CPA exam Passing Rates; New Practice Questions

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August 2, 2012

Lesson 120

From:  Joe

 

Great Questions, Great Answers

 

We always love hearing from the folks who use our products.   Here’s an email that we got yesterday from PH:  “You guys are so great, thanks for what you do.  Your explanations of why the wrong answers were wrong and why the right answers were right are extremely thorough and helpful.
It's great to have a supplement like this, and a free one also!”

 

PH makes a great point.   One of the best ways to evaluate any review program is to look at the explanations they provide for the answers.   Most of the ones that I have seen do that very poorly.   The real learning is not in the question; the real learning is in the answers.  Anyone can write a question but only true teachers know how to write clear and helpful answers.  “The answer is C because it is not A, B, or D” is simply not a good answer.   It doesn’t help you get the question correct the next time you see it (which, of course, is the real goal).  

 

When anyone asks what makes CPAreviewforFREE special,  I always have the same response:   “Our answers are, by far, the best in the business and that’s how you learn to pass the CPA Exam.”

 

CPA Exam Passing Rates for the First Half of 2012

 

I posted this information on our Facebook page on Friday but it is worth repeating here.  The pass rates for the CPA Exam for the first half of 2012 were:   Auditing – 46.45 percent, BEC – 51.03 percent, FAR – 45.19 percent, and Regulation – 47.40 percent.  

 

I am sure we would all love to see pass rates of 99 percent.   It would take the uncertainty out of exam preparation.   However, I think a rate of close to 50 percent is pretty good.   For many decades, back under the old exam format, the pass rate hovered around 30 percent.   That was scary.   You had to get in the upper 30 percent to pass. 

 

With roughly a 50 percent pass rate, you obviously only need to get into the upper half of the candidates.   That’s a lower threshold.  

 

Furthermore, I would estimate that between 25 and 30 percent of the candidates have not seriously prepared when they enter the test site.   They meant to study or they planned to study or they thought about studying.   But they never got around to studying.   If only 70 percent of the candidates actually prepare in a reasonable manner and the pass rate is about 50 percent, you can see that there is certainly good reason not to despair.   Most people who prepare in an adequate fashion do well.   Not all, but most. 

 

If YOU prepare seriously for the CPA Exam, you’ve got quite a good chance (let’s guess 50/70) of being successful.   Those are not bad odds.

 

But, of course, preparation is the key.  Preparation is always the key.   Go start answering some questions.

 

Serious Preparation or Fun Now

 

This summer, I have spent some time at the gym working to get into better physical shape.   The other day, as I drove into the parking lot, I noticed that they had put up a sign:   “would you prefer to be sore or sorry tomorrow?”    I thought that was an excellent question.   In life, we make choices.   Often, those choices come down to:   What do you want to do right now versus what do you want to be like tomorrow?  

--I can be lazy now or I can feel stronger tomorrow.  

--I can eat cake now or I can be thinner tomorrow.  

 

As we all know, one of the main reasons we fail to accomplish our goals is that we choose to be easy on ourselves now which results inbeing weaker tomorrow.  

 

For CPA candidates, the choice is obvious:

--Do I study now so that I am able to get a higher score tomorrow?

or

--Do I have fun now and have a lower score tomorrow?

 

That’s a choice you must make.

 

Life is full of choices.   It is very easy to choose “fun now” or “cake now” because the poor results won’t appear until tomorrow.  

 

If you seriously want to pass the CPA Exam, you have to get away from that “fun now” attitude.   I teach in college.   I cannot even begin to tell you how many good students that I have seen do poorly over the years simply because they could not get beyond that basic “fun now” attitude.  

 

You don’t have to study every minute.   You don’t have to work yourself into exhaustion.  There’s no benefit from that.

 

But you do have to do the work and you need to start right NOW.   You can’t put it off and put it off and put it off.   That’s just a loser’s approach.  

 

Given the choice between “study now” or “study later,” absolutely everyone is inclined to study later because that allows for fun now.  

 

It is a tough world out there.   You are never going to live up to your potential and be competitive until you can choose “study now” over “fun now,” at least most of the time.

 

CPA Exam Candidates are Like Tea Bags

 

I was at church on Sunday and the pastor used a quote from Eleanor Roosevelt that I am going to steal (borrow) and change a little bit.   The quote was “Women are like tea bags. You never know how strong they are until you put them in hot water.”   And, of course, I am going to modify Mrs. Roosevelt’s words to:   CPA Exam candidates are like tea bags.   You never know how strong they are until you put them into hot water.

