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June 7, 2011
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Lesson 97
From: Joe
(1) – We just added a few additional Tips to our “Tips for Success” column on our website (www.CPAreviewforFREE.com). Go to the homepage and you’ll see “CPA Exam Resources” in the lower left. “Tips for Success” should be the fourth article on that list.
(2) – I am truly excited that, in two weeks, we will be adding a brand new product to our list. We are always thinking of ways to help you pass. Okay, for now, it is only for FAR. It addresses the concern that every candidate must face:
--You work a question.
--You miss the question.
--You read the answer carefully.
--You think you understand the answer so you want to work another question again to see if you can get it correct this time. (Have you really learned it?) However, you already know the answer to that question so it really doesn’t prove anything to do the same question again.
What you really want is another question in the same category that you can keep working as many times as you want as long as you want--unlimited questions! Yea, that would be a big help.
Welcome to: POINTS TO PASS
If you subscribe to this program, the software will generate a stream of new questions so that you can try again (and again and again) until you are sure you have mastered the material. The best way to practice is to practice and Points to Pass allows you to do that for as long as you want.
Points to Pass will generate an entirely new question.
If you really understand the concept, you will get the correct answer. If not, you can read the answer carefully and try again with a newly generated question until you are comfortable with this computation.
I just think this is the absolute greatest way ever to prepare for the CPA Exam. And we will have FAR available on a subscription basis in about two weeks – stay tuned.
(3) – I was in Norfolk, Virginia a few weeks back on a Sunday morning. I walked into an old-timey bookstore, the kind you used to see before they started getting to be the size of large barns. The first thing I noticed was a little sign that asked the question “what would you set out to do in life if you had no fear of failure?”
Interesting question – one that I have thought a lot about since that morning. We are all ruled (at least somewhat) by fear. There are lots of things that we really want to do except we are afraid to try. We are timid. We all hold back because we worry about what might happen if we do not succeed. Instead of focusing on what we might be able to accomplish, we try to stay totally safe. Failure gets built up in our minds until it is this huge ogre that is going to hurt us with an ax.
Come on, really?
I’ve known lots of people who became so obsessed with the possibility of failure that they would not even take the exam. They were never able to walk in and take it for fear of failure.
What will really happen if you fail the CPA Exam?
--You’ll feel bad for a day or two.
--You’ll wonder how you could have gotten a few more questions correct.
--You’ll fuss that you got too many weird questions.
--You’ll wish you had been a bit more careful and managed your time better.
And then you’ll move on and start thinking about getting back into your preparation. You’ll start adding points again and working to do things slightly better. Life is full of trial and error – you’ll start working on doing better the next time so you will pass.
So, put all thoughts of failure out of your mind. Such thoughts are never helpful and, in truth, those thoughts will just seem a lot scarier than necessary. The fear of failure will hold you back and make you cautious. Thinking about failure doesn’t do you any good and it will probably make you play scared.
I don’t like playing scared. That’s not what life is all about. Instead of thinking about failure, I want you to have Power Thoughts.
--I am going to learn this stuff.
--If other people can do this, so can I.
--It just takes time and I’m going to give it the time that it needs.
--If I add a point or two every day, I’ll be able to pass in no time.
--I will make the time today to get in the study that I need.
--I can make this happen.
--I can work one more question and read one more answer.
You need Power Thoughts. You need Power Thoughts every day to keep up your spirits. You don’t need to play scared. I recently heard a person mention a favorite saying of mine: “Why not go out on a limb? Isn't that where the fruit is?”
Go after the exam, don’t let it come after you.
Go after those hours of study.
Go after the knowledge you need.
Go after those points and don’t quit going for them until you have 75.
Go boldly after the CPA Exam. Nothing is accomplished by being afraid.
(4) – We love having 20,000 subscribers – we hope you’ll go out and get us some more subscribers. Explain to people what they are missing.
However, if you ever decide that you want to unsubscribe, just scroll to the bottom of this email and click on “unsubscribe.” You can do that if and when you are ready to stop receiving these email messages.
(5) – One of my former students came by my office this afternoon to talk about the CPA Exam. She graduated a few weeks ago and is studying hard so she can knock out some/all of the exam over the summer. She asked specifically about the three written communication questions included in BEC.
The best thing you can do for the written communications questions is to go to www.cpa-exam.org and click on Tutorial and Sample Tests. Then, select the Sample Tests for downloading. They will give you five multiple-choice questions. After you submit those answers, they give you two examples of written communications questions. That shows you the kinds of questions that you are going to see.
It is very important to understand that they include the following information (I may have missed a word or two but this is the basic idea).
“REMINDER: Your response will be graded for both technical content and writing skills. Technical content will be evaluated for infor¬mation that is helpful to the intended reader and clearly relevant to the issue. Writing skills will be evaluated for development, organi¬zation, and the appropriate expression of ideas in professional correspondence. Use a standard business memo or letter format with a clear beginning, middle, and end. Do not convey information in the form of a table, bullet point list, or other abbreviated presentation.”
In other words, write something that is clear and understandable and addresses the question in a professional manner. Make it look like it was written by a CPA.
I gave my student the following example: you might be told that a client runs a manufacturing operation and wants you to suggest a method for reporting a by-product that is created as a result of this process. That seemed like a reasonable question that a CPA might encounter in practice and would fall under the BEC topics.
My student then asked the obvious question. “What if I don’t know a specific method for handling a by-product? Do I just leave the answer blank and get a zero?”
Absolutely not!!! The answer is graded twice. First, it is read to determine whether it is “on topic” – in other words is the written answer about the accounting for by-products? If it is not, if you have written about deferred taxes or contract law, you get a zero regardless of how well written the answer is. The answer has to address the question.
If your answer is “on topic,” then the question goes through a second grading where points are given for your use of the English language as described above. Notice, that the second grading is about the use of the language and not about whether the answer is right or wrong. The rest of the BEC exam tests your knowledge of content. That is not the purpose of the written communication questions. So, you do have to be “on content,” you do have to write about the subject in question. After that, though, the points are given based on proper use of English and not on how well you did getting the answer perfectly correct.
(6) – Remember a free study guide is available to show you how to combine our free questions and answers with our content subscription service ($15 per month per part) if you’ll identify the part that you are going to study next in an email to Jhoyle@cpareviewforfree.com. It is not fair to ask you to spend money without showing you how the program works.
(7) – Review – let’s add some points. Let’s do some practice.
FAR – Just to show you how a program like Points to Pass works, I went to our free question and answer data base and selected a question and answer. Then, I made some changes so that you can try the topic again.
You can find the following question in our database of questions:
(a) - The James Company starts Year One with accounts receivable of $370,000 and an allowance for doubtful accounts of $22,200 (a credit balance). During the year, credit sales of $1.9 million were made and cash of $1.2 million was collected. Accounts with a total balance of $50,000 were written off during the period as uncollectible. Company officials believe that 6 percent of ending accounts receivables will eventually prove to be uncollectible. What should James Company report as its bad debt expense for this year?
A - $61,200
B - $68,400
C - $89,000
D - $92,000
The answer is C.
In applying the percentage of receivables approach to bad debts, the allowance for doubtful accounts is the balance being estimated. The ending receivable balance is $370,000 plus $1.9 million less $1.2 million less $50,000 or $1,020,000. Because 6 percent is the estimated amount of uncollectible accounts, the company needs to report an allowance for doubtful accounts of $61,200 ($1,020,000 x 6 percent). Bad debt expense is the amount of adjustment that is needed so that the year-end allowance reports this $61,200. Prior to the adjustment, the allowance has a debit balance of $27,800 (the original $22,200 credit reduced by $50,000 in accounts written off). The company must turn the $27,800 debit balance into the proper $61,200 credit balance. To do so, an expense of $89,000 is recognized.
**
Let’s assume you missed the above question, you read the answer carefully and now you want to try again. You tell Points to Pass to show you a second question on this topic and here is what you get.
(b) The Robertson Company starts Year One with accounts receivable of $510,000 and an allowance for doubtful accounts of $41,000 (a credit balance). During the year, credit sales of $2.3 million were made and cash of $1.9 million was collected. Accounts with a total balance of $60,000 were written off during the period as uncollectible. Company officials believe that 5 percent of ending accounts receivables will eventually prove to be uncollectible. What should Robertson Company report as its bad debt expense for this year?
A - $42,500
B - $61,500
C - $64,500
D - $69,500
The answer is B.
In applying the percentage of receivables approach to bad debts, the allowance for doubtful accounts is the balance being estimated. The ending receivable balance is $510,000 plus $2.3 million less $1.9 million less $60,000 or $850,000. Because 5 percent is the estimated amount of uncollectible accounts, the company needs to report an allowance for doubtful accounts of $42,500 ($850,000 x 5 percent). Bad debt expense is the amount of adjustment that is needed so that the year-end allowance reports this $42,500. Prior to the adjustment, the allowance has a debit balance of $19,000 (the original $41,000 credit reduced by $60,000 in accounts written off). The company must turn the $19,000 debit balance into the proper $42,500 credit balance. To do so, an expense of $61,500 is recognized.
AND, you can keep requesting questions under Points to Pass until you know exactly how to work this question. Every time I see this I just know how much it will help YOU to pass the FAR portion of the CPA Exam.
Auditing and Attestation
The treasurer of a company has stolen $10,000 in cash from the company. At the end of the year, he is afraid that he will be caught so he transfers $10,000 from one company bank account to another. He records the deposit on December 31 of the first year so that $10,000 cash is added. He does not record the withdrawal from the other account until January 1 of the second year. As a result, for one day, the company looks like it has $10,000 more than it really does. What is this deception called?
A. Kiting
B. Lapping
C. Simultaneous Origination
D. Zero Line Fraud
Answer is A
When money is moved from one account to another but the deposit and the withdrawal are recorded in different time periods to inflate the amount of cash being reported, the term “kiting” is used to identify that fraud.
BEC
A company spends $100,000 to produce 20,000 pounds of product A. However, in that process, 3,000 pounds of product Z are produced. It is viewed as a by-product because it can only be sold for $5 per pound after spending $3 per pound to process it enough to be sold. The company chooses to record this by-product at its net realizable value. What is the cost of a pound of product A?
A. $4.25 per pound
B. $4.50 per pound
C. $4.70 per pound
D. $5.00 per pound
Answer is C
The net realizable value of the by-product is the $5.00 sales price less the $3.00 to be spent on processing or $2.00 per pound. For 3,000 pounds, that is a net realizable value of $6,000. The by-product is recorded at its net realizable value so $6,000 is moved from the $100,000 cost into a by-product inventory account. That leaves $94,000 assigned just to product A. There are 20,000 pounds of product A so the cost is $4.70 per pound.
Regulation
Mr. and Mrs. Stremble were married at the age of 30 and lived together until the current year when Mrs. Stremble died at the age of 70. Mr. Stremble received $100,000 in cash from a life insurance policy. They had paid, as a couple, a total of $40,000 in premiums over the years on this policy. What amount of income must he include in his current tax return as a result of receiving the $100,000 payment?
A. Zero
B. $60,000
C. $80,000
D. $100,000
Answer is A.
Life insurance premiums paid by the couple were never deductible but the proceeds, when received at the time of death, are not taxable. Money from a life insurance policy is not viewed as “income” and, therefore, is not taxed as taxable income.
Have a great week. It has been a beautiful day here in Richmond. Enjoy each day but make sure to make time to do your studies and add some points. Don’t be afraid – go forward boldly.
Joe Hoyle
President
CPA review for FREE
www.CPAreviewforFREE.com
Tuesday, June 7, 2011
Tuesday, May 31, 2011
Words for Success--Do the Work and Pass the CPA Exam
Try us FIRST before you spend your hard-earned money.
May 31, 2011
CPA Review for FREE
www.CPAreviewforFREE.com
Over 2,200 FREE CPA Review Questions and Answers Available for YOU
152 Weeks of Operation and 24,487,209 Page Views (without a penny being spent on marketing)
Lesson 96
From: Joe
(1) – We have distributed an amazing number of FREE study guides to the folks who have identified their next exam in an email to Jhoyle@cpareviewforfree.com. These study guides explain how to combine our 2,200 free questions and answers with our subscription service to create a comprehensive CPA Exam review program for $15 per month per part (50 cents per day – try to beat that on eBay).
However, the question we always get is: “Can you explain how your subscription service actually works?” Seems like a reasonable question. So, at the end of this email, I’ll give you a demonstration of one very small part of our subscription service. I hope that proves helpful in understanding how our program will get you through this exam for a whole lot less than $2,500.
(2) – We’ve added something new to the home page of our website (www.CPAreviewforFREE.com). Under our CPA Exam Resources section, we already have three important articles:
--Using CPA Review for FREE to Prepare for the CPA Exam.
--Applying for the CPA Exam
--Structure of the CPA Exam
We believe all of these would be helpful to every candidate.
We have now added a fourth article: “Tips for Success.” Over the years, we have distributed scores of tips for success on our Facebook page. Over the last few days, I have gathered my top 60 or so of these tips. Because we have so many, I posted the first ten this week and I’ll post another batch every week or two until they are all posted.
Go to www.CPAreviewforFREE.com. Go to “CPA Exam Resources” on the home page. Click on “Tips for Success.” I probably wouldn’t sit down and read this material all at once like you might a novel. Most people don’t need 60 tips for success at one time. Instead, every day or two, if you feel the need for some encouragement or a boost of energy, go to the website and read a couple.
We hope they help. As always, we are trying our best to do everything we can possibly do to assist you in getting the 75 points you need to pass the CPA Exam. Hope our Tips for Success makes the journey a bit easier.
(3) – I attended a lovely wedding here in Richmond this past Sunday. It was held in a beautiful church that was constructed in 1848. Because of the US Civil War, there are few buildings standing in Richmond that are so old.
During the ceremony, the pastor talked directly to the young couple. He told them there are certain words that they should say to each other so often, during their lives together, that they wear those words out. “Wear these words out” was kind of the theme of his remarks. To the bride and groom, he suggested the words: “I am sorry” and “I’m so very grateful.” Probably good advice for any newlyweds (or anyone else, for that matter).
I liked that idea of “wearing words out.” So, I started thinking: If I were talking to my CPA Exam candidates, what words would I suggest that they “wear out” over the course of their study.
Here’s my suggestion for words that you might want to wear out over the next few weeks or months as you prepare to pass the CPA Exam.
"I'm tired but I can still study a bit longer.” Too many people obsess over being tired and let it control what they can accomplish. At the first hint of tired, they give up and quit. Successful people get to the point where they are tired and then they keep going. That is one true mark of people who succeed in this life.
“I missed this problem but now I see how it works.” Passing the CPA Exam is all about making progress. If you get a question correct, you really learn nothing. If you miss a question and move on, you really learn nothing. But the most important moment is when you miss a question, read the answer carefully, and figure out how to work it right the next time. Now, that’s success.
“I’m not trying to be perfect; I just want to answer enough questions to pass.” It is very easy to get stuck trying to learn it all. I’ve known way too many people who gave up before they ever took the exam because they couldn’t achieve perfection. Don’t worry about trying to answer every question correctly. Once again, as above, the only important goal is making progress.
“The CPA Exam is a mile wide and an inch deep.” The CPA Exam that you take will try to cover a little bit about everything in the world of accounting, auditing, tax, and the like. As you study, it is much more important to cover all the topics a little bit than to cover any topic in too much depth and detail.
“When I get to the exam, I’m going to watch my time closely.” I’m convinced that, once you have put in your 60-100 hours of preparation for each part, the biggest problem is time management during the exam. If you rush too fast, you’ll make careless mistakes. If you work too slowly, you won’t finish. It is very important, as I said in my previous lesson (Lesson 95 that can be found in the Blog Archives in the right hand navigation), that you get used to working at an appropriate “exam speed.”
Okay, I could probably come up with 25 other sets of words to wear out as you prepare for the CPA Exam but these five form a pretty good foundation. I’m not sure that I wouldn’t write them down and tape them to your wall and read through them each and every day.
Wear those words out.
(4) – Personal note to all 20,000 of our subscribers (yeah, this means YOU). We love having you. We really hope we provide a benefit. I never go anywhere (like a wedding) that I don’t think about things to tell you that might help you pass the CPA Exam.
