How to Answer SIMS and MCQs

Try us FIRST before you spend your hard-earned money   CPA Review for FREE  Over 2,400 FREE CPA Review Questions and Answers Available to YOU (for FREE) An unsolicited testimonial from K. Bailey!  September 23, 2013 Lesson 140   From:   Joe   Set a Goal To Pass One or Two Parts in 2013   We are edging closer to the October-November testing window for the CPA exam.   Are you going to be ready to knock out one or more parts during those two months?    Remember, our 2,400 free questions and answers are just waiting for you atCPAreviewforFREE.    We occasionally get people who are skeptical; who believe nothing should be free.   Well, work some yourself and see for yourself.   What do you have to lose?  Why in the world wouldn’t you try some free questions?   Avoidance makes no sense.     If you were starving and I offered you a free hot dog, would you turn up your nose and respond “I’m sorry – I don’t trust free.   I’ll just sit here starving until something a whole lot more expensive comes along.”   That cannot be a smart plan.     I must admit that I am always surprised that every college accounting program in the world doesn’t have our URL posted on all of the blackboards or their course website.   I am surprised that every CPA firm doesn’t have a big sign about our website above their doors.   We are free.   Who else in this world offers you 2,400 great questions and answers for FREE.   Thousands of people use our site every day and never pay us a penny.   Are you really in such a big hurry to throw away thousands of dollars?   Are you related to Bill Gates or Warren Buffett so that wasting money is no big deal?   ***** If you haven't taken our survey, please., please take a quick 2 minute break from studying to complete our 3rd Annual 2 Minute Survey.  Yes, only 2 minutes.  We're not kidding. No multi-layered questions.    Your comments and feedback help us help you pass the CPA exam.  If you've passed the exam and used us in any way, we'd like your feedback as well!   Click here to take the survey.   ******   Learn Through Practice   How are you going to get ready to make passing grades in October and November?   Let me tell you about a trick that I learned around 1973 and that I still use today.   Back then, I read a book titled Psycho-cybernetics by Maxwell Maltz.   I won’t try to repeat the entire book but Maltz began with the obvious idea that we learn through practice.   He used the example of learning to drive a car.   We get behind the wheel, we step on the gas, we steer the car.   We do it over and over and we learn to drive.   Unfortunately, in our busy lives, there is only a limited amount of time that we have for practice.   And, whether you are learning to drive a car or to play golf or tennis, a considerable amount of time also goes into the preparation.   Maltz argued that real benefit could be obtained by more..   ***** New Partnership for Advanced Tech Review Course withFast Forward Academy (FFA)   Two things you should know.  1. FFA has the best price in the market for the most technologically advanced CPA review program, but they also offer a simple 4 pay plan of $225 for 4 months. 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Use the 10% coupon code CPAREVIEWFORFREE when you order all four parts.   ******   How to Answer TBSs and MCQs   On the FAR and Auditing portion of the CPA exam, you will face 90 multiple-choice questions.   Of that total, 75 are graded with the remainder checked for possible use on future exams.   On the Regulation and BEC portions of the exam, you will see 72 multiple-choice questions.   Here, 60 are graded with the other 12 being tested to see if they can be added to later exams.   On all parts of the exam other than BEC, 60 percent of the grade comes from the multiple-choice questions and 40 percent from task-based simulations (TBSs).   FAR and Auditing have seven TBSs; six of these are graded and one is checked for future use.   Regulation has six TBSs and, again, all but one are graded.       No one ever asks about the structure of multiple-choice questions.   From experiences in school, virtually every candidate has had plenty of knowledge of multiple-choice questions.   But, the task-based simulations seem to cause a bit of consternation.   On www.cpa-exam.org, the official AICPA website, the TBSs are described as follows:   “Task-based simulations are condensed case studies that test accounting knowledge and skills using real life, work-related situations. Each task-based simulation is expected to take approximately 8 – 15 minutes to complete.”   So, in FAR and auditing, you need to reserve 105 minutes if you can (15 times 7 TBSs) for the simulations and in Regulation, you should try to leave 90 minutes (15 times 6 TBSs).   That can be difficult to do so you need to monitor your time usage very carefully.   BEC is different because 85 percent of the grade comes from the multiple-choice questions.   