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June 7, 2011

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Lesson 97

From: Joe

(1) – We just added a few additional Tips to our “Tips for Success” column on our website (www.CPAreviewforFREE.com). Go to the homepage and you’ll see “CPA Exam Resources” in the lower left. “Tips for Success” should be the fourth article on that list.


(2) – I am truly excited that, in two weeks, we will be adding a brand new product to our list. We are always thinking of ways to help you pass. Okay, for now, it is only for FAR. It addresses the concern that every candidate must face:
--You work a question.
--You miss the question.
--You read the answer carefully.
--You think you understand the answer so you want to work another question again to see if you can get it correct this time. (Have you really learned it?) However, you already know the answer to that question so it really doesn’t prove anything to do the same question again.

What you really want is another question in the same category that you can keep working as many times as you want as long as you want--unlimited questions! Yea, that would be a big help.

Welcome to: POINTS TO PASS

If you subscribe to this program, the software will generate a stream of new questions so that you can try again (and again and again) until you are sure you have mastered the material. The best way to practice is to practice and Points to Pass allows you to do that for as long as you want.

Points to Pass will generate an entirely new question.

If you really understand the concept, you will get the correct answer. If not, you can read the answer carefully and try again with a newly generated question until you are comfortable with this computation.

I just think this is the absolute greatest way ever to prepare for the CPA Exam. And we will have FAR available on a subscription basis in about two weeks – stay tuned.

(3) – I was in Norfolk, Virginia a few weeks back on a Sunday morning. I walked into an old-timey bookstore, the kind you used to see before they started getting to be the size of large barns. The first thing I noticed was a little sign that asked the question “what would you set out to do in life if you had no fear of failure?”

Interesting question – one that I have thought a lot about since that morning. We are all ruled (at least somewhat) by fear. There are lots of things that we really want to do except we are afraid to try. We are timid. We all hold back because we worry about what might happen if we do not succeed. Instead of focusing on what we might be able to accomplish, we try to stay totally safe. Failure gets built up in our minds until it is this huge ogre that is going to hurt us with an ax.

Come on, really?

I’ve known lots of people who became so obsessed with the possibility of failure that they would not even take the exam. They were never able to walk in and take it for fear of failure.

What will really happen if you fail the CPA Exam?

--You’ll feel bad for a day or two.
--You’ll wonder how you could have gotten a few more questions correct.
--You’ll fuss that you got too many weird questions.
--You’ll wish you had been a bit more careful and managed your time better.

And then you’ll move on and start thinking about getting back into your preparation. You’ll start adding points again and working to do things slightly better. Life is full of trial and error – you’ll start working on doing better the next time so you will pass.

So, put all thoughts of failure out of your mind. Such thoughts are never helpful and, in truth, those thoughts will just seem a lot scarier than necessary. The fear of failure will hold you back and make you cautious. Thinking about failure doesn’t do you any good and it will probably make you play scared.

I don’t like playing scared. That’s not what life is all about. Instead of thinking about failure, I want you to have Power Thoughts.
--I am going to learn this stuff.
--If other people can do this, so can I.
--It just takes time and I’m going to give it the time that it needs.
--If I add a point or two every day, I’ll be able to pass in no time.
--I will make the time today to get in the study that I need.
--I can make this happen.
--I can work one more question and read one more answer.

You need Power Thoughts. You need Power Thoughts every day to keep up your spirits. You don’t need to play scared. I recently heard a person mention a favorite saying of mine: “Why not go out on a limb? Isn't that where the fruit is?”

Go after the exam, don’t let it come after you.
Go after those hours of study.
Go after the knowledge you need.
Go after those points and don’t quit going for them until you have 75.

Go boldly after the CPA Exam. Nothing is accomplished by being afraid.


(4) – We love having 20,000 subscribers – we hope you’ll go out and get us some more subscribers. Explain to people what they are missing.