 

Preparation for the CPA Exam and the actual taking of the CPA Exam can sometimes just move along like clockwork.   Everything just goes according to schedule.  You never get sick while studying.   You never have any job problems while studying.   You never have any family issues while studying.   You never have any major distractions while studying.   And, then, you go to the exam itself and the questions are pretty much what you expected and what you studied.

 

When things go that well, you really don’t need much internal strength in order to do well.  

 

How often do things run that smoothly?  Oh, I would guess about one time in 100.   Life is just always full of unexpected challenges.   It is when those challenges begin to pop up along the way that you come to learn how much real strength you have.   You have to plunge into that hot water to know how strong you really are.

 

There are always tough days that you have to face.

--The boss wants you to work late.

--Your children need for you to take them to a soccer tournament.

--One of your parents gets sick.

--A friend asks you for a favor that is going to require a lot of time you don’t have.

 

At those moments, you can always just bring out the white flag and give up.  I’ve met many candidates over the years who just threw in the towel at the first sign of trouble.  They were great when things went smoothly but they couldn’t deal with the hot water.

 

Giving up is always easy.

 

Or, they got to the exam and unexpected challenges started jumping at them.

--The room was noisy.

--The room was hot.

--The room was cold.

--They faced questions on topics they had never heard of in their studies.

--They worked a problem they knew and their answer was not one of the choices.

 

At those moments, it is easy to get distracted and discouraged and frightened.   Negative emotions seem to be everywhere.    It’s at that point that Mrs. Roosevelt’s (modified) quote comes into play:   CPA Exam candidates are like tea bags.   You never know how strong they are until you put them into hot water.

 

There are a lot of things out there – both as you prepare each day and while you take the exam – that seem designed to throw you off your game.   I’d love to wave my magic wand and push those distractions away.   But there is no magic wand.   The only thing that works is your ability to soldier on through that hot water.  

 

“I am not going to let this get me rattled.   I am not going to let this keep me from my goal of passing the CPA Exam.”

 

When it comes to hot water, are you ready to be strong????

 

NEW COMMUNITY FORUM SITE 

 

If you haven't visited our new Community Forum, you are missing out.  Designed as a survival guide for candidates preparing to pass the  Certified Public Accountants, HELP!!! + HOPE is a discussion forum to provide tips and tricks to help others pass the CPA exam. Now you don't have to go to other websites to discuss common issues, questions, share stories, etc.  AND, you can use your current login info and seamlessly create your username that will appear on the forum.  We are a "one stop shop" for CPA exam preparation, discussion and encouragement for others.  Even if you've passed the exam, encourage others by setting a great example.

 

More importantly, we have partnered with Project Hope who is dedicated to providing lasting solutions to health problems with the mission of helping people to help themselves. Most visibly known by the SS HOPE, the world’s first peacetime hospital ship, Project HOPE offers medical training and health education along with humanitarian assistance programs in more than 35 countries. Give to others.  More..

 

Practice – Time to Add Some Points.   You Can Do It!

 

FAR

 

Company A and Company Z go together equally to create Middle Company as a joint venture with joint control.   Middle Company holds land that cost $2 million but has a fair value of $3 million.   Company A is currently considering how it should report its ownership interest in this joint venture.   Which of the following statements is not true?

 

A.   Under U.S. GAAP, Company A applies the equity method to its ownership of the joint venture.

B.   Under IFRS, Company A is allowed to apply the equity method to its ownership of the joint venture.

C.   Under U.S. GAAP, Company A is allowed to add $1.5 million to the reported value of its land account.

D.   Under IFRS, Company A is allowed to add $1.5 million to the reported value of its land account.

 

 

Answer is C

 

Under U.S. GAAP, a joint venture is reported using the equity method.  The ownership interest appears in an investment account.   The share of the income is reported by Company A as a single amount as it is earned by Middle.     According to IFRS, the equity method can be used.  However, a second method called proportionate consolidation is also allowed.   In that alternative, the assets of Middle Company are reported by each owner based on the proportionate share of fair value.  Thus, half of the land’s value can be reported by Company A under IFRS but not under U.S. GAAP.

 

 

Auditing

 

The CPA firm of Kobe and James has been hired by an investment firm to examine the financial statements of Winston Coal Company.   The firm has been hired to specifically perform three testing procedures.    The board of directors for Winston Coal has agreed to allow such testing.   Which of the following is true about this engagement?

