Wiley CPA Examination Review, Outlines and Study Guides (Wiley Cpa Examination Review Vol 1: Outlines and Study Guides) (Volume 1)

1184 Pages·2004·6.32 MB·English

by  Patrick R. Delaney

Wiley
CPA
Examination
Review
31st Edition
--
2004 2005
VOLUME 1
Outlines and Study Guides
O. Ray Whittington, CPA, PhD
Patrick R. Delaney, CPA, PhD
John Wiley & Sons, Inc.
The following items copyright © by the American Institute of Certified Public Accountants, Inc. are reprinted (or adapted) with
permission.
1. Material from Uniform CPA Examination Questions and Unofficial Answers, copyright © 1982 through 2002 by
American Institute of Certified Public Accountants, Inc., is reprinted (or adapted) with permission.
2. Information for CPA Candidates and Content Specification Outlines for the Uniform Certified Public Accountant Ex-
amination, Board of Examiners.
3. Material from AU 319 (SAS 55, SAS 78, and SAS 94) and an AICPA Audit Guide, both titled Consideration of Inter-
nal Control in a Financial Statement Audit.
4. Material from AICPA Auditing Procedures Studies; Consideration of the Internal Control Structure in a Computer
Environment: A Case Study; Auditing with Computers; Auditing in Common Computer Environments; Audit Implica-
tions of EDI.
5. Example audit reports from Statements on Auditing Standards and Statements on Standards for Accounting and Re-
view Services.
6. Definitions, examples, etc. from The Code of Professional Conduct.
7. AICPA Audit and Accounting Guide: Health Care Organizations, 1996, page 142.
Reproduction and adaptation of pronouncements, copyright © Financial Accounting Standards Board, Norwalk, Connecticut
06856-5116, with permission.
Material adapted, with permission, from Writing for Accountants, Aletha Hendrickson, South-Western Publishing Co., 1993.
Reproduction of “Combined Statement of Revenues, Expenditures, and Changes in Fund Balances—All Governmental Fund
Types and Expendable Trust Funds,” copyright © Governmental Accounting Standards Board, Norwalk, Connecticut 06856-
5116, with permission.
Statement of changes in Fund Balances for an educational institution from Financial Accounting and Reporting in Higher Edu-
cation with permission of the National Association of College and University Business Officers.
Several examples in Chapter 9, Federal Taxation, are taken from Internal Revenue Service Publication 17.
Copyright © 2004, by John Wiley & Sons, Inc. All rights reserved.
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Published simultaneously in Canada
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ISBN 0-471-65628-3 (Volume 1)
ISBN 0-471-65627-5 (Set)
Printed in the United States of America.
10 9 8 7 6 5 4 3 2 1
CONTENTS
Vol. 1
page no.
1. BEGINNING YOUR CPA REVIEW PROGRAM 1
2. EXAMINATION GRADING AND GRADER ORIENTATION 17
3. THE SOLUTIONS APPROACH 19
4. TAKING THE EXAMINATION 32
5. AUDITING AND ATTESTATION 36
Module*
Abbreviations Numbers
Engagement Planning ENPL 1 53
Internal Control IC 2 66
Evidence EVID 3 98
Reporting REPT 4 128
Audit Sampling AUDS 5 164
Auditing with Technology ATEC 6 182
Outlines of Professional Standards 189

6. FINANCIAL ACCOUNTING AND REPORTING 294
Basic Theory and Financial Reporting TREP 7 300
A. Basic Concepts 300
B. Error Correction 316
C. Accounting Changes 319
D. Financial Statements 322
Inventory INVY 8 334
Fixed Assets FA 9 345
Monetary Current Assets and Current Liabilities CACL 10 362
Present Value PV 11 378
A. Fundamentals 378
B. Bonds 387
C. Debt Restructure 392
D. Pensions 397
E. Leases 411
Deferred Taxes DETX 12 430
Stockholders’ Equity STK 13 446
Investments IVES 14 464
Statement of Cash Flows SCF 15 476
Business Combinations and Consolidations BCC 16 486
Derivative Instruments and Hedging Activities DIHA 17 506
Miscellaneous MISC 18 520
A. Personal Financial Statements 520
B. Interim Reporting 521
C. Segment Reporting 523
D. Partnership Accounting 527
E. Foreign Currency Translation 535
Governmental GOV 19 542
Not-for-Profit NFP 20 580
Outlines of Accounting Pronouncements 594
7. REGULATION 670
____________________________
* As explained in Chapter 1, this volume is organized into 45 modules (manageable study units). Volume 2 is organized in a parallel
fashion.
8. PROFESSIONAL RESPONSIBILITIES AND BUSINESS LAW 675
Professional Responsibilities RESP 21 678
Federal Securities Acts FEDE 22 712
Contracts CONT 23 730
Sales SALE 24 752
Commercial Paper CPAP 25 764
Secured Transactions SECU 26 781
Bankruptcy BANK 27 789
Debtor-Creditor Relationships DBCR 28 799
Agency AGEN 29 809
Regulation of Employment and Environment EMEN 30 816
Property PROP 31 830
Insurance INSU 32 847

