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October 31, 2011 (Happy Halloween for those in the USA)

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Lesson 106

From:  Joe

 

(1) – People always ask us:  “CPAreviewforFree.com provides such a great service for so many people – how can I help?”   That’s easy—don't pay all those other guys thousands of dollars for mediocre materials.   Go to our store and (at the very least) review what we have to sell to help you pass the CPA Exam.   It’s good stuff and it’s a lot less expensive.   You can support us by buying one of our products.   Those products are offered to help provide the financial support we need in order to stay in business.

 

You can also help us by asking your firm HR manager/partner to contact us about how CPAreviewforFREE can save thousands of dollars per intern/employee by using our proven materials.

 

We are able to spend all these countless hours for exactly one reason:    people just like you are willing to buy our products and support our efforts to be helpful to so many people around the globe. 

 

(2) – Speaking of helping people:

 

From GB:  “I purchased the Accounting Points to Pass and they really helped.“

 

From KG:  “Just wanted to say thanks again for the excellent information on this website. I've passed two exams on the first try using it. . . . Thanks, and I will be using this site for my last 2 exams without hesitation. Great tool for study.”

 

From JC:  “Thank you so much for creating this site. It’s been a huge resource throughout my studying process. Got my scores back the other day and got an 81 on AUD and a 75 on BEC! Like you guys say, anything beyond a 75 means you studied too hard! I already got an 81 on FAR so now on to REG!”

 

Ah, such notes just make us all smile around here.

 

(3) - The Wall Street Journal had a great article on Wednesday, October 26 titled “Toughest Exam Question:   What is the Best Way to Study?”   I personally thought it was super – even going so far as to talk about what you should eat on the morning of an exam.   After so many years of watching students take tests (and often doing poorer than they should), I liked everything they said in this article.   Further down in the article, there is another short essay titled “Tips on Conquering Test-Day Jitters.”  

 

If you are going to be taking the CPA Exam (or if you know anyone who is a student and will be taking tests in the future), it would be a great idea to read both of these articles.

 

(4) – I am not sure how many of the people who get these emails might be impacted by this announcement but it is interesting to see how the CPA Exam is moving more and more toward becoming a completely international exam. 

 

Starting in February 2012, the CPA Exam will be given in Brazil.  

 

(5) – It is amazing where a person can manage to find inspiration.   I have often said that inspiration is everywhere in life if you’ll just open up your eyes and look for it.   Inspiration is there is you are willing to receive it.   It is almost like all of life wants to encourage you to succeed.   We seem to live in a negative time where everyone is angry about everything.   But, if you will stay positive and look around you with an open mind, you’ll be surprised how much inspiration there really is. 

 

I was watching a video recently about Islamic Art at the Metropolitan Museum of Art.   The moderator showed this lovely bowl that was approximately 1,000 years old (you had to wonder how it could have possibly survived for so long without being cracked or crushed).   It had on it a very interesting and intricate design.   It was an extremely pretty piece.   The moderator then went on to explain that the design was really the words “planning before work protects you from regret.”   The words were the design.  

 

I liked that idea—the need for planning before work.  I rush around a lot and have a lot of regret.   Frequently, I start working on something and only then do I try to figure out what I want to get done.   Probably not surprising, I’m often inefficient and wind up wasting lots of valuable time.

 

Ever since I watched that art video, I have been trying to do a better job of “planning before work.”   I want to get back into the habit of (a) writing down what I want to do over the next few hours and then (b) putting those tasks in order of priority before I get started.   I’ll list 5-10 things that I need to get done and then circle them one at a time and write 1, 2, 3, etc. to indicate what I need to do first, second, and so on.

 

It really has helped me.   I’m starting to get more accomplished.   I work a lot of hours but often get frustrated that I don’t accomplish as much as I should.  Too often, I spend a lot of time and get really tired but wind up feeling like I have under-achieved.

 

“Planning before work” seems to be helping me.   It forces me to consider what I need to get done and what I really can defer.  

 

So, when you next sit down to plan your day or your studies.   You might try listing out what needs to be done and then prioritize that list.   I find, in preparing for the CPA exam, that it is very easy to do everything BUT study for the exam.   If you don’t give studying a high priority, it is often easy to put it off until tomorrow so that it simply never gets done.  And, that is no way to get those 75 points you need to pass this exam.

 

Check out the bowl that I found inspirational, it can be located at the following URL.   Can you imagine, it is 1,000 years old and the message is still special.

 

(6) – As many people know, I write college textbooks.   One of my books is free online.   It is a basic Financial Accounting textbook.   If you know anyone who just wants to read basic Financial Accounting, click here.  You can see the table of contents and read any chapter that you want.  This is not a bad way to review the basics of financial accounting without having to spend money.

 

 

(7) – Okay, I know some baseball fans are happy and some baseball fans are upset by the World Series.   However, it is hard not to feel good about the St. Louis Cardinals.   About 5-6 weeks ago, no one gave them a chance of even getting into the playoffs.   They were out of it and they seemed to have no hope at all.   But, not only did they get into the playoffs on the very last day of the season, they went all the way to the final game and became the champions.

 

It would have been so easy for those players to have given up back in September.

 

It would have been so easy to say “we just can’t make it so why kill ourselves trying.”

 

It would have been so easy to say “we are just not good enough this time, maybe we can do better next year.”

 

But they didn’t give up and things started to go better and they managed to win it all. 

 

In sports, there is nothing quite like watching the final out of the championship game when all the players rush together to celebrate.  What a wonderful feeling.   Success!  Victory!

