAreviewforFREE.com
June 15, 2010
CPA Review for FREE
www.CPAreviewforFREE.com
Over 2,100 FREE CPA Review Questions and Answers Available for YOU
102 Weeks of Operation and 12,722,785 Page Views (without a penny spent on marketing)
Lesson 73
From: Joe
(a) - We have readers from around the world so I want to tell everyone who is following the World Cup: I hope your team goes all the way!! (You want them to win and they want you to pass the CPA Exam - seems like a fair trade.) I only wish I had a vuvuzela to use to cheer you on.
(1) - Nice email that I just got a few minutes ago. This is exactly what I want to hear from you. This note comes from S. D. "I want to thank all of your staff for building such a wonderful portal for all CPA candidates. I was initially using a well known review provider but they were not updated on most of the latest topics. I used your materials and got through the toughest parts of the exam. Again I thank you all for helping me become a CPA."
Yeah, that's a problem with those other courses - they charge you a lot of money and still are not well updated. You pay a lot for material that is mediocre at best and then blame yourself when you don't pass.
--OUR goal is to get you through the CPA Exam.
--THEIR goal is to get your money from your pocket into their pocket.
And, here's another note from a few days ago-another winner!!!! "I got my FAR score today. I got 80! Thanks for your great website, I would not be able to do well without it! I will notify other scores as soon as I receive them. Once again THANK YOU!"
(2) - Remember, if you want, that you can download all of our questions and answers for a small fee so that you can study 24/7 and not just when you are online. Just go to www.CPAreviewforFREE.com and click on "Store" in the upper right-hand corner. However, of course, the questions are always free and available on line.
(3) - As most of you probably know, we have a Facebook page (just search for CPAreviewforFREE and it'll pop up). A couple of days ago a person wrote in on Facebook to ask what percentage of the questions he should be getting correct to feel comfortable as he studied. That's a common question - people are tense and want some assurance that they are going to make it.
My response was the same one that I have given to this question since I first started in CPA review in 1980. On the CPA Exam some of the questions are relatively simple. You look at it and you wonder if you are misreading it because you automatically know the answer. Other questions are harder - some are almost impossibly hard. It is a wide-ranging test.
Here is my advice. If you are looking at a relatively easy question, you probably need to get 90 percent of those correct. You have to stay focused so that you don't make careless errors. It is easy to throw away points by missing questions that are easy. There is something about seeing an easy question that makes you stop paying close attention to it. You start thinking about what comes next. So, for the easy questions, I would want you to get close to 100 percent of them right - but let's say 90 percent. I think that is a "passing goal."
The other questions, though, are harder-often extremely hard. Obviously, if you just guess randomly you should get 25 percent of the remaining multiple-choice questions. You clearly need to do better than that. My goal, if I were taking the exam again at the current time, would be to shoot for 60 percent of the hard questions correct. Oh, it would be nice to get 90 percent of these right also but I doubt that is a reasonable goal for most of us. As I always say, I just want you to pass; I don't need for you to seek perfection. I think getting 60 percent of the tough questions would probably get you to a grade of about 75.
90 percent of the relatively easy questions
60 percent of the relatively hard questions
--I think that is a good benchmark
--And, I think it is something that you can do with enough time and effort.
--Yeah, you may have to fight for every possible point. You may have to work and think and try to squeeze out a point here and there.
--But, there is no reason why you cannot get 90 percent of the easy ones and 60 percent of the hard ones.
Go for it!!!
(4) - I got a note from a candidate (A. E.) a few days ago who said something like "I passed the CPA Exam using www.CPAreviewforFREE.com and I'm going to unsubscribe to the email lessons now but I just couldn't leave without saying thanks." As always, the kind words are very much appreciated.
We are delighted for you to stay on our subscription list forever. Delighted to have you. However, like A. E. who wrote in, you certainly have the right to unsubscribe. She had passed and was ready to move on. Wonderful!!! I was proud of her. So, please know that you can stay with us or you can unsubscribe whenever you wish. Just scroll to the bottom of any email lesson and click on the appropriate link.
