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Business Environment and Concepts
by
Michael F. Farrell, J.D.
Dr. Sidney J. Baxendale, CMA, CPA, CFM Dr. Richard Coppage, CMA, CPA, CFM
Dr. Alan S. Levitan, DBA, CPA Vincent W. Lambers, MBA, CPA
Donald T. Hanson, MBA, CPA
Published by
Copyright © 2006 by Lambers CPA Review.
All rights reserved. No part of this publication may be reproduced in any form without the
written permission of the publisher.
2006
ACKNOWLEDGMENTS
It would be impossible to write a CPA examination preparation book of any kind without the assistance of the American Institute of Certified Public Accountants, and their various operating divisions, in granting permission to use various materials. We respectfully acknowledge and thank those persons in the American Institute who promptly answered our inquiries.
We also acknowledge the following sources, with our thanks for their assistance:
Material from the Certified Management Accountant Examinations, Copyright © 1988 through 1996 by the Institute of Certified Management Accountants is reprinted and/or adapted with permission.
Solutions to the CMA examination questions reprinted with the permission of Multimedia Management Training, Inc.
Questions from Investment Planning: Multiple Choice Questions Workbook, Lesson 2, Keir Educational Resources, Revised February 2003, reproduced with permission of Keir Educational Resources.
Special thanks to the National Conference of Commissioners on Uniform State Laws.
Material from their web site on Uniform Partnership Act reproduced with permission.
Lambers CPA Review North Andover, Massachusetts January 2006
Chapter Subjects of
Volume 4—BUSINESS ENVIRONMENT AND CONCEPTS
Chapter One
NON-CORPORATE ENTITIES Chapter Two
CORPORATIONS Chapter Three
MICROECONOMICS WITH STRATEGY EMPHASIS Chapter Four
BUSINESS CYCLES Chapter Five ECONOMIC MEASURES
Chapter Six FOREIGN EXCHANGE
Chapter Seven FINANCIAL MODELING
Chapter Eight
STRATEGIES FOR SHORT- AND LONG-TERM FINANCING OPTIONS Chapter Nine
FINANCIAL STATEMENT IMPLICATIONS OF LIQUID ASSET MANAGEMENT Chapter Ten
INFORMATION TECHNOLOGY IMPLICATIONS IN THE BUSINESS ENVIRONMENT Chapter Eleven
COST ACCOUNTING: ACTUAL COST, JOB ORDER AND PROCESS Chapter Twelve
COST ACCOUNTING: JOINT PRODUCTS AND STANDARD COSTS Chapter Thirteen
MANAGERIAL ANALYSIS AND CONTROL Chapter Fourteen
MANAGERIAL PLANNING AND CONTROL
Material from Uniform CPA Examination Questions and Unofficial Answers, copyright 1977 through 2005 by the American Institute of Certified Public Accountants, Inc., is reprinted (or adapted) with permission.
Welcome to the CPA Exam!
If you have taken the CPA exam before, you are now facing a new exam format, including some new material. However, you should know that overall the exam content has not changed very much, probably less than 20%. What definitely has changed is the schedule for the CPA examination, not only in May and November, but offered at various times during the four quarters of the year.
The CPA Examination
The CPA exam is a computer-based test (CBT). There are four sections: Auditing &
Attestation (AUD), Financial Accounting & Reporting (FAR), Regulation (REG), and Business Environment & Concepts (BEC). Each section includes sets of multiple-choice questions (testlets). In addition, all sections, except the newest section, Business Environment and Concepts, contain a new case study component called “simulations.” Simulations provide a set of facts and require candidates to complete related tasks and access authoritative literature.
Signing up and taking the exam:
Candidates have significant flexibility in where and when they take the CPA examination.
The exam is administered at Prometric Test Centers. There are some 300 test centers throughout the United States; however, not all of them offer CPA exam testing. Candidates may take the exam five days a week during any testing window. Weekday hours are 9am to 6pm. Many locations have extended hours, and some test centers offer weekend testing.
International candidates are required to test within the 54 jurisdictions that currently administer the CPA examination.
There are four testing windows per year: January-February, April-May, July-August and October-November. In most jurisdictions, candidates are able to take any or all sections of the exam during any testing window; however, the candidate is not allowed to take the same section more than once during any testing window.
The Application Process. Requirements to take the CPA examination vary from state to state. Therefore, candidates should contact the state board in their jurisdiction when requesting an application to sit for one or more parts of the CPA exam. After being determined by a state board to be eligible to take the exam, the candidate will receive a Notice to Schedule (NTS) and can then make an appointment with Prometric on their web site, www.prometric.com/cpa, or by phone, or in person at a test center. Candidates are encouraged to schedule at least 45 days in advance. No candidate will be scheduled fewer than five days before testing
.
Call 1-800-CPA-EXAM if you are applying to:
Colorado, Connecticut, Delaware, Florida, Georgia, Hawaii, Indiana, Iowa, Kansas, Louisiana, Maine, Massachusetts, Michigan, Minnesota, Missouri, Montana, Nebraska, New Hampshire, New Jersey, New Mexico, New York, Ohio, Pennsylvania, Puerto Rico, Rhode Island, South Carolina, Tennessee, Utah, Vermont, Virginia, or Wisconsin.
Call the Board of Accountancy if you are applying to:
Alabama, Alaska, Arizona, Arkansas, California, District of Columbia, Guam, Idaho, Illinois, Kentucky, Maryland, Mississippi, Nevada, North Carolina, North Dakota, Oklahoma, Oregon, South Dakota, Texas, U.S. Virgin Islands, West Virginia, or Wyoming.
Notice to Schedule (NTS). Your NTS will contain an “examination password” that you must enter on the computer as part of the log-in process. You will not be admitted to the test center without the NTS, and all exam fees will be forfeited for that section. Be sure your identification exactly matches the name on the NTS. Also, do not apply for the exam until you are ready to take it, because the NTS could expire in six months, won’t be extended and all fees lost. A six-month NTS validation period has been established in all jurisdictions except the following:
TEXAS CALIFORNIA NORTH DAKOTA SOUTH DAKOTA LOUISIANA 3 MONTHS 9 MONTHS 12 MONTHS 12 MONTHS 18 MONTHS
EXAMINATION SECTIONS
New Section Length Hours Old exam counterpart Auditing and Attestation 4.5 Auditing
Regulation (1) 3.0 Law & Professional Responsibility
Financial Accounting and Same – See note below
Reporting (2) 4.0
Business Environment & Managerial and Cost Accounting
Concepts (3) 2.5
The entire CPA examination length is 14 hours.