However, if you ever decide that you are ready to unsubscribe, it is easy to do. Scroll to the bottom of any one of these email lessons. You’ll find a link to unsubscribe. Click on that and follow the directions. You have every right to manage your emails. If you are ready to unsubscribe, go for it.
(5) – Yesterday, while I was dressing for the wedding, I watched the last 10 laps of the Indianapolis 500. If you follow car racing at all, you already know what happened. A young rookie was leading the race going into the last lap. He had a good sized lead and was going to win fairly easily. The announcers were already talking about him being the champion. There was really nothing in his way of winning. As he took the very last turn (he could see the finish line), his car slid into the wall. He wasn’t hurt but he lost the race. He let it get away. He had driven by that wall 199 previous times that day with no problem but on that last time, for no apparent reason, he crashed.
Whenever I talk with people about the CPA Exam, I always tell them to take nothing for granted. If you know the topic, make sure you continue to do the work. If you feel good about an area, make sure you continue to do the work. If you have been studying all day and you are going to work a few more problems, make sure you continue to do the work. If you are actually taking the CPA exam and you have been working for nearly 3 or 4 hours, make sure you continue to do the work.
It is easy to lose your focus. It is easy to start day dreaming or just start thinking of something else. It is easy to get distracted. Things are always happening that catch your attention. When you are studying, your mind should be on one thing and one thing only: How do I get this particular question in front of me answered correctly? When you are taking the exam itself, your mind should be on one thing and one thing only: How do I get this one particular question in front of me answered correctly?
My assumption is that most people actually study enough hours to pass the exam. However, during those hours, it is easy to get distracted and wind up accomplishing nothing. You don’t just need 60-100 hours per part; you need 60-100 hours of concentrated study per part. Make sure you continue to do the work.
My assumption is that most people who take the CPA Exam actually have enough knowledge in their heads to pass. However, during the exam itself, it is easy to get distracted and wind up making mistakes. Don’t worry about the lights, the seat, the computer screen, the noise, the heat, the cold, the other people. When you are taking the CPA Exam only one thing matters: How do I get this particular question in front of me answered correctly?
Studying for the CPA Exam is not a game. It is not for play. It deserves your undivided attention. You don’t want to lose the race just because you failed to do something that you had done before and should have been able to do again.
(6) – I want to close today by giving you a full-scale illustration of our Subscription Service. As we’ve said, it costs $15 per month per part. Let’s look at FAR. If you subscribe to the FAR material, what do you get for your $15?
--You get 10 examples of our illustrations of what we believe task-based simulations look like.
--You get a study guide to show how to combine our free questions and our subscription service to create a comprehensive program (this is the study guide you can get for free by sending a note to Jhoyle@cpareviewforfree.com).
--For FAR, you get content information divided into 23 different topic areas – everything from consolidations to earnings per share and inventory to government accounting. Those topic areas contain hundreds of slides presenting the information we believe you need to know to pass that part of the CPA Exam.
What does this content information look like? I decided to select accounts receivable as my illustration because it is one of the shortest topics and won’t use up so much space in your email box.
So, quite literally, here is our content material for Accounts Receivable within the FAR part of the CPA Exam as covered by our subscription service
SLIDE ONE
Accounts Receivables
Accounts receivable is normally reported as a current asset because collection is expected within one year. It reflects amounts owed to a company by its customers.
Accounts receivable should be disclosed in the balance sheet at net realizable value (the cash expected – the total amount owed to the company less the estimated amount of uncollectibles). Receivables from company officers, employees, and affiliate companies should be separately disclosed.
SLIDE TWO
Cash discounts (such as 2/10, n/30) give a discount if the customer pays within a certain period of time. In this example, a 2 percent discount can be taken if payment is made in 10 days but any remaining amount must be paid in total in 30 days.
When a discount is offered, account receivable can be recorded by either the net method or the gross method.
SLIDE THREE
Net method. The seller (and the buyer if that company so chooses) reports the transaction at the net amount (after the discount) which assumes the discount will be taken. A $100 sale is recorded at only $98 if a 2 percent discount is available. If paid in time, cash is debited for $98 and the $98 account receivable is removed. However, the $2 discount might not be taken so that the entire $100 is collected. In that case, the extra $2 collection is recorded as interest.
SLIDE FOUR
Gross method. The seller (and, possibly, buyer) reports these transactions at the gross amount which assumes the discount will not be taken. A $100 sale is recorded at $100. The only problem is that the $2 discount might still be taken so that only $98 is collected. The $2 reduction is recorded as a sales discount by the seller. “Sales discounts” reduce Sales on the income statement.
SLIDE FIVE
Bad Debts. Bad Debt Expense is reported on the income statement and the Allowance for Bad Debts is reported on the balance sheet as a reduction to Accounts Receivable.
The allowance method of recording bad debts is used in US GAAP because it matches the expense with the timing of the revenue. An alternative, the direct method, does not recognize any expense until an account proves uncollectible. This method is not allowed under US GAAP.
SLIDE SIX
The allowance method estimates the amount of uncollectible accounts based on past experience and present industry, company, and economic conditions. Bad debt expense is recognized in the same period as the sale. Because the actual bad accounts have not yet been identified, a contra valuation account (an Allowance for Bad Debts – which might also be called something like an Allowance for Doubtful Accounts) is established for the amount of the receivables estimated to be uncollectible.
SLIDE SEVEN
The adjusting entry to record Bad Debt Expense for the period and establish the proper balance in the Allowance for Bad Debts is made at the end of each period.
Bad Debt Expense estimated amount
Allowance for Bad Debts estimated amount
SLIDE EIGHT
When an account actually proves to be uncollectible (the customer dies, moves away, files for bankruptcy or just refuses to pay), the account is written off. However, the expense has already been recognized in the previous estimation entry and should not be recorded again.
Allowance for Bad Debts uncollectible amount
Accounts Receivable uncollectible amount
If this account is ever collected in the future, the above entry is reversed to reinstate the balance before collection is recorded.
SLIDE NINE
One key element of this reporting is left to be shown. How does the company estimate the amount of its bad debts in the first entry shown previously? There are two methods to determine the annual charge to bad debt.
(1) Percentage of sales method
(2) Percentage of receivable method (or a variation – the aging method)
SLIDE TEN
Regardless of the method being used, at the end of each period, the reporting company will have a bad debt expense account with a balance that is zero because no estimation has yet been recorded for the period.
It will also have an Allowance for Bad Debts but that account will have a remaining balance that can either be a debit or a credit. The Allowance balance is its beginning balance for the period less the amount of accounts written off during the period (but plus any accounts that were written back on the books because of latter collection).
SLIDE ELEVEN
PERCENTAGE OF SALES METHOD
Multiply the appropriate percentage times the sales balance for the period. This is the balance that should be reported for Bad Debt Expense.
Because the Bad Debt Expense account has a zero balance, the amount determined by the computation is added directly to Bad Debt Expense (and also to the Allowance for Bad Debts). If the estimation is for $36,000, then the adjusting entry is for $36,000. Bad Debt Expense will equal the estimation. The Allowance for Bad Debts will be its previous balance as adjusted by this final entry.
SLIDE TWELVE
PERCENTAGE OF RECEIVABLES METHOD
Multiply the appropriate percentage times the accounts receivable balance at the end of the period. This is the balance that should be reported as a credit for the Allowance for Bad Debts.
That contra account already has a balance that may be either a debit or a credit. The adjusting entry records the amount needed to bring this previous account balance to the new estimation. If a $3,000 credit was in the allowance account and the estimation is now $40,000, then the adjusting entry is for $37,000. If a $1,000 debit was in the allowance account and the estimation is now $40,000, then the adjusting entry is for $41,000.
SLIDE THIRTEEN
Pledging of receivables. Pledging is an agreement whereby a company’s accounts receivable are used as collat¬eral for loans. Customers whose accounts have been pledged are not aware of this situation so their payments are still remitted to the original company. The pledged accounts merely serve as security to a lender. The only accounting issue relating to pledging is that of adequate disclosure. The accounts receivable, which remain assets of the borrowing entity, continue to be shown as current assets on its balance sheet but must be identified as having been pledged.
SLIDE FOURTEEN
Factoring of receivables. Factoring is the sale of receivables to a buyer known as a factor. The transfer of receivables “without recourse” means that the factor (the buyer) assumes the risk of loss from any noncollection. Thus, once this type of factoring arrangement is com¬pleted, the seller has no further involvement with the accounts. The receivables are removed from the books of the seller and the difference between the cash received and the car¬rying value of those receivables is recognized as a gain or loss.
SLIDE FIFTEEN
Another possibility is factoring “with recourse” where a monetary amount must be returned to the buyer if a specified amount is not collected from the receivables. In recording the transfer of the receivables, the seller must take into account any anticipated repayment amount. For example, if cash of $100,000 is guaranteed but the seller only anticipates that the buyer will collect $98,000, a $2,000 liability is recorded by the seller at the time of sale. The accounts receivable are removed from the seller’s books and this liability is recognized; the cash received is also recorded and the difference is a gain or loss.
SLIDE SIXTEEN
Several Important Ratios Involving Current Assets
Solvency ratios or amounts—Any ratio or computation that measures an entity's short-term viability by its ability to pay its debts as they come due.
---Acid-test (quick) ratio—It is the sum of the quick assets (cash, receivables, and short-term investments) divided by the total of the current liabilities.
---Current ratio—It is computed by taking the total of all current assets (the quick assets plus inventory, prepayments, and supplies) and dividing it by the total of current liabilities
---Working capital—It is computed by taking the total of the current assets and subtracting the current liabilities
SLIDE SEVENTEEN
Operational efficiency ratios or amounts—A ratio or computation that measures an entity's ability to make good use of its assets
---Receivable turnover—It measures how rapidly cash is collected from credit sales. It is computed by taking the net credit sales for a period divided by the average of the net receivables for the same period.
---Number of days’ sales in receivables—The average length of time receivables are out¬standing, which reflects the efficiency of credit and collection policies. It is the receivable balance divided by average credit sales per day.
SLIDE EIGHTEEN
Now that you have gone through all of these slides for accounts receivable, go back to our free questions and answers and work all of the questions provided under “Accounts Receivable.” This should help you get to the point where you can pass Accounts Receivable. Once you can pass the topics, you can pass FAR.
Take good notes, especially for any questions that you miss. A good note is one that takes 10 words or less and explains anything that you might have missed that would prevent you from getting the question correct.
Have a great week!!!
Joe Hoyle
Co-Founder and President
CPA Review for FREE
www.CPAreviewforFREE.com
May 31, 2011
CPA Review for FREE
www.CPAreviewforFREE.com
Over 2,200 FREE CPA Review Questions and Answers Available for YOU
152 Weeks of Operation and 24,487,209 Page Views (without a penny being spent on marketing)
Lesson 96
From: Joe
(1) – We have distributed an amazing number of FREE study guides to the folks who have identified their next exam in an email to Jhoyle@cpareviewforfree.com. These study guides explain how to combine our 2,200 free questions and answers with our subscription service to create a comprehensive CPA Exam review program for $15 per month per part (50 cents per day – try to beat that on eBay).
However, the question we always get is: “Can you explain how your subscription service actually works?” Seems like a reasonable question. So, at the end of this email, I’ll give you a demonstration of one very small part of our subscription service. I hope that proves helpful in understanding how our program will get you through this exam for a whole lot less than $2,500.
(2) – We’ve added something new to the home page of our website (www.CPAreviewforFREE.com). Under our CPA Exam Resources section, we already have three important articles:
--Using CPA Review for FREE to Prepare for the CPA Exam.
--Applying for the CPA Exam
--Structure of the CPA Exam
We believe all of these would be helpful to every candidate.
We have now added a fourth article: “Tips for Success.” Over the years, we have distributed scores of tips for success on our Facebook page. Over the last few days, I have gathered my top 60 or so of these tips. Because we have so many, I posted the first ten this week and I’ll post another batch every week or two until they are all posted.
Go to www.CPAreviewforFREE.com. Go to “CPA Exam Resources” on the home page. Click on “Tips for Success.” I probably wouldn’t sit down and read this material all at once like you might a novel. Most people don’t need 60 tips for success at one time. Instead, every day or two, if you feel the need for some encouragement or a boost of energy, go to the website and read a couple.
We hope they help. As always, we are trying our best to do everything we can possibly do to assist you in getting the 75 points you need to pass the CPA Exam. Hope our Tips for Success makes the journey a bit easier.
(3) – I attended a lovely wedding here in Richmond this past Sunday. It was held in a beautiful church that was constructed in 1848. Because of the US Civil War, there are few buildings standing in Richmond that are so old.
During the ceremony, the pastor talked directly to the young couple. He told them there are certain words that they should say to each other so often, during their lives together, that they wear those words out. “Wear these words out” was kind of the theme of his remarks. To the bride and groom, he suggested the words: “I am sorry” and “I’m so very grateful.” Probably good advice for any newlyweds (or anyone else, for that matter).
I liked that idea of “wearing words out.” So, I started thinking: If I were talking to my CPA Exam candidates, what words would I suggest that they “wear out” over the course of their study.
Here’s my suggestion for words that you might want to wear out over the next few weeks or months as you prepare to pass the CPA Exam.
"I'm tired but I can still study a bit longer.” Too many people obsess over being tired and let it control what they can accomplish. At the first hint of tired, they give up and quit. Successful people get to the point where they are tired and then they keep going. That is one true mark of people who succeed in this life.
“I missed this problem but now I see how it works.” Passing the CPA Exam is all about making progress. If you get a question correct, you really learn nothing. If you miss a question and move on, you really learn nothing. But the most important moment is when you miss a question, read the answer carefully, and figure out how to work it right the next time. Now, that’s success.
“I’m not trying to be perfect; I just want to answer enough questions to pass.” It is very easy to get stuck trying to learn it all. I’ve known way too many people who gave up before they ever took the exam because they couldn’t achieve perfection. Don’t worry about trying to answer every question correctly. Once again, as above, the only important goal is making progress.
“The CPA Exam is a mile wide and an inch deep.” The CPA Exam that you take will try to cover a little bit about everything in the world of accounting, auditing, tax, and the like. As you study, it is much more important to cover all the topics a little bit than to cover any topic in too much depth and detail.
“When I get to the exam, I’m going to watch my time closely.” I’m convinced that, once you have put in your 60-100 hours of preparation for each part, the biggest problem is time management during the exam. If you rush too fast, you’ll make careless mistakes. If you work too slowly, you won’t finish. It is very important, as I said in my previous lesson (Lesson 95 that can be found in the Blog Archives in the right hand navigation), that you get used to working at an appropriate “exam speed.”
Okay, I could probably come up with 25 other sets of words to wear out as you prepare for the CPA Exam but these five form a pretty good foundation. I’m not sure that I wouldn’t write them down and tape them to your wall and read through them each and every day.
Wear those words out.
(4) – Personal note to all 20,000 of our subscribers (yeah, this means YOU). We love having you. We really hope we provide a benefit. I never go anywhere (like a wedding) that I don’t think about things to tell you that might help you pass the CPA Exam.
However, if you ever decide that you are ready to unsubscribe, it is easy to do. Scroll to the bottom of any one of these email lessons. You’ll find a link to unsubscribe. Click on that and follow the directions. You have every right to manage your emails. If you are ready to unsubscribe, go for it.
(5) – Yesterday, while I was dressing for the wedding, I watched the last 10 laps of the Indianapolis 500. If you follow car racing at all, you already know what happened. A young rookie was leading the race going into the last lap. He had a good sized lead and was going to win fairly easily. The announcers were already talking about him being the champion. There was really nothing in his way of winning. As he took the very last turn (he could see the finish line), his car slid into the wall. He wasn’t hurt but he lost the race. He let it get away. He had driven by that wall 199 previous times that day with no problem but on that last time, for no apparent reason, he crashed.
Whenever I talk with people about the CPA Exam, I always tell them to take nothing for granted. If you know the topic, make sure you continue to do the work. If you feel good about an area, make sure you continue to do the work. If you have been studying all day and you are going to work a few more problems, make sure you continue to do the work. If you are actually taking the CPA exam and you have been working for nearly 3 or 4 hours, make sure you continue to do the work.
