Over 2,100 FREE CPA Review Questions and Answers Available for YOU
112 Weeks of Operation and 15,534,135 Page Views (without a penny spent on marketing)
Lesson 79
From: Joe
(1) – Friday, on our Facebook.com page (CPAreviewforFREE), I issued the following challenge to all of our friends and fans. What interested me most was how many people wrote in to say they would make that commitment, they would accept my challenge of getting the CPA Exam passed by this time next year. I hereby put the same challenge out to you. Make that commitment!!! Do it now!!!
Facebook: “I want to challenge you (yes, YOU), right here today on 8/27/10, to make a commitment that you are going to finish the CPA exam in the next 12 months. You are going to pass it all. One year from today, I want you to write me and say ‘I am finished!’ It will take work, sacrifice and some serious self-discipline. But, the way you start to achieve this success is to make that commitment. Do it!! Today!! Right now!”
(2) – We had a huge week last week. We had (by far) our largest number of visitors and approximately 325,000 page views. We had visitors from 102 countries – I’m not sure I even knew there were that many countries. (Well, yeah, I really did.)
(3) – Why are we experiencing such rapid growth? Here are a couple of recent emails that I received that should explain this. Trust me, this is not an accident.
From JW: “Passed FAR with a 77. . . . After trying XXXX self-review software and XXXXXX flash cards, the time I spend answering questions on your site is truthfully the most valuable review I've done. I chose to use your site exclusively during my final exam preparation for FAR, because I knew I understood the material after working through the more complex questions.”
From JT: “Thank you so much for this excellent (FREE) website. The questions did a great job preparing me for the exam and the drill-down capabilities were fantastic, allowing me to work harder on the sections I wasn't as well-versed in. I sure am glad I didn’t waste $2,500 and 1,000 hours of my life studying with XXXXXX – I was able to pass all four parts of the exam, first try, with nothing more than this website and some year-old borrowed XXXXX books.”
(4) – Don’t forget that for a mere $15 per month you can access our on-line FAR content. Over 620 content slides. Why use a borrowed book that may be out of date? We will have the other three parts of the exam available very soon (over the next few weeks).
(5) – I am going to give you a piece of advice that most of those other big-name review courses are not giving. I guess the word on the street is to take BEC if you can in October or November before it is extended by 30 minutes and three written communications questions are added. There seems to be a flood of people rushing to take BEC before the end of 2010.
From my experience, most college graduates (even accounting majors) write pretty well. They know how to create a business letter or a memorandum. Okay, I don’t meet many Shakespeare's in accounting but you don’t have to be Shakespeare to write a business letter.
Remember, as long as a written communication question is “on topic,” the content is not graded—-only the use of the English language.
So, in looking at BEC, you have a choice:
--Take in 2010 – 100 percent of the grade is based on knowledge of content
--Take in 2011 – 85 percent of the grade is based on knowledge of content and 15 percent is based on the ability to use the English language properly.
I think most blanket advice is wrong and stupid. It seems to me that those of you who really write poorly (you know who you are) should take the BEC exam in 2010. However, those of you who write reasonably well (and, yes, you know who you are) might well prefer to wait until 2011 and take advantage of that writing skill.
Forget blanket advice. Think about which exam suits your skills and talents best.
(6) – I received an email from a dear friend a few days back. He ended it with a quote from John Wooden, the legendary UCLA basketball coach. Apparently, Wooden’s father gave him this advice when he was a small boy and it stuck with him throughout his adult life.
“Make each day your masterpiece.”
We spend a lot of time dwelling on the past.
We spend a lot of time planning for the future.
But when it comes down to accomplishing something, making something happen, the only day that actually counts is today. The only day where you can add points to your score is today. The only day that really makes any difference is today.
And, one of the absolutely great things about life is that every day is a new day. When you wake up each morning, you do have the chance to make that day your masterpiece. Even if yesterday was awful and a waste time, you can still make great use of today. You have the opportunity to make today a special day, one to remember – that one day when you knock it out of the park.
No matter how bad yesterday was—every new day provides the remarkable offer of a new chance.
Even if you didn’t add a single point yesterday; you can still add them today.
I know that you can’t climb Mt. Everest every day or create a new invention every day but you can make the most of the time you are given.
In a basketball game, if a team is behind at halftime by a lot of points, the coach will invariably explain to the team that they cannot catch up all at once. They have to work slowly to catch up, one minute or one possession at a time.
No matter how far behind you are – you can start catching up today.
It seems to me that people who truly succeed:
--Learn from the past
--Plan for the future
--Focus on today.
When you got up this morning, what did you focus on?
Did you focus on having a great day where you could get in some serious study for the CPA Exam?
Or, did you whine about another defeated day?
If you expect defeat, you will get it.
But, if you expect to create a masterpiece, you have taken the very important first step to getting there.
(7) – As our lawyers always tell us – “remind your subscribers that they have the right to unsubscribe from these free email lessons whenever they wish. Tell them that they can just scroll to the bottom of the lesson and we have included a link that allows them to easily and quickly unsubscribe.”
Don’t you love lawyers?
(8) – Practice – let’s create a masterpiece.
FAR
A company owes a bank $1 million on a long-term loan that comes due on July 2, Year Two. The company is currently preparing a December 31, Year One, balance sheet that will be issued on February 17, Year Two. On January 3, Year Two, the company refinanced this entire debt with the bank by signing for a debt that will not come due until 2019. How is the original debt reported on the December 31, Year One balance sheet?
A – As a current liability under US GAAP but as a noncurrent liability under IFRS.
B – As a noncurrent liability under US GAAP but as a current liability under IFRS.
C – As a current liability under both US GAAP and IFRS.
D – As a noncurrent liability under both US GAAP and IFRS.
Answer is B
The US GAAP portion of this question could be tested now but the IFRS portion could only be tested starting in 2011. Under US GAAP, the refinancing of the debt (or the obtaining of a noncancellable agreement to refinance) must take place before the statements are issued for the debt to be moved to noncurrent. That was done—it is reported as noncurrent. Under IFRS, the company must take action before the balance sheet date. That was not done—it is reported as current.
Regulation
On January 1, Year One, the Acme Company begins operations and spends $41,000 in organization expenditures. How much of this amount can be deducted for corporate income tax purposes in Year One?
A – Zero
B - $5,000
C - $7,400
D - $41,000
Answer is C
Organizational expenditures to get a business into operation can be deducted immediately but only up to $5,000. This $5,000 amount must be reduced (but not below zero) by the amount by which organizational expenditures exceed $50,000. This is not the case here. Remaining expenditures (in this case $36,000 or $41,000 less $5,000) are deducted evenly over a 180-month period beginning with the month in which the corporation begins business. Thus, $36,000/180 months means that $200 can be deducted per month or $2,400 for the entire year. The Year One deduction is $5,000 plus $2,400 or $7,400.
Auditing
The Raleins Corporation is being audited by its CPA firm which is currently looking at accounts receivables. The auditors want to reduce the audit risk of a material misstatement existing in accounts receivable to 4 percent. That is considered an acceptable level of risk. Inherent risk has already been assessed at 50 percent. Control risk has been assessed at 40 percent. The auditors are now beginning their substantive testing of accounts receivable which will gradually reduce the assessed level of detection risk. What is the level of detection risk the auditors must achieve from their substantive tests of accounts receivable?