(5) - I was driving through Williamsburg a couple of days ago, one of the real homes of American freedom. At the time, I was listening to one of my favorite songs on my iPod-"Virginia" by a singer named Page Wilson. (Of course, I have lived in the state of Virginia since 1976 so I am biased toward the state.) The song has one line that I like especially when the singer is talking about life: "in the end, it's just a gamble; at least you chased a few dreams."
I think people ought to chase more dreams. Life becomes too ho-hum without some dreams to chase. I like chasing dreams even if I don't really expect to catch them. (That is probably why I put $2 on the lottery every week.)
What are your dreams? What dreams are you chasing at the moment?
I think that is a great question to ask yourself - and demand a serious answer.
Here at www.CPAreviewforFREE.com, we have one overriding dream. We would like, within a couple of more years, for every single person in the entire world who takes the CPA Exam to use our questions and answers to help them pass. I think that is a great goal and one that deserves to be chased. And, I see no reason why it cannot happen.
But that is our goal-what is your goal? Why dreams are you chasing?
Obviously, I hope that one of your top dreams is passing the CPA Exam. If it is a real dream of yours, that alone will give you the energy and courage needed to do the work.
--If you view this whole process as drudgery, it is awfully hard to do the work necessary.
--If you are really not enthusiastic about passing, it is hard to get up the excitement needed to push forward.
--If the CPA Exam for you is more of a nightmare than a dream, you are going to have troubles. No one chases nightmares.
I want passing the CPA Exam to be a dream that you chase. I want passing the CPA Exam to be a desire that burns in your belly. I want this to be real to you.
All over the world, people recognize what it means to pass the CPA Exam. Many people major in accounting but only a few make it all the way through the CPA Exam. It is the pinnacle of the profession. It is the Mt. Everest of accounting. If you are an accountant, passing the CPA Exam really should be a dream that you chase.
In life, attitude is everything.
If you have dreams to chase, you'll be surprised by how many of them you eventually catch and you'll have a wonderful life chasing them.
(6) - When I wrote the line above "In life, attitude is everything" I was reminded of a story that I have told before. My uncle used to tell me about joining the Marines in World War II and being sent to Parris Island, South Carolina to train. He and all the young recruits were scared to death of the obstacle course they had to run there during training. It was supposed to be impossibly hard and it was all they could talk about-how much they dreaded it.
However, after they had all been there for several weeks, they would sneak out of the barracks in the middle of the night and go run the obstacle course just for fun. After a little practice, it went from impossibly hard to something they did for fun.
The only thing that changed was their attitude toward it. Many, many people start the CPA Exam with nothing but dread. But eventually the feeling will change. I cannot possibly tell you how many people over the years have told me (about half way through the exam) "I'm actually getting to enjoy learning this material. I never understood a lot of this stuff before but now as I work through these questions, it feels good to see how much I can learn. I hated it at first but, now, I don't mind studying for a couple of hours each night. It actually feels good."
Marine obstacle course.
CPA Exam.
Same thing (well, kind of).
Don't let your attitude ruin the experience. If you tell yourself that you are going to be miserable and will only study under pain of death, then you are going to have a terrible time and probably fail. But, if you will tell yourself, I'm chasing a dream, I'm adding points, I'm actually learning some interesting stuff, the chance of passing goes way up because you won't mind putting in the work.
It is not about the exam; it is about YOU and what kind of attitude you bring to the exam.
(7) - PRACTICE - Let's have some fun practicing on a couple of questions and adding a few points.
FAR
The Markoff Company buys inventory costing $11,000 from Montclair Corporation. Markoff plans to sell this merchandise for $19,000. The goods are shipping by Montclair on December 28, Year One and received by Markoff on January 3, Year Two. They were listed as FOB shipping point. Markoff uses a periodic inventory system and, on December 28, debited Purchases of Inventory for $11,000 and credited Accounts Payable for the same amount. Markoff failed to count this inventory when it took its December 31, Year One physical count because it had yet arrived. In making its Year One financial statements, which of the following is true for Markoff?
