The Student CPA at Blogged
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Succeeding in any field of study requires the use of a solid strategy and accounting is no exception. As an undergraduate student in accounting, I many times had classmates in my accounting courses that would vent to me their frustration with their inability to consistently achieve above average exam grades. In response, I would ask them their strategy for studying for the course. In 9 out 10 cases, they had no clearly defined strategy and that's exactly what I call a recipe for failure. Successful studies in the field of accounting require a structured approach. While I never did exceptionally well in college, I was however able to do better than average in all my accounting classes because I developed and adopted effective learning habits very early on. Before going any further, I would like to mention that the study skills I am about to share with the whole world are not a one size fits all. You are thereby invited to tweak them for the purpose of achieving optimum results. With the disclaimer out of the way, let's take a look together at the study habits that enabled me to fare better than most throughout each of my accounting classes. These learning habits were stacked up in four chronological phases: before the lecture, during the lecture, after the lecture, and before the test.
- Before the lecture: Before showing up for every lecture, there were two things that I would do. First, I would read the assigned chapter's opening story. Reading the opening story was very helpful to me because it enabled me to get a good feel for the issues to be discussed throughout the lecture. The other activity that I completed as part of preparing for the lecture was to print out then read the assigned chapter's powerpoint slides hosted on the textbook's website. If any worked problem was included in the slides, I would make every effort to solve it without looking at the solution. By the time I was finished working with the slides, I had become well acquainted with most of the topics to be covered in the lecture.
- During the lecture: I always made sure to show up for the lecture on time and equipped with the chapter's powerpoint slides, the textbook, a basic scientific calculator, a notebook, etc. As I listened to the lecture, I would write anything that the instructor mentioned that was not included in the notes. If the professor singled out topics or types of problems that were highly likely to appear in the exam, I would also write that down. Last but not least, I made every effort to ask questions whenever I felt confused and I could not find the answers in the textbook.
- After the lecture: My first year in college, I had a bad habit of not reviewing my class notes nor completing any additional reading in a timely manner. That strategy seemed to work well until the semester of my Intermediate Accounting I course. The instructor was going through the chapters so fast that my procrastination ended up becoming a serious liability. It didn't take me too long to realize that a change of strategy was badly needed. It is right then that I decided that I was going to strive as much as possible to review my class notes and complete any further reading within 36 hours of the completion of a class session. Additionally, I committed to working out all chapter assigned problems over the weekend. These small adjustments in my study habits turned out to be very instrumental in helping me turn the semester around after I got off to a bad start in my Intermediate I accounting course.
- Before the exam: Once I became accustomed to consistently completing phases 1 through 3, my exam preparation became less tedious. Obviously I still needed to do things like review my class notes, read over the powerpoint slides, and rework some of the assigned problems with higher difficulty levels. I also did put a special emphasis on knowing how to solve every problem worked in class and in the textbook. This is because, from personal experience, in almost 85% percent of the cases, the tests questions will be modeled after the lecture's and or textbook's solved illustrations or problems. To complete my preparation for the exam, I would go on the textbook's website take a quiz and a true or false questionnaire for each of the chapters I was going to be tested on. Not only did this final step help me hone in my exam taking skills, but it did also assist me in assessing my level of readiness for the exam I was about to give.
These guidelines are not meant to apply to very student's situation because learning styles vary from one individual to the other. Nonetheless, any person is welcomed to adapt the study habits I just outlined to her own set of circumstances. If you find yourself reading this post, please take a few minutes to contribute to the discussion by sharing some of the study techniques that worked or are working for you in your accounting courses or in your other business classes.
