Read Those Questions Carefully

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February 27, 2011

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Lesson 89

From: Joe

(I was going to send this message out several hours ago but my Internet connection went down completely. At such times, I am always reminded of how much we rely on technology.)

(1) – I gave an intermediate accounting test last week. I thought it was a pretty good test—the questions were hard without being impossible. However, there was one devious trick: The students had to read each question rather carefully. Okay, the test was in English and I used relatively small words but you had to actually read what it said rather than scan it quickly and guess at what was being asked.

It was the first test of the semester and the students were very tense and, unfortunately, some of them didn’t really read the questions. It wasn’t that they didn’t know the material; it was that they literally did not read the questions closely enough. Can you believe that? How could you ever try to answer a question without reading it carefully? It was an important test in their major and they didn’t focus on the question. Well, believe it or not, that happens way too often. Students are in such a hurry to start creating answers that they don’t pay sufficient attention to the question. They do not show the patience necessary to read the entire question before they start forming an answer.

Decades ago, candidates could buy back their CPA Exam answers so they could actually see what they had missed and try to do better the next time (the CPA Exam has obviously changed a lot over the decades). I would occasionally sit down with a candidate who had failed and we would go over the questions they missed very carefully. I cannot tell you how often the candidate would look up horror stricken during these sessions and cry out “I knew that question – how could I possibly have chosen the wrong answer? I must have read the question incorrectly.” There we go again, missing questions based on a poor reading.

I have a theory. If are sloppy when we practice, then, when we get to the real game, we will play sloppy. As the old saying goes, “you play like you practice.” In other words, when you practice, if you get used to scanning through questions quickly without focusing on what is being asked, you’ll be likely to do that on the real exam. In my classes, students often excuse themselves for dumb answers by lamenting “oh, I read the question wrong.” And, I will respond “don’t do that! You are picking up bad habits.”

As you work problem after problem to get yourself ready for the CPA Exam, work on focusing on the question to make sure you know
--what is being asked
--the facts that you have available

Then, in most cases, the problem is no more than putting those pieces together in the proper order.

If you miss a question during practice because you didn’t know what to do, that’s okay because you can then work on the topic and learn it. However, if you miss a question due to careless reading, you’ve wasted your time. You’ve not learned a single thing. That is probably the very worse outcome: a mistake by bad reading. Nothing at all happens that can be positive about that.

As you practice, read those questions ever so carefully. Learn to focus during your work sessions and you’ll be more likely to focus in the real exam. Don’t pick up bad habits. That focus will help you to stop giving away points on the CPA Exam through carelessness.


(2) – If you are ready to unsubscribe to these email lessons that I send out every week or two, you can easily scroll to the bottom of this lesson (or any other lesson) and you’ll find the world famous “Unsubscribe” button. Click on that and we will have parted. It will seem sad without you but you do have the right to unsubscribe whenever you so choose.


(3) – My good buddy Professor C. J. Skender at UNC sent me the following great quote. I had asked him what words had inspired him in his life.

“In Rocky IV, Rocky is talking with his son before leaving for Russia to fight Ivan Drago. ‘Going in one more round when you don't think you can, that's what makes all the difference in your life.’"

In studying to pass the CPA Exam (and in so many other things in life), we work until we get tired. Studying day after day can just wear a person totally out. Whether you succeed often depends on what you do AFTER you reach the point of being sick and tired of it all. Anyone can study well when they are fresh and just getting started. That doesn’t prove much. You start really making a difference when you get to the point where you want to quit. Then, what do you do? How tough are you?

A vast majority of people get tired and ready to quit and then they respond by quitting. It certainly takes nothing to put down the pencil and go watch television or go take a nap. That’s easy. That doesn’t make you stronger or more able to take on strong challenges.

It is a whole lot more difficult when you get tired to then push yourself to keep working for another 15-30 minutes. It takes something deep down inside of yourself to push on when you have reached the point when you start to think “Quit.”

Anyone can work well up to the point where you think “I’m ready to stop.” It is the real winners in life who can then push on for another 15-30 minutes even after they are dogged tired and ready to quit for the day.