 

I know a lot of the people who get these email lessons may be feeling discouraged.   It might feel like you are never going to pass.   It is easy to give up.  Or, at the least, not study so hard.   It is easy to feel defeated.   But if you tell yourself that you can’t win, you’ll never get anywhere.   The moment St. Louis gave up, their season would have been over.   That didn’t give up; they came back; they won.

 

I always say that giving up is the easiest thing in the world.    It gives you an excuse to stop trying so hard.   It is the mere fact that St. Louis didn’t give up even when things looked hopeless that makes their victory so much more exciting. 

 

If victory were easy, it wouldn’t be fun.

If success were assured, you would never experience the excitement.

 

Yes, passing the CPA Exam is a real challenge.  And, yes, you may fail parts.   But, in the long run, the only way that you can fail is to give up.  If you keep pushing, if you keep getting better, if you keep believing in yourself, if you keep adding points, then one day you are going to pass.   And that day is one that you will remember for the rest of your life.  Every time you think about the day that you received those passing grades you’ll feel this exciting tingle run up and down your spine – “it looked like I was going to come up short but I didn’t give in and, ultimately, I made it happen.”

 

That’s the definition of a champion.

 

St. Louis did it

So can you.

 

(9) – Time for some practice.

 

FAR – from my Intermediate Accounting class from Friday.

 

A company has $900,000 in revenues in Year One.   Of that amount, $350,000 is taxable in Year 5 with the rest taxable immediately.    The company also has $600,000 in expenses.  Of this amount, $300,000 is deductible in Year One for tax purposes, $200,000 in Year Two, and $100,000 in Year Three.   The company believes there is a 53 percent chance that it will have income in Year Two so the expenses can be deducted and that there is a 46 percent chance that it will have income in Year Three so the expenses can be deducted.   The enacted tax rate is 40 percent.   What is income tax expense-deferred to be recognized in Year One?

A.   $20,000

B.   $60,000

C.   $80,000

D.   $140,000

 

 

Answer is B

 

Deferred income taxes are recognized using a balance sheet approach.   Deferred tax liabilities and assets are determined first and the expense is the amount needed to record those figures.   Here, the deferred tax liability is the tax on the temporary difference that increases taxable income in Year 5 ($140,000 or $350,000 times 40 percent).   The deferred tax asset is the tax on the temporary differences that will decrease taxable income in Years 2 and 3 ($200,000 + $100,000 = $300,000 and then times 40 percent to arrive at $120,000).   However, for any deferred tax asset, the company must also recognize a reduction (a valuation allowance) if officials believe that the company is not more likely than not to have income in those years so that the expenses can be used to reduce that taxable income.   The chance is over 50 percent in Year Two (53 percent) but not in Year Three (46 percent).   Therefore, a valuation allowance is needed for Year Three ($40,000 or $100,000 x 40 percent).   The deferred tax asset to be reported is really only $80,000 ($120,000 minus $40,000).   Creating the deferred tax liability leads to an expense of $140,000.   Creating the deferred tax asset leads to an expense reduction of $80,000.   The net change of $60,000 ($140,000 minus $80,000) is the income tax expense-deferred.

 

 

Regulation

 

Samson and Delilah form a partnership to create a business.   They will be equal partners.   Samson contributes $13,000 in cash and several pieces of equipment.   This equipment had originally cost $30,000 but now has a tax basis of $21,000.    However, it had a fair value of $24,000.   What is Samson’s tax basis in connection with his interest in this partnership?

 

A.   $13,000

B.   $34,000

C.   $37,000

D.   $43,000

 

 

Answer is B

 

Normally, there is no gain or loss for tax purposes in an exchange between a partner and a partnership.   Therefore, without a recognized gain or loss, there is no reason to change the tax basis.   The cash has a tax basis of $13,000 and the equipment has a tax basis of $21,000.   The tax basis surrendered was $34,000.  That becomes the taxpayer’s basis in the partnership.  

 

 

Auditing

 

An auditor is currently examining invoices that explain additions recorded to the reporting company’s buildings and equipment account during the current year.   In this particular test, what is the auditor most concerned about?

 

A.     Net income is overstated.

B.     Expenses are overstated.

C.     Assets are understated.

D.    Liabilities are understated.

 

 

Answer is A

 

The amounts have already been recorded as assets.   It is likely that the amounts have also been recorded as liabilities (liabilities are credited to offset the debit to the asset account).   Therefore, the assets and liabilities might be overstated but it is hard to see how they could be understated.    And, since an asset has been recorded (rather than an expense), the expenses cannot be overstated.    The auditor worries that the capitalized amount in the asset account really should have been an expense.    For example, the amount might have been recorded as an asset to lower expenses and, therefore, inflate net income.   The auditor is worried that net income is overstated.

 

 

BEC

 

A company has a quick ratio of 1.60 to 1.0 ($160,000/$100,000) and a current ratio of 2.00 to 1.0 ($200,000/$100,000).   At the very last minute in a company’s fiscal year, it sells an additional $10,000 in inventory on account for $14,000.   Which of the following is true after this last transaction is recorded?

 

A.   The quick ratio is 1.74 to 1.0

B.   The current ratio is 2.14 to 1.0

C.   The current ratio is 2.10 to 1.0

D.   The quick ratio is 1.64 to 1.0

 

 

Answer is A

 

Accounts receivable is included in determining the quick ratio but inventory is not.   Thus, the only change here for the quick ratio is that accounts receivable goes up by $14,000 so the computation is now $174,000/$100,000 or 1.74 to 1.0.   For the current ratio, both the change in accounts receivable (up $14,000) and inventory (down $10,000) are included.   The net impact is an increase of $4,000 so that the current ratio is now $204,000/$100,000 or 2.04 to 1.0

 

 

Have a great week.   Shoot for that victory.

 

 

Joe Hoyle

President and CoFounder

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