A. 2 percent
B. 20 percent
C. 25 percent
D. 40 percent
Answer is B
The CPA must gather evidence until overall audit risk is reduced to an appropriately low level (4 percent in this case). Mathematically, audit risk is the inherent risk times the control risk times the auditor's detection risk. Inherent risk has already been assessed by the CPAs as 50 percent and control risk as 40 percent. At this point, .50 times .40 gives .20 (or 20 percent risk). How much substantive testing is still needed to reduce detection risk so that overall audit risk drops from this 20 percent level to 4 percent (or .04)? Or, stated differently, .50 x .40 x DR = .04. Only 20 percent or .20 will reduce the current .20 down to .04. When detection risk drops to 20 percent, then .50 x .40 x .20 will equal the desired level of audit risk of 4 percent.
BEC
The Norfolk Company signs a contract to sell 10,000 barrels of a specified grade of crude oil (for example light, sweet crude oil) on May 9, Year One, to a customer for $78 per barrel regardless of the market price on that date. What type of contract is this?
A. Redeemable contract
B. Futures contract
C. Deliverable contract
D. Simultaneous contract
Answer is B
A futures contract is a contract between two parties to buy or sell a specified asset of standardized quantity and quality at a specified future date at a price agreed upon when the contract is signed.
Make today your masterpiece!!!!
Joe Hoyle
President
CPA Review for FREE
www.CPAreviewforFREE.com
Monday, August 30, 2010
Thursday, August 19, 2010
Keep Working--You Can Make It
Over 2,100 FREE CPA Review Questions and Answers Available for YOU
111 Weeks of Operation and 15,209,997 Page Views (without a penny spent on marketing)
Lesson 78
From: Joe
(a) – We had the most visitors in our history this past week and went over 15 million total page views on our website. Yeah!!! And a whole lot of the thanks go to everyone who helps to spread the word about www.CPAreviewforFREE.com.
(b) – Last spring, I made available a practice quiz for FAR of 20 new questions and answers so that you can look for your strengths and weaknesses. Take 30 – 40 minutes and see how you feel in an exam mode. The questions are on a variety of topics. If anyone is interested in receiving these, I’ll make those same 20 Q & A available for a few days. Drop me an email at Jhoyle@cpareviewforfree.com
(c) – Our new subscription service for FAR is up and running and doing great. We are currently putting the final touches on Regulation and hope to have it available in a week or two. For $15 per month or $30 for 3 months, you get online access that allows you to review 620+ slides covering all of the important information in FAR. This is not a quick cram—this is a legitimate program that marries our free questions with our 620 content slides.
--To gain access, go to www.CPAreviewforFREE.com. Click on “Store” at the top right of the home page, click on “here” under the “Essential Content,” log into your account (or register if you have not registered previously), and click on “Paid Content.” Then, purchase one month of online access for $15 or 3 months for $30.
--How does it work? Well, here’s an example. For land, buildings, and equipment, we have dozens of slides that explain all aspects of the financial accounting for these assets. Four of those slides are specifically about the capitalization of interest. To illustrate, here are those four. For this topic, this is exactly what I believe you need to know.
*
Slide One:
Capitalization of Interest
Capitalization of interest cost is necessary during the period of time when fixed assets (and inventory specially built for a customer) are constructed. This interest is incurred prior to any revenues being generated so the matching principle requires that the expensing of the interest be delayed (by being added to the cost of the asset). Expensing eventually takes place through the depreciation process. Interest is only capitalized during the period of construction.
It is not the amount of interest paid that is capitalized. The amount capitalized is computed as:
Average accumulated expenditures X Interest rate X Period of construction
Slide Two:
If a building project has no accumulated expenditures on the first day of the year but work gradually increases the accumulated expenditures to $1.2 million by the last day of the year, a simple average of those accumulated expenditures is $600,000 ([-0- + $1,200,000]/2).
The interest rate to be used in this computation is the rate for any money specifically borrowed to finance the construction project. For example, if a company borrows $1.2 million at an annual rate of 5 percent to finance this building, then 5 percent is the applicable rate.
However, if no debt is incurred specifically for a construction project, the interest rate to be used is the weighted average rate of the company’s other debts. (Note that interest must be capitalized during construction even if no specific debt was incurred for the project.)
Slide Three:
Example. The Jones Company borrows $5 million on January 1, Year One to build a new warehouse. This debt has an annual interest rate of 8 percent. During Year One, $2 million is spent on this construction project evenly throughout the period. During Year Three, $3 million is spent on this construction project evenly throughout the period.
What is the capitalized cost of this warehouse on December 31, Year One? What is the capitalized cost of this warehouse on December 31, Year Two?
December 31, Year One: The accumulated expenditure total on this warehouse on the first day of the year was zero but had risen steadily to $2 million as of the last day of the year. The average accumulated expenditures for the period was $1,000,000 ([-0- + $2,000,000]/2). Since the annual interest rate was 8 percent, the capitalized interest was $80,000. That amount is removed from interest expense and reclassified as part of the cost of the warehouse which now has a reported cost to date of $2,080,000.
Slide Four:
December 31, Year Two: The accumulated expenditure total on this warehouse on the first day of the second year is $2,080,000 (see above). Another $3,000,000 is spent evenly over the year to arrive at $5,080,000. The average accumulated expenditures for Year Two is $3,580,000 ([$2,080,000 + $5,080,000]/2). The amount of interest to be capitalized is $3,580,000 X 8 percent or $286,400. This interest charge raises the capitalized cost from $5,080,000 by $286,400 to $5,366,400.
After the asset is completed and used in generating revenues, all further interest is expensed. In addition, at that time, the depreciation of the cost can begin so that these costs (interest and depreciation) are matched with revenues.
*
Four slides and you should know enough to be able to pass the topic of capitalized interest. That is how you pass the CPA Exam; you learn to pass each topic—one at a time.
(1) – I have been reading a book (“Mao’s Last Dancer”) about a Chinese peasant boy who works incredibly hard and eventually becomes one of the top ballet dancers in the world. A lot of the book focuses on his early training when he moves quickly from extreme poverty to a national dance academy where he is pushed to learn ballet—something he does not even understand at first.
In the book, he talks about how difficult it is to learn each dance movement. He is shown a new step or a turn and his first reaction is “I cannot possibly do that. Someone else may be able to do it, but not me.”
And, sure enough, for the longest time, he cannot master the new move. He tries and fails, he tries and fails, and he tries and fails. However, what really sets this young man apart from the other dancers in the academy is that he keeps trying even though he continues to fail. The other dancers practice three times each day (in a building without air conditioning) but he practices six times each day (at times breaking into the studio at night so he can practice alone). The other dancers are satisfied with being okay; he wants to be great. His desire is as large as his talent. His desire may be more important than his talent.
So many times, after he has failed and failed and failed with a new dance movement, he’ll have a break-through and suddenly he can do it. It just happens—almost without warning. With enough practice, one day he can actually do what he had originally thought was impossible.
The word that I really like in that story is “break-through.” That is the way learning, especially when you are dealing with a very difficult topic, usually happens. Learning is just full of epiphanies. You miss the question, you miss the question, you miss the question and suddenly you have a break-through. Without warning, you see how the pieces fit together to form the correct answer. Once you catch on, the process frequently seems rather simple: “Why did I not see that before now—it is obvious how it works.”
But that is just the way learning often works—you have to miss and practice, miss and practice until eventually you’ll have your own personal break-through and you will find that you have mastered the concept. That is a wonderful feeling. In learning, there is little that feels better than that quiet pause followed by “Oh, I see it now.”