It is easy to lose your focus. It is easy to start day dreaming or just start thinking of something else. It is easy to get distracted. Things are always happening that catch your attention. When you are studying, your mind should be on one thing and one thing only: How do I get this particular question in front of me answered correctly? When you are taking the exam itself, your mind should be on one thing and one thing only: How do I get this one particular question in front of me answered correctly?
My assumption is that most people actually study enough hours to pass the exam. However, during those hours, it is easy to get distracted and wind up accomplishing nothing. You don’t just need 60-100 hours per part; you need 60-100 hours of concentrated study per part. Make sure you continue to do the work.
My assumption is that most people who take the CPA Exam actually have enough knowledge in their heads to pass. However, during the exam itself, it is easy to get distracted and wind up making mistakes. Don’t worry about the lights, the seat, the computer screen, the noise, the heat, the cold, the other people. When you are taking the CPA Exam only one thing matters: How do I get this particular question in front of me answered correctly?
Studying for the CPA Exam is not a game. It is not for play. It deserves your undivided attention. You don’t want to lose the race just because you failed to do something that you had done before and should have been able to do again.
(6) – I want to close today by giving you a full-scale illustration of our Subscription Service. As we’ve said, it costs $15 per month per part. Let’s look at FAR. If you subscribe to the FAR material, what do you get for your $15?
--You get 10 examples of our illustrations of what we believe task-based simulations look like.
--You get a study guide to show how to combine our free questions and our subscription service to create a comprehensive program (this is the study guide you can get for free by sending a note to Jhoyle@cpareviewforfree.com).
--For FAR, you get content information divided into 23 different topic areas – everything from consolidations to earnings per share and inventory to government accounting. Those topic areas contain hundreds of slides presenting the information we believe you need to know to pass that part of the CPA Exam.
What does this content information look like? I decided to select accounts receivable as my illustration because it is one of the shortest topics and won’t use up so much space in your email box.
So, quite literally, here is our content material for Accounts Receivable within the FAR part of the CPA Exam as covered by our subscription service
SLIDE ONE
Accounts Receivables
Accounts receivable is normally reported as a current asset because collection is expected within one year. It reflects amounts owed to a company by its customers.
Accounts receivable should be disclosed in the balance sheet at net realizable value (the cash expected – the total amount owed to the company less the estimated amount of uncollectibles). Receivables from company officers, employees, and affiliate companies should be separately disclosed.
SLIDE TWO
Cash discounts (such as 2/10, n/30) give a discount if the customer pays within a certain period of time. In this example, a 2 percent discount can be taken if payment is made in 10 days but any remaining amount must be paid in total in 30 days.
When a discount is offered, account receivable can be recorded by either the net method or the gross method.
SLIDE THREE
Net method. The seller (and the buyer if that company so chooses) reports the transaction at the net amount (after the discount) which assumes the discount will be taken. A $100 sale is recorded at only $98 if a 2 percent discount is available. If paid in time, cash is debited for $98 and the $98 account receivable is removed. However, the $2 discount might not be taken so that the entire $100 is collected. In that case, the extra $2 collection is recorded as interest.
SLIDE FOUR
Gross method. The seller (and, possibly, buyer) reports these transactions at the gross amount which assumes the discount will not be taken. A $100 sale is recorded at $100. The only problem is that the $2 discount might still be taken so that only $98 is collected. The $2 reduction is recorded as a sales discount by the seller. “Sales discounts” reduce Sales on the income statement.
SLIDE FIVE
Bad Debts. Bad Debt Expense is reported on the income statement and the Allowance for Bad Debts is reported on the balance sheet as a reduction to Accounts Receivable.
The allowance method of recording bad debts is used in US GAAP because it matches the expense with the timing of the revenue. An alternative, the direct method, does not recognize any expense until an account proves uncollectible. This method is not allowed under US GAAP.
SLIDE SIX
The allowance method estimates the amount of uncollectible accounts based on past experience and present industry, company, and economic conditions. Bad debt expense is recognized in the same period as the sale. Because the actual bad accounts have not yet been identified, a contra valuation account (an Allowance for Bad Debts – which might also be called something like an Allowance for Doubtful Accounts) is established for the amount of the receivables estimated to be uncollectible.
SLIDE SEVEN
The adjusting entry to record Bad Debt Expense for the period and establish the proper balance in the Allowance for Bad Debts is made at the end of each period.
Bad Debt Expense estimated amount
Allowance for Bad Debts estimated amount
SLIDE EIGHT
When an account actually proves to be uncollectible (the customer dies, moves away, files for bankruptcy or just refuses to pay), the account is written off. However, the expense has already been recognized in the previous estimation entry and should not be recorded again.
Allowance for Bad Debts uncollectible amount
Accounts Receivable uncollectible amount
If this account is ever collected in the future, the above entry is reversed to reinstate the balance before collection is recorded.
SLIDE NINE
One key element of this reporting is left to be shown. How does the company estimate the amount of its bad debts in the first entry shown previously? There are two methods to determine the annual charge to bad debt.
(1) Percentage of sales method
(2) Percentage of receivable method (or a variation – the aging method)
SLIDE TEN
Regardless of the method being used, at the end of each period, the reporting company will have a bad debt expense account with a balance that is zero because no estimation has yet been recorded for the period.
It will also have an Allowance for Bad Debts but that account will have a remaining balance that can either be a debit or a credit. The Allowance balance is its beginning balance for the period less the amount of accounts written off during the period (but plus any accounts that were written back on the books because of latter collection).
SLIDE ELEVEN
PERCENTAGE OF SALES METHOD
Multiply the appropriate percentage times the sales balance for the period. This is the balance that should be reported for Bad Debt Expense.
Because the Bad Debt Expense account has a zero balance, the amount determined by the computation is added directly to Bad Debt Expense (and also to the Allowance for Bad Debts). If the estimation is for $36,000, then the adjusting entry is for $36,000. Bad Debt Expense will equal the estimation. The Allowance for Bad Debts will be its previous balance as adjusted by this final entry.
SLIDE TWELVE
PERCENTAGE OF RECEIVABLES METHOD
Multiply the appropriate percentage times the accounts receivable balance at the end of the period. This is the balance that should be reported as a credit for the Allowance for Bad Debts.
That contra account already has a balance that may be either a debit or a credit. The adjusting entry records the amount needed to bring this previous account balance to the new estimation. If a $3,000 credit was in the allowance account and the estimation is now $40,000, then the adjusting entry is for $37,000. If a $1,000 debit was in the allowance account and the estimation is now $40,000, then the adjusting entry is for $41,000.
SLIDE THIRTEEN
Pledging of receivables. Pledging is an agreement whereby a company’s accounts receivable are used as collat¬eral for loans. Customers whose accounts have been pledged are not aware of this situation so their payments are still remitted to the original company. The pledged accounts merely serve as security to a lender. The only accounting issue relating to pledging is that of adequate disclosure. The accounts receivable, which remain assets of the borrowing entity, continue to be shown as current assets on its balance sheet but must be identified as having been pledged.
SLIDE FOURTEEN
Factoring of receivables. Factoring is the sale of receivables to a buyer known as a factor. The transfer of receivables “without recourse” means that the factor (the buyer) assumes the risk of loss from any noncollection. Thus, once this type of factoring arrangement is com¬pleted, the seller has no further involvement with the accounts. The receivables are removed from the books of the seller and the difference between the cash received and the car¬rying value of those receivables is recognized as a gain or loss.
SLIDE FIFTEEN
Another possibility is factoring “with recourse” where a monetary amount must be returned to the buyer if a specified amount is not collected from the receivables. In recording the transfer of the receivables, the seller must take into account any anticipated repayment amount. For example, if cash of $100,000 is guaranteed but the seller only anticipates that the buyer will collect $98,000, a $2,000 liability is recorded by the seller at the time of sale. The accounts receivable are removed from the seller’s books and this liability is recognized; the cash received is also recorded and the difference is a gain or loss.
SLIDE SIXTEEN
Several Important Ratios Involving Current Assets
Solvency ratios or amounts—Any ratio or computation that measures an entity's short-term viability by its ability to pay its debts as they come due.
---Acid-test (quick) ratio—It is the sum of the quick assets (cash, receivables, and short-term investments) divided by the total of the current liabilities.
---Current ratio—It is computed by taking the total of all current assets (the quick assets plus inventory, prepayments, and supplies) and dividing it by the total of current liabilities
---Working capital—It is computed by taking the total of the current assets and subtracting the current liabilities
SLIDE SEVENTEEN
Operational efficiency ratios or amounts—A ratio or computation that measures an entity's ability to make good use of its assets
---Receivable turnover—It measures how rapidly cash is collected from credit sales. It is computed by taking the net credit sales for a period divided by the average of the net receivables for the same period.
---Number of days’ sales in receivables—The average length of time receivables are out¬standing, which reflects the efficiency of credit and collection policies. It is the receivable balance divided by average credit sales per day.
SLIDE EIGHTEEN
Now that you have gone through all of these slides for accounts receivable, go back to our free questions and answers and work all of the questions provided under “Accounts Receivable.” This should help you get to the point where you can pass Accounts Receivable. Once you can pass the topics, you can pass FAR.
Take good notes, especially for any questions that you miss. A good note is one that takes 10 words or less and explains anything that you might have missed that would prevent you from getting the question correct.
Have a great week!!!
Joe Hoyle
Co-Founder and President
CPA Review for FREE
www.CPAreviewforFREE.com
Friday, May 20, 2011
How many review courses have you used?
So many of the big review courses claim passing candidates as their own and while that may be true, we hear from many that they've used materials from other courses. So how many prep courses have you used?
Friday, May 13, 2011
Auditing Subscription Service Now Available
Try us FIRST before you spend your hard-earned money.
May 12, 2011
CPA Review for FREE
www.CPAreviewforFREE.com
Over 2,200 FREE CPA Review Questions and Answers Available for YOU
149 Weeks of Operation and 23,661,776 Page Views (without a penny spent on marketing)
Lesson 94
From: Joe
(1) - Our Auditing and Attestation subscription service is now up and running!!! For a mere $15 per month (50 cents per day), you can get
---377 slides of information covering everything you need to know about Auditing and Attestation
---10 task-based simulations covering audit reports, reviews, compilations, internal control, and much more
---a complete 24 step study guide to prepare you to take and pass the Auditing and Attestation section of the CPA Exam.
All for that just 50 cents per day.
We now have a complete CPA Exam review service available for you!!
**Free Questions and Answers**
--Auditing and Attestation
--Financial Accounting & Reporting
--BEC
--Regulation
**Subscription Service (each part for $15/month)**
--Auditing and Attestation
--Financial Accounting & Reporting
--BEC
--Regulation
Trust me - you don’t have to spend $2,500. That is highway robbery. For $15 per month, we can give you thousands of free questions and the content you need to pass AND a study guide to tell you what to do.
Try us first, before you spent thousands. Why not try us for a month and see if you can save thousands?
Okay, I know you want to know more about how the subscription service works. So, send me an email at Jhoyle@cpareviewforfree.com and tell me what part of the exam you plan to take next. I’ll send you the study guide for that part. As we like to say down here in the South, it is not good idea to buy a pig in a poke. We believe in our program and want you to see how our program works. Just send me an email (jhoyle@cpareviewforfree.com and let me know what part you plan to take next and I’ll send you our study guide by return email. You can see how our program is designed.
I’ve been in this business for over 30 years. I designed this program so that you can pass AND pay as close to zero as possible.
--If you are truly wealthy and are dying to spend thousands of dollars, then nothing I can say is going to change your mind. Nothing—that money is burning a hole in your pocket.
--However, if it were me, I’d invest $15 first and try this program for one month. That’s just common sense. At the end of a month, you can give us another $15 or you can give the other guys $2,500 but at least you’ll know what works for you. Come on – accountants should be smart enough to see that trying one month for $15 is a good idea.
**To purchase any of our subscription services:
You must be registered to purchase any of our content. Then, just login to your account at www.CPAreviewforFREE.com and click on “Paid Content” to choose the section and select the package you wish to purchase which is only $15/one month or $30 for three months
(2) – In case you missed it above, send me a note at Jhoyle@cpareviewforfree.com and tell me the part that you are going to take next and I’ll send you our study guide for that part ABSOLUTELY FREE. (Our favorite term around here - “absolutely free.”)
(3) – Recently, I have been posting daily messages on our Facebook page. I just like giving everyone a daily boost of “you can do it – put in the time and energy and make it happen.”)
However, I wrote an entry the other day that I have thought a lot about over the last few days. Here’s what I had to say:
“If you don’t dream enough, work becomes work – pure drudgery. However, if you dream about what you want to accomplish, work becomes a real joy. So, dream about passing the CPA Exam. If you don’t enjoy studying, maybe you are not dreaming enough. From Oliver Wright: ‘I got more thrill out of flying before I had ever been in the air at all – while lying in bed thinking how exciting it would be to fly.’”
I’ve had a terribly busy spring schedule and, in all honesty, work has really started to feel like drudgery to me. I can do it but there’s no real spark there. There’s not been enough excitement. I have just gone through the motions to get it done. I find that a whine and moan a lot. Not enough joy.
So, after I wrote that entry above, I decided that I probably was speaking to me more than to anyone else.
Since then, I have really worked on dreaming about what I want to see happen.
--I dream about having really efficient days where I just seem to work without stopping and everything goes well. I dream about having the energy to get up and get things done.
--I dream about finishing projects and saying to myself “I did it. I made it happen.”
--I dream about doing a good job and that wonderful, wonderful feeling of accomplishment.
--I dream about looking up one day and smiling and saying “it worked out just like I hoped it would.”
I have a request. Stop reading and ask yourself a couple of questions.
--Over the last few weeks would you say that your study for the CPA Exam has been drudgery or a joy?
--Over the last few weeks do you find yourself whining more than you’d like to admit?
--Over the last few weeks have you tried to avoid studying at all costs?
--Over the last few weeks when you have studied have you wanted to quit almost as soon as you started?
If the answer to these questions all tend to be in the “I’m sick to death of studying” mode, then maybe it is time for you to start dreaming. Every morning when you get up, take an extra minute or two and dream:
--Dream that you study and you are perfectly focused and just seem to learn every piece of information that you cover. It is all just very clear.
--Dream that you go to take the CPA Exam and you feel the exaltation as you realize that you know most of the questions. You catch the tricks and understand what they want.
--Most of all, dream about getting your scores and seeing four grades of 75 or above. Dream about how good that is going to feel. Dream about telling your mother, father, husband, wife, son, daughter, boss, coworkers, etc. Dream about that wonderful sense of accomplishment. Dream about yelling out “I DID IT!!!!”
I think you’ll find that having dreams of what you want to do will reenergize your spirits. We are all human. We all get sick of this stuff. It is easy to forget why you got started in the first place. Take five minutes a day – take five minutes every day – and dream about success, victory, and accomplishment. Dream great dreams!!!!
Speaking strictly for me, it really has helped. I feel better about my work and feel better about the whole process of working.
Motivation seeps away pretty quickly if you don’t stop to refill the tanks. Dreaming will help.
(4) – We are delighted to have everyone of you on this email service (and on our Facebook page). Please stay as long as you wish. I’ve been writing these lessons now for about 15 years; I’m pretty sure I can write them for another 15. However, if you ever decide you are ready to unsubscribe, just go to the bottom of this email (or any other email from us) and click on the “unsubscribe” button. Our goal is to help and motivate. Our goal is not to fill up your email box.
(5) – Okay, practice time. Let’s see if we can add some points – ABSOLUTELY FREE!!!
FAR
Living plants and animals are referred to as biological assets for accounting purposes. Assume a company has a large fruit orchard. Under IFRS, how should this asset be reported on a company’s balance sheet?
A. Fair value
B. Fair value less estimated cost to sell
C. Historical cost
D. Historical cost less accumulated depreciaton
Answer is B
Under US GAAP, the orchard would be reported at historical cost less accumulated depreciation like most other long-lived assets. But, under IFRS, biological assets are reported at fair value less the estimated cost that it would take to sell them.
