Filling in the Holes in Swiss Cheese Knowledge
From: Joe
(1) - It is Saturday night in Richmond, Virginia. Do you think the guys who run those great big CPA review courses and who want to charge you thousands of dollars (for pretty mediocre products) are working tonight? Are any of them trying to help YOU tonight? Do they even care if YOU pass? Think about that before you start mailing in those checks.
I have always felt that, if you really really really want to be successful, you should be willing to work when the other guy is not working. It gives you a chance to get ahead. Okay, I am going downstairs a little later tonight to watch a movie with my wife but, for right now, I'm working to help YOU pass the CPA Exam. How many other review courses can say that?
If you are only willing to work when it is easy, if you are only willing to work when it is fun, success is not necessarily your number one priority.
So, if you are planning on taking the CPA Exam in the near future, I hope you are adding a point or two tonight. You don't have to work all the time but it is nice to think: "I'm sitting here adding points when everyone else is wasting their time."
(2) - Quick story that I found funny. I was talking with one of the accounting majors at the University on Thursday. Here was her story:
"I have a friend who is a math major at another university. She has never even taken an accounting course. She doesn't know a thing about debits and credits. However, before every test that she takes, she goes online to YouTube and watches your 'Believe in Yourself' video. She claims that it gets her pumped up and ready to go do a great job on her tests. She watches it all the time."
I laughed and laughed. I don't remember which of the videos is the "Believe in Yourself" video but I was delighted to be helping a math major.
(If you go to YouTube and search for CPAreviewforFREE and you can find out which one it is.)
It is amazing how many people you can influence when you just try to help people believe in themselves. Nothing in life beats a little positive reinforcement. You always strengthen the people around you when you pat someone on the back and say "you are doing a great job; you really have a lot of great talent." Try it. Don't wait for someone else to do it. You do it. Pass it on.
(3) - I received a number of neat emails this week. Here are a few that I wanted to pass along.
From Erik: "It's been a long six months, but I've done it . I PASSED THE CPA EXAM! I logged on early this morning to check my REG score and saw a magical 89. I couldn't believe it. I want to thank you again for cpareviewforfree.com, which I used (in combination with a review book) for all four parts of the exam (98 on FAR in August, 99 on AUD in October, 92 on BEC in November, 89 on REG in January). It is a tremendous resource, and I know it helped me immensely in this accomplishment. Thanks again!"
From NA: "Thank you so much for your website!!! I just received my score for the FARS section and it was amazing! I just know that I could not have done it without your help. I used a CPA review books & CDs to organize my studying but if it wasn't for your questions I would not have had the confidence and strategies to take the exam as well as I did. This was the first section I've taken so passing it definitely gives me the encouragement I need to study for the other 3 sections. Thank you again and I am definitely recommending your website to anyone I know planning to study for the CPA."
From Donna: "Just a quick note to say Thank you for your encouragement and your free questions. I went through your questions and took my Audit test in January. I passed it, after two earlier attempts at 74 points! I enjoy reading your newsletter and respect you for writing such long newsletters."
THANKS to everyone who takes the time to write. I love reading your notes.
(4) - Always remember that you can unsubscribe at any time you wish. Just scroll down to the end of this email or any of our emails and click on the appropriate box.
And, if anyone ever asks you that all-important question: "How do you get those nifty email lessons from Joe Hoyle?" the answer is easy. You go to www.CPAreviewforFREE.com and register. In the registration process, there is a box that asks if you want to get additional materials (these email lessons). Make sure that box is checked. That's all it takes.
(5) - This semester, I teach one class of introductory accounting and two classes of intermediate accounting II. On Wednesday, in my intro class, we went over FIFO and LIFO. On that same day, in the intermediate classes, we went over capital leases (from the lessee's perspective).
We had a good day in all of the classes and, after each, the students were all smiles. Unfortunately, that can be a bad sign. The students were able to FOLLOW what we were doing in class and that led them to make the assumption that they could DO it themselves. In fact, students will often blurt out: I saw exactly what you just did (true) and I can do that myself now (maybe or maybe not). That can be a dangerous assumption in an accounting class.
So, on Friday, in the subsequent class, I brought in practice problems. I had changed a few of the words from Wednesday and some of the numbers and altered the situations slightly but the problems were not radically different than we had done a mere 48 hours before (with all smiles). This time, though, I did not lead them through the problems but rather let them go on their own. I put the students into teams of 2 or 3 and gave them the practice problems and told them that it was Friday and we could all go home when they had worked those questions successfully.
It was amazing how quickly those smiles turned into frowns. After 20 minutes, most of the students were completely lost. Some could not even get the problems started, let alone finished.
What happened? Did they all get stupid between Wednesday and Friday? Did they forget everything? Of course not.
I finally stopped the chaos and told them the following story that comes from 38 years of being a college professor.
--When you go over something, if it is well explained, it can be easy to follow. It is like following a well-worn path. That just proves that you can follow what someone else has done. It does not mean that you can do the problem yourself.
--After a topic is first covered, your knowledge is like a block of Swiss cheese. It looks solid; it looks substantial. However, it is full of holes. And, at first, those holes are gigantic. Any person who knows how to write a good test question can find those holes very easily.
--So, on Wednesday, the students thought they had solid knowledge but I needed for them to understand there were still a lot of holes in that knowledge. I needed for them to keep working rather than sit around congratulating themselves.
--Of course, my point was that every time they worked a problem, especially a slightly different problem, those holes begin to get smaller. If they keep practicing, quite quickly that Swiss cheese knowledge becomes completely solid. Every question they work helps to fill in a hole. It is not enough to follow an explanation; you have to know that you can do the problem yourself.
Unfortunately, college students have a tendency to quit too soon. They often move on before they get all the holes filled in. They then come to a test and the questions are written to find the holes. The students then come to my office, often in tears, with the following story: "I knew that material until I got to the test." I don't want to be mean but the truth is:
---their knowledge looked solid but really did have holes.
---I wrote questions that exposed those holes.
---If they had just worked more problems in advance, those holes would have gone away.
That is exactly why I wanted www.CPAreviewforFREE.com to have thousands of questions and answers. I firmly believe this is the best way to fill in the holes in your knowledge. Work problem and read the answers. Work problems and read the answers.
You can pass this exam. You can get the 75 points you need. But you cannot quit your study until you have knowledge without any serious holes. And, the only way to do that is keep working questions and keep reading those answers and keep taking 10 word notes on the ones you missed. That will do it.
Don't fool yourself. Don't walk into the testing center with Swiss cheese knowledge that has a whole lot of holes. If you seriously want to pass, you have to put in the hours of practice that are necessary to gain the knowledge that will eliminate the holes in your knowledge. Then, when you take the CPA Exam, it is NOT a question of luck. No matter what questions you get, you will be able to answer enough to get that magic grade of 75.
(6) - Time for some practice.
Financial Accounting and Reporting-it seems only fair that I give you a version of the question that I asked my intermediate accounting II students yesterday. With practice, they can get it and so can you.
On January 1, Year One, the Hermione Company leases a machine for $14,000 per year for five years with the first payment made immediately. The asset has an expected life of six years. At the end of five years, Hermione can buy the machine for $5,000 which is viewed as a bargain. The lessor's implicit interest rate (which is known by Hermione) is 10 percent per year. Hermione's own incremental borrowing rate is 6 percent. The present value of $1 in five years at 6 percent is .75 and at 10 percent is .62. The present value of an ordinary annuity of $1 for five years at 6 percent is 4.21 and at 10 percent is 3.79. The present value of an annuity due of $1 for five years at 6 percent is 4.47 and at 10 percent is 4.17. How much expense should Hermione recognize in Year One?
A-$14,000
B-$14,195
C-$15,035
D-$16,406
Answer is B
Because of the bargain purchase option, this a capital lease and the cash flows are recorded at present value. The incremental borrowing rate of 6 percent is used because it is lower than the implicit rate. The first payment is made immediately so the $14,000 payments represent an annuity due. The $5,000 purchase option is a single amount at the end of the fifth year. Present value is $14,000 times 4.47 or $62,580 plus $5,000 times .75 or $3,750 for a total present value of $66,330. Because of the bargain purchase option, depreciation each year will be $11,055 ($66,330/6 years). The lessee expects to use the asset for its entire life. The initial liability is $66,330 but that amount is reduced immediately by the first $14,000 payment to $52,330. When multiplied by the 6 percent annual rate, interest expense of $3,140 is reported for Year One. Total expense is $11,055 (depreciation) plus $3,140 (interest) for a total of $14,195.
Regulation
The Weasley Company had sales in Year One of $500,000 plus dividend income from other domestic corporations of $100,000. The company had ordinary and necessary business expenses of $400,000. All dividends came from companies in which Weasley held 8 percent ownership. The company also made charitable contributions of $40,000 during the year. What is its taxable income?
A-$90,000
B-$100,000
C-$110,000
D-$117,000
Answer is C
The company's operating income is $200,000 ($500,000 plus $100,000 less $400,000). However, the company also gets a deduction for charitable contributions even though it is not an ordinary and necessary business expense. The amount of that deduction in any one year is limited to 10 percent of this operating income figure or $20,000 in this problem (10 percent of $200,000). In addition, because Weasley holds ownership of less than 20 percent of the domestic companies paying dividends, a 70 percent dividends received deduction is available or $70,000. Thus, taxable income is $500,000 plus $100,000 less $400,000 less $20,000 less $70,000 or $110,000.
Auditing and Attestation
A CPA is performing an audit examination of Malfoy, Inc. The CPA has already done the work necessary to gain a general understanding of the company's internal control. The CPA is now looking at the internal control policies and procedures within the accounting system for accounts receivable. The CPA has decided to perform a test of controls in this area. Which is the following is least likely to be true?
A-The system contains an excess number of possible problems so that testing is required.
B-The system appears to be well designed.
C-The CPA hopes to reduce the amount of substantive testing to be necessary.
D-The CPA hopes to reduce overall audit time.
Answer is A
Once a general understanding of internal control has been obtained, the auditor only needs to test specific controls if it is efficient to do so. If the system is well designed, testing specific controls to verify their efficiency can lead to a reduction in the assessed level of control risk. Hopefully, the amount of substantive testing can then be reduced because the desired level of detection risk does not need to be so low. This decrease in substantive testing can lead, possibly, to an overall reduction in the time and cost of performing the audit. If the internal control appears to be weak, no benefit is gained by testing those controls further. It is not likely that the weaknesses can be overcome.
BEC
The Snape Corporation plans to raise $1 million for operating purposes by either issuing a number of bonds to the public or by issuing shares of common stock. Which of the following is not an advantage of issuing the bonds?
A-It is possible for owners to have an increase in profits without making any additional investment.
B-There is less risk associated with the bonds.
C-The cost of bonds is lowered because the resulting interest is deductible for tax purposes.
D-If inflation results between the date of issuance and the maturity date, the money paid back is worth less than the money originally received.
Answer is B
All debt raises the risk of company bankruptcy. If a cash flow problem arises and debts cannot be paid as they come due, the possibility of bankruptcy is always a possibility. However, debts do have advantages. If the company can use the money to increase income by more than the cost of the interest, this leveraging increases net income without any additional funds from the owners. Furthermore, interest expense is tax deductible so that its cost is reduced significantly (whereas dividend payouts are not tax deductible). Finally, if inflation takes place (which is common), the dollars that are eventually used to repay the bonds are worth less than the ones that were received on the day of issuance-a financial benefit.
Have a great week.
Believe in yourself (it really helps).
And
Go out there and help others to believe in themselves.
Joe Hoyle
Co-Founder
CPA Review for FREE
Monday, March 2, 2009
Thursday, February 19, 2009
Dreams Are Worth Pursuing -- CPA Review For FREE
What Does It Really Take To Be Successful
From: Joe
(1) - I realize that a lot of our readers are gearing up to take a part or two of the CPA Exam here at the end of the January-February window. A couple of last minute pieces of advice:
---Work as hard as you can here at the end. Every point you add might be the one point that gets you from 74 to 75.
---Try to review everything one final time between now and the exam so that it is all fresh in your mind. Anything you review now will still be in your head when you take the exam.
---Read the information carefully that came with your Notice To Schedule so you know everything you can about taking the exam. You don't want any surprises at the testing center.
---Think about how much time you have on the exam and how you want to allocate that time. Remember that time management is essential on the CPA Exam.
---Get as relaxed as you can. A small (very small) amount of tension can keep you focused. However, anything more than a small amount of tension ties you in knots and keeps you from doing your best.
---Get a normal amount of sleep the night before the exam. Taking the exam when you are groggy is not a smart move.
---Never think "tired" while you are going through the exam. Okay, that takes discipline but you can do it. You want to have as much energy and concentration on the last question as you had on the first.
---If you see a question that you don't know, don't get rattled. Eliminate as many answers as you can and make a guess. Remember that (except in BEC) about 15-20 percent of the questions are not even graded. They are being tested. Assume the weird questions are the ones not being graded.
---If you've put in the hours, have some confidence. There is no reason that you cannot pass. Confidence is one of the world's best characteristics. I always say that you want to be confident without being cocky.
Finally, if you do take the exam in the near future, or if you have taken it recently, hit reply and drop me a note and tell me how it went. You cannot talk about specific questions-just tell me about the experience in general.
And, tell me: what is the one piece of advice that you would give your best friend if he or she were getting ready to take the CPA Exam?
(2) - I have said this before but I find that I must say it again: last week was our most successful one yet on www.CPAreviewforFREE.com!!!! We had more visitors than in any other week of our entire history. Moreover, we have now had well over 1.7 million page views. We are not to our 10 million goal (yet) but we are certainly getting there. And, that is entirely thanks to you. We do not advertise; we have no money to advertise. That is the only way we can afford to stay free. We depend on you to spread the word. How did you hear about www.CPAreviewforFREE.com? More than likely someone was nice enough to tell you or forward one of our lessons to you or the like. Now, it is your turn. I do hope you'll take a second to tell someone else about us. We love providing thousands of questions for free but we have to depend on you to spread the word.
One of my favorite parts of CPA Review for FREE is getting to work with people all around the world. As you would imagine, a vast majority of our visitors come from inside of the US. However, last week alone, we had visitors from 78 different countries. That's like the United Nations. Last week, the countries with the most visitors to our site were: Canada, South Korea, the Philippines, India, Saudi Arabia, the United Arab Emirates, the Bahamas, Australia, and China. No matter where you are from, everyone is more than welcome to use the information that we provide at www.CPAreviewforFREE.com.
(3) - I am currently reading a book that I find fascinating. It is "Born Standing Up," an autobiography written by the comedian Steve Martin. He talks about growing up in a working class family and, through years of hard work, becoming a famous entertainer.
In reading this book, Martin has said two things that I thought were so interesting that I stopped immediately and wrote them down.
"Perseverance is a great substitute for talent." Martin talks about how he performed his act in hundreds of tiny clubs for about a decade. In those places, a lot of the customers did not think he was funny at all. The feedback was not always encouraging. But he persevered and finally when he was almost broke and about ready to quit, he became a big star. How many of us would have worked for a short while and then gotten totally discouraged and said "I give up. I obviously do not have what it takes to make it as a comedian. I need to quit and get a real job and settle down."
As everyone knows by now, I have worked for nearly 30 years with thousands upon thousands of CPA candidates. I never fail to be surprised by how many people give up on their dreams so quickly. "I want to be a CPA but if I don't pass in a couple of months I'm just giving up." I've heard that line way too many times in my life.
Golly, with that type of attitude, Christopher Columbus would not have made it very far beyond the harbor.
I know everyone wants to get the exam out of the way but this is not a speed race. Failing the CPA Exam does not make you the subject of public ridicule. Taking awhile to pass the CPA Exam does not mean that you should give up on your dream of becoming a CPA and take up dog catching.
Dreams are worth pursuing.
I worry that people put too much pressure on themselves to pass the exam in record time. I have known people who have passed quickly and I have known people who passed slowly (very slowly, in some cases). To be honest, I have never noticed that the people who took longer to pass had a poorer career. In fact, in some cases, they moved on to become quite successful.
We have a fast-paced society, one that often moves at break-neck speed. At times, it is reassuring to know that "Perseverance is a great substitute for talent." I don't know how it is going for you at this very moment. Just remember: if you really want to pass the CPA Exam, then keep working at it because you will pass.
And, as soon as you pass, no one is ever going to ask you how long it took or how many points you got.
When you pass, people will simply come up to you and say: "Congratulations!!! I hear you passed the CPA Exam. I have always been told that the CPA Exam can be a bear; you must really be smart to have passed it when so many people fail." Trust me: that is going to feel good.
The other thing that Steve Martin said that I wrote down was the following. And, I really do think this applies to a lot of successful people. It is one of those weird situations where having problems in life can actually make you a better person. "I was not naturally talented. I did not sing, dance, or act. But working around that minor detail made me inventive." What a great attitude!!!
