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May 7, 2013
Lesson 132
From: Joe
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I have been a bit slow sending out these email lessons during the spring because I have been tied up teaching some complicated courses at the university. However, I gave my last final exam of the semester yesterday. Now, I plan to be much more consistent over the summer and fall with these periodic email lessons – hopefully, you will be receiving a new lesson every 10-14 days from now on. So, if you are preparing to take the CPA Exam soon, make sure to watch out for our emails. We want to help you (yes, you) get the points you need to knock out that exam just as quickly as possible.
And, if you know someone (perhaps a graduating college student) who is gearing up to take the CPA Exam, suggest they go towww.CPAreviewforFREE.com and register so they can get these lessons. They are absolutely free. We just want to help you add those essential points to your grades and get you that much closer to 75.
WORK ON STAYING FOCUSED--HERE'S HOW
I wanted to give you a quick update. Back on February 27, I talked about how hard it was for me to exercise. Perhaps like you studying for the CPA Exam, I can exercise for a few days but then I will get distracted and fall behind and quit. In that lesson, I talked about the need to have enough discipline to keep doing the necessary work day after day even after it gets boring.
At that time, I mentioned that I had started working out on a recumbent cross trainer (a type of exercise machine that works both the legs and arms). What I had found very interesting was that this particular machine would count my steps. So, after every workout session, I would write down my number of steps and go home and record them in a computer file. There was something about keeping a count and watching the number get higher that really appealed to me. Every day that I exercised on that machine, I will see that number of steps move higher.
Back then, I was trying to go to the gym about 5 times each week. When I was writing that lesson, 33 days had passed and my grand total of steps was all the way up to 35,150. For me, that was a real accomplishment. I had not gotten bored and quit. I had found a routine that seemed to work for me.
So, how am I doing? Well, a total of 97 days have now passed and I am still shooting to work out 5 days per week and my grand total of steps is up to 116,900. I am on track to hit my goal of 1 million steps in 2 ½ years – that will be the summer of 2015.
I cannot explain it but keeping track of the steps just works for me and I’m thrilled by that.
I have never successfully exercised in my entire life but now, every day, I say to myself – you can actually do this; every step you take adds more steps to your total. You can move that total up. My legs are stronger. My heart is stronger. My arms are stronger.
And what is the secret? More...
WE ARE HERE FOR A REASON; THERE IS SERIOUS WORK TO BE DONE
I was reading a book recently and the author was talking about leading a conference on writing. For some reason, he did not take his role very seriously and walked in on the first day and started wasting time. He was amazed because the participants immediately let him know that they had not come to play and have a good time. He said something in the book like “No one said anything directly to me but the message was clear: We are here for a reason; there is serious work to be done.”
There is serious work to be done. That’s a mantra that I like.
If you are going to take the CPA Exam and pass it in a reasonable period of time, you have to approach each day of your preparation with some quote like that: “There is serious work to be done.” The CPA Exam is not trivial. Passing takes a lot of serious work.
In life, there are always distractions calling to you. Those distractions want to keep you from your serious work.
--I am hungry.
--I need a sharper pencil.
--I am cold; I need a sweater.
--I need a cola.
--My shoes hurt my feet.
--I might have an email so I better check
--I wonder who has posted something funny on Facebook.
--I wonder if the dog needs food.
I could list a thousand of these. Sometimes you sound like a two year old fighting to stay out of bed at night.
But, if you really want to pass the CPA Exam, there is serious work to be done.
If you don’t start out with that type of serious attitude, the distractions will pull you in 10 different directions and never let your alone.
There is serious work to be done.
If that is not your attitude, then you might ask yourself whether you really have much of a desire to pass the CPA Exam.
We all build up excuses – my kids, my spouse, my friends, my parents, my teachers – they are all in the way. We all have issues. I can send you a list of mine if you wish. But, in the end, there is serious work to be done. You have to figure out how to go over, around, under, or through those excuses.
And it is up to you to do it. No one can study for you. People can do all kinds of things for you but no one can put information into your head. You have to do that. And, that only starts when you realize that there is serious work to be done.
We launched a subsidiary company that created Accounting Homework Apps for college students. The homework apps are like nothing else on the market. They provide hundreds of multiple choice questions in six common college course topics: Financial Accounting, Management Accounting, Audit, Tax, Accounting Information Systems and Business Law. The app tracks the percent of questions correct, the time it takes to work the questions, the number of questions you want to work and more.
Now you can study on your iPhone/iPad and Android smartphone without using precious data. As finals hit college students, let them know about the apps.
PRACTICE QUESTIONS--ADD SOME POINTS!
For practice today, I am going to do something different. Yesterday afternoon I gave a test and part of it was on accounting for private not-for-profit organizations. NFP accounting makes up 10 percent (on average) of the FAR exam. So, I thought I would give you some of the questions that I asked my students yesterday. A lot of the accounting for these private not-for-profit organizations revolves around handling of donations.
Good luck (I hope you pass the course).
For all of the following questions, assume that Charity A and Charity B are alike in every way except as described. Assume that each of these questions is independent from all other questions.
(1) – Charity A and Charity B both suffer significant damage from a hail storm. Each hires a person to provide essential repairs. Each of these workers donates the labor to the charity. Charity A looks at the repair work and deems it to require a specialized skill. Charity B looks at the repair work and decides that it did not require a specialized skill. After that, which of the following statements is true? Circle the correct answer.
