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May 12, 2015
Lesson 161
From: Joe
How to Go from Good (up to a 74 on the Exam) to Great (Passing the Exam)
A few weeks ago, I was asked to present the keynote speech at the Richmond College Senior Recognition Dinner. Senior students who had excelled during their time here on campus were honored for all they had accomplished. As always when I speak at such events, I wanted to impart a few words that the audience could carry with them and think about over the following days and weeks.
At the event, I talked about something I had seen recently. As I remembered it, ESPN—the television sports channel—had done a show on a famous and very successful college basketball coach. The announcers wanted to find out how he had managed to be so successful for so many years. If you think about it, college basketball is extremely interesting and pays its coaches well. Why are there only a relatively few who seem to be successful on an ongoing basis? Yes, there are clearly some but it is not a very high number who seem to win consistently.
The coach being interviewed was Geno Auriemma, head coach of the University of Connecticut women’s basketball team. The accomplishments of his teams are almost unbelievable. They have won 10 national championships, including the last three straight. The team has been in the Final Four for each of the last 8 years. The University of Connecticut team has had five undefeated seasons with Auriemma as coach and once won 90 games in a row.
Those records are hard to even comprehend. Coach Auriemma is, indeed, a winner. He is a successful coach by any scale. He knows how to make great things happen.
On the ESPN show, the announcer asked him to talk about how he had been so successful. He chatted about several things but one thing stood out to me. More...
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Change Your Attitude Regarding Correct and Incorrect Responses
I drove to my younger daughter’s college yesterday to bring her home for the summer vacation. I had to carry her numerous bags and boxes through the dorm and out to my car in the parking lot. I must have made that trip 15 or so times. On every trip, I passed a door where a student had written a couple of interesting formulas:
Start -----> Success (probably won’t happen)
Start--->Fail--->Fail--->Fail-
Every time I walked past that door, I thought more about the bottom formula. Every time you are studying and work a question and get it correct, you learn absolutely nothing. No points are added. Every time you work a question and get it wrong and then have the self-discipline to study the correct answer, you have a wonderful chance to add knowledge to your brain.
Too many CPA Exam candidates get upset when they miss a question during practice. That’s the wrong attitude. You need to realize that you have just located a spot where you can add knowledge and get closer to passing the CPA Exam. I know that can be a hard lesson to accept. Everyone wants to get 100 percent of the questions correct because that makes them feel confident. But, in truth, getting 100 adds nothing to your brain or to your chances of passing. If you can learn from even one missed question, then that does add more than a correct answer.
But you have to do the work. You can’t think about working questions or dream about working questions or pray about working questions. You actually have to do it. Over and over. You have to be methodical. It is often a lonely task. But it will get you where you want to go. If you want to pass the CPA Exam, get on with it. Answer questions and when you miss one, celebrate a little bit because you have found a spot where you have the chance to add some knowledge.
That is how you go from good to great.
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Practice These Questions Now!
Okay, let’s practice a bit. Here are some typical CPA Exam questions. Read the question, come up with your answer. If you are right, move on. If you are wrong, read the answer questions below all the questions carefully and learn from it.
Adding knowledge adds points.
FAR
The Jennings Company reports net income of $500,000 for the current year. The company has 30,000 shares of nonconvertible preferred stock outstanding for the entire year that pays an annual cash dividend of $3 per share. A cash dividend of $60,000 is paid on the common stock. At the beginning of the year, the company has 100,000 shares of common stock outstanding. On April 1, 20,000 shares of this stock were reacquired by the company as treasury stock. The company also has 10,000 stock options outstanding. For $10 each option can be used to obtain one new share of common stock. The average price of the stock for this year was $25 per share. No income effect was recognized this year in connection with the issuance of these stock options. The company’s effective tax rate was 30 percent. What should the company report as its diluted earnings per share?
A. $3.85
B. $4.32
C. $4.51
D. $5.49
Regulation
Robert J. Forester starts a business in New York and invites his friend Sylvia Winslow to work with him on this new endeavor. When they begin, Forester makes the following statement: “Let’s just make it simple and share all profits evenly.” That is all that is ever said about this arrangement. Which of the following is true?