Tags: Accounting Department Advisory Board, Accounting Textbook Authors, Accounting Textbook Publishers, Big Four Accounting Firms, GAAP, IAS, IFRS, SEC, SEC IFRS Adoption, US GAAP to IFRS transition | Category: Audit and Assurance, Financial Accounting, Master of Accounting |  For a decade or so, there has been quite a lot of talk in the US about a possible transition from US GAAP (Generally Accepted Accounting Principles) to IFRS (International Reporting Standards) with regard to US publicly traded companies. Up to this point, most of the discussions on the subject have been about assessing the merits of such a change. As usual, some people are for it while others aren't. Because I am still in the process of gathering the facts on the possible ramifications of the adoption or non-adoption of IFRS by the SEC (US securities and Exchange Commission), I find myself incapable of formulating an opinion on this issue. There is however plenty of literature about the subject available online therefore I urge you to conduct your own investigation. From the little I have learned so far, it is no longer a matter of if but when the SEC will require US publicly traded companies to report under IFRS. I am saying this because the American Institute of Certified Public Accounting announced not too long ago that starting with the year 2011, the CPA exam will test the candidate's knowledge on IFRS and IAS (International Auditing Standards). What would be the purpose of incorporating IFRS and IAS content into the uniform CPA exam if IFRS and IAS were not actually going to be widely or selectively implemented in the US? The debate we should be having right at this moment is how to best prepare accounting professionals and college students majoring in accounting in order to ensure a smooth transition from US GAAP to IFRS. This debate is critical because without adequately trained accounting professionals, the migration from US GAAP to IFRS is going to be a total disaster. Two Big Four accounting firms Deloitte and Ernst & Young have independently created partnerships with a select number of universities in order to develop teaching materials to aid instructors and professors in incorporating the differences between U.S. GAAP and IFRS into intermediate accounting courses. Although I salute those initiatives, I believe that more needs to be done. In my opinion, every higher education institution offering accounting degrees ought to, without further delay, start reengineering its curricula in anticipation of the ineluctable adoption of IFRS by the SEC. Right at this moment, it will indeed pay more to adopt an anticipatory attitude rather than a reactionary one. Furthermore, every accounting department's advisory board shall make it a top priority that IFRS is no longer vaguely talked about but rather taught in classrooms' settings. Last but not least , college accounting textbooks publishers and their respective authors must work hand in hand in order to quickly bring to market comprehensibly updated study materials that fully incorporate IFRS. Because mankind is a creature of habits, I thus understand that we have a certain tendency to resist the idea of change. However, one can no longer ignore the fact that the SEC is moving inexorably towards the adoption of IFRS. Therefore, all potentially affected parties must work in concert with each other to ensure that today's and tomorrow's US accounting professionals are more than appropriately prepared to deal with the much anticipated SEC migration from US GAAP to IFRS.
Suggested reading:
- International Financial Reporting Standards: An AICPA Backgrounder
- Content and Skill Specifications for the Uniform CPA Examination
- University Professors Weigh In on IFRS Curricula
- Is it US GAAP IFRS at US Universities?
- Deloitte Puts IFRS in College Classrooms
- E & Y Launches Academic Center
Tags: Accrual Accounting, Earnings Management, FASB Satement, Financial Reporting, IFRS, Materiality, Restructuring Charges, Revenue Recognition, SAB, SEC, SFAS | Category: Audit and Assurance, Financial Accounting, Management Accounting | As I explained in my previous post, accrual accounting is not an exact science. Indeed, a variety of assumptions and accounting estimates is used in arriving at the final earnings figures. In assessing the health of a company, lenders and investors alike almost always look at the quality of its earnings first. However, it is nearly impossible for a company to consistently report stellar periodical earnings over a long period of time. This is because a company's business activities can be affected by changes in economic cycles, seasonal changes, new legislation, and other extraordinary events. In order to "normalize" the continuous succession of ebbs and flows in financial results characteristic of any typical business, company managers, more often than not, resort to a practice known as earnings management. According to Healy and Wahlen (A review of the earnings management literature and its implications for standard setting', Accounting Horizons, December 1999, pp. 365–383.), "earnings management" occurs when managers use judgment in financial reporting and in structuring transactions to alter financial reports to either mislead some stakeholders about the underlying economic performance of a company or influence contractual outcomes that depend on reported accounting numbers. In other words, earnings numbers are deliberately manipulated by management for the purpose of meeting company's objectives whatever they might be. There are about three types of companies that are likely to adopt an earnings management policy: companies where executive compensation is tied to earnings, publicly traded companies because they are under constant pressure to meet or beat analysts earnings forecasts, and companies getting ready for major debt financing or for an IPO (Initial Public Offering). Contrary to what you may think, most earnings management techniques are often within the boundaries of Generally Accepted Accounting Principles (GAAP). Indeed, all it takes is a well trained accountant that understands how changes in accounting judgments and estimates can be used to upwardly or downwardly affect earnings. In his remarks entitled "The Numbers Game" made on September 28, 1998 at the New York University Center for Law and Business, then-SEC (Securities and Exchange Commission) Chairman Arthur Levitt described five techniques of "accounting hocus-pocus" that summarized the most glaring abuses of the flexibility inherent to accrual accounting: big bath charges, creative acquisition accounting, cookie jar reserves, materiality, and revenue recognition.