(1) Includes Federal Income Tax 60%, Law and Professional Responsibility 40%
(2) Includes Fund Accounting and Not-for-Profit Organizations 20%
(3) Includes several new subjects, such as economic concepts and information technology, and traditional exam subjects, but in greater depth.
(See Content Specifications at the end of this section.)
Candidates take different, equivalent exams consisting of items from a pool of test questions according to defined specifications. The specifications ensure that the results are comparable. The test package delivered to the test centers contains the test items, and also the rules for administering the tests. All items are classified according to content and statistical properties before they are administered in an operational test. The testing software ensures that each candidate’s test contains appropriate content coverage and difficulty.
RECOGNITION OF PARTIAL CREDIT UNDER OLD EXAM FORMAT
For those who have conditioning credit after the last paper and pencil exam in November 2003, credit is recognized for the new exam as follows:
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Credit on Paper-based Exam Will earn CBT credit
Auditing AUD Auditing & Attestation
Law and Professional Responsibility LPR Business Environment & Concepts Accounting & Reporting ARE Regulation
Financial Accounting & Reporting FARE Financial Accounting & Reporting
RELEASE OF GRADES
Distribution of grades is the responsibility of the state boards of accountancy. Advisory grades and diagnostic information will be provided to state boards at the end of the third month of each testing cycle or testing window. For example, grades should be available to state boards for the April-May testing period at the end of June. The passing standard for the computer-based version of the Uniform CPA Examination is set at a scaled score of 75.
Once you pass a section(s) of the examination, you will likely be allowed a maximum of 18 months to pass all remaining sections in order to retain credit on the passed section(s).
AICPA EXAM TUTORIAL
A CPA examination tutorial prepared and tested by the CBT exam Steering Group is available at www.cpa-exam.org. The tutorial covers the revised exam’s look, feel, and functionality, as well as offers both guided and self-directed instructions. The tutorial does not replace practice materials according to the CBT Steering Group of the AICPA.
Candidates are strongly advised to review the tutorial before taking the computer-based CPA examination.
TYPES OF QUESTIONS ON THE CPA EXAMINATION MULTIPLE-CHOICE QUESTIONS AND SIMULATIONS
I. The majority of the computer-based CPA exam (70-80 percent) is made up of multiple- choice questions. Each section of the examination consists of “testlets” which are the multiple-choice questions (24-30 questions), and 2 “simulations.” Part Four, Business Environment and Concepts (BEC), has only multiple-choice questions. BEC simulations will be added later.
The testlets will be “tracked” in that the second and third testlet will be adjusted by the computer to an easier or harder version. This will be based on the candidate’s performance on the first testlet. The candidate won’t know what version is on his/her computer screen.
The third testlet may or may not be adjusted up or down. The system is equitable because the grading is also adjusted according to the track of the questions; if the student has a hard track, fewer questions need to be answered correctly; likewise, an easy track requires that more answers be correct.
During the exam, within each testlet, you may review and change any of your answers.
Once you have exited the testlet, you will not be able to access your answers to any of
time clock on the screen is “cumulative” and indicates the time left for the entire exam, not just a portion.
II. While the majority of the test is multiple-choice questions, a key part of the exam is the
“simulation” question. According to the AICPA web site, simulations “are condensed case studies that will test candidates’ knowledge and skills using real life work- related situations.” The CPA exam candidate can expect two simulations to appear in each section with the exception of Part Four-Business Environment and Concepts. The simulations will take an estimated 35-45 minutes to complete, and will require the following:
“CPA candidates are expected to know how to use common spreadsheet and word processing functions, including writing formulae for spreadsheets. They must also have the ability to use a four-function calculator or a spreadsheet to perform standard financial calculations. In addition, candidates will be asked to use online authoritative literature. Many of the question types used in the simulations are based on familiar computer interface controls (e.g., text entry, mouse clicks, highlighting, copy and pasting).
In order to become familiar with the electronic tools provided for research questions, further practice may be required.”1
Available resources during the test will depend on the simulation that the candidate receives. Incorporated into the simulation portion of the exam is an assessment of written communication skills. The exam tests typical communications an entry-level CPA would write on the job, such as memoranda, client letters, etc.
The AICPA web site displays “screen shots” utilized for the simulations. The work tabs on top of the screen direct the tasks to be performed and are highlighted by a pencil which becomes shaded once the task is complete. Simulations typically include multiple-choice questions and/or written elements such as correspondence to a client. To become familiar with navigating the computerized exam screen, it is strongly advised that the candidate visit the AICPA web site tutorial.
The CPA Exam consists of the following:
Auditing & Attestation: 3 MCQ testlets and 2 simulations Regulation: 3 MCQ testlets and 2 simulations Financial Accounting & Reporting: 3 MCQ testlets and 2 simulations Business Environment & Concepts: 3 MCQ testlets
AICPA web site on simulations: Visit this site to become familiar with the computer format of simulated problems on the new CPA exam:
http://www.cpa-exam.org/lrc/exam_tutorial.html
1 AICPA web site
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Entry-level CPA skills to be measured:
Analysis: The ability to organize, process, and interpret data to develop options for decision making.
Judgment: The ability to evaluate options for decision-making and provide an appropriate conclusion.
Communication: The ability to effectively elicit and/or express information through written or oral means.
Research: The ability to locate and extract relevant information from available resource materials.
Understanding: The ability to recognize and comprehend the meaning and application of a particular matter.
Writing skills to be graded:
1. Coherent Organization. Candidates should organize responses so ideas are arranged logically and the flow of thought is easy to follow. Generally, short paragraphs composed of short sentences, with each paragraph limited to the development of one principal idea, can best emphasize the main points in the answer. Each principal idea should be placed in the first sentence of the paragraph, followed by supporting concepts and examples.
2. Conciseness. Candidates should present complete thoughts in the fewest possible words while ensuring important points are covered adequately. Short sentences and simple wording also contribute to concise writing.
3. Clarity. A clearly written response prevents uncertainty about the candidate’s meaning or reasoning. Clarity involves using words with specific meanings, including proper technical terminology. Well-constructed sentences also contribute to clarity.
