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May 31, 2011
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Lesson 96
From: Joe
(1) – We have distributed an amazing number of FREE study guides to the folks who have identified their next exam in an email to Jhoyle@cpareviewforfree.com. These study guides explain how to combine our 2,200 free questions and answers with our subscription service to create a comprehensive CPA Exam review program for $15 per month per part (50 cents per day – try to beat that on eBay).
However, the question we always get is: “Can you explain how your subscription service actually works?” Seems like a reasonable question. So, at the end of this email, I’ll give you a demonstration of one very small part of our subscription service. I hope that proves helpful in understanding how our program will get you through this exam for a whole lot less than $2,500.
(2) – We’ve added something new to the home page of our website (www.CPAreviewforFREE.com). Under our CPA Exam Resources section, we already have three important articles:
--Using CPA Review for FREE to Prepare for the CPA Exam.
--Applying for the CPA Exam
--Structure of the CPA Exam
We believe all of these would be helpful to every candidate.
We have now added a fourth article: “Tips for Success.” Over the years, we have distributed scores of tips for success on our Facebook page. Over the last few days, I have gathered my top 60 or so of these tips. Because we have so many, I posted the first ten this week and I’ll post another batch every week or two until they are all posted.
Go to www.CPAreviewforFREE.com. Go to “CPA Exam Resources” on the home page. Click on “Tips for Success.” I probably wouldn’t sit down and read this material all at once like you might a novel. Most people don’t need 60 tips for success at one time. Instead, every day or two, if you feel the need for some encouragement or a boost of energy, go to the website and read a couple.
We hope they help. As always, we are trying our best to do everything we can possibly do to assist you in getting the 75 points you need to pass the CPA Exam. Hope our Tips for Success makes the journey a bit easier.
(3) – I attended a lovely wedding here in Richmond this past Sunday. It was held in a beautiful church that was constructed in 1848. Because of the US Civil War, there are few buildings standing in Richmond that are so old.
During the ceremony, the pastor talked directly to the young couple. He told them there are certain words that they should say to each other so often, during their lives together, that they wear those words out. “Wear these words out” was kind of the theme of his remarks. To the bride and groom, he suggested the words: “I am sorry” and “I’m so very grateful.” Probably good advice for any newlyweds (or anyone else, for that matter).
I liked that idea of “wearing words out.” So, I started thinking: If I were talking to my CPA Exam candidates, what words would I suggest that they “wear out” over the course of their study.
Here’s my suggestion for words that you might want to wear out over the next few weeks or months as you prepare to pass the CPA Exam.
"I'm tired but I can still study a bit longer.” Too many people obsess over being tired and let it control what they can accomplish. At the first hint of tired, they give up and quit. Successful people get to the point where they are tired and then they keep going. That is one true mark of people who succeed in this life.
“I missed this problem but now I see how it works.” Passing the CPA Exam is all about making progress. If you get a question correct, you really learn nothing. If you miss a question and move on, you really learn nothing. But the most important moment is when you miss a question, read the answer carefully, and figure out how to work it right the next time. Now, that’s success.
“I’m not trying to be perfect; I just want to answer enough questions to pass.” It is very easy to get stuck trying to learn it all. I’ve known way too many people who gave up before they ever took the exam because they couldn’t achieve perfection. Don’t worry about trying to answer every question correctly. Once again, as above, the only important goal is making progress.
“The CPA Exam is a mile wide and an inch deep.” The CPA Exam that you take will try to cover a little bit about everything in the world of accounting, auditing, tax, and the like. As you study, it is much more important to cover all the topics a little bit than to cover any topic in too much depth and detail.
“When I get to the exam, I’m going to watch my time closely.” I’m convinced that, once you have put in your 60-100 hours of preparation for each part, the biggest problem is time management during the exam. If you rush too fast, you’ll make careless mistakes. If you work too slowly, you won’t finish. It is very important, as I said in my previous lesson (Lesson 95 that can be found in the Blog Archives in the right hand navigation), that you get used to working at an appropriate “exam speed.”
Okay, I could probably come up with 25 other sets of words to wear out as you prepare for the CPA Exam but these five form a pretty good foundation. I’m not sure that I wouldn’t write them down and tape them to your wall and read through them each and every day.
Wear those words out.
(4) – Personal note to all 20,000 of our subscribers (yeah, this means YOU). We love having you. We really hope we provide a benefit. I never go anywhere (like a wedding) that I don’t think about things to tell you that might help you pass the CPA Exam.
However, if you ever decide that you are ready to unsubscribe, it is easy to do. Scroll to the bottom of any one of these email lessons. You’ll find a link to unsubscribe. Click on that and follow the directions. You have every right to manage your emails. If you are ready to unsubscribe, go for it.
(5) – Yesterday, while I was dressing for the wedding, I watched the last 10 laps of the Indianapolis 500. If you follow car racing at all, you already know what happened. A young rookie was leading the race going into the last lap. He had a good sized lead and was going to win fairly easily. The announcers were already talking about him being the champion. There was really nothing in his way of winning. As he took the very last turn (he could see the finish line), his car slid into the wall. He wasn’t hurt but he lost the race. He let it get away. He had driven by that wall 199 previous times that day with no problem but on that last time, for no apparent reason, he crashed.