In learning, too many people give up too quickly. They never reach the “break-through” point. The work is too hard or the failure is too devastating. They don’t have enough confidence to keep pushing or they don’t want success badly enough. They walk away saying “I just cannot do this.”
Here’s what I want you to know: Those frustrations are normal; they are no reason to quit. Failure is a natural part of getting to success. Yeah, it is tough to miss questions but that is just the way the learning process works. If you keep plugging, if you keep pushing yourself, you will have a break-through and suddenly you’ll say “Oh, I see it now.” And, that is going to feel great.
(2) – As always, I want to remind you that you can always unsubscribe from these email lessons at any point in time. We love having you with us but we don’t want you to stay one minute longer than you wish. To unsubscribe, scroll to the bottom of this lesson (or any lesson) and click on the unsubscribe button.
On the other hand, if you or a friend (or a sworn enemy) wants to receive these free email lessons every week or two, go to www.CPAreviewforFREE.com and register and make sure the box about getting additional material for the CPA Exam is checked. These email lessons are that additional material.
(3) – Practice (and if you had not anticipated the first question, you have not been getting these lessons for very long).
FAR
The Mills Company can buy a retail store for $1 million on January 1, Year One and start selling inventory immediately. However, company officials decide to build a store instead so they can get everything exactly as they want. They borrow $1 million on that date and spend the money evenly over the year and the store is completed on December 31, Year One. They start making sales the next day. The building has a 10-year life and no salvage value and straight-line depreciation is used. Which of the following statements is not true?
A – No depreciation expense will be recognized in Year One.
B – Interest expense of $35,000 is reported on the company’s income statement in Year One.
C – On the 12/31/1 balance sheet, the building is reported at $1,070,000.
D – Depreciation expense for Year Two is $103,500.
Answer is C
Interest paid for this first year is $70,000 ($1,000,000 X 7%). Because the building is constructed, a part of that interest is capitalized. The average accumulated expenditure figure for that period is $500,000 which is (0 + 1,000,000)/2. The interest rate is 7 percent so $35,000 is capitalized ($500,000 x 7 percent). That amount is moved from interest expense to the building account. Interest expense is dropped from $70,000 to $35,000 and the cost of the building is raised from $1,000,000 to $1,035,000. No revenues are earned in Year One so no depreciation expense is recognized. Depreciation for Year Two is $1,035,000/10 years or $103,500.
Regulation
Wilson owns stock in two companies. Each investment cost $10,000. Both investments drop in value to $9,000. At that point, he gives one investment to Adam and the other investment to Sara. Adam’s investment goes up in value to $10,400 and he sells it. Sara’s investment goes down in value to $8,500 and she sells it. What are the tax effects created by these sales?
A. Adam has a $400 taxable gain and Sara has a $1,500 taxable loss.
B. Adam has a $1,400 taxable gain and Sara has a $500 taxable loss.
C. Adam has a $400 taxable gain and Sara has a $500 taxable loss.
D. Adam has a $1,400 taxable gain and Sara has a $1,500 taxable loss.
Answer is C
Adam has a gain and Sara has a loss. If property is received as a gift, a gain on the eventual sale is determined by comparing the amount received to the previous owner’s basis. Adam’s gain is $10,400 less $10,000 or $400. If property is received as a gift, a loss on the eventual sale is determined by comparing the amount received to the lower of the previous owner’s basis or the fair value at the date of gift. Fair value of $9,000 was lower than the previous basis of $10,000 so $9,000 is used. Sara’s loss is $9,000 less $8,500 or $500.
Auditing
An auditor finds a journal entry where a company records the acquisition of a machine for $7,000 cash. The auditor then searches for the related source documents—original documents on which the acquisition was initially recorded (such as a purchase requisition, receiving report, and vendor invoice). Which of the following assertions is the auditor most likely seeking evidence to substantiate?
A – Allocation
B – Presentation
C – Existence
D – Completeness
Answer is C
When an auditor starts at the end of the accounting process where the recording has been made and then moves backwards toward the beginning of the system to find relevant source documents, the auditor is usually trying to substantiate proof of the existence of the transaction. Here, the company is reporting a machine but did they really buy a machine, is there adequate proof that the reported account does exist. (Completeness is usually substantiated by starting at the beginning of the process with the source documents and then following the information through the system to ensure that nothing got lost along the way.)
BEC
Henri Corporation produces product XC7. They plan to hire workers for $18.00 per hour and produce 8,000 units of XC7. Each unit should take four hours of labor to produce. In actual practice, Henri produces 9,000 units of XC7 but it takes the workers 35,000 hours at a total labor cost of $683,000. What is the labor rate variance for this period?
A. $35,000 unfavorable
B. $53,000 unfavorable
C. $18,000 favorable
D. $19,514 favorable
Answer is B
The company paid $683,000 for 35,000 hours of labor. At the standard rate of $18.00 per hour, the company should only have paid $630,000. The company paid $53,000 more for those hours than the standard. That is the labor rate variance and it is unfavorable because they paid more than anticipated.
Keep working – you will get there.
Joe Hoyle
President
CPA Review for FREE
www.CPAreviewforFREE.com
111 Weeks of Operation and 15,209,997 Page Views (without a penny spent on marketing)
Lesson 78
From: Joe
(a) – We had the most visitors in our history this past week and went over 15 million total page views on our website. Yeah!!! And a whole lot of the thanks go to everyone who helps to spread the word about www.CPAreviewforFREE.com.
(b) – Last spring, I made available a practice quiz for FAR of 20 new questions and answers so that you can look for your strengths and weaknesses. Take 30 – 40 minutes and see how you feel in an exam mode. The questions are on a variety of topics. If anyone is interested in receiving these, I’ll make those same 20 Q & A available for a few days. Drop me an email at Jhoyle@cpareviewforfree.com
(c) – Our new subscription service for FAR is up and running and doing great. We are currently putting the final touches on Regulation and hope to have it available in a week or two. For $15 per month or $30 for 3 months, you get online access that allows you to review 620+ slides covering all of the important information in FAR. This is not a quick cram—this is a legitimate program that marries our free questions with our 620 content slides.
--To gain access, go to www.CPAreviewforFREE.com. Click on “Store” at the top right of the home page, click on “here” under the “Essential Content,” log into your account (or register if you have not registered previously), and click on “Paid Content.” Then, purchase one month of online access for $15 or 3 months for $30.
--How does it work? Well, here’s an example. For land, buildings, and equipment, we have dozens of slides that explain all aspects of the financial accounting for these assets. Four of those slides are specifically about the capitalization of interest. To illustrate, here are those four. For this topic, this is exactly what I believe you need to know.
*
Slide One:
Capitalization of Interest
Capitalization of interest cost is necessary during the period of time when fixed assets (and inventory specially built for a customer) are constructed. This interest is incurred prior to any revenues being generated so the matching principle requires that the expensing of the interest be delayed (by being added to the cost of the asset). Expensing eventually takes place through the depreciation process. Interest is only capitalized during the period of construction.
It is not the amount of interest paid that is capitalized. The amount capitalized is computed as:
Average accumulated expenditures X Interest rate X Period of construction
Slide Two:
If a building project has no accumulated expenditures on the first day of the year but work gradually increases the accumulated expenditures to $1.2 million by the last day of the year, a simple average of those accumulated expenditures is $600,000 ([-0- + $1,200,000]/2).
The interest rate to be used in this computation is the rate for any money specifically borrowed to finance the construction project. For example, if a company borrows $1.2 million at an annual rate of 5 percent to finance this building, then 5 percent is the applicable rate.