4. Use of Standard English. Responses should be written using Standard English.
Standard English is used to carry on the daily business of the nation. It is the language of business, industry, government, education, and the professions.
Standard English is characterized by exacting standards of punctuation and capitalization, by accurate spelling, by exact diction, by an expressive vocabulary, and by knowledgeable choices.
5. Responsiveness to the Requirements of the Question. Answers should address the requirements of the question directly and demonstrate the candidate’s awareness of the purpose of the writing task. Responses should not be broad expositions on the general subject matter.
6. Appropriateness for the Reader. Writing appropriate for the reader takes into account the reader’s background, knowledge of the subject, interests and concerns.
Some questions may ask candidates to prepare a document for a certain reader, such as an engagement memorandum for a CPA’s client.
M
ENTAL ANDT
ECHNICALP
REREQUISITES FORS
UCCESS ON THECPA E
XAMThe exam is a test of your overall technical competency, a test to measure judgment and intelligence in the application of accounting principles, auditing standards, and procedures to practical problems, and to evaluate professional ethics. You are being tested on a basic level of knowledge in a broad spectrum of areas.
Your preparation should be geared to obtaining three things:
A Basic Technical Knowledge in All Areas. The emphasis here is on basics. You don’t need to know all the intricacies involved in any particular subject. What you do need to know are the major issues involved and you need to have a solid understanding of the underlying principles and concepts so you can respond to different types of questions and unfamiliar fact patterns.
Exam-Taking Skills. You need weapons. You need exam-taking skills and techniques for each subject area. These will allow you to win the maximum amount of points in the shortest amount of time. The only way you can develop your skill is to PRACTICE by working hundreds of exam questions in each topic area so that answering them correctly becomes second nature. Also, don’t forget to demonstrate good writing skills on all essay responses.
Confidence. When you walk into that exam, you must be confident. This confidence will come as a by-product of the above two elements. To quote a former successful Lambers student, “Study the material,……solve as many multiple-choice questions as your schedule permits. Although this is a very difficult exam, do not get discouraged.
If you are prepared….you will pass this exam.”
Strategies for Answering Objective Questions
1.) Cover (or do not look) at the answers. They are sometimes misleading and may confuse you before you have worked the question. Covering the answers keeps you from turning one simple question into four true or false questions. Also, in many cases, two or more choices may look plausible (and in fact, both may be technically correct), but you are asked to pick the best answer. For these reasons, it is critical that you cover the answers so you can think and formulate your own response first.
2.) Read the last sentence first. Generally, this will tell you the requirements.
3.) Decide on your answer or perform the appropriate calculations if a numerical response is required--still not looking at the answers.
Read the alternatives. If one agrees with yours, select it and move on. If your answer is close, see if it is due to a procedural error. If your answer is totally out of line, reread the requirements and body to see what was missed. If all else fails, try to eliminate any answer choices and make your best guess.
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General Comments and Pitfalls to Avoid
1.) Work individual questions in order. Make sure you answer everything.
Remember, there is no penalty for guessing.
2.) Watch for wrong-choice indicators; words like, “always,” “never,” “only,”
“under no circumstances,” “identical,” etc. These words are usually there for a reason…and that’s to indicate the incorrect answer.
3.) Watch for negatively stated questions. For example, “Which of the following is not a characteristic of effective internal control?”
Goal Setting: Your goal is to become a CPA, a professional. That will mean financial security, the opportunity for more fulfilling positions, possibly the opportunity to start your own firm. Keep your ultimate goals in mind as you begin. You must stay focused throughout your preparation period, and work every day to make that goal a reality.
Visualize your Goal: In the flux of daily life, it’s easy to lose sight of your goals. As the saying goes, “When you’re knee-high in alligators, it’s easy to forget your objective was to drain the swamp.” You need to visualize your goals on a daily basis. Picture yourself sitting in a plush office as the CFO of a major company, or imagine yourself owning your own firm.
Expect to achieve your goal; keep a positive attitude.
Organization and Focus: Focus on your objective; do not let minor things distract you.
Organize your life to accommodate the time you need to devote to preparation.
Discipline: This means studying when you feel like it and when you don’t. Passing the CPA exam is earned day in and day out. You cannot neglect studying and cram for the exam.
One more helpful hint…..do you really want to go through the whole process over again if you don’t stick with it and do it right the first time?
Make the commitment, and good luck with your studies!
Benefits of Becoming a CPA
First, a little background on the Certified Public Accountant (CPA) designation. The first CPA examination was offered in the state of New York in 1896* and shortly thereafter other states offered an examination for candidates aspiring to be CPA’s. Now all states and territories offer examinations for those wishing to become CPA’s. Unlike many other professional designations, CPA’s are licensed by the state(s) to practice the “attest to”
function. This allows the CPA to attest, in the form of an opinion, as to the condition of the financial statements provided by management. The CPA’s opinion may vary from outright refusal to be associated with the statements to acceptance of the statements as fairly representing the financial condition of the enterprise. In carrying out the attest function and other work, the CPA must adhere to certain auditing standards of performance including, but not limited to, independence and designated audit procedures.
The attest function carries with it a heavy responsibility because the CPA’s opinion is heavily relied upon by leaders, investors and others who have an interest in the condition of a particular enterprise. Besides the attest function, the CPA’s association with other work, such as tax work, carries with it a presumption of excellence because of the standards that are required of CPA’s.
Individuals who are CPA’s are looked up to in the world of finance and industry especially where accountability is a factor, which is almost always the case. Whether the CPA is in public practice or in an executive position, the designation is recognized as a standard of excellence. Naturally, enterprises in general are willing to pay for the presumption of excellence that the CPA demonstrates, which for the individual results in increased income.
Using the world-famous cliché, the “bottom line” is that the CPA enjoys prestige, higher income, financial security and independence to a much greater extent than the same person without it.
Vincent W. Lambers
President, Lambers CPA Review
*An excerpt from the New York State Certified Public Accountant Examination, December 1896, a Theory of Accounts question with full answer:
I. State the essential principles of double entry bookkeeping and show wherein it differs from single entry bookkeeping.
The essential principles of double entry bookkeeping are, (1) The record of every transaction involving the transfer of money or its equivalent must appear on both the debit and credit side of the ledger, thus maintaining it in balance. (2) Provision must be made for the constant differentiation under properly classified accounts of capital and revenue income and expenditure. (3) As resulting therefrom, the profit or loss determined from the collection of the preponderance of the balance of the revenue accounts must be proved by the excess of the assets over the liabilities as exhibited in the balance sheet.