None of us are as smart as we would like to be.
None of us remember as much from our college courses as we feel we should.
None of us is ever a perfect test-taker.
However, we can look at those minor details as huge road-blocks to prevent us from ever be successful. A lot of folks do look at themselves and their talents in that way.
Or
We can look at those minor details as something we recognize and understand and will just work around AND the working around will actually make us better at what we are doing. Too much talent can actually be bad because it makes us lazy and careless and can prevent us from developing strong habits. A little shortage of talent can actually make us stronger people. It makes us more inventive. Our strength can come from our weakness.
Yes, we have to learn to compensate; we have to learn how best to deal with our shortcomings but, as Steve Martin says, that just makes us more inventive.
So, as you are studying, think of ways that you can take notes in a better fashion or consider new ways of reviewing material that might help you become a better student. Don't just say "darn, I'm just no good at this." That attitude does not do you one bit of good. That is a road block that is going to keep you from success. Instead, ask yourself: "Okay, I missed this question. What can I do to make sure that I will get it right the next time? I know myself better than anyone else. What can I do to get this concept in my head? Be inventive.
Perseverance
And
Inventive
When you are thinking about passing the CPA Exam, those are two words that can go a long way in helping you gain the success that you want.
(4) - As always, if you want to unsubscribe from these email lessons, just scroll to the bottom and click on the link. That takes you off. We love having you but you have the right to come and go as you please.
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(5) - In these lessons, I often say that the CPA Exam is a mile wide and an inch deep. Along those same lines, I have said that the questions on the CPA Exam are actually easier than the questions that I give in my intermediate accounting tests. So, even if you did not do great in your college classes, there is no reason why you cannot pass the CPA Exam. In all honesty, the Exam really is all about Perseverance more than any other skill or quality.
So, I thought I would show you my point today by giving a demonstration. I gave a test to my Intermediate Accounting II classes last week. I want to take the first two questions on that test (there were seven questions in total) and compare how I asked the question to how I think those same questions would have been asked on the CPA Exam. Remember, you are preparing for the CPA Exam, not for Intermediate Accounting. This comparison might well help you understand how to prepare yourself for the exam.
Question One on Intermediate Accounting Test: On January 1, Year One, the Robious Company issues a 5 year $50,000 bond that pays 5 percent interest each year starting on December 31, Year One. The negotiated rate is 8 percent per year. The bond is issued for $43,900. The accountant was informed of the transaction and the cash payment of $43,900 but was erroneously told that the negotiated rate had been 10 percent. The accountant made the December 31, Year One and Year Two entries based on that information. In Year Three, the error was discovered. Assume the present value of $1 in five years at 8 percent is .68 and at 10 percent is .45. Assume the present value of an ordinary annuity of $1 for five years at 8 percent is $3.96 and at 10 percent is $3.25. Assume the present value of an annuity due of $1 for five years at 8 percent is $4.28 and at 10 percent is $3.80. Circle any and all of the following that are correct. Some, all, or none may be correct.
A - Net income in Year One was misstated but by less than $632
B - Net income in Year One was misstated by between $631 and $883
C - Net income in Year One was misstated but by more than $882
D - Net income in Year Two was misstated but by less than $745
E - Net income in Year Two was misstated by between $744 and $977
F - Net income in Year Two was misstated but by more than $976
G - At the end of Year Two, the reported liability was misstated but by less than $1,346
H - At the end of Year Two, the reported liability was misstated by between $1,345 and $1,858
I - At the end of Year Two, the reported liability was misstated but by more than $1,857
ANSWER: Here is my quick explanation that I gave to my students for the answer to this question.
The accountant should have multiplied the $43,900 by 8 percent to get $3,512 to be recognized as interest expense in Year One. Since only $2,500 was paid ($50,000 times 5 percent), the extra $1,012 ($3,512 less $2,500) should have been compounded raising the liability from $43,900 to $44,912. In Year Two, the $44,912 should have been multiplied again by 8 percent to get interest expense of $3,593. Only $2,500 was paid so the extra $1,093 ($3,593 less $2,500) should have been compounded to bring the liability up to $46,005.
However, the accountant incorrectly used 10 percent and not 8 percent. The interest expense for Year One was reported as $4,390 ($43,900 times 10 percent). Because $2,500 was paid, the extra $1,890 ($4,390 minus $2,500) was compounded to raise the principal to $45,790. The interest expense for Year Two was then recognized as $4,579 based on the wrong 10 percent rate. Only $2,500 was paid so the extra $2,079 ($4,579 minus $2,500) was compounded to bring the principal up to $47,869.
---Year One expense: should have been $3,512 but was reported as $4,390. The misstatement was the difference of $878.
---Year Two expense: should have been $3,593 but was reported as $4,579. The misstatement was the difference of $986.
---December 31, Year Two liability: should have been $46,005 but was reported as $47,869. The misstatement was the difference of $1,864
CORRECT ANSWERS: B, F, I
CPA EXAM: I think the above question is a good one and in fact most of my students did fine on it. But it would never never never have been on the CPA Exam because there are way too many steps in the process. Questions on the CPA Exam (at least the ones that have been released) tend to focus on one or two steps and that is it. The examiners want to know if you know how to do a very particular task. They test you by setting up questions to address that task. In the above question, you had to read carefully and then do way too many different things and then also make comparisons. Too complicated for the CPA Exam.
Here is how I think this question would have appeared on the CPA Exam:
On January 1, Year One, the Robious Company issues a 5 year $50,000 bond that pays 5 percent interest each year starting on December 31, Year One. The negotiated rate is 8 percent per year. The bond is issued for $43,900.
Question One: What amount of interest expense will the company report on its income statement for Year Two?
A - $2,195
B - $2,500
C - $3,512
D - $3,593
Question Two: What will be the reported balance of the liability on the balance sheet at the end of Year Two?
A - $43,900
B - $44,912
C - $45,775
D - $46,005
Now, these questions really look like CPA Exam questions. The variables and the complexity have been removed. The examiners want to see if you understand how to do a specific task: use the effective rate method to record a bond or note over two years.
The answers to both questions are D and the explanation is as follows:
The accountant should have multiplied the $43,900 by 8 percent to get $3,512 to be recognized as interest expense in Year One. Since only $2,500 was paid ($50,000 times 5 percent), the extra $1,012 ($3,512 less $2,500) should have been compounded raising the liability from $43,900 to $44,912. In Year Two, the $44,912 should have been multiplied again by 8 percent to get interest expense of $3,593. Only $2,500 was paid so the extra $1,093 ($3,593 less $2,500) should have been compounded to bring the liability up to $46,005.
Question Two on Intermediate Accounting Test: Ace Company is a local fitness center in Richmond. To boost sales, it sells a package to its customers which is made up of two pieces of paper. Paper One is the right to a free massage with a retail value of $100. Paper Two is the right to a second massage at a reduced price. The first massage is taken in Year One when the package is bought. The second massage is taken in Year Two. Assume $100 is paid to Ace for the package. Paper Two gives $10 off the retail price of the second massage (a relatively minor amount). Paper Two cannot be transferred so it has no sales value. United States GAAP is fuzzy in this area. Describe three ways that the "$10 off" coupon can be reported.
ANSWER: The $10 off coupon can be ignored completely. No expense is recorded and no liability is recorded. Revenue is recorded for $100 for the first massage and for $90 for the second massage. (This is my preference.)
Or, the company can record the $10 off as a liability in Year One along with an expense of $10. Thus, the $10 reduction in income is associated with the first massage and not the second.
Or, the company can record the $10 off as a liability in Year One along with a $10 deferred expense which is not reclassified as an expense until Year Two. Thus, the reduction in income is associated with the second massage and not the first.
CPA EXAM: This is an interesting question but there is absolutely no way that it could have been given on the CPA Exam because there is no definitive answer. The examiners give questions where there is one and only one right way to handle the problem and that way is usually found in an authoritative pronouncement. If they can help it, there are no gray areas on the CPA Exam. If there are alternative possibilities, they must be based on well-known methods. For example, if they ask about inventory costing, they want to be able to tell you to use FIFO or, possibly, LIFO. On the CPA Exam, every question needs a clear cut and obviously correct answer.
Here is how I think this question would have appeared on the CPA Exam:
Ace Company is a local fitness center in Richmond. To boost sales, it sells a package to its customers which is made up of two pieces of paper. Paper One is the right to a massage. Paper Two is a coupon that can be presented for a $10 cash rebate. One hundred packages are sold for $100 each in Year One. All 100 massages are taken in Year One. The company expects 70 percent of the coupons to be redeemed but not until Year Two. What is net income for Year One?
A - $9,000
B - $9,300
C - $9,500
D - $10,000
Answer is B
Answer: The earning process for the massages is substantially complete in Year One so the $10,000 revenue is recognized at that point. However, because cash must be paid based on the cash rebate, the company also records a liability. The cash payout is estimated based on a 70 percent return rate. The total amount of these cash rebates could be as high as $1,000 (100 times $10) but since only 70 percent are anticipated, the expense and liability are only $700. That amount is recognized in Year One when the debt is incurred. Thus, net income for Year One is $10,000 minus $700 or $9,300.
Notice, here that there are clear rules for handling cash payments where an obligation has been accepted. To the examiners, there is one correct answer and the question is structured to see if you know how to derive that one correct answer.
I hope this demonstration gives you a better feel for how the CPA Exam might be structured a bit differently than the tests you took in college. At least in my opinion, the questions on the CPA Exam are not nearly as complex. If you know the rule, you can almost always get the question correct.
When I run live classes, I almost always start asking the candidates: What rule are they testing in this particular question? That is not a bad way to look at the questions as you go through our questions at www.CPAreviewforFREE.com.
Have a great week.
Remember---every point you get may be the one that moves you from 74 to 75 so go get those points.
From: Joe
(1) - I realize that a lot of our readers are gearing up to take a part or two of the CPA Exam here at the end of the January-February window. A couple of last minute pieces of advice:
---Work as hard as you can here at the end. Every point you add might be the one point that gets you from 74 to 75.
---Try to review everything one final time between now and the exam so that it is all fresh in your mind. Anything you review now will still be in your head when you take the exam.
---Read the information carefully that came with your Notice To Schedule so you know everything you can about taking the exam. You don't want any surprises at the testing center.
---Think about how much time you have on the exam and how you want to allocate that time. Remember that time management is essential on the CPA Exam.
---Get as relaxed as you can. A small (very small) amount of tension can keep you focused. However, anything more than a small amount of tension ties you in knots and keeps you from doing your best.
---Get a normal amount of sleep the night before the exam. Taking the exam when you are groggy is not a smart move.
---Never think "tired" while you are going through the exam. Okay, that takes discipline but you can do it. You want to have as much energy and concentration on the last question as you had on the first.
---If you see a question that you don't know, don't get rattled. Eliminate as many answers as you can and make a guess. Remember that (except in BEC) about 15-20 percent of the questions are not even graded. They are being tested. Assume the weird questions are the ones not being graded.
---If you've put in the hours, have some confidence. There is no reason that you cannot pass. Confidence is one of the world's best characteristics. I always say that you want to be confident without being cocky.
Finally, if you do take the exam in the near future, or if you have taken it recently, hit reply and drop me a note and tell me how it went. You cannot talk about specific questions-just tell me about the experience in general.
And, tell me: what is the one piece of advice that you would give your best friend if he or she were getting ready to take the CPA Exam?
(2) - I have said this before but I find that I must say it again: last week was our most successful one yet on www.CPAreviewforFREE.com!!!! We had more visitors than in any other week of our entire history. Moreover, we have now had well over 1.7 million page views. We are not to our 10 million goal (yet) but we are certainly getting there. And, that is entirely thanks to you. We do not advertise; we have no money to advertise. That is the only way we can afford to stay free. We depend on you to spread the word. How did you hear about www.CPAreviewforFREE.com? More than likely someone was nice enough to tell you or forward one of our lessons to you or the like. Now, it is your turn. I do hope you'll take a second to tell someone else about us. We love providing thousands of questions for free but we have to depend on you to spread the word.
One of my favorite parts of CPA Review for FREE is getting to work with people all around the world. As you would imagine, a vast majority of our visitors come from inside of the US. However, last week alone, we had visitors from 78 different countries. That's like the United Nations. Last week, the countries with the most visitors to our site were: Canada, South Korea, the Philippines, India, Saudi Arabia, the United Arab Emirates, the Bahamas, Australia, and China. No matter where you are from, everyone is more than welcome to use the information that we provide at www.CPAreviewforFREE.com.
(3) - I am currently reading a book that I find fascinating. It is "Born Standing Up," an autobiography written by the comedian Steve Martin. He talks about growing up in a working class family and, through years of hard work, becoming a famous entertainer.
In reading this book, Martin has said two things that I thought were so interesting that I stopped immediately and wrote them down.
"Perseverance is a great substitute for talent." Martin talks about how he performed his act in hundreds of tiny clubs for about a decade. In those places, a lot of the customers did not think he was funny at all. The feedback was not always encouraging. But he persevered and finally when he was almost broke and about ready to quit, he became a big star. How many of us would have worked for a short while and then gotten totally discouraged and said "I give up. I obviously do not have what it takes to make it as a comedian. I need to quit and get a real job and settle down."
As everyone knows by now, I have worked for nearly 30 years with thousands upon thousands of CPA candidates. I never fail to be surprised by how many people give up on their dreams so quickly. "I want to be a CPA but if I don't pass in a couple of months I'm just giving up." I've heard that line way too many times in my life.
Golly, with that type of attitude, Christopher Columbus would not have made it very far beyond the harbor.
I know everyone wants to get the exam out of the way but this is not a speed race. Failing the CPA Exam does not make you the subject of public ridicule. Taking awhile to pass the CPA Exam does not mean that you should give up on your dream of becoming a CPA and take up dog catching.
Dreams are worth pursuing.
I worry that people put too much pressure on themselves to pass the exam in record time. I have known people who have passed quickly and I have known people who passed slowly (very slowly, in some cases). To be honest, I have never noticed that the people who took longer to pass had a poorer career. In fact, in some cases, they moved on to become quite successful.
We have a fast-paced society, one that often moves at break-neck speed. At times, it is reassuring to know that "Perseverance is a great substitute for talent." I don't know how it is going for you at this very moment. Just remember: if you really want to pass the CPA Exam, then keep working at it because you will pass.
And, as soon as you pass, no one is ever going to ask you how long it took or how many points you got.
When you pass, people will simply come up to you and say: "Congratulations!!! I hear you passed the CPA Exam. I have always been told that the CPA Exam can be a bear; you must really be smart to have passed it when so many people fail." Trust me: that is going to feel good.
The other thing that Steve Martin said that I wrote down was the following. And, I really do think this applies to a lot of successful people. It is one of those weird situations where having problems in life can actually make you a better person. "I was not naturally talented. I did not sing, dance, or act. But working around that minor detail made me inventive." What a great attitude!!!
None of us are as smart as we would like to be.
None of us remember as much from our college courses as we feel we should.
None of us is ever a perfect test-taker.
However, we can look at those minor details as huge road-blocks to prevent us from ever be successful. A lot of folks do look at themselves and their talents in that way.
Or
We can look at those minor details as something we recognize and understand and will just work around AND the working around will actually make us better at what we are doing. Too much talent can actually be bad because it makes us lazy and careless and can prevent us from developing strong habits. A little shortage of talent can actually make us stronger people. It makes us more inventive. Our strength can come from our weakness.
Yes, we have to learn to compensate; we have to learn how best to deal with our shortcomings but, as Steve Martin says, that just makes us more inventive.
So, as you are studying, think of ways that you can take notes in a better fashion or consider new ways of reviewing material that might help you become a better student. Don't just say "darn, I'm just no good at this." That attitude does not do you one bit of good. That is a road block that is going to keep you from success. Instead, ask yourself: "Okay, I missed this question. What can I do to make sure that I will get it right the next time? I know myself better than anyone else. What can I do to get this concept in my head? Be inventive.
Perseverance
And
Inventive
When you are thinking about passing the CPA Exam, those are two words that can go a long way in helping you gain the success that you want.
(4) - As always, if you want to unsubscribe from these email lessons, just scroll to the bottom and click on the link. That takes you off. We love having you but you have the right to come and go as you please.
At www.CPAreviewforFREE.com, we are delighted to offer you
--thousands of excellent questions and well-written answers.
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This is the kind of information you need to make sure you are ready when you walk into the testing site. AND IT IS ALL FREE!!!!
(5) - In these lessons, I often say that the CPA Exam is a mile wide and an inch deep. Along those same lines, I have said that the questions on the CPA Exam are actually easier than the questions that I give in my intermediate accounting tests. So, even if you did not do great in your college classes, there is no reason why you cannot pass the CPA Exam. In all honesty, the Exam really is all about Perseverance more than any other skill or quality.