Auditing & Attestation
An auditor must make an assessment of control risk as part of the process to determine how much substantive testing must be done to reduce overall audit risk to an acceptably low level. Which of the following is not one of the five components that make up internal control?
A. Checks and balances
B. Monitoring
C. Control environment
D. Risk assessment.
Answer is A
The five components of internal control are (1) control environment—the organization’s commitment to having a strong internal control, (2) risk assessment—the organization’s ability to anticipate problems and work to prevent them in advance, (3) control activities-the policies and procedures in place to help ensure that the organization’s systems are working as intended by management, (4) information and communication-the organization’s ability to gather significant data and get it to the people who need it in a timely fashion, and (5) monitoring—the assessment of internal control by the organization over time to ensure that internal control properly adapts as changes are needed.
BEC
What is meant by the term “economic profit?”
A. It is just a different way of saying net income.
B. It is the amount of profit being earned in excess of a normal profit.
C. It is equivalent to gross margin.
D. It is the same as return on assets.
Answer is B.
Economic profit is any profit earned in excess of a normal amount of profit. In economics, it is important because it is assumed that additional competition will be drawn to areas where an economic profit can be earned so that, in the long run, it will be eliminated by the added competition. In fact, the term is also referred to as “excess profits” which is more self-explanatory.
Regulation
A company owes a bank $10,000. The company cannot pay. Jones is a surety on the debt for $6,000. Smith is also a co-surety on the same debt for $6,000. The bank releases Jones without reservation of rights against Smith. For what amount is Smith now obligated to the bank in connection with this debt?
A. Zero
B. $3,000
C. $5,000
D. $6,000
Answer is B
Initially, each co-surety is liable in for the amount that each has personally guaranteed. However, when the bank released one co-surety without reservation of rights against the other, the remaining co-surety is also released, but only to the extent that his right of contribution is affected. In other words, Smith has lost the right to step into the bank's shoes against Jones for contribution of $3,000, so is released to that extent.
Joe Hoyle
Co-Founder
CPA Review for FREE
www.CPAreviewforFREE.com
May 12, 2011
CPA Review for FREE
www.CPAreviewforFREE.com
Over 2,200 FREE CPA Review Questions and Answers Available for YOU
149 Weeks of Operation and 23,661,776 Page Views (without a penny spent on marketing)
Lesson 94
From: Joe
(1) - Our Auditing and Attestation subscription service is now up and running!!! For a mere $15 per month (50 cents per day), you can get
---377 slides of information covering everything you need to know about Auditing and Attestation
---10 task-based simulations covering audit reports, reviews, compilations, internal control, and much more
---a complete 24 step study guide to prepare you to take and pass the Auditing and Attestation section of the CPA Exam.
All for that just 50 cents per day.
We now have a complete CPA Exam review service available for you!!
**Free Questions and Answers**
--Auditing and Attestation
--Financial Accounting & Reporting
--BEC
--Regulation
**Subscription Service (each part for $15/month)**
--Auditing and Attestation
--Financial Accounting & Reporting
--BEC
--Regulation
Trust me - you don’t have to spend $2,500. That is highway robbery. For $15 per month, we can give you thousands of free questions and the content you need to pass AND a study guide to tell you what to do.
Try us first, before you spent thousands. Why not try us for a month and see if you can save thousands?
Okay, I know you want to know more about how the subscription service works. So, send me an email at Jhoyle@cpareviewforfree.com and tell me what part of the exam you plan to take next. I’ll send you the study guide for that part. As we like to say down here in the South, it is not good idea to buy a pig in a poke. We believe in our program and want you to see how our program works. Just send me an email (jhoyle@cpareviewforfree.com and let me know what part you plan to take next and I’ll send you our study guide by return email. You can see how our program is designed.
I’ve been in this business for over 30 years. I designed this program so that you can pass AND pay as close to zero as possible.
--If you are truly wealthy and are dying to spend thousands of dollars, then nothing I can say is going to change your mind. Nothing—that money is burning a hole in your pocket.
--However, if it were me, I’d invest $15 first and try this program for one month. That’s just common sense. At the end of a month, you can give us another $15 or you can give the other guys $2,500 but at least you’ll know what works for you. Come on – accountants should be smart enough to see that trying one month for $15 is a good idea.
**To purchase any of our subscription services:
You must be registered to purchase any of our content. Then, just login to your account at www.CPAreviewforFREE.com and click on “Paid Content” to choose the section and select the package you wish to purchase which is only $15/one month or $30 for three months
(2) – In case you missed it above, send me a note at Jhoyle@cpareviewforfree.com and tell me the part that you are going to take next and I’ll send you our study guide for that part ABSOLUTELY FREE. (Our favorite term around here - “absolutely free.”)
(3) – Recently, I have been posting daily messages on our Facebook page. I just like giving everyone a daily boost of “you can do it – put in the time and energy and make it happen.”)
However, I wrote an entry the other day that I have thought a lot about over the last few days. Here’s what I had to say:
“If you don’t dream enough, work becomes work – pure drudgery. However, if you dream about what you want to accomplish, work becomes a real joy. So, dream about passing the CPA Exam. If you don’t enjoy studying, maybe you are not dreaming enough. From Oliver Wright: ‘I got more thrill out of flying before I had ever been in the air at all – while lying in bed thinking how exciting it would be to fly.’”
I’ve had a terribly busy spring schedule and, in all honesty, work has really started to feel like drudgery to me. I can do it but there’s no real spark there. There’s not been enough excitement. I have just gone through the motions to get it done. I find that a whine and moan a lot. Not enough joy.
So, after I wrote that entry above, I decided that I probably was speaking to me more than to anyone else.
Since then, I have really worked on dreaming about what I want to see happen.
--I dream about having really efficient days where I just seem to work without stopping and everything goes well. I dream about having the energy to get up and get things done.
--I dream about finishing projects and saying to myself “I did it. I made it happen.”
--I dream about doing a good job and that wonderful, wonderful feeling of accomplishment.
--I dream about looking up one day and smiling and saying “it worked out just like I hoped it would.”
I have a request. Stop reading and ask yourself a couple of questions.
--Over the last few weeks would you say that your study for the CPA Exam has been drudgery or a joy?
--Over the last few weeks do you find yourself whining more than you’d like to admit?
--Over the last few weeks have you tried to avoid studying at all costs?
--Over the last few weeks when you have studied have you wanted to quit almost as soon as you started?
If the answer to these questions all tend to be in the “I’m sick to death of studying” mode, then maybe it is time for you to start dreaming. Every morning when you get up, take an extra minute or two and dream:
--Dream that you study and you are perfectly focused and just seem to learn every piece of information that you cover. It is all just very clear.
--Dream that you go to take the CPA Exam and you feel the exaltation as you realize that you know most of the questions. You catch the tricks and understand what they want.
--Most of all, dream about getting your scores and seeing four grades of 75 or above. Dream about how good that is going to feel. Dream about telling your mother, father, husband, wife, son, daughter, boss, coworkers, etc. Dream about that wonderful sense of accomplishment. Dream about yelling out “I DID IT!!!!”
I think you’ll find that having dreams of what you want to do will reenergize your spirits. We are all human. We all get sick of this stuff. It is easy to forget why you got started in the first place. Take five minutes a day – take five minutes every day – and dream about success, victory, and accomplishment. Dream great dreams!!!!
Speaking strictly for me, it really has helped. I feel better about my work and feel better about the whole process of working.
Motivation seeps away pretty quickly if you don’t stop to refill the tanks. Dreaming will help.
(4) – We are delighted to have everyone of you on this email service (and on our Facebook page). Please stay as long as you wish. I’ve been writing these lessons now for about 15 years; I’m pretty sure I can write them for another 15. However, if you ever decide you are ready to unsubscribe, just go to the bottom of this email (or any other email from us) and click on the “unsubscribe” button. Our goal is to help and motivate. Our goal is not to fill up your email box.
(5) – Okay, practice time. Let’s see if we can add some points – ABSOLUTELY FREE!!!
FAR
Living plants and animals are referred to as biological assets for accounting purposes. Assume a company has a large fruit orchard. Under IFRS, how should this asset be reported on a company’s balance sheet?
A. Fair value
B. Fair value less estimated cost to sell
C. Historical cost
D. Historical cost less accumulated depreciaton
Answer is B
Under US GAAP, the orchard would be reported at historical cost less accumulated depreciation like most other long-lived assets. But, under IFRS, biological assets are reported at fair value less the estimated cost that it would take to sell them.
Auditing & Attestation
An auditor must make an assessment of control risk as part of the process to determine how much substantive testing must be done to reduce overall audit risk to an acceptably low level. Which of the following is not one of the five components that make up internal control?
A. Checks and balances
B. Monitoring
C. Control environment
D. Risk assessment.
Answer is A
The five components of internal control are (1) control environment—the organization’s commitment to having a strong internal control, (2) risk assessment—the organization’s ability to anticipate problems and work to prevent them in advance, (3) control activities-the policies and procedures in place to help ensure that the organization’s systems are working as intended by management, (4) information and communication-the organization’s ability to gather significant data and get it to the people who need it in a timely fashion, and (5) monitoring—the assessment of internal control by the organization over time to ensure that internal control properly adapts as changes are needed.
BEC
What is meant by the term “economic profit?”
A. It is just a different way of saying net income.
B. It is the amount of profit being earned in excess of a normal profit.
C. It is equivalent to gross margin.
D. It is the same as return on assets.
Answer is B.
Economic profit is any profit earned in excess of a normal amount of profit. In economics, it is important because it is assumed that additional competition will be drawn to areas where an economic profit can be earned so that, in the long run, it will be eliminated by the added competition. In fact, the term is also referred to as “excess profits” which is more self-explanatory.
Regulation
A company owes a bank $10,000. The company cannot pay. Jones is a surety on the debt for $6,000. Smith is also a co-surety on the same debt for $6,000. The bank releases Jones without reservation of rights against Smith. For what amount is Smith now obligated to the bank in connection with this debt?
A. Zero
B. $3,000
C. $5,000
D. $6,000
Answer is B
Initially, each co-surety is liable in for the amount that each has personally guaranteed. However, when the bank released one co-surety without reservation of rights against the other, the remaining co-surety is also released, but only to the extent that his right of contribution is affected. In other words, Smith has lost the right to step into the bank's shoes against Jones for contribution of $3,000, so is released to that extent.
Joe Hoyle
Co-Founder
CPA Review for FREE
www.CPAreviewforFREE.com
Thursday, May 12, 2011
Auditing & Attestation subscription service is now up and running!!!
Try us FIRST before you spend your hard-earned money.
May 12, 2011
CPA Review for FREE
www.CPAreviewforFREE.com
Over 2,200 FREE CPA Review Questions and Answers Available for YOU
149 Weeks of Operation and 23,661,776 Page Views (without a penny spent on marketing)
Lesson 94
From: Joe
(1) - Our Auditing and Attestation subscription service is now up and running!!! For a mere $15 per month (50 cents per day), you can get
---377 slides of information covering everything you need to know about Auditing and Attestation
---10 task-based simulations covering audit reports, reviews, compilations, internal control, and much more
---a complete 24 step study guide to prepare you to take and pass the Auditing and Attestation section of the CPA Exam.
All for that just 50 cents per day.
We now have a complete CPA Exam review service available for you!!
**Free Questions and Answers**
--Auditing and Attestation
--Financial Accounting & Reporting
--BEC
--Regulation
**Subscription Service (each part for $15/month)**
--Auditing and Attestation
--Financial Accounting & Reporting
--BEC
--Regulation
Trust me - you don’t have to spend $2,500. That is highway robbery. For $15 per month, we can give you thousands of free questions and the content you need to pass AND a study guide to tell you what to do.
Try us first, before you spent thousands. Why not try us for a month and see if you can save thousands?
Okay, I know you want to know more about how the subscription service works. So, send me an email at Jhoyle@cpareviewforfree.com and tell me what part of the exam you plan to take next. I’ll send you the study guide for that part. As we like to say down here in the South, it is not good idea to buy a pig in a poke. We believe in our program and want you to see how our program works. Just send me an email (jhoyle@cpareviewforfree.com and let me know what part you plan to take next and I’ll send you our study guide by return email. You can see how our program is designed.
I’ve been in this business for over 30 years. I designed this program so that you can pass AND pay as close to zero as possible.
--If you are truly wealthy and are dying to spend thousands of dollars, then nothing I can say is going to change your mind. Nothing—that money is burning a hole in your pocket.
--However, if it were me, I’d invest $15 first and try this program for one month. That’s just common sense. At the end of a month, you can give us another $15 or you can give the other guys $2,500 but at least you’ll know what works for you. Come on – accountants should be smart enough to see that trying one month for $15 is a good idea.
**To purchase any of our subscription services:
You must be registered to purchase any of our content. Then, just login to your account at www.CPAreviewforFREE.com and click on “Paid Content” to choose the section and select the package you wish to purchase which is only $15/one month or $30 for three months
(2) – In case you missed it above, send me a note at Jhoyle@cpareviewforfree.com and tell me the part that you are going to take next and I’ll send you our study guide for that part ABSOLUTELY FREE. (Our favorite term around here - “absolutely free.”)
(3) – Recently, I have been posting daily messages on our Facebook page. I just like giving everyone a daily boost of “you can do it – put in the time and energy and make it happen.”)
However, I wrote an entry the other day that I have thought a lot about over the last few days. Here’s what I had to say:
“If you don’t dream enough, work becomes work – pure drudgery. However, if you dream about what you want to accomplish, work becomes a real joy. So, dream about passing the CPA Exam. If you don’t enjoy studying, maybe you are not dreaming enough. From Oliver Wright: ‘I got more thrill out of flying before I had ever been in the air at all – while lying in bed thinking how exciting it would be to fly.’”
I’ve had a terribly busy spring schedule and, in all honesty, work has really started to feel like drudgery to me. I can do it but there’s no real spark there. There’s not been enough excitement. I have just gone through the motions to get it done. I find that I whine and moan a lot. Not enough joy.
So, after I wrote that entry above, I decided that I probably was speaking to me more than to anyone else.
Since then, I have really worked on dreaming about what I want to see happen.
--I dream about having really efficient days where I just seem to work without stopping and everything goes well. I dream about having the energy to get up and get things done.
--I dream about finishing projects and saying to myself “I did it. I made it happen.”
--I dream about doing a good job and that wonderful, wonderful feeling of accomplishment.
--I dream about looking up one day and smiling and saying “it worked out just like I hoped it would.”
I have a request. Stop reading and ask yourself a couple of questions.
--Over the last few weeks would you say that your study for the CPA Exam has been drudgery or a joy?
--Over the last few weeks do you find yourself whining more than you’d like to admit?
--Over the last few weeks have you tried to avoid studying at all costs?
--Over the last few weeks when you have studied have you wanted to quit almost as soon as you started?
If the answer to these questions all tend to be in the “I’m sick to death of studying” mode, then maybe it is time for you to start dreaming. Every morning when you get up, take an extra minute or two and dream:
--Dream that you study and you are perfectly focused and just seem to learn every piece of information that you cover. It is all just very clear.
--Dream that you go to take the CPA Exam and you feel the exaltation as you realize that you know most of the questions. You catch the tricks and understand what they want.
--Most of all, dream about getting your scores and seeing four grades of 75 or above. Dream about how good that is going to feel. Dream about telling your mother, father, husband, wife, son, daughter, boss, coworkers, etc. Dream about that wonderful sense of accomplishment. Dream about yelling out “I DID IT!!!!”
I think you’ll find that having dreams of what you want to do will re-energize your spirits. We are all human. We all get sick of this stuff. It is easy to forget why you got started in the first place. Take five minutes a day – take five minutes every day – and dream about success, victory, and accomplishment. Dream great dreams!!!!
Speaking strictly for me, it really has helped. I feel better about my work and feel better about the whole process of working.
Motivation seeps away pretty quickly if you don’t stop to refill the tanks. Dreaming will help.
(4) – We are delighted to have everyone of you on this email service (and on our Facebook page). Please stay as long as you wish. I’ve been writing these lessons now for about 15 years; I’m pretty sure I can write them for another 15. However, if you ever decide you are ready to unsubscribe, just go to the bottom of this email (or any other email from us) and click on the “unsubscribe” button. Our goal is to help and motivate. Our goal is not to fill up your email box.