 

A.   The CPA firm is not allowed to accept such an engagement.

B.    The report must be in the form of a general use report or Kobe and James should not accept the engagement.

C.    The engagement can only be accepted if the report will first be filed with the PCAOB.

D.   The final report from the CPA firm will be a restricted use report for the parties involved.

 

 

Answer is D

 

When agreed-upon procedures are being performed, the risk is that parties who do not fully understand what was done by the auditors will see the report and make incorrect conclusions based on the information.   Therefore, when parties have agreed-upon the procedures to be performed, the report should be restricted to those parties who understand the actions that were taken.  

 

 

Regulation

 

Mr. and Mrs. Smith have two children, both of whom are dependents.  Their son James was a full-time junior at State College this past year.  Mr. and Mrs. Smith paid $4,000 for his tuition, fees, and course materials.    Their daughter Delores was a full-time freshman at South University this past year.   Mr. and Mrs. Smith paid $2,000 for her tuition, fees, and course materials.   Mr. and Mrs. Smith report adjusted gross income of $92,000.   What amount will Mr. and Mrs. Smith take as their American Opportunity Tax Credit (also known as the Modified Hope Scholarship Tax Credit)?

 

A.   $2,000

B.   $4,000

C.   $4,500

D.   $6,000

 

 

Answer is C

 

Because the adjusted gross income is well below the threshold here, Mr. and Mrs. Smith are allowed to take the American Opportunity Tax Credit.   The amount is 100 percent of the first $2,000 spent on tuition, fees, and course materials and 25 percent of the next $2,000 spent on those same costs.   That is a credit of $2,000 for the daughter (100 percent of $2,000).   That is also a credit of $2,500 for the son (100 percent of the first $2,000 and 25 percent of the next $2,000) for a total of $4,500.

 

 

BEC

 

Determination must be made as to whether each member of a corporation’s board of directors is independent or not.   Under normal rules, which of the following directors for the Kreyst Corporation is independent?

 

A.   A director who is president of Washington Corporation, a company that receives significant amounts of revenue from Kreyst.

B.   A director whose spouse received $50,000 in payments from Kreyst while working as an independent contractor.

C.   A director who was a former partner until last year of Adams CPAs, the external audit firm that examines the financial statements of Kreyst.

D.   A director whose spouse was an officer of Kreyst until two years ago.

 

 

Answer is B

 

The New York Stock Exchange (and NASDAQ) have rules that establish whether a director is deemed to be independent or not.   Those rules identify relationships that are too recent and too significant to be ignored.   Thus, the president of the company that sells to Kreyst is too closely tied to the company and is not independent.   The same is true for the director whose spouse was recently an officer and the director who was recently a partner with the external auditor.   However, the director whose spouse received $50,000 is still considered independent.   The rules set $120,000 as the threshold for this amount and that line was not broken.

 

 

And, finally, to repeat:

 

You don’t have to study every minute.   You don’t have to work yourself into exhaustion.  There’s no benefit from that.

 

But you do have to do the work and you need to start right NOW.   You can’t put it off and put it off and put it off.   That’s just a loser’s approach.  

 

 

Joe Hoyle

CoFounder

CPA Review for FREE

 

www.CPAreviewforFREE.com

 

 

 

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July 20, 2012

Lesson 119

From:  Joe

 

THIRTY QUESTIONS A DAY CAN CHANGE YOUR LIFE

 

Greetings from Richmond, Virginia, where the temperature is supposed to hit about 100 today and tomorrow.   That’s a great time to curl up in a cool room with a computer and work questions onCPAreviewforFREE.   You do not have to work thousands of questions each day.   Believe it or not, if you take your time and work just 30 questions per day and really think about each answer, you can go through our entire 2,300 question database in 2 ½ months.

 

People often view the CPA Exam as this massive undertaking.  And, of course, there is a lot to be done.   However, it is amazing how much you can get done if you simply break things down and then put in a consistent effort virtually every day.   If I asked you how long it would take to work 2,300 questions, you’d probably say 6-9 months because the number of questions seems so large.

 

But, if you just work 30 questions per day (which should take 90 minutes or less), you can go through our entire group of questions in 2 ½ months.  Take that a step further and figure that you'll be studying for one part of the exam at a time and it should take only approximately 20 days (550 questions/30 a day).  

 

So, what are you waiting for – get to work, answer some questions.   It’s going to be hot today.  You might as well find a cool place and start answering questions.  

 

WELCOME TO OUR FIRST TIME READERS

 

It's always great to welcome new users to our site and newsletters.  There are lots of resources to help you prepare for the exam. Hopefully, you didn't buy another review course before trying CPAreviewforFREE.  We offer everything you need to pass the exam.  "Try us first before you spend your hard earned money."