So, I thought I would show you my point today by giving a demonstration. I gave a test to my Intermediate Accounting II classes last week. I want to take the first two questions on that test (there were seven questions in total) and compare how I asked the question to how I think those same questions would have been asked on the CPA Exam. Remember, you are preparing for the CPA Exam, not for Intermediate Accounting. This comparison might well help you understand how to prepare yourself for the exam.
Question One on Intermediate Accounting Test: On January 1, Year One, the Robious Company issues a 5 year $50,000 bond that pays 5 percent interest each year starting on December 31, Year One. The negotiated rate is 8 percent per year. The bond is issued for $43,900. The accountant was informed of the transaction and the cash payment of $43,900 but was erroneously told that the negotiated rate had been 10 percent. The accountant made the December 31, Year One and Year Two entries based on that information. In Year Three, the error was discovered. Assume the present value of $1 in five years at 8 percent is .68 and at 10 percent is .45. Assume the present value of an ordinary annuity of $1 for five years at 8 percent is $3.96 and at 10 percent is $3.25. Assume the present value of an annuity due of $1 for five years at 8 percent is $4.28 and at 10 percent is $3.80. Circle any and all of the following that are correct. Some, all, or none may be correct.
A - Net income in Year One was misstated but by less than $632
B - Net income in Year One was misstated by between $631 and $883
C - Net income in Year One was misstated but by more than $882
D - Net income in Year Two was misstated but by less than $745
E - Net income in Year Two was misstated by between $744 and $977
F - Net income in Year Two was misstated but by more than $976
G - At the end of Year Two, the reported liability was misstated but by less than $1,346
H - At the end of Year Two, the reported liability was misstated by between $1,345 and $1,858
I - At the end of Year Two, the reported liability was misstated but by more than $1,857
ANSWER: Here is my quick explanation that I gave to my students for the answer to this question.
The accountant should have multiplied the $43,900 by 8 percent to get $3,512 to be recognized as interest expense in Year One. Since only $2,500 was paid ($50,000 times 5 percent), the extra $1,012 ($3,512 less $2,500) should have been compounded raising the liability from $43,900 to $44,912. In Year Two, the $44,912 should have been multiplied again by 8 percent to get interest expense of $3,593. Only $2,500 was paid so the extra $1,093 ($3,593 less $2,500) should have been compounded to bring the liability up to $46,005.
However, the accountant incorrectly used 10 percent and not 8 percent. The interest expense for Year One was reported as $4,390 ($43,900 times 10 percent). Because $2,500 was paid, the extra $1,890 ($4,390 minus $2,500) was compounded to raise the principal to $45,790. The interest expense for Year Two was then recognized as $4,579 based on the wrong 10 percent rate. Only $2,500 was paid so the extra $2,079 ($4,579 minus $2,500) was compounded to bring the principal up to $47,869.
---Year One expense: should have been $3,512 but was reported as $4,390. The misstatement was the difference of $878.
---Year Two expense: should have been $3,593 but was reported as $4,579. The misstatement was the difference of $986.
---December 31, Year Two liability: should have been $46,005 but was reported as $47,869. The misstatement was the difference of $1,864
CORRECT ANSWERS: B, F, I
CPA EXAM: I think the above question is a good one and in fact most of my students did fine on it. But it would never never never have been on the CPA Exam because there are way too many steps in the process. Questions on the CPA Exam (at least the ones that have been released) tend to focus on one or two steps and that is it. The examiners want to know if you know how to do a very particular task. They test you by setting up questions to address that task. In the above question, you had to read carefully and then do way too many different things and then also make comparisons. Too complicated for the CPA Exam.
Here is how I think this question would have appeared on the CPA Exam:
On January 1, Year One, the Robious Company issues a 5 year $50,000 bond that pays 5 percent interest each year starting on December 31, Year One. The negotiated rate is 8 percent per year. The bond is issued for $43,900.
Question One: What amount of interest expense will the company report on its income statement for Year Two?
A - $2,195
B - $2,500
C - $3,512
D - $3,593
Question Two: What will be the reported balance of the liability on the balance sheet at the end of Year Two?
A - $43,900
B - $44,912
C - $45,775
D - $46,005
Now, these questions really look like CPA Exam questions. The variables and the complexity have been removed. The examiners want to see if you understand how to do a specific task: use the effective rate method to record a bond or note over two years.
The answers to both questions are D and the explanation is as follows:
The accountant should have multiplied the $43,900 by 8 percent to get $3,512 to be recognized as interest expense in Year One. Since only $2,500 was paid ($50,000 times 5 percent), the extra $1,012 ($3,512 less $2,500) should have been compounded raising the liability from $43,900 to $44,912. In Year Two, the $44,912 should have been multiplied again by 8 percent to get interest expense of $3,593. Only $2,500 was paid so the extra $1,093 ($3,593 less $2,500) should have been compounded to bring the liability up to $46,005.
Question Two on Intermediate Accounting Test: Ace Company is a local fitness center in Richmond. To boost sales, it sells a package to its customers which is made up of two pieces of paper. Paper One is the right to a free massage with a retail value of $100. Paper Two is the right to a second massage at a reduced price. The first massage is taken in Year One when the package is bought. The second massage is taken in Year Two. Assume $100 is paid to Ace for the package. Paper Two gives $10 off the retail price of the second massage (a relatively minor amount). Paper Two cannot be transferred so it has no sales value. United States GAAP is fuzzy in this area. Describe three ways that the "$10 off" coupon can be reported.
ANSWER: The $10 off coupon can be ignored completely. No expense is recorded and no liability is recorded. Revenue is recorded for $100 for the first massage and for $90 for the second massage. (This is my preference.)
Or, the company can record the $10 off as a liability in Year One along with an expense of $10. Thus, the $10 reduction in income is associated with the first massage and not the second.
Or, the company can record the $10 off as a liability in Year One along with a $10 deferred expense which is not reclassified as an expense until Year Two. Thus, the reduction in income is associated with the second massage and not the first.
CPA EXAM: This is an interesting question but there is absolutely no way that it could have been given on the CPA Exam because there is no definitive answer. The examiners give questions where there is one and only one right way to handle the problem and that way is usually found in an authoritative pronouncement. If they can help it, there are no gray areas on the CPA Exam. If there are alternative possibilities, they must be based on well-known methods. For example, if they ask about inventory costing, they want to be able to tell you to use FIFO or, possibly, LIFO. On the CPA Exam, every question needs a clear cut and obviously correct answer.
Here is how I think this question would have appeared on the CPA Exam:
Ace Company is a local fitness center in Richmond. To boost sales, it sells a package to its customers which is made up of two pieces of paper. Paper One is the right to a massage. Paper Two is a coupon that can be presented for a $10 cash rebate. One hundred packages are sold for $100 each in Year One. All 100 massages are taken in Year One. The company expects 70 percent of the coupons to be redeemed but not until Year Two. What is net income for Year One?
A - $9,000
B - $9,300
C - $9,500
D - $10,000
Answer is B
Answer: The earning process for the massages is substantially complete in Year One so the $10,000 revenue is recognized at that point. However, because cash must be paid based on the cash rebate, the company also records a liability. The cash payout is estimated based on a 70 percent return rate. The total amount of these cash rebates could be as high as $1,000 (100 times $10) but since only 70 percent are anticipated, the expense and liability are only $700. That amount is recognized in Year One when the debt is incurred. Thus, net income for Year One is $10,000 minus $700 or $9,300.
Notice, here that there are clear rules for handling cash payments where an obligation has been accepted. To the examiners, there is one correct answer and the question is structured to see if you know how to derive that one correct answer.
I hope this demonstration gives you a better feel for how the CPA Exam might be structured a bit differently than the tests you took in college. At least in my opinion, the questions on the CPA Exam are not nearly as complex. If you know the rule, you can almost always get the question correct.
When I run live classes, I almost always start asking the candidates: What rule are they testing in this particular question? That is not a bad way to look at the questions as you go through our questions at www.CPAreviewforFREE.com.
Have a great week.
Remember---every point you get may be the one that moves you from 74 to 75 so go get those points.
Sunday, February 8, 2009
What Does the CPA Exam Look Like
What Does the CPA Exam Look Like
From: Joe
If you are taking a part of the exam at the end of the January-February window and you work just 20 questions per day at www.cpareviewforfree.com, you can get 300 questions done and that ought to get you very close to a passing score. Even if you have not studied one bit so far, you can still pass in February if you get to work right now.
(a) - On Friday, it is Valentine's Day here in the United States (I am not sure if Valentine's Day is observed in other countries). I sent the following note to my college students today. It probably applies to everyone out there. Think of someone you love and write them a note.
"I am going to give you some fatherly advice that I wish someone had given me when I was your age. Valentine's Day is coming up on Saturday. If you are lucky and your mother is still alive, go to Hallmark or some other card shop and buy her a real card. Then, write her a few lines in your own handwriting and tell her how much you love her. Don't leave it to an email or to a phone call. Those don't show any imagination or creativity or caring - they are just overly convenient. Don't take the people in your family and in your life for granted. Life should be lived with some imagination and some caring. Go out of your way to do something personal. If you buy a card and especially if you write a note, there will come a day when you will be glad that you did."
(b)-In case you have not already done so, go to www.youtube.com and type in (without spaces) CPAreviewforfree. You should get three videos that I made about preparing for the CPA Exam. My spring break is coming up in a few weeks and I hope to make 2-3 more videos to put up on YouTube. I am always trying to think of every possible way to encourage people to get the points they need to pass the CPA Exam.
(c)-Got another great email today. Always makes me smile.
"Thanks for the valuable help. I really appreciate it, your questions are unique and the explanations are awesome. Also I like the names that are used in the questions. For sure I will inform you about my grades since you are my partner in any success."
Hey, we are always delighted to be of help to every person who wants to pass the CPA Exam. We know times are tough and not everyone can afford to pay $2,500 for a review program. Money should not be a barrier that keeps you from reaching your career goal. Life should reward the people who work, not just the people with money.
(1)-One of my senior students came by last week to chat about the CPA Exam. She graduates in 2 1/2 months and wants to get the exam done over the summer. She asked me to list out the things that were most important for her to know as she gets started.
My goodness, that was an interesting question. A list of the things that are most important to know about the CPA Exam. I thought for awhile and then gave her the following TOP TEN. I have pondered it for several days since that time and still like the choices.
(a)-Nothing beats hours studied. There are no short-cuts. You need to plan to study at least 60 hours per part. Anyone who tells you differently is giving you bad advice.
(b)-The exam is one mile wide and one inch deep. They want to see if you know a little bit about everything. They have very few topics where the depth of coverage is much more than shallow. It is a comprehensive exam of the basics.
(c)-You do not have to be perfect. You only need to pass. Learn each topic enough to pass and then move on.
(d)-On the exam itself, time management is critical. Always know how much time you have and how much time you can afford to spend on each question.
(e)-As you study, you need some easy way to review and keep the material fresh in your mind. I told her about the 10-word notes and the three-second questions that I have mentioned in these email lessons. It is shocking as to how quickly you will lose knowledge without some review process.
(f)-Knowing material is not the key; the key is being able to answer questions. For the CPA Exam, you have no other goal than being able to answer questions.
(g)-Learn from your mistakes. To pass you must constantly get better and you do that by learning from the problems you miss. Any time you miss a question, you have a golden opportunity to make improvement.
(h)-Consistency is a real key. Too many people study hard for a day and then take five days off. I really like for people to study 60-90 minutes per day 5-6 days per week. I think that is a schedule that works.
(i)-Study as early in the day as you can. If you put off studying, it is easy to get to the end of the day and be too tired to do any at all. Study first and then you cannot put it off. Procrastination is your biggest enemy.
(j)-I then gave her our Lesson 23 that I send out to all of our readers on February 3 and told her to read the 22 steps that I had listed for success using CPA Review For FREE. I think everyone who is taking the CPA Exam should read those 22 steps carefully. I believe they provide perfect guidance for passing the CPA Exam without spending one penny for review materials. Never forget our motto: Try us FIRST before you spend your hard-earned money.
(2)-Always know that you can very easily unsubscribe to these email lessons. Just scroll to the bottom of this lesson or any lesson and click on the appropriate button.
And, anyone who wants to automatically receive these email lessons can do so by going to www.CPAreviewforFREE.com and registering and then make sure the box is checked to get extra materials. These lessons ARE the extra material.
(3)-I am always surprised as to how many people go into the CPA Exam without a real understanding of the exam itself. I thought I would remind you of how the CPA Exam is structured.
(a)-Time:
Auditing-4.5 hours
BEC-2.5 hours
Financial Accounting and Reporting-4.0 hours
Regulation-3.0 hours
(b)-Composition of Exam:
Each part except BEC is made up of three testlets and two simulations.
BEC is made up of three testlets only.
(c)-Composition of Testlet:
In each part except Regulation, a testlet holds 30 multiple-choice questions.
In Regulation, a testlet holds 24 multiple-choice questions.
(d)-Graded Questions in a Testlet:
In each part except Regulation, 25 out of the 30 multiple-choice questions are graded. The other five are being tested to see if they are good questions.
In Regulation, 20 out of the 24 multiple-choice questions are graded. The other four are being tested to if they are good questions.
(e)-Passing Grade:
75 is the passing grade in all four parts.
However, because different questions have different weighted values, that does not mean that you need to get 75 percent of the questions correct in order to pass.
(f)-Grading Points:
Because BEC only has multiple-choice questions, 100 percent of the grade comes from those questions.
For all other parts, 70 percent of the grade comes from the multiple-choice questions, 10 percent from the written communications question, and 20 percent from the rest of the simulations.
(g)-Variability of Difficulty
In BEC, there is no variability in difficulty from one testlet to the next.
In all of the other parts, if you do well on the first testlet, the next testlet has harder questions. If you do well on the second testlet, the third testlet also has questions that are judged to be harder. You want harder questions because they have a higher point value.
(h)-Examination Windows
Each part of the exam can be taken one time per exam window. Those exam windows are January-February, April-May, July-August, October-November.
(i)-Time Limit for Passing
Each state sets a limit in which all four parts must be passed. Many states use 18 months.
(j)-Number of Tests Per Window
A vast majority of candidates take one or two parts of the CPA Exam per window. A few candidates do attempt all four parts in a single two-month window.
(k)-Getting More Information
There is a lot of information about the CPA Exam at www.cpa-exam.org. I would especially recommend the CPA Candidate Bulletin, Tutorial and Sample Exams, and CPA Examination Newsletters. In addition, the Notice to Schedule that you receive when you are approved to take the exam provides a significant amount of information.
(4)-Okay, let's practice a bit. Think through each of the following questions and see if we can add a point or so. Every point moves you that much closer to passing.
---Financial Accounting
The Mulieri Company was authorized to issue 100,000 shares of common stock with a $10 par value. The company issued 30,000 shares for cash of $15 per share. Later, when the shares were selling for $20 per share on a stock exchange, the company issued another 9,000 shares as a stock dividend. Which of the following statements is true about the recording of the stock dividend?
A-The total amount of stockholders' equity is not affected but retained earnings is reduced by $90,000.
B-Stockholders' equity is reduced by $180,000 and retained earnings is also reduced by $180,000.
C-Stockholders' equity is reduced by $90,000 and retained earnings is reduced by $135,000.
D-The total amount of stockholders' equity is not effected but retained earnings is reduced by $180,000.
Answer is A.
When a stock dividend is above 20-25 percent, it is recorded at the par value of the shares issued. Here, that is 9,000 shares times $10 per share are $90,000. Retained earnings is reduced by that amount and common stock is increased by that same amount. The increase in common stock and the decrease in retained earnings offset each other so that total stockholders' equity is not affected.
---Auditing and Attestation
The CPA firm of Bryant and James is auditing Garnett Corporation and has made the decision that there is a increased amount of risk that the financial statements being issued contain a material misstatement. Which of the following is most likely to have led to that assessment?
A-The board of directors takes an active role in the oversight of company management.
B-Garnett is a bank in a region where several banks have failed in recent months.
C-The company recently sold land and has reporting a gain on that transaction.
D-The president of Garnett holds two percent of the outstanding shares of the company.
Answer is B.
There are many factors that can lead to special concern by the auditors. The board of directors being actively involved with the company is considered beneficial and might actually reduce the risk of a misstatement. The sale of land would probably warrant examination by the auditor but the mere sale does not increase the risk of a misstatement. The president holding stock in the company is not unusual and, again, by itself does not lead to an increase in the level of assessed risk. However, when an audit client is in a declining industry, the auditor knows that market conditions are already bad. The fact that the company faces such adverse times means that the likelihood of material misstatements (especially from fraud) is elevated.