However, if no debt is incurred specifically for a construction project, the interest rate to be used is the weighted average rate of the company’s other debts. (Note that interest must be capitalized during construction even if no specific debt was incurred for the project.)
Slide Three:
Example. The Jones Company borrows $5 million on January 1, Year One to build a new warehouse. This debt has an annual interest rate of 8 percent. During Year One, $2 million is spent on this construction project evenly throughout the period. During Year Three, $3 million is spent on this construction project evenly throughout the period.
What is the capitalized cost of this warehouse on December 31, Year One? What is the capitalized cost of this warehouse on December 31, Year Two?
December 31, Year One: The accumulated expenditure total on this warehouse on the first day of the year was zero but had risen steadily to $2 million as of the last day of the year. The average accumulated expenditures for the period was $1,000,000 ([-0- + $2,000,000]/2). Since the annual interest rate was 8 percent, the capitalized interest was $80,000. That amount is removed from interest expense and reclassified as part of the cost of the warehouse which now has a reported cost to date of $2,080,000.
Slide Four:
December 31, Year Two: The accumulated expenditure total on this warehouse on the first day of the second year is $2,080,000 (see above). Another $3,000,000 is spent evenly over the year to arrive at $5,080,000. The average accumulated expenditures for Year Two is $3,580,000 ([$2,080,000 + $5,080,000]/2). The amount of interest to be capitalized is $3,580,000 X 8 percent or $286,400. This interest charge raises the capitalized cost from $5,080,000 by $286,400 to $5,366,400.
After the asset is completed and used in generating revenues, all further interest is expensed. In addition, at that time, the depreciation of the cost can begin so that these costs (interest and depreciation) are matched with revenues.
*
Four slides and you should know enough to be able to pass the topic of capitalized interest. That is how you pass the CPA Exam; you learn to pass each topic—one at a time.
(1) – I have been reading a book (“Mao’s Last Dancer”) about a Chinese peasant boy who works incredibly hard and eventually becomes one of the top ballet dancers in the world. A lot of the book focuses on his early training when he moves quickly from extreme poverty to a national dance academy where he is pushed to learn ballet—something he does not even understand at first.
In the book, he talks about how difficult it is to learn each dance movement. He is shown a new step or a turn and his first reaction is “I cannot possibly do that. Someone else may be able to do it, but not me.”
And, sure enough, for the longest time, he cannot master the new move. He tries and fails, he tries and fails, and he tries and fails. However, what really sets this young man apart from the other dancers in the academy is that he keeps trying even though he continues to fail. The other dancers practice three times each day (in a building without air conditioning) but he practices six times each day (at times breaking into the studio at night so he can practice alone). The other dancers are satisfied with being okay; he wants to be great. His desire is as large as his talent. His desire may be more important than his talent.
So many times, after he has failed and failed and failed with a new dance movement, he’ll have a break-through and suddenly he can do it. It just happens—almost without warning. With enough practice, one day he can actually do what he had originally thought was impossible.
The word that I really like in that story is “break-through.” That is the way learning, especially when you are dealing with a very difficult topic, usually happens. Learning is just full of epiphanies. You miss the question, you miss the question, you miss the question and suddenly you have a break-through. Without warning, you see how the pieces fit together to form the correct answer. Once you catch on, the process frequently seems rather simple: “Why did I not see that before now—it is obvious how it works.”
But that is just the way learning often works—you have to miss and practice, miss and practice until eventually you’ll have your own personal break-through and you will find that you have mastered the concept. That is a wonderful feeling. In learning, there is little that feels better than that quiet pause followed by “Oh, I see it now.”
In learning, too many people give up too quickly. They never reach the “break-through” point. The work is too hard or the failure is too devastating. They don’t have enough confidence to keep pushing or they don’t want success badly enough. They walk away saying “I just cannot do this.”
Here’s what I want you to know: Those frustrations are normal; they are no reason to quit. Failure is a natural part of getting to success. Yeah, it is tough to miss questions but that is just the way the learning process works. If you keep plugging, if you keep pushing yourself, you will have a break-through and suddenly you’ll say “Oh, I see it now.” And, that is going to feel great.
(2) – As always, I want to remind you that you can always unsubscribe from these email lessons at any point in time. We love having you with us but we don’t want you to stay one minute longer than you wish. To unsubscribe, scroll to the bottom of this lesson (or any lesson) and click on the unsubscribe button.
On the other hand, if you or a friend (or a sworn enemy) wants to receive these free email lessons every week or two, go to www.CPAreviewforFREE.com and register and make sure the box about getting additional material for the CPA Exam is checked. These email lessons are that additional material.
(3) – Practice (and if you had not anticipated the first question, you have not been getting these lessons for very long).
FAR
The Mills Company can buy a retail store for $1 million on January 1, Year One and start selling inventory immediately. However, company officials decide to build a store instead so they can get everything exactly as they want. They borrow $1 million on that date and spend the money evenly over the year and the store is completed on December 31, Year One. They start making sales the next day. The building has a 10-year life and no salvage value and straight-line depreciation is used. Which of the following statements is not true?
A – No depreciation expense will be recognized in Year One.
B – Interest expense of $35,000 is reported on the company’s income statement in Year One.
C – On the 12/31/1 balance sheet, the building is reported at $1,070,000.
D – Depreciation expense for Year Two is $103,500.
Answer is C
Interest paid for this first year is $70,000 ($1,000,000 X 7%). Because the building is constructed, a part of that interest is capitalized. The average accumulated expenditure figure for that period is $500,000 which is (0 + 1,000,000)/2. The interest rate is 7 percent so $35,000 is capitalized ($500,000 x 7 percent). That amount is moved from interest expense to the building account. Interest expense is dropped from $70,000 to $35,000 and the cost of the building is raised from $1,000,000 to $1,035,000. No revenues are earned in Year One so no depreciation expense is recognized. Depreciation for Year Two is $1,035,000/10 years or $103,500.
Regulation
Wilson owns stock in two companies. Each investment cost $10,000. Both investments drop in value to $9,000. At that point, he gives one investment to Adam and the other investment to Sara. Adam’s investment goes up in value to $10,400 and he sells it. Sara’s investment goes down in value to $8,500 and she sells it. What are the tax effects created by these sales?
A. Adam has a $400 taxable gain and Sara has a $1,500 taxable loss.
B. Adam has a $1,400 taxable gain and Sara has a $500 taxable loss.
C. Adam has a $400 taxable gain and Sara has a $500 taxable loss.
D. Adam has a $1,400 taxable gain and Sara has a $1,500 taxable loss.
Answer is C
Adam has a gain and Sara has a loss. If property is received as a gift, a gain on the eventual sale is determined by comparing the amount received to the previous owner’s basis. Adam’s gain is $10,400 less $10,000 or $400. If property is received as a gift, a loss on the eventual sale is determined by comparing the amount received to the lower of the previous owner’s basis or the fair value at the date of gift. Fair value of $9,000 was lower than the previous basis of $10,000 so $9,000 is used. Sara’s loss is $9,000 less $8,500 or $500.
Auditing
An auditor finds a journal entry where a company records the acquisition of a machine for $7,000 cash. The auditor then searches for the related source documents—original documents on which the acquisition was initially recorded (such as a purchase requisition, receiving report, and vendor invoice). Which of the following assertions is the auditor most likely seeking evidence to substantiate?