(5) – Okay, practice time. Let’s see if we can add some points – ABSOLUTELY FREE!!!
FAR
Living plants and animals are referred to as biological assets for accounting purposes. Assume a company has a large fruit orchard. Under IFRS, how should this asset be reported on a company’s balance sheet?
A. Fair value
B. Fair value less estimated cost to sell
C. Historical cost
D. Historical cost less accumulated depreciation
Answer is B
Under US GAAP, the orchard would be reported at historical cost less accumulated depreciation like most other long-lived assets. But, under IFRS, biological assets are reported at fair value less the estimated cost that it would take to sell them.
Auditing & Attestation
An auditor must make an assessment of control risk as part of the process to determine how much substantive testing must be done to reduce overall audit risk to an acceptably low level. Which of the following is not one of the five components that make up internal control?
A. Checks and balances
B. Monitoring
C. Control environment
D. Risk assessment.
Answer is A
The five components of internal control are (1) control environment—the organization’s commitment to having a strong internal control, (2) risk assessment—the organization’s ability to anticipate problems and work to prevent them in advance, (3) control activities-the policies and procedures in place to help ensure that the organization’s systems are working as intended by management, (4) information and communication-the organization’s ability to gather significant data and get it to the people who need it in a timely fashion, and (5) monitoring—the assessment of internal control by the organization over time to ensure that internal control properly adapts as changes are needed.
BEC
What is meant by the term “economic profit?”
A. It is just a different way of saying net income.
B. It is the amount of profit being earned in excess of a normal profit.
C. It is equivalent to gross margin.
D. It is the same as return on assets.
Answer is B.
Economic profit is any profit earned in excess of a normal amount of profit. In economics, it is important because it is assumed that additional competition will be drawn to areas where an economic profit can be earned so that, in the long run, it will be eliminated by the added competition. In fact, the term is also referred to as “excess profits” which is more self-explanatory.
Regulation
A company owes a bank $10,000. The company cannot pay. Jones is a surety on the debt for $6,000. Smith is also a co-surety on the same debt for $6,000. The bank releases Jones without reservation of rights against Smith. For what amount is Smith now obligated to the bank in connection with this debt?
A. Zero
B. $3,000
C. $5,000
D. $6,000
Answer is B
Initially, each co-surety is liable in for the amount that each has personally guaranteed. However, when the bank released one co-surety without reservation of rights against the other, the remaining co-surety is also released, but only to the extent that his right of contribution is affected. In other words, Smith has lost the right to step into the bank's shoes against Jones for contribution of $3,000, so is released to that extent.
Joe Hoyle
Co-Founder
CPA Review for FREE
www.CPAreviewforFREE.com
May 12, 2011
CPA Review for FREE
www.CPAreviewforFREE.com
Over 2,200 FREE CPA Review Questions and Answers Available for YOU
149 Weeks of Operation and 23,661,776 Page Views (without a penny spent on marketing)
Lesson 94
From: Joe
(1) - Our Auditing and Attestation subscription service is now up and running!!! For a mere $15 per month (50 cents per day), you can get
---377 slides of information covering everything you need to know about Auditing and Attestation
---10 task-based simulations covering audit reports, reviews, compilations, internal control, and much more
---a complete 24 step study guide to prepare you to take and pass the Auditing and Attestation section of the CPA Exam.
All for that just 50 cents per day.
We now have a complete CPA Exam review service available for you!!
**Free Questions and Answers**
--Auditing and Attestation
--Financial Accounting & Reporting
--BEC
--Regulation
**Subscription Service (each part for $15/month)**
--Auditing and Attestation
--Financial Accounting & Reporting
--BEC
--Regulation
Trust me - you don’t have to spend $2,500. That is highway robbery. For $15 per month, we can give you thousands of free questions and the content you need to pass AND a study guide to tell you what to do.
Try us first, before you spent thousands. Why not try us for a month and see if you can save thousands?
Okay, I know you want to know more about how the subscription service works. So, send me an email at Jhoyle@cpareviewforfree.com and tell me what part of the exam you plan to take next. I’ll send you the study guide for that part. As we like to say down here in the South, it is not good idea to buy a pig in a poke. We believe in our program and want you to see how our program works. Just send me an email (jhoyle@cpareviewforfree.com and let me know what part you plan to take next and I’ll send you our study guide by return email. You can see how our program is designed.
I’ve been in this business for over 30 years. I designed this program so that you can pass AND pay as close to zero as possible.
--If you are truly wealthy and are dying to spend thousands of dollars, then nothing I can say is going to change your mind. Nothing—that money is burning a hole in your pocket.
--However, if it were me, I’d invest $15 first and try this program for one month. That’s just common sense. At the end of a month, you can give us another $15 or you can give the other guys $2,500 but at least you’ll know what works for you. Come on – accountants should be smart enough to see that trying one month for $15 is a good idea.
**To purchase any of our subscription services:
You must be registered to purchase any of our content. Then, just login to your account at www.CPAreviewforFREE.com and click on “Paid Content” to choose the section and select the package you wish to purchase which is only $15/one month or $30 for three months
(2) – In case you missed it above, send me a note at Jhoyle@cpareviewforfree.com and tell me the part that you are going to take next and I’ll send you our study guide for that part ABSOLUTELY FREE. (Our favorite term around here - “absolutely free.”)
(3) – Recently, I have been posting daily messages on our Facebook page. I just like giving everyone a daily boost of “you can do it – put in the time and energy and make it happen.”)
However, I wrote an entry the other day that I have thought a lot about over the last few days. Here’s what I had to say:
“If you don’t dream enough, work becomes work – pure drudgery. However, if you dream about what you want to accomplish, work becomes a real joy. So, dream about passing the CPA Exam. If you don’t enjoy studying, maybe you are not dreaming enough. From Oliver Wright: ‘I got more thrill out of flying before I had ever been in the air at all – while lying in bed thinking how exciting it would be to fly.’”
I’ve had a terribly busy spring schedule and, in all honesty, work has really started to feel like drudgery to me. I can do it but there’s no real spark there. There’s not been enough excitement. I have just gone through the motions to get it done. I find that I whine and moan a lot. Not enough joy.
So, after I wrote that entry above, I decided that I probably was speaking to me more than to anyone else.
Since then, I have really worked on dreaming about what I want to see happen.
--I dream about having really efficient days where I just seem to work without stopping and everything goes well. I dream about having the energy to get up and get things done.
--I dream about finishing projects and saying to myself “I did it. I made it happen.”
--I dream about doing a good job and that wonderful, wonderful feeling of accomplishment.
--I dream about looking up one day and smiling and saying “it worked out just like I hoped it would.”
I have a request. Stop reading and ask yourself a couple of questions.
--Over the last few weeks would you say that your study for the CPA Exam has been drudgery or a joy?
--Over the last few weeks do you find yourself whining more than you’d like to admit?
--Over the last few weeks have you tried to avoid studying at all costs?
--Over the last few weeks when you have studied have you wanted to quit almost as soon as you started?
If the answer to these questions all tend to be in the “I’m sick to death of studying” mode, then maybe it is time for you to start dreaming. Every morning when you get up, take an extra minute or two and dream:
--Dream that you study and you are perfectly focused and just seem to learn every piece of information that you cover. It is all just very clear.
--Dream that you go to take the CPA Exam and you feel the exaltation as you realize that you know most of the questions. You catch the tricks and understand what they want.
--Most of all, dream about getting your scores and seeing four grades of 75 or above. Dream about how good that is going to feel. Dream about telling your mother, father, husband, wife, son, daughter, boss, coworkers, etc. Dream about that wonderful sense of accomplishment. Dream about yelling out “I DID IT!!!!”
I think you’ll find that having dreams of what you want to do will re-energize your spirits. We are all human. We all get sick of this stuff. It is easy to forget why you got started in the first place. Take five minutes a day – take five minutes every day – and dream about success, victory, and accomplishment. Dream great dreams!!!!
Speaking strictly for me, it really has helped. I feel better about my work and feel better about the whole process of working.
Motivation seeps away pretty quickly if you don’t stop to refill the tanks. Dreaming will help.
(4) – We are delighted to have everyone of you on this email service (and on our Facebook page). Please stay as long as you wish. I’ve been writing these lessons now for about 15 years; I’m pretty sure I can write them for another 15. However, if you ever decide you are ready to unsubscribe, just go to the bottom of this email (or any other email from us) and click on the “unsubscribe” button. Our goal is to help and motivate. Our goal is not to fill up your email box.
(5) – Okay, practice time. Let’s see if we can add some points – ABSOLUTELY FREE!!!
FAR
Living plants and animals are referred to as biological assets for accounting purposes. Assume a company has a large fruit orchard. Under IFRS, how should this asset be reported on a company’s balance sheet?
A. Fair value
B. Fair value less estimated cost to sell
C. Historical cost
D. Historical cost less accumulated depreciation
Answer is B
Under US GAAP, the orchard would be reported at historical cost less accumulated depreciation like most other long-lived assets. But, under IFRS, biological assets are reported at fair value less the estimated cost that it would take to sell them.
Auditing & Attestation
An auditor must make an assessment of control risk as part of the process to determine how much substantive testing must be done to reduce overall audit risk to an acceptably low level. Which of the following is not one of the five components that make up internal control?
A. Checks and balances
B. Monitoring
C. Control environment
D. Risk assessment.
Answer is A
The five components of internal control are (1) control environment—the organization’s commitment to having a strong internal control, (2) risk assessment—the organization’s ability to anticipate problems and work to prevent them in advance, (3) control activities-the policies and procedures in place to help ensure that the organization’s systems are working as intended by management, (4) information and communication-the organization’s ability to gather significant data and get it to the people who need it in a timely fashion, and (5) monitoring—the assessment of internal control by the organization over time to ensure that internal control properly adapts as changes are needed.
BEC
What is meant by the term “economic profit?”
A. It is just a different way of saying net income.
B. It is the amount of profit being earned in excess of a normal profit.
C. It is equivalent to gross margin.
D. It is the same as return on assets.
Answer is B.
Economic profit is any profit earned in excess of a normal amount of profit. In economics, it is important because it is assumed that additional competition will be drawn to areas where an economic profit can be earned so that, in the long run, it will be eliminated by the added competition. In fact, the term is also referred to as “excess profits” which is more self-explanatory.
Regulation
A company owes a bank $10,000. The company cannot pay. Jones is a surety on the debt for $6,000. Smith is also a co-surety on the same debt for $6,000. The bank releases Jones without reservation of rights against Smith. For what amount is Smith now obligated to the bank in connection with this debt?
A. Zero
B. $3,000
C. $5,000
D. $6,000
Answer is B
Initially, each co-surety is liable in for the amount that each has personally guaranteed. However, when the bank released one co-surety without reservation of rights against the other, the remaining co-surety is also released, but only to the extent that his right of contribution is affected. In other words, Smith has lost the right to step into the bank's shoes against Jones for contribution of $3,000, so is released to that extent.
Joe Hoyle
Co-Founder
CPA Review for FREE
www.CPAreviewforFREE.com
Wednesday, May 4, 2011
Break the Chains that are Keeping YOU from Success
May 4, 2011
CPA Review for FREE
www.CPAreviewforFREE.com
Over 2,200 FREE CPA Review Questions and Answers Available for YOU
148 Weeks of Operation and 23,443,043 Page Views (without a penny spent on marketing)
Lesson 93
From: Joe
(1) – Would you like to help www.CPAreviewforFREE.com? We always tell people that we are only able to continue our operations because of the kindness of so many people. How can YOU help so that we can keep our 2,200 questions and answers available for FREE?
The answer is easy: Simply forward this email to a friend, acquaintance, stranger or someone else who might be interested in taking the CPA Exam. That’s the best way you can help us. Forward this email and just say – these email lessons are free and they’ll help you learn more about passing the CPA Exam. After that, it is up to the other person to go on to our website and register and check the box that they want to get CPA Exam information (these email lessons).
Especially in May and June, it is helpful if we can get the word out to college students who are graduating and, thus, starting to do some serious thinking about the CPA Exam. At this time of the year, those are some of our prime targets. They often spent $2,500-$3,000 (that they probably don’t have) before they even know that we exist. The big courses want you to think that you have no alternative. Don’t let that happen.
(2) – By the way, those of you who are teachers might be interested in reading my teaching blog that I created in connection with my Financial Accounting textbook.
http://m1e.net/c?128895165-44nNhN/l.klSs%406419717-DhrtMNOAYMhwE
If you know a teacher, forward the URL.
(3) – I know we have a lot of international candidates who read these email lessons. You may have seen the following announcement from the AICPA on our Facebook page:
International applications for the Uniform CPA Examination are now being accepted by participating state boards of accountancy. Candidates who wish to sit for the Exam in Japan, Bahrain, Kuwait, Lebanon, or the United Arab Emirates should visit NASBA’s website for the updated list of state boards, a breakdown of fees, and the updated Candidate Bulletin:
http://m1e.net/c?128895165-2EWBD3juWEuF6%406419718-02j786rs0vu36
If you’re unsure of your eligibility or would like more information, the AICPA Exam website’s International Examination FAQs provide a good starting point:
http://m1e.net/c?128895165-voKD1BqEZuT02%406419719-o6iKRAXYjZZAk
(4) – We have a lot of people preparing to take one or more sections of the CPA Exam before the end of the April-May testing window. As in many endeavors in life, it is important to finish up your study strong. You want to go into the testing site with a lot of momentum. You want to make the last days and weeks of study your very best.
We wake up each morning bearing a lot of chains that hold us back from reaching our goals. These are self-inflicted weaknesses that we cling to which keep us from shining and keep us from achieving our potential.
---We believe that we are not smart enough to pass the CPA Exam. That is just a chain that we cling to that holds us back.
---We believe that we are not able to find the time needed for study—another chain that we use to keep ourselves from advancing. It is easy to blame family, friends, and job.
---We judge ourselves to be lazy or weak. You are only as lazy and weak as you think you are. It is the thinking that makes it so.
“I’m just not strong enough to pass the CPA Exam” is easy to say and easy to believe but all it does is hold us back.
We hide under these chains so that we don’t have to face the responsibilities of being successful. A lot of us just don’t want to deal with being successful. It’s easier to wallow around and make excuses and stay lazy.
The world needs for you to stop being timid and push yourself to success.
When you wake up tomorrow morning, wake up a different person. Don’t wake up as a scared person who feels that they are incapable of winning. That is pure baloney. Wake up a different person tomorrow – a person who has put fears and self-doubts and excuses behind. Wake up a different person tomorrow – if you can simply get rid of (a) your fears, (b) your self-doubt, and (c) your excuses, if you can break through your own chains, then that person tomorrow will have a better chance of passing the CPA Exam.
My younger daughter has cerebral palsy. Despite the problems that CP creates, she is the hardest working person that I know. Last month, she received her Gold Award – the highest award that any Girl Scout can achieve. At the ceremony, the leaders read a poem by Marianne Williamson that I think applies to us all. It talks about having the courage to break through your chains to use your talents well and wisely. It was perfect for the Girl Scouts but it was also perfect for people taking the CPA Exam. My two favorite lines are “your playing small does not serve the world” and “we are all meant to shine.” I think that is true about everyone and everything we do.
“Our deepest fear is not that we are inadequate.
Our deepest fear is that we are powerful beyond measure.
It is our light, not our darkness that most frightens us.
We ask ourselves,
Who am I to be brilliant, gorgeous, talented, fabulous?
Actually, who are you not to be?
You are a child of God.
Your playing small does not serve the world.
There is nothing enlightened about shrinking
so that other people won't feel insecure around you.
We are all meant to shine, as children do.
We were born to make manifest the glory of God that is within us.
It's not just in some of us; it's in everyone.
And as we let our own light shine,
we unconsciously give other people permission to do the same.
As we are liberated from our own fear,
our presence automatically liberates others.”
Okay, tomorrow morning, when you get out of bed, it is going to be a new day. Start by leaving your old chains behind. Walk away from those things that you are using to hold yourself back. Forget the excuses. Throw out the self-doubt. You have the ability to pass the CPA Exam if you will just finish strong, if you’ll just put in the hours you need here at the end.