9. FEDERAL TAXATION 851
Individual ITAX 33 858
Transactions in Property TPRO 34 911
Partnership PTAX 35 926
Corporate CTAX 36 938
Gift and Estate GETX 37 961
10. BUSINESS ENVIRONMENT AND CONCEPTS 970
Business Structure BSTR 38 976
Information Technology IFTC 39 1001
Economics and Strategy ECON 40 1029
Financial Management FINM 41 1056
Risk Management and Capital Budgeting RMBC 42 1081
Performance Measures PERM 43 1105
Cost Measurement COST 44 1121
Planning, Control, and Analysis PLAN 45 1137
INDEX 1157
PREFACE
Passing the CPA exam upon your first attempt is possible! The Wiley CPA Examination Review preparation ma-
terials provide you with the necessary materials (visit our website at www.wiley.com/cpa for more information). It’s up
to you to add the hard work and commitment. Together we can beat the first-time pass rate of less than 20%. All Wiley
CPA products are continuously updated to provide you with the most comprehensive and complete knowledge base.
Choose your products from the Wiley preparation materials and you can proceed confidently. You can select support
materials that are exam-based and user-friendly. You can select products that will help you pass!
The objective of this work is to provide, in an easily readable format, study outlines of all areas tested on the Uniform
Certified Public Accounting (CPA) Examination. The clear, concise phraseology supplemented by brief examples and
illustrations is designed to help candidates quickly understand and retain the material. To make the task of preparing for
the examination more manageable, we have structured both review volumes into 45 modules (manageable study units).
Also, the multiple-choice questions in Volume 2 have been grouped into topical categories within each module. These
categories correspond to the sequencing of material as it appears within each of the corresponding modules in this
volume. The content of this volume and Volume 2 is based upon current AIPCA Content Specification Outlines for the
Uniform Certified Public Accountant Examination. Actual American Institute of Certified Public Accountants (AICPA)
unofficial questions and answers are presented to test your knowledge. With the introduction of the new computerized
exam, many author-constructed questions have been added to Volume 2.
Remaining current is one of the keys to examination success. Here is a list of what’s new in this edition of
Wiley CPA Examination Review, 31st Edition, 2003-2004.
• The new AICPA Content Specification Outlines for the Computerized CPA Examination
• Discussion of the new simulation style questions
• Coverage of new auditing and attestation standards, especially:
• Statement on Auditing Standards 99, Consideration of Fraud in a Financial Statement Audit
• Statement on Auditing Standards 100, Interim Financial Information
• Statement on Auditing Standards 101, Auditing Fair Value Measurements and Disclosures
• Coverage of new financial accounting standards, especially
• Statement of Financial Accounting Standard 149, Amendment of Statement 133 on Derivative Instruments
and Hedging Activities
• Statement of Financial Accounting Standard 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity
We are indebted to the American Institute of Certified Public Accountants, the Financial Accounting Standards
Board, and the Governmental Accounting Standards Board for permission to reproduce and adapt their publications.
The CPA exam is one of the toughest exams you will ever take. It will not be easy. But if you follow our guidelines
and focus on your goal, you will be thrilled with what you can accomplish.
Ray Whittington
April 2004
Don’t forget to visit our website at www.wiley.com/cpa
for supplements and updates.

