Page 1 of 8 Gleim CPA Review Updates to Financial 2011 Edition, 1st Printing August 22, 2011 NOTE: Text that should be deleted from the outline is displayed with a line through the text. New text is shown with a blue background. Introduction Page 8: These additions reflect the AICPA s update to the CPA Exam s CSO reference list for Financial (effective July 1, 2011). Gleim did not need to alter any other area of our materials, as we already cover all of these items. REFERENCES The AICPA suggests that the following publications will be sources of questions for Financial. Our outlines and answer explanations are based on these publications and are organized into meaningful, easy-to-use, common-sense study units to facilitate your exam preparation via the Gleim Knowledge Transfer System. 1. Financial Accounting Standards Board (FASB) Accounting Standards Codification 2. Governmental Accounting Standards Board (GASB) Codification of Governmental Accounting and Financial Reporting Standards 3. Standards issued by the U.S. Securities and Exchange Commission (SEC): Regulation S-X of the Code of Federal Regulations (17 CFR Part 210) Financial Reporting Releases (FRR)/Accounting Series Releases (ASR) Interpretive Releases (IR) SEC Staff Guidance in Staff Accounting Bulletins (SAB) SEC Staff Guidance in EITF Topic D and SEC Staff Observer Comments Regulation S-K of the Code of Federal Regulations 4. International Accounting Standards Board (IASB), International Financial Reporting Standards (IFRSs), International Accounting Standards (IASs), and Interpretations 5. AICPA Auditing and Accounting Guides 6. Codification of Statements on Auditing Standards AU Section 623, Special Reports 6 7. Current textbooks on accounting for business, not-for-profit, and governmental entities 8. FASB Concept Statements 9. GASB Concept Statements 10. IFRS Framework
Page 2 of 8 Study Unit 1 The Financial Reporting Environment Page 56, Unofficial Answers, Tab 2: This edit updates the correct answer explanation to show that assessing services provided is a reporting objective of both not-for-profit and governmental entities. 2. Reporting Objectives (6 Gradable Items) 1. B) Not-for-profit entities. A reporting objective of not-for-profit (nongovernmental) entities is to provide information useful in assessing management stewardship. 2. B) Not-for-profit entities and C) Governmental entities. A reporting objective of not-for-profit entities and governmental entities is to assist in assessing services provided. 3. A) General-purpose financial reporting. The objective of general-purpose financial reporting is to report financial information that is useful in making decisions about providing economic resources to the reporting entity. The information relates to entity resources, claims to those resources, and changes in them. 4. B) Not-for-profit entities. A reporting objective of not-for-profit (nongovernmental) entities is to provide information about factors that may affect an organization s liquidity. 5. A) General-purpose financial reporting. The objective of general-purpose financial reporting is to report financial information that is useful in making decisions about providing economic resources to the reporting entity. Primary users are current and prospective investors and creditors. 6. C) Governmental entities. A reporting objective of governmental entities is to assist in public accountability. Study Unit 2 Financial Statements Page 101, Classification of Cash Flows, and Page 103, Unofficial Answers, Tab 5: These edits correct the simulation to show that cash flows from trading securities are classified based on the nature and purpose for which the securities were acquired. Select from the list provided the correct best classification for each activity below. Each choice may be used once, more than once, or not at all. Cash Flow Answer Classification 1. Purchase of available-for-sale securities A) Operating activity 2. Purchase of land B) Investing activity 3. Dividends distributed to shareholders C) Financing activity 4. Equipment acquired through capital lease D) Noncash investing and financing activities 5. Sale of trading securities E) Not reported on statement of cash flows 6. Collection of trade receivables F) Based on nature and purpose 7. Equipment acquired through purchase 8. Dividends received 9. Interest paid 10. Interest received 11. Retirements of bond principal 12. Issuance of preferred shares
5. Classification of Cash Flows (12 Gradable Items) Page 3 of 8 1. B) Investing activity. Investing activities include the effects of transactions involving long-lived assets. The purchase and sale of investment securities that are not for active trading falls into this category. 2. B) Investing activity. Investing activities include the effects of transactions involving long-lived assets. The purchase and sale of property, plant, and equipment falls into this category. 3. C) Financing activity. Financing activities include the effects of transactions involving liabilities and owners equity. The distribution of a return on capital to shareholders falls into this category. 4. D) Noncash investing and financing activities. Some transactions affect recognized assets or liabilities but not cash flows. They are disclosed outside the body of the statement. The acquisition of equipment subject to a capital lease falls into this category. 5. A) Operating activity. F) Based on nature and purpose. Operating activities include the effects of transactions involved in the determination of net income. The purchase, sale, and maturity of trading securities fall into this category. Cash flows from trading securities are classified based on the nature and purpose for which the securities were acquired. 6. F) Financing activity. A) Operating activity. Financing activities include the effects of transactions involving liabilities and owners' equity. Operating activities include the effects of transactions involved in the determination of net income. The receipt of cash from the sale of goods or services to customers falls into this category. 7. B) Investing activity. Investing activities include the effects of transactions involving long-lived assets. The purchase and sale of property, plant, and equipment falls into this category. 8. A) Operating activity. Operating activities include the effects of transactions involved in the determination of net income. Returns on investment securities fall into this category. 