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CPA REVIEW VOLUME 8



The CPA Exam

From CPA Review; Written by Steve Dowling on 2012-01-15
The CPA Exam

The Uniform Certified Public Accountant Examination (Uniform CPA Exam) is the examination administered to people who wish to become Certified Public Accountants in the United States. The Uniform CPA Exam is developed and maintained by the American Institute of Certified Public Accountants (AICPA), and is administered by the National Association of State Boards of Accountancy (NASBA).

The sections have been reorganized as follows:

Auditing and Attestation – This section covers knowledge of planning the engagement, internal controls, obtaining and documenting information, reviewing engagements and evaluating information, and preparing communications.
Financial Accounting and Reporting – This section covers knowledge of concepts and standards for financial statements, typical items in financial statements, specific types of transactions and events, accounting and reporting for governmental...(Read More)


Liabilities

From CPA Review; Written by Steve Dowling on 2012-08-05

What is the quality of liabilities?

If liabilities are understated, net income is overstated because it does not include necessary charges to reflect the proper valuation of liabilities.

Examine trends in current liabilities to total liabilities, to stockholders' equity, and to sales. Rising trends may point to liquidity problems. Determine whether liabilities are "patient" or "pressing." A "patient" supplier with a long relationship may postpone or modify the debt payable for a financially troubled company. "Pressing debt" includes taxes and loans payable. These have to be paid without excuse. A high ratio of "pressing liabilities" to "patient liabilities" points to greater liquidity risk.

If you find that reserves are used to manage earnings, add back the amounts charged to earnings and deduct the amounts credited to earnings. A firm having an unrealistically low provision for...(Read More)


Deferred Charges And Unrecorded Assets

From CPA Review; Written by Steve Dowling on 2012-08-05

Are deferred charges of poor quality?

Deferred expenses depend to a greater extent on estimates of future probabilities than do other assets. The estimates may be overly optimistic. Is the company deferring an item having no future benefit only to defer costs in order not to burden net income? Deferred charges are not cash realizable assets and cannot be used to meet creditor claims.

EXAMPLES: Questionable deferred charges are:
o Deferred exploration costs under the full cost method
o Deferred interest on borrowed funds for self-constructed assets

The higher ratios of deferred charges to total assets, to sales, and to net income indicate more realization risk in assets. Furthermore, 20X5's earnings quality may be lower because deferred costs may include in it items that should have been expensed.

A high ratio of intangible assets and deferred charges to total assets points...(Read More)


Other Intangibles

From CPA Review; Written by Steve Dowling on 2012-05-06

How should I handle new product costs, organization cost, leasholds?

Internally generated costs to derive a new patented product are expensed. The patent is at the registration fees to secure and register it, legal fees in successfully defending it in court, and the cost of acquiring competing patents from outsiders. The patent account is amortized over its useful life not exceeding 20 years.

NOTE If an intangible asset is deemed worthless, it should be written off, recognizing an extraordinary or nonrecurring item depending on the circumstances.

How are trademarks, tradenames, franchises, licenses, and copyrights accounted for?

Trademarks and tradenames have legal protection for 10 years and maybe renewed for an indefinite number of times. Franchises and licenses with a limited life should be amortized over its useful life. Copyrights are granted for the life of the creator...(Read More)


Goodwill As An Intangible

From CPA Review; Written by Steve Dowling on 2012-05-06

How is goodwill valued?

Goodwill is theoretically equal to the present value of future excess earnings of a company over other companies in the industry. In buying a new business, a determination must often be made as to the estimated value of the goodwill.

Two methods that can be used are:
o Capitalization of earnings
o Capitalization of excess earnings

EXAMPLE 2.16
The net worth of ABC Company excluding goodwill is $800,000, and profits for the last four years were $750,000. Included in the latter figure are extraordinary gains of $50,000 and nonrecurring losses of $30,000. It is desired to determine a selling price of the business. A 12 percent return on net worth is deemed typical for the industry. The capitalization of excess earnings is 45 percent in determining goodwill.

Net Income for 4 years $750,000
Less: Extraordinary gains 50,000
Add: Nonrecurring losses...(Read More)





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