Shine – do the work – make the progress. Answer as many questions as you can. Learn from your mistakes.
This is accounting. It is not easy but it is not rocket science either. You don’t have to be perfect. You merely have to pass. People just like you pass every day. It takes time and patience and perseverance but it doesn’t take any quality that you don’t already have.
Go get it – wake up tomorrow a new person – a person who is going to get the points needed to pass the CPA Exam. Leave your chains of fear and doubt behind.
(5) – As always, we are legally bound to tell you that you can unsubscribe from these emails. If we weren’t legally bound, we wouldn’t tell you because we hope you’ll stay. There is no variable cost (using a good old accounting term) of one more subscriber. So please stay as long as you can.
But, if you ever do want to unsubscribe, scroll to the bottom of any email lesson and you’ll find the appropriate button and it will remove you from our list.
(6) – I am always thrilled to get emails from successful candidates who have made good use of all our free questions and answers. Here are a couple of recent emails. (This is the part of this email lesson that the leaders of all those big programs don’t want you to hear. YOUR money is paying for THEIR Mercedes-Benz. Our success scares them.)
From KM: I finally did it on my own and without taking a class. I wanted to thank you for recommending cpareviewforfree.com because it really helped me target what areas were my weaknesses. It was nice to be able to do multiple choice questions online where the answer is presented to me instantly, instead of having to flip through pages and pages to find the right answer. I couldn't have done it without it.
From KW: I was one that you encouraged through this tedious process. Each week, I looked forward to receiving your e-mails because it seemed I was out of gas! I studied using many sources and tested with your questions to gauge myself. I am excited to tell you I no longer need the encouraging words or questions. I mean that in the best way. On 3/24/2011, I received my FAR grade (final section). I have passed all sections! Thank you, Thank you, Thank you!
From OP: Just a thank you note for all your help over the past year or more. I just got word last week that I passed the last section of my exam. I am so happy, especially at 58 years old. God Bless you for all your efforts in helping so many to achieve their dreams.....
And, I know what some of you are going to ask: I drive a 1997 Subaru station wagon (which is red and has 119,000 miles on it).
(7) – Okay, let’s do some practice – time to add some points. That should be your constant chant: add points, add points.
---FAR – Here is one of the 37 questions that I asked on my final exam for Intermediate Accounting II last week. Most of my students did well on this question; let’s see how well you do.
In Year One, the Alba Company has sales revenues of $600,000. The company has no other revenues and expenses except for a warranty expense of $160,000. The company expects these warranties to be satisfied as follows: $30,000 in Year Two, $60,000 in Year Three, and $70,000 in Year Four. The enacted tax rate is 24 percent. The company believes that there is 58 percent chance that it will have adequate taxable income in Year Two to absorb the warranty expense but that likelihood drops to 51 percent in Year Three, and 39 percent in Year Four. On its December 31, Year One balance sheet, what does this company report as its total net deferred income tax asset (noncurrent)?
A. $14,400
B. $16,800
C. $21,600
D. $31,200
Answer is A
The $30,000 temporary difference in Year Two creates a deferred tax asset but it relates to a Warranty Payable that will be settled next year and, thus, is reported as a current liability. Deferred tax effects created by current accounts are themselves reported as current. The question is asking for the noncurrent asset to be reported. The $60,000 and $70,000 temporary differences will not be settled until Years Three and Four. For those two, the related Warranty Payable is noncurrent. Thus, the deferred tax asset is also noncurrent which is what the question is asking. The total asset would be $130,000 times 24 percent or $31,200. However, the likelihood of receiving the benefit of the Year Four figure (the $70,000 temporary difference) is not more likely than not (not over 50 percent). Thus, that part of the deferred tax asset ($70,000 times 24 percent or $16,800) must be removed by establishing a valuation allowance. The deferred tax asset to be
recognized is $31,200 but the valuation allowance for that amount is $16,800 so that the net deferred tax asset is $31,200 less $16,800 or $14,400.
---Auditing & Attestation - The following question comes from one of our ten audit simulations that we will have in our subscription service for Auditing that we hope to have available within the next week.
Cox Company is being audited by Brown & Yellow CPAs. This public accounting firm has offices in five locations but this audit is primarily performed out of the Baltimore office. Smith is a partner in this firm and works out of the Baltimore office but does not participate in the Cox Company audit. Jones is also a partner in this firm but works out of the Philadelphia office and does not participate in the Cox Company audit. The CPA firm is now trying to determine who in the firm qualifies as a covered member of this engagement so audit independence rules can be verified. Which of the following is true?
A. Smith and Jones are both covered members for this audit engagement.
B. Smith is a covered member but Jones is not
C. Jones is a covered member but Smith is not
D. Neither Smith nor Jones is a covered member
Answer is B
A covered member is any individual on the audit engagement team, anyone who can influence either the engagement or the members of the engagement team, and the partners in the office in which the engagement is primarily performed. Thus, all partners in the Baltimore office would be covered members whereas other partners would only be covered members if they were part of the engagement team or had some influence on it. The designation of the covered members is important because those individuals must abide by specific independence rules toward the audit client.
---Regulation – I wrote the following question by looking (randomly) at the 2010 IRS instruction book for the 1040 form. I have always thought that was one of the very best ways to prepare for the individual income tax part of the Regulation exam—use the instruction manual.
Mr. Jones is a high school counselor and Mrs. Jones is an elementary school aide who works 1,000 hours per year. Mr. Jones spent $200 of his own money for educational software that was common and accepted in his field. Mrs. Jones spent $320 of her own money for books that were also ordinary and necessary for her job. If a joint return is filed, how much of a deduction can they take in arriving at their adjusted gross income for the tax year?
A. $200
B. $450
C. $500
D. $520
Answer is B
I might as well quote the 1040 instructions for this one. “If you were an eligible educator in 2010, you can deduct on line 23 up to $250 of qualified expenses you paid in 2010. If you and your spouse are filing jointly and both of you were eligible educators, the maximum deduction is $500. However, neither spouse can deduct more than $250 of his or her qualified expenses on line 23. You may be able to deduct expenses that are more than the $250 (or $500) limit on Schedule A, line 21. An eligible educator is a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide who worked in a school for at least 900 hours during a school year. Qualified expenses include ordinary and necessary expenses . . . .” So, Mr. Jones can deduct his $200 but Mrs. Jones can only deduct $250 of her expenses. The remaining expenses can be listed as an itemized deduction on Schedule A.
---BEC – I was reading a friend’s managerial accounting textbook recently and came upon the question “what is a cost driver?” so I wrote the following question based on the reading I was doing.
Buffalo Bakery produces donuts but has had trouble determining an accurate cost for its overhead and, thus, has been uncomfortable with setting a price. The accountant is unsure about the cost driver that has been utilized. In this situation, what is meant by a cost driver?
A. The quantity of expensive materials (such as sugar) used in the production process.
B. The number of hours that the machine operators must work.
C. The actions that cause increases in costs such as electricity, rent, and indirect materials
D. The potential for shortages in vital items both in material and equipment.
Answer is C.
According to my friend’s textbook, a cost driver is the action that causes (or “drives”) the costs associated with the activity. Company officials are concerned about the cost of overhead (all costs associated with production other than direct material and direct labor). In determining the cost for a manufactured item, costs must be anticipated for overhead such as electricity, rent, and indirect materials. Such costs do not change randomly. All changes have a cause and those causes are referred to as cost drivers. By determining the cost driver for each cost, the accountant can anticipate the amount that will have to be spent at different levels of production.
We are into the month of May – time to push off chains and start making good things happen that will bring you those points that you need to pass the CPA Exam.
Joe Hoyle
Co-Founder
CPA Review for FREE
www.CPAreviewforFREE.com
CPA Review for FREE
www.CPAreviewforFREE.com
Over 2,200 FREE CPA Review Questions and Answers Available for YOU
148 Weeks of Operation and 23,443,043 Page Views (without a penny spent on marketing)
Lesson 93
From: Joe
(1) – Would you like to help www.CPAreviewforFREE.com? We always tell people that we are only able to continue our operations because of the kindness of so many people. How can YOU help so that we can keep our 2,200 questions and answers available for FREE?
The answer is easy: Simply forward this email to a friend, acquaintance, stranger or someone else who might be interested in taking the CPA Exam. That’s the best way you can help us. Forward this email and just say – these email lessons are free and they’ll help you learn more about passing the CPA Exam. After that, it is up to the other person to go on to our website and register and check the box that they want to get CPA Exam information (these email lessons).
Especially in May and June, it is helpful if we can get the word out to college students who are graduating and, thus, starting to do some serious thinking about the CPA Exam. At this time of the year, those are some of our prime targets. They often spent $2,500-$3,000 (that they probably don’t have) before they even know that we exist. The big courses want you to think that you have no alternative. Don’t let that happen.
(2) – By the way, those of you who are teachers might be interested in reading my teaching blog that I created in connection with my Financial Accounting textbook.
http://m1e.net/c?128895165-44nNhN/l.klSs%406419717-DhrtMNOAYMhwE
If you know a teacher, forward the URL.
(3) – I know we have a lot of international candidates who read these email lessons. You may have seen the following announcement from the AICPA on our Facebook page:
International applications for the Uniform CPA Examination are now being accepted by participating state boards of accountancy. Candidates who wish to sit for the Exam in Japan, Bahrain, Kuwait, Lebanon, or the United Arab Emirates should visit NASBA’s website for the updated list of state boards, a breakdown of fees, and the updated Candidate Bulletin:
http://m1e.net/c?128895165-2EWBD3juWEuF6%406419718-02j786rs0vu36
If you’re unsure of your eligibility or would like more information, the AICPA Exam website’s International Examination FAQs provide a good starting point:
http://m1e.net/c?128895165-voKD1BqEZuT02%406419719-o6iKRAXYjZZAk
(4) – We have a lot of people preparing to take one or more sections of the CPA Exam before the end of the April-May testing window. As in many endeavors in life, it is important to finish up your study strong. You want to go into the testing site with a lot of momentum. You want to make the last days and weeks of study your very best.
We wake up each morning bearing a lot of chains that hold us back from reaching our goals. These are self-inflicted weaknesses that we cling to which keep us from shining and keep us from achieving our potential.
---We believe that we are not smart enough to pass the CPA Exam. That is just a chain that we cling to that holds us back.
---We believe that we are not able to find the time needed for study—another chain that we use to keep ourselves from advancing. It is easy to blame family, friends, and job.
---We judge ourselves to be lazy or weak. You are only as lazy and weak as you think you are. It is the thinking that makes it so.
“I’m just not strong enough to pass the CPA Exam” is easy to say and easy to believe but all it does is hold us back.
We hide under these chains so that we don’t have to face the responsibilities of being successful. A lot of us just don’t want to deal with being successful. It’s easier to wallow around and make excuses and stay lazy.
The world needs for you to stop being timid and push yourself to success.
When you wake up tomorrow morning, wake up a different person. Don’t wake up as a scared person who feels that they are incapable of winning. That is pure baloney. Wake up a different person tomorrow – a person who has put fears and self-doubts and excuses behind. Wake up a different person tomorrow – if you can simply get rid of (a) your fears, (b) your self-doubt, and (c) your excuses, if you can break through your own chains, then that person tomorrow will have a better chance of passing the CPA Exam.
My younger daughter has cerebral palsy. Despite the problems that CP creates, she is the hardest working person that I know. Last month, she received her Gold Award – the highest award that any Girl Scout can achieve. At the ceremony, the leaders read a poem by Marianne Williamson that I think applies to us all. It talks about having the courage to break through your chains to use your talents well and wisely. It was perfect for the Girl Scouts but it was also perfect for people taking the CPA Exam. My two favorite lines are “your playing small does not serve the world” and “we are all meant to shine.” I think that is true about everyone and everything we do.
“Our deepest fear is not that we are inadequate.
Our deepest fear is that we are powerful beyond measure.
It is our light, not our darkness that most frightens us.
We ask ourselves,
Who am I to be brilliant, gorgeous, talented, fabulous?
Actually, who are you not to be?
You are a child of God.
Your playing small does not serve the world.
There is nothing enlightened about shrinking
so that other people won't feel insecure around you.
We are all meant to shine, as children do.
We were born to make manifest the glory of God that is within us.
It's not just in some of us; it's in everyone.
And as we let our own light shine,
we unconsciously give other people permission to do the same.
As we are liberated from our own fear,
our presence automatically liberates others.”
Okay, tomorrow morning, when you get out of bed, it is going to be a new day. Start by leaving your old chains behind. Walk away from those things that you are using to hold yourself back. Forget the excuses. Throw out the self-doubt. You have the ability to pass the CPA Exam if you will just finish strong, if you’ll just put in the hours you need here at the end.
Shine – do the work – make the progress. Answer as many questions as you can. Learn from your mistakes.
This is accounting. It is not easy but it is not rocket science either. You don’t have to be perfect. You merely have to pass. People just like you pass every day. It takes time and patience and perseverance but it doesn’t take any quality that you don’t already have.
Go get it – wake up tomorrow a new person – a person who is going to get the points needed to pass the CPA Exam. Leave your chains of fear and doubt behind.
(5) – As always, we are legally bound to tell you that you can unsubscribe from these emails. If we weren’t legally bound, we wouldn’t tell you because we hope you’ll stay. There is no variable cost (using a good old accounting term) of one more subscriber. So please stay as long as you can.
But, if you ever do want to unsubscribe, scroll to the bottom of any email lesson and you’ll find the appropriate button and it will remove you from our list.
(6) – I am always thrilled to get emails from successful candidates who have made good use of all our free questions and answers. Here are a couple of recent emails. (This is the part of this email lesson that the leaders of all those big programs don’t want you to hear. YOUR money is paying for THEIR Mercedes-Benz. Our success scares them.)
From KM: I finally did it on my own and without taking a class. I wanted to thank you for recommending cpareviewforfree.com because it really helped me target what areas were my weaknesses. It was nice to be able to do multiple choice questions online where the answer is presented to me instantly, instead of having to flip through pages and pages to find the right answer. I couldn't have done it without it.
From KW: I was one that you encouraged through this tedious process. Each week, I looked forward to receiving your e-mails because it seemed I was out of gas! I studied using many sources and tested with your questions to gauge myself. I am excited to tell you I no longer need the encouraging words or questions. I mean that in the best way. On 3/24/2011, I received my FAR grade (final section). I have passed all sections! Thank you, Thank you, Thank you!
From OP: Just a thank you note for all your help over the past year or more. I just got word last week that I passed the last section of my exam. I am so happy, especially at 58 years old. God Bless you for all your efforts in helping so many to achieve their dreams.....
And, I know what some of you are going to ask: I drive a 1997 Subaru station wagon (which is red and has 119,000 miles on it).
(7) – Okay, let’s do some practice – time to add some points. That should be your constant chant: add points, add points.
---FAR – Here is one of the 37 questions that I asked on my final exam for Intermediate Accounting II last week. Most of my students did well on this question; let’s see how well you do.
In Year One, the Alba Company has sales revenues of $600,000. The company has no other revenues and expenses except for a warranty expense of $160,000. The company expects these warranties to be satisfied as follows: $30,000 in Year Two, $60,000 in Year Three, and $70,000 in Year Four. The enacted tax rate is 24 percent. The company believes that there is 58 percent chance that it will have adequate taxable income in Year Two to absorb the warranty expense but that likelihood drops to 51 percent in Year Three, and 39 percent in Year Four. On its December 31, Year One balance sheet, what does this company report as its total net deferred income tax asset (noncurrent)?
A. $14,400
B. $16,800
C. $21,600
D. $31,200
Answer is A
The $30,000 temporary difference in Year Two creates a deferred tax asset but it relates to a Warranty Payable that will be settled next year and, thus, is reported as a current liability. Deferred tax effects created by current accounts are themselves reported as current. The question is asking for the noncurrent asset to be reported. The $60,000 and $70,000 temporary differences will not be settled until Years Three and Four. For those two, the related Warranty Payable is noncurrent. Thus, the deferred tax asset is also noncurrent which is what the question is asking. The total asset would be $130,000 times 24 percent or $31,200. However, the likelihood of receiving the benefit of the Year Four figure (the $70,000 temporary difference) is not more likely than not (not over 50 percent). Thus, that part of the deferred tax asset ($70,000 times 24 percent or $16,800) must be removed by establishing a valuation allowance. The deferred tax asset to be
recognized is $31,200 but the valuation allowance for that amount is $16,800 so that the net deferred tax asset is $31,200 less $16,800 or $14,400.