The fundamental difference between single and double entry bookkeeping is this: In single entry the income and expenditure accounts are not kept, and the profit or loss for any given period is determinable solely from a comparison of the assets with the liabilities—the excess of the one over the other showing the profit or loss; the proof of the accuracy of same, though the same result being arrived at through the profit and loss account being entirely wanting.
Of minor importance also is the fact that the mathematical accuracy of the posting is in single entry bookkeeping undemonstrable in trial balance form, as in double entry.
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CPA EXAMINATION: CONTENT SPECIFICATION OUTLINE
AUDITING & ATTESTATION CONTENT SPECIFICATION OUTLINE
I. PLAN THE ENGAGEMENT, EVALUATE THE PROSPECTIVE CLIENT AND ENGAGEMENT, DECIDE WHETHER TO ACCEPT OR CONTINUE THE CLIENT AND THE ENGAGEMENT, AND ENTER INTO AN AGREEMENT WITH THE CLIENT (22%- 28%)
A. Determine nature and scope of engagement
1. Auditing standards generally accepted in the United States of America (GAAS)
2. Standards for accounting and review services 3. Standards for attestation engagements
4. Compliance auditing applicable to governmental entities and other recipients of governmental financial assistance
5. Other assurance services
6. Appropriateness of engagement to meet client’s needs
B. Assess engagement risk and the CPA firm’s ability to perform the engagement 1. Engagement responsibilities
2. Staffing and supervision requirements 3. Quality control considerations
4. Management integrity
5. Researching information sources for planning and performing the engagement
C. Communicate with the predecessor accountant or auditor
D. Decide whether to accept or continue the client and engagement
E. Enter into an agreement with the client about the terms of the engagement F. Obtain an understanding of the client’s operations, business, and industry G. Perform analytical procedures
H. Consider preliminary engagement materiality
I. Assess inherent risk and risk of misstatements from errors, fraud, and illegal acts by clients
J. Consider other planning matters
1. Using the work of other independent auditors 2. Using the work of a specialist
3. Internal audit function
4. Related parties and related party transactions 5. Electronic evidence
6. Risks of auditing around the computer
K. Identify financial statement assertions and formulate audit objectives
1. Significant financial statement balances, classes of transactions, and disclosures
2. Accounting estimates
L. Determine and prepare the work program defining the nature, timing, and extent of the procedures to be applied.
II. CONSIDER INTERNAL CONTROL IN BOTH MANUAL AND COMPUTERIZED ENVIRONMENTS (12%-18%) A. Obtain an understanding of business processes and information flows
B. Identify controls that might be effective in preventing or detecting misstatements C. Document an understanding of internal control
D. Consider limitations of internal control
E. Consider the effects of service organizations on internal control F. Perform tests of controls
G. Assess control risk
III. OBTAIN AND DOCUMENT INFORMATION TO FORM A BASIS FOR CONCLUSIONS (32%-38%) A. Perform planned procedures
1. Applications of audit sampling 2. Analytical procedures
3. Confirmation of balances and/or transactions with third parties 4. Physical examination of inventories and other assets
5. Other tests of details
6. Computer-assisted audit techniques, including data interrogation, extraction and analysis
7. Substantive tests before the balance sheet date 8. Tests of unusual year-end transactions
B. Evaluate contingencies
C. Obtain and evaluate lawyers’ letters D. Review subsequent events
E. Obtain representations from management
F. Identify reportable conditions and other control deficiencies G. Identify matters for communication with audit committees
H. Perform procedures for accounting and review services engagements I. Perform procedures for attestation engagements
IV. REVIEW THE ENGAGEMENT TO PROVIDE REASONABLE ASSURANCE THAT OBJECTIVES ARE ACHIEVED AND EVALUATE INFORMATION OBTAINED TO REACH AND TO DOCUMENT ENGAGEMENT CONCLUSIONS
(8%-12%)
A. Perform analytical procedures
B. Evaluate the sufficiency and competence of audit evidence and document engagement conclusions
C. Evaluate whether financial statements are free of material misstatements
D. Consider whether substantial doubt about an entity’s ability to continue as a going concern exists
E. Consider other information in documents containing audited financial statements
F. Review the work performed to provide reasonable assurance that objectives are achieved V. PREPARE COMMUNICATIONS TO SATISFY ENGAGEMENT OBJECTIVES (12%-18%)
A. Reports
1. Reports on audited financial statements
2. Reports on reviewed and compiled financial statements 3. Reports required by Government Auditing Standards 4. Reports on compliance with laws and regulations 5. Reports on internal control
6. Reports on prospective financial information 7. Reports on agreed-upon procedures
8. Reports on the processing of transactions by service organizations 9. Reports on supplementary financial information
10. Special reports
11. Reports on other assurance services 12. Reissuance of reports
B. Other required communications 1. Errors and fraud 2. Illegal acts
3. Communications with audit committees
4. Other reporting considerations covered by statements on auditing standards and statements on standards for attestation engagements
C. Other matters
1. Subsequent discovery of facts existing at the date of the auditor’s report 2. Consideration after the report date of omitted procedures
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FINANCIAL ACCOUNTING & REPORTING CONTENT SPECIFICATION OUTLINE I. CONCEPTS AND STANDARDS FOR FINANCIAL STATEMENTS (17%-23%)
A. Financial accounting concepts
1. Process by which standards are set and roles of standard-setting bodies 2. Conceptual basis for accounting standards
B. Financial accounting standards for presentation and disclosure in general-purpose financial statements
1. Consolidated and combined financial statements 2. Balance sheet
3. Statement(s) of income, comprehensive income and changes in equity accounts 4. Statement of cash flows
5. Accounting policies and other notes to financial statements
C. Other presentations of financial data (financial statements prepared in conformity with comprehensive bases of accounting other than GAAP)
D. Financial statement analysis
II. TYPICAL ITEMS: RECOGNITION, MEASUREMENT, VALUATION, AND PRESENTATION IN FINANCIAL STATEMENTS IN CONFORMITY WITH GAAP(27%-33%)
A. Cash, cash equivalents and marketable securities B. Receivables
C. Inventories
D. Property, plant, and equipment E. Investments
F. Intangibles and other assets G. Payables and accruals H. Deferred revenues I. Notes and bonds payable J. Other liabilities
K. Equity accounts
L. Revenues, cost, and expense accounts
III. SPECIFIC TYPES OF TRANSACTIONS AND EVENTS: RECOGNITION, MEASUREMENT, VALUATION, AND PRESENTATION IN FINANCIAL STATEMENTS IN CONFORMITY WITH GAAP(27%-33%)
A. Accounting changes and corrections of errors B. Business combinations
C. Contingent liabilities and commitments D. Discontinued operations
E. Earnings per share
F. Employee benefits, including stock options G. Extraordinary items