- Big Bath Charges: this is when a company resorts to taking a one time huge restructuring charge/write down as opposed to appropriately recording the losses over several fiscal years. This is to avoid a succession of years of earnings decline that would have otherwise made the company financial health look bad in the eyes of stakeholders. To make it more difficult for companies to abuse of "big bath charges", in 1998, the FASB adopted SFAS No. 144 on impairment losses and SFAS No. 146 on the timing of the recognition of restructuring obligations.
- Creative Acquisition Accounting: This is when following a business acquisition, the acquirer allocate the bulk of the total purchase price to the acquiree's in-process Research & Development as opposed to its long lived assets, thus recording a huge expense during the year of acquisition as mandated by US GAAP. Since 1998 however, SFAS Nos. 141 and 142 have been adopted to provide clearer guidelines on how the purchase price in a business acquisition should be allocated.
- Cookie Jar Reserves: This can take place in two ways. In the first scenario, a company with record revenues overstates its bad debt expense in quarter/year A so as to record little bad debt expense in subsequent quarters/years when it expects to achieve below average revenues. In the second scenario, a company understates revenues by inflating unearned revenues in quarter/year A so as to pad revenue figures in subsequent quarters/years should they fall below market expectations. Since 1998, the SEC has released Staff Accounting Bulletin (SAB) 101 outlining with more clarity when deferring revenue is a permissible practice.
- Materiality: the concept of materiality is a gray area of accounting and consequently is subject to different interpretations. Chairman Levitt invited auditors to use more professional skepticism in the way they look at materiality when conducting financial statements audits. Sometimes, publicly traded companies resort to questionable accounting practices with immaterial effects but that allow the company to meet or beat analysts earnings expectations. In this type of situation, Chairman Levitt recommends that the misstatement be considered as material because it is very likely that the company's stock price would have declined if the misstatement had been corrected. In 1999, the SEC released SAB 99 providing a better understanding of the definition of materiality.
- Revenue Recognition: Some companies accelerate the recording of revenues to give a nice face lift to their operating results because they are in desperate need of financing. This situation is very peculiar to companies in their early stages of growth. This is the reason why SAB 101 was released as explained in the "Cookie Jar Reserves" section.
I have no doubt that there is a host of companies out there always looking for additional loopholes in the established financial reporting standards so as to keep managing their earnings. As demonstrated by former SEC Chairman Arthur Levitt, earnings management techniques may follow the letter of the rules of standard accounting practices, however they certainly deviate from the spirit of those rules. I personally think that it is rather unethical for a company's management to condone the use of legitimate accounting techniques that have for sole design to misrepresent the quality of earnings to existing and potential users of financial statements. With the proposed adoption of IFRS (International Financial Reporting Standards) by the SEC, I wonder if the practice of managing earnings won't become more pervasive since IFRS seems to be more of a principles-based system (involving more judgment) whereas US GAAP is more of a rules-based system (involving less judgment).