A - Liabilities on the balance sheet is understated by $8,000.
B - Retained earnings on the balance sheet is correctly stated.
C - Net income for the period is overstated by $11,000.
D - Net income for the period is understated by $11,000.
Answer is D
Because of the FOB point, the inventory belongs to Markoff at the end of the year and the journal entry that was recorded was appropriate. However, the inventory was not counted in determining the ending inventory balance. In a periodic system, cost of goods sold is calculated by taking beginning inventory and adding purchases and then subtracting ending inventory. Purchases (as well as accounts payable) are correct because of the entry that was made. Ending inventory, though, is understated because it was not included in the count. Ending inventory is too low and it is a subtraction so the resulting cost of goods sold is too high. Cost of goods sold is an expense so the resulting net income is too low by the $11,000 cost. Because net income is too low, retained earnings is also too low by the same amount.
Regulation
Skiba is a lawyer who does work for one of her clients in Year One. The invoice price for the work done was $2,000 but she agreed to accept shares of another company as payment in full. These shares had cost the client $600 when bought two years earlier as an investment but were worth $1,900 at the time of conveyance. In Year Two, Skiba sells the shares for $2,500 in cash. What gain does Skiba have for income tax purposes at the time of sale?
A - Zero
B - $500
C - $600
D - $2,500
Answer is C
When the shares are received, Skiba records the investment at its fair value of $1,900 and reports taxable revenue of $1,900. She did work and received compensation of $1,900-that is taxable revenue. The shares have a tax basis to her of $1,900 so that when sold for $2,500, she must report a gain for tax purposes of $600.
Auditing and Attestation
The CPA firm of Bryant and Rondo are auditing the financial statements of Rivers, Inc. The CPAs send out positive confirmations of a sample of the accounts receivable being reported by the client. One confirmation of $8,000 is returned from the Jackson Company indicating that the amount is correct. However, the confirmation was returned by fax. Which action is the CPA firm most likely to take?
A - Send another confirmation to Jackson.
B - Call Jackson to confirm that the confirmation was sent by the company.
C - Accept the confirmation and do nothing further.
D - Send another confirmation to a different company that owes approximately $8,000.
Answer is B
The confirmation sent by fax is okay but there needs to be follow up to provide more assurance that the fax was actually sent by the debtor company and came from the proper representative. Usually, the CPA will call and verify that the fax copy is appropriate and also ask for the original confirmation to be mailed so that it is held by the CPA.
BEC
Carmichael Corporation needs to raise $50 million for a major construction project. The company is trying to decide whether to issue bonds to raise this money or common stock. Which of the following is the most likely reason to issue the bonds rather than the stock?
A - There is less risk involved with the debt.
B - Interest is tax deductible whereas dividend distributions are not.
C - Earnings per share will go up and, hence, stock prices will rise.
D - Interest payments can be avoided but dividend payments cannot.
Answer is B
Creditors can force a company into bankruptcy and shareholders cannot so debt is viewed as a more risky method to raise funds. Bankruptcy is possible if interest and principal payments cannot be made when due. It is hard to predict what will happen to earnings per share because the interest drives the net income down but, hopefully, the additional revenue from the completed project will push net income up. However, that rise may not happen for a number of years, if at all. The cost of interest, though, is reduced because interest expense can be deducted from income for tax purposes but dividend payments cannot.
Have a great week - it is too hot to be outside so go somewhere cool and study (and add points)!!!
Joe Hoyle
Co-Founder
CPA Review for FREE
www.CPAreviewforFREE.com
Monday, June 7, 2010
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Lesson 72
From: Joe
(1) – Nice note that came in a day or so ago from DA: “I'm glad you mentioned that the questions on your site can be worked on smart phones. I just discovered it myself recently as I was preparing for Audit. That is HUGE!! I can practice anywhere I can get service! No excuses!”
