Publisher: John Wiley and Sons, 2014, ISBN 978-1-118-02707-3
CHAPTER 2
CRITICAL THINKING and
EFFECTIVE WRITING SKILLS
FOR THE PROFESSIONAL
ACCOUNTANT
Discussion
Questions:
1.
Critical thinking has many definitions. One definition is as follows: Critical
thinking involves a process of (more deeply) understanding, evaluating, and
judging the underlying issues under investigation.
2.
The highest level of thinking according to Bloom’s taxonomy entails the
"evaluation” of a statement (based upon definite criteria) for a given
purpose.
3.
In Bloom’s taxonomy, comprehension (or
grasping the meaning of a statement) entails the ability of restating the item
into the researcher’s own words without changing the statement's
meaning--thereby entailing a higher order skill than merely paraphrasing it.
4.
While critical thinking involves a process of (more deeply) understanding,
evaluating and judging the underlying issues under investigation, professional
skepticism entails an attitude of examining and recognizing emotional-laden,
and explicit and hidden assumptions “behind” each question.
5.
The qualities that lie behind rethinking include: a willingness to say that you
don’t know the answer, an openness to alternatives, an interest in the ideas of
others, thoughtfulness, a desire to discover what others have done and thought,
an insistence on getting the best evidence, and an openness to one’s own
intuition.
6.
The three levels of thought by the Illinois Renewal Institute include:
Recall--the lowest level, where one defines, describes, lists, recites or selects;
Process--the second level, where one compares, contrasts, classifies, sorts,
and analyzes; and Application--the highest level, where one evaluates,
imagines, judges, and hypothesizes.
7.
The AICPA’s list of effective writing characteristics include a coherent
organization, conciseness, clarity, use of standard English, responsiveness to
the requirements of the question, and appropriateness for the reader. The
editing skills include conciseness, clarity, and the use of standard English.
The composing skills include organization, responsiveness, and appropriateness.
8.
Per SEC Rule # 33-7380, six principles of clear writing include using:
a.
Active voice;
b.
Short
sentences;
c.
Everyday
language;
d.
Tabular
presentation of complex material;
e.
No legal
jargon; and
f.
No multiple
negatives.
9. Plain English writing does not mean deleting complex
information. Rather, it presents documents in an orderly and clear fashion
so the reader can better understand it.
10.
The elements of plain English include: Know your audience; know what material
information needs to be disclosed; use clear writing techniques; and design and
structure the document for ease of readability.
11.
The active voice uses strong, direct verbs. The subject of the sentence
performs the action described by the verb. An example: “ I will respond to the
client’s memo.” The passive voice is where the action is done to somebody or
something by another agent. The passive
voice often uses the words “be" or "been.” An example: “No one has
been authorized to respond to the client’s memo.”
12.
Special concerns of using e-mails include the need to develop strong writing
skills as one attempts to state his or her thoughts as concisely as
possible; and strong technological
skills in the security of the transmission of the communication.
13.
The different types of client letters include: transmittal letters that merely
transmit information; status update letters that reminds the client about a
situation by providing an update to the issue; action request letter requests
action; and an opinion letter summarizes the situation very briefly.
14.
A memo to the file documents the reasoning for one’s conclusion that might be
related to a research issue. A client letter normally does not document the
details of the research process.
15. A tax memo is often unique in that it usually
includes the reasoning for the law or authorities used, as well as the
application of the law or authorities to the client’s set of facts. The memo
would include the following areas: Facts, Issues, Conclusion, and Reasoning.
Chapter 7 will provide greater details as to tax issues and memos.
Exercises:
1.
The solution to this logic problem is the following:
House 1 House 2 House 3 House
4 House 5
Color Yellow Blue Red White Green
Country America Russia England Spain Japan
Sport Football Table Tennis Hockey Basketball Baseball
Drink Water Tea Milk Orange
Juice Coffee
Pet Fox Horse Hamster Dog Monkey
2.
Allison is the eldest.
A= Allison, M= Mary, J= Jennifer,
X=eldest
If
M = 1/2 X, J= A +M +1/2 X
If A is eldest: A=X, J= X =1/2 X
=3/2 X and Jennifer receives the highest points, and Mary as youngest receives
the least points.
If J is the eldest: J=X, J=A +1/2 X,
A= 1/2 X, Allison and Mary receive the same number of points. However, the
youngest receives the least points, so J cannot be the eldest.
3.
The eight elements of reasoning as to the question of when assets need to be
classified as current assets are as follows:
a.
Purpose—the
purpose is to respond to the client’s request for information.
b.
Issue—the
issue is to provide a specific response to the question, "When do assets
need to be classified as current assets?"
c.