Regulation
The Oregon Company has a large donut maker used in its business which has a tax basis of $14,000 but a fair value of $11,000. It is exchanged for a new donut maker worth $10,000. Oregon also collected $1,000 in cash to even up the trade. What is the tax basis to Oregon of the new donut maker after the trade?
A--$10,000
B--$11,000
C--$13,000
D--$14,000
Answer is C.
In a like-kind exchange, the taxable gain is the lower of the gain on the trade or the cash (boot) received. Here, the gain is actually a loss of $3,000 so no gain is recognized. The loss is the tax basis given up ($14,000) less the fair value received ($11,000 or $10,000 plus $1,000). So, if Oregon is given up a tax basis of $14,000 and no gain is recognized, the items received must have a tax basis of that same $14,000. The cash has to have a tax basis of $1,000. That leaves $13,000 as the remaining tax basis for the new donut-maker.
BEC
Which of the following is the best explanation of an enterprise resource planning system or ERP?
A-It is a computer system designed to make certain that all raw materials are received as needed within an organization.
B-It is an attempt to consolidate all of a company's departments and functions into a single computer system that services each department's individual needs through the use of a common database.
C-It is a computer program that should maintain proper cash resources within a company at all times and places.
D-It is an ongoing planning process that measures labor input and related output in an attempt to maximize efficiency.
Answer is B.
According to Wikipedia: "Enterprise resource planning (ERP) is an enterprise-wide information system designed to coordinate all the resources, information, and activities needed to complete business processes such as order fulfillment or billing. An ERP system supports most of the business system that maintains - in a single database - the data needed for a variety of business functions such as manufacturing, supply chain management, financials, projects, human resources and customer relationship management."
Have a great week!!!
From: Joe
If you are taking a part of the exam at the end of the January-February window and you work just 20 questions per day at www.cpareviewforfree.com, you can get 300 questions done and that ought to get you very close to a passing score. Even if you have not studied one bit so far, you can still pass in February if you get to work right now.
(a) - On Friday, it is Valentine's Day here in the United States (I am not sure if Valentine's Day is observed in other countries). I sent the following note to my college students today. It probably applies to everyone out there. Think of someone you love and write them a note.
"I am going to give you some fatherly advice that I wish someone had given me when I was your age. Valentine's Day is coming up on Saturday. If you are lucky and your mother is still alive, go to Hallmark or some other card shop and buy her a real card. Then, write her a few lines in your own handwriting and tell her how much you love her. Don't leave it to an email or to a phone call. Those don't show any imagination or creativity or caring - they are just overly convenient. Don't take the people in your family and in your life for granted. Life should be lived with some imagination and some caring. Go out of your way to do something personal. If you buy a card and especially if you write a note, there will come a day when you will be glad that you did."
(b)-In case you have not already done so, go to www.youtube.com and type in (without spaces) CPAreviewforfree. You should get three videos that I made about preparing for the CPA Exam. My spring break is coming up in a few weeks and I hope to make 2-3 more videos to put up on YouTube. I am always trying to think of every possible way to encourage people to get the points they need to pass the CPA Exam.
(c)-Got another great email today. Always makes me smile.
"Thanks for the valuable help. I really appreciate it, your questions are unique and the explanations are awesome. Also I like the names that are used in the questions. For sure I will inform you about my grades since you are my partner in any success."
Hey, we are always delighted to be of help to every person who wants to pass the CPA Exam. We know times are tough and not everyone can afford to pay $2,500 for a review program. Money should not be a barrier that keeps you from reaching your career goal. Life should reward the people who work, not just the people with money.
(1)-One of my senior students came by last week to chat about the CPA Exam. She graduates in 2 1/2 months and wants to get the exam done over the summer. She asked me to list out the things that were most important for her to know as she gets started.
My goodness, that was an interesting question. A list of the things that are most important to know about the CPA Exam. I thought for awhile and then gave her the following TOP TEN. I have pondered it for several days since that time and still like the choices.
(a)-Nothing beats hours studied. There are no short-cuts. You need to plan to study at least 60 hours per part. Anyone who tells you differently is giving you bad advice.
(b)-The exam is one mile wide and one inch deep. They want to see if you know a little bit about everything. They have very few topics where the depth of coverage is much more than shallow. It is a comprehensive exam of the basics.
(c)-You do not have to be perfect. You only need to pass. Learn each topic enough to pass and then move on.
(d)-On the exam itself, time management is critical. Always know how much time you have and how much time you can afford to spend on each question.
(e)-As you study, you need some easy way to review and keep the material fresh in your mind. I told her about the 10-word notes and the three-second questions that I have mentioned in these email lessons. It is shocking as to how quickly you will lose knowledge without some review process.
(f)-Knowing material is not the key; the key is being able to answer questions. For the CPA Exam, you have no other goal than being able to answer questions.
(g)-Learn from your mistakes. To pass you must constantly get better and you do that by learning from the problems you miss. Any time you miss a question, you have a golden opportunity to make improvement.
(h)-Consistency is a real key. Too many people study hard for a day and then take five days off. I really like for people to study 60-90 minutes per day 5-6 days per week. I think that is a schedule that works.
(i)-Study as early in the day as you can. If you put off studying, it is easy to get to the end of the day and be too tired to do any at all. Study first and then you cannot put it off. Procrastination is your biggest enemy.
(j)-I then gave her our Lesson 23 that I send out to all of our readers on February 3 and told her to read the 22 steps that I had listed for success using CPA Review For FREE. I think everyone who is taking the CPA Exam should read those 22 steps carefully. I believe they provide perfect guidance for passing the CPA Exam without spending one penny for review materials. Never forget our motto: Try us FIRST before you spend your hard-earned money.
(2)-Always know that you can very easily unsubscribe to these email lessons. Just scroll to the bottom of this lesson or any lesson and click on the appropriate button.
And, anyone who wants to automatically receive these email lessons can do so by going to www.CPAreviewforFREE.com and registering and then make sure the box is checked to get extra materials. These lessons ARE the extra material.
(3)-I am always surprised as to how many people go into the CPA Exam without a real understanding of the exam itself. I thought I would remind you of how the CPA Exam is structured.
(a)-Time:
Auditing-4.5 hours
BEC-2.5 hours
Financial Accounting and Reporting-4.0 hours
Regulation-3.0 hours
(b)-Composition of Exam:
Each part except BEC is made up of three testlets and two simulations.
BEC is made up of three testlets only.
(c)-Composition of Testlet:
In each part except Regulation, a testlet holds 30 multiple-choice questions.
In Regulation, a testlet holds 24 multiple-choice questions.
(d)-Graded Questions in a Testlet:
In each part except Regulation, 25 out of the 30 multiple-choice questions are graded. The other five are being tested to see if they are good questions.
In Regulation, 20 out of the 24 multiple-choice questions are graded. The other four are being tested to if they are good questions.
(e)-Passing Grade:
75 is the passing grade in all four parts.
However, because different questions have different weighted values, that does not mean that you need to get 75 percent of the questions correct in order to pass.
(f)-Grading Points:
Because BEC only has multiple-choice questions, 100 percent of the grade comes from those questions.
For all other parts, 70 percent of the grade comes from the multiple-choice questions, 10 percent from the written communications question, and 20 percent from the rest of the simulations.
(g)-Variability of Difficulty
In BEC, there is no variability in difficulty from one testlet to the next.
In all of the other parts, if you do well on the first testlet, the next testlet has harder questions. If you do well on the second testlet, the third testlet also has questions that are judged to be harder. You want harder questions because they have a higher point value.
(h)-Examination Windows
Each part of the exam can be taken one time per exam window. Those exam windows are January-February, April-May, July-August, October-November.
(i)-Time Limit for Passing
Each state sets a limit in which all four parts must be passed. Many states use 18 months.
(j)-Number of Tests Per Window
A vast majority of candidates take one or two parts of the CPA Exam per window. A few candidates do attempt all four parts in a single two-month window.
(k)-Getting More Information
There is a lot of information about the CPA Exam at www.cpa-exam.org. I would especially recommend the CPA Candidate Bulletin, Tutorial and Sample Exams, and CPA Examination Newsletters. In addition, the Notice to Schedule that you receive when you are approved to take the exam provides a significant amount of information.
(4)-Okay, let's practice a bit. Think through each of the following questions and see if we can add a point or so. Every point moves you that much closer to passing.
---Financial Accounting
The Mulieri Company was authorized to issue 100,000 shares of common stock with a $10 par value. The company issued 30,000 shares for cash of $15 per share. Later, when the shares were selling for $20 per share on a stock exchange, the company issued another 9,000 shares as a stock dividend. Which of the following statements is true about the recording of the stock dividend?
A-The total amount of stockholders' equity is not affected but retained earnings is reduced by $90,000.
B-Stockholders' equity is reduced by $180,000 and retained earnings is also reduced by $180,000.
C-Stockholders' equity is reduced by $90,000 and retained earnings is reduced by $135,000.
D-The total amount of stockholders' equity is not effected but retained earnings is reduced by $180,000.
Answer is A.
When a stock dividend is above 20-25 percent, it is recorded at the par value of the shares issued. Here, that is 9,000 shares times $10 per share are $90,000. Retained earnings is reduced by that amount and common stock is increased by that same amount. The increase in common stock and the decrease in retained earnings offset each other so that total stockholders' equity is not affected.
---Auditing and Attestation
The CPA firm of Bryant and James is auditing Garnett Corporation and has made the decision that there is a increased amount of risk that the financial statements being issued contain a material misstatement. Which of the following is most likely to have led to that assessment?
A-The board of directors takes an active role in the oversight of company management.
B-Garnett is a bank in a region where several banks have failed in recent months.
C-The company recently sold land and has reporting a gain on that transaction.
D-The president of Garnett holds two percent of the outstanding shares of the company.
Answer is B.
There are many factors that can lead to special concern by the auditors. The board of directors being actively involved with the company is considered beneficial and might actually reduce the risk of a misstatement. The sale of land would probably warrant examination by the auditor but the mere sale does not increase the risk of a misstatement. The president holding stock in the company is not unusual and, again, by itself does not lead to an increase in the level of assessed risk. However, when an audit client is in a declining industry, the auditor knows that market conditions are already bad. The fact that the company faces such adverse times means that the likelihood of material misstatements (especially from fraud) is elevated.
Regulation
The Oregon Company has a large donut maker used in its business which has a tax basis of $14,000 but a fair value of $11,000. It is exchanged for a new donut maker worth $10,000. Oregon also collected $1,000 in cash to even up the trade. What is the tax basis to Oregon of the new donut maker after the trade?
A--$10,000
B--$11,000
C--$13,000
D--$14,000
Answer is C.
In a like-kind exchange, the taxable gain is the lower of the gain on the trade or the cash (boot) received. Here, the gain is actually a loss of $3,000 so no gain is recognized. The loss is the tax basis given up ($14,000) less the fair value received ($11,000 or $10,000 plus $1,000). So, if Oregon is given up a tax basis of $14,000 and no gain is recognized, the items received must have a tax basis of that same $14,000. The cash has to have a tax basis of $1,000. That leaves $13,000 as the remaining tax basis for the new donut-maker.
BEC
Which of the following is the best explanation of an enterprise resource planning system or ERP?
A-It is a computer system designed to make certain that all raw materials are received as needed within an organization.
B-It is an attempt to consolidate all of a company's departments and functions into a single computer system that services each department's individual needs through the use of a common database.
C-It is a computer program that should maintain proper cash resources within a company at all times and places.
D-It is an ongoing planning process that measures labor input and related output in an attempt to maximize efficiency.
Answer is B.
According to Wikipedia: "Enterprise resource planning (ERP) is an enterprise-wide information system designed to coordinate all the resources, information, and activities needed to complete business processes such as order fulfillment or billing. An ERP system supports most of the business system that maintains - in a single database - the data needed for a variety of business functions such as manufacturing, supply chain management, financials, projects, human resources and customer relationship management."
Have a great week!!!
Tuesday, February 3, 2009
Try us FIRST before you spend your hard-earned money
Don't Limit Yourself
From: Joe
(a) - It snowed in Richmond this morning, about an inch. Did not stick to the road but it clung heavily to every tree limb. I drove out at around 7 and the white snow filling the dark woods was lovely. Even when you are buried deep in preparing for the CPA Exam, it is good idea to notice the beauty around you. Makes the whole experience much easier. All work and no play is never a perfect strategy.
(1) - I usually don't watch the Super Bowl. It is a lot of time spent watching other people. But, for some reason, I did pay attention to the game on Sunday. I saw two teams who really seemed to enjoy the challenge of the battle. They kept slugging until the very end. Great effort is something that should always be prized and both teams put out a great effort.
You will probably never play in the Super Bowl (although I have had, at least one former student play in a Super Bowl). However, there are a few times in life when you have your own chance to put out a great effort.
The CPA Exam is one of those times.
Passing the CPA Exam requires a great effort. You need to put in about 60-90 hours per part and that is never easy to do. You need to put in time almost every day. You need to stay focused. You need to be efficient and make progress. But, if you put in that great effort, you will never regret it.
When the players left the field on Sunday, they could all say "we did it; we gave it our very best." What more can you ask from yourself? When you are faced with a real challenge, that kind of statement is something special.
That is what I want from you on the CPA Exam. When you leave the testing center, I want you to smile and say "I did it; I gave it my very best!!!"
(2) - In operating a live CPA Exam Review program, I had the great pleasure of working with 300-500 people per year who were getting ready for the big challenge. When you work with so many people, you start to notice habits. One that was very prevalent was the tendency to start off from the very beginning with an excuse:
---"Hi, my name is X and I don't do well on tests."
---"Hi, I'm X and I get really nervous during exams."
---"I'm X and I seem to make an incredible number of careless errors."
My response was always the same to such personal apologies: "DON'T BE SO NEGATIVE ABOUT YOURSELF." I could never see any advantages in making people think you were going to fail. How does that help? It is like giving yourself an excuse to fail.
Do you have such negative habits?
Are you letting your own habits limit what you can accomplish?
As you talk about the CPA Exam with others, listen to what you have to say. Why is it so important to have excuses? Why not start out with
"My name is X and I'm going to give it my best shot."
"I'm X and I realize that this is a challenge but I like challenges and I'm looking forward to this one."
"Hi, I'm X and if I put in the time, I can lick this thing."
Don't give yourself an excuse for failure.
Don't give yourself a reason not to try.
Don't give yourself a pass so you can avoid putting in a good effort.
So, here is an exercise that I want you to consider over the next week. Pay close attention to what you tell your friends and family about the CPA Exam. If I were to then ask them how you talk about the exam, what would they tell me?
--Would they say that you are upbeat and optimistic or that you always expect the worse?
--Would they say that you make good things happen or that you seem to have no control over your own life?
--Would they say that you seem to think of yourself as a winner or a loser?
--Would that say that you were pushing toward victory or sliding toward defeat?
Okay, you don't have to be a cheerleader for yourself if that is not your style. However, I see no reason why you should define yourself and your battle with the CPA Exam in a negative way. That just limits who you can be. That just puts you in a box and says "you are stuck."
I don't believe that. I believe that, with work and patience and thought, you can achieve what you want to achieve.
Don't put limits on yourself. There is nothing in your DNA that means that you cannot stay calm and focused and do a good job on the CPA Exam. People just like YOU pass that exam every day. They prepare, they learn, they pass. If they can do it, so can you. You don't have to be Superman. You don't have to leap tall buildings with a single bound. You just have to put in a reasonable amount of time and effort. And, you can do that.
(3) - Here is another nice email that we received recently.
"Just want to say thank you for all that you do. Your CPA review site is FREE and your encouraging words are PRICELESS. Yesterday I took my first part (BEC) of the CPA exam. It was very hard for me. Just thinking that I'll have to do it at least 3 more times made me want to quit. I was thinking that I don't have to do it and maybe don't have to be a CPA. Just being an accountant will do. After reading your e-mail I knew what I need to do - I need to change my attitude and face the challenges. Your interpretation of the president's words gave me a boost of energy and desire to 'give my all to the difficult task.'"
(4) - We send out email lessons like this one about every 7-10 days. If you ever want to UNSUBCRIBE, just scroll to the bottom of any lesson and click on the appropriate link.
We are delighted to have you with us but you always have the right to unsubscribe.
Thanks as always to everyone who has passed along information about www.CPAreviewforFREE.com. We have now had over 1.6 million page views since we started operations. Our goal is to help 100 percent of the CPA Exam candidates to get the points they need in order to pass this exam. 100 PERCENT!! We want to help everyone-not just the rich or the well-employed.
With your help, we can make it!!! Thanks!!!
(5) - In case you have not really tried CPA Review for FREE yet, let me make the following suggestion. Put your money back in your pocket. Then, use us for one part of the exam and see how you do. We think you will be very pleased and you will have saved thousands of dollars. It makes no sense to pay for a program (especially a mediocre program) and then realize that we can get you the points you need to pass for FREE.
