CONTENTS Preface About the Authors About the Contributor Introduction Chapter 1: Beginning Your CPA Review Program General Comments on the Examination Attributes of Examination Success Purpose and Organization of This Review Textbook Self-Study Program Planning For The Examination Chapter 2: Examination Grading Chapter 3: The Solutions Approach Chapter 4: Taking The Examination Examination Strategies Chapter 5: Exam Content Overview Aicpa Content and Skills Specification Researching Fasb Accounting Standards Financial Accounting and Reporting Module 9: Basic Theory and Financial Reporting Module 10: Inventory Module 11: Fixed Assets Module 12: Monetary Current Assets and Current Liabilities Module 13: Present Value Module 14: Deferred Taxes Module 15: Stockholders’ Equity Module 16: Investments Module 17: Statement of Cash Flows Module 18: Business Combinations and Consolidations Module 19: Derivative Instruments and Hedging Activities Module 20: Miscellaneous Module 21: Governmental (State and Local) Accounting Module 22: Not-for-Profit Accounting ARB, APB, and FASB Pronouncements Appendices Appendix A: Financial Accounting and Reporting Sample Examination Appendix B: Sample Financial Accounting and Reporting Testlet Released by the AICPA Appendix C: 2012 Released AICPA Questions for Financial Accounting and Reporting Index 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 Answers, 1978 through 2000. 2. Information for Uniform CPA Examination Candidates, Board of Examiners, 2000. 3. Material from the Certified Internal Auditor Examination, Copyright © 1994 through 1997 by the Institute of Internal Auditors, Inc., are reprinted and/or adapted by permission. 4. Material from the Certified Management Accountant Examinations, Copyright © 1993 through 1997 by the Institute of Certified Management Accountants are reprinted and/or adapted by permission. 5. Example financial statements from Industry Audit Guides: Audits of Colleges and Universities, Audits of Voluntary Health and Welfare Organizations, and Audits of Providers of Health Care Services. 6. Example of Statement of Activity from SOP 78-10. Reproduction and adaptation of pronouncements, copyright © Financial Accounting Standards Board, Norwalk, Connecticut 06856-5116, with permission. 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 College and University Business Administration with permission of the National Association of College and University Business Officers. Copyright © 2013 by John Wiley & Sons, Inc. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada. 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Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our Web site at www.wiley.com. ISBN 978-1-118-27722-5 (paperback); 978-1-118-41959-5 (ebk); 978-1-118-42119-2 (ebk); 978-1-118-56222-2 (ebk) PREFACE DON’T FORGET TO VISIT OUR WEBSITE AT WWW.WILEY.COM/CPA FOR SUPPLEMENTS AND UPDATES. Passing the CPA exam upon your first attempt is possible! The Wiley CPA Examination Review preparation materials 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 pass rate on each section of about 45%. 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! Remaining current is one of the keys to examination success. Here is a list of what’s new in this edition of the Wiley CPA Examination Review Financial Accounting and Reporting text. The new AICPA Content Specification Outlines on Financial Accounting and Reporting for the computerized CPA Examination beginning in 2012 AICPA questions released in 2012 The new task-based simulations Complete coverage of standards, especially The newest FASB accounting standards International accounting standards SEC reporting requirements The objective of this work is to provide you with the knowledge to pass the Financial Accounting and Reporting portion of the Uniform Certified Public Accounting (CPA) Exam. The text is divided up into fourteen areas of study called modules. Each module contains written text with discussion, examples, and demonstrations of the key exam concepts. Following each text area, actual American Institute of Certified Public Accountants (AICPA) unofficial questions and answers are presented to test your knowledge. We are indebted to the AICPA for permission to reproduce and adapt examination materials from past examinations. Author constructed questions and simulations are provided for new areas or areas that require updating. All author constructed questions and simulations are modeled after AICPA question formats. The multiple-choice questions are grouped into topical areas, giving candidates a chance to assess their areas of strength and weakness. Selection and inclusion of topical content is based upon current AICPA Content Specification Outlines. Only testable topics are presented. If the CPA exam does not test it, this text does not present it. 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 November 2012 ABOUT THE AUTHORS Ray Whittington, PhD, CPA, CMA, CIA, is the dean of the Driehaus College of Business 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 Certified Public Accountants (AICPA), and he previously was on the audit staff of KPMG. He previously served as a member of the Auditing Standards Board of the AICPA and as a member of the Accounting and Review Services Committee and the Board of Regents of the Institute of Internal Auditors. Professor Whittington has published numerous textbooks, articles, monographs, and continuing education courses. Patrick R. Delaney, deceased, was the dedicated author and editor of the Wiley CPA Exam Review books for twenty years. He 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 accounting experience with Arthur Andersen LLP and was coauthor of GAAP: Interpretation and Application, also published 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, Institute of Management Accountants; and had served on numerous other professional committees. 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 Accounting 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 CONTRIBUTOR Natalie T. Churyk, PhD, CPA, is the Caterpillar Professor of Accountancy at Northern Illinois University. She teaches in the undergraduate and L.M.A.S. programs as well as developing and delivering continuing professional education in Northern Illinois University’s CPA Review program. Professor Churyk has published in professional and academic journals. She serves on state and national committees relating to education and student initiatives and is a member of several editorial review boards. Professor Churyk is a coauthor on two textbooks: Accounting and Auditing Research: Tools and Strategies and Mastering the Codification and eIFRS: A Case Approach. INTRODUCTION To maximize the efficiency of your review program, begin by studying (not merely reading) chapters 1 through 5 of this volume. They have been carefully organized and written to provide you with important information to assist you in successfully completing the Financial Accounting and Reporting section of the CPA exam. Beyond providing a comprehensive outline to help you organize the material tested on the Financial Accounting and Reporting section of the exam, these chapters will assist you in organizing a study program to prepare for the Financial Accounting and Reporting portion. Self-discipline is essential. Chapter 1: Beginning Your CPA Review Program Chapter 2: Examination Grading Chapter 3: The Solutions Approach Chapter 4: Taking the Examination Chapter 5: Exam Content Overview