And one from HA: “Thank you! I passed AUDIT 82! I love this feeling of sending an e-mail to let you know how much I appreciate you. I am so fortunate to have come across your free website. I want all the CPA candidates in the world to know about this wonderful web site and want them to experience how I feel. I feel great! Joe, your questions and explanations are the best to put things together to provide me with the whole picture; your explanation helps me to understand the concept which I am then able to apply. So, you set me free from suffering from the vast amount of memorization and being overwhelmed. Thank you. I passed REG and BEC last time by studying your website. Unfortunately, I failed FARE 71 this time. But, I know I can pass FARE my next attempt as long as I practice your questions! Thanks for motivating me and .. helping me " NOT TO GIVE UP." Finally, I feel I am close to accomplishing my goal... it has been about 15 years. Again, thanks very very much.”
I love getting emails like these. This second person came in after struggling in the past and used our website and passed three and needs only four more points to pass that last exam. This is just great!!!
And, you can be the next – get to work and get those points and go do it!!
(2) – Okay, let’s assume you come to me and say “I want to pass the first part of the exam in 5-6 weeks from right now. I want to try my very best to pass this first part without spending a penny. I have a job and a family but I’m willing to put in 1-3 hours each evening. If I fail, I may do something different next time but, first, I want to try to do it quick and dirty and free. What would you recommend? I want to pass the first part in 5-6 weeks, I can spend 1-3 hours per day, and I want to keep my money for my spouse and kids. I don’t need to make 99 or even 76; I just want to make 75.”
Fair question – in fact, I’m surprised that I don’t get asked this question more: the quick and dirty and free approach to passing.
--Pick the part of the exam that you like best.
--Start by trying to work 30 questions each day at www.CPAreviewforFREE.com. If it turns out that you don’t have time for 30, pick some other daily goal that is reasonable for you: 25 or 20, for example.
--When studying, never guess at the answer. Read the question carefully. If you think you can get the answer, go for it.
--Read through the answer carefully. If you got the question right, move on. Don’t dwell on success. If you missed the question, write down 10 words or less that should give you a better chance to get the answer correct the next time. That’s how you add points and “adding points” is the name of the game.
--Get a supportive friend or your spouse or even a parent to play the role of your parental advisor. Lots of friends want to help—give one of the them a chance to do that. Every night when you get finished studying, email this “parental advisor” with the number of questions you did during that day. “Did 32 today” for example– keep it short. There is something about having to report your progress to a parental figure that will make you work harder.
--Ask your parental advisor to respond to every one of these emails but with just a few words. If you managed to hit your daily goal, the person should write back some congratulations. “Wonderful, I knew you could do it.” “That’s the way to make 75.” “Not easy but you made it.” “I’m very proud of you.”
--If you were not able to hit your daily goal, ask the parent to give you some support/encouragement. “you are making progress; you’ll get there,” “don’t get down, we all know you can do it,” “look for those open moments during the day when you can get a question done,” “try to work just a little harder tomorrow.” That kind of encouragement can be ever so helpful.
--If you’ll follow this regiment, you can work all of the questions in a section of www.CPAreviewforFREE.com TWICE in roughly five weeks. There’s obviously no guarantee but if you work all the questions twice in a fairly short period of time and take a few notes to help you add points, I think you’ve got a wonderful chance to make 75 and get on to the next part WITHOUT SPENDING ANY MONEY.
(3) – I send out these emails about every 7 to 10 days to nearly 13,500 accountants around the world. Please feel free to stay on the list just as long as you want. I’ve been writing these emails, off and on now, for about a dozen years – I’m pretty sure I can go for another dozen. However, if you are ever ready to unsubscribe, scroll to the bottom of the page and click on the appropriate link.
(4) – Went to a movie a few days ago about one of my favorite artist: Vincent van Gogh. Absolutely beautiful work – unbelievable, what a wonderful talent. However, one of the things that I found the most interesting was that van Gogh painted around 900 paintings but only managed to sell one. Of course, these same paintings now sell for tens of millions but when he was alive and working, 899 out of 900 (.999) of his work no one wanted to buy. What a horrible batting average.