Here is one way that we recommend using CPA Review for FREE.
(1) - Make sure that you are qualified to take the CPA Exam. Start the process by going to www.nasba.org and review the requirements of your state. It is probably going to take a month or so for the state to review your application so get the process going.
(2) - Pick the part of the exam that you like the most. It is always easier to get started with a part you like. I am personally a big fan of starting with Financial Accounting.
(3) - Once you get your official Notice to Schedule, schedule to take that part of the exam in roughly 40 days. There is absolutely no reason to study for six months. Let's get started and get it done. Pick a day in about 6 weeks and reserve your seat. Having a date set will get you fired up to do the work.
(4)-Go to www.CPAreviewforFREE.com and read all the information under "resources." It is all important so read it all.
(5)-Start answering at least 15-18 questions per day. It is probably a good idea to go one topic at a time. Make a list of the categories and check them off as you go. Seeing the progress will make you feel good. Work six days per week. Take off one day each week completely and get some real rest and relaxation. Try to average at least 90 minutes per day the rest of the week.
(6)-Do 15 minutes or so of exercise each day to keep the blood pumping. You will feel better and you will do better.
(7)-Never guess at answers when you study. On the exam, you need to guess but not when you are preparing.
(8)-Never worry about how many questions you are getting right or wrong. That is a distraction that does not help one bit. The only thing you want to worry about is getting better.
(9)-If you get a question correct, move on. Don't sit and congratulate yourself.
(10)-If you miss a question, read the answer carefully and find the step you missed and figure out what you missed in that step. Write down 10 words or less to help you get the question/step right the next time you see it. Don't spend time writing pages-keep it to 10 words. You want to improve the odds that you can get the question right the next time. Reading the answer for missed questions may be the single most important thing you do in this process.
(11)-Keep a list of "three-second questions." Those are the very basics-questions that you should be able to read, count to three, and give an answer off the top of your head. Having the basics down is so very vital to learning. "How is interest expense computed?" "Interest expense is the book value of the debt times the effective or yield rate." "How is the amount of cash interest to be paid on a debt computed?" "Cash interest is the face value of the debt times the stated rate of interest." Those are three second questions.
(12)-Never forget that you only need to get 75 points to pass. You are not seeking perfection. Because of the grading system, 75 points does not even mean 75 percent of the questions.
(13)-Once a week, walk back through your three-second questions. You just want to keep the basics fresh in your mind.
(14)-When you get to the final 7-10 days, start going methodically back through your 10 word notes. You want to work on increasing the number of questions that you can answer. That is your only real goal.
(15)-When you get to the final 7-10 days, start answering questions at www.CPAreviewforFREE.com in random mode. You want to get used to seeing questions move quickly from one topic to the next.
(16)-When you get to the final 7-10 days, go to www.cpa-exam.org and go through the tutorial and sample tests. Read everything and just get a feel for how the questions (both multiple choice and simulations) are presented. Don't worry about trying to figure out answers.
(17)-Make sure you read all of the information that came with your Notice to Schedule. They try to explain everything to you in advance to make the testing experience less stressful. Read this material carefully.
(18)-Make sure you know the location of the testing center. Estimate how long the drive will take and what time you need to get there comfortably. You want to avoid any and all stress. You want 100 percent of your energy focused on getting points.
(19)-On the night before the exam, eat normally and get a typical amount of sleep. You will think more clearly during the exam if nothing has upset the normal rhythm of your life. You want to be loose but focused. I am totally against losing sleep to study on the night before the exam. Sleepy people do not pass the CPA Exam.
(20)-During the exam, watch your time very closely. You want to finish with about 10 seconds left. Don't waste time but don't get too rushed.
(21)-If you do not know a question, eliminate as many answers as possible and take a guess. Do not let a tough question get you rattled. Don't spend time on a question that you really do not know. No one is seeking perfection from you.
(22)-- When you leave the testing center, smile and say "I did it; I gave it my very best!!!"
(6)-One more email from one of our "customers."
"I just found this web-site last night and I have already done some questions. At first I was skeptical about it. I thought, 'CPA review for free, how can that be? Maybe there are errors in the questions and answers.' But having read one of the articles on the site and seen the name of the co-founder Joe Hoyle, I am now convinced and feel very fortunate to have found this site. I have used lectures delivered by Mr. Hoyle (in another program) and have found his lectures very easy to understand and follow. I think this is a wonderful resource for CPA students and I wish to say many thanks to Mr. Hoyle and others for creating this."
(7)-Okay, time for some practice questions. Let's see if we can add a point with a bit of practice.
Financial Accounting and Reporting
The Hathaway Company buys land on January 1, Year One for $300,000. The company agrees to pay $6,000 in interest each December 31 for five years and then the entire $300,000. A reasonable interest rate is 10 percent. The present value of $1 in five years at a 10 percent annual rate is .62. The present value of a five-year ordinary annuity of $1 at a 10 percent annual rate is 3.89. Later, Hathaway holds surplus cash and on July 1, Year Two, agrees to pay off the remaining liability for exactly $310,000. What loss is recognized by Hathaway on the extinguishment of the debt? (round all computations to the nearest dollar).
A - $74,512
B - $76,922
C - $80,435
D - $82,867
Answer is A.
The interest of $6,000 per year was not a reasonable rate so that the debt must be recorded at its present value of $209,340. That is $300,000 times .62 ($186,000) plus $6,000 times 3.89 ($23,340). In Year One, the interest expense is 10 percent times the book value of $209,340 or $20,934. Because only $6,000 was paid this period, the remaining $14,934 has to be compounded or added to the book value of the liability. That raises the book value from $209,340 to $224,274. The interest expense for the next six months (until date of payment) is $11,214. That is $224,274 times 10 percent times 6/12 year. Payment for half year of interest is $3,000 (which is assumed to be included in the $310,000) so an extra interest of $8,214 is recognized ($11,214 less $3,000). Since it was not paid as interest, it is also compounded bringing the book value from $224,274 up to $232,488 as of the date of the final payment. Of the $310,000, $3,000 pays off the cash interest for the first
six months so the other $307,000 is paid on the debt. That creates a loss to be recognized of $74,512 ($307,000 less $232,488).
Auditing and Attestation
An auditor is analyzing documents creating by a client company in connection with the purchase of a large warehouse. In studying the ten-year loan that was taken out to pay for the acquisition, the auditor discovers that the company must maintain a current ratio of at least 2 to 1 or the debt can be immediately called by the bank. The current ratio is well over 2 to 1. What impact does this have on the auditor's investigation of the financial statements?
A - The loan must be recorded as a current liability rather than as a noncurrent liability.
B - The requirement impacts the capitalized cost of the warehouse.
C - The requirement impacts the book value reported for the liability.
D - The requirement must be disclosed in the notes to the financial statements.
Answer is D.
Because the requirement has been met to date, there is no change in any reported balances. However, the presentation of the financial statements is still in question because the information about the loan covenant must be properly disclosed. Because of the requirement, the auditor is concerned with the presentation and disclosure assertion in connection with the financial statements.
Regulation
The Andrews Company makes sales on credit of $400,000 in Year One and $500,000 in Year Two and recognizes those amounts for income tax purposes. The company believes that 2 percent of all credit sales will prove to be worthless. In Year One, $3,000 in accounts are judged to be completely worthless along with another $12,000 in Year Two. What is reported by the company as its bad debt expense for income tax purposes?
A - $8,000 in Year One and $10,000 in Year Two
B - $3,000 in Year One and $12,000 in Year Two
C - $3,000 in Year One and $10,000 in Year Two
D - $8,000 in Year One and $12,000 in Year Two
Answer is B.
For income tax purposes, bad debts cannot be anticipated. They can only be deducted when they prove to be worthless and only if they were recognized as income at the time of sale.
BEC
Which of the following measures the average change over time in the selling prices received by domestic producers for their output?
A - Producer price index
B - The US index of domestic production.
C - The inflation index for domestic production.
D - The sales index for domestic output of durable goods
Answer is A
According to the Department of Labor Statistics, "the Producer Price Index (PPI) program measures the average change over time in the selling prices received by domestic producers for their output. The prices included in the PPI are from the first commercial transaction for many products and some services."
Have a great week. Keep focused and adding points. If you do that, there is nothing that can keep you from passing the CPA Exam.
Joe Hoyle
Co-Founder
From: Joe
(a) - It snowed in Richmond this morning, about an inch. Did not stick to the road but it clung heavily to every tree limb. I drove out at around 7 and the white snow filling the dark woods was lovely. Even when you are buried deep in preparing for the CPA Exam, it is good idea to notice the beauty around you. Makes the whole experience much easier. All work and no play is never a perfect strategy.
(1) - I usually don't watch the Super Bowl. It is a lot of time spent watching other people. But, for some reason, I did pay attention to the game on Sunday. I saw two teams who really seemed to enjoy the challenge of the battle. They kept slugging until the very end. Great effort is something that should always be prized and both teams put out a great effort.
You will probably never play in the Super Bowl (although I have had, at least one former student play in a Super Bowl). However, there are a few times in life when you have your own chance to put out a great effort.
The CPA Exam is one of those times.
Passing the CPA Exam requires a great effort. You need to put in about 60-90 hours per part and that is never easy to do. You need to put in time almost every day. You need to stay focused. You need to be efficient and make progress. But, if you put in that great effort, you will never regret it.
When the players left the field on Sunday, they could all say "we did it; we gave it our very best." What more can you ask from yourself? When you are faced with a real challenge, that kind of statement is something special.
That is what I want from you on the CPA Exam. When you leave the testing center, I want you to smile and say "I did it; I gave it my very best!!!"
(2) - In operating a live CPA Exam Review program, I had the great pleasure of working with 300-500 people per year who were getting ready for the big challenge. When you work with so many people, you start to notice habits. One that was very prevalent was the tendency to start off from the very beginning with an excuse:
---"Hi, my name is X and I don't do well on tests."
---"Hi, I'm X and I get really nervous during exams."
---"I'm X and I seem to make an incredible number of careless errors."
My response was always the same to such personal apologies: "DON'T BE SO NEGATIVE ABOUT YOURSELF." I could never see any advantages in making people think you were going to fail. How does that help? It is like giving yourself an excuse to fail.
Do you have such negative habits?
Are you letting your own habits limit what you can accomplish?
As you talk about the CPA Exam with others, listen to what you have to say. Why is it so important to have excuses? Why not start out with
"My name is X and I'm going to give it my best shot."
"I'm X and I realize that this is a challenge but I like challenges and I'm looking forward to this one."
"Hi, I'm X and if I put in the time, I can lick this thing."
Don't give yourself an excuse for failure.
Don't give yourself a reason not to try.
Don't give yourself a pass so you can avoid putting in a good effort.
So, here is an exercise that I want you to consider over the next week. Pay close attention to what you tell your friends and family about the CPA Exam. If I were to then ask them how you talk about the exam, what would they tell me?
--Would they say that you are upbeat and optimistic or that you always expect the worse?
--Would they say that you make good things happen or that you seem to have no control over your own life?
--Would they say that you seem to think of yourself as a winner or a loser?
--Would that say that you were pushing toward victory or sliding toward defeat?
Okay, you don't have to be a cheerleader for yourself if that is not your style. However, I see no reason why you should define yourself and your battle with the CPA Exam in a negative way. That just limits who you can be. That just puts you in a box and says "you are stuck."
I don't believe that. I believe that, with work and patience and thought, you can achieve what you want to achieve.
Don't put limits on yourself. There is nothing in your DNA that means that you cannot stay calm and focused and do a good job on the CPA Exam. People just like YOU pass that exam every day. They prepare, they learn, they pass. If they can do it, so can you. You don't have to be Superman. You don't have to leap tall buildings with a single bound. You just have to put in a reasonable amount of time and effort. And, you can do that.
(3) - Here is another nice email that we received recently.
"Just want to say thank you for all that you do. Your CPA review site is FREE and your encouraging words are PRICELESS. Yesterday I took my first part (BEC) of the CPA exam. It was very hard for me. Just thinking that I'll have to do it at least 3 more times made me want to quit. I was thinking that I don't have to do it and maybe don't have to be a CPA. Just being an accountant will do. After reading your e-mail I knew what I need to do - I need to change my attitude and face the challenges. Your interpretation of the president's words gave me a boost of energy and desire to 'give my all to the difficult task.'"
(4) - We send out email lessons like this one about every 7-10 days. If you ever want to UNSUBCRIBE, just scroll to the bottom of any lesson and click on the appropriate link.
We are delighted to have you with us but you always have the right to unsubscribe.
Thanks as always to everyone who has passed along information about www.CPAreviewforFREE.com. We have now had over 1.6 million page views since we started operations. Our goal is to help 100 percent of the CPA Exam candidates to get the points they need in order to pass this exam. 100 PERCENT!! We want to help everyone-not just the rich or the well-employed.
With your help, we can make it!!! Thanks!!!
(5) - In case you have not really tried CPA Review for FREE yet, let me make the following suggestion. Put your money back in your pocket. Then, use us for one part of the exam and see how you do. We think you will be very pleased and you will have saved thousands of dollars. It makes no sense to pay for a program (especially a mediocre program) and then realize that we can get you the points you need to pass for FREE.
Here is one way that we recommend using CPA Review for FREE.
(1) - Make sure that you are qualified to take the CPA Exam. Start the process by going to www.nasba.org and review the requirements of your state. It is probably going to take a month or so for the state to review your application so get the process going.
(2) - Pick the part of the exam that you like the most. It is always easier to get started with a part you like. I am personally a big fan of starting with Financial Accounting.
(3) - Once you get your official Notice to Schedule, schedule to take that part of the exam in roughly 40 days. There is absolutely no reason to study for six months. Let's get started and get it done. Pick a day in about 6 weeks and reserve your seat. Having a date set will get you fired up to do the work.
(4)-Go to www.CPAreviewforFREE.com and read all the information under "resources." It is all important so read it all.
(5)-Start answering at least 15-18 questions per day. It is probably a good idea to go one topic at a time. Make a list of the categories and check them off as you go. Seeing the progress will make you feel good. Work six days per week. Take off one day each week completely and get some real rest and relaxation. Try to average at least 90 minutes per day the rest of the week.
(6)-Do 15 minutes or so of exercise each day to keep the blood pumping. You will feel better and you will do better.
(7)-Never guess at answers when you study. On the exam, you need to guess but not when you are preparing.
(8)-Never worry about how many questions you are getting right or wrong. That is a distraction that does not help one bit. The only thing you want to worry about is getting better.
(9)-If you get a question correct, move on. Don't sit and congratulate yourself.
(10)-If you miss a question, read the answer carefully and find the step you missed and figure out what you missed in that step. Write down 10 words or less to help you get the question/step right the next time you see it. Don't spend time writing pages-keep it to 10 words. You want to improve the odds that you can get the question right the next time. Reading the answer for missed questions may be the single most important thing you do in this process.
(11)-Keep a list of "three-second questions." Those are the very basics-questions that you should be able to read, count to three, and give an answer off the top of your head. Having the basics down is so very vital to learning. "How is interest expense computed?" "Interest expense is the book value of the debt times the effective or yield rate." "How is the amount of cash interest to be paid on a debt computed?" "Cash interest is the face value of the debt times the stated rate of interest." Those are three second questions.
(12)-Never forget that you only need to get 75 points to pass. You are not seeking perfection. Because of the grading system, 75 points does not even mean 75 percent of the questions.
(13)-Once a week, walk back through your three-second questions. You just want to keep the basics fresh in your mind.
(14)-When you get to the final 7-10 days, start going methodically back through your 10 word notes. You want to work on increasing the number of questions that you can answer. That is your only real goal.
(15)-When you get to the final 7-10 days, start answering questions at www.CPAreviewforFREE.com in random mode. You want to get used to seeing questions move quickly from one topic to the next.
(16)-When you get to the final 7-10 days, go to www.cpa-exam.org and go through the tutorial and sample tests. Read everything and just get a feel for how the questions (both multiple choice and simulations) are presented. Don't worry about trying to figure out answers.
(17)-Make sure you read all of the information that came with your Notice to Schedule. They try to explain everything to you in advance to make the testing experience less stressful. Read this material carefully.
(18)-Make sure you know the location of the testing center. Estimate how long the drive will take and what time you need to get there comfortably. You want to avoid any and all stress. You want 100 percent of your energy focused on getting points.
(19)-On the night before the exam, eat normally and get a typical amount of sleep. You will think more clearly during the exam if nothing has upset the normal rhythm of your life. You want to be loose but focused. I am totally against losing sleep to study on the night before the exam. Sleepy people do not pass the CPA Exam.