ABOUT THE AUTHORS
Ray Whittington, PhD, CPA, CMA, CIA, is the Ledger & Quill Director of the School of Accountancy at DePaul
University. Prior to joining the faculty at DePaul, Professor Whittington was the Director of Accountancy at San Diego
State University. From 1989 through 1991, he was the Director of Auditing Research for the American Institute of Certi-
fied Public Accountants (AICPA), and he previously was on the audit staff of KPMG. He was a member of the Auditing
Standards Board of the AICPA and has previously served as a member of the Accounting and Review Services Commit-
tee and the Board of Regents of the Institute of Internal Auditors. Professor Whittington has published numerous text-
books, articles, monographs, and continuing education courses.
Patrick R. Delaney was the Arthur Andersen LLP Alumni Professor of Accountancy and Department Chair at
Northern Illinois University. He received his PhD in Accountancy from the University of Illinois. He had public ac-
counting experience with Arthur Andersen LLP and was coauthor of GAAP: Interpretation and Application, also pub-
lished by John Wiley & Sons, Inc. He served as Vice President and a member of the Illinois CPA Society’s Board of
Directors, and was Chairman of its Accounting Principles Committee; was a past president of the Rockford Chapter, In-
stitute of Management Accountants; and had served on numerous other professional committees; and has made many
presentations to professional groups. He was a member of the American Accounting Association, American Institute of
Certified Public Accountants, and Institute of Management Accountants. Professor Delaney was published in The Ac-
counting Review and was a recipient of the Illinois CPA Society’s Outstanding Educator Award, NIU’s Excellence-in-
Teaching Award, and Lewis University’s Distinguished Alumnus Award. He was involved in NIU’s CPA Review
Course as director and instructor.
ABOUT THE CONTRIBUTORS
Richard E. Baker, PhD, CPA, is a Presidential Teaching Professor and the Ernst and Young LLP Professor of Ac-
countancy at Northern Illinois University and teaches in the NIU CPA Review Course. He is the coauthor of Advanced
Financial Accounting, McGraw-Hill, Inc. Professor Baker prepared the Business Combinations and Consolidations
Module and provided input on the new section on Derivative Instruments and Hedging Activities. He has received sev-
eral teaching awards at NIU.
John C. Borke, MAS, CPA, is an Associate Professor of Accounting at the University of Wisconsin-Platteville. He
has been a recipient of the U.W. Platteville Excellence-in-Teaching Award, and has worked as a staff auditor with KPMG
Peat Marwick LLP. Professor Borke prepared several sections in Financial Accounting including the section in Chapter 8
on the Conceptual Framework.
John H. Engstrom, DBA, CPA, is the KPMG Peat Marwick LLP Professor of Accountancy at Northern Illinois
University. He is the coauthor of Essentials of Accounting for Governmental and Not-for-Profit Organizations, Richard
D. Irwin, Inc. He revised Chapter 10, Governmental and Not-for-Profit Organizations.
Anita L. Feller,PhD, CPA, is a Lecturer in Accountancy at the University of Illinois at Urbana-Champaign. She is
the recipient of the Commerce Council Excellence in Teaching Award. Formerly a staff accountant in the tax department
at KPMG Peat Marwick, she teaches courses in financial accounting and applied professional research. Professor Feller
also teaches financial and managerial topics in the University of Illinois CPA Review Course.
Edward C. Foth, PhD, CPA, is the KPMG Faculty Fellow and Administrator of the Master of Science in Taxation
Program at DePaul University. He is a member of the American Accounting Association, the American Institute of Certi-
fied Public Accountants, the Illinois CPA Society, and the American Taxation Association. He has been a recipient of the
Ledger & Quill Faculty Excellence Award, and is the author of CCH Incorporated’s Federal Tax Study Manual, Federal
Taxation Refresher Course, and is coauthor of their S Corporations Guide. He prepared Chapter 11.
Mark L. Frigo, PhD, CPA, CMA, is Director of The Center for Strategy, Execution and Valuation in Kellstadt
Graduate School of Business and Eichenbaum Foundation Distinguished Professor of Strategy and Leadership in the
School of Accountancy at DePaul University. Professor Frigo authored the Performance Measures module for the
Business Environment and Concepts section of this manual.
Debra R. Hopkins, MAS, CPA, is the Director of CPA Review courses at Northern Illinois University. She has au-
dit experience with Ernst and Young LLP and Grant Thornton LLP, and has presented many CPE seminars for public
accounting firms. She provided input in Auditing and prepared the chart in Professional Responsibilities. She is a recipi-
ent of the Illinois CPA Society’s Outstanding Educator Award.
Duane R. Lambert, JD, MBA, CPA, is Professor of Business Administration at California State University, Hay-
ward, where he teaches courses in Business Law and Accounting. He also has been a Visiting Lecturer and a Visiting