Suggested reading:
- Earnings Management and the Abuse of Materiality, Journal of Accountancy
- Quality of Earnings and Earnings Management: A Primer for Audit Committee Members, AICPA
- Detecting Earnings Management, Dr. Gary Giroux, Mays School of Business at Texas A&M University
- Earnings Management: Short Term Gains, Longer Terms Costs, Dr. Nicole Jenkins, Owen Graduate School of Management at Vanderbilt University
Tags: APB Opinion No. 19, Balance Sheet, FASB Statement No. 95, Financial Reporting, Financing Activities, Income Statement, Investing Activities, Operating Activities, Primary Financial Statements, Pro Forma Statement of Cash Flows, Statement of Cash Flows | Category: Financial Accounting | From the date I graduated from college in May 2009 until a few weeks ago, I did not have a single opportunity to accomplish any reading as it pertains to academic related accounting materials. I was indeed very tied up with completing the different components of the graduate school application process. Researching Master of Accounting programs, intensively preparing for the GMAT, and meeting the application requirements of four different programs took up all my spare time from June 2009 through February 2010. Waiting to receive admissions decisions on my graduate school applications, I recently started laying the groundwork for my preparation for the CPA exam. I intend to complete all four sections of the CPA exam in year 2011. Before dashing to buy any CPA review materials, I thought it would be wise to brush up on the topics that I didn't fully grasp while I was completing my B.S. in Accounting. Consequently, I spent the past couple of weeks getting reacquainted with the statement of cash flows. If I have good recollection, the only time I was exposed to a lecture on the statement of cash flows was in my Intermediate II course. Thus, the little I learned backed then was not fully cemented in my memory. The textbook I used to revisit the chapter on the statement of cash flows is Intermediate Accounting 15 E by Stice, Stice, and Skousen whereas I was assigned Intermediate Accounting 11 E by Kieso, Weygandt, and Warfield for my Intermediate II class. I have the feeling that the former offers a better emphasis on applied learning and I love it! Anyway, let's talk statement of cash flows. The purpose of this post is not to discuss the technical aspects of the statement of cash flows but rather to talk about its purposes and applications. Before we get to that, let me give you a brief overview of the statement of cash flows. The statement of cash flows is a categorized cash basis report on operating, investing, and financing activities. The statement of cash flows strictly reflects the inflows and outflows of cash and cash equivalents during a period (usually a year); it doesn't include transactions that don't have a direct effect on cash receipts and payments. Contrarily, the other two primary financial statements are derived from the use of accrual basis accounting. The statement of cash flows did not become a primary financial statement until 1971 when the APB issued Opinion No. 19 officially making it a requirement that a funds statement be included as one of the three primary financial statements. However Opinion 19 omitted to provide specific guidelines and rules on how to produce a statement of change in financial position as the statement of cash flows was then called. It is not until 1987 that the FASB issued Statement No. 95 which, by superseding APB Opinion No. 19, created the official appellation: statement of cash flows. While providing for an official definition for the statement of cash flows, FASB Statement No. 95 also enunciated the rules and format to be used when creating the statement of cash flows. As you might have already realized, the statement of cash flows is relatively new when compared to the balance sheet and the income statement. This might explain why the statement of cash flows doesn't get nearly as much of the business news and academic (as related to college accounting curriculum) coverages as the other two primary financial statements do. Despite its relative newness, the statement of cash flows provides some very useful information on the financial performance of a company. According to Intermediate Accounting 15 E by Stice, Stice, and Skousen, there are three majors reasons why the statement of cash flows should not be overlooked: "sometimes earnings fail, everything is on one page, and it's used as a forecasting tool".
- Sometimes Earnings Fail: Because of the use of accrual accounting and allocations derived from the use of different accounting methods, the income statement fails to sometime give an accurate picture of the economic performance of a company during a certain period. Depreciation and amortization methods, provisions for obligations, and assets write offs are some of the non cash transactions that can affect the accuracy of earnings. Because it is a categorized cash basis report on operating, investing, and financing activities, the statement of cash flows not only provides key information on a firm's liquidity and solvency but it also indicates the amount, timing, and probability of future cash flows. Last but not least, it provides a leveled playing field when comparing different firms' operating performance by nullifying the effects of the use of dissimilar accounting methods.
