Don't Let Self-Imposed Barriers Stop You; Pottery and the CPA review?

Try us FIRST before you spend your hard-earned money.   CPA Review for FREE   Over 2,400 FREE CPA Review Questions and Answers Available to YOU (for FREE) August 6, 2013 Lesson 137   From:   Joe   Meet Joe at the AAA in Anaheim in August   I know that some of the readers of these email lessons are college accounting professors.   So, this first short item is for you.   If you are going to be at the annual convention of the American Accounting Association in Anaheim, I am scheduled to give a 90 minute teaching presentation from 2:00 until 3:30 p.m. on Wednesday, August 7, in the Laguna A room, on the 4th floor of the Hilton.   My teaching blog was named the AAA Accounting Education Innovation of the Year for 2013.   As a result, they will give me 90 minutes to talk about some of the teaching ideas I have written about recently.   If you are going to be at the convention, I hope you’ll stop by my presentation.    I would love to meet you and chat about teaching (and the CPA Exam as well as Accounting Homework Apps, smartphone apps containing mcqs to practice for accounting course tests).     Aw, shucks!   As always, we love getting your feedback.  These are just some of those that have been sent to us.  To read more, see ourtestimonials CPA Exam Tips.   From JY:   “I used cpareviewforfree as my main source of review questions. Thank you for creating this website it was an amazing source for helping me pass the CPA Exam.”   From CI:    “I passed FAR in May with a 94. I spent a lot of time reviewing your multiple choice questions and find your email messages very helpful. THANK YOU so much for helping me pass.... Three more to go...” Don't Let Self Imposed Barriers Stop You   In all the years that I used to teach a live CPA Exam review course, I was always amazed by how many capable candidates showed up and immediately started telling me why they couldn’t pass the CPA Exam.   Had it not been so sad, it would have been funny.   In fact, I labeled it as the “I can’t do this because” disease.   New candidates would practically leap out of their cars on the first day telling me why they couldn’t pass the CPA Exam.   --I can’t do this because I didn’t learn much in college. --I can’t do this because I am a bad test taker. --I can’t do this because my boss won’t give me any time to study.   --I can’t do this because my family is not supportive.   --I can’t do this because I work so slowly. --I can’t do this because I have failed in the past. --I can’t do this because I didn’t make good grades in Accounting at college.   With all these self-imposed barriers, I used to wonder how anyone ever passed the CPA Exam.   My response was always “well, don’t place too many stumbling blocks in your own path.   Let’s start adding some points on a daily basis and see where we wind up.”   The CPA Exam is tough enough without you telling yourself you are going to fail.   I could never figure out how all of those excuses were of any possible help.     I think the “I can’t do this because” disease must be pretty universal.   A lot of humans just seem to think that way.   Every time we start a new challenge in life, especially if it pushes us outside of our comfort zone, we seem to lose faith in ourselves.   We all do this – it is just a little more obvious in studying for the CPA Exam.  Setting low expectations makes it is easier if you do fail.  We seem to be trying to soften the possible blow by letting everyone know that we don’t really expect to do well.   However, setting low expectations makes it so much more difficult to succeed.   That attitude works against you.   It is hard to have the confidence to do the hard work necessary for success if you have already explained to everyone (including yourself) the many reasons you are going to fail.   Who wants to work hard if you don’t believe you can succeed?     People live up to their own high expectations but, just as importantly, they also live down to their own low expectations.     Attitude is vitally important in achieving success.   People rarely succeed without a “can do” attitude.   No one wants you to walk around and brag about how well you are going to do.   But, a certain degree of “I can do this” is necessary if you are going to take on tough challenges and win.   Let me give you an example.    My wife has long wanted to take a pottery class.   I have always resisted because I was convinced that I could never learn how to take a lump of clay and put it on a wheel and turn it into a pot or bowl or vase that could be glazed and fired.   I always assumed that I would produce a wreck.   I didn’t want to try because I was afraid that I would be embarrassed by my failure.   I was afraid of looking stupid.   So, I created all kinds of excuses.   I found myself constantly starting sentences with “I can’t do this because.”    Finally, this summer we decided to take a six-week pottery class after I ran out of excuses.   I figured that I would produce awful stuff but I’d get it over with.     And, of course, you can guess what happened.   The teacher was very patient and showed me exactly how to start, how to get the clay centered, how to mold it, how to shape and trim it.   When I did something wrong, she would show me how to learn from my mistake and do better the next time.   It was a wonderful learning experience.   I enjoyed every second. And, almost immediately, “I can’t do this because” was replaced by “with some help, I can make this happen.”    But the key was that I stopped putting roadblocks in my path.   I stopped defeating myself.   I let the teacher help me make gradual progress.   And, eventually, I could make some pottery.   After 6 weeks, my wife and I had produced over 30 pieces.   Here are a few photos that we took.   What is the point of the previous story about pottery?   More...

Practice always gives us an opportunity to add some points...

...and get better on that CPA Exam.   Read these questions, provide your answer and then read the answers that I give.  As always, the goal is to get better.  No peaking at the answers at the end before working the questions!

FAR

The Marston Corporation recently issued 1,000 shares of its common stock to its president for $30 per share so that she can vote at stockholders’ meetings and also receive dividends.   However, in five years, when she is expected to retire, she must sell these shares back to the company for $35 per share.   On its balance sheet, at the end of this first year, how is this stock reported?

a.   As a liability

b.   It is reported through note disclosure as a contingency

c.   In stockholders’ equity as “common stock.”

d.   In stockholders’ equity as the “equivalent of preferred stock.”

Auditing and Attestation

The Harthaus Corporation is a publicly-traded corporation that is audited by the CPA firm of Hansel and Gretel.    Bob Patterson has been the audit partner in charge of this audit for the firm.   At the end of his fifth year in that role, he turned this responsibility over to a different audit partner in the firm:   Alexandra Manjal.   What is the most likely reason for this switch?

a.   It is required by U.S. GAAP.

b.  It is required by the Sarbanes-Oxley Act.

c.   It is required by IFRS.

d.   It is not required so it must have been a personal decision or a firm decision.