Think how discouraging that must have been. He did all that work and no one thought the results were worth buying. What would you have done?
In such cases, most people would have given up and assumed they were wasting their time. Fortunately, van Gogh did not give up and our world is richer for his persistence.
When you are studying for the CPA Exam, you’ll often hit patches were you will miss a lot of questions (although I’m not sure any of us will ever miss .999 of the questions we work). As you probably already know, it is really easy to get discouraged and decide that you are wasting your time. It is always easy to push yourself forward when you are getting positive results. If you get question after question right, everyone enjoys doing the work—keeping going is easy. There is no challenge to that.
However, the real test of what we are made of is when we miss a question and then miss another question and then another. It is so easy to get discouraged quickly—that is just human nature. It takes a really tough person to hang in there. That is one of the reasons that I stress so often that the goal is not to focus on where you are at right now but to concentrate on adding points. If you try three questions and get them all correct, you are probably not adding any points. If you try three questions and miss them all, you have a wonderful opportunity to add some points, to get better, to get closer to passing.
I know how hard it is, though, to keep a positive attitude when everything seems negative. That alone may be the single biggest reason why 50 percent of the people fail each of the four parts of the CPA Exam. It is hard to keep pushing when the results are not positive.
So, when you get up in the morning, you have to start out with a push. Start with the right attitude.
--I’m going to add some points today.
--I’m going to work 30 questions today and read those answers carefully.
--I’m going to learn from my mistakes and not get discouraged.
--I’m going to find spare moments when I can work a question or two.
--I can pass and I am going to pass.
In life and the CPA Exam, success is all about attitude. Go for it – you can do it!!!
(5) – Speaking of doing some questions, let’s practice a bit – here’s where you can add a point or two right now.
FAR
The Hammerstein Company produces a balance sheet. Within stockholders’ equity is a rather large figure reported as accumulated other comprehensive income. Which of the following could NOT have led to this recognition?
A. Hammerstein has a subsidiary in Japan which uses the yen as its functional currency.
B. Hammerstein has invested in a bond that was issued at a discount from its face value and is reported as a trading security.
C. Hammerstein bought shares of another company several years ago that are being reported as available for sale.
D. Hammerstein has a defined benefit pension plan where the projected benefit obligation was just increased as a result of an amendment in the plan contract.
Answer is B
Accumulated other comprehensive income is used to recognize specific income effects that are reported but not included within net income. Three of the most common sources of this reporting are foreign currency translation of the statements of a subsidiary in another country, the gains and losses in the value of investments reported as available for sale, and changes in the projected benefit obligation of a defined benefit plan because of contractual adjustments (known as a prior service cost). However, the reporting of an investment classified as a trading security only affects net income and does not impact other comprehensive income.
Regulation
Milano Corporation buys land for $34,000 from John and Susan Orteland. The president of Milano hands them a check for the appropriate amount. Which of the following is true about a check?
A – A check is a promise to pay a certain amount.
B – A check is a written order for the payment of money.
C – A check is the equivalent of an IOU.
D – A check indicates that payment will be made upon the completion of specified actions.
Answer is B
A check is an order to a bank to make cash payment of the amount specified. The Ortelands can take the check they have received and go to the bank on which it is written and receive the $34,000 (assuming that amount of money is held in the appropriate account).
BEC
Company officials for Lastinaff, Inc. are thinking about buying a machine for $300,000 that has a ten-year life and no salvage value. Ignoring any tax effects, they expect this machine to generate net income for the company of $50,000 per year. In deciding whether to make this investment, what is the best estimation of the payback period?