---Auditing & Attestation - The following question comes from one of our ten audit simulations that we will have in our subscription service for Auditing that we hope to have available within the next week.
Cox Company is being audited by Brown & Yellow CPAs. This public accounting firm has offices in five locations but this audit is primarily performed out of the Baltimore office. Smith is a partner in this firm and works out of the Baltimore office but does not participate in the Cox Company audit. Jones is also a partner in this firm but works out of the Philadelphia office and does not participate in the Cox Company audit. The CPA firm is now trying to determine who in the firm qualifies as a covered member of this engagement so audit independence rules can be verified. Which of the following is true?
A. Smith and Jones are both covered members for this audit engagement.
B. Smith is a covered member but Jones is not
C. Jones is a covered member but Smith is not
D. Neither Smith nor Jones is a covered member
Answer is B
A covered member is any individual on the audit engagement team, anyone who can influence either the engagement or the members of the engagement team, and the partners in the office in which the engagement is primarily performed. Thus, all partners in the Baltimore office would be covered members whereas other partners would only be covered members if they were part of the engagement team or had some influence on it. The designation of the covered members is important because those individuals must abide by specific independence rules toward the audit client.
---Regulation – I wrote the following question by looking (randomly) at the 2010 IRS instruction book for the 1040 form. I have always thought that was one of the very best ways to prepare for the individual income tax part of the Regulation exam—use the instruction manual.
Mr. Jones is a high school counselor and Mrs. Jones is an elementary school aide who works 1,000 hours per year. Mr. Jones spent $200 of his own money for educational software that was common and accepted in his field. Mrs. Jones spent $320 of her own money for books that were also ordinary and necessary for her job. If a joint return is filed, how much of a deduction can they take in arriving at their adjusted gross income for the tax year?
A. $200
B. $450
C. $500
D. $520
Answer is B
I might as well quote the 1040 instructions for this one. “If you were an eligible educator in 2010, you can deduct on line 23 up to $250 of qualified expenses you paid in 2010. If you and your spouse are filing jointly and both of you were eligible educators, the maximum deduction is $500. However, neither spouse can deduct more than $250 of his or her qualified expenses on line 23. You may be able to deduct expenses that are more than the $250 (or $500) limit on Schedule A, line 21. An eligible educator is a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide who worked in a school for at least 900 hours during a school year. Qualified expenses include ordinary and necessary expenses . . . .” So, Mr. Jones can deduct his $200 but Mrs. Jones can only deduct $250 of her expenses. The remaining expenses can be listed as an itemized deduction on Schedule A.
---BEC – I was reading a friend’s managerial accounting textbook recently and came upon the question “what is a cost driver?” so I wrote the following question based on the reading I was doing.
Buffalo Bakery produces donuts but has had trouble determining an accurate cost for its overhead and, thus, has been uncomfortable with setting a price. The accountant is unsure about the cost driver that has been utilized. In this situation, what is meant by a cost driver?
A. The quantity of expensive materials (such as sugar) used in the production process.
B. The number of hours that the machine operators must work.
C. The actions that cause increases in costs such as electricity, rent, and indirect materials
D. The potential for shortages in vital items both in material and equipment.
Answer is C.
According to my friend’s textbook, a cost driver is the action that causes (or “drives”) the costs associated with the activity. Company officials are concerned about the cost of overhead (all costs associated with production other than direct material and direct labor). In determining the cost for a manufactured item, costs must be anticipated for overhead such as electricity, rent, and indirect materials. Such costs do not change randomly. All changes have a cause and those causes are referred to as cost drivers. By determining the cost driver for each cost, the accountant can anticipate the amount that will have to be spent at different levels of production.
We are into the month of May – time to push off chains and start making good things happen that will bring you those points that you need to pass the CPA Exam.
Joe Hoyle
Co-Founder
CPA Review for FREE
www.CPAreviewforFREE.com
Sunday, April 10, 2011
Find Your Mistake and Use It to Improve
Try us FIRST before you spend your hard-earned money.
April 10, 2011
CPA Review for FREE
www.CPAreviewforFREE.com
Over 2,200 FREE CPA Review Questions and Answers Available for YOU
144 Weeks of Operation and 22,608,605 Page Views (without a penny spent on marketing)
Lesson 92
From: Joe
(1) – Some great news – we just added eight brand new task-based simulations for FAR to our subscription service. Now, for just $15 per month (50 cents per day), you get hundreds of slides of content, separated out by topic for easy access. You also get a study guide. And you get task-based simulations that cover:
--Land Buildings and Equipment
--Bond Investments
--Leases
--Cash Flows
--Earnings per Share
--Current Assets
--Consolidations
--Government Accounting I
--Government Accounting II
--Not-for-Profit Accounting
More good news: we just added eight brand new task-based simulations for Regulation to our subscription service. Regulation is also just $15 per month for hundreds of content slides and you get task-based simulations that cover:
--Sales and Exchanges
--Corporate Income and Expenses
--Deductions
--Itemized Deductions
--Individual Taxes-Income
--Corporate Taxes-Other Issues
--Partnership Income Taxes
--Other Areas of Taxation
--Bankruptcy
--Sales
Our subscription service for BEC ($15 per month) currently has 29 written communication questions that cover a variety of areas such as financial management, economics, managerial accounting, and corporate governance (plus, of course, all of the hundreds of content slides).
Obviously, our 2,200 questions and answers are free and will always stay free. But if you need additional help at a reasonable price, try our subscription service for a month and see if it won’t add the points you need to pass your next part of the CPA Exam.
(2) – Several people have asked when our subscription service for Auditing and Attestation will be ready. Unfortunately, my elder daughter spent most of March in the hospital and that has thrown my work schedule behind a bit. She is out now, though, so I hope to get Auditing and Attestation up and running shortly.
(3) – We’ve received a number of nice notes recently. Can’t publish them all but here are a few. This is EXACTLY what I want from you – to hear the good news that you have passed that exam. And, also, that you have saved a ton of money.
FROM MH: “I just wanted to say thanks for the site. Using only this site I received scores of 78 - BEC, 77 - FAR, 75 - REG and 70 - AUD. I ended up retaking AUD and just received my score of 88. This site saved me a ton of money.”
FROM RR: “I'm RR from Los Angeles, CA. I cried this morning when I saw that I passed AUD with 84. This is my last part of the CPA Exams. This has been a very long journey for me. I graduated from College more than 25 years ago in a foreign country so it was really difficult for me but when a friend introduced me to your website, I found a new hope. Your inspiring words kept me going. I used your free questions to better understand what I could hardly understand from the review materials that I paid for in the big CPA review. Joe, you are my hero, you are a very nice person and I thank God for people like you.”
FROM TL: “For the last 18 months I have always read your emails, and I prayed that one day I could write to you and let you know that I passed all sections... Here is that email: It was a long journey and I almost lost my BEC credit. I took FAR twice and every time I missed it by 2-3 point. I had studied for that section probably 1,000 hours by the third and last time, but for the last time I only had a chance to study 20 hours. I knew it would be impossible to pass, but nothing is impossible with God. With being 8 months pregnant and working full time, I needed all the help and support and encouragement, and your emails and online questions were defiantly among the top resources I used. Thank you and you may know that you are making a difference in people's lives and it is very appreciated. THANK YOU, and may God bless you and your family.”
Gosh, everyone here at www.CPAreviewforFREE.com is just delighted to be able to help such wonderful folks reach their dreams. I really do appreciate all the emails.
(4) – Here is one more email that I have separated out because the writer actually includes some studying advice that I give within the subscription service. Not bad advice to think about no matter how you are going about studying.
FROM MH: “I want to thank you for your devotion to the profession and the support you provide to all future CPAs. I just retrieved my score online on Regulations which was my last section to pass and I could not believe my eye when I saw 80! I have been trying to pass since I graduated from college in ’02. I failed many times but I would always get back up and try again. I had all the excuses to fail: full time job, married with two children, and I doubted myself because English is not my first language and I was not the smartest student in my class. You got me through when you said all these excuses do not matter, but what matters the most is how hard you work. One of my favorite quotes which is put on my Outlook reminder is “You have one day and one day only when you can accomplish something”. Then I followed the study plan that you laid-out. Which is where you said that ‘I think you can boil the exam preparation down to four things at its very core:
A – Work as many problems as you possibly can. Problems are like physical exercise—the more you do the stronger you get.
B – Read the answers very carefully, especially for the problems you miss. The answers help you fill in the gaps in your knowledge. The single best way to add points is to miss a question and then figure out how to get it right the next time.
C – Take short notes. I like 3 by 5 cards with a basic question on one side and a short answer on the other. Whatever form they take, keep them to a few words and only the stuff that really makes a difference. Carry them with you everywhere.
D – Review your notes on a regular basis to keep everything as fresh in your head as you can. If you have not reviewed a topic in the last 10-14 days, the knowledge is probably beginning to fade.’”
I realize that I wrote that myself so I am biased but that does seem like excellent advice in preparing for the CPA Exam. Work those questions, read those answers, keep note cards with only a few essential words, carry those cards with you everywhere, and review those cards whenever you have ten free seconds.
(5) – We have a gazillion or maybe two gazillion good folks who get these email lessons every week or two (more often when my daughter is out of the hospital). We love having you; we love working with you; we love hearing from you; and—most of all—we love celebrating your success with you. It doesn’t always happen on the first time but if you keep adding points, you are going to make it.
However, if you are ready to stop getting these email lessons, always know that you can scroll to the bottom of any lesson and there will be a link that will allow you to unsubscribe and have your name removed. Stay as long as you want but when you are ready to leave, don’t hesitate to unsubscribe.
(6) – I was lying in bed this morning wondering what I could write that would help you add points and the words conveyed by MH (above) ran through my head “The single best way to add points is to miss a question and then figure out how to get it right the next time.”
I have long believed that the answer to virtually all questions is developed in a sequential pattern. You figure out A, then you figure out B, then you figure out C, and eventually you arrive at the answer. Some questions only have 2-3 steps whereas others might have a dozen. The answer is really a puzzle where you put the pieces together in the proper order.
Therefore, if you miss a question, it doesn’t mean that you missed the entire question. Rather, it means that at some point in this series you made a misstep. I believe it is locating that misstep that is essential to your adding points and passing the CPA Exam. It just seems to me that missing a question does not do you any good unless you can isolate the step that tripped you up. Saying you missed a lease question is not helpful. Saying you missed a particular step (such as determining the life of the asset) is quite helpful especially if you follow up with “and now I know how to get that step correct myself.”
Let’s do a question together so I can show you what I mean by working the question as a series of steps.
Assume you go to take the FAR part of the CPA Exam and you get 74 points and you have one more question left. If you get it right, you’ll probably pass but if you miss it you’ll get the dreaded grade of 74. Here is the question. (And before someone asks – no, you do not actually know your score while you are taking the exam. This is just hypothetical.)
On January 1, Year One, Company A leases equipment for eight years for $10,000 per year with the first payment to be made immediately and every January 1 thereafter. The equipment has a ten-year life. At the end of eight years, Company A can buy the equipment for $9,000. That $9,000 is not viewed as a bargain because the asset is only expected to be worth $7,000 at that time. Company A has an incremental borrowing rate of 10 percent but does not know the implicit interest rate that the lessor built into the contract. The present value of $1 in eight years at a 10 percent annual rate is .424. The present value of an annuity due of $1 for eight years at a 10 percent annual rate is 5.868. The present value of an ordinary annuity of $1 for eight years at a 10 percent annual rate is 5.335. Company A uses the straight-line method of depreciation. What is the total expense that Company A should recognize for Year Two?
GETTING TO THE ANSWER: Here is the sequence of steps that I would follow to get this question answered correctly. Could you make it through each of these steps? If not, where would you falter? It is THAT step that you want to focus your attention on.
--ONE – What is the question asking? It is amazing to me how often students/candidates try to answer a question without getting a handle on what the question is. They are nervous and want to get started. Thus, that start trying to solve a question and they don’t even know what the question is. Take a deep breath and make sure you are comfortable that you know what is being asked. Here, Company A has leased an asset and you are asked for the total expense in the SECOND YEAR. If it is an operating lease, that will be rent expense based on the amount paid. If it is a capital lease, there will be depreciation expense for the cost of the asset and interest expense on the liability.
--TWO – Is it a capital lease or an operating lease? The lease is for 8 years out of 10. That is 75 percent or more of the life of the asset. That meets one of the four criteria so it must be reported as a capital lease.
--THREE – As a capital lease, you must start off by determining the cash flows. Here that is $10,000 per year at the start of each of the next eight years. The $9,000 is not included because it is not viewed as a bargain. The lessee does not expect to make that payment.
--FOUR – You find the present value of the future cash flows (which basically removes all future interest from those cash flows). Since the first payment is made immediately, it is an annuity due and the present value is $10,000 times 5.868 or $58,680.
--FIVE – The asset is only to be used for the eight-year life of the lease. Straight-line depreciation is used to allocate the cost of the asset to expense so depreciation each year will be $58,680 divided by 8 years is $7,335. At the end of those eight years, Company A will give the equipment back to the owner/lessor so the $7,000 residual value has nothing to do with Company A.
--SIX – The first $10,000 payment is made immediately so the liability for this capital lease falls from $58,680 to $48,680 and remains at that figure for all of Year One. Interest is determined at 10 percent so interest expense for the first year is $4,868. Interest is not explicitly paid in a lease so the amount is computed and recognized by compounding—it is added to the liability. That increases the liability from $48,680 to $53,548. The next $10,000 payment reduces that liability to $43,548 at the beginning of the second year. That is the balance for the second year so interest is 10 percent of $43,548 or $4,355 rounded.
--SEVEN – Question asks for total expense for Year Two. Depreciation expense is $7,335. Interest expense is $4,355. Total expense is $11,690
The problem seemed terribly difficult but in seven, fairly easy steps, you walked right through it to the correct answer to get that point you needed to get from 74 to 75. YOU CAN DO THIS!!!
The key, though, is that if you missed any one of these seven steps did you stop right then and read the answer very carefully to figure out what you missed and how to get it right the next time. That is the key to getting better. That is the key to adding points. To me, that is the key to passing the CPA Exam.
(7) – Okay time for you to practice.
FAR
Company A leases a car on January 1, Year One for $20,000 per year for five years—the entire life of the vehicle. The first payment is made immediately with additional payments every January 1 in the future. Company A has an incremental borrowing rate of 10 percent per year but knows that the lessor built in an implicit interest rate (in setting the annual payments) of 12 percent per year. The present value of an annuity due for 5 years at 10 percent annual interest is 4.170. The present value of an annuity due for 5 years at 12 percent annual interest is 4.037. What does Company A report as its net liability for this lease on the December 31, Year Two balance sheet?
A. $54,714
B. $56,724
C. $57,832
D. $58,152
Answer is A
The lessee (Company A) uses its own incremental borrowing rate unless the lessor’s implicit rate is known and it is less. Here, the implicit rate is known but it is more so the lessee uses its own 10 percent rate. The cash flows are $20,000 per year and the present value factor for 10 percent and five years is 4.170. Present value of these cash flows is $20,000 times 4.170 or $83,400. Here, you are not worried with the asset but just with the liability. It is $83,400 at first but an immediate payment reduces it by $20,000 to $63,400. Interest for the first year is 10 percent or $6,340. In a lease, that is not paid but, rather, compounded bringing the total up to $69,740 ($63,400 + $6,340). The second payment (made on January 1, Year Two) reduces the liability by $20,000 to $49,740. Based on that balance, interest for the second year is $4,974. Compounding that expense at the end of the second year brings the balance up to $54,714 ($49,740 + $4,974).