Whenever I talk with people about the CPA Exam, I always tell them to take nothing for granted. If you know the topic, make sure you continue to do the work. If you feel good about an area, make sure you continue to do the work. If you have been studying all day and you are going to work a few more problems, make sure you continue to do the work. If you are actually taking the CPA exam and you have been working for nearly 3 or 4 hours, make sure you continue to do the work.
It is easy to lose your focus. It is easy to start day dreaming or just start thinking of something else. It is easy to get distracted. Things are always happening that catch your attention. When you are studying, your mind should be on one thing and one thing only: How do I get this particular question in front of me answered correctly? When you are taking the exam itself, your mind should be on one thing and one thing only: How do I get this one particular question in front of me answered correctly?
My assumption is that most people actually study enough hours to pass the exam. However, during those hours, it is easy to get distracted and wind up accomplishing nothing. You don’t just need 60-100 hours per part; you need 60-100 hours of concentrated study per part. Make sure you continue to do the work.
My assumption is that most people who take the CPA Exam actually have enough knowledge in their heads to pass. However, during the exam itself, it is easy to get distracted and wind up making mistakes. Don’t worry about the lights, the seat, the computer screen, the noise, the heat, the cold, the other people. When you are taking the CPA Exam only one thing matters: How do I get this particular question in front of me answered correctly?
Studying for the CPA Exam is not a game. It is not for play. It deserves your undivided attention. You don’t want to lose the race just because you failed to do something that you had done before and should have been able to do again.
(6) – I want to close today by giving you a full-scale illustration of our Subscription Service. As we’ve said, it costs $15 per month per part. Let’s look at FAR. If you subscribe to the FAR material, what do you get for your $15?
--You get 10 examples of our illustrations of what we believe task-based simulations look like.
--You get a study guide to show how to combine our free questions and our subscription service to create a comprehensive program (this is the study guide you can get for free by sending a note to Jhoyle@cpareviewforfree.com).
--For FAR, you get content information divided into 23 different topic areas – everything from consolidations to earnings per share and inventory to government accounting. Those topic areas contain hundreds of slides presenting the information we believe you need to know to pass that part of the CPA Exam.
What does this content information look like? I decided to select accounts receivable as my illustration because it is one of the shortest topics and won’t use up so much space in your email box.
So, quite literally, here is our content material for Accounts Receivable within the FAR part of the CPA Exam as covered by our subscription service
SLIDE ONE
Accounts Receivables
Accounts receivable is normally reported as a current asset because collection is expected within one year. It reflects amounts owed to a company by its customers.
Accounts receivable should be disclosed in the balance sheet at net realizable value (the cash expected – the total amount owed to the company less the estimated amount of uncollectibles). Receivables from company officers, employees, and affiliate companies should be separately disclosed.
SLIDE TWO
Cash discounts (such as 2/10, n/30) give a discount if the customer pays within a certain period of time. In this example, a 2 percent discount can be taken if payment is made in 10 days but any remaining amount must be paid in total in 30 days.
When a discount is offered, account receivable can be recorded by either the net method or the gross method.
SLIDE THREE
Net method. The seller (and the buyer if that company so chooses) reports the transaction at the net amount (after the discount) which assumes the discount will be taken. A $100 sale is recorded at only $98 if a 2 percent discount is available. If paid in time, cash is debited for $98 and the $98 account receivable is removed. However, the $2 discount might not be taken so that the entire $100 is collected. In that case, the extra $2 collection is recorded as interest.
SLIDE FOUR
Gross method. The seller (and, possibly, buyer) reports these transactions at the gross amount which assumes the discount will not be taken. A $100 sale is recorded at $100. The only problem is that the $2 discount might still be taken so that only $98 is collected. The $2 reduction is recorded as a sales discount by the seller. “Sales discounts” reduce Sales on the income statement.
SLIDE FIVE
Bad Debts. Bad Debt Expense is reported on the income statement and the Allowance for Bad Debts is reported on the balance sheet as a reduction to Accounts Receivable.
The allowance method of recording bad debts is used in US GAAP because it matches the expense with the timing of the revenue. An alternative, the direct method, does not recognize any expense until an account proves uncollectible. This method is not allowed under US GAAP.
SLIDE SIX
The allowance method estimates the amount of uncollectible accounts based on past experience and present industry, company, and economic conditions. Bad debt expense is recognized in the same period as the sale. Because the actual bad accounts have not yet been identified, a contra valuation account (an Allowance for Bad Debts – which might also be called something like an Allowance for Doubtful Accounts) is established for the amount of the receivables estimated to be uncollectible.
SLIDE SEVEN
The adjusting entry to record Bad Debt Expense for the period and establish the proper balance in the Allowance for Bad Debts is made at the end of each period.