A – 3.75 years
B – 4.50 years
C – 5.00 years
D – 6.00 years
Answer is A
The payback period is the time that it takes a company to generate cash inflows equal to its investment. The quicker the payback period is the better the investment is. If cash is generated evenly over time, the payback period is the cost of the asset divided by the annual cash inflow. Here, the company makes a profit of $50,000 each year. However, depreciation expense is a noncash expense that is subtracted to arrive at this net income. Assuming straight-line depreciation (by far the most common method used in the business community), annual depreciation is $30,000 ($300,000/10 years). Cash revenues and expenses minus noncash revenues and expenses give net income. If the noncash depreciation is $30,000 and net income is $50,000, then the cash revenues and expenses net to $80,000 per year from the machine. The payback period is $300,000 divided by $80,000 or 3.75 years.
Auditing
Jane Simpson works for Shadowline Corporation and is paid $30 per hour. She typically works 28 hours per week but always reports that she works 32 hours per week so that she can receive additional wages from the company. Which of the following internal control activities is most likely to prevent this type of theft?
A – The company’s payroll program is tested each month with test data to ensure that it operates properly.
B – A separate paymaster delivers the checks each pay period to Jane Simpson after verifying her identity.
C – The supervisor for Jane Simpson must review her time sheet each period and indicate approval.
D – Any paychecks that are printed but not picked up must be turned over to an independent group for subsequent handling.
Answer is C
Each of these four is an internal control activity frequently found in a company’s payroll system. However, they are each designed to prevent or discover frauds of a specific type. Here, the problem is extra hours claimed by an employee so that unearned money can be received. Test data is used to verify that the payroll program is working as intended. The paymaster hands out checks to make certain that checks are being prepared for actual individuals who work for the company. That is also the case for following up on checks that are not claimed at the appropriate time. The approval by the supervisor is correct here because the supervisor is the person most likely to know how many hours the employee actually did work. That person is in a position to verify that the number of hours listed is correct.
Have a great week. Remember 30 questions per day is a great pace as you get started working to pass the CPA Exam.
Joe Hoyle
Co-Founder
CPA Review for FREE
www.cpareviewforfree.com
100 Weeks of Operation and 12,388,928 Page Views (without a penny spent on marketing)
Lesson 72
From: Joe
(1) – Nice note that came in a day or so ago from DA: “I'm glad you mentioned that the questions on your site can be worked on smart phones. I just discovered it myself recently as I was preparing for Audit. That is HUGE!! I can practice anywhere I can get service! No excuses!”
And one from HA: “Thank you! I passed AUDIT 82! I love this feeling of sending an e-mail to let you know how much I appreciate you. I am so fortunate to have come across your free website. I want all the CPA candidates in the world to know about this wonderful web site and want them to experience how I feel. I feel great! Joe, your questions and explanations are the best to put things together to provide me with the whole picture; your explanation helps me to understand the concept which I am then able to apply. So, you set me free from suffering from the vast amount of memorization and being overwhelmed. Thank you. I passed REG and BEC last time by studying your website. Unfortunately, I failed FARE 71 this time. But, I know I can pass FARE my next attempt as long as I practice your questions! Thanks for motivating me and .. helping me " NOT TO GIVE UP." Finally, I feel I am close to accomplishing my goal... it has been about 15 years. Again, thanks very very much.”
I love getting emails like these. This second person came in after struggling in the past and used our website and passed three and needs only four more points to pass that last exam. This is just great!!!
And, you can be the next – get to work and get those points and go do it!!
(2) – Okay, let’s assume you come to me and say “I want to pass the first part of the exam in 5-6 weeks from right now. I want to try my very best to pass this first part without spending a penny. I have a job and a family but I’m willing to put in 1-3 hours each evening. If I fail, I may do something different next time but, first, I want to try to do it quick and dirty and free. What would you recommend? I want to pass the first part in 5-6 weeks, I can spend 1-3 hours per day, and I want to keep my money for my spouse and kids. I don’t need to make 99 or even 76; I just want to make 75.”
Fair question – in fact, I’m surprised that I don’t get asked this question more: the quick and dirty and free approach to passing.
--Pick the part of the exam that you like best.
--Start by trying to work 30 questions each day at www.CPAreviewforFREE.com. If it turns out that you don’t have time for 30, pick some other daily goal that is reasonable for you: 25 or 20, for example.
