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November 6, 2012

Lesson 125

 

Thoughts Go To Those Impacted by Hurricane Sandy

 

Everyone here at CPAreviewforFREE wants the folks who have been hurt by the recent hurricane to know that you are in our thoughts.   Whether you live in one of the Caribbean islands that was hit by Sandy or live along the east coast of the United States, we fully understand how much damage the storm has caused and the incredible amount of suffering.   In our daily lives, it is easy to get wrapped up in something like the CPA Exam and come to believe that passing or failing that test is the most important thing in the world.   Then, a catastrophe like Sandy rolls up and people die or homes are lost or significant devastation takes place.   We hope and pray that each of you has stayed safe along with your family and friends.   Times like the last week help us to keep the rest of life in better perspective.    Every day that we wake up in a warm house with everyone safe, we should count our blessings.  This is why we have a partnership with Project HOPE as part of our Help & Hope Community Forum.  Just click on the Project HOPE logo to help with whatever you can.

 

Make Up Your Mind Yourself

 

I know the big CPA Exam Review programs (that want YOUR money) often tell you that no one actually uses our site.   Hmmm.   I wonder how much you should trust those people.    Let’s look at the facts.    Last week was a pretty typical week for us.  Hundreds of new candidates register with us each week.  The AVERAGE visitor stayed on the site for well over 23 minutes.   Not 23 seconds – but 23 minutes.  

 

Now, what does that tell you about the actual quantity of candidates using our questions and answers to prepare to pass the CPA Exam? 

 

We will go over 40 million pageviews (40,000,000) in the next day or two.   As always, thanks to everyone who helps us by spreading the good word.   We don’t advertise so a whole lot of candidates never even know we exist.   We continue to help more and more candidates every day because you tell people about us, in person and on Facebook and Twitter and in a million other ways.   Thanks!!!

 

Points of Clarification

 

We'd like to clarify some misconceptions about CPAreviewforFREE that we received from users.  

1.  "I'd like to have more than 20 free questions.  How about 30-40?"  You CAN work over 2400 free questions.  After 20 questions, we ask you to register.  That's it.  You can go back to working the remainder of the 2400 free questions after registering.  We ask that you register to receive newsletters from us to encourage you and provide tips to help you pass the exam.  We don't sell or rent our lists!

2.  "Questions should be updated with the current standards."  We are up to date with the standards that will appear on the CPA exam.  Remember, accounting and auditing pronouncements are eligible to be tested on the Uniform CPA Examination in the testing window beginning six months after a pronouncement's effective date.  CPAreviewforFREE meets with the AICPA Board of Examiners twice a year to hear the latest regarding the exam. 

3.  "Develop a Comprehensive Online Forum so that People return to your site for mutual support."  We DO have a community forum.  Share your thoughts, fears, encouragement.  Bookmark it today!

 

How to Deal with Nervousness

 

I gave a big test last week in one of my classes here at the university.   As luck would have it, I walked to the classroom with one of my students.   She was chatting about the test and how nervous she was.   In those last 15 seconds, I tried to get her to calm down but there wasn’t much time.  

 

I had expected this particular student to do quite well on the test but she didn’t.   She missed a number of questions that I would have thought she would get correct.   She should have done well but she made a low grade.   Afterwards, my first concern was that her nervousness had prevented her from scoring high on my test.  

 

Whenever there is an important test, everyone gets a little nervous.   In fact, I think a slight bit of tension can be okay because it helps you focus and keeps you alert.   However, any degree of tension above the “slight” level is bad.   It makes it difficult to read the questions and concentrate on the numbers and words that are most important.   It zaps away your energy.   There is absolutely nothing good about more than a little (a very little) nervousness.  

 

I have a couple of pieces of advice about nervousness and how to stay calm.  More...

 

Time for some practice.   

 

Here are four questions.   Let’s see if you can add four points.

 

FAR

 

The Lawson Corporation buys an inventory item for $321 that it plans to sell for $352.   However, by the end of the year, the replacement cost of that inventory item has dropped to $270 because the market has been flooded with units.   Lawson believes the net realizable value is now $318.   If IFRS is being applied, what is reported for this inventory item on the company’s balance sheet?

 

A.   $270

B.   $318

C.   $321

D.   $352

 

 

Answer is B

 

Both IFRS and US GAAP report inventory at the lower of cost or market.  Under US GAAP, the computation of market is quite complex involving both replacement cost and net realizable value.   In IFRS, market is simply the net realizable value.   Since net realizable value ($318) is lower than cost ($321), the $318 is reported.   Furthermore, in US GAAP, if the reported value of this item is reduced and then ever increases, no removal of the loss is made.   However, for IFRS, if the value rebounds, the loss (or a portion of the loss) is removed.

 

 

Auditing

 

An audit team is doing an engagement that requires the use of governmental auditing standards.   Where can generally accepted government auditing standards be found?

 

A.   In the “yellow book” produced by the Government Accountability Office.

B.   In the “white book” produced by the US Treasury Department.

C.   In the “blue book” produced by the Office of the Controller General.

D.  In the “red book” produced by the Chief Accountant of the SEC.

 

 

Answer is A.  

 

According to Wikipedia, “the Generally Accepted Government Auditing Standards (GAGAS), commonly referred to as the ‘Yellow Book’, are produced in the United States by the Government Accountability Office (GAO).  The standards apply to bothfinancial and performance audits of government agencies. Five general standards are included: Independence, Due Care,Continuing Professional Education (CPE),

Supervision, Quality Control.  The Yellow Book standards are used by auditors who examine the federal government, . . .”

 

 

Regulation

 

The Curry Corporation (an accrual based taxpayer) had sales in the current year of $500,000.   The company wrote off $9,000 of its accounts receivable as uncollectible.   At the end of the year, the company still had accounts receivable of $100,000.   The company’s accountant believes that roughly 2 percent of its sales for the year or 11 percent of its accounts receivable will eventually prove to be uncollectible.   What amount can be deducted as bad debts for the year?

 

A.   Zero

B.   $9,000

C.   $10,000

D.   $11,000

 

 

Answer is B

 

Corporations file a form 1120.   According to the instructions for the form 1120, in determining bad debts, the company should “enter the total debts that became worthless in whole or in part during the tax year.”   The government prefers the actual fact of the debt becoming worthless to any estimate of that amount.   In this year, $9,000 in accounts were judged to be uncollectible.  

  

BEC

 

A company is looking into making an investment and discovers that the net present value of that investment is a positive $6,000.   What does that mean?

 

A.   The investment has a cost to the company of $6,000.

B.   The investment has an expected residual value at the end of its maturity of $6,000.

C.   The present value of the cash flows generated by the investment is greater than its cost by $6,000.

D.   The future cash to be generated by the investment is greater than its present value by $6,000.

 

 

Answer is C

 

One way to determine if an investment opportunity should be pursued is to determine the present value of those future cash flows that it will generate and compare that amount to its cost.   The difference is known as the net present value.   If that number is positive (the present value is higher than the cost), the investment is considered a wise one.   In that case, the value of the future cash flows is greater than the current amount that must be spent.   In computing the present value, a discount rate must be selected.   Several possible rates can be applied although the company’s weighted average cost of capital is frequently used.

 

 

Have a great week.    Add some points.

 

Add more points.

 

And

 

Add even more points.

 

Joe Hoyle
Co-Founder
CPA Review for FREE