- Everything Is on One Page: "If you were stuck on a desert island and could receive only a single financial statement each year ( by bottle floated in on the waves), you would probably choose the cash flow statement" (Intermediate Accounting 15 E by Stice, Stice, and Skousen). As noted earlier, the statement of cash flows provides cash variation with regard to operating, investing, and financing activities. In other words, the statement of cash flows in itself is a snap shot of a company's overall performance during the year. First, the operating activities section of the statement of cash flows quantifies the net change in cash resulting from operations. Second, the investing activities section quantifies the net increase or decrease in the cash value of long lived assets. Third and last, the investing activities section itemizes the amount of cash that a company took in and paid out in order to finance its activities. Additionally, it should be noted that under US General Accepted Accounting Principles (GAAP), non cash activities may be disclosed within the statement of cash flows itself.
- It Is Used as a Forecasting Tool: The statement of cash flows can also be used as an excellent analytical and forecasting tool. It indicates the amount, timing and probability of future cash flows. For instance, most lending institutions used what's called a pro forma statement of cash flows which is a prediction of the inflow and outflow of cash for a business. This is to assess if a business will experience a cash shortage in the foreseeable future thus preventing it from repaying the loan on time or defaulting altogether on it. The statement of cash flows also provides the possibility to compute certain ratios to assess a company's financial strength. Some examples of cash flow ratios are: cash flow to net income, cash flow adequacy, and cash times interest earned. If you are interested to find out more about these ratios, you can look them up with a search engine like Google.
Just as many people out there, I never gave much importance to the statement of cash flows. However, that was the case until I spent the last two weeks studying its features, its purpose, and its applications. It was indeed a really enlightening study. A very close look at a company's statement of cash flows will provide a more accurate picture of the current and future health of a business than the other primary financial statements will. I am in no way de-emphasizing the purpose of the balance sheet and of the income statement but I am rather admitting to the fact that the statement of cash flows is a key aspect of financial reporting and as such it would be a grave mistake to overlook it. I hope after reading this post, readers will make a real effort to get themselves reacquainted with statement of cash flows so they can too realize it deserves as much attention as the other two primary financial statements.
Tags: Accounting Profession, AICPA Code of Professional Conduct, Business Ethics, Corporate Fraud, Corporate Governance, Ethical Judgment, Ethical Standards, Integrity, Ponzi Scheme, Public Trust | Category: Audit and Assurance, Careers in Accounting, Financial Accounting, Management Accounting, Master of Accounting, Words to the Wise | Integrity is one of the essential pillars of the American Institute of Certified Public Accountants (AICPA) Code of Professional Conduct. A distinguishing mark of the accounting profession is acceptance of its responsibility to honor the public trust. Lenders, investors, government agencies, and other members of the business community rely on the integrity of certified public accountants to preserve the proper functioning of commercial activities. Indeed, the published independent annual audit reports of the financial statements of public companies play a fundamental role in maintaining the soundness of business transactions of all types. Active and aspiring public accountants ought to embrace the obligation to act in a way that warrants the faith that the entire public reposes in the work they do or will do. Richard L. Schmalense, former John C Head III Dean of the MIT Sloan School of Management, once stated: "Without ethics, business can't be done – or taught". In the wake of the resurgence of high profile Ponzi schemes and corporate frauds, it is now more important than ever to teach standards of professional conduct in undergraduate accounting and business curricula. While it may be impossible to mold every undergraduate student into a business professional that will spouse the form and spirit of ethical standards, it remains nonetheless essential to impress upon students the significance of fostering an organizational culture that values a high standard of business behavior. I personally think that the chapter on professional ethics taught in the introductory auditing course is not enough to ingrain in students' minds the necessity of conducting their duties in accordance with professional standards. Additionally, I don't know why anybody should wait until enrolling into a MBA program before he or she is exposed to a course on business ethics and corporate governance. Business programs need to be reminded that repetition has a pedagogical significance. Ethical cases should be regularly discussed in each and every accounting and management course at the undergraduate level. This will ensure that business and accounting college students are adequately prepared to deal with most ethical dilemmas that could arise in the workplace. It seems to me that universities are churning out a lot of business and accounting graduates that sadly are unable to identify business situations requiring sound ethical judgment. It is about time to start putting an end to this very alarming trend. Accounting professionals have always been held in high esteem because they are viewed as business professionals that do their work with a high degree of integrity. With major accounting firms being repetitively and deservedly scrutinized for failing to flag some flagrant cases of fraudulent financial reporting by their audit clients, I am increasingly concerned that public accountants will soon start loosing the good reputation that so many of their earlier generations worked so hard to establish and preserve.