Regulation

Janice Stathmore had a salary of $32,000 in the most recent year.   In filing her federal taxes, she took the standard deduction this year as well as the previous three years.   She also received unemployment compensation of $2,000.   Finally, she received a $1,300 refund on her state income tax return for the previous year.   In the current year, for federal income tax purposes, what should she report as her gross income?

a.   $32,000

b.   $33,300

c.   $34,000

d.   $35,300

BEC

A company wants to borrow $30 million for an expansion project.   Bonds with that face value are issued at 98 percent of face value.   How is the cost of this debt most likely measured for decision-making purposes?

a.    At the prime rate

b.   At the coupon (or cash) rate

c.   At the effective rate based on the issuance price of the bonds

d.   At the effective rate less tax savings

EXCLUSIVE:  REVISIONS TO REGULATION (REG)

Although not much has been happening in the U.S. Congress, CPAreviewforFREE updated the REG categories for the MCQs, Essential Content and SIMS to more accurately align with the AICPA Content Specification Outline as well a fix minor edits.  New MCQs are being added every day and will be included on our REG app for iPhone/iPad and Android smartphones shortly. For those of you who have purchased our premium subscription content, the changes are automatically updated in the Essential Content.   Here are the top level REG categories:

Business Structure

Business Law

Debtor-Creditor

Govt. Regulation of Business

Corporate Income Taxes

Individual Income Taxes

Partnerships, S Corps and Other Taxation Areas

IN CASE YOU MISSED IT...HERE IS INFO ON THE AUDITING CLARITY PROJECT

As many of you know, the AUD section of the exam starting with the July 1, 2013 testing window includes questions on the Auditing Clarity Project.  Many review courses charge you for the information we are giving you for free.  Please do us a favor.  Forward this newsletter to friends, co-workers, HR/Training Specialist at your firm and be sure to let them know that you received the free updates from CPAreviewforFREE.    Here are the new updates.

MCQ Answers

FAR

Answer is A

Any financial instrument that imposes an obligation on the issuer to transfer assets or issue equity shares is classified as a liability.

Auditing and Attestation

Answer is B

Section 204 of the Sarbanes-Oxley Act makes it unlawful for an audit partner having primary responsibilities for the audit to perform that service for more than five years.

Regulation

Answer is C

The salary is obviously taxable.   The unemployment compensation is also included in gross income.   The key point here is the handling of the state income tax refund.   If that amount was taken on the previous year’s tax return as an itemized deduction, then it is taxable income when the refund is collected.   If the taxpayer takes the standard deduction (as she does in this problem), then the original payment did not reduce her taxable income.  No effect last year means no effect this year.    Consequently, the subsequent refund is not included in taxable income.   Only the salary and the unemployment compensation make up her gross taxable income.

BEC

Answer is D

Because these bonds were sold at a discount, the investors wanted (and the company gave) a higher effective rate of interest.   Apparently, the bonds were not enticing enough at their cash interest rate to get enough investing interest.   However, the effective interest rate (based on the lower price) is not the cost of the debt because interest expense is tax deductible.   Those savings must also be taken into consideration.

Joe at CPAreviewforFREE

SPECIAL EDITION – AUDITING CLARITY PROJECT

SPECIAL EDITION – AUDITING CLARITY PROJECT

 

Many review courses charge you for the information we are giving you for free.  Please do us a favor. Forward this newsletter to friends, co-workers, HR/Training Specialist at your firm and be sure to let them know that you received the free updates fromCPAreviewforFREE.    So let's get started with the new updates that are effective July 1, 2013.  

 

The Auditing Standard’s Board (ASB) has spent the past several years rewriting virtually all of the official statements of auditing standards (SASs) used in the United States in a codification project.   Officially, the old standards were referred to by AU section numbers whereas the new standards are now identified using AU-C section numbers.   This Auditing Clarity Project was carried out for a number of reasons.   The rewriting and rearranging of sections was performed to make the standards easier to read, understand, and apply.   They are now more principles based and also bring together US standards with the International Standards of Auditing issued by the International Auditing and Assurance Standards Board.  

 

The newly rewritten standards have been put into a consistent format somewhat like FASB’s Accounting Standards Codificationso that locating information will be quicker and periodic changes in standards can be made more easily.  

 

Although extremely extensive, many parts of this rewriting project had no real impact on the underlying requirements.   It is a “clarity project” rather than a creation project.   At other times, minor word changes have been made that are probably not important enough for coverage on the CPA Exam.  For example, a number of implied requirements have become explicit requirements.  

 

However, some changes are clearly important and should be noted when preparing for the Auditing and Assurance section of the CPA Exam.  The following information comes from a number of different sources but primarily from the AICPA’s “Summary of Differences Between Clarified SASs and Existing SASs” (as revised in February 2013) which can be found at the AICPA website.  That website is a great source of information.  However, do not get bogged down in the quantity of minor changes.

 

This list of differences below is not intended to be all-inclusive.   It is a list of the differences that seem most likely to be tested on the CPA Exam starting in the third testing window of 2013.  If you lose this newsletter in your inbox, you can find the changes in the CPA Exam Tips on CPAreviewforFREE.

 

1.  The overall objectives of the auditor and the audit process were established although they have not been radically altered from the past.

 

--To obtain reasonable assurance as to whether the financial statements as a whole are free from material misstatement (whether due to fraud or error) thereby enabling the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework and

--To provide a report on the financial statements in accordance with the auditor’s findings.

 

2.   The auditor must obtain the agreement of management that it acknowledges and understands its responsibility for selecting the appropriate financial reporting framework (such as U.S. GAAP or IFRS), establishing and maintaining internal control, and providing adequate access and information to the auditor.   This is not a significant change but tightens up the wording (which is true for many things covered in this project).

 

3.   The auditor is now required to perform procedures to identify instances of noncompliance with those laws and regulations that may have a material effect on the financial statements.   To this end, the auditor must inspect correspondence, if any, with the relevant licensing or regulatory authorities.  