Bad Debt Expense estimated amount
Allowance for Bad Debts estimated amount
SLIDE EIGHT
When an account actually proves to be uncollectible (the customer dies, moves away, files for bankruptcy or just refuses to pay), the account is written off. However, the expense has already been recognized in the previous estimation entry and should not be recorded again.
Allowance for Bad Debts uncollectible amount
Accounts Receivable uncollectible amount
If this account is ever collected in the future, the above entry is reversed to reinstate the balance before collection is recorded.
SLIDE NINE
One key element of this reporting is left to be shown. How does the company estimate the amount of its bad debts in the first entry shown previously? There are two methods to determine the annual charge to bad debt.
(1) Percentage of sales method
(2) Percentage of receivable method (or a variation – the aging method)
SLIDE TEN
Regardless of the method being used, at the end of each period, the reporting company will have a bad debt expense account with a balance that is zero because no estimation has yet been recorded for the period.
It will also have an Allowance for Bad Debts but that account will have a remaining balance that can either be a debit or a credit. The Allowance balance is its beginning balance for the period less the amount of accounts written off during the period (but plus any accounts that were written back on the books because of latter collection).
SLIDE ELEVEN
PERCENTAGE OF SALES METHOD
Multiply the appropriate percentage times the sales balance for the period. This is the balance that should be reported for Bad Debt Expense.
Because the Bad Debt Expense account has a zero balance, the amount determined by the computation is added directly to Bad Debt Expense (and also to the Allowance for Bad Debts). If the estimation is for $36,000, then the adjusting entry is for $36,000. Bad Debt Expense will equal the estimation. The Allowance for Bad Debts will be its previous balance as adjusted by this final entry.
SLIDE TWELVE
PERCENTAGE OF RECEIVABLES METHOD
Multiply the appropriate percentage times the accounts receivable balance at the end of the period. This is the balance that should be reported as a credit for the Allowance for Bad Debts.
That contra account already has a balance that may be either a debit or a credit. The adjusting entry records the amount needed to bring this previous account balance to the new estimation. If a $3,000 credit was in the allowance account and the estimation is now $40,000, then the adjusting entry is for $37,000. If a $1,000 debit was in the allowance account and the estimation is now $40,000, then the adjusting entry is for $41,000.
SLIDE THIRTEEN
Pledging of receivables. Pledging is an agreement whereby a company’s accounts receivable are used as collat¬eral for loans. Customers whose accounts have been pledged are not aware of this situation so their payments are still remitted to the original company. The pledged accounts merely serve as security to a lender. The only accounting issue relating to pledging is that of adequate disclosure. The accounts receivable, which remain assets of the borrowing entity, continue to be shown as current assets on its balance sheet but must be identified as having been pledged.
SLIDE FOURTEEN
Factoring of receivables. Factoring is the sale of receivables to a buyer known as a factor. The transfer of receivables “without recourse” means that the factor (the buyer) assumes the risk of loss from any noncollection. Thus, once this type of factoring arrangement is com¬pleted, the seller has no further involvement with the accounts. The receivables are removed from the books of the seller and the difference between the cash received and the car¬rying value of those receivables is recognized as a gain or loss.
SLIDE FIFTEEN
Another possibility is factoring “with recourse” where a monetary amount must be returned to the buyer if a specified amount is not collected from the receivables. In recording the transfer of the receivables, the seller must take into account any anticipated repayment amount. For example, if cash of $100,000 is guaranteed but the seller only anticipates that the buyer will collect $98,000, a $2,000 liability is recorded by the seller at the time of sale. The accounts receivable are removed from the seller’s books and this liability is recognized; the cash received is also recorded and the difference is a gain or loss.
SLIDE SIXTEEN
Several Important Ratios Involving Current Assets
Solvency ratios or amounts—Any ratio or computation that measures an entity's short-term viability by its ability to pay its debts as they come due.
---Acid-test (quick) ratio—It is the sum of the quick assets (cash, receivables, and short-term investments) divided by the total of the current liabilities.
---Current ratio—It is computed by taking the total of all current assets (the quick assets plus inventory, prepayments, and supplies) and dividing it by the total of current liabilities
---Working capital—It is computed by taking the total of the current assets and subtracting the current liabilities
SLIDE SEVENTEEN
Operational efficiency ratios or amounts—A ratio or computation that measures an entity's ability to make good use of its assets
---Receivable turnover—It measures how rapidly cash is collected from credit sales. It is computed by taking the net credit sales for a period divided by the average of the net receivables for the same period.
---Number of days’ sales in receivables—The average length of time receivables are out¬standing, which reflects the efficiency of credit and collection policies. It is the receivable balance divided by average credit sales per day.
SLIDE EIGHTEEN
Now that you have gone through all of these slides for accounts receivable, go back to our free questions and answers and work all of the questions provided under “Accounts Receivable.” This should help you get to the point where you can pass Accounts Receivable. Once you can pass the topics, you can pass FAR.
Take good notes, especially for any questions that you miss. A good note is one that takes 10 words or less and explains anything that you might have missed that would prevent you from getting the question correct.
Have a great week!!!
Joe Hoyle
Co-Founder and President
CPA Review for FREE
www.CPAreviewforFREE.com
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