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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.
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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
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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.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
Cash Flow
Purchase of available-for-sale securities
Purchase of land
Dividends distributed to shareholders
Equipment acquired through capital lease
Sale of trading securities
Collection of trade receivables
Equipment acquired through purchase
Dividends received
Interest paid
Interest received
Retirements of bond principal
Issuance of preferred shares
Answer
A)
B)
C)
D)
E)
F)
Classification
Operating activity
Investing activity
Financing activity
Noncash investing and financing activities
Not reported on statement of cash flows
Based on nature and purpose
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5. Classification of Cash Flows (12 Gradable Items)
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.
EXAMPLE
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
Installment receivable, Year 1
Cost of installment sales
Inventory
Deferred gross profit, Year 1 (sales price × GP%) Installment sales
$100
900
600
$ 600
400 1,000
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d. At the end of the period, a portion of deferred gross profit is realized.
EXAMPLE
In December when the first installment is received, the entry is
Cash
Installment receivable, Year 1
$100
$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
Cost of installment sales
Deferred gross profit
Deferred gross profit (Year 1)
Realized gross profit
$1,000
$600
400
$
80
$ 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
Minus: deferred gross profit
Net installment receivable
$ 800
(320)
$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.
EXAMPLE
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.
EXAMPLE
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
Deferred gross profit
Loss on repossession
Installment receivable
$400
360
140
$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.
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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
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
Purchases Price of goods purchased
Freight-in
Transportation to consignees
Freight-out
Ending inventory
-- held by Kam
-- held by consignees
$122,000
540,000
10,000
5,000
35,000
145,000
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
Purchase Price discounts
Freight-in
Freight-out
Beginning inventory
Ending inventory
$102,800
10,280
15,420
5,140
30,840
20,560
What amount should Azur report as cost of goods sold for
the year?
A. $102,800
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.
B. $118,220
C. $123,360
D. $128,500
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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.
EXAMPLE
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
= $100,000 × 2.4869 = $248,690
Crimson’s journal entry on January 2, Year 1:
Lease payments receivable*
Asset
Unearned interest income
$300,000
$248,690
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
Unearned interest income
Interest income
Date
1/2/Year 1
12/31/Year 1
12/31/Year 2
12/31/Year 3
Lease Receivable
Net Investment
$248,690
173,559
90,915
$100,000
$24,869
$24,869
Times:
Effective
Rate
Equals:
Interest
Income
Cash
Receipt
Difference:
Reduction of
Lease Receivable
Net Investment
10%
10%
10%
$24,869
17,356
9,091
$100,000
100,000
100,000
$(75,131)
(82,644)
(90,915)
Lease Receivable
Net Investment
$248,690
173,559
90,915
0
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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
Liquidation expenses
First distribution
Loan from Rosecrans
Second distribution
To Rosecrans
Third distribution
To Bragg
To Rosecrans
Fourth distribution
All further distributions:
Bragg – 25%
Rosecrans – 50%
Thomas -- 25%
$20,000 10,000
14,000
$34,000 24,000
40,000
40,000
19,697
19,697
10,000
20,303
30,303
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.
C) No effect
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.
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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.
EXAMPLE
General fund:
Appropriations control
Estimated other financing uses
-- transfer to debt service fund
Budgetary fund balance
Estimated revenues -- sales taxes
Estimated other financing sources -- bond proceeds
$2,100,000,000
600,000,000
100,000,000
$2,400,000,000
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
Appropriations – wages
Appropriations -- road equipment
Appropriations -- construction materials
Budgetary fund balance
Estimated revenues -- vehicle license fees
$40,000,000
20,000,000
40,000,000
25,000,000
5,000,000
$130,000,000
1) Because governmental bodies do not measure net income, no closing entry is
made for operating accounts.
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