 

4.   When contacting the necessary parties about significant deficiencies and material weaknesses that have been identified in an audit client’s internal control, an explanation of the potential effect of those problems must be included.

 

5.   If management refuses to allow the auditor to send out a confirmation request (on an accounts receivable, for example), the auditor must communicate that information to those individuals charged with governance (but only if the auditor concludes that management’s refusal is unreasonable or if the auditor is unable to obtain relevant and reliable audit evidence from alternative audit procedures).   Once again, this change is not significant from the past but makes the requirement clearer.

 

6.   In an initial audit of a reporting entity, the question has been raised as to whether merely reviewing the previous auditor’s work papers is sufficient – the only work that needs to be performed – in regard to opening account balances.   The answer provided here is “no.”   Instead, a more general rule is applied.   The previous work papers can be helpful but other work should be performed.  The auditor must obtain audit evidence to ascertain the following:  

 

--Whether opening balances contain misstatements that materially affect the current period’s financial statements and

--Whether accounting policies reflected in the opening balances have been consistently applied in the current period’s financial statements and whether changes in the accounting policies have been properly accounted for and adequately presented.

 

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7.  One of the most significant changes created by this project concerned engagements that involve more than one auditor.   Group financial statements are ones that are comprised of more than a single component.   A component is “an entity or business activity for which group or component management prepares financial information that should be included in the group financial statements.”  So, group financial statements are roughly equivalent to consolidated financial statements although distinct legal subsidiaries are not necessary.  (Three large stores in three different states might be viewed as three components, for example, even if not legally separate.)  The principal auditor is now known as the “auditor of the group financial statements” and any other auditors that are involved are referred to as “component auditors.”  The group engagement partner and team is responsible for:

 

--The direction, supervision, and performance of the group audit engagement in compliance with professional standards and other requirements and 

--The determination as to whether the auditor’s report that is issued is appropriate in the circumstances.

 

The group engagement team is defined as “partners, including the group engagement partner, and staff who establish the overall group audit strategy, communicate with component auditors, perform work on the consolidation process, and evaluate the conclusions drawn from the audit evidence as the basis for forming an opinion on the group financial statements.” Any auditors who are involved but do not meet the definition of a member of the group engagement team are considered to be component auditors.   Interestingly, that can include members of the group engagement team’s own firm as well as auditors from an entirely different firm.

 

The decision as to whether a group engagement partner can function in that capacity is based on determining whether that auditor believes he or she will be able to obtain sufficient appropriate audit evidence about the group financial statements.  The decision also takes into consideration whether the group engagement team will have appropriate access to information.   This writing changes the emphasis from a “reliance on other (outside) auditors” to “can we get enough evidence to make essential judgments?”

 

The group engagement team might make reference in the audit report to the component auditor or auditors.

Reference is permitted when the “other” financial information is prepared using a different financial reporting framework than that used by the group.    However, if reference is made in that case, the auditor’s report on the group financial statements must disclose that it is the auditor of the group financial statements who is taking responsibility for evaluating the appropriateness of the adjustments to convert the component’s financial statements to the financial reporting framework used by the group.   This is important when a subsidiary uses IFRS, for example, but the financial statements as a whole are prepared based on U. S. GAAP or vice versa so that a conversion must be made from one framework to the other.

Cannot make reference to the audit of a component auditor in the auditor’s report of group financial statements unless the component auditor performed an actual audit that meets the relevant requirements of GAAS.   In other words, cannot make reference about random auditing techniques that were carried out.

 

The group engagement team is required to gain an understanding of the component auditor. This understanding includes certain aspects such as competence and independence that have long been performed at such situations.   The group engagement team should also make a determination of the extent to which the group engagement team will be able to be involved in the work of the component auditor.   Here, “involvement” pertains to decisions about materiality and risk assessment procedures. 

 

--Group engagement team must determine materiality for the group financial statements as well as materiality for the component.   Component materiality is normally lower than group materiality.

--Group engagement team (with or without the component auditors) must perform appropriate risk assessment procedures.

--After an understanding is gained of the component auditor, the group engagement partner can make reference to the component auditor (and not assume responsibility) or not make reference to the component auditor (and assume responsibility). 

 

Requirements and guidance are provided for work to be performed on all components for which the group engagement partner is assuming responsibility for the work of the component auditor (not making reference in the report).   These requirements are particularly important when performing work on significant components.

 

A significant component is defined as one that is identified by the group engagement team that is of individual financial significance to the group or is likely to include significant risks of material misstatement within the group financial statements.

 

For components that are “financially” significant, an audit of the component’s financial information is performed. For components considered significant due to their “likelihood of significant risks,” an audit or other audit procedures are performed.   In other words, in these cases, if the group auditor is not making reference to a component auditor, a considerable amount of work must be performed.

 

For components that are not significant, the group engagement team performs analytical procedures at the group level.

 

In order for reference to the component auditor to be made in the auditor’s report on the group financial statements, the component financial statements need to be prepared using the same financial reporting framework as the group financial statements and the component auditor has performed an audit on the financial statements of that component.

 

More Changes...

 

 

Practice, Practice, Practice

 

Okay, here are a few practice questions based on these new rules.

 

(1) – The audit firm of Slackto and Bennette is currently preparing an unmodified audit report for a company that is privately-held.   To whom should the report be addressed:

               a.   The Securities and Exchange Commission (SEC)

               b.   The Public Company Accounting Oversight Board (PCAOB)

               c.    The primary users of the report

               d.    The Auditing Standards Board (ASB)

 

 

(2) – The audit firm of ABcd is in the process of providing an unmodified report for the Missouri-Alabama Company, a nonissuer.   Which of the following are headings that would be found in that report?

               a.   Authoritative Accounting and Authoritative Auditing

               b.  Management’s Responsibility for the Financial Statements and Auditor’s Responsibility

               c.   U. S. GAAS and U. S. GAAP

               d.   Audit Testing and Internal Control

 

(3) – The new audit report for a nonissuer mentions the internal control for the reporting company.   Which of the following is NOT mentioned specifically?

               a.   No opinion on internal control is provided.

               b.   Consideration of internal control helps the auditor design appropriate audit procedures.

               c.   The overall quality of the reporting entity’s internal control

               d.   The only internal control considered is that which is relevant to the preparation and fair presentation of the financial statements.