H. Financial instruments, including derivatives I. Foreign currency transactions and translation J. Income taxes
K. Interest costs
L. Interim financial reporting M. Leases
N. Non-monetary transactions O. Related parties
P. Research and development costs Q. Segment reporting
R. Subsequent events
IV. ACCOUNTING AND REPORTING FOR GOVERNMENTAL ENTITIES (8%-12%) A. Governmental accounting concepts
1. Measurement focus and basis of accounting 2. Fund accounting concepts and application 3. Budgetary process
B. Format and content of governmental financial statements 1. Government-wide financial statements
4. Proprietary fund financial statements 5. Fiduciary fund financial statements 6. Notes to financial statements
7. Required supplementary information, including management’s discussion and analysis
8. Comprehensive annual financial report (CAFR)
C. Financial reporting entity including blended and discrete component units D. Typical items and specific types of transactions and events:
recognition, measurement, valuation and presentation in governmental entity financial statements in conformity with GAAP
1. Net assets
2. Capital assets and infrastructure 3. Transfers
4. Other financing sources and uses 5. Fund balance
6. Non-exchange revenues 7. Expenditures
8. Special items 9. Encumbrances
E. Accounting and financial reporting for governmental not-for-profit organizations V. ACCOUNTING AND REPORTING FOR NONGOVERNMENTAL NOT-FOR-PROFIT ORGANIZATIONS (8%-12%)
A. Objectives, elements and formats of financial statements 1. Statement of financial position
2. Statement of activities 3. Statement of cash flows
4. Statement of functional expenses
B. Typical items and specific types of transactions and events:
recognition, measurement, valuation and presentation in the financial statements of not- for-profit organizations in conformity with GAAP
1. Revenues and contributions 2. Restrictions on resources
3. Expenses, including depreciation and functional expenses 4. Investments
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REGULATION CONTENT SPECIFICATION OUTLINE I. ETHICS AND PROFESSIONAL AND LEGAL RESPONSIBILITIES (15%-20%)
A. Code of Professional Conduct
B. Proficiency, independence, and due care C. Ethics and responsibilities in tax practice
D. Licensing and disciplinary systems imposed by the profession and state regulatory bodies E. Legal responsibilities and liabilities
1. Common law liability to clients and third parties 2. Federal statutory liability
F. Privileged communications and confidentiality II. BUSINESS LAW (20%-25%)
A. Agency
1. Formation and termination
2. Duties and authority of agents and principals 3. Liabilities and authority of agents and principals B. Contracts
1. Formation 2. Performance
3. Third-party assignments
4. Discharge, breach, and remedies C. Debtor-creditor relationships
1. Rights, duties, and liabilities of debtors, creditors, and guarantors 2. Bankruptcy
D. Government regulation of business 1. Federal securities acts
2. Other government regulation (antitrust, pension and retirement plans, union and employee relations, and legal liability for payroll and social security taxes) E. Uniform commercial code
1. Negotiable instruments and letters of credit 2. Sales
3. Secured transactions
4. Documents of title and title transfer F. Real property, including insurance
III. FEDERAL TAX PROCEDURES AND ACCOUNTING ISSUES (8%-12%) A. Federal tax procedures
B. Accounting periods
C. Accounting methods including cash, accrual, percentage of completion, completed contract, and installment sales
D. Inventory methods, including uniform capitalization rules IV. FEDERAL TAXATION OF PROPERTY TRANSACTIONS (8%-12%)
A. Types of assets B. Basis of assets
C. Depreciation and amortization
D. Taxable and nontaxable sales and exchanges
E. Income, deductions, capital gains and capital losses, including sales and exchanges of business property and depreciation recapture
V. FEDERAL TAXATION – INDIVIDUALS (12%-18%) A. Gross income—inclusions and exclusions
B. Reporting of items from pass-through entities, including passive activity losses C. Adjustments and deductions to arrive at taxable income
D. Filing status and exemptions
E. Tax computations, credits, and penalties F. Alternative minimum tax
G. Retirement plans
H. Estate and gift taxation, including transfers subject to the gift tax, annual exclusion, and items includible and deductible from gross estate
VI. FEDERAL TAXATION—ENTITIES (22%-28%)
A. Similarities and distinctions in tax reporting among such entities as sole proprietorships, general and limited partnerships, Subchapter C corporations, Subchapter S corporations, limited liability companies, and limited liability partnerships
B. Subchapter C corporations
1. Determination of taxable income and loss, and reconciliation of book income to taxable income
2. Tax computations, credits, and penalties, including alternative minimum tax 3. Net operating losses
4. Consolidated returns
5. Entity/owner transactions, including contributions and distributions C. Subchapter S corporations
1. Eligibility and election
2. Determination of ordinary income, separately stated items, and reconciliation of book income to taxable income
3. Basis of shareholder’s interest
4. Entity/owner transactions, including contributions and liquidating and nonliquidating distributions
5. Built-in gains tax D. Partnerships
1. Determination of ordinary income, separately stated items, and reconciliation of book income to taxable income
2. Basis of partner’s interest and basis of assets contributed to the partnership
3. Partnership and partner elections 4. Partner dealing with own partnership 5. Treatment of partnership liabilities 6. Distribution of partnership assets
7. Ownership changes and liquidation and termination of partnership E. Trusts
1. Types of trusts
2. Income and deductions
3. Determination of beneficiary’s share of taxable income
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BUSINESS ENVIRONMENT & CONCEPTS CONTENT SPECIFICATION OUTLINE I. BUSINESS STRUCTURE (17%-23%)
A. Advantages, implications, and constraints of legal structures for business 1. Sole proprietorships and general and limited partnerships
2. Limited liability companies (LLC), limited liability partnerships (LLP), and joint ventures
3. Subchapter C and subchapter S corporations B. Formation, operation, and termination of businesses
C. Financial structure, capitalization, profit and loss allocation, and distributions
D. Rights, duties, legal obligations, and authority of owners and management (directors, officers, stockholders, partners, and other owners)
II. ECONOMIC CONCEPTS ESSENTIAL TO OBTAINING AN UNDERSTANDING OF AN ENTITY’S BUSINESS AND INDUSTRY (8%-12%)
A. Business cycles and reasons for business fluctuations
B. Economic measures and reasons for changes in the economy, such as inflation, deflation and interest rate changes
C. Market influences on business strategies, including selling, supply chain, and customer management strategies
D. Implications to business of dealings in foreign currencies, hedging and exchange rate fluctuations
III. FINANCIAL MANAGEMENT (17%-23%)
A. Financial modeling, including factors such as financial indexes, taxes and opportunity costs, and models such as economic value added, cash flow, net present value, discounted payback, and internal rate of return