A – Allocation
B – Presentation
C – Existence
D – Completeness
Answer is C
When an auditor starts at the end of the accounting process where the recording has been made and then moves backwards toward the beginning of the system to find relevant source documents, the auditor is usually trying to substantiate proof of the existence of the transaction. Here, the company is reporting a machine but did they really buy a machine, is there adequate proof that the reported account does exist. (Completeness is usually substantiated by starting at the beginning of the process with the source documents and then following the information through the system to ensure that nothing got lost along the way.)
BEC
Henri Corporation produces product XC7. They plan to hire workers for $18.00 per hour and produce 8,000 units of XC7. Each unit should take four hours of labor to produce. In actual practice, Henri produces 9,000 units of XC7 but it takes the workers 35,000 hours at a total labor cost of $683,000. What is the labor rate variance for this period?
A. $35,000 unfavorable
B. $53,000 unfavorable
C. $18,000 favorable
D. $19,514 favorable
Answer is B
The company paid $683,000 for 35,000 hours of labor. At the standard rate of $18.00 per hour, the company should only have paid $630,000. The company paid $53,000 more for those hours than the standard. That is the labor rate variance and it is unfavorable because they paid more than anticipated.
Keep working – you will get there.
Joe Hoyle
President
CPA Review for FREE
www.CPAreviewforFREE.com
Tuesday, August 10, 2010
Six Hints to Help You Pass the CPA Exam
Try us FIRST before you spend your hard-earned money.
August 9, 2010
CPA Review for FREE
www.CPAreviewforFREE.com
Over 2,100 FREE CPA Review Questions and Answers Available for YOU
109 Weeks of Operation and 14,640,175 Page Views (without a penny spent on marketing)
Lesson 77
From: Joe
(a) - Our subscription service for FAR is now up and running. We will have the other three parts ready as soon as we can. I actually received two emails (about 24 hours apart) from one of our first customers to use our subscription service:
From ES: "I'm so very grateful for you and the rest of your team for making studying so much easier. I'm actually enjoying reading through the FAR slides, and I'm comprehending the information much better than I did by using XXX review. Your review material increases my confidence level tremendously! . . . I really can't send enough praise and thanks your way. As I'm making my way through all of the FAR slides, I have decided, without a doubt, that the $15 I paid for a one-month subscription is by far the best investment I've ever made. You truly have a knack for making this material seem so simple and straightforward. The free multiple choice questions were good enough, but this FAR review is simply phenomenal. Best wishes in preparing the slides for the other 3 sections -- you've got something really great here. I'm so grateful to have had college professors who knew about your site and passed the info. along because your review material has been a total blessing!"
Okay, what is the deal?
--For $15 per month or $30 for 3 months, you get online access that allow you to review 620+ slides covering all of the important information in FAR. This is not a quick cram-this is a legitimate program that marries our free questions with our 620 content slides.
--You also get a study guide to direct you logically through the entire program. You are not left to wander around; we tell you what to do to work your way through our program so you can get those 75 points you need.
--Most programs cost thousands. We cost 50 cents per day. That's it. Think about it. You are risking $15.00. We believe, as ES said above, it will be the best investment you ever made.
--To gain access, here is what you need to do. Go to www.CPAreviewforFREE.com. Click on "Store" at the top right of the home page, click on "here" under the "Essential Content," log into your account (or register if you have not registered previously), and Click on "Paid Content." Then, purchase one month of online access for $15 or 3 months for $30.
--One suggestion if you subscribe - read the study program first. You certainly can proceed in any manner that you wish but I would like for you to see how I envisioned this program before you get started.
(1) - I know that a lot of you will be taking one or more parts of the CPA Exam during the remainder of the July-August window. So, when I woke up this morning, I started thinking about what I want you to think about as you walk into the test site. What should be on your mind as you enter the building and you show your IDs and you get ready to start up that exam? I came up with the following six recommendations. I believe if you can keep each of these six in mind, you've made a great stride toward passing that exam.
a. Stay loose. Getting overly tense and nervous is really a bad idea. No one does well when they tie themselves into emotional knots. I tell candidates to wiggle their fingers (so they are not clenching their fists) and wiggle their lower jaws (so they are not clenching their teeth). I find that such actions actually do help you stay loose. Play soothing (but maybe a little upbeat) music as you drive to the facility. Remember the exam is not five minutes long-getting yourself worked into a fever pitch might not be a bad idea for a 5-minute wrestling match. This is something entirely different - it is a mental test that will last 2 ½ to 4 ½ hours. To get the most out of yourself, stay loose, calm, and relaxed.
b. During the exam, you have to watch your time very carefully. In each part (except BEC), you have three multiple-choice testlets and two simulations. In BEC, you have three multiple-choice testlets. You need to be very aware as to how much time you plan to spend in each part. Yes, you will have to push yourself constantly but you can get through each exam in the time allotted. You do not want to finish early but you absolutely cannot afford to leave questions blank. Know how much time you want to spend in each area, keep an eye on the time, and keep pushing.
c. I would bet that almost as many points are lost on the CPA Exam through carelessness as are lost through lack of knowledge. People misread words or pick up the wrong numbers. I wrote a friend yesterday and said that I needed 150 booklets in 30 days. He then wrote his secretary (and copied me) telling the secretary that I needed 30 booklets in 150 days. On the CPA Exam, you absolutely cannot do something like that. For the questions that you really do know, you need to get 90 percent or more of them correct. Yeah, we are all human and make mistakes but you have to cut those careless errors down to a minimum. Don't throw away a passing score by being careless.
d. People tend to slow down pretty quickly over time. They get tired but it is also just human nature. On the exam, you need to be going as strong the last hour of the exam as you were the first hour. Monitor yourself. Don't let yourself start dragging. Tiredness is often no more than mental laziness (you are taking an exam - you are not digging ditches). The person who can still be answering questions at a crisp pace at the end of the exam has a great chance to get the points needed to pass.
e. I have said this before but it bears repeating. If you do not know an answer, eliminate as many possible answers as you can and make a guess. Never Never Never leave anything blank. Your grade is entirely based on the number of right answers you get.
f. Don't be rattled if you see questions that you do not know. If you have spent enough time studying (60-100 hours per part), anything you find that you have never seen before is something that other candidates have not seen before either. You are not striving for perfection. You just want to pass. There are always going to be some weird questions tossed in. That's just part of the game. Eliminate as many answers as you can, take a guess, move on.
g. (Okay, I lied about being six - I really have seven recommendations.) And, I have said this before also. The written communication answers only have to be "on topic." After that they are not graded on content, only on the use of the English language. Don't be so concerned about getting the answer absolutely "right." Worry about writing well. Short words, short sentences, and short paragraphs. For about a million years, "Elements of Style" by Strunk and White has been the first word and the last word as to the proper use of the English language. Go to a library, find a copy, sit down and read it.
Once you go to the CPA Exam, your only goal is to get the knowledge out of your head and onto that computer screen so you can show them that you deserve to pass. I think these recommendations will help.
(2) - If you would like to unsubscribe from these email lessons, just scroll to the bottom of this (or any) lesson and click on "unsubscribe." It is no big deal; it is easy. We love having all 14,000 of you folks but don't hesitate to unsubscribe at any time you wish.
(3) - I attended a meeting last Tuesday with the CPA Examiners in San Francisco as they talked about the upcoming changes in the CPA Exam starting in 2011. I took notes and what follows are my notes from that meeting. One piece of advice: pass the exam in 2010 and you won't have to worry about 2011. Second piece of advice: yeah, the exam is going to change some but I really don't think it will have a huge impact on you or your testing experience. Some change, sure. Much change-not really.