(20)-During the exam, watch your time very closely. You want to finish with about 10 seconds left. Don't waste time but don't get too rushed.
(21)-If you do not know a question, eliminate as many answers as possible and take a guess. Do not let a tough question get you rattled. Don't spend time on a question that you really do not know. No one is seeking perfection from you.
(22)-- When you leave the testing center, smile and say "I did it; I gave it my very best!!!"
(6)-One more email from one of our "customers."
"I just found this web-site last night and I have already done some questions. At first I was skeptical about it. I thought, 'CPA review for free, how can that be? Maybe there are errors in the questions and answers.' But having read one of the articles on the site and seen the name of the co-founder Joe Hoyle, I am now convinced and feel very fortunate to have found this site. I have used lectures delivered by Mr. Hoyle (in another program) and have found his lectures very easy to understand and follow. I think this is a wonderful resource for CPA students and I wish to say many thanks to Mr. Hoyle and others for creating this."
(7)-Okay, time for some practice questions. Let's see if we can add a point with a bit of practice.
Financial Accounting and Reporting
The Hathaway Company buys land on January 1, Year One for $300,000. The company agrees to pay $6,000 in interest each December 31 for five years and then the entire $300,000. A reasonable interest rate is 10 percent. The present value of $1 in five years at a 10 percent annual rate is .62. The present value of a five-year ordinary annuity of $1 at a 10 percent annual rate is 3.89. Later, Hathaway holds surplus cash and on July 1, Year Two, agrees to pay off the remaining liability for exactly $310,000. What loss is recognized by Hathaway on the extinguishment of the debt? (round all computations to the nearest dollar).
A - $74,512
B - $76,922
C - $80,435
D - $82,867
Answer is A.
The interest of $6,000 per year was not a reasonable rate so that the debt must be recorded at its present value of $209,340. That is $300,000 times .62 ($186,000) plus $6,000 times 3.89 ($23,340). In Year One, the interest expense is 10 percent times the book value of $209,340 or $20,934. Because only $6,000 was paid this period, the remaining $14,934 has to be compounded or added to the book value of the liability. That raises the book value from $209,340 to $224,274. The interest expense for the next six months (until date of payment) is $11,214. That is $224,274 times 10 percent times 6/12 year. Payment for half year of interest is $3,000 (which is assumed to be included in the $310,000) so an extra interest of $8,214 is recognized ($11,214 less $3,000). Since it was not paid as interest, it is also compounded bringing the book value from $224,274 up to $232,488 as of the date of the final payment. Of the $310,000, $3,000 pays off the cash interest for the first
six months so the other $307,000 is paid on the debt. That creates a loss to be recognized of $74,512 ($307,000 less $232,488).
Auditing and Attestation
An auditor is analyzing documents creating by a client company in connection with the purchase of a large warehouse. In studying the ten-year loan that was taken out to pay for the acquisition, the auditor discovers that the company must maintain a current ratio of at least 2 to 1 or the debt can be immediately called by the bank. The current ratio is well over 2 to 1. What impact does this have on the auditor's investigation of the financial statements?
A - The loan must be recorded as a current liability rather than as a noncurrent liability.
B - The requirement impacts the capitalized cost of the warehouse.
C - The requirement impacts the book value reported for the liability.
D - The requirement must be disclosed in the notes to the financial statements.
Answer is D.
Because the requirement has been met to date, there is no change in any reported balances. However, the presentation of the financial statements is still in question because the information about the loan covenant must be properly disclosed. Because of the requirement, the auditor is concerned with the presentation and disclosure assertion in connection with the financial statements.
Regulation
The Andrews Company makes sales on credit of $400,000 in Year One and $500,000 in Year Two and recognizes those amounts for income tax purposes. The company believes that 2 percent of all credit sales will prove to be worthless. In Year One, $3,000 in accounts are judged to be completely worthless along with another $12,000 in Year Two. What is reported by the company as its bad debt expense for income tax purposes?
A - $8,000 in Year One and $10,000 in Year Two
B - $3,000 in Year One and $12,000 in Year Two
C - $3,000 in Year One and $10,000 in Year Two
D - $8,000 in Year One and $12,000 in Year Two
Answer is B.
For income tax purposes, bad debts cannot be anticipated. They can only be deducted when they prove to be worthless and only if they were recognized as income at the time of sale.
BEC
Which of the following measures the average change over time in the selling prices received by domestic producers for their output?
A - Producer price index
B - The US index of domestic production.
C - The inflation index for domestic production.
D - The sales index for domestic output of durable goods
Answer is A
According to the Department of Labor Statistics, "the Producer Price Index (PPI) program measures the average change over time in the selling prices received by domestic producers for their output. The prices included in the PPI are from the first commercial transaction for many products and some services."
Have a great week. Keep focused and adding points. If you do that, there is nothing that can keep you from passing the CPA Exam.
Joe Hoyle
Co-Founder
Sunday, January 25, 2009
Words from Our New President
Words from Our New President
From: Joe
I want to wish my daughter Lara a very happy 16th birthday. She came to us from Russia 14.5 years ago and added a ton of joy to our lives. (Now, for the obvious questions: Yes, I do have two daughters and, yes, they were born exactly 53 weeks apart in the very middle of Russia.)
(a) – I mentioned last Saturday that the prior week had been our best ever. Our number of page views was 10 percent higher than in any previous week of our existence. Well, guess what? This past week our page views were up another 9 percent. At this rate, our goal of 10 million page views in 2009 is going to become a reality. Remember, that is a lot of points being added to your CPA Exam score (for FREE).
It is amazing how many emails we receive that start off "A friend just told me about your wonderful website." Thanks to every one of you folks who tell their friends, relatives, students, and coworkers about www.CPAreviewforFREE.com.
(b) – I had a free moment yesterday so I went to the website of a very well known CPA Review program. Just curious. What did I notice? Well, two things. The site spent an incredible amount of time talking about the ten people who attained the highest scores in the whole world on the CPA Exam in 2008. That is just great FOR THOSE TEN PEOPLE. I am not too sure who else that helps at all. I do not know about you but it would have never occurred to me when I took the CPA Exam to shoot for one of the top ten highest scores in the country. First, I couldn't see me scoring that high; it was not a realistic goal for anyone that I knew. And, second, I couldn't understand why I could ever want to study that hard. I just wanted to pass. I wanted to see a giant headline: "Joe scores exactly 75." (Actually, I did get two 75s and two 81s.)
Second, I looked forever on that website and I could not find how much they were charging. The Loch Ness Monster is not hidden as well as their prices. They have the cost so well hidden that you practically have to write them a check before you can find out the cost. Hmmm. I wonder why they hide the cost so carefully? My guess is that they are afraid you will pass out when you see what they are charging you. I am always concerned when someone wants to sell me something and will not tell me the price.
You know our motto: Try us FIRST before you spend your hard-earned money.
You do not have to follow the herd. Think for yourself. You can do this and we can help. Save your money—in these times, you might need it some day.
(1) – This past Tuesday, Barack Obama was sworn in as president of the United States. I am not going to get into politics but it was hard not to be pleased. He then gave a speech. He had a lot of great things to say but there was one line toward the end that really caught my attention. In fact, I stopped and wrote it down as soon as I heard it.
"There is nothing so satisfying to the spirit, so defining of our character than giving our all to a difficult task."
I could not agree more. In fact, I have been preaching that attitude since I started working in CPA Review in 1980. Believe it or not, the important part is not passing. The important part is giving our all to a difficult task. It really does make you a better person. And, that is a worthwhile endeavor.
Of course, it is something we applaud when President Obama says it. How good are we at living up to that kind of assertion?
Nothing so satisfying
Giving our all
To a difficult task
Everyone can say it; not everyone can do it. Can you?
It is all about attitude. You are preparing to pass the CPA Exam, WHAT IS YOUR ATTITUDE? Let's make that a question with multiple choice answers. What is your attitude toward the CPA Exam?
A – I am going to hate every minute of this whole process.
B – I would never do this if I did not absolutely have to do it.
C – I will do what it takes but I am going to complain every single day.
D – It's a great challenge; I am looking forward to seeing how far I can push myself.
Well, we all know the "Obama" answer. However, he has managed to push and challenge himself all the way to the White House. We know what he would do. That is not the real question for us here today. The real question is: which one of these answers reflects your feeling? What is your attitude?
Here's maybe a better way to look at this question. If I were to ask your spouse or your best friend to describe how you are approaching the CPA Exam, what would that person say about you? What attitude radiates from you?
What I really want is for your spouse or best friend to say about you: "It is amazing. I never thought it would happen but the challenge is really bringing out the best in (fill in your name). I can just see more interest and energy and enthusiasm. There is more of a purpose in life. I figured this would be one long series of complaints but, actually, there is something here that is bringing out the best."
That is what a real challenge does for you. If you have the right attitude, it can make you a better person.
Go for that passing grade
and
Throw yourself into the challenge.
(2) – As always, please know that you can unsubscribe from these email lessons whenever you wish. Just scroll to the bottom of any lesson and click on the link that you will find there. However, don't get in a rush; we love having you on board.
If someone has forwarded this email to you and you would like to receive these lessons on a regular basis, just go to www.cpareviewforfree.com and register. Be sure that the box about getting additional material is checked. These lessons are the additional material.
(3) I mentioned getting emails from our "customers." Here is a wonderfully nice note that I received recently from KT. Notes like this really do pay for the website.
"I have found your website very helpful. This past year, I bought a CD review course through our firm at a discounted rate. I took the audit section in October, but did not pass. Shortly after, I received an email from a CPA about your website. I like the format of your website and the emails with practice questions sent each week or so. I really appreciated your message in your December email about the television and wasting time. My television will be off for more study time, for sure. I wish I had learned of your website before spending any money on study material, but your website will give me even more practice. Thanks so much for the free help. You are truly a caring individual and teacher. You actually like helping people to succeed. Thanks for sharing."
And, here is another email, this one from NM:
"I thank you for the wonderful support you and your team are extending to the CPA students through your free website. I have extensively used your website and I have cleared all my subjects within 6 weeks. It feels great because I had devoted 4 full months to the course and I cleared it in the first shot. And I owe a great part of my success to you."
(4) – I was talking with my intermediate accounting students last week about the importance of building a strong foundation of knowledge. It is hard to answer any questions if you don't have a solid core of understanding.
I introduced them to my concept of "3 second questions." These are questions that are so basic that if you get them, you should be able to count to three and then immediately answer the question. I suggested that they start making a list of all the 3 second questions. It helps them decide what is important and what they should know.
Three second questions are not a bad concept for CPA Exam Review also. As you go through a topic, write down everything you should be able to answer off the top of your head. Believe it or not, there is a fairly finite list of things you should know in three seconds. If you can just answer all of the three second questions, you are very close to passing the CPA Exam.
Let me give you an example (or the start of an example). Assume that you are going to take Regulation and you are currently studying individual income taxes. You are going through our questions and answers and writing down what you should know.
What are some of the three second questions that you should expect to be able to answer off the top of your head? As you study, you should ask the question, count to three, and give the answer.
Well, here is the start of such a list. I will not try to list everything but you can get the idea.
--Name three types of income that are taxable.
--Name three types of income that are nontaxable.
--How do taxpayers qualify to file a joint return and what are the advantages?
--How do taxpayers qualify as head of household and what are the advantages?
--How do taxpayers qualify as qualifying widow or widow (surviving spouse) and what are the advantages?
--In general, what are the five rules for qualifying as a dependent on a taxpayer's tax return?
--When does the amount of money that a person make not impact the decision as to whether they are a dependent on another person's tax return?
--When are dividends nontaxable?
--When is interest received from a US Series EE bond nontaxable?
--When is a scholarship taxable?
--What are examples of passive activities?
--When you have passive activity gains and losses, what is the tax effect?
--When is a prize taxable?
--How are gambling gains and losses taxed?
--An employer pays for life insurance on an employee. When is that benefit taxable to the employee?
--What is the statute of limitation in connection with the filing of an individual tax return? When does it go up to six years?
--What is a capital asset?
--What is meant by short-term versus long-term in connection with the sale of capital assets?
--What are the tax rules if you sell your house at a gain?
--What are the tax rules if you receive a gift and later sell it?
I assume you get my point. You can have a great little study guide by just listing out 3 second questions. There is nothing here on this list that you could not learn in a short period of time to get you ready for the CPA Exam.
Better still, by working our questions at www.CPAreviewforFREE.com, you can find the answers to all of these three second questions and many more.
(5) – Time for a little practice. Here are some brand new questions that we will be loading up on the CPA Review for FREE website next week. You can get a head start on these.
Regulation
Silas Wykowski receives 20 shares of stock from a friend as a gift. These shares had originally cost the friend $400 but were only worth $300 when the conveyance to Silas was made. The stock was held for some time and then sold for $280. What is the income tax effect recognized by SilasWykowski?
A - $300 gain at the time of gift and a $20 loss when sold.
B – No gain or loss at the time of gift and a $120 loss when sold.
C – No gain or loss at the time of gift and a $20 loss when sold.
D - $400 gain at the time of gift and a $120 loss when sold.
Answer is C
There is no income tax effect when a gift is made. A gift tax might have to be paid if the amount is large but this is a small gift. If the value then goes down, the owner can recognize a loss when sold. That loss is the difference in what was received and the lower of the tax basis to the previous owner (usually original cost) and the fair value at the date of the gift. Here, that fair value when conveyed ($300) is less. So, the tax loss is this $300 less the $280 sales price or $20.
Financial Accounting & Reporting
On December 31, Year One, United Open Housing, a nongovernmental not-for-profit organization, received a promise of a monetary gift of $10,000 to be received in five years. The gift is unconditional in that the charity does not have to do anything to qualify. However, the donor has specified that the gift cannot be utilized until received (for example, the promise cannot be sold for cash). There are no restrictions on the use of this money. The charity is confident that it will collect all $10,000. What is the initial recording by United Open Housing?
A – No recording is made.
B – A receivable of $10,000 is recorded along with an increase of that amount in unrestricted net assets.
C – A receivable of $10,000 is recorded along with an increase of that amount in temporarily restricted net assets.
D – A receivable for the present value of $10,000 is recorded along with an increase of that amount in temporarily restricted net assets.
Answer is D
Because the money is not expected to be collected within the next year, it must be recorded at its present value. The money cannot be used until received and, therefore, serves to increase the temporarily restricted net assets of the organization.
Auditing and Attestation
The Ligano Corporation is being sued for $3 million by the Stoneco Company. Abner and Doubleday are the independent auditors of Ligano and they are currently assessing the reporting of this litigation. Which of the following is the most likely test that they will carry out?
A – Discuss the case with Ligano's attorney and review the attorney's files to date.
B – Evaluate the procedures used by Ligano to assess the likelihood and amount of any potential loss from the suit.
C – Discuss the case with Stoneco's attorney with the understanding that all information is confidential and possibly biased.
D – Discuss the case with court officials who have jurisdiction over the proceedings.
Answer is B
Financial statements are produced by the management of the reporting company. Normally, the auditor begins by coming to an understanding of how client figures and disclosures were derived. For litigation, the auditor then sends a list of the claims and the likelihood and amount of loss as determined by the client to the company's outside attorney. This person is then asked to contact the auditor to indicate whether there is any disagreement with these assessments.
BEC
What is a call option?
A – The obligation to sell a security at a specified price in the future.
B – The right to purchase a security at a specified price for a defined period of time.
C – The right to sell a security if a specified event occurs.
D – The obligation to provide specified information to holders of a security if certain events take place.
Answer is B
A call option gives the holder the right to purchase a security at a specified price for a certain period of time (often three months or less). For example, if the price of company X stock is $30, an investor might buy a call option that would allow the purchase of company X stock for $32 per share over the next 3 months. If the price goes to $40 per share, the investor has made a large profit from a small investment.
To all of our friends around the world, HAVE A GREAT DAY!!!
Work hard and add some points to your CPA Exam score.
Have the right attitude. Enjoy the challenge that you are facing.
Joe Hoyle
Co-Founder
CPA Review for FREE
From: Joe
I want to wish my daughter Lara a very happy 16th birthday. She came to us from Russia 14.5 years ago and added a ton of joy to our lives. (Now, for the obvious questions: Yes, I do have two daughters and, yes, they were born exactly 53 weeks apart in the very middle of Russia.)
(a) – I mentioned last Saturday that the prior week had been our best ever. Our number of page views was 10 percent higher than in any previous week of our existence. Well, guess what? This past week our page views were up another 9 percent. At this rate, our goal of 10 million page views in 2009 is going to become a reality. Remember, that is a lot of points being added to your CPA Exam score (for FREE).
It is amazing how many emails we receive that start off "A friend just told me about your wonderful website." Thanks to every one of you folks who tell their friends, relatives, students, and coworkers about www.CPAreviewforFREE.com.