--When studying, never guess at the answer. Read the question carefully. If you think you can get the answer, go for it.
--Read through the answer carefully. If you got the question right, move on. Don’t dwell on success. If you missed the question, write down 10 words or less that should give you a better chance to get the answer correct the next time. That’s how you add points and “adding points” is the name of the game.
--Get a supportive friend or your spouse or even a parent to play the role of your parental advisor. Lots of friends want to help—give one of the them a chance to do that. Every night when you get finished studying, email this “parental advisor” with the number of questions you did during that day. “Did 32 today” for example– keep it short. There is something about having to report your progress to a parental figure that will make you work harder.
--Ask your parental advisor to respond to every one of these emails but with just a few words. If you managed to hit your daily goal, the person should write back some congratulations. “Wonderful, I knew you could do it.” “That’s the way to make 75.” “Not easy but you made it.” “I’m very proud of you.”
--If you were not able to hit your daily goal, ask the parent to give you some support/encouragement. “you are making progress; you’ll get there,” “don’t get down, we all know you can do it,” “look for those open moments during the day when you can get a question done,” “try to work just a little harder tomorrow.” That kind of encouragement can be ever so helpful.
--If you’ll follow this regiment, you can work all of the questions in a section of www.CPAreviewforFREE.com TWICE in roughly five weeks. There’s obviously no guarantee but if you work all the questions twice in a fairly short period of time and take a few notes to help you add points, I think you’ve got a wonderful chance to make 75 and get on to the next part WITHOUT SPENDING ANY MONEY.
(3) – I send out these emails about every 7 to 10 days to nearly 13,500 accountants around the world. Please feel free to stay on the list just as long as you want. I’ve been writing these emails, off and on now, for about a dozen years – I’m pretty sure I can go for another dozen. However, if you are ever ready to unsubscribe, scroll to the bottom of the page and click on the appropriate link.
(4) – Went to a movie a few days ago about one of my favorite artist: Vincent van Gogh. Absolutely beautiful work – unbelievable, what a wonderful talent. However, one of the things that I found the most interesting was that van Gogh painted around 900 paintings but only managed to sell one. Of course, these same paintings now sell for tens of millions but when he was alive and working, 899 out of 900 (.999) of his work no one wanted to buy. What a horrible batting average.
Think how discouraging that must have been. He did all that work and no one thought the results were worth buying. What would you have done?
In such cases, most people would have given up and assumed they were wasting their time. Fortunately, van Gogh did not give up and our world is richer for his persistence.
When you are studying for the CPA Exam, you’ll often hit patches were you will miss a lot of questions (although I’m not sure any of us will ever miss .999 of the questions we work). As you probably already know, it is really easy to get discouraged and decide that you are wasting your time. It is always easy to push yourself forward when you are getting positive results. If you get question after question right, everyone enjoys doing the work—keeping going is easy. There is no challenge to that.
However, the real test of what we are made of is when we miss a question and then miss another question and then another. It is so easy to get discouraged quickly—that is just human nature. It takes a really tough person to hang in there. That is one of the reasons that I stress so often that the goal is not to focus on where you are at right now but to concentrate on adding points. If you try three questions and get them all correct, you are probably not adding any points. If you try three questions and miss them all, you have a wonderful opportunity to add some points, to get better, to get closer to passing.
I know how hard it is, though, to keep a positive attitude when everything seems negative. That alone may be the single biggest reason why 50 percent of the people fail each of the four parts of the CPA Exam. It is hard to keep pushing when the results are not positive.
So, when you get up in the morning, you have to start out with a push. Start with the right attitude.
--I’m going to add some points today.
--I’m going to work 30 questions today and read those answers carefully.
--I’m going to learn from my mistakes and not get discouraged.
--I’m going to find spare moments when I can work a question or two.
--I can pass and I am going to pass.
In life and the CPA Exam, success is all about attitude. Go for it – you can do it!!!
(5) – Speaking of doing some questions, let’s practice a bit – here’s where you can add a point or two right now.