As Rocky says, “Going in one more round when you don't think you can, that's what makes all the difference in your life."


(4) – Let’s do some practice. Remember to read the questions carefully to make sure you know the facts that are given and the actual question being asked. Don’t miss a single question because of poor reading.


FAR (we worked this problem today in my Intermediate Accounting II class).

On January 1, Year One, Ace Company completes construction work on a warehouse at a cost of $2 million and sells it to a bank for $2.3 million. Ace immediately leases it back for its entire 20 year life for lease payments that have a present value of $2.3 million. The straight-line method is to be used and the warehouse is expected to have no residual value at the end of that 20 years. What amount of depreciation expense is recognized by Ace for Year One?

A. Zero
B. $15,000
C. $100,000
D. $115,000


Answer is C

Initially, in this question, it looks like the depreciation should be the capitalized lease cost of $2.3 million allocated over 20 years at a rate of $115,000 per year. However, in a sale-leaseback arrangement where the asset is leased back for most of its life, any gain on the sale ($300,000 in this case) is not recognized but rather deferred. Then, that deferred gain is reduced over the life of the lease or, here, at the rate of $15,000 per year ($300,000 deferred gain divided over 20 years). The reduction of the deferred gain is not recognized as an actual gain but rather as a reduction of depreciation expense. Therefore, Ace will report depreciation expense of $100,000 ($115,000 less $15,000).


Regulation

My daughter made a ceramic soup bowl at her church. It was red and shaped like a heart. It had a value of $20. Right before the Super Bowl, it was auctioned off by the church and I paid $35 to buy it. What amount of itemized deduction can I claim on my individual income taxes?

A. Zero
B. $15
C. $20
D. $35


Answer is B

If you pay an amount to a qualified charity to acquire an item, then anything you pay over the fair value of the property is viewed as a donation to the organization. Because I paid $15 more than fair value, I can take that as a charitable contribution on my itemized deductions.


BEC

Internal controls are extremely important to the appropriate governance of any organization. In the United States, what group produced the framework for internal controls that is the most commonly used by organizations?

A. FASB
B. PCAOB
C. COSO
D. IASB


Answer is C

The internal control framework that is most commonly used in the United States is “Internal Control—Integrated Framework” produced by COSO. In this, COSO separates internal control into five components: control environment, risk assessment process, control activities, information and communication, and monitoring. COSO is the Committee of Sponsoring Organizations of the Treadway Commission.


Auditing and Attestation

The International Ethics Standards Board for Accountants (IAESB) operates within the International Federation of Accountants (IFAC). It produces ethical standards to be used by accountants around the world. Which of these statements reflects the rules created by the IAESB in connection with the acceptance of contingent fees?

A. The professional accountant should never accept a contingent fee.
B. The professional accountant should only accept contingent fees for audit engagements.
C. The professional accountant should make sure that necessary safeguards are in effect in connection with contingent fees.
D. The professional accountant should only accept contingent fees for tax engagements.


Answer is C.

Because this set of rules must be flexible enough to be applied around the world (where widely differing rules have long been accepted practice), these standards tend to be more general in nature. Note that A, B, and D are all very specific rules. In contrast, C is a general guideline. It does not indicate what is allowed or not allowed. Instead, it requires the company to set up proper safeguards.


Auditing and Attestation (bonus question because we really want you to pass)

In which paragraph of a standard unqualified audit report is the following sentence found: “An audit includes examining all evidence that supports the amounts and disclosures in the financial statements.”

A. First (introductory) paragraph
B. Second (scope) paragraph
C. Third (opinion) paragraph
D. None of the above


Answer is D

The auditor almost never examines all of the evidence for any reported amount or disclosure. Instead, as is explained in the scope paragraph, the auditor looks at evidence on a test basis. A test basis means that items are studied in samples and is sufficient to be able to provide the reasonable assurance which is given by a CPA in an unqualified opinion.




Joe Hoyle

Co-Founder
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