However, if you ever decide that you want to unsubscribe, just scroll to the bottom of this email and click on “unsubscribe.” You can do that if and when you are ready to stop receiving these email messages.


(5) – One of my former students came by my office this afternoon to talk about the CPA Exam. She graduated a few weeks ago and is studying hard so she can knock out some/all of the exam over the summer. She asked specifically about the three written communication questions included in BEC.

The best thing you can do for the written communications questions is to go to www.cpa-exam.org and click on Tutorial and Sample Tests. Then, select the Sample Tests for downloading. They will give you five multiple-choice questions. After you submit those answers, they give you two examples of written communications questions. That shows you the kinds of questions that you are going to see.

It is very important to understand that they include the following information (I may have missed a word or two but this is the basic idea).

“REMINDER: Your response will be graded for both technical content and writing skills. Technical content will be evaluated for infor¬mation that is helpful to the intended reader and clearly relevant to the issue. Writing skills will be evaluated for development, organi¬zation, and the appropriate expression of ideas in professional correspondence. Use a standard business memo or letter format with a clear beginning, middle, and end. Do not convey information in the form of a table, bullet point list, or other abbreviated presentation.”

In other words, write something that is clear and understandable and addresses the question in a professional manner. Make it look like it was written by a CPA.

I gave my student the following example: you might be told that a client runs a manufacturing operation and wants you to suggest a method for reporting a by-product that is created as a result of this process. That seemed like a reasonable question that a CPA might encounter in practice and would fall under the BEC topics.

My student then asked the obvious question. “What if I don’t know a specific method for handling a by-product? Do I just leave the answer blank and get a zero?”

Absolutely not!!! The answer is graded twice. First, it is read to determine whether it is “on topic” – in other words is the written answer about the accounting for by-products? If it is not, if you have written about deferred taxes or contract law, you get a zero regardless of how well written the answer is. The answer has to address the question.

If your answer is “on topic,” then the question goes through a second grading where points are given for your use of the English language as described above. Notice, that the second grading is about the use of the language and not about whether the answer is right or wrong. The rest of the BEC exam tests your knowledge of content. That is not the purpose of the written communication questions. So, you do have to be “on content,” you do have to write about the subject in question. After that, though, the points are given based on proper use of English and not on how well you did getting the answer perfectly correct.


(6) – Remember a free study guide is available to show you how to combine our free questions and answers with our content subscription service ($15 per month per part) if you’ll identify the part that you are going to study next in an email to Jhoyle@cpareviewforfree.com. It is not fair to ask you to spend money without showing you how the program works.


(7) – Review – let’s add some points. Let’s do some practice.

FAR – Just to show you how a program like Points to Pass works, I went to our free question and answer data base and selected a question and answer. Then, I made some changes so that you can try the topic again.

You can find the following question in our database of questions:
(a) - The James Company starts Year One with accounts receivable of $370,000 and an allowance for doubtful accounts of $22,200 (a credit balance). During the year, credit sales of $1.9 million were made and cash of $1.2 million was collected. Accounts with a total balance of $50,000 were written off during the period as uncollectible. Company officials believe that 6 percent of ending accounts receivables will eventually prove to be uncollectible. What should James Company report as its bad debt expense for this year?

A - $61,200
B - $68,400
C - $89,000
D - $92,000


The answer is C.

In applying the percentage of receivables approach to bad debts, the allowance for doubtful accounts is the balance being estimated. The ending receivable balance is $370,000 plus $1.9 million less $1.2 million less $50,000 or $1,020,000. Because 6 percent is the estimated amount of uncollectible accounts, the company needs to report an allowance for doubtful accounts of $61,200 ($1,020,000 x 6 percent). Bad debt expense is the amount of adjustment that is needed so that the year-end allowance reports this $61,200. Prior to the adjustment, the allowance has a debit balance of $27,800 (the original $22,200 credit reduced by $50,000 in accounts written off). The company must turn the $27,800 debit balance into the proper $61,200 credit balance. To do so, an expense of $89,000 is recognized.
**

Let’s assume you missed the above question, you read the answer carefully and now you want to try again. You tell Points to Pass to show you a second question on this topic and here is what you get.