A. This is a partnership unless evidence to the contrary exists.
B. This is not a partnership because Forester does not specifically mention the word “partner” or “partnership.”
C. This is not a partnership because the agreement was incomplete—it only talks about profits and does not specify the handling of losses.
D. This is not a partnership because the agreement was not in writing which is required.
Auditing
The auditing firm of House and Staunton is currently performing an independent audit of the financial statements produced by the South Central Corporation. The audit team is currently testing the accounts receivable balance for any evidence that might indicate a material misstatement. One member of the audit team is looking through the subsidiary ledger for amounts due from officers of the company. What of the following is the most likely objective of this work?
A. To determine that South Central actually owns or controls all of the reported accounts receivable reported at the balance sheet date.
B. To determine that all accounts receivable are properly presented in the financial statements.
C. To determine that the reported accounts receivable balance represents all of the amounts owed to South Central as of the balance sheet date with no accounts omitted.
D. To determine that the accounts receivable balance is properly reduced to the net realizable value on the balance sheet date.
BEC
The Middleton Company produces a variety of widgets. Each model is first designed by company engineers and then produced in the company’s manufacturing plant. Model 96 widget is created by combining two pounds of material XY with six hours of labor. Several thousand Model 96 widgets are manufactured each month. A cost of $24,000 has been assigned to the production of these widgets for the design time that was required. The inclusion of the design time in the cost of these units indicates which of the following is most likely being applied?
A. Traditional activity-based cost accounting
B. Traditional process cost accounting
C. Traditional standard cost accounting
D. Traditional job order cost accounting
ANSWERS
FAR
Answer is C.
A company’s reported earnings per share is a common stock computation. It starts by taking the reported net income of $500,000 and subtracting the $90,000 dividend paid to preferred stock. That leaves $410,000 as the income assigned to common stock. The company has 100,000 shares of common stock outstanding for the first three months of the year (100,000 times 3 or 300,000) and 80,000 shares outstanding for the final 9 months (80,000 times 9 or 720,000). The weighted average for the year is (300,000 + 720,000)/12 or 85,000 shares. Basic earnings per share is the $410,000 in net income left over for the common stockholders divided by 85,000 weighted average shares are $4.82 per share. For diluted earnings per share, the stock options must be included. According to US GAAP, those options are first assumed to be converted with the money then used to buy back treasury stock shares at its average price for the year. If the options are converted, 10,000 new shares would be issued (one for each option) and $100,000 in cash received (10,000 times $10). The company might do an infinite amount with that cash but US GAAP assumes that all companies will use the $100,000 to buy back new shares of treasury stock at the average price for the year. That $25 average price would buy back 4,000 shares (or $100,000/$25). The earnings portion of diluted earnings per share remains at $410,000. There is no related income effect. The basic number of shares of 85,000 is first increased by 10,000 shares because of the assumed conversion of the options. Then, the $100,000 in cash that would be received is assumed to be used to buy back 4,000 shares of treasury stock. For diluted EPS, the number of shares is 85,000 plus 10,000 less 4,000 or 91,000 shares of common stock. Diluted EPS is computed as $410,000/91,000 or $4.51 per share.
Regulation
The answer is: A
A partnership agreement can be very informal and does not have to be in writing or any other specified form. Simply agreeing to split profits is normally considered a sufficient indication that a partnership has been formed. Because no statement was made here as to the handling of losses, the same ratio used for profits will also apply to any subsequent losses.
Auditing
The answer is B.
A company’s officers are viewed as related parties and, thus, any receivables owed to the company by these individuals need to be disclosed as part of proper presentation. The staff auditor is looking for evidence that any such receivables exist but have not been separately disclosed on the balance sheet by the reporting company.
BEC
The answer is A
Traditional process, job order, and standard cost accounting have always focused exclusively on the manufacturing process. Raw materials are turned into a final product and the material, labor, and factory overhead are included in arriving at a cost figure. Activity-based costing extends the idea of a product’s cost to include all value-adding activities such as the design function. Designing Model 96 is a cost of this product even though it is not a manufacturing cost. In activity-based cost accounting, the cost of that value-added activity is included.
Go for it! You can do it!
Joe Hoyle
President, CPAreviewforFREE