From my notes:
The following is somewhat random as it is a summation of the rambling conversation that takes place in virtually any meeting. Speaking for the AICPA were Michael Decker (Director of Operations and Development) and Elaine Rodeck (Director of Exam Strategy). Unless specifically stated, the following refers to the CPA Exam after major changes are started in January 2011.
--One of the reasons they are going (in all parts except BEC) to 6-7 smaller simulations (known as task-based simulations) rather than the current two very large simulations is so that they can release the scores to candidates faster. They hope that by the end of 2011, everyone will be getting their scores within four weeks of taking each part of the exam.
--Growth in the number of people taking the exam continues to go up at about 3 percent per year.
--Many candidates want to take the exam late in each window. Because of capacity issues, they urge candidates to schedule their exams as early as possible. If they have no available seats, then they have no available seats. They especially worry about the end of November-schedule early.
--They constantly survey candidates on their exam experience at the testing site and the satisfaction rate is 98.4 percent which is considered extremely high. The number of candidates who have a bad testing experience has gone down rather dramatically since the exam was first computerized.
--As most people probably know, starting in January 2011, the written communications questions will be removed from FAR, Auditing, and Regulation. Instead, three written communications questions will be asked in BEC. Of those, two will be graded and the other will be for pre-testing purposes (to see if the question is properly written). However, for obvious reasons, the candidate will not be told which two will be graded.
--Starting in 2011, the Auditing exam will be 30 minutes shorter (down to 4 hours) and BEC will be 30 minutes longer (up to three hours).
--On Auditing, FAR, and Regulation, one of the 6-7 task-based simulations will be a research question. The research functionality that the candidate will use will be improved (they feel) in 2011.
--Someone asked: "Candidates can pay to have a regrade of their exam scores. In recent years, how many regrades have led to grade improvements?" And, the response was: "I think the answer is zero." (Before you send them your regrade money, please read that response again carefully. Their feeling is always going to be the same: they have already graded the close exams so many many times before they send the scores out to you that there is no possible way they could have missed a point.)
--They reiterated (for about the 900th time) that in the written communication questions, they do not grade on content but on use of the English language. However, they do have a CPA read the answers to make sure they are related to the point of the question. In other words, if the question is on capital leases, then the answer has to be on capital leases. After that, it is all about the candidate's use of the English language and not about getting the content correct.
--If you are taking the exam in 2011, be sure to go to www.cpa-exam.org and look at the content specifications outlines (CSOs). There will be some differences-especially in Auditing and BEC.
--As they always do, they urged (practically begged) candidates to go to www.cpa-exam.org and do the sample exams and tutorials before coming to the test site. They still have the samples up for 2010 but, in the fall, they will have them up for the 2011 exam.
--In one of the most interesting points, Ms. Rodeck made a great point something like: "The secret to passing the CPA Exam is to get off Facebook and IM and truly study." I could not agree more. I am amazed by how much time people spend on forums talking about the CPA Exam. I guess it is more fun than studying.
--Starting in 2011, the exam will have coverage of international standards which could possibly be tested in FAR, Auditing, and/or BEC but not in Regulation. The word was that the international standards would be introduced gradually. Personally, I think it will be awhile (maybe quite awhile) before international standards are a major part of the CPA Exam. It is good, though, to know about the international standards. However, I would not become obsessed by them.
--They still plan to offer the CPA Exam internationally but it will not be during the first quarter of 2011. When the exam is offered outside of the US, it will be in English and not in the local language.
--The pass rate continues to fluctuate slightly over time. In the first quarter of 2010, the pass rates were: Auditing: 48.94 percent, BEC: 47.80 percent, FAR: 46.70 percent, Regulation: 50.60 percent.
--Starting in 2011, the way the score is weighted will change. Currently, BEC is 100 percent multiple-choice and the other three parts are 70 percent from the multiple-choice and 30 percent from simulations. In 2011, BEC will be 85 percent from multiple-choice and 15 percent from the written communications questions. The other three parts will be 60 percent from multiple-choice and 40 percent from the 6-7 task based simulations.
--In the research questions, they want a citation to show where you found the correct answer. However, there can be more than one correct citation.
(4) - Practice - it is never a bad idea to see if we can add one more point to your score right here as you read this email lesson.
FAR
On January 1, Year One, the Motzart Company issued a 10-year $1 million bond that paid 6 percent annual interest. It was issued for 86 percent of face value in order to yield an annual interest rate of 8 percent. The company used the straight-line method to amortize the discount and reported a net income for Year One of $100,000. Then, the independent auditors asserted that there was a material difference between the straight-line and effective rate methods so that the effective rate method had to be used. After making the necessary adjustment, what amount did the company report as its net income?
A. $98,600
B. $99,480
C. $100,520
D. $101,400
Answer is C.
The company paid cash interest of $6,000 per year ($100,000 times 6 percent) and recognized amortization of the $14,000 discount at the rate of $1,400 per year over the ten-year life of the bond. So, using the straight-line method, the company recognized interest expense for Year One of $7,400 (cash plus discount amortization). However, under the effective rate method, interest expense is 8 percent times $86,000 or $6,880 for Year One. Thus, the expense would have been $520 lower ($7,400 less $6,880) so that net income is $520 higher or $100,520.
Regulation
What is the purpose of the National Labor Relations Act (also known as the Wagner Act)?
A. It requires overtime payment when employees work more than a specified period of time.
B. It establishes 40 hours per week as the point in time at which overtime must be paid.
C. It requires the employee's responsibility to pay social security taxes.
D. It specifies the rights that employees have to join or form labor organizations.
Answer is D
This particular US law was passed in 1935 to establish the rights that workers had to become part of labor unions and other such organizations. Not surprisingly, it was passed during the Great Depression when many workers were paid very small amounts for the work they did.
Auditing
The Venthura Corporation is a privately-held company that is being auditing by the independent firm of Smith and Rapunzel CPAs. In assessing control risk, the auditors become aware of a significant deficiency in the company's internal control. What should the auditors do as a result?
A. Provide a qualified audit opinion.
B. Release a formal report to the stockholders and any other member of the public who are directly involved with the company.
C. Issue a written report describing the problem to the board of directors and the management of the company.
D. Switch the audit to a review because sufficient evidence for an opinion cannot be obtained.
Answer is C
A significant deficiency in internal control is a serious problem. However, it does not necessarily mean that an audit cannot be carried out by extensive testing and other measures. It also does not mean that material misstatements actually exist in the financial statements. So, a qualified opinion is not justified simply because of this problem. Therefore, the board of directors (representing the stockholders) and the management must be formally informed. The auditor should watch carefully the company's reaction to the problem because it will probably indicate how seriously they take internal control within the organization.
BEC
A company hopes to benefit over the next few years from the economies of scale. Which of the following is most likely to cause this hope?
A. The company hopes to have better trained workers because it has now been in operation for a critical period of time.
B. The company hopes that expansion will create a lower cost per unit for its products.
C. The company hopes to be able to change the type of operation so that its variable costs will decrease significantly although fixed costs will rise.
D. The company hopes to gradually increase its sales price while its cost remains unchanged due to better market recognition.
Answer is B
As a company expands (through growth or acquisition), it hopes that its average production costs will fall on a per unit basis. Many costs will not grow proportionally with the increase in units sold. If sales price and demand remain stable, profits should rise. Hopefully, this anticipated drop in average cost can be created by such things as buying in larger quantities and spreading advertising expenditures over more products.