 

 

 

 

Answers:

 

1.  Answer:   C    The audit report should be addressed to the parties who are most likely to make use of its contents.   That would be the board of directors and the stockholders.

 

2.  Answer:   B    The audit report for a nonissuer must have headings to indicate the purpose of each section and they include Management’s Responsibility for the Financial Statements, the Auditor’s Responsibility, and Opinion.

 

3.  Answer is C    Consideration of internal control helps the independent auditor decide what testing needs to be done but no opinion or indication of the specific quality of the internal control is provided.   That is not the purpose of a financial statement audit.

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June 26, 2013

Lesson 135

 

From:   Joe

 

Pledge to Yourself to Sit for the Exam this Testing Window

 

The July testing window will be opening in a few days.   Are you ready?   Each new window offers you the opportunity of getting some parts passed.   I’ve always liked that word “opportunity” because it indicates a potential benefit but not a sure thing.   You have the opportunity to move forward, you have the chance to make something great happen.   But it is up to you.   The opportunity is available but what you do with that opportunity is up to you.

 

For better or worse, it won’t be long until it is the end of August and this opportunity will have passed.   Will you be thrilled by what you have accomplished in those few weeks?  Or, will you be disappointed in yourself because you let the time slip away?   Whether you pass or not, you need to make the most of the opportunity.  I fully realize that there are so very many things in life that can steal your time from you – the Internet alone provides at least 1,000 ways to waste time without adding a single point to your CPA Exam score.   Television is just as bad.

 

Make it your pledge as you start into this new window that you will not get to the end of August disappointed in yourself.   You will not lose this opportunity.

 

Throw away these lines:

--“I could have done better.”

--“I don’t know how I could have lost so much study time.”

--“I don’t know why I find so many other things to do rather than study.”

--“I kept promising myself that I would get to work but I just never made it happen.”

 

In many ways, I think, success comes NOT from all that you get done but rather by avoiding the negatives.   It is those negatives that drag us down.   What is worse is that we allow that to happen.   We make excuses for ourselves.   “I’m just so disorganized.”   “I’ve always been lazy.”   “I don’t know why I’m not able to sit and study.”  Excuses that give you permission to fail.

 

Those are just reasons you are giving yourself not to try very hard.   Most people (not all but most, for sure) who “try very hard” do well on the CPA Exam.   I don’t care what review course you are using or how much you paid for it.   Most review programs where you “try very hard” have good results.

 

So, the key is:   try very hard.   No matter what anyone tells you, those three words are really the key:   try very hard.    Unfortunately, you cannot give yourself 1,000 excuses not to do the work and still take advantage of the opportunity.   You cannot always put it off until tomorrow.   You have to have the intestinal fortitude to sit down and do the work today (now).

 

I cannot make you any promises but if you will just “try very hard,” you have a wonderful chance for success.   Okay, you might not make 99 or 100 but if you put in the effort, you have a great chance to pass.   That’s the only real goal.

 

But, if you don’t “try very hard” your chances of success fall dramatically.

 

So, the only thing you should be focused on as you move into the July-August window is that you will “try very hard” so that when you get to the end of August, you will have no regrets.

 

Focus on avoiding setting up excuses for yourself.   Just sit down and start answering those questions.

 

Try very hard.

 

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If you are a college student or recent graduate reading this newsletter, consider the AccountingHomeworkApps to help you during this semester/quarter.  These phone apps help practice for quizzes and tests in the following college course topics (although maybe not the exact course name):  Financial Accounting, Accounting Information Systems, Business Law, Management Accounting, Auditing, Tax.  Love writing?  Let us know if you'd be interested in contributing to our AccountingHomeworkApps Blog.   A great resume builder!

 

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Are you willing to do the work necessary to achieve your goal of passing the CPA Exam? 

 

A new movie is coming out called Before Midnight.   This movie is a continuation of two earlier movies:   Before Sunrise and Before Sunset.   I really liked the first two movies so I am looking forward to seeing the third movie.   To get ready for this new movie, I recently went back and watched the first two again so I could easily remember everything that happened.

 

There was a line in Before Sunset that I must have missed when I watched it years ago but it really caught my attention this time.   I was so impressed by it that I stopped the video so that I could write it down.

 

These movies are about a man and woman who fall in love.   In Before Sunset, the woman talks about people where their love eventually fails:  “They enjoy the goal but not the process. But the reality of it is that the true work of improving things is in the little achievements of the day.”

 

Okay, she was talking about being in love and staying in love but she could have been talking about passing the CPA Exam.   Over the past 34 years, I have had thousands of people tell me “I am so excited about the possibility of passing the CPA Exam.   That has long been my goal.”

 

Then a couple of weeks will pass and I will ask them how their studies are going and they will say “I am so excited about the possibility of passing the CPA Exam.   That has long been my goal.”   But when I press them about their actual studying, they will confess that they have not yet even started to study.

 

They are in love with the goal of passing the CPA Exam but not the process.   That is simply not enough.   Wanting something, by itself, is never enough.   You have to do enough work, answer enough questions, so that you make a little improvement each day.   If you can successfully make a little improvement every day, you will be amazed by how quickly you will be able to pass the CPA Exam.

 

But you have to take that second step.  Yes, you really do have to have a goal that is meaningful to you.   However, you have to take that second step and get into the process.   You have to be excited enough about the goal that you are willing to do the work.   A goal without work is not a goal but a fantasy.   A goal where there is not enough energy to work questions is just hollow – it is not real.

 

Do you want to pass the CPA Exam?     If the answer to this first question is not a shouted “You bet I do!!!” then you probably should wait.   Unless you want it pretty badly, you are setting yourself up for failure.   It is hard to pass without a serious desire.