9. A) Operating activity. Operating activities include the effects of transactions involved in the determination of net income. Interest expense falls into this category. Study Unit 3 Income Statement Items Page 121, Subunit 3.6, 1.c.1) through 1.f.: This change corrects our terminology to say fair value instead of net realizable value. In addition, it is a correction (simplification) of accounting for repossessed goods. 1) A separate gross profit percentage is calculated for each period. A TV costing $600 is the only item sold on the installment basis in Year 1. The TV was sold for a price of $1,000 on November 1, Year 1. Thus, the gross profit percentage is 40% [($1,000 $600) $1,000]. A down payment of $100 was received, and the remainder is due in nine monthly payments of $100 each. Because all payments are due within 1 year, no interest is charged. The entry for the sale is Cash $100 Installment receivable, Year 1 900 Cost of installment sales 600 Inventory $ 600 Deferred gross profit, Year 1 (sales price GP%) Installment sales 400 1,000
Page 4 of 8 d. At the end of the period, a portion of deferred gross profit is realized. In December when the first installment is received, the entry is Cash $100 Installment receivable, Year 1 $100 At December 31, the installment sales and cost of installment sales are closed and deferred gross profit is recognized. Moreover, deferred gross profit must be adjusted to report the portion that has been earned. Given that $200 of the total price has been received, $80 of the gross profit ($200 40%) has been earned. The entry is Installment sales $1,000 Cost of installment sales $600 Deferred gross profit 400 Deferred gross profit (Year 1) $ 80 Realized gross profit $ 80 Net income should include only the $80 realized gross profit for the period. The balance sheet should report a receivable of $800 minus the deferred gross profit of $320. Thus, the net receivable is $480. Balance sheet presentation Installment receivable $ 800 Minus: deferred gross profit (320) Net installment receivable $480 e. The gross profit percentage for the period of the sale continues to be applied to the realization of deferred gross profit from sales of that period. In Year 2, the remaining $800 is received, and the $320 balance of deferred gross profit is recognized. If only $400 were received in Year 2 (if payments were extended), the December, Year 2, statements would report a $400 installment receivable and $160 of deferred gross profit. f. If goods sold are repossessed due to nonpayment, their net realizable fair value, remaining deferred gross profit, and any loss are debited. The remaining receivable is credited. The TV had to be repossessed because no payments after the down payment were made by the buyer. The realized gross profit at December 31 would be only $40 ($100 40%). Moreover, the used TV would be recorded at its net realizable fair value minus a resale profit. Assume that fair value at the time of repossession was $500 400 and that repair costs and sales commissions will equal $100. Inventory of used merchandise $400 Deferred gross profit 360 Loss on repossession 140 Installment receivable $900 The loss on repossession is the difference between the $400 NRV fair value ($500 fair value $100 repair and sales costs) and the $540 carrying amount [$900 remaining receivable ($400 deferred gross profit $40 realized gross profit)] of the receivable.
Page 137, Question 32: These changes were made to avoid confusion with the price of purchases, since purchases in a periodic system includes freight-in. 3.7 Consignment Accounting Page 5 of 8 32. During the year just ended, Kam Co. began offering its goods to selected retailers on a consignment basis. The following information for the year was derived from Kam s accounting records: Beginning inventory $122,000 Purchases Price of goods purchased 540,000 Freight-in 10,000 Transportation to consignees 5,000 Freight-out 35,000 Ending inventory -- held by Kam 145,000 -- held by consignees 20,000 In its income statement for the year, what amount should Kam report as cost of goods sold? A. $507,000 B. $512,000 C. $527,000 D. $547,000 Answer (B) is correct. (CPA, adapted) REQUIRED: The total cost of goods sold. DISCUSSION: Cost of goods sold is equal to the cost of goods available for sale minus the ending inventory. Cost of goods available for sale is equal to beginning inventory, plus purchases the price of goods purchased, plus additional costs (such as freight-in and transportation to consignees) that are necessary to prepare the inventory for sale. The cost of goods sold for Kam Co. is $512,000 [($122,000 beginning inventory + $540,000 purchases price + $10,000 freight-in + $5,000 transportation to consignees) ($145,000 Kam s ending inventory + $20,000 consignee ending inventory)]. Freight-out is a selling cost and is not included in cost of goods sold. Answer (A) is incorrect. The amount of $507,000 does not include $5,000 for transportation to consignees. Answer (C) is incorrect. The amount of $527,000 does not include $5,000 for transportation to consignees or reflect the $20,000 of inventory held by consignees. Answer (D) is incorrect. The amount of $547,000 includes $35,000 of freight-out. Study Unit 7 Inventories Page 281, Question 11: These changes were made to avoid confusion with the price of purchases, since purchases in a periodic system includes freight-in. 11. The following information pertained to Azur Co. for the year: Purchases Price of goods purchased $102,800 Purchase Price discounts 10,280 Freight-in 15,420 Freight-out 5,140 Beginning inventory 30,840 Ending inventory 20,560 What amount should Azur report as cost of goods sold for the year? A. $102,800 B. $118,220 C. $123,360 D. $128,500 Answer (B) is correct. (CPA, adapted) REQUIRED: The cost of goods sold reported for the year. DISCUSSION: Cost of goods sold equals beginning inventory, plus net purchases price of goods purchased, plus freight-in, minus ending inventory. Freight-out is a cost of selling the goods rather than a cost of acquiring the goods. Thus, cost of goods sold is $118,220 [$30,840 + ($102,800 $10,280) + $15,420 $20,560]. Answer (A) is incorrect. This figure is the amount of the gross purchases price of goods purchased. Answer (C) is incorrect. This figure treats freight-out as a cost of goods sold. Answer (D) is incorrect. This figure omits purchase price discounts from the calculation.