1. Objectives 2. Techniques 3. Limitations
B. Strategies for short-term and long-term financing options, including cost of capital and derivatives
C. Financial statement and business implications of liquid asset management
1. Management of cash and cash equivalents, accounts receivable, accounts payable, and inventories.
2. Characteristics and financial statement and business implications of loan rates (fixed vs. variable)and loan covenants
IV. INFORMATION TECHNOLOGY (IT) IMPLICATIONS IN THE BUSINESS ENVIRONMENT (22%-28%) A. Role of business information systems
1. Reporting concepts and systems 2. Transaction processing systems 3. Management reporting systems 4. Risks
B. Roles and responsibilities within the IT function
1. Roles and responsibilities of database/network/Web administrators, computer operators, librarians, systems programmers and applications programmers 2. Appropriate segregation of duties
C. IT fundamentals
1. Hardware and software, networks, and data structure, analysis, and application, including operating systems, security, file organization, types of data files, and database management systems
2. Systems operation, including transaction processing modes, such as batch, on- line, real-time, and distributed processing, and application processing phases, such as data capture, edit routines, master file maintenance; reporting, accounting, control, and management; query, audit trail, and ad hoc reports; and transaction flow
D. Disaster recovery and business continuity, including data backup and data recovery procedures, alternate processing facilities (hot sites), and threats and risk management E. Financial statement and business implications of electronic commerce, including electronic
fund transfers, point of sale transactions, internet-based transactions and electronic data interchange
V. PLANNING AND MEASUREMENT (22%-28%) A. Planning and budgeting
1. Planning techniques, including strategic and operational planning 2. Forecasting and projection techniques
3. Budgeting and budget variance analysis B. Performance measures
1. Organizational performance measures, including financial and nonfinancial scorecards
2. Benchmarking, including quality control principles, best practices, and benchmarking techniques
C. Cost measurement
1. Cost measurement concepts (standard, joint product, and by-product costing)
2. Accumulating and assigning costs (job order, process, and activity-based costing)
3. Factors affecting production costs
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Chapter One
Non-Corporate Entities
SOLE PROPRIETORSHIPS ... 1-1 PARTNERSHIPS ... 1-1 GENERAL PARTNERSHIPS... 1-2 GENERAL PARTNERS’ RESPONSIBILITIES ... 1-2 PARTNERS’ RIGHTS ... 1-3 ASSIGNING A PARTNERSHIP INTEREST ... 1-4 PARTNER DISSOCIATION ... 1-4 PURCHASE OF DISSOCIATED PARTNER’S INTEREST... 1-5 DISSOCIATED PARTNER’S LIABILITY TO OTHER PERSONS... 1-6 EVENTS CAUSING DISSOLUTION AND WINDING UP OF
PARTNERSHIP BUSINESS... 1-6
DISTRIBUTION UPON DISSOLUTION– GENERAL PARTNERSHIPS ... 1-7
LIMITED PARTNERSHIPS ... 1-7
2001 LIMITED PARTNERSHIP ACT ... 1-8
LIMITED LIABILITY COMPANY ... 1-8
OTHER UNINCORPORATED ASSOCIATIONS... 1-9
Chapter One
Non-Corporate Entities
SOLE PROPRIETORSHIPS
This is the simplest form of business organization and the easiest to begin and to terminate.
The proprietor furnishes all the capital, receives all the profits and owns all the property of the proprietorship.
Proprietors can sue and be sued. Their personal assets are at risk. The proprietor is taxed as an individual and reports sales and expenses on Schedule C of Form 1040 for Federal tax purposes.
Proprietorships do not necessarily do business in their owner’s name. If not, they may be required under state law to file a d/b/a “doing business as” disclosure.
A proprietorship endures at the will of the owner, but is automatically terminated upon the proprietor’s death.
Advantage: Simplicity, ability to do business across state or national boundaries.
Disadvantage: Lack of capital and management skills and depth.
PARTNERSHIPS
Summary of Significant Changes in the Revised Uniform Partnership Act (RUPA) Which Simplify Partnership Law
Prior law generally viewed partnerships as a collection of the partners and perhaps a legal entity. RUPA states that a general partnership is a legal entity that can own and convey property, and sue and be sued in its own name. Under RUPA, a partnership is an entity distinct from its partners resulting in greater partnership stability. No partner has an interest in specific partnership property.
Partnerships do not have perpetual existence like corporations, but nearly so since the partnership continues in existence when one or more partners leave. Formerly, the partnership was dissolved by the exit, for whatever reason, of any partner.
RUPA is a default act, meaning that it generally applies in situations not covered in the partnership agreement. The partnership agreement, however, may not override the default rule to eliminate a partner’s duty of loyalty or obligation of good faith and fair dealing, or unreasonably reduce a partner’s duty of care.
In most states, requirements are specified for filing, amending and canceling partnership agreements. However, there are no required filings under RUPA.
Generally, filing may be made for:
1. a statement of partnership authority
2. a statement of denial of partnership authority 3. a statement of dissociation
4. a statement of dissolution 5. a statement of merger
Partners are jointly and severally liable for all partnership obligations. Property taken by a partner improperly from a third party is the responsibility of the partnership even if the partnership never received the property.