 

Are you willing to do the work necessary to achieve your goal of passing the CPA Exam?    That is probably the most important single question that I can ask you.   Are you willing to do the work?    It is not easy but it certainly is not impossible.   People just like you pass the CPA Exam all the time.   And, it is not luck.   They have a goal and they are able to translate that into a desire to do the process also.   That process is answering questions and reading answers and taking short notes about the ones you missed so that you can review and get better.   That’s the process – you should love it because that is the process that leads to success on the CPA Exam.

 

New Practice Questions

 

As always, let’s do a little practice.   Let’s see if we can add some points to your CPA Exam score.

 

FAR

 

FASB has created a fair value hierarchy to help companies know how to determine fair value when that is required for reporting purposes.   In this hierarchy, one level uses a quoted market price found in an active market.   What level is that?

 

A.   Level 1

B.   Level 3

C.   Level A10

D.   Level A 1A

 

Auditing

 

The James and Wade CPA firm have audited the financial statement of Riley, Inc. for a number of years.   Riley has consistently produced high qualify financial statements with no material misstatements.   Although Riley has always been privately owned, it will have an initial public offering of shares on a stock market 4 months after the end of the current year.   How does the knowledge of this initial public offering impact the work of the CPA firm?

 

A.   It has no impact on the work of the CPA firm because of the historic quality of the work.

B.   It increases the risk of a possible material misstatement.

C.   It lowers risk because of the legal liability that Riley is taking on with the initial public offering.

D.   It depends on what percentage of the company is being traded in the initial public offering.

 

Regulation

 

An entity files a form 1023 with the Internal Revenue Service.   What is the purpose of this form?

 

A.   It reports gains and losses by a company from the sale of its own stock.

B.   It is an application for tax-exempt status.

C.   It is a form used by not-for-profit entities to report the salaries received by its officers and directors.

D.  It is required whenever a corporation issues a stock dividend where the owners have the option of receiving cash instead of stock.

 

 

BEC

 

A company produces 10,000 widgets for $90,000 and sells them for $110,000.    Fixed cost is $20,000.   The company plans to drop the price of a widget by $1 with the hopes that it will sell 40 percent more units.   How will that decision impact net income?

 

A.   Net income will go up by $2,000

B.   Net income will go up by $10,000

C.   Net income will go up by $12,000

D.  Net income will go up by $14,000

 

ANSWERS:

 

 

 

FAR

 

Answer is A

 

The fair value hierarchy has three levels:   1, 2, and 3.   Using 1 is the most desirable because it is the most accurate portrayal of fair value.   It is described as using a quoted market price from an active market.   Level 2 is a bit less desirable and suggests using other observable information such as a quoted price for a similar property in an active or inactive market.   Level 3 is the least desirable because it requires the use of assumptions (rather than observations) such as guess at what a market participant might do in arriving at a price for a property.   In reporting fair value, a company is supposed to use the highest level possible for each account balance.

 

Auditing

 

Answer is B

 

Any time that a company plans to issue shares of its own stock, it hopes to receive as much money from investors as possible.   Investors will bid up the opening price of the initial public offering if Riley, Inc. looks especially profitable.   Therefore, whenever an audit client is making plans to issue shares to the public, the independent auditor should be aware that the risk of a material misstatement is higher because it could be used to benefit the company and its original owners.

 

 

Regulation

 

Answer is B

 

The form 1023 is labeled as the Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code.  Section 501(c)(3) is the most common tax-exempt status.

 

 

BEC

 

Answer is A

 

Currently, net income is $110,000 less $90,000 or $20,000.   Widgets are sold for $110,000/10,000 units are $11 each.  Because fixed cost is $20,000, the variable cost must be the other $70,000 or $7 per unit ($70,000/10,000 units).   If the price is lowered from $11 to $10, the number of units sold will go up by 40 percent from 10,000 to 14,000.   Total sales will be 14,000 times $10 sales price or $140,000.   Fixed cost is still $20,000 and variable costs are $7 each times 14,000 units or $98,000.   Total costs are now $118,000 ($20,000 plus $98,000).   The new profit will be $140,000 sales less $118,000 cost for a profit of $22,000.   That is $2,000 more than the current net income.

 

 

You’ve got roughly 9 weeks in the July-August window.  Let’s make the very best of that time to add points and get 75 and pass.

 

Joe Hoyle

Co-Founder and President

 

CPA Review for FREE

How to Stay Fresh While Taking the CPA Exam; New Practice MCQs

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Over 2,400 FREE CPA Review Questions and Answers Available to YOU (for FREE)
 

May 14, 2013

Lesson 133

 

From:   Joe

 

THANKS FOR YOUR HELP PAYING US FORWARD

 

We just got our results for last week and we had 10,029 visitors to our website who spent an average time of over 21 minutes.   That is an average visit for the entire week of 21 minutes, not 21 seconds like on most websites but 21 minutes.   To put that in another way, those visitors looked at 212,502 pages in that one week.   That means that someone looked at a page onCPAreviewforFREE every 2.8 seconds for 24 hours per day for the entire 7 days.

 

Why do so many people look at so many of our pages?   That’s easy – people just like you get the word out to their friends.   All those other (expensive) review programs advertise like crazy.   We spend nothing on advertising.   Nothing.   Instead, we depend on you to pass along emails like this one to people who are preparing to take the CPA Exam.  

So, every time we see a number like 212,502, we always say a word of thanks to YOU for helping to spread the word.

 

 

FACEBOOK AND TWITTER FOR MOTIVATION  BETWEEN NEWSLETTERS

 

We send these email lessons out every 10-14 days to everyone who registers for free at CPAreviewforFREE.  However, we want to try to provide more encouragement quicker.   So, recently, we have been sending out 2-3 messages per day on Facebook (CPAreviewforFREE) and twitter (CPAreview4FREE).   It is amazing how much you can say in just 140 characters.   We realize that people who are challenging something as tough as the CPA Exam can use a touch of encouragement on a regular basis and that is what we are trying to provide.

 

Check us out.

 

Or, again, pass the word along.