Professor at the University of California, Berkeley. Professor Lambert has “Big Six” experience and teaches in CPA re-
view courses. He rewrote and revised modules to reflect current treatment in Chapter 6, Business Law and Professional
Responsibilities.
John McDougald, MAS, CPA, is an Instructor in the College of Business at Northern Illinois University. He has
extensive industry experience, having spent twenty-eight years in management positions with Ameritech. Mr. McDou-
gald prepared the Derivative Instruments and Hedging Activities section of Module 32.
Patricia L. McQueen, MBA, CPA, is an instructor in the School of Accountancy at DePaul University. She has a
background in auditing and financial accounting. She has audit experience with KPMG. She contributed to the auditing
modules.
Kurt Pany, PhD, CPA, is a Professor of Accounting at Arizona State University. Prior to entering academe, he
worked as a staff auditor for Deloitte and Touche LLP. He is a former member of the AICPA’s Auditing Standards
Board and has taught in the Arizona State University CPA Review Course.
W. Max Rexroad, PhD, CPA, is Professor of Accounting at Illinois State University. He has received the Distin-
guished Teaching Award from the College of Business at ISU as well as other teaching awards. He has taught numerous
CPE courses for the Illinois CPA Society and other state societies. He prepared a revision of the Pensions section in
Module 26.
John R. Simon, PhD, CPA, is a Presidential Teaching Professor and the Coopers and Lybrand LLP Professor of Ac-
countancy at Northern Illinois University. He has taught in NIU’s CPA Review Course for the past twenty-five years and
was the director of the course for ten years. He is a recipient of NIU’s Excellence-in-Teaching Award. Professor Simon
prepared the Earnings Per Share section of the Stockholders’ Equity Module, and the Foreign Currency Translation Mod-
ule.
Susan Smith, MA, CAS (English), CPA. Ms. Smith has taught rhetoric and technical writing at Northern Illinois
University. Ms. Smith prepared material on “Improving Your Writing” in Chapter 3.
BEGINNING YOUR CPA REVIEW
PROGRAM
General Comments on the Examination 1 Purpose and Organization of This Review
Purpose of the Examination 1 Textbook 7
Examination Content 2 Other Textbooks 8
Nondisclosure and Computerization of Ordering Other Materials 8
Examination 2 Working CPA Questions 8
Types of Questions 3 Self-Study Program 9
State Boards of Accountancy 3 Study Facilities and Available Time 10
Exam Scheduling 4 Self-Evaluation 10
Attributes of Examination Success 5 Using Notecards 11
Knowledge of Material 5 Level of Proficiency Required 13
Commitment to Exam Preparation 5 Multiple-Choice Feedback 13
Solutions Approach 6 Conditional Candidates 13
Grading Insights 6 Planning for the Examination 13
Examination Strategy 6 Overall Strategy 13
Examination Confidence 6 Weekly Review of Preparation Program
Common Candidate Mistakes 7 Progress 14
Time Management of Your Preparation 16
To maximize the efficiency of your review program, begin by studying (not merely reading) this chapter
and the next three chapters of this volume. They have been carefully organized and written to provide you
with important information to assist you in successfully completing the CPA exam. Beyond providing a com-
prehensive outline to help you organize the material tested on the exam, Chapter 1 will assist you in organizing
a study program to prepare for the exam. Self-discipline is essential.
GENERAL COMMENTS ON THE EXAMINATION
Beginning in April of 2004, the Uniform CPA Examination is delivered in a computer-based format. The
final paper-based version of the CPA exam was given in November 2003. While there are still a lot of un-
knowns about the new format, there is also good news. You may take the exam one section at a time. As a
result, your studies can be focused on that one section, improving your chances for success. In addition, the
exam is no longer offered twice a year. During eight months of ever year, you may take the exam on your
schedule, six days a week and in the morning or in the afternoon.
Successful completion of the exam is an attainable goal. Keep this point foremost in your mind as you
study the first four chapters in this volume and develop your study plan.
1
Purpose of the Examination
The Uniform CPA Examination is designed to test the entry-level knowledge and skills necessary to pro-
tect the public interest. These knowledge and skills were identified through a Practice Analysis performed in
2000, which served as a basis for the development of the content specifications for the new exam. The skills
identified as necessary for the protection of the public interest include
• 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.

1
More information may be obtained from the AICPA’s Information for Uniform CPA Examination Candidates, which is usually
sent to CPA candidates by their State Board of Accountancy as they apply to sit for the CPA Examination. You can also find the
publication on the AICPA’s Web site at www.cpa-exam.org.