(b) – I had a free moment yesterday so I went to the website of a very well known CPA Review program. Just curious. What did I notice? Well, two things. The site spent an incredible amount of time talking about the ten people who attained the highest scores in the whole world on the CPA Exam in 2008. That is just great FOR THOSE TEN PEOPLE. I am not too sure who else that helps at all. I do not know about you but it would have never occurred to me when I took the CPA Exam to shoot for one of the top ten highest scores in the country. First, I couldn't see me scoring that high; it was not a realistic goal for anyone that I knew. And, second, I couldn't understand why I could ever want to study that hard. I just wanted to pass. I wanted to see a giant headline: "Joe scores exactly 75." (Actually, I did get two 75s and two 81s.)
Second, I looked forever on that website and I could not find how much they were charging. The Loch Ness Monster is not hidden as well as their prices. They have the cost so well hidden that you practically have to write them a check before you can find out the cost. Hmmm. I wonder why they hide the cost so carefully? My guess is that they are afraid you will pass out when you see what they are charging you. I am always concerned when someone wants to sell me something and will not tell me the price.
You know our motto: Try us FIRST before you spend your hard-earned money.
You do not have to follow the herd. Think for yourself. You can do this and we can help. Save your money—in these times, you might need it some day.
(1) – This past Tuesday, Barack Obama was sworn in as president of the United States. I am not going to get into politics but it was hard not to be pleased. He then gave a speech. He had a lot of great things to say but there was one line toward the end that really caught my attention. In fact, I stopped and wrote it down as soon as I heard it.
"There is nothing so satisfying to the spirit, so defining of our character than giving our all to a difficult task."
I could not agree more. In fact, I have been preaching that attitude since I started working in CPA Review in 1980. Believe it or not, the important part is not passing. The important part is giving our all to a difficult task. It really does make you a better person. And, that is a worthwhile endeavor.
Of course, it is something we applaud when President Obama says it. How good are we at living up to that kind of assertion?
Nothing so satisfying
Giving our all
To a difficult task
Everyone can say it; not everyone can do it. Can you?
It is all about attitude. You are preparing to pass the CPA Exam, WHAT IS YOUR ATTITUDE? Let's make that a question with multiple choice answers. What is your attitude toward the CPA Exam?
A – I am going to hate every minute of this whole process.
B – I would never do this if I did not absolutely have to do it.
C – I will do what it takes but I am going to complain every single day.
D – It's a great challenge; I am looking forward to seeing how far I can push myself.
Well, we all know the "Obama" answer. However, he has managed to push and challenge himself all the way to the White House. We know what he would do. That is not the real question for us here today. The real question is: which one of these answers reflects your feeling? What is your attitude?
Here's maybe a better way to look at this question. If I were to ask your spouse or your best friend to describe how you are approaching the CPA Exam, what would that person say about you? What attitude radiates from you?
What I really want is for your spouse or best friend to say about you: "It is amazing. I never thought it would happen but the challenge is really bringing out the best in (fill in your name). I can just see more interest and energy and enthusiasm. There is more of a purpose in life. I figured this would be one long series of complaints but, actually, there is something here that is bringing out the best."
That is what a real challenge does for you. If you have the right attitude, it can make you a better person.
Go for that passing grade
and
Throw yourself into the challenge.
(2) – As always, please know that you can unsubscribe from these email lessons whenever you wish. Just scroll to the bottom of any lesson and click on the link that you will find there. However, don't get in a rush; we love having you on board.
If someone has forwarded this email to you and you would like to receive these lessons on a regular basis, just go to www.cpareviewforfree.com and register. Be sure that the box about getting additional material is checked. These lessons are the additional material.
(3) I mentioned getting emails from our "customers." Here is a wonderfully nice note that I received recently from KT. Notes like this really do pay for the website.
"I have found your website very helpful. This past year, I bought a CD review course through our firm at a discounted rate. I took the audit section in October, but did not pass. Shortly after, I received an email from a CPA about your website. I like the format of your website and the emails with practice questions sent each week or so. I really appreciated your message in your December email about the television and wasting time. My television will be off for more study time, for sure. I wish I had learned of your website before spending any money on study material, but your website will give me even more practice. Thanks so much for the free help. You are truly a caring individual and teacher. You actually like helping people to succeed. Thanks for sharing."
And, here is another email, this one from NM:
"I thank you for the wonderful support you and your team are extending to the CPA students through your free website. I have extensively used your website and I have cleared all my subjects within 6 weeks. It feels great because I had devoted 4 full months to the course and I cleared it in the first shot. And I owe a great part of my success to you."
(4) – I was talking with my intermediate accounting students last week about the importance of building a strong foundation of knowledge. It is hard to answer any questions if you don't have a solid core of understanding.
I introduced them to my concept of "3 second questions." These are questions that are so basic that if you get them, you should be able to count to three and then immediately answer the question. I suggested that they start making a list of all the 3 second questions. It helps them decide what is important and what they should know.
Three second questions are not a bad concept for CPA Exam Review also. As you go through a topic, write down everything you should be able to answer off the top of your head. Believe it or not, there is a fairly finite list of things you should know in three seconds. If you can just answer all of the three second questions, you are very close to passing the CPA Exam.
Let me give you an example (or the start of an example). Assume that you are going to take Regulation and you are currently studying individual income taxes. You are going through our questions and answers and writing down what you should know.
What are some of the three second questions that you should expect to be able to answer off the top of your head? As you study, you should ask the question, count to three, and give the answer.
Well, here is the start of such a list. I will not try to list everything but you can get the idea.
--Name three types of income that are taxable.
--Name three types of income that are nontaxable.
--How do taxpayers qualify to file a joint return and what are the advantages?
--How do taxpayers qualify as head of household and what are the advantages?
--How do taxpayers qualify as qualifying widow or widow (surviving spouse) and what are the advantages?
--In general, what are the five rules for qualifying as a dependent on a taxpayer's tax return?
--When does the amount of money that a person make not impact the decision as to whether they are a dependent on another person's tax return?
--When are dividends nontaxable?
--When is interest received from a US Series EE bond nontaxable?
--When is a scholarship taxable?
--What are examples of passive activities?
--When you have passive activity gains and losses, what is the tax effect?
--When is a prize taxable?
--How are gambling gains and losses taxed?
--An employer pays for life insurance on an employee. When is that benefit taxable to the employee?
--What is the statute of limitation in connection with the filing of an individual tax return? When does it go up to six years?
--What is a capital asset?
--What is meant by short-term versus long-term in connection with the sale of capital assets?
--What are the tax rules if you sell your house at a gain?
--What are the tax rules if you receive a gift and later sell it?
I assume you get my point. You can have a great little study guide by just listing out 3 second questions. There is nothing here on this list that you could not learn in a short period of time to get you ready for the CPA Exam.
Better still, by working our questions at www.CPAreviewforFREE.com, you can find the answers to all of these three second questions and many more.
(5) – Time for a little practice. Here are some brand new questions that we will be loading up on the CPA Review for FREE website next week. You can get a head start on these.
Regulation
Silas Wykowski receives 20 shares of stock from a friend as a gift. These shares had originally cost the friend $400 but were only worth $300 when the conveyance to Silas was made. The stock was held for some time and then sold for $280. What is the income tax effect recognized by SilasWykowski?
A - $300 gain at the time of gift and a $20 loss when sold.
B – No gain or loss at the time of gift and a $120 loss when sold.
C – No gain or loss at the time of gift and a $20 loss when sold.
D - $400 gain at the time of gift and a $120 loss when sold.
Answer is C
There is no income tax effect when a gift is made. A gift tax might have to be paid if the amount is large but this is a small gift. If the value then goes down, the owner can recognize a loss when sold. That loss is the difference in what was received and the lower of the tax basis to the previous owner (usually original cost) and the fair value at the date of the gift. Here, that fair value when conveyed ($300) is less. So, the tax loss is this $300 less the $280 sales price or $20.
Financial Accounting & Reporting
On December 31, Year One, United Open Housing, a nongovernmental not-for-profit organization, received a promise of a monetary gift of $10,000 to be received in five years. The gift is unconditional in that the charity does not have to do anything to qualify. However, the donor has specified that the gift cannot be utilized until received (for example, the promise cannot be sold for cash). There are no restrictions on the use of this money. The charity is confident that it will collect all $10,000. What is the initial recording by United Open Housing?
A – No recording is made.
B – A receivable of $10,000 is recorded along with an increase of that amount in unrestricted net assets.
C – A receivable of $10,000 is recorded along with an increase of that amount in temporarily restricted net assets.
D – A receivable for the present value of $10,000 is recorded along with an increase of that amount in temporarily restricted net assets.
Answer is D
Because the money is not expected to be collected within the next year, it must be recorded at its present value. The money cannot be used until received and, therefore, serves to increase the temporarily restricted net assets of the organization.
Auditing and Attestation
The Ligano Corporation is being sued for $3 million by the Stoneco Company. Abner and Doubleday are the independent auditors of Ligano and they are currently assessing the reporting of this litigation. Which of the following is the most likely test that they will carry out?
A – Discuss the case with Ligano's attorney and review the attorney's files to date.
B – Evaluate the procedures used by Ligano to assess the likelihood and amount of any potential loss from the suit.
C – Discuss the case with Stoneco's attorney with the understanding that all information is confidential and possibly biased.
D – Discuss the case with court officials who have jurisdiction over the proceedings.
Answer is B
Financial statements are produced by the management of the reporting company. Normally, the auditor begins by coming to an understanding of how client figures and disclosures were derived. For litigation, the auditor then sends a list of the claims and the likelihood and amount of loss as determined by the client to the company's outside attorney. This person is then asked to contact the auditor to indicate whether there is any disagreement with these assessments.
BEC
What is a call option?
A – The obligation to sell a security at a specified price in the future.
B – The right to purchase a security at a specified price for a defined period of time.
C – The right to sell a security if a specified event occurs.
D – The obligation to provide specified information to holders of a security if certain events take place.
Answer is B
A call option gives the holder the right to purchase a security at a specified price for a certain period of time (often three months or less). For example, if the price of company X stock is $30, an investor might buy a call option that would allow the purchase of company X stock for $32 per share over the next 3 months. If the price goes to $40 per share, the investor has made a large profit from a small investment.
To all of our friends around the world, HAVE A GREAT DAY!!!
Work hard and add some points to your CPA Exam score.
Have the right attitude. Enjoy the challenge that you are facing.
Joe Hoyle
Co-Founder
CPA Review for FREE
Sunday, January 18, 2009
Believe in Yourself
I want to wish my daughter Anna a very happy 17th birthday. She came to us from Russia 14.5 years ago and added a ton of joy to our lives.
(a) Just a quick, special announcement: last week was our biggest in history at www.CPAreviewforFREE.com. Our number of visitors was 24 percent higher than in any previous week of our entire existence. What an amazing jump!!! Thanks to everyone who has helped us spread the word. We could not have this success without you!
Remember our goal for 2009 is 10 million page views. That is the equivalent of everyone who takes the CPA Exam looking at 100 pages on our site. Since we already have roughly 2,000 questions available for free, it is certainly a possible goal.
Just think how many points 10 million page views would add to CPA Exam scores around the country. So, please forward this email and say "these guys are for real; you should check them out. 2,000 great questions and every question is completely free."
(b) A lot of people focus on our free questions and miss all of the other stuff on our site especially the information located in our "resources" section.
If you are planning to take the CPA Exam in January or February, read "The Look and Feel of the CPA Exam."
If you are studying for auditing, read "Typical Audit Engagement" which goes through an audit step by step.
If you are considering applying to take the CPA Exam, read "Essential Information About Applying to Sit for the CPA Exam."
If you want to know how to use CPA Review for FREE to prepare for the CPA Exam, read "Using CPA Review for FREE to Prepare for Success." (Give us 40 days to prepare you for the first part of the exam and if you don't like the results, you can still pay for a course with someone else. Try us first and say your money.)
I think all of this information can be very helpful as you get ready to pass the CPA Exam in 2009.
(c) One other piece of interesting information. The pass rates for 2008 have now been announced:
Financial Accounting and Reporting - 49.21 percent
Auditing and Attestation - 49.10 percent
BEC - 47.49 percent
Regulation - 48.74 percent
This is considerably better than the roughly 30 percent pass rate under the old paper and pencil exam. "Old-timers" will tell you how hard the CPA Exam is to pass but times have changed. In recent years, this has become a much more passable exam; if you are willing to do the work, you have a great chance to get those 75 points that you need.
(1) - I read a quote yesterday that I thought applied to everyone taking the CPA Exam:
"You must believe in yourself, my child, or no one else will believe in you. Be self-confident, self-reliant, and even if you do not make it, you will know you have done your best. Now go for it."
So many good things about this quote:
"Believe in yourself"
"Be self-confident"
"Self-reliant"
"You will know you have done your best"
"Now go for it"
Success does not come from smarts or money. For the most part, success comes from doing more work than other people are willing to do. (Success = Ability to Do More Work than Others Are Willing to Do) When you start down the path to pass the CPA Exam, you must believe that you will do more work than other people are willing to do. That ability to drive yourself to success is going to get you those 75 points you need.
Unfortunately, doing work does not guarantee success; no one can guarantee success. However, not doing the work guarantees failure along with a feeling that you have not even tried. In life, there is a wonderful feeling that comes from putting in a great effort. One of the problems with much of life is that you can go through day after day with just mediocre effort. Life is not meant to be lived at a mediocre pace. There have to be times when you get so excited about the chance to accomplish something that you go at it as hard as you possibly can. You push yourself to success. That is what I have always loved about the CPA Exam. It is a goal worth all of that effort.
Make up your mind that you are going to go after that passing grade. Be confident that you can put in the work. Personally, I think if you have the self-discipline to work the questions on www.cpareviewforfree.com, you will have a great chance to pass. But just as importantly, I do not think you will ever forget the excitement of going for the gold. The ability to put out that effort makes you a better person.
Now go for it.
(2) Just a reminder that you can take your name off of our list by scrolling to the bottom of any of these email lessons and clicking on the appropriate button.
If someone has forwarded this email lesson to you and you would like to get them every 7-14 days automatically, just register at www.CPAreviewforFREE.com and make sure to check the box that indicates you want to receive extra materials about the exam.
(3) There is a lot of misunderstanding on the CPA Exam about the written communications questions. In each part of the exam except BEC, you will get two written communication questions (one in each simulation). You will be given a grade on your ability to use the English language and that grade will make up 10 percent of your overall grade.
To give you some guidance, here is what www.cpa-exam.org says specifically about this part of the exam: "In all simulations, candidates are presented with a situation and instructed to write a letter or memorandum on a specific topic. Written communication responses are scored on the basis of three criteria: (1) organization (structure, ordering of ideas, linking of ideas one to another); (2) development (presentation of supporting evidence); and (3) expression (use of standard business English)."
If you want more official information, you can check out the following site:
http://m1e.net/c?86471133-akFTZdhUgdLbs%403905862-d/0hY7WZ/BoXM
I believe that it is important for you to understand how your written communication answer will be graded. First, a grader looks over the answer to make sure that it is "on topic." In other words, if the question is about leases, then the answer has to be on leases. If the answer is not on the proper topic, you get a zero and no further grading is done. However, if the answer is just on topic, it is turned over to a different expert who then grades it on the three criteria mentioned above.
It is important to understand this grading process because the content itself is not graded. That is not the purpose of this question. So, if you get a question and you are not too sure about the exact answer, that may not make any difference at all. For these questions, you should worry about the writing and not the absolute precision of your answers.
Keep in mind also, that the computer on which you are taking the exam has "spell check" so you should not worry about misspelling words. You can check for that.
Let me give you some of my own hints on how to answer the written communication questions in order to maximize your points.
---Restate the question. That will help focus you in on what is wanted. Plus, in business writing, it is not unusual to make sure everyone knows the issue at hand.
---Keep your sentences as short as possible. Unless you are good at writing, once you go beyond about six or seven, the more likely it is that you will get into trouble. "The lease should be capitalized" is a great sentence. Avoid long and difficult sentences.
---Make sure each sentence logically follows the previous sentence. "The cat is in the kitchen. The cat is eating breakfast." makes sense. "The cat is in the kitchen. The Martian jumped out of his space ship." does not connect well. When the sentences stop connecting well, you need a new paragraph.
---Avoid using words unless you are very sure of their meaning. Do not try to get fancy. You are not trying to be William Shakespeare or William Faulkner.
---Remember that this is business writing. It should sound professional and formal. Slang is not appropriate. I also think that contractions and abbreviations should be avoided. You want your writing to look professional.
---Make sure that each sentence is complete. It should have a subject and a verb. "The cat over there in the kitchen." has no verb.
---Capitalize the first word in each sentence.
---Two to four sentences is a good length for most paragraphs.