 

 

HOW TO STAY FRESH WHILE TAKING THE EXAM

 

I gave a couple of final exams last week for Intermediate Accounting II (deferred taxes, bonds, leases, etc.).   As I am sure you know, that material is very complex.   Therefore, although the students normally get three hours, I gave them four hours.   One of the things that I always warn my students about is “thinking tired” during any exam.   They are not digging ditches or building pyramids but it is easy to start convincing yourself that you are tired as you mentally work through a long test.   When you start “thinking tired,” you begin to get careless.   You lose your concentration.   You start making silly errors.   That can be the difference in passing and failing.

 

I realize that a four hour test is a long test but when it comes to your mental state, you are only as tired as you tell yourself you are.   I want my students to be as fresh during the last hour on that exam as they are during the first.   I suggest that they stand up and stretch every 45 minutes or so just to relax and get the energy moving again.  

 

However, my most common admonition is that they never start mentally whining about how tired they feel.  More...  

 

DEFINITIVE INFORMATION ON THE CPA EXAM FROM THE AICPA

 

I am a big believer when you face a serious challenge that you need to learn as much about the enemy as you can.   When I took the CPA Exam many decades ago, I spent the first couple of weeks reading as much about the Exam as I could find.   I felt like I could better prepare myself for the battle if I understood what the CPA Exam was all about.

 

Now, of course, there is an entire website devoted to the CPA Exam.   Before you get too much further into your preparation, take a break and make sure you understand what you are facing.

 

Go to www.cpa-exam.org

 

Next, click on “For candidates” and read the “Candidate Bulletin.”   Skip what does not apply to you but read carefully everything that does apply to you.

 

Next, click on “Exam content” and read the “CSOs/SSOs Effective January 1, 2013”

 

After that, just wander through the website and see what you can learn.   Much of it will not impact you but some of it can be very important.   Know the enemy – it makes the enemy easier to defeat.  A reminder, our material is up to date to prepare you for the CPA exam.

 

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Did you know we have iPhone/iPad apps as well as Android apps?  

 

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PRACTICE NEW MCQs

 

Let’s do some practice and add some points to your score.  We're trying something different.  We added the answer letter and explanation to the end of the questions so you don't see the answers right off the bat.  Let us know if you like this.   

 

FAR

 

 The city of LeHuston sends out its Year Two property tax levies in Year One.   Although the money cannot be legally used by the city until Year Two, cash of $30,000 is collected prior to the end of Year One.   Cash is debited for $30,000 at that time.   How is the credit recorded in preparing the government-wide financial statements for Year One?

a.     As a revenue of $30,000 on the statement of activities

b.     As a liability of $30,000 on the statement of net assets

c.     As a deferred inflow of resources of $30,000 on the statement of net position

d.    As an increase in the fund balance-restricted on the balance sheet

 

 

Auditing

 

 The audit firm of Jennifer and Lawrence is gathering evidence about the possibility of material misstatements in a client company’s accounts receivable.   The company has 10,000 accounts receivable that the CPAs have split into two groups:   one for balances under $500 and another for balances of $500 or more.   The CPAs tested 5 percent of the first group and 20 percent of the second.   Which of the following statements is true?

a.   The audit firm cannot split accounts receivable in this way because the balance must be examined as a whole.

b.   The audit firm has stratified the population in hopes of reducing the necessary sample size.

c.    The audit firm can split the group as it pleases but the same number of items must be selected from each group.

d.   The audit firm can split the group as it pleases but must sample at least 30 percent of the total number of items.

 

 

Regulation

 

The Mendenhall Corporation is a domestic US company and owns shares in three different companies.   Each investment paid a $20,000 dividend to Mendenhall during the current tax year (for a total of $60,000).    Mendenhall owned 9 percent of the first company which was not a domestic US corporation.   Mendenhall owned 18 percent of the second company which was a domestic US corporation.   Mendenhall owned 27 percent of the third company which was also a domestic US corporation.   By how much did these dividends cause Mendenhall’s taxable income to go up?

a.   $60,000

b.   $30,000

c.   $16,000

d.   $12,000

 

 

BEC

 

A company is attempting to project the amount of cash that it will need to purchase an adequate amount of inventory for the current physical year.   The company expects to make sales of $300,000 with the merchandise costing $180,000.    The company wants to increase its level of inventory during the year by $25,000.   In addition, the company would like to decrease the level of accounts payable by $10,000.   What cash will have to be spent to achieve these objectives?

a.    $145,000

b.   $165,000

c.   $195,000

d.   $215,000

 

Have a great week – check out our Facebook page and/or out Twitter feed.

 

 

Answers to the questions above:

 

 

FAR--Answer is C

 

Historically, this early payment amount was reported as a liability.   However, services do not have to be rendered to earn the money and no repayment will occur.   So, the credit does not really meet the normal definition of a liability.   In a relatively new standard, GASB has created a statement of net position (instead of a statement of net assets) where a few balances (such as this) are reported as deferred inflows of resources in a category separate from the government’s liabilities.   

Joe Hoyle

 

Auditing--Answer is B

 

One of the problems in doing statistical sampling is that sample size is affected by the variability of the items in the population.  Thus, a lot of variability may necessitate a very large sample size (requiring a large amount of cost and effort).   That problem can be alleviated somewhat by dividing a population into several smaller populations based on dollar amounts – a process known as stratification.   The variability of each of these smaller populations is reduced so that the overall sampling size can be smaller saving time and cost.

 

Regulation--Answer is B.  

 

All of the dividends are included as revenue but then, for the two investments in domestic US corporations, a dividend received deduction is allowed.   For the second company, that deduction is $14,000 or 70 percent because ownership was under 20 percent.   For the third company, that deduction is $16,000 or 80 percent because ownership was 20 percent or more.   The revenue was $60,000 less $14,000 and $16,000 for an increase in taxable income of $30,000.