FAR
The Hammerstein Company produces a balance sheet. Within stockholders’ equity is a rather large figure reported as accumulated other comprehensive income. Which of the following could NOT have led to this recognition?
A. Hammerstein has a subsidiary in Japan which uses the yen as its functional currency.
B. Hammerstein has invested in a bond that was issued at a discount from its face value and is reported as a trading security.
C. Hammerstein bought shares of another company several years ago that are being reported as available for sale.
D. Hammerstein has a defined benefit pension plan where the projected benefit obligation was just increased as a result of an amendment in the plan contract.
Answer is B
Accumulated other comprehensive income is used to recognize specific income effects that are reported but not included within net income. Three of the most common sources of this reporting are foreign currency translation of the statements of a subsidiary in another country, the gains and losses in the value of investments reported as available for sale, and changes in the projected benefit obligation of a defined benefit plan because of contractual adjustments (known as a prior service cost). However, the reporting of an investment classified as a trading security only affects net income and does not impact other comprehensive income.
Regulation
Milano Corporation buys land for $34,000 from John and Susan Orteland. The president of Milano hands them a check for the appropriate amount. Which of the following is true about a check?
A – A check is a promise to pay a certain amount.
B – A check is a written order for the payment of money.
C – A check is the equivalent of an IOU.
D – A check indicates that payment will be made upon the completion of specified actions.
Answer is B
A check is an order to a bank to make cash payment of the amount specified. The Ortelands can take the check they have received and go to the bank on which it is written and receive the $34,000 (assuming that amount of money is held in the appropriate account).
BEC
Company officials for Lastinaff, Inc. are thinking about buying a machine for $300,000 that has a ten-year life and no salvage value. Ignoring any tax effects, they expect this machine to generate net income for the company of $50,000 per year. In deciding whether to make this investment, what is the best estimation of the payback period?
A – 3.75 years
B – 4.50 years
C – 5.00 years
D – 6.00 years
Answer is A
The payback period is the time that it takes a company to generate cash inflows equal to its investment. The quicker the payback period is the better the investment is. If cash is generated evenly over time, the payback period is the cost of the asset divided by the annual cash inflow. Here, the company makes a profit of $50,000 each year. However, depreciation expense is a noncash expense that is subtracted to arrive at this net income. Assuming straight-line depreciation (by far the most common method used in the business community), annual depreciation is $30,000 ($300,000/10 years). Cash revenues and expenses minus noncash revenues and expenses give net income. If the noncash depreciation is $30,000 and net income is $50,000, then the cash revenues and expenses net to $80,000 per year from the machine. The payback period is $300,000 divided by $80,000 or 3.75 years.
Auditing
Jane Simpson works for Shadowline Corporation and is paid $30 per hour. She typically works 28 hours per week but always reports that she works 32 hours per week so that she can receive additional wages from the company. Which of the following internal control activities is most likely to prevent this type of theft?
A – The company’s payroll program is tested each month with test data to ensure that it operates properly.
B – A separate paymaster delivers the checks each pay period to Jane Simpson after verifying her identity.
C – The supervisor for Jane Simpson must review her time sheet each period and indicate approval.
D – Any paychecks that are printed but not picked up must be turned over to an independent group for subsequent handling.
Answer is C
Each of these four is an internal control activity frequently found in a company’s payroll system. However, they are each designed to prevent or discover frauds of a specific type. Here, the problem is extra hours claimed by an employee so that unearned money can be received. Test data is used to verify that the payroll program is working as intended. The paymaster hands out checks to make certain that checks are being prepared for actual individuals who work for the company. That is also the case for following up on checks that are not claimed at the appropriate time. The approval by the supervisor is correct here because the supervisor is the person most likely to know how many hours the employee actually did work. That person is in a position to verify that the number of hours listed is correct.
Have a great week. Remember 30 questions per day is a great pace as you get started working to pass the CPA Exam.
Joe Hoyle
Co-Founder
CPA Review for FREE
www.cpareviewforfree.com
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