A partnership agreement may be in writing, oral or implied. The partnership has no duty to have books and records;
however, if the partnership does have books and records, they must be maintained at the partnership’s principal
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office. Partners have the right to partnership information, including inspection of books and records, if any, under reasonable circumstances.
Creditors of a partner may attach the interest of a partner, but may not attach specific partnership property. Creditors may be assigned rights to a partner’s interest, but have no rights to partnership property, only earnings and/or distributions made to the debtor partner. Creditors assigned rights to a partner’s profits are responsible for the income taxes thereon, whether cash is distributed or not.
GENERAL PARTNERSHIPS
1. A partnership is an association of two or more co-owners of a business for profit.
a. Must have two or more persons (can be a person, corporation, partnership, estate, trust, joint venture, or government agency). Person includes any commercial entity that is legal.
b. Must have co-ownership of a business:
1) Two key factors are sharing of profits and sharing of management.
2) The parties must be co-owners of a business, not co-owners of property.
c. Must be a business operated for profit (e.g. social clubs, religious organizations or associations are not partnerships).
2. A partnership is formed by an agreement of all partners to conduct the business.
a. The partnership agreement may be oral, implied or in writing:
1) Partnerships impossible to perform in one year require a writing (e.g., A, B and C form ABC partnership and agree that it will not terminate for 5 years.)
2) Limited partnerships and limited liability companies require a writing.
3) A written partnership agreement (sometimes called the articles of partnership) can only be amended by unanimous consent of all partners.
b. If a partner breaches the partnership agreement, (s)he is liable.
3. A partnership may also be created from the conduct of the parties (e.g., if two or more parties are co-owners of a business and share profits, they may be a partnership even though they did not consider themselves to be a partnership)
4. Under RUPA, a partnership is considered to be a separate entity.
a. It is subject to Worker's Compensation, FICA, FUTA, etc.
b. It is a separate entity for ownership of property (e.g. ABC partnership may own real estate in the name of the partnership).
c. Assets of the firm are considered separate and distinct from the assets of individual partners.
d. Partnerships do not pay income tax. They file an information return on Form 1065 reporting sales, expenses, and partnership income. All items of partnership income or loss flow through to the individual returns of the partners.
e. Unlike a corporation, a partnership does not have perpetual existence and the departure of a partner does not ordinarily dissolve the partnership. (see section on dissolution and dissociation)
GENERAL PARTNERS’ RESPONSIBILITIES
1. Partners in a general partnership have unlimited personal liability
a. General partners are jointly liable for all partnership debts and contract obligations (joint liability means all partners must be sued as a group).
b. They are jointly and severally liable for all partnership torts (joint and several liability means all partners may be sued as a group or sued individually).
2. General partners are agents of the partnership and agents of each other.
a. Partners owe the same duties that all agents do.
1) Owe a duty of Obedience to partnership agreements.
3) Owe a duty to Inform their fellow partners of relevant facts.
4) Owe a duty to Account for all money and property received or expended.
5) Owe a fiduciary duty of Loyalty to the partnership and each other (e.g., cannot compete with the partnership or make a profit at the expense of the partnership).
b. When acting with real or apparent authority, each partner can impose contract liability on the partnership and on their fellow partners.
c. Any partner committing a tort while acting on partnership business imposes tort liability on himself, the partnership and fellow partners (respondeat superior).
d. Each must give actual notice to old customers and published notice to new customers upon their termination from the partnership.
PARTNER’S RIGHTS
1. Each partner has an equal right to participate in the management of the business, unless the partners specifically agree otherwise.
a. Most decisions require only a majority vote.
b. Unless otherwise agreed, the following require unanimous consent of all partners:
1). admit new general partners or new limited partners 2). transfer partnership property to others
3). change a written partnership agreement 4). change the capital of the firm
5). admit liability in a law suit (confess a judgment) or submit a claim to arbitration
6). make a fundamental change in partnership business to specifically include selling the partnership's goodwill
2. Each partner has an equal right to share in distributions, unless otherwise agreed.
a. Unless otherwise agreed, profits and losses are split equally:
1). The partners may specify an unequal division of profits and losses (e.g. A, B and C agree profits and losses will be split 60% for A, 30% for B and 10% for C).
2). If a division of profits is specified but not losses, losses will follow profits.
b. Unless otherwise agreed, a partner is not entitled to compensation
3. Each partner has the right to be reimbursed for loans and advances made to the partnership and for payments made on behalf of the partnership plus interest.
a. Partners also have the right to be indemnified for liability incurred while properly acting on behalf of the partnership.
b. A partner entitled to repayment is only paid after all other creditors are paid.
4. All partners and limited partners have the right to full information about the partnership.
a. They have the right to inspect and copy books and records at reasonable times.
b. A partner has the right to demand a formal account (a complete review of all financial transactions of the partnership, including financial statements).
1). An accounting is granted when circumstances make it just and reasonable.
2). e.g. breach of fiduciary duties or wrongful exclusion from the partnership.
5. Each partner is a co-owner of partnership property.
a. Each has an equal right to use partnership property for partnership purposes, but has no right to use it for any other purpose without the consent of other partners.
b. A partner cannot transfer or assign his/her individual interest in partnership property to others. No partner has an individual interest in partnership property.
c. Partnership property may not be attached by an individual partner's creditors.
d. If a partner dies, partnership property remains as partnership property (entity concept), not the heirs.
A deceased partner’s interest is part of his/her estate. A partner’s estate has no continuing interest in the business.
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6. Power of dissociation
A partner has the right to dissociate him/herself from the partnership. Dissociated partner must serve notice to the remaining partners of dissociation and is responsible for all partnership acts and debts up until dissociation. Third parties must be made aware of dissociation. If not, the dissociated partner is liable for third parties damaged on the assumption of partner’s continuance in the partnership.
7. The “In Kind” Rule
Partners have the right to receive cash distributions (profits or liquidation payments) and may not be paid “in kind” unless otherwise agreed. Partners similarly have no right to demand payment in kind. Creditors may be paid “in kind” if agreed.
ASSIGNING A PARTNERSHIP INTEREST
1. Any general or limited partner may assign or sell their partnership interest.
a. An assignment does not dissolve partnership.
b. Thus, the assignor remains a partner and is still liable for partnership debts.
c. The consent of other partners is not required, unless otherwise agreed.