Long are gone those days when obtaining an accounting degree was enough to get you a decent entry level job in public accounting or in industry accounting. Nowadays, it is not enough to simply earn a bachelor's degree in accounting, but you also need good grades (over 3.0) and some level of accounting internship experience. You see, in recent years the number of undergraduate business students majoring in accounting has reached unprecedented levels. For instance, at some institutions like Louisiana State University (LSU), the demand is so high that only sophomores averaging 3.0 or better are accepted into the undergraduate accounting concentration. More and more business students have come to realize that an accounting degree offers more versatility than most of the other business related concentrations. As universities confer an ever growing number of accounting degrees, public accounting firms become more selective in their choice of recruits. Nowadays, most public accounting firms, if not all of them, are going after job candidates that have either obtained their CPA license or that are eligible to give the CPA examination. This is the reason why more and more college students are entering accounting graduate programs so they can fulfill the 150 credit hour requirement for the CPA examination. For those who are able to obtain a master of science in accounting, the likelihood that they will get an offer right after graduation is very high. This is because the average entering class for a master in accounting program is about 50. Basically, if employers visit your campus, they will most certainly give priority consideration to graduate students over undergraduate students. Please understand that getting into an accounting masters program is not an end in itself but more of a lubricant improving your chances of obtaining a job offer. Indeed, you still have to take it upon yourself to embellish your resume, to network with members of the accounting profession, and to polish your job interview skills. Because admission to accounting graduate programs is steadily becoming selective with universities requiring above average GMAT scores and academic records, you should not be surprised to experience some difficulties in getting into top accounting programs. However, don't let all of that discourage you, there are a lot of graduate schools out there that have reasonable admission standards. As I was researching graduate level accounting programs this past summer, I stumbled upon a great book entitled: Peterson's MBA programs 2009. Although it says MBA in the title, this books offers a comprehensive overview of all the business related masters offered at almost every institution in the US and abroad. Before you dash to your favorite bookstore or online retailer, I would suggest that you check with your campus library or/and your local public library first. With this book, you will be able to narrow your graduate programs choices down to the schools where you will be considered a competitive applicant. Although job growth in the accounting profession is not due to stall anytime soon, obtaining an entry level job in the accounting industry is getting harder by the annual commencement ceremonies. As you enter your senior year or as you get ready the complete your bachelor's degree, it is paramount that you carefully evaluate your chances of receiving a job offer upon graduation. For most of you out there, your job prospects will likely be nonexistent which is why I strongly recommend that you consider applying to graduate school to increase your chances of starting a career in accounting. As I write this post, I am going through the application process to get admitted in a MS Accounting program for Fall 2010. In time, you will know which school I have decided to attend.
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I am currently enrolled in a Master of Professional Accounting program at UWG. I intend to develop expertise in Fraud Examination and Business Advisory. The Student CPA is a blog that strives to provide learning resources for accounting courses, graduate business school admission tips, information about careers in accounting, and job search strategies.
Wednesday, 21st of April 2010 at 11:50:06 PM
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