 

Answer is D

 

The company expects to sell $180,000 worth of inventory but still wants to increase inventory levels by $25,000.   That is only possible if the company buys $205,000 in inventory this period.   The company also wants to reduce the level of its accounts payable by $10,000.    Reducing a liability requires an additional payment, in this situation an additional payment of $10,000.   Therefore, to achieve these goals the company must anticipate spending a total of $215,000 in purchasing inventory.

 

Now go get some additional points!

 

Joe Hoyle, Co-Founder

CPA Review for FREE

 

www.CPAreviewforFREE.com

 

Q2 Scores for the CPA Exam

The AICPA announced that the scores for days 1-20 of Q2 have been released.  Have you received your scores yet?  If so, let us know how you did.

Congrats to those who put in the time and work to pass one part at a time!

Remember, if you didn't pass, you can "talk" it over with others on our forum.  Also, be sure that you register for our free newsletter where Joe provides encouragement, motivation and some new questions to study.

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How to Stay Focused While Preparing for the CPA Exam

Try us FIRST before you spend your hard-earned money.   CPA Review for FREE   Over 2,400 FREE CPA Review Questions and Answers Available to YOU (for FREE)   May 7, 2013 Lesson 132   From:   Joe   PAY US FORWARD   I have been a bit slow sending out these email lessons during the spring because I have been tied up teaching some complicated courses at the university.   However, I gave my last final exam of the semester yesterday.   Now, I plan to be much more consistent over the summer and fall with these periodic email lessons – hopefully, you will be receiving a new lesson every 10-14 days from now on.   So, if you are preparing to take the CPA Exam soon, make sure to watch out for our emails.  We want to help you (yes, you) get the points you need to knock out that exam just as quickly as possible.   And, if you know someone (perhaps a graduating college student) who is gearing up to take the CPA Exam, suggest they go towww.CPAreviewforFREE.com and register so they can get these lessons.   They are absolutely free.   We just want to help you add those essential points to your grades and get you that much closer to 75.   WORK ON STAYING FOCUSED--HERE'S HOW   I wanted to give you a quick update.  Back on February 27, I talked about how hard it was for me to exercise.   Perhaps like you studying for the CPA Exam, I can exercise for a few days but then I will get distracted and fall behind and quit.   In that lesson, I talked about the need to have enough discipline to keep doing the necessary work day after day even after it gets boring.   At that time, I mentioned that I had started working out on a recumbent cross trainer (a type of exercise machine that works both the legs and arms).   What I had found very interesting was that this particular machine would count my steps.   So, after every workout session, I would write down my number of steps and go home and record them in a computer file.  There was something about keeping a count and watching the number get higher that really appealed to me.   Every day that I exercised on that machine, I will see that number of steps move higher.   Back then, I was trying to go to the gym about 5 times each week.  When I was writing that lesson, 33 days had passed and my grand total of steps was all the way up to 35,150.   For me, that was a real accomplishment.   I had not gotten bored and quit.   I had found a routine that seemed to work for me.   So, how am I doing?   Well, a total of 97 days have now passed and I am still shooting to work out 5 days per week and my grand total of steps is up to 116,900.   I am on track to hit my goal of 1 million steps in 2 ½ years – that will be the summer of 2015.   I cannot explain it but keeping track of the steps just works for me and I’m thrilled by that.   I have never successfully exercised in my entire life but now, every day, I say to myself – you can actually do this; every step you take adds more steps to your total.   You can move that total up.   My legs are stronger.   My heart is stronger.   My arms are stronger.   And what is the secret?  More...   WE ARE HERE FOR A REASON; THERE IS SERIOUS WORK TO BE DONE   I was reading a book recently and the author was talking about leading a conference on writing.   For some reason, he did not take his role very seriously and walked in on the first day and started wasting time.    He was amazed because the participants immediately let him know that they had not come to play and have a good time.   He said something in the book like “No one said anything directly to me but the message was clear:   We are here for a reason; there is serious work to be done.”   There is serious work to be done.   That’s a mantra that I like.     If you are going to take the CPA Exam and pass it in a reasonable period of time, you have to approach each day of your preparation with some quote like that:   “There is serious work to be done.”   The CPA Exam is not trivial.   Passing takes a lot of serious work.   In life, there are always distractions calling to you.   Those distractions want to keep you from your serious work. --I am hungry. --I need a sharper pencil. --I am cold; I need a sweater. --I need a cola. --My shoes hurt my feet. --I might have an email so I better check --I wonder who has posted something funny on Facebook. --I wonder if the dog needs food.    I could list a thousand of these.   Sometimes you sound like a two year old fighting to stay out of bed at night.   But, if you really want to pass the CPA Exam, there is serious work to be done.   If you don’t start out with that type of serious attitude, the distractions will pull you in 10 different directions and never let your alone.   There is serious work to be done.   If that is not your attitude, then you might ask yourself whether you really have much of a desire to pass the CPA Exam.    We all build up excuses – my kids, my spouse, my friends, my parents, my teachers – they are all in the way.   We all have issues.   I can send you a list of mine if you wish.   But, in the end, there is serious work to be done.   You have to figure out how to go over, around, under, or through those excuses.    And it is up to you to do it.   No one can study for you.   People can do all kinds of things for you but no one can put information into your head.   You have to do that.   And, that only starts when you realize that there is serious work to be done.   NOW A WORD FROM AHA! AccountingHomeworkApps   We launched a subsidiary company that created Accounting Homework Apps for college students.  The homework apps are like nothing else on the market.  They provide hundreds of multiple choice questions in six common college course topics:  Financial Accounting, Management Accounting, Audit, Tax, Accounting Information Systems and Business Law.  The app tracks the percent of questions correct, the time it takes to work the questions, the number of questions you want to work and more.     Now you can study on your iPhone/iPad and Android smartphone without using precious data.  As finals hit college students, let them know about the apps.     PRACTICE QUESTIONS--ADD SOME POINTS!   For practice today, I am going to do something different.   Yesterday afternoon I gave a test and part of it was on accounting for private not-for-profit organizations.   NFP accounting makes up 10 percent (on average) of the FAR exam.   So, I thought I would give you some of the questions that I asked my students yesterday.   