(b) The Robertson Company starts Year One with accounts receivable of $510,000 and an allowance for doubtful accounts of $41,000 (a credit balance). During the year, credit sales of $2.3 million were made and cash of $1.9 million was collected. Accounts with a total balance of $60,000 were written off during the period as uncollectible. Company officials believe that 5 percent of ending accounts receivables will eventually prove to be uncollectible. What should Robertson Company report as its bad debt expense for this year?

A - $42,500
B - $61,500
C - $64,500
D - $69,500


The answer is B.

In applying the percentage of receivables approach to bad debts, the allowance for doubtful accounts is the balance being estimated. The ending receivable balance is $510,000 plus $2.3 million less $1.9 million less $60,000 or $850,000. Because 5 percent is the estimated amount of uncollectible accounts, the company needs to report an allowance for doubtful accounts of $42,500 ($850,000 x 5 percent). Bad debt expense is the amount of adjustment that is needed so that the year-end allowance reports this $42,500. Prior to the adjustment, the allowance has a debit balance of $19,000 (the original $41,000 credit reduced by $60,000 in accounts written off). The company must turn the $19,000 debit balance into the proper $42,500 credit balance. To do so, an expense of $61,500 is recognized.

AND, you can keep requesting questions under Points to Pass until you know exactly how to work this question. Every time I see this I just know how much it will help YOU to pass the FAR portion of the CPA Exam.


Auditing and Attestation

The treasurer of a company has stolen $10,000 in cash from the company. At the end of the year, he is afraid that he will be caught so he transfers $10,000 from one company bank account to another. He records the deposit on December 31 of the first year so that $10,000 cash is added. He does not record the withdrawal from the other account until January 1 of the second year. As a result, for one day, the company looks like it has $10,000 more than it really does. What is this deception called?

A. Kiting
B. Lapping
C. Simultaneous Origination
D. Zero Line Fraud


Answer is A

When money is moved from one account to another but the deposit and the withdrawal are recorded in different time periods to inflate the amount of cash being reported, the term “kiting” is used to identify that fraud.


BEC

A company spends $100,000 to produce 20,000 pounds of product A. However, in that process, 3,000 pounds of product Z are produced. It is viewed as a by-product because it can only be sold for $5 per pound after spending $3 per pound to process it enough to be sold. The company chooses to record this by-product at its net realizable value. What is the cost of a pound of product A?

A. $4.25 per pound
B. $4.50 per pound
C. $4.70 per pound
D. $5.00 per pound


Answer is C

The net realizable value of the by-product is the $5.00 sales price less the $3.00 to be spent on processing or $2.00 per pound. For 3,000 pounds, that is a net realizable value of $6,000. The by-product is recorded at its net realizable value so $6,000 is moved from the $100,000 cost into a by-product inventory account. That leaves $94,000 assigned just to product A. There are 20,000 pounds of product A so the cost is $4.70 per pound.


Regulation

Mr. and Mrs. Stremble were married at the age of 30 and lived together until the current year when Mrs. Stremble died at the age of 70. Mr. Stremble received $100,000 in cash from a life insurance policy. They had paid, as a couple, a total of $40,000 in premiums over the years on this policy. What amount of income must he include in his current tax return as a result of receiving the $100,000 payment?

A. Zero
B. $60,000
C. $80,000
D. $100,000


Answer is A.

Life insurance premiums paid by the couple were never deductible but the proceeds, when received at the time of death, are not taxable. Money from a life insurance policy is not viewed as “income” and, therefore, is not taxed as taxable income.


Have a great week. It has been a beautiful day here in Richmond. Enjoy each day but make sure to make time to do your studies and add some points. Don’t be afraid – go forward boldly.

Joe Hoyle
President
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