2. The assignee does not become a partner without the consent of all other partners.
a. The only right an assignee gets is the right to receive assignor's share of profits if any (e.g. assignee does not have a right to vote, manage or to inspect partnership books).
b. The assignee is not liable for the assignor's share of losses.
3. A creditor of an individual partner may obtain from a court a charging order against an individual partner’s share of profits. This is the only right the creditor receives.
a. The creditor cannot attach the partner’s interest in partnership property.
b. A charging order does not cause a dissolution of the partnership.
c. A charging order does not make the creditor a partner and does not allow the creditor to vote, participate in management or obtain partnership information.
d. A charging order gives the creditor essentially the same rights as an assignee.
e. Assignees are entitled to partnership profits, and are responsible for the income taxes thereon. Profits with no money being distributed are a deterrent to charging orders.
PARTNER DISSOCIATION
Dissociation is the act of a partner leaving the partnership. Dissociation will lead to either a buyout of the partner’s interest, or dissolution and winding up of the partnership.
A partner is dissociated from a partnership upon the occurrence of any of the following events:
1. The partnership’s having notice of the partner’s express will to withdraw as a partner or on a later date specified by the partner;
2. An event agreed to in the partnership agreement as causing the partner’s dissociation;
3. The partner’s expulsion pursuant to the partnership agreement;
4. The partner’s expulsion by the unanimous vote of the other partners if:
a. it is unlawful to continue with that partner.
b. there has been a transfer of the partner’s transferable interest or a court order charging the partner’s interest.
c. Within 90 days after the partnership notifies a corporate partner that it will be expelled because of dissolution, revoked charter or its right to conduct business has been suspended.
d. A partnership that is a partner has been dissolved and its business is being wound up.
5. On application by the partnership or another partner, the partner’s expulsion by judicial determination because:
a. The partner engaged in wrongful conduct.
b. The partner committed a material breach of the partnership agreement.
c. Conduct by partner makes it not practical to continue with that partner.
6. The partner
a. Becoming a debtor in bankruptcy b. Executing an assignment for creditors
c. Potential or actual appointment of custodian of all or mostly all of partner’s property. Partner has 90 days to stay appointment of trustee, receiver or liquidator.
7. In the case of a partner who is an individual, a. Partner’s death.
b. The appointment of a guardian for the partner; or
c. Judicial determination that partner is not capable of carrying on duties under partnership agreement.
8. Transfer of the entire transferable interest in a trust or estate that is a partner.
A partner has the power to dissociate at any time, rightfully or wrongfully. It is wrongful only if 1. It is a breach of the partnership agreement.
2. For a term partnership or partnership for a particular undertaking before completion of term or undertaking; e.g., partner who is chief engineer of a bridge project quits when bridge is 50% complete.
a. The partner withdraws by express will, except if the partner dissociating follows within 90 days of another partner’s dissociation by death or otherwise it is not wrongful.
b. A partner is expelled by judicial determination.
c. The partner is a debtor in bankruptcy.
A partner who wrongfully dissociates is liable to the partnership and to the other partners for damages caused by the dissociation.
Note above that item 2 is a default rule in RUPA applying only if the issue is not addressed in the partnership agreement.
Effect of Partner’s Dissociation
1. The right to participate in management terminates.
2. The partner’s duty of loyalty terminates.
3. The partner’s duty of loyalty and care continue only with regard to matters arising and events occurring before dissociation.
PURCHASE OF DISSOCIATED PARTNER’S INTEREST
If dissociation occurs without resulting in dissolution, the partnership has the right to continue the business and the dissociated partner has the right to be paid the value of his interest. In this case the buyout is mandatory. The buyout may be by the partnership, one or more remaining partners or a third party acceptable to the remaining partners.
The buyout price is the amount, on the date of dissociation, as if the assets of the partnership were sold at a price equal to the greater of liquidation value or going concern value without the departing partner. The partnership must pay interest from the date of dissociation to the date of payment. This is a default rule. If the partnership agreement fixes the method of calculating payment, that will be used.
The partnership may offset against the buyout price all amounts due from the dissociated partner including amounts due for wrongful dissociation.
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If the dissociated partner does not agree with the partnership’s stipulated buyout price and no agreement is reached after 120 days, the dissociated partner shall receive the partnership’s offer in cash as the undisputed minimum value and may thereafter bring suit to achieve a higher buyout price.
DISSOCIATED PARTNER’S LIABILITY TO OTHER PERSONS
A partner who dissociates without causing a dissolution is liable as a partner to the other party in a transaction entered into by the partnership before dissociation for a period of two years after dissociation.
Further, for a period of two years a dissociating partner is liable to third parties if they act after dissociation believing that the departed partner is a member of the partnership. A statement of dissociation operates conclusively as constructive notice to third parties 90 days after filing.
EVENTS CAUSING DISSOLUTION AND WINDING UP OF PARTNERSHIP BUSINESS
A partnership is dissolved and its business must be wound up under any of the following:
1. Notice from a partner they wish to withdraw in a partnership at will and that partner has not dissociated prior to such notice. “Partnership at will” means a partnership in which the partners have not agreed to remain partners until the expiration of a definite term or the completion of a particular undertaking.
2. For term partnerships:
a. Within 90 days after a partner’s dissociation by death or otherwise, and at least half the remaining partners express their will to dissolve and wind up the business.
b. The express will of all the partners to wind up the business.
c. Expiration of the term or completion of the undertaking.
3. An event occurs agreed to in the partnership agreement resulting in the winding up of the business.
4. An event that makes it unlawful for all or substantially all of the business to continue.
5. On application by a partner, a judicial determination that continuation of the business is not practical.
6. On application by a transferee of a partner’s transferable interest, a judicial determination that it is equitable to wind up the business.
A partnership continues after dissolution only for the purpose of winding up its business. After winding up is complete, the partnership is terminated.
At any time after dissolution of a partnership and before the winding up is completed, all the partners, including any dissociating partner other than a wrongfully dissociating partner, may waive the right to have the business wound up and the partnership terminated.
In that event, the partnership resumes as if dissolution had not occurred. In this process, third parties are protected.
A partnership is bound by a partner’s act after dissolution that is necessary for winding up partnership affairs, or would have bound the partnership before dissolution if the other party did not have notice of the dissolution.
Note: Third parties are assumed to have notice 90 days after the filing of a Statement of Dissolution.