BEC
A company makes widgets using 3 pounds of product X with a standard cost of $4.00 per pound. The company bought 11,000 pounds of product X for $45,700 and then used 9,100 pounds to produce 3,000 widgets. What was the unfavorable material price variance?
A. $1,391
B. $1,406
C. $1,635
D. $1,700
Answer is D
The 11,000 pounds that were acquired should have cost $4.00 per pound or $44,000. Those pounds actually cost $45,700 which was an extra (unfavorable) amount of $1,700.
Regulation
On January 1, Year One, the Jones family refinanced the mortgage loan on their home in order to reduce the previous 9 percent interest rate to a 5 percent rate. The old loan had a remaining life of 15 years while the new loan is for 20 years. The Jones family was required to pay $3,000 in points at that time as one of the costs of the refinanced loan. What amount of this $3,000 can the Jones family deduct in Year One?
A. Zero
B. $150
C. $200
D. $3,000
Answer is B
According to the instructions for the form 1040, “generally, you must deduct points you paid to refinance a mortgage over the life of the loan.” Here, the loan was for 20 years, so $150 of these points can be deducted each year ($3,000/20 years).
Auditing and Attestation
The independent audit firm of Zeller and Henson has been engaged to audit the Williams Corporation. In performing an audit, an assessment must be made of inherent risk. Which of the following situations would indicate that the level of inherent risk here should be assessed at a particularly high level?
A. The CPA assigned by Zeller and Henson to manage this audit has never worked on an engagement of this type before.
B. A particularly important control procedure is performed by a relatively new company employee.
C. The CPA firm has decided to perform negative confirmations of accounts receivable rather than positive confirmations.
D. The company employee who codes checks for recording purposes is relatively inexperienced.
Answer is D
The chance that a material misstatement will occur within the reporting company’s accounting system is known as inherent risk. If coding (assigning accounts for journal entry purposes) is done by an inexperienced person, the chances of errors occurring will go up. That increases the level of inherent risk. The chance that company control procedures will not discover or prevent a material misstatement is referred to as control risk (answer B). The chance that the independent auditor will fail to detect a material misstatement is known as detection risk (answer A). Positive and negative confirmations are used to gather evidence in hopes of reducing the overall audit risk to an acceptably low level.
Have a great week – add lots of points.
Let’s get this exam finished off sooner rather than later.
Joe Hoyle
Co-Founder
CPA Review for FREE
April 10, 2011
CPA Review for FREE
www.CPAreviewforFREE.com
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Lesson 92
From: Joe
(1) – Some great news – we just added eight brand new task-based simulations for FAR to our subscription service. Now, for just $15 per month (50 cents per day), you get hundreds of slides of content, separated out by topic for easy access. You also get a study guide. And you get task-based simulations that cover:
--Land Buildings and Equipment
--Bond Investments
--Leases
--Cash Flows
--Earnings per Share
--Current Assets
--Consolidations
--Government Accounting I
--Government Accounting II
--Not-for-Profit Accounting
More good news: we just added eight brand new task-based simulations for Regulation to our subscription service. Regulation is also just $15 per month for hundreds of content slides and you get task-based simulations that cover:
--Sales and Exchanges
--Corporate Income and Expenses
--Deductions
--Itemized Deductions
--Individual Taxes-Income
--Corporate Taxes-Other Issues
--Partnership Income Taxes
--Other Areas of Taxation
--Bankruptcy
--Sales
Our subscription service for BEC ($15 per month) currently has 29 written communication questions that cover a variety of areas such as financial management, economics, managerial accounting, and corporate governance (plus, of course, all of the hundreds of content slides).
Obviously, our 2,200 questions and answers are free and will always stay free. But if you need additional help at a reasonable price, try our subscription service for a month and see if it won’t add the points you need to pass your next part of the CPA Exam.
(2) – Several people have asked when our subscription service for Auditing and Attestation will be ready. Unfortunately, my elder daughter spent most of March in the hospital and that has thrown my work schedule behind a bit. She is out now, though, so I hope to get Auditing and Attestation up and running shortly.
(3) – We’ve received a number of nice notes recently. Can’t publish them all but here are a few. This is EXACTLY what I want from you – to hear the good news that you have passed that exam. And, also, that you have saved a ton of money.
FROM MH: “I just wanted to say thanks for the site. Using only this site I received scores of 78 - BEC, 77 - FAR, 75 - REG and 70 - AUD. I ended up retaking AUD and just received my score of 88. This site saved me a ton of money.”
FROM RR: “I'm RR from Los Angeles, CA. I cried this morning when I saw that I passed AUD with 84. This is my last part of the CPA Exams. This has been a very long journey for me. I graduated from College more than 25 years ago in a foreign country so it was really difficult for me but when a friend introduced me to your website, I found a new hope. Your inspiring words kept me going. I used your free questions to better understand what I could hardly understand from the review materials that I paid for in the big CPA review. Joe, you are my hero, you are a very nice person and I thank God for people like you.”
FROM TL: “For the last 18 months I have always read your emails, and I prayed that one day I could write to you and let you know that I passed all sections... Here is that email: It was a long journey and I almost lost my BEC credit. I took FAR twice and every time I missed it by 2-3 point. I had studied for that section probably 1,000 hours by the third and last time, but for the last time I only had a chance to study 20 hours. I knew it would be impossible to pass, but nothing is impossible with God. With being 8 months pregnant and working full time, I needed all the help and support and encouragement, and your emails and online questions were defiantly among the top resources I used. Thank you and you may know that you are making a difference in people's lives and it is very appreciated. THANK YOU, and may God bless you and your family.”
Gosh, everyone here at www.CPAreviewforFREE.com is just delighted to be able to help such wonderful folks reach their dreams. I really do appreciate all the emails.
(4) – Here is one more email that I have separated out because the writer actually includes some studying advice that I give within the subscription service. Not bad advice to think about no matter how you are going about studying.
FROM MH: “I want to thank you for your devotion to the profession and the support you provide to all future CPAs. I just retrieved my score online on Regulations which was my last section to pass and I could not believe my eye when I saw 80! I have been trying to pass since I graduated from college in ’02. I failed many times but I would always get back up and try again. I had all the excuses to fail: full time job, married with two children, and I doubted myself because English is not my first language and I was not the smartest student in my class. You got me through when you said all these excuses do not matter, but what matters the most is how hard you work. One of my favorite quotes which is put on my Outlook reminder is “You have one day and one day only when you can accomplish something”. Then I followed the study plan that you laid-out. Which is where you said that ‘I think you can boil the exam preparation down to four things at its very core:
A – Work as many problems as you possibly can. Problems are like physical exercise—the more you do the stronger you get.
B – Read the answers very carefully, especially for the problems you miss. The answers help you fill in the gaps in your knowledge. The single best way to add points is to miss a question and then figure out how to get it right the next time.
C – Take short notes. I like 3 by 5 cards with a basic question on one side and a short answer on the other. Whatever form they take, keep them to a few words and only the stuff that really makes a difference. Carry them with you everywhere.
D – Review your notes on a regular basis to keep everything as fresh in your head as you can. If you have not reviewed a topic in the last 10-14 days, the knowledge is probably beginning to fade.’”
I realize that I wrote that myself so I am biased but that does seem like excellent advice in preparing for the CPA Exam. Work those questions, read those answers, keep note cards with only a few essential words, carry those cards with you everywhere, and review those cards whenever you have ten free seconds.
(5) – We have a gazillion or maybe two gazillion good folks who get these email lessons every week or two (more often when my daughter is out of the hospital). We love having you; we love working with you; we love hearing from you; and—most of all—we love celebrating your success with you. It doesn’t always happen on the first time but if you keep adding points, you are going to make it.
However, if you are ready to stop getting these email lessons, always know that you can scroll to the bottom of any lesson and there will be a link that will allow you to unsubscribe and have your name removed. Stay as long as you want but when you are ready to leave, don’t hesitate to unsubscribe.
(6) – I was lying in bed this morning wondering what I could write that would help you add points and the words conveyed by MH (above) ran through my head “The single best way to add points is to miss a question and then figure out how to get it right the next time.”
I have long believed that the answer to virtually all questions is developed in a sequential pattern. You figure out A, then you figure out B, then you figure out C, and eventually you arrive at the answer. Some questions only have 2-3 steps whereas others might have a dozen. The answer is really a puzzle where you put the pieces together in the proper order.
Therefore, if you miss a question, it doesn’t mean that you missed the entire question. Rather, it means that at some point in this series you made a misstep. I believe it is locating that misstep that is essential to your adding points and passing the CPA Exam. It just seems to me that missing a question does not do you any good unless you can isolate the step that tripped you up. Saying you missed a lease question is not helpful. Saying you missed a particular step (such as determining the life of the asset) is quite helpful especially if you follow up with “and now I know how to get that step correct myself.”
Let’s do a question together so I can show you what I mean by working the question as a series of steps.
Assume you go to take the FAR part of the CPA Exam and you get 74 points and you have one more question left. If you get it right, you’ll probably pass but if you miss it you’ll get the dreaded grade of 74. Here is the question. (And before someone asks – no, you do not actually know your score while you are taking the exam. This is just hypothetical.)
On January 1, Year One, Company A leases equipment for eight years for $10,000 per year with the first payment to be made immediately and every January 1 thereafter. The equipment has a ten-year life. At the end of eight years, Company A can buy the equipment for $9,000. That $9,000 is not viewed as a bargain because the asset is only expected to be worth $7,000 at that time. Company A has an incremental borrowing rate of 10 percent but does not know the implicit interest rate that the lessor built into the contract. The present value of $1 in eight years at a 10 percent annual rate is .424. The present value of an annuity due of $1 for eight years at a 10 percent annual rate is 5.868. The present value of an ordinary annuity of $1 for eight years at a 10 percent annual rate is 5.335. Company A uses the straight-line method of depreciation. What is the total expense that Company A should recognize for Year Two?
GETTING TO THE ANSWER: Here is the sequence of steps that I would follow to get this question answered correctly. Could you make it through each of these steps? If not, where would you falter? It is THAT step that you want to focus your attention on.
--ONE – What is the question asking? It is amazing to me how often students/candidates try to answer a question without getting a handle on what the question is. They are nervous and want to get started. Thus, that start trying to solve a question and they don’t even know what the question is. Take a deep breath and make sure you are comfortable that you know what is being asked. Here, Company A has leased an asset and you are asked for the total expense in the SECOND YEAR. If it is an operating lease, that will be rent expense based on the amount paid. If it is a capital lease, there will be depreciation expense for the cost of the asset and interest expense on the liability.
--TWO – Is it a capital lease or an operating lease? The lease is for 8 years out of 10. That is 75 percent or more of the life of the asset. That meets one of the four criteria so it must be reported as a capital lease.
--THREE – As a capital lease, you must start off by determining the cash flows. Here that is $10,000 per year at the start of each of the next eight years. The $9,000 is not included because it is not viewed as a bargain. The lessee does not expect to make that payment.
--FOUR – You find the present value of the future cash flows (which basically removes all future interest from those cash flows). Since the first payment is made immediately, it is an annuity due and the present value is $10,000 times 5.868 or $58,680.
--FIVE – The asset is only to be used for the eight-year life of the lease. Straight-line depreciation is used to allocate the cost of the asset to expense so depreciation each year will be $58,680 divided by 8 years is $7,335. At the end of those eight years, Company A will give the equipment back to the owner/lessor so the $7,000 residual value has nothing to do with Company A.
--SIX – The first $10,000 payment is made immediately so the liability for this capital lease falls from $58,680 to $48,680 and remains at that figure for all of Year One. Interest is determined at 10 percent so interest expense for the first year is $4,868. Interest is not explicitly paid in a lease so the amount is computed and recognized by compounding—it is added to the liability. That increases the liability from $48,680 to $53,548. The next $10,000 payment reduces that liability to $43,548 at the beginning of the second year. That is the balance for the second year so interest is 10 percent of $43,548 or $4,355 rounded.
--SEVEN – Question asks for total expense for Year Two. Depreciation expense is $7,335. Interest expense is $4,355. Total expense is $11,690
The problem seemed terribly difficult but in seven, fairly easy steps, you walked right through it to the correct answer to get that point you needed to get from 74 to 75. YOU CAN DO THIS!!!
The key, though, is that if you missed any one of these seven steps did you stop right then and read the answer very carefully to figure out what you missed and how to get it right the next time. That is the key to getting better. That is the key to adding points. To me, that is the key to passing the CPA Exam.
(7) – Okay time for you to practice.
FAR
Company A leases a car on January 1, Year One for $20,000 per year for five years—the entire life of the vehicle. The first payment is made immediately with additional payments every January 1 in the future. Company A has an incremental borrowing rate of 10 percent per year but knows that the lessor built in an implicit interest rate (in setting the annual payments) of 12 percent per year. The present value of an annuity due for 5 years at 10 percent annual interest is 4.170. The present value of an annuity due for 5 years at 12 percent annual interest is 4.037. What does Company A report as its net liability for this lease on the December 31, Year Two balance sheet?
A. $54,714
B. $56,724
C. $57,832
D. $58,152
Answer is A
The lessee (Company A) uses its own incremental borrowing rate unless the lessor’s implicit rate is known and it is less. Here, the implicit rate is known but it is more so the lessee uses its own 10 percent rate. The cash flows are $20,000 per year and the present value factor for 10 percent and five years is 4.170. Present value of these cash flows is $20,000 times 4.170 or $83,400. Here, you are not worried with the asset but just with the liability. It is $83,400 at first but an immediate payment reduces it by $20,000 to $63,400. Interest for the first year is 10 percent or $6,340. In a lease, that is not paid but, rather, compounded bringing the total up to $69,740 ($63,400 + $6,340). The second payment (made on January 1, Year Two) reduces the liability by $20,000 to $49,740. Based on that balance, interest for the second year is $4,974. Compounding that expense at the end of the second year brings the balance up to $54,714 ($49,740 + $4,974).
BEC
A company makes widgets using 3 pounds of product X with a standard cost of $4.00 per pound. The company bought 11,000 pounds of product X for $45,700 and then used 9,100 pounds to produce 3,000 widgets. What was the unfavorable material price variance?
A. $1,391
B. $1,406
C. $1,635
D. $1,700
Answer is D
The 11,000 pounds that were acquired should have cost $4.00 per pound or $44,000. Those pounds actually cost $45,700 which was an extra (unfavorable) amount of $1,700.
Regulation
On January 1, Year One, the Jones family refinanced the mortgage loan on their home in order to reduce the previous 9 percent interest rate to a 5 percent rate. The old loan had a remaining life of 15 years while the new loan is for 20 years. The Jones family was required to pay $3,000 in points at that time as one of the costs of the refinanced loan. What amount of this $3,000 can the Jones family deduct in Year One?
A. Zero
B. $150
C. $200
D. $3,000
Answer is B
According to the instructions for the form 1040, “generally, you must deduct points you paid to refinance a mortgage over the life of the loan.” Here, the loan was for 20 years, so $150 of these points can be deducted each year ($3,000/20 years).
Auditing and Attestation
The independent audit firm of Zeller and Henson has been engaged to audit the Williams Corporation. In performing an audit, an assessment must be made of inherent risk. Which of the following situations would indicate that the level of inherent risk here should be assessed at a particularly high level?
A. The CPA assigned by Zeller and Henson to manage this audit has never worked on an engagement of this type before.
B. A particularly important control procedure is performed by a relatively new company employee.
C. The CPA firm has decided to perform negative confirmations of accounts receivable rather than positive confirmations.
D. The company employee who codes checks for recording purposes is relatively inexperienced.
Answer is D
The chance that a material misstatement will occur within the reporting company’s accounting system is known as inherent risk. If coding (assigning accounts for journal entry purposes) is done by an inexperienced person, the chances of errors occurring will go up. That increases the level of inherent risk. The chance that company control procedures will not discover or prevent a material misstatement is referred to as control risk (answer B). The chance that the independent auditor will fail to detect a material misstatement is known as detection risk (answer A). Positive and negative confirmations are used to gather evidence in hopes of reducing the overall audit risk to an acceptably low level.
Have a great week – add lots of points.
Let’s get this exam finished off sooner rather than later.
Joe Hoyle
Co-Founder
CPA Review for FREE
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