Page 6 of 8 Study Unit 13 Leases and Contingencies Page 495, Subunit 13.2, 2.d. Example: This change corrects the terminology in our example so the net investment is properly identified. On January 2, Year 1, Cottle, Inc. leased a machine for 3 years from Crimson, LLC. Cottle must pay Crimson $100,000 at the end of each year. The machine has zero residual value after 3 years. The rate implicit in the lease is 10%. The present value factor for an ordinary annuity at 10% for three periods is 2.4869. The present value of $1 at 10% for three periods is.7513. PV of minimum rental payments = PV of minimum lease payments Crimson s journal entry on January 2, Year 1: = $100,000 2.4869 = $248,690 Lease payments receivable* $300,000 Asset $248,690 Unearned interest income 51,310 *This entry records the gross receivable. An alternative is to debit the receivable for an amount net of unearned interest (the net investment). This amount is $248,690. Crimson s journal entry on December 31, Year 1: Cash $100,000 Lease payments receivable $100,000 Unearned interest income $24,869 Interest income $24,869 Difference: Times: Equals: Reduction of Lease Receivable Effective Interest Cash Lease Receivable Lease Receivable Date Net Investment Rate Income Receipt Net Investment Net Investment 1/2/Year 1 $248,690 12/31/Year 1 $248,690 10% $24,869 $100,000 $(75,131) 173,559 12/31/Year 2 173,559 10% 17,356 100,000 (82,644) 90,915 12/31/Year 3 90,915 10% 9,091 100,000 (90,915) 0
Page 7 of 8 Study Unit 14 Equity Page 541, Subunit 14.10, 11. Example: These edits correct the amounts in the example so they are consistent with page 540. The following is the cash predistribution plan: Outside creditors $20,000 10,000 Liquidation expenses 14,000 First distribution $34,000 24,000 Loan from Rosecrans 40,000 Second distribution 40,000 To Rosecrans 19,697 Third distribution 19,697 To Bragg 10,000 To Rosecrans 20,303 Fourth distribution 30,303 All further distributions: Bragg 25% Rosecrans 50% Thomas -- 25% Page 561, Practice Simulation, Tab 3: The outline on page 532 uses a common stock dividend distributable account on declaration, which is adjusted on distribution. This makes two questions on Simulation tab 3 unclear. Adding the phrase and distributes clears this up. Select from the list provided the effect (increase, decrease, or no effect) each transaction below will have on Mart s common stock account. Each choice may be used once, more than once, or not at all. The state in which Mart is incorporated requires capitalization of retained earnings in the amount of the par value of the shares issued when a stock split in the form of a dividend occurs. Transaction Answer Choices 1. Mart declares and distributes a 10% stock dividend. A) Increase 2. Mart retires 5,000 of its outstanding shares of common stock. B) Decrease 3. Mart acquires its own stock to hold as treasury stock using the cost method. 4. Mart issues a 3-for-1 stock split. 5. Mart issues 1,000 previously unissued common shares at $25 per share. 6. Mart declares and distributes a 30% stock dividend. 7. Mart distributes a dividend of $1,200,000. Only $900,000 is in retained earnings to distribute as a cash dividend. C) No effect
Page 8 of 8 Study Unit 17 Governmental Accounting Page 652, Subunit 17.2, 5.a.1): This deletion reflects that governmental funds close revenues and expenditures to fund balance. 5. Year-End Closing a. The budgetary entries are reversed. General fund: Appropriations control $2,100,000,000 Estimated other financing uses -- transfer to debt service fund 600,000,000 Budgetary fund balance 100,000,000 Estimated revenues -- sales taxes $2,400,000,000 Estimated other financing sources -- bond proceeds 400,000,000 The mid-year amendment to the budget for construction materials is reflected in the reversal entry for the special revenue fund. Special revenue fund -- highway maintenance: Appropriations -- salaries $40,000,000 Appropriations wages 20,000,000 Appropriations -- road equipment 40,000,000 Appropriations -- construction materials 25,000,000 Budgetary fund balance 5,000,000 Estimated revenues -- vehicle license fees $130,000,000 1) Because governmental bodies do not measure net income, no closing entry is made for operating accounts.