 

 Visit our Forum of users to give back, share insights, frustrations, happenings, and dreams.  Be on the lookout for news of weekly "best" comments as voted on by others in the forum.  We'll be giving away our products and services to the best response.  We also have many Tips for Success in our Resources section of the site.  Most importantly, you can always reach us to ask for help, let us know you passed the exam or part of the exam, or suggestions to make us better. 

 

Check out our HELP!!! & HOPE alliance with Project Hope as part of our forum.  We all have so much to be thankful for and Project HOPE is there to help those in need in their most critical time.

 

WHY DO YOU WANT TO PASS THE EXAM

 

If you have read these email lessons for long, you probably know that I read a lot.   I rarely watch television (except for “Breaking Bad”) but I enjoy reading.   I was reading a book last week and the hero was talking with a young woman and he asked her who she would like to be if she could be anyone in the world.   It’s a common question and people usually talk about athletes or singers or actors or politicians.  

 

I really enjoyed the answer the woman gave in the book because I thought it was ever so true:   “If I could be anyone, I would just as soon be me on my good days.”   I think we all get tied up occasionally in wishing that we could be someone else.   What we want seems to be outside of ourselves, outside of our own abilities; we have to be someone else to get what we want.    However, on a really good day, would you truly want to be anyone else?   Those days when you feel strong, courageous, and confident are just great.   Those are the days when you know that you can conquer the world.   What you want is not outside of you some place; it is inside of you – it is that strength, courage, and confidence that hides inside of each of us that we really want to draw out.

 

That’s one of the reasons that people try to pass the CPA Exam.   They want that exhilaration that comes from passing an exam that people often fail.   They know that passing the CPA Exam will require all of their strength, courage, and confidence.   Every last ounce.   Passing will help them understand just how strong, courageous, and confident they really are.  

 

It is always important to know why you are trying to pass the CPA Exam.   I think that is a must.  Some of reasons don't count.  More...

 

HOW TO TURN A NEGATIVE INTO A POSITIVE 

 

I get a lot of emails, as you might imagine.   I’m always touched by how many people write because they have become tired and frustrated and upset.   Over the years, I have received thousands of emails that start out “I work these questions and I miss them and that is so discouraging.”  

 

I guess that is one way to look at it but I’m not sure that’s the best way.  

 

I have a saying that I find helps me to avoid becoming discouraged:   “every action in life can have two outcomes:  (1) it can help you learn something new or (2) it can reinforce what you already know.   And, both outcomes are positive.”   If you can look at life that way, it can be a wonderfully positive experience:   everything’s either a learning experience or a reinforcement of what you know.  Here's what works to increase that knowledge.  More...

 

PRACTICE, PRACTICE, PRACTICE

 

Let’s do a bit of practice.   I actually went to the site and picked four questions at random and then changed them up a bit.   And, here they are:

 

FAR

 

A company located in the United States sells a significant amount of inventory to a company in Chile on credit. The transaction was denominated in Chilean pesos.   The balance had not been paid prior to the end of the current fiscal year. Financial statements are now being prepared for the US company and its functional currency is the US dollar.   Officials want to know which exchange rate will be used to report these amounts (the receivable and the revenue) in terms of US dollars. What procedure should the company follow in determining the amounts to be reported?

 

A.   Internal conversion

B.   Remeasurement

C.   Translation

D.   Exchange arrangement

 

 

Answer is B

 

The US company has engaged in a transaction that is denominated in a currency outside of its functional currency.   The exchange rates to be applied are based on the remeasurement process.   In remeausrement, monetary assets and liabilities are reported at the current exchange rate (the exchange rate at the balance sheet date) and all other accounts are reported using the historical exchange rate at the time of the original recording.

 

 

Auditing

 

A CPA is in the process of evaluating the design of a specific internal control being applied by an audit client.   The CPA will determine whether the control can do all but which of the following?

 

A.   Detect material misstatements

B.   Correct material misstatements

C.   Prevent material misstatements

D.   None of the above is a correct answer

 

 

Answer is B

 

Internal control policies and procedures are intended to keep material misstatements from occurring and winding up in the financial statements reported by a company.   This process usually takes one of two forms.   Many elements of internal control are designed to prevent material misstatements from ever occurring in the first place.   Other elements are created to detect material misstatements that have managed to get into the financial reporting system.   Some types of misstatements are more easily prevented.  Others are more easily detected.   Internal control policies and procedures should recognize and address those traits.