Quick comment:
Several weeks ago, I mentioned that my new favorite quotation is "Your dream isn't big enough if it doesn't scare you." I love that quote and have repeated it to many people whom I know. I originally read it on someone's website. So, earlier today I decided to go to Google and figure out who really did say these words in the first place. When I typed in the phrase and hit search, one of the very first sources that popped up was www.CPAreviewforFREE.com. I just had to laugh - apparently, if you repeat something often enough, people will start to give you the credit.
Joe Hoyle
President
CPA Review for FREE
www.CPAreviewforFREE.com
3351 Lady Marian Court
Midlothian, VA 23113
August 9, 2010
CPA Review for FREE
www.CPAreviewforFREE.com
Over 2,100 FREE CPA Review Questions and Answers Available for YOU
109 Weeks of Operation and 14,640,175 Page Views (without a penny spent on marketing)
Lesson 77
From: Joe
(a) - Our subscription service for FAR is now up and running. We will have the other three parts ready as soon as we can. I actually received two emails (about 24 hours apart) from one of our first customers to use our subscription service:
From ES: "I'm so very grateful for you and the rest of your team for making studying so much easier. I'm actually enjoying reading through the FAR slides, and I'm comprehending the information much better than I did by using XXX review. Your review material increases my confidence level tremendously! . . . I really can't send enough praise and thanks your way. As I'm making my way through all of the FAR slides, I have decided, without a doubt, that the $15 I paid for a one-month subscription is by far the best investment I've ever made. You truly have a knack for making this material seem so simple and straightforward. The free multiple choice questions were good enough, but this FAR review is simply phenomenal. Best wishes in preparing the slides for the other 3 sections -- you've got something really great here. I'm so grateful to have had college professors who knew about your site and passed the info. along because your review material has been a total blessing!"
Okay, what is the deal?
--For $15 per month or $30 for 3 months, you get online access that allow you to review 620+ slides covering all of the important information in FAR. This is not a quick cram-this is a legitimate program that marries our free questions with our 620 content slides.
--You also get a study guide to direct you logically through the entire program. You are not left to wander around; we tell you what to do to work your way through our program so you can get those 75 points you need.
--Most programs cost thousands. We cost 50 cents per day. That's it. Think about it. You are risking $15.00. We believe, as ES said above, it will be the best investment you ever made.
--To gain access, here is what you need to do. Go to www.CPAreviewforFREE.com. Click on "Store" at the top right of the home page, click on "here" under the "Essential Content," log into your account (or register if you have not registered previously), and Click on "Paid Content." Then, purchase one month of online access for $15 or 3 months for $30.
--One suggestion if you subscribe - read the study program first. You certainly can proceed in any manner that you wish but I would like for you to see how I envisioned this program before you get started.
(1) - I know that a lot of you will be taking one or more parts of the CPA Exam during the remainder of the July-August window. So, when I woke up this morning, I started thinking about what I want you to think about as you walk into the test site. What should be on your mind as you enter the building and you show your IDs and you get ready to start up that exam? I came up with the following six recommendations. I believe if you can keep each of these six in mind, you've made a great stride toward passing that exam.
a. Stay loose. Getting overly tense and nervous is really a bad idea. No one does well when they tie themselves into emotional knots. I tell candidates to wiggle their fingers (so they are not clenching their fists) and wiggle their lower jaws (so they are not clenching their teeth). I find that such actions actually do help you stay loose. Play soothing (but maybe a little upbeat) music as you drive to the facility. Remember the exam is not five minutes long-getting yourself worked into a fever pitch might not be a bad idea for a 5-minute wrestling match. This is something entirely different - it is a mental test that will last 2 ½ to 4 ½ hours. To get the most out of yourself, stay loose, calm, and relaxed.
b. During the exam, you have to watch your time very carefully. In each part (except BEC), you have three multiple-choice testlets and two simulations. In BEC, you have three multiple-choice testlets. You need to be very aware as to how much time you plan to spend in each part. Yes, you will have to push yourself constantly but you can get through each exam in the time allotted. You do not want to finish early but you absolutely cannot afford to leave questions blank. Know how much time you want to spend in each area, keep an eye on the time, and keep pushing.
c. I would bet that almost as many points are lost on the CPA Exam through carelessness as are lost through lack of knowledge. People misread words or pick up the wrong numbers. I wrote a friend yesterday and said that I needed 150 booklets in 30 days. He then wrote his secretary (and copied me) telling the secretary that I needed 30 booklets in 150 days. On the CPA Exam, you absolutely cannot do something like that. For the questions that you really do know, you need to get 90 percent or more of them correct. Yeah, we are all human and make mistakes but you have to cut those careless errors down to a minimum. Don't throw away a passing score by being careless.
d. People tend to slow down pretty quickly over time. They get tired but it is also just human nature. On the exam, you need to be going as strong the last hour of the exam as you were the first hour. Monitor yourself. Don't let yourself start dragging. Tiredness is often no more than mental laziness (you are taking an exam - you are not digging ditches). The person who can still be answering questions at a crisp pace at the end of the exam has a great chance to get the points needed to pass.
e. I have said this before but it bears repeating. If you do not know an answer, eliminate as many possible answers as you can and make a guess. Never Never Never leave anything blank. Your grade is entirely based on the number of right answers you get.
f. Don't be rattled if you see questions that you do not know. If you have spent enough time studying (60-100 hours per part), anything you find that you have never seen before is something that other candidates have not seen before either. You are not striving for perfection. You just want to pass. There are always going to be some weird questions tossed in. That's just part of the game. Eliminate as many answers as you can, take a guess, move on.
g. (Okay, I lied about being six - I really have seven recommendations.) And, I have said this before also. The written communication answers only have to be "on topic." After that they are not graded on content, only on the use of the English language. Don't be so concerned about getting the answer absolutely "right." Worry about writing well. Short words, short sentences, and short paragraphs. For about a million years, "Elements of Style" by Strunk and White has been the first word and the last word as to the proper use of the English language. Go to a library, find a copy, sit down and read it.
Once you go to the CPA Exam, your only goal is to get the knowledge out of your head and onto that computer screen so you can show them that you deserve to pass. I think these recommendations will help.
(2) - If you would like to unsubscribe from these email lessons, just scroll to the bottom of this (or any) lesson and click on "unsubscribe." It is no big deal; it is easy. We love having all 14,000 of you folks but don't hesitate to unsubscribe at any time you wish.
(3) - I attended a meeting last Tuesday with the CPA Examiners in San Francisco as they talked about the upcoming changes in the CPA Exam starting in 2011. I took notes and what follows are my notes from that meeting. One piece of advice: pass the exam in 2010 and you won't have to worry about 2011. Second piece of advice: yeah, the exam is going to change some but I really don't think it will have a huge impact on you or your testing experience. Some change, sure. Much change-not really.
From my notes:
The following is somewhat random as it is a summation of the rambling conversation that takes place in virtually any meeting. Speaking for the AICPA were Michael Decker (Director of Operations and Development) and Elaine Rodeck (Director of Exam Strategy). Unless specifically stated, the following refers to the CPA Exam after major changes are started in January 2011.
--One of the reasons they are going (in all parts except BEC) to 6-7 smaller simulations (known as task-based simulations) rather than the current two very large simulations is so that they can release the scores to candidates faster. They hope that by the end of 2011, everyone will be getting their scores within four weeks of taking each part of the exam.