The remaining 15 percent is from 3 written communication questions, two of which are graded with the other one being pre-tested.     Here is some advice on the answering the TBSs.  More...     Okay, Time for Some Practice   Read through each question and see how you can do.   If you get them right, then that is great.  If you miss one, you have a golden opportunity to add some additional information to your head.     FAR   Little Company has net assets with a net carrying value of $500,000.    An evaluation of the individual assets and liabilities is made and they have a net fair value of $600,000.    Big Company buys a 90 percent ownership in Little Company and pays exactly $630,000.    This price is considered to be a good representation of the total value of this business operation.    Immediately thereafter Big Company prepares consolidated financial statements.   What amount, if any, should be reported as the noncontrolling interest in Little? a.   Zero b.   $50,000 c.   $60,000 d.   $70,000     Auditing   In Year One, CPAs compute the inventory turnover for an audit client and find that it is 9.0.   In Year Two, they repeat the calculation but the inventory turnover has dropped to 6.0.   Which of the following has most likely occurred? a.   The company is taken a week longer to pay its invoices in Year Two than it did in Year One. b.   The company over counted its inventory at the end of Year One. c.   Sales fell off in Year Two but inventory levels have remained the same. d.   The company began to sell online during Year Two.     Regulation   Lolly and Pop are equal partners in a partnership.   Lolly receives a guaranteed payment of $80,000 per year because of work performed at the business.   For federal income taxes, which of the following is true about that payment? a.   Lolly’s tax basis in the partnership is reduced by $80,000 b.   The partnership’s ordinary income is reduced by $80,000 c.   Lolly has an increase in taxable income of $40,000  d.   Lolly has an increase in long-term capital gains of $80,000     BEC   What is meant by the term “capital rationing?” a.   Allocating investments between those that produce taxable and nontaxable income b.   Limiting new investments often by assuming a higher cost of capital c.   Setting up an investment structure where different amounts of money are invested for several different periods of time. d.   Dividing long-term financing in a prearranged ratio between debt and equity.     The October-November testing window is about to open.  Make great use of this time to knock out as many parts of the CPA exam as you possibly can.   ANSWERS   FAR  Answer is D   The $630,000 price paid for a 90 percent ownership is viewed as a representation of the total value of Little.   Mathematically, that total value is $700,000 or $630,000/90 percent.   Of that $700,000 value, 90 percent or $630,000 is owned by Big.   The remaining 10 percent or $70,000 is held by other owners.   This $70,000 must be reported as the noncontrolling interest in a portion of the company’s consolidated balance sheet.   Auditing Answer is C   Inventory turnover is determined as cost of goods sold divided by the average inventory for the period.   Here, the ratio went down.   One possibility for the drop that was seen is for cost of goods sold to be high in Year One or low in Year Two.   A second possibility is that average inventory could have been low in Year One or high in Year Two.   In both cases, the ratio goes down.   Answer (a) does not affect inventory or cost of goods sold and cannot be the answer.   Answer (d) could change many possible balances so a specific drop like this is just one of many possible outcomes of this decision.   For example, it could also have caused inventory turnover to go up if average inventory levels declined.   Answer (b) understates cost of goods sold in Year One and overstates average inventory.   In Year Two, cost of goods sold is overstated.   Those effects are all backwards to what has been seen.   Answer (c) is correct because cost of goods sold will drop with reduced sales but inventory balances were not changed.   Regulation  Answer is B   A guaranteed payment from a partnership to a partner for work done is handled much the same as a regular salary expense.    The ordinary income is reduced by $80,000 and Lolly reports earned income of $80,000.   Because Lolly only owns half of the business, the reduction in ordinary income only creates a $40,000 decrease in Lolly’s tax basis in the partnership.   BEC Answer is B   Companies sometimes have to limit new investments often to align with budget requirements.    To assist in making those decisions, some type of cap or restriction has to be placed on new investments.   One common way is to assume a higher cost of capital.   In that way, when the net present value is determined, fewer investments qualify as appropriately profitable.   Did you add some points?  If so, great!  If not, practice, practice, practice.   Joe Hoyle President CPA Review for FREE   www.CPAreviewforFREE.com