 

 

Regulation

 

Company A traded a large delivery truck to Company Z for a small delivery truck and a medium size delivery truck. The fair value of the assets exchanged is equal: both sides are surrendering assets worth $37,000.   Company A’s tax basis in the large truck is $42,000 and Company Z’s tax basis in the small truck and medium truck are $8,000 and $24,000. What is the tax effect of this transaction?

 

A.   Company Z has a tax basis in the new large truck of $42,000

B.   Company A has a total tax basis in the two new trucks (small and medium-sized) of $32,000.

C.   Company A has a tax loss of $10,000

D.   Company A has a total tax basis in the two new trucks (small and medium-sized) of $42,000.

 

 

Answer is D

 

Like-kind business assets are being exchanged here and no cash or other boot is conveyed.   Thus, it is a tax-free exchange and both parties retain their tax basis.    Company A had a tax basis of $42,000 and it will still have a tax basis of $42,000.   Company Z had a tax basis of $32,000 and it will still have a tax basis of $32,000

 

 

BEC

 

In Year Two, the Walton Company reported a contribution margin of $800,000 and net income of $600,000.    If the contribution margin was 40 percent of sales, what is the break-even point for this company?

 

A.   $500,000

B.   $600,000

C.   $720,000

D.   $840,000

 

 

Answer is A

 

Contribution margin is sales minus a company’s variable costs.   If contribution margin is $800,000 and net income is $600,000, then the total amount of fixed costs is $200,000.   Break-even point can then be determined by taking Sales minus Variable Costs minus Fixed Costs and setting that formula equal to zero.   Sales minus Variable Costs will be 40 percent of sales while Fixed Costs total $200,000.  Therefore, 40 percent of Sales minus $200,000 equals zero.  Or, 40 percent of Sales equals $200,000.   Or, Sales at break-even is equal to $500,000 ($200,000/40 percent).

 

 

Have a great week.   Stay cool.   Stay inside and work questions at www.CPAreviewforFREE.com

 

Joe Hoyle

CoFounder

CPA Review for FREE

 

www.CPAreviewforFREE.com

Community Forum Launched; Apps Update; More

CPAreviewforFREE--Try us FIRST before you spend your hard-earned money.

Lesson 116—In this lesson--Community Forum Launched; Apps Update; Work Harder and Smarter;  Practice Questions

From:  Joe

 

COMMUNITY FORUM SITE LAUNCHED

 

CPAreviewforFREE  today announced its partnership with Project HOPE, a global nonprofit healthcare organization. The partnership coincides with the launch of CPAreviewforFREE’s own community site called “HELP!!! + HOPE (Helping Others ­Pass the Exam). Designed as a survival guide for candidates preparing to pass the  Certified Public Accountants, HELP!!! + HOPE is a discussion forum for our users to provide tips and tricks to help others pass the CPA exam. Now you don't have to go to other websites to discuss common issues, questions, share stories, etc.  Use your current login info and seamlessly create your username that will appear on the forum.  We are a "one stop shop" from CPA exam preparation, discussion and encouragement for others after passing the exam.  More..

 

THANKS, AGAIN

 

We always love hearing from each of you concerning your CPA Exam adventures.   Here’s one that came in just a day or so ago on Facebook:

 

“New scores are being released! Just passed FAR (last exam) with an 87! Thanks CPA Review for Free!"

 

Our goal is to help everyone get the points they need to pass.  Whether you are rich or poor, we believe you and everyone else deserves the chance to pass the CPA Exam and gain entrance to the Accounting profession.  

 

Spread the word – we are here to help.

 

APPS UPDATE

 

To download our difficulty ranking of mcq's apps directly from your smart device, hereis how it can be done.   The instructions were just fine to access from your PC Android device (google play)or MAC  (iTunes), but definitely didn't show the best way to do it from your iPad/iPhone or Android smartphone device.  Note:  The apps are not available for Blackberry or Kindle Fire devices.  We plan on selling the mcq's by difficulty ranking on the website in the next couple of months.  

 

TIPS TO WORK HARDER AND SMARTER

 

I was watching the first few minutes of a pro basketball game a few nights ago (apparently I’m watching too much television).   If you don’t follow pro basketball, they are down to the final four teams.   On this telecast, they went inside the locker room of one of the teams and listened to the coach’s final few words before the team went out to play basketball against a very strong competitor.   As you can imagine, I’m always fascinated by how coaches work to get their teams ready to play at a high level.  