--Growth in the number of people taking the exam continues to go up at about 3 percent per year.
--Many candidates want to take the exam late in each window. Because of capacity issues, they urge candidates to schedule their exams as early as possible. If they have no available seats, then they have no available seats. They especially worry about the end of November-schedule early.
--They constantly survey candidates on their exam experience at the testing site and the satisfaction rate is 98.4 percent which is considered extremely high. The number of candidates who have a bad testing experience has gone down rather dramatically since the exam was first computerized.
--As most people probably know, starting in January 2011, the written communications questions will be removed from FAR, Auditing, and Regulation. Instead, three written communications questions will be asked in BEC. Of those, two will be graded and the other will be for pre-testing purposes (to see if the question is properly written). However, for obvious reasons, the candidate will not be told which two will be graded.
--Starting in 2011, the Auditing exam will be 30 minutes shorter (down to 4 hours) and BEC will be 30 minutes longer (up to three hours).
--On Auditing, FAR, and Regulation, one of the 6-7 task-based simulations will be a research question. The research functionality that the candidate will use will be improved (they feel) in 2011.
--Someone asked: "Candidates can pay to have a regrade of their exam scores. In recent years, how many regrades have led to grade improvements?" And, the response was: "I think the answer is zero." (Before you send them your regrade money, please read that response again carefully. Their feeling is always going to be the same: they have already graded the close exams so many many times before they send the scores out to you that there is no possible way they could have missed a point.)
--They reiterated (for about the 900th time) that in the written communication questions, they do not grade on content but on use of the English language. However, they do have a CPA read the answers to make sure they are related to the point of the question. In other words, if the question is on capital leases, then the answer has to be on capital leases. After that, it is all about the candidate's use of the English language and not about getting the content correct.
--If you are taking the exam in 2011, be sure to go to www.cpa-exam.org and look at the content specifications outlines (CSOs). There will be some differences-especially in Auditing and BEC.
--As they always do, they urged (practically begged) candidates to go to www.cpa-exam.org and do the sample exams and tutorials before coming to the test site. They still have the samples up for 2010 but, in the fall, they will have them up for the 2011 exam.
--In one of the most interesting points, Ms. Rodeck made a great point something like: "The secret to passing the CPA Exam is to get off Facebook and IM and truly study." I could not agree more. I am amazed by how much time people spend on forums talking about the CPA Exam. I guess it is more fun than studying.
--Starting in 2011, the exam will have coverage of international standards which could possibly be tested in FAR, Auditing, and/or BEC but not in Regulation. The word was that the international standards would be introduced gradually. Personally, I think it will be awhile (maybe quite awhile) before international standards are a major part of the CPA Exam. It is good, though, to know about the international standards. However, I would not become obsessed by them.
--They still plan to offer the CPA Exam internationally but it will not be during the first quarter of 2011. When the exam is offered outside of the US, it will be in English and not in the local language.
--The pass rate continues to fluctuate slightly over time. In the first quarter of 2010, the pass rates were: Auditing: 48.94 percent, BEC: 47.80 percent, FAR: 46.70 percent, Regulation: 50.60 percent.
--Starting in 2011, the way the score is weighted will change. Currently, BEC is 100 percent multiple-choice and the other three parts are 70 percent from the multiple-choice and 30 percent from simulations. In 2011, BEC will be 85 percent from multiple-choice and 15 percent from the written communications questions. The other three parts will be 60 percent from multiple-choice and 40 percent from the 6-7 task based simulations.
--In the research questions, they want a citation to show where you found the correct answer. However, there can be more than one correct citation.
(4) - Practice - it is never a bad idea to see if we can add one more point to your score right here as you read this email lesson.
FAR
On January 1, Year One, the Motzart Company issued a 10-year $1 million bond that paid 6 percent annual interest. It was issued for 86 percent of face value in order to yield an annual interest rate of 8 percent. The company used the straight-line method to amortize the discount and reported a net income for Year One of $100,000. Then, the independent auditors asserted that there was a material difference between the straight-line and effective rate methods so that the effective rate method had to be used. After making the necessary adjustment, what amount did the company report as its net income?
A. $98,600
B. $99,480
C. $100,520
D. $101,400
Answer is C.
The company paid cash interest of $6,000 per year ($100,000 times 6 percent) and recognized amortization of the $14,000 discount at the rate of $1,400 per year over the ten-year life of the bond. So, using the straight-line method, the company recognized interest expense for Year One of $7,400 (cash plus discount amortization). However, under the effective rate method, interest expense is 8 percent times $86,000 or $6,880 for Year One. Thus, the expense would have been $520 lower ($7,400 less $6,880) so that net income is $520 higher or $100,520.
Regulation
What is the purpose of the National Labor Relations Act (also known as the Wagner Act)?
A. It requires overtime payment when employees work more than a specified period of time.
B. It establishes 40 hours per week as the point in time at which overtime must be paid.
C. It requires the employee's responsibility to pay social security taxes.
D. It specifies the rights that employees have to join or form labor organizations.
Answer is D
This particular US law was passed in 1935 to establish the rights that workers had to become part of labor unions and other such organizations. Not surprisingly, it was passed during the Great Depression when many workers were paid very small amounts for the work they did.
Auditing
The Venthura Corporation is a privately-held company that is being auditing by the independent firm of Smith and Rapunzel CPAs. In assessing control risk, the auditors become aware of a significant deficiency in the company's internal control. What should the auditors do as a result?
A. Provide a qualified audit opinion.
B. Release a formal report to the stockholders and any other member of the public who are directly involved with the company.
C. Issue a written report describing the problem to the board of directors and the management of the company.
D. Switch the audit to a review because sufficient evidence for an opinion cannot be obtained.
Answer is C
A significant deficiency in internal control is a serious problem. However, it does not necessarily mean that an audit cannot be carried out by extensive testing and other measures. It also does not mean that material misstatements actually exist in the financial statements. So, a qualified opinion is not justified simply because of this problem. Therefore, the board of directors (representing the stockholders) and the management must be formally informed. The auditor should watch carefully the company's reaction to the problem because it will probably indicate how seriously they take internal control within the organization.
BEC
A company hopes to benefit over the next few years from the economies of scale. Which of the following is most likely to cause this hope?
A. The company hopes to have better trained workers because it has now been in operation for a critical period of time.
B. The company hopes that expansion will create a lower cost per unit for its products.
C. The company hopes to be able to change the type of operation so that its variable costs will decrease significantly although fixed costs will rise.
D. The company hopes to gradually increase its sales price while its cost remains unchanged due to better market recognition.
Answer is B
As a company expands (through growth or acquisition), it hopes that its average production costs will fall on a per unit basis. Many costs will not grow proportionally with the increase in units sold. If sales price and demand remain stable, profits should rise. Hopefully, this anticipated drop in average cost can be created by such things as buying in larger quantities and spreading advertising expenditures over more products.
Quick comment:
Several weeks ago, I mentioned that my new favorite quotation is "Your dream isn't big enough if it doesn't scare you." I love that quote and have repeated it to many people whom I know. I originally read it on someone's website. So, earlier today I decided to go to Google and figure out who really did say these words in the first place. When I typed in the phrase and hit search, one of the very first sources that popped up was www.CPAreviewforFREE.com. I just had to laugh - apparently, if you repeat something often enough, people will start to give you the credit.
Joe Hoyle
President
CPA Review for FREE
www.CPAreviewforFREE.com
3351 Lady Marian Court
Midlothian, VA 23113
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