---Unless you have strong skill as a writer, avoid semi-colons, colons, and dashes. Most people can say all they need to say with periods and a few commas.
---If you make any type of assertion, you should try to justify it. "Equipment must be depreciated" is an assertion. "Equipment must be depreciated because it has a finite life" is an assertion with an explanation.
I know a lot of people really dread the written communications questions. Personally, I think this is one place where if you simply take it easy and do not "overwrite" you can do well.
(4) We received several nice emails recently. Thanks to everyone who writes. We read them all. Here was just one that we got:
"When I first discovered the site, 'free online resources for the CPA exam,' I was skeptical. I asked myself: can there really be such a free site for the CPA exam? I then proceeded to try out some questions on BEC, and I was impressed. I have been trying several times over to pass BEC, and I hope that I can pass this time."
(5) Okay, as always, here are a few practice questions that I will eventually add to our database at CPA Review for FREE. I hope they help you to add a couple of points.
FAR (and this comes from the class that I did yesterday afternoon in my intermediate accounting II class)
The Simi Company has $10 million in long-term bonds coming due on August 9, 2009. The company is currently preparing a balance sheet as of December 31, 2008. The financial statements will be issued to the public on February 27, 2009. Which of the following statements is true?
A The bond must be reported as a current liability.
B The company can only report the bond as a noncurrent liability if it is refinanced prior to December 31, 2008.
C The company can only report the bond as a noncurrent liability if it is refinanced prior to February 27, 2009.
D If the company signs a non-cancellable agreement with a bank on January 17, 2009 indicating that the bond will be refinanced when it comes due, the bond is reported on the December 31, 2008, balance sheet as noncurrent.
Answer is D
The loan comes due within the current year and must be shown as current unless the company can show that it has both the intent and ability to refinance. That intent and ability is proven by either refinancing the debt prior to the issuance of the financial statements on February 27, 2009 or obtaining a non-cancellable agreement to refinance by that same date. Basically, the company must show that there is no chance that the bond will have to be paid out of the company's own current assets. If that is demonstrated, the bond is reported as long-term.
Regulation
The ABCD partnership has sales revenue of $300,000, cost of goods sold of $200,000, long-term capital gain of $12,000, repair expense of $20,000, and charitable contributions of $8,000. John Apple is one of the partners who holds a 25 percent share of the partnership. How should Mr. Apple report this partnership income on his own income federal tax return?
A Ordinary income from the partnership of $21,000
B Ordinary income from the partnership of $18,000 and a $3,000 long-term capital gain.
C Ordinary income from the partnership of $20,000, a $3,000 long-term capital gain, and $2,000 charitable contribution.
D Ordinary income from the partnership of $25,000, a $3,000 long-term capital gain, $2,000 charitable contribution, and $5,000 repair expense.
Answer is C
For the taxation of a partnership (or an S corporation), certain items such as long-term capital gains, charitable contributions, and interest expense are passed through directly to each partner based on the ownership percentage. Apple owns 25 percent of the partnership so that portion of the long-term capital gain and the charitable contribution are passed through directly and shown as such on his own return. All other income effects are then gathered into a single figure which is the income of the partnership which is assigned to the individual partners based on ownership percentage. Here, the $100,000 gross profit minus $20,000 repair expense gives income of $80,000 so that this 25 percent owner is assigned $20,000 as the income from the partnership.
Auditing & Attestation
What are the three components of audit risk?
A Preliminary risk, construction risk, and design risk
B Inherent risk, control risk, and detection risk
C Payment risk, receipt risk, and recording risk
D Variable risk, attribute risk, and assessment risk
Answer is B.
Audit risk is the chance that a material misstatement will occur and wind up being included in issued financial statements. The auditor needs to reduce overall audit risk to an acceptably low level before reasonable assurance can be given. Audit risk starts with inherent risk which is the chance that a material misstatement will actually occur in the accounting system that leads to the production of the financial statements. Then, control risk is the chance that this material misstatement (once it has occurred) will fail to be caught by the internal control policies and procedures established by the reporting company. Finally, detection risk is the chance that the material misstatement that has taken place and gotten past the internal control of the reporting company will not be caught by the work of the outside independent auditors.
BEC
The Madison Company takes 22 days to sell the average piece of inventory (that is the inventory conversion period). It takes another 27 days on the average to collect an account receivable (that is the receivables conversion period). It takes 31 days to pay accounts payable on the average (that is the payable conversion period). What is the cash conversion cycle for this company?
A - 18 days
B - 49 days
C - 53 days
D - 80 days
Answer is A.
The cash conversion cycle (which is sometimes referred to as CCC) is the time it takes a company to convert its resources into cash. It is actually the total time to convert inventory into accounts receivable and then collect those accounts less the period it takes the company to then pay for the inventory that it acquired. Hence, the computation for the Madison Company would be 22 plus 27 minus 31 or 18 days.
Believe in yourself and then go for it!!!!
Writing to you from Richmond, Virginia on a very cold Saturday night.
Joe Hoyle
Co-Founder
CPA Review for FREE
(a) Just a quick, special announcement: last week was our biggest in history at www.CPAreviewforFREE.com. Our number of visitors was 24 percent higher than in any previous week of our entire existence. What an amazing jump!!! Thanks to everyone who has helped us spread the word. We could not have this success without you!
Remember our goal for 2009 is 10 million page views. That is the equivalent of everyone who takes the CPA Exam looking at 100 pages on our site. Since we already have roughly 2,000 questions available for free, it is certainly a possible goal.
Just think how many points 10 million page views would add to CPA Exam scores around the country. So, please forward this email and say "these guys are for real; you should check them out. 2,000 great questions and every question is completely free."
(b) A lot of people focus on our free questions and miss all of the other stuff on our site especially the information located in our "resources" section.
If you are planning to take the CPA Exam in January or February, read "The Look and Feel of the CPA Exam."
If you are studying for auditing, read "Typical Audit Engagement" which goes through an audit step by step.
If you are considering applying to take the CPA Exam, read "Essential Information About Applying to Sit for the CPA Exam."
If you want to know how to use CPA Review for FREE to prepare for the CPA Exam, read "Using CPA Review for FREE to Prepare for Success." (Give us 40 days to prepare you for the first part of the exam and if you don't like the results, you can still pay for a course with someone else. Try us first and say your money.)
I think all of this information can be very helpful as you get ready to pass the CPA Exam in 2009.
(c) One other piece of interesting information. The pass rates for 2008 have now been announced:
Financial Accounting and Reporting - 49.21 percent
Auditing and Attestation - 49.10 percent
BEC - 47.49 percent
Regulation - 48.74 percent
This is considerably better than the roughly 30 percent pass rate under the old paper and pencil exam. "Old-timers" will tell you how hard the CPA Exam is to pass but times have changed. In recent years, this has become a much more passable exam; if you are willing to do the work, you have a great chance to get those 75 points that you need.
(1) - I read a quote yesterday that I thought applied to everyone taking the CPA Exam:
"You must believe in yourself, my child, or no one else will believe in you. Be self-confident, self-reliant, and even if you do not make it, you will know you have done your best. Now go for it."
So many good things about this quote:
"Believe in yourself"
"Be self-confident"
"Self-reliant"
"You will know you have done your best"
"Now go for it"
Success does not come from smarts or money. For the most part, success comes from doing more work than other people are willing to do. (Success = Ability to Do More Work than Others Are Willing to Do) When you start down the path to pass the CPA Exam, you must believe that you will do more work than other people are willing to do. That ability to drive yourself to success is going to get you those 75 points you need.
Unfortunately, doing work does not guarantee success; no one can guarantee success. However, not doing the work guarantees failure along with a feeling that you have not even tried. In life, there is a wonderful feeling that comes from putting in a great effort. One of the problems with much of life is that you can go through day after day with just mediocre effort. Life is not meant to be lived at a mediocre pace. There have to be times when you get so excited about the chance to accomplish something that you go at it as hard as you possibly can. You push yourself to success. That is what I have always loved about the CPA Exam. It is a goal worth all of that effort.
Make up your mind that you are going to go after that passing grade. Be confident that you can put in the work. Personally, I think if you have the self-discipline to work the questions on www.cpareviewforfree.com, you will have a great chance to pass. But just as importantly, I do not think you will ever forget the excitement of going for the gold. The ability to put out that effort makes you a better person.
Now go for it.
(2) Just a reminder that you can take your name off of our list by scrolling to the bottom of any of these email lessons and clicking on the appropriate button.
If someone has forwarded this email lesson to you and you would like to get them every 7-14 days automatically, just register at www.CPAreviewforFREE.com and make sure to check the box that indicates you want to receive extra materials about the exam.
(3) There is a lot of misunderstanding on the CPA Exam about the written communications questions. In each part of the exam except BEC, you will get two written communication questions (one in each simulation). You will be given a grade on your ability to use the English language and that grade will make up 10 percent of your overall grade.
To give you some guidance, here is what www.cpa-exam.org says specifically about this part of the exam: "In all simulations, candidates are presented with a situation and instructed to write a letter or memorandum on a specific topic. Written communication responses are scored on the basis of three criteria: (1) organization (structure, ordering of ideas, linking of ideas one to another); (2) development (presentation of supporting evidence); and (3) expression (use of standard business English)."
If you want more official information, you can check out the following site:
http://m1e.net/c?86471133-akFTZdhUgdLbs%403905862-d/0hY7WZ/BoXM
I believe that it is important for you to understand how your written communication answer will be graded. First, a grader looks over the answer to make sure that it is "on topic." In other words, if the question is about leases, then the answer has to be on leases. If the answer is not on the proper topic, you get a zero and no further grading is done. However, if the answer is just on topic, it is turned over to a different expert who then grades it on the three criteria mentioned above.
It is important to understand this grading process because the content itself is not graded. That is not the purpose of this question. So, if you get a question and you are not too sure about the exact answer, that may not make any difference at all. For these questions, you should worry about the writing and not the absolute precision of your answers.
Keep in mind also, that the computer on which you are taking the exam has "spell check" so you should not worry about misspelling words. You can check for that.
Let me give you some of my own hints on how to answer the written communication questions in order to maximize your points.
---Restate the question. That will help focus you in on what is wanted. Plus, in business writing, it is not unusual to make sure everyone knows the issue at hand.
---Keep your sentences as short as possible. Unless you are good at writing, once you go beyond about six or seven, the more likely it is that you will get into trouble. "The lease should be capitalized" is a great sentence. Avoid long and difficult sentences.
---Make sure each sentence logically follows the previous sentence. "The cat is in the kitchen. The cat is eating breakfast." makes sense. "The cat is in the kitchen. The Martian jumped out of his space ship." does not connect well. When the sentences stop connecting well, you need a new paragraph.
---Avoid using words unless you are very sure of their meaning. Do not try to get fancy. You are not trying to be William Shakespeare or William Faulkner.
---Remember that this is business writing. It should sound professional and formal. Slang is not appropriate. I also think that contractions and abbreviations should be avoided. You want your writing to look professional.
---Make sure that each sentence is complete. It should have a subject and a verb. "The cat over there in the kitchen." has no verb.
---Capitalize the first word in each sentence.
---Two to four sentences is a good length for most paragraphs.
---Unless you have strong skill as a writer, avoid semi-colons, colons, and dashes. Most people can say all they need to say with periods and a few commas.
---If you make any type of assertion, you should try to justify it. "Equipment must be depreciated" is an assertion. "Equipment must be depreciated because it has a finite life" is an assertion with an explanation.
I know a lot of people really dread the written communications questions. Personally, I think this is one place where if you simply take it easy and do not "overwrite" you can do well.
(4) We received several nice emails recently. Thanks to everyone who writes. We read them all. Here was just one that we got:
"When I first discovered the site, 'free online resources for the CPA exam,' I was skeptical. I asked myself: can there really be such a free site for the CPA exam? I then proceeded to try out some questions on BEC, and I was impressed. I have been trying several times over to pass BEC, and I hope that I can pass this time."
(5) Okay, as always, here are a few practice questions that I will eventually add to our database at CPA Review for FREE. I hope they help you to add a couple of points.
FAR (and this comes from the class that I did yesterday afternoon in my intermediate accounting II class)
The Simi Company has $10 million in long-term bonds coming due on August 9, 2009. The company is currently preparing a balance sheet as of December 31, 2008. The financial statements will be issued to the public on February 27, 2009. Which of the following statements is true?
A The bond must be reported as a current liability.
B The company can only report the bond as a noncurrent liability if it is refinanced prior to December 31, 2008.
C The company can only report the bond as a noncurrent liability if it is refinanced prior to February 27, 2009.
D If the company signs a non-cancellable agreement with a bank on January 17, 2009 indicating that the bond will be refinanced when it comes due, the bond is reported on the December 31, 2008, balance sheet as noncurrent.
Answer is D
The loan comes due within the current year and must be shown as current unless the company can show that it has both the intent and ability to refinance. That intent and ability is proven by either refinancing the debt prior to the issuance of the financial statements on February 27, 2009 or obtaining a non-cancellable agreement to refinance by that same date. Basically, the company must show that there is no chance that the bond will have to be paid out of the company's own current assets. If that is demonstrated, the bond is reported as long-term.
Regulation
The ABCD partnership has sales revenue of $300,000, cost of goods sold of $200,000, long-term capital gain of $12,000, repair expense of $20,000, and charitable contributions of $8,000. John Apple is one of the partners who holds a 25 percent share of the partnership. How should Mr. Apple report this partnership income on his own income federal tax return?
A Ordinary income from the partnership of $21,000
B Ordinary income from the partnership of $18,000 and a $3,000 long-term capital gain.
C Ordinary income from the partnership of $20,000, a $3,000 long-term capital gain, and $2,000 charitable contribution.
D Ordinary income from the partnership of $25,000, a $3,000 long-term capital gain, $2,000 charitable contribution, and $5,000 repair expense.
Answer is C
For the taxation of a partnership (or an S corporation), certain items such as long-term capital gains, charitable contributions, and interest expense are passed through directly to each partner based on the ownership percentage. Apple owns 25 percent of the partnership so that portion of the long-term capital gain and the charitable contribution are passed through directly and shown as such on his own return. All other income effects are then gathered into a single figure which is the income of the partnership which is assigned to the individual partners based on ownership percentage. Here, the $100,000 gross profit minus $20,000 repair expense gives income of $80,000 so that this 25 percent owner is assigned $20,000 as the income from the partnership.
Auditing & Attestation
What are the three components of audit risk?
A Preliminary risk, construction risk, and design risk
B Inherent risk, control risk, and detection risk
C Payment risk, receipt risk, and recording risk
D Variable risk, attribute risk, and assessment risk
Answer is B.
Audit risk is the chance that a material misstatement will occur and wind up being included in issued financial statements. The auditor needs to reduce overall audit risk to an acceptably low level before reasonable assurance can be given. Audit risk starts with inherent risk which is the chance that a material misstatement will actually occur in the accounting system that leads to the production of the financial statements. Then, control risk is the chance that this material misstatement (once it has occurred) will fail to be caught by the internal control policies and procedures established by the reporting company. Finally, detection risk is the chance that the material misstatement that has taken place and gotten past the internal control of the reporting company will not be caught by the work of the outside independent auditors.
BEC
The Madison Company takes 22 days to sell the average piece of inventory (that is the inventory conversion period). It takes another 27 days on the average to collect an account receivable (that is the receivables conversion period). It takes 31 days to pay accounts payable on the average (that is the payable conversion period). What is the cash conversion cycle for this company?
A - 18 days
B - 49 days
C - 53 days
D - 80 days
Answer is A.
The cash conversion cycle (which is sometimes referred to as CCC) is the time it takes a company to convert its resources into cash. It is actually the total time to convert inventory into accounts receivable and then collect those accounts less the period it takes the company to then pay for the inventory that it acquired. Hence, the computation for the Madison Company would be 22 plus 27 minus 31 or 18 days.
Believe in yourself and then go for it!!!!
Writing to you from Richmond, Virginia on a very cold Saturday night.
Joe Hoyle
Co-Founder
CPA Review for FREE
Thursday, January 15, 2009
CPA Exam Content Areas
Hi all,
Recently, the AICPA released the Uniform CPA Examination Content and Skill Specification Outlines (CSOs/SSOs) and copies of the new CSOs/SSOs. They will not go into effect until sometime in the future which has not yet been specified.
Not to worry though. CPAreviewforFREE has you covered.
Keep practicing and remember, the exam is a short term goal with long term benefits.
Recently, the AICPA released the Uniform CPA Examination Content and Skill Specification Outlines (CSOs/SSOs) and copies of the new CSOs/SSOs. They will not go into effect until sometime in the future which has not yet been specified.
Not to worry though. CPAreviewforFREE has you covered.
Keep practicing and remember, the exam is a short term goal with long term benefits.
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