 

The coach’s final words were:  More...

 

LAZY, NO; UNINSPIRED, YES

 

I gave a presentation recently at the Kentucky Accounting Educator’s Conference.    At some point, I made a comment that dealing with lazy students is often challenging.    On the way to the airport, Randy Hahn who teaches at Kentucky State told me something he had heard from Zig Ziglar, the famous motivational speaker.   According to Ziglar, there are no lazy people – they are only people who are uninspired.  More...

 

PRACTICE QUESTIONS

 

Let’s do some practice.   I love setting up some questions that you can practice on.

 

FAR

The Loomis Corporation has two checking accounts at the end of the year.    One has a positive balance of $120,000 and the other has a negative balance of $14,000.   The account with the negative balance tends to swing between slightly positive and slightly negative as company officials seek to minimize the amount of assets tied up in cash.   On a balance sheet, how much is reported by the company as the cash balance within its assets?

 

A.    US GAAP - $120,000 and IFRS - $120,000

B.    US GAAP - $120,000 and IFRS - $106,000

C.    US GAAP - $106,000 and IFRS - $120,000

D.   US GAAP - $106,000 and IFRS - $106,000

 

 

Answer is B

 

According to US GAAP, negative cash balances are separated and reported as liabilities.   Therefore, only the positive balance of $120,000 is shown within the assets.   Under IFRS, both balances are netted and then reported as assets if the negative balance is part of normal cash management.   Putting the two balances together gives a net $106,000 asset to be reported on the balance sheet.  

 

 

REG

 To get the following question, I went to www.irs.gov and typed “1040 Instructions” into the search engine.   Then, I just randomly scrolled down until I found something to write a question about.   When you are studying individual income taxes, the government’s instructions are a good source of free information.   However, as I have said before in these email lessons, don’t get hung up on dollar amounts that change quickly.   Notice in this question, that I simply assume the number is $4,500 rather than ask for the exact amount, a number that is correct for only one particular year.   

 

Jim Jaxon worked for one company for 8 months this year and another company for the remaining 4 months.   The first company withheld $3,000 from his pay for social security.   The second company withheld another $1,900 from his pay for social security.   Assume that the maximum social security that should have been withheld in that year is $4,500.   What should Jaxon do because of these social security withholding amounts?

 

A.   Nothing, the excess payment resulted from two separate jobs and is lost.

B.   Demand a rebate of $400 from the second employer.

C.   Take a $400 credit on his federal income tax return.

D.   Demand a rebate of $200 from each of the two employers.

 

 

Answer is C

 

This type of a situation can easily happen if an employee has more than one job in a year.   The credit for the excess social security withholding allows a simple way to limit an employee’s payment to the maximum amount for that year.   The employers are not at fault as long as neither withheld more than the maximum figure for the year.

 

 

AUD

 

Rick Fox, CPA, is auditing Smith Corporation for the year ending December 31, Year Eight.   Fox uncovers a rather large cash payment recorded on January 4, Year Nine.   Fox becomes concerned by what this payment might indicate.   Which of the following is least likely to be a potential concern for the CPA?

 

A.   The December 31, Year 8, cash balance was overstated.

B.   The December 31, Year 8, working capital is understated.

C.   The Year 8 net income figure is overstated.

D.   The December 31, Year 8, liability balance is understated

 

Answer is B

 

There are really two potential concerns here for the CPA:  (1) the payment might have been made in Year 8 but not recorded until Year 9 and (2) the amount might have been owed in Year 8 but no recording was made until the payment in Year 9.    First, the payment made here might have been made in Year 8 but the recording was delayed until Year 9 so that the reported cash balance remained high (overstated).   Second, the payment might have been made in Year 9 to settle an expense and liability that should have been recorded in Year 8 but was not.   In that case, reported net income for Year 8 is too high for that year (overstated) and the liability balance at the end of Year 8 was too low (understated).   So, cash at the end of Year 8 might have been overstated and the liabilities might have been understated.   Both of those conditions cause working capital (current assets minus current liabilities) to be overstated on the balance sheet rather than understated.  

 

BEC

 

Which of the following is computer software designed to help humans make decisions?

 

A.   Random data connectivity theory

B.   Artificial intelligence

C.   Factual life-alteration simulation

D.   Complex wisdom analysis

 

 

Answer is B

 

When computers were first developed, they were designed to process information mechanically.   That processing could be done with extreme speed and accuracy.   Over the decades, programming has been developed so that computers are able to replicate a particular decision-making process.   That aspect of computer technology is known as artificial intelligence (AI). 