A lot of the accounting for these private not-for-profit organizations revolves around handling of donations.     Good luck (I hope you pass the course).     For all of the following questions, assume that Charity A and Charity B are alike in every way except as described.   Assume that each of these questions is independent from all other questions.   (1) – Charity A and Charity B both suffer significant damage from a hail storm.   Each hires a person to provide essential repairs.   Each of these workers donates the labor to the charity.   Charity A looks at the repair work and deems it to require a specialized skill.   Charity B looks at the repair work and decides that it did not require a specialized skill.   After that, which of the following statements is true?  Circle the correct answer. A.   Charity A will report more unrestricted net assets than Charity B. B.   Charity A will report the same amount of unrestricted net assets as Charity B. C.   Charity A will report less unrestricted net assets than Charity B.       Answer is B   If donated services require a specialized skill that would have been purchased except for the donation, the expense is recorded at fair value as well as contribution revenue.   That is what Charity A did.   Those two accounts cancel each other out so that the total of unrestricted net assets is not affected.   If the work does not require a specialized skill (and if a nonfinancial asset is not enhanced), no recording is normally made.   That is what Charity B did.   No entry means that unrestricted net assets are not affected.   There is no net effect on unrestricted net assets for either charity.     (2) – Each charity receives a large investment in the common stock shares of a publicly-traded company.   Each investment must be held forever.   Charity A can spend the resulting income as it sees fit.   Charity B must spend the resulting income to supplement salaries.   Both charities receive the same amount of income this year.   Both charities immediately spend the entire amount of income to supplement salaries.  After that, which of the following statements is true?  Circle the correct answer. A.   Charity A will report more unrestricted net assets than Charity B. B.   Charity A will report the same amount of unrestricted net assets as Charity B. C.   Charity A will report less unrestricted net assets than Charity B.       Answer is B   The income is unrestricted for Charity A.   When it is earned, contribution revenue is increased within the unrestricted net assets.   When the money is then spent, salary expense is recognized which reduces unrestricted net assets.   The two cancel out.   Charity A has no change in its unrestricted net assets.    The income is restricted for Charity B.   When earned, the temporarily restricted net asset balance is increased.   However, when the money is spent in the appropriate fashion, the temporarily restricted net asset balance is reduced and the unrestricted net assets category is increased (because the restriction has been fulfilled).   Also, the salary expense is recorded within the unrestricted net assets.  For Charity B, the unrestricted net asset total goes up and then is reduced so, once again, there is no change in unrestricted net assets.   Neither Charity A nor Charity B report any change in unrestricted net assets.     (3) – On 1/1/1, each charity combines with another similar charity.   In both cases, this similar charity has assets with a book value of $700,000 but which are worth $780,000.   This similar charity had no liabilities.   Both Charity A and Charity B paid $800,000 to make this acquisition.   Charity A is acquiring a charity that gets its money through exchange transactions (it sells cookies).   Charity B is acquiring a charity that gets its money through donations.    After that, which of the following statements is true for consolidated statements?  Circle the correct answer. A.   Charity A will report more unrestricted net assets than Charity B. B.   Charity A will report the same amount of unrestricted net assets as Charity B. C.   Charity A will report less unrestricted net assets than Charity B.       Answer is A   The problem here is with the handling of the $20,000 that was paid in excess of the fair value of the similar charity’s assets.   The charity acquired by Charity A generates revenue so the $20,000 is viewed as goodwill.   The charity acquired by Charity B gets its funds from donation.   Goodwill is really the amount paid in an acquisition on the anticipation of additional revenues (from a source that cannot otherwise be identified as an intangible asset).    This second charity does not have revenues.   Therefore, the excess is not recorded by Charity B as goodwill but as a reduction in net assets.   Charity A does not have that reduction and will have more unrestricted net assets.     (4) – On 1/1/1, a rich person tells Charity A that she will give $300,000 in cash on January 31, Year Three if the charity has been able to push its program service expenses to 80 percent or more of the charity’s total for expenses.   If received, this donation must be spent on salaries for hourly workers.   The reported figure on December 31, Year One is 75 percent and on December 31, Year Two is 82 percent.   The money is donated early in Year Three and then properly spent several weeks later.    Circle the correct answer. A.   During Year One, Charity A increases its unrestricted net assets. B.   At the end of Year Two, Charity A increases its unrestricted net assets. C.   During Year Three, unrestricted net assets are both increased and decreased. D.   During Year Three, temporarily restricted net assets are both increased and decreased.     Answer is C   Initially, this gift is conditional because it will only be given if the charity is able to accomplish a certain objective.   Conditional pledges are not recorded by not-for-profit organizations.   However, at the end of Year 2, the objective is reached and the gift becomes unconditional so it is recorded.   At that time, in Year Two, the asset “pledge receivable” is increased along with contribution revenue (which increases the temporarily restricted net assets).   The temporarily restricted category is used because the money has to be spent in a particular fashion.   In Year Three, when the money is properly spent, the temporarily restricted net asset category is reduced and the total of unrestricted net assets is increased (the restriction has been fulfilled).   The salary expense also reduced unrestricted net assets at that time.   The total of temporarily restricted net assets is increased in Year Two and decreased in Year Three.   The total of unrestricted net assets is increased and decreased in Year Three.     (5) – Assume Charity A is a not-for-profit hospital.   On 1/1/1, Charity A does an appendectomy on one of its patients.   The cost is $76,000 but the normal charge is $100,000.   Charity A realized from the beginning that collection would be impossible and made no attempt to collect.   What amount should be disclosed by Charity A?   Circle the correct answer.  A.   Zero B.   $76,000 C.   $100,000       Answer is B   Not-for-profit health care entities often do charity service where work is performed but the charity does not anticipate receiving any money, often because the person is poor and uninsured.   Such charity work is not recorded at all since there was no expectation of collection.   However, to indicate the financial impact of this decision, the cost of that work must be disclosed.      Have a great week.   I’ll be back soon with a new lesson.   Let’s get this CPA Exam finished off in 2013.     Joe Hoyle   Co-Founder CPA Review for FREE