A. Charity A will report more unrestricted net assets than Charity B.
B. Charity A will report the same amount of unrestricted net assets as Charity B.
C. Charity A will report less unrestricted net assets than Charity B.
Answer is B
If donated services require a specialized skill that would have been purchased except for the donation, the expense is recorded at fair value as well as contribution revenue. That is what Charity A did. Those two accounts cancel each other out so that the total of unrestricted net assets is not affected. If the work does not require a specialized skill (and if a nonfinancial asset is not enhanced), no recording is normally made. That is what Charity B did. No entry means that unrestricted net assets are not affected. There is no net effect on unrestricted net assets for either charity.
(2) – Each charity receives a large investment in the common stock shares of a publicly-traded company. Each investment must be held forever. Charity A can spend the resulting income as it sees fit. Charity B must spend the resulting income to supplement salaries. Both charities receive the same amount of income this year. Both charities immediately spend the entire amount of income to supplement salaries. After that, which of the following statements is true? Circle the correct answer.
A. Charity A will report more unrestricted net assets than Charity B.
B. Charity A will report the same amount of unrestricted net assets as Charity B.
C. Charity A will report less unrestricted net assets than Charity B.
Answer is B
The income is unrestricted for Charity A. When it is earned, contribution revenue is increased within the unrestricted net assets. When the money is then spent, salary expense is recognized which reduces unrestricted net assets. The two cancel out. Charity A has no change in its unrestricted net assets. The income is restricted for Charity B. When earned, the temporarily restricted net asset balance is increased. However, when the money is spent in the appropriate fashion, the temporarily restricted net asset balance is reduced and the unrestricted net assets category is increased (because the restriction has been fulfilled). Also, the salary expense is recorded within the unrestricted net assets. For Charity B, the unrestricted net asset total goes up and then is reduced so, once again, there is no change in unrestricted net assets. Neither Charity A nor Charity B report any change in unrestricted net assets.
(3) – On 1/1/1, each charity combines with another similar charity. In both cases, this similar charity has assets with a book value of $700,000 but which are worth $780,000. This similar charity had no liabilities. Both Charity A and Charity B paid $800,000 to make this acquisition. Charity A is acquiring a charity that gets its money through exchange transactions (it sells cookies). Charity B is acquiring a charity that gets its money through donations. After that, which of the following statements is true for consolidated statements? Circle the correct answer.
A. Charity A will report more unrestricted net assets than Charity B.
B. Charity A will report the same amount of unrestricted net assets as Charity B.
C. Charity A will report less unrestricted net assets than Charity B.
Answer is A
The problem here is with the handling of the $20,000 that was paid in excess of the fair value of the similar charity’s assets. The charity acquired by Charity A generates revenue so the $20,000 is viewed as goodwill. The charity acquired by Charity B gets its funds from donation. Goodwill is really the amount paid in an acquisition on the anticipation of additional revenues (from a source that cannot otherwise be identified as an intangible asset). This second charity does not have revenues. Therefore, the excess is not recorded by Charity B as goodwill but as a reduction in net assets. Charity A does not have that reduction and will have more unrestricted net assets.
(4) – On 1/1/1, a rich person tells Charity A that she will give $300,000 in cash on January 31, Year Three if the charity has been able to push its program service expenses to 80 percent or more of the charity’s total for expenses. If received, this donation must be spent on salaries for hourly workers. The reported figure on December 31, Year One is 75 percent and on December 31, Year Two is 82 percent. The money is donated early in Year Three and then properly spent several weeks later. Circle the correct answer.
A. During Year One, Charity A increases its unrestricted net assets.
B. At the end of Year Two, Charity A increases its unrestricted net assets.
C. During Year Three, unrestricted net assets are both increased and decreased.
D. During Year Three, temporarily restricted net assets are both increased and decreased.
Answer is C
Initially, this gift is conditional because it will only be given if the charity is able to accomplish a certain objective. Conditional pledges are not recorded by not-for-profit organizations. However, at the end of Year 2, the objective is reached and the gift becomes unconditional so it is recorded. At that time, in Year Two, the asset “pledge receivable” is increased along with contribution revenue (which increases the temporarily restricted net assets). The temporarily restricted category is used because the money has to be spent in a particular fashion. In Year Three, when the money is properly spent, the temporarily restricted net asset category is reduced and the total of unrestricted net assets is increased (the restriction has been fulfilled). The salary expense also reduced unrestricted net assets at that time. The total of temporarily restricted net assets is increased in Year Two and decreased in Year Three. The total of unrestricted net assets is increased and decreased in Year Three.
(5) – Assume Charity A is a not-for-profit hospital. On 1/1/1, Charity A does an appendectomy on one of its patients. The cost is $76,000 but the normal charge is $100,000. Charity A realized from the beginning that collection would be impossible and made no attempt to collect. What amount should be disclosed by Charity A? Circle the correct answer.
A. Zero
B. $76,000
C. $100,000
Answer is B
Not-for-profit health care entities often do charity service where work is performed but the charity does not anticipate receiving any money, often because the person is poor and uninsured. Such charity work is not recorded at all since there was no expectation of collection. However, to indicate the financial impact of this decision, the cost of that work must be disclosed.
Have a great week. I’ll be back soon with a new lesson. Let’s get this CPA Exam finished off in 2013.
Joe Hoyle
Co-Founder
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Friday, May 10, 2013
How to Stay Focused While Preparing for the CPA Exam
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