 

 

Go get it – take that risk.   Push yourself harder than you ever thought possible.

 

Joe Hoyle

CoFounder

CPA Review for FREE

 

www.CPAreviewforFREE.com

 

Are CPAreviewforFREE MCQ's Harder than Other Courses?

CPAreviewforFREE--Try us FIRST before you spend your hard-earned money.

Lesson 115—In this lesson--Global Reach, SIMS, Focus on One Word, Joe's Text Book, Are CPAreviewforFREE's MCQ's Hard than Other Review Course MCQ's?

From:  Joe

 

Global Reach

 

199 Weeks of Operation and 34,363,920 Page Views (an average of over 172,000 page views each and every week for nearly 4 years)

 

(1) – Last week CPAreviewforFREE had visitors from 99 countries.   That is always amazing to me; we helped people in that one week who live in 99 different countries.   And, what is even more interesting to me is that it was a normal week.   We usually get people visiting our site from between 92-103 countries every single week year round. 

 

 

And, of course, that’s our goal – to help everyone, absolutely everyone, to get the points they need to pass the CPA Exam. More.

 

SIMS, an Extension of MCQ's

 

(2) – I got a nice note a few days ago from a person who was getting ready to take FAR.   She indicated that she had worked all of our free multiple choice questions and that she had also paid $9.99 so that she could work all of our Simulation questions.  

 

That was probably a well invested $9.99.  Since 60% of the exam are M/C questions for FAR, AUD and REG, and BEC is 85%, you should do well if you understand the concepts and receive over 75% of our questions correctly.  SIMS test the same concepts in a different format.   Become familiar with the exam by reviewing the Sample Test and Tutorial at the AICPA. 

 

If you are interested in practicing on Sims as well as multiple-choice questions, go to theCPAreviewforFREE store, scroll down and you can see all of the Simulations we have available.  If you are already a registered user, log into your account and click on "Manage your purchases."

 

Focus on an Empowering Word

 

(3) – I’ve had an incredibly busy spring.   I’ve been working on two textbooks and also trying to educate 82 students in Intermediate Accounting and Financial Accounting.   There have been many days over the past 4-5 months when I’ve woken up in the morning realizing that I needed to accomplish an awful lot that day.   Not just a small amount.   Not just a normal amount.   There have been many days where I needed to accomplish a whole lot. 

 

People often like to talk about what they are going to do.

 

People often like to plan what they are going to do.

 

However, at the end of the day, it is what you actually manage to do that makes the real difference.   At the end of the day, saying “I planned well” doesn’t do you much good.   Saying “I talked about getting stuff done” isn’t much help.   What really works is to be able to say “I can’t believe all that I managed to do today.” 

 

You can have days like that.

In fact, every day can be like that if you work at it.   More...

 

Joe's Financial Accounting Textbook

 

(4) – The second edition of my Financial Accounting textbook came out a few weeks ago.   I wrote it with C. J. Skender of UNC and it uses a Socratic Method to teach accounting.   If you teach this course in college and would like to get a copy to consider, please send an email tofaculty@flatworldknowledge.com.   I know I’m biased but it is a great textbook.

 

Are CPAreviewforFREE Questions Harder than Other CPA Review Course Questions?

 

(5) – My daughter and I went to a baseball game here on campus a few days ago.   We sat behind the visiting dugout.   Their batters had an interesting habit.   They had a sledge hammer and each player would swing it for several seconds before picking up the real bat to go to the plate. 

 

My daughter was mystified by the sledge hammer and wanted to know what they were doing.   I explained that batters have long had the practice of swinging very heavy objects before they bat.   When I was a kid, they would swing 2-3 bats at one time.   Now, they often have a heavy object that they refer to as a “donut” that they slip on the bat to add weight.  Or, apparently, they use a sledge hammer.

 

The purpose of swinging the weight is to loosen up and strengthen the batter’s muscles to get ready to better hit the baseball.   After straining against the weight of the sledge hammer, the batter is able to swing his own bat faster and harder.   I’m assuming Babe Ruth did this type of practice 90 years ago.   It’s not a new idea.

 

I was reminded of this last week.   Someone on the Internet said that she liked the review question from X course because they were easy but didn’t like ours quite as much because they were harder.   I thought that a really naïve thing to say.

 

Are our questions really harder?  More...

 

Add More Points!

 

(6) – Practice Questions.

 

Okay, time to add some points.  Time to get just a little smarter.  

 

FAR – this is a question that I took directly from my Intermediate Accounting II final exam that I gave to my students last week.   Most of them got it right but several didn’t.

 

The Houston Company has maintained a defined-benefit pension plan for its employees for a number of years.  At the end of the most recent year, the following information was available:

--Service cost                                                         $279,000

--Expected return on plan assets                                52,000

--Actual return on plan assets                                     59,000

--Funding                                                                   220,000

--Interest on projected benefit obligation                     75,000

--Amortization of prior service cost (created

    when a contractual provision was amended which

    reduced the projected benefit obligation)                  21,000

 

What should be reported by the company as the pension expense for the year?

A.   $274,000

B.   $279,000

C.   $281,000

D.   $316,000

 

 

Answer is C

 

Pension expense (also known as net pension cost) is normally the service cost plus interest on the projected benefit obligation less earnings on the plan assets plus any amortization of a prior service cost (or net gain or loss).   There are two keys, though, to answering the above question.  First, when the problem gives both expected and actual earnings, pension expense is computed using the expected number.   And, second, amortization increases pension expense but only if the prior service cost is a loss.   Here, the prior service cost caused the projected benefit obligation to go down (rather than up).   The liability is less which means that the prior service cost here is a gain.   Thus, the amortization of that prior service cost reduces the expense instead of increases it.   Pension expense is $279,000 - $52,000 + $75,000 - $21,000 or $281,000.

 

 

Auditing

 

Janine Haimston, CPA is performing an audit and is currently examining the reporting company’s bank reconciliation which was completed by a company employee.   Haimston discovers that several checks were outstanding at the end of the year but were omitted from the bank reconciliation.   It still reconciled.   Which of the following is most likely to be the risk that Haimston should consider?

A.   The company is attempting to inflate its sales figure for the year.

B.   The company is trying to reduce the reported balance of its liabilities.

C.   The company wants to report expenses in the subsequent period and not in the current period.

D.   The company plans to record sales figures in two different periods to improve its financial position.

 

 

Answer is C

 

The recording of checks deals with cash payments and, therefore, has nothing to do with sales so that neither A nor D can be correct.   Because the checks are outstanding, they have not cleared the bank.  Thus, the only way that the bank and book figures will reconcile (despite leaving off the outstanding checks) is if those checks have not yet been recorded by the company in its accounting records.   They were not recorded on the books so they could not be included as outstanding on the bank reconciliation.   Why would a company leave off recording its cash payments?   Many expenses are not recorded until cash is paid.   If the check is not recorded in a timely manner, the expense will not be reported in the current period.   However, the bank reconciliation will not reconcile unless the checks are also left off the list of outstanding checks.  

 

 

Regulation

 

Lucy Tyler is completing her current form 1040 tax return.    Below are listed some items and the schedule on which they are reported.   Which of these schedules is incorrect for her use?

A.   Schedule C – net income from a business that she operates as a partnership with her sister.

B.   Schedule D – the gain on the sale of 100 shares of Ford Motor Company stock held by 8 months

C.   Schedule D – the loss on the sale of 200 shares of IBM stock held for 15 months

D.   Schedule E – royalty income she received from a textbook that she had written.

 

 

Answer is A

 

A partnership will file its own separate tax return on Form 1065.   The partners then report their share of the income on form 1040 Schedule E.   The proportionate share of certain pass through items such as capital gains and charitable contributions are reported individually on each partner’s tax return.   The business income, though, is not included on Schedule C.   That form is used for sole propriertorships.

 

 

BEC

 

A CPA goes to a conference and one of the speakers states that CPAs can help their clients “by making sure they are able to manage all movement and storage of raw materials, work-in-process inventory, and finished goods all the way from the point of origin to the point of consumption.”   Which of the following terms was the speaker most likely discussing?

 

A.   Supply chain management

B.   User consumption theory

C.   Quality assurance and management practices (QAMP)

D.   Harvard Theory of Optimum Practices

 

 

Answer is A

 

Supply chain management is a method of achieving a competitive advantage by ensuring that all aspects of the supply chain (both those inside a company and those inside other companies with which they work) are operating as efficiently and effectively as possible.   Historically, companies only worried about operations inside their own company.   Supply chain management extends that thinking to include the interaction between all related companies so that products can be produced as well and as cheaply as possible.   Thus, the operations of the companies that supply raw materials to a business are considered in the planning process as well as the shipping companies that eventually take finished goods to customers.

 

 

Have a great week – work hard – add points.

 

Joe Hoyle

CoFounder

CPA Review for FREE