Information—the
information for this issue would include the authoritative accounting
literature.
d.
Concepts—the
concepts would include the concepts (definition) of an asset, and the
classification between current and
long-term assets.
e.
Assumptions—the
assumption to classify an asset as current is that it will be used up, or
consumed within one year or the operating cycle, whichever is longer.
f.
Interpretations
or inference—the interpretation requires one to determine from the evidence
whether the asset will be used up or converted into cash.
g.
Implications
or Consequences—If an asset is not properly classified, the analysis of the
financial statements (i.e., current ratio) would be misleading.
h.
Solution—An
asset should be classified as a current asset when it will be converted into
cash, or consumed in operations within one year or the operating cycle,
whichever is longer ( ASC 210-45-3).
4. The
eight elements of reasoning for the question of when a contingent liability
should be booked are as follows:
a.
Purpose—the purpose is to respond to the client’s request for
information.
b.
Issue—the
issue is to provide a specific response to the question, "When should a
contingent liability be recorded?"
c.
Information—the
information for this issue would include the authoritative accounting
literature.
d.
Concepts—the
concepts would include the concepts (definition) of a contingent liability, and
when to record a liability.
e.
Assumptions—the
assumption to record a contingent liability would be that the dollar amount can
be estimated and the liability is probable in occurrence.
f.
Interpretations
or inference—the interpretation requires one to evaluate the probability of
occurrence and whether the amount can be reasonably estimated.
g.
Implications—If
a contingent liability meeting the requirements of FASB No. 5 is not recorded,
then the financial statements are misstated.
h.
Solution—a
contingent liability should be recorded if it meets the two criteria of ASC
450-20-25-1—probable and the amount can be reasonably estimated.
5. Correct punctuation:
a.
A general
ledger contains all the assets, liabilities, and owners’ equity accounts.
b.
The purpose of
a trial balance is to prove that debits equal credits, but this does not prove
that all transactions have been recorded.
c.
The current
assets section of the balance sheet contains items such as cash, accounts
receivable, and prepaid expenses; and the current liabilities section contains
items such as accounts payable, notes payable, and short-term debt.
d.
The auditing
exam was to begin at 2:00 p.m., but the professor’s car broke down, so we
didn’t begin until 2:30 p.m.
e.
Did William
ask, “ How can we finish the audit tonight because Linda said, ‘We have twenty
hours of work left to do’”?
6. Examples of the sentences rewritten:
a. Original
sentence;
For good reasons, the secretary may grant
extensions of time in 30-day increments for
filing of the lease and all required bonds, provided that additional extensions
requests are submitted and approved
before the expiration of the original 30 days
or the previously granted extension.
rewritten:
We may extend the time you have to file the
lease and required bonds. Each extension will be for a 30-day period. To get an extension, you must write us giving the reasons that you need more
time. We must receive your extension request in time to approve it before your
current deadline or extension expires.
b. Original
sentence:
If the State agency finds that an individual
has received a payment to which the individual
was not entitled, whether or not the payment was due to the individual’s fault or misrepresentation, the
individual shall be liable to repay to the
State the total sum of the payment to which the individual was not entitled.
rewritten:
If
the State agency finds that you received a payment that you weren’t entitled
to, you must pay the entire sum back.
c. Original
sentence:
Universities differ greatly in style, with
some being located on out of town campuses
in parkland, others having buildings scattered about parts of city centers and others being at various points between
these two extremes.
rewritten:
Universities
differ greatly in style. Some are
located on out of town campuses in parkland. Others have buildings scattered about parts
of city centers. Others are at various points between these two
extremes.
Student
Cases with Solutions to accompany Accounting & Auditing Research: Tools
& Strategies (8th
edition)
NOTE:
In addition to the end-of-chapter exercises which serve as short cases you will
find the following cases arranged by course title that can also be utilized as
short cases that require the student to access the authoritative literature to
address the issue presented in the case. Other excellent sources of longer and
more detailed cases include the Deloitte Trueblood cases and cases provided by
various accounting firms.
A topical listing of the cases is
presented with the case and solution following the listing.
Topical Index of Student Cases
INTERMEDIATE ACCOUNTING
Cases
Case
1: Reporting acquisition and repayment transactions in the Statement of Cash
Flows
Case
2: Recording a forfeited payment
Case
3: Revenue and expense recognition associated extended warranties
Case
4: Accounting for “due on demand” note payable
Case
5: Purchase of a controlling interest with a greenmail premium
Case
6: Accrual and measurement of interest payments
Case
7: Recognition of an asset transfer when title has not yet been received
Case
8: Capitalization of interest and property taxes on a construction project
Case
9: Deferred compensation and life insurance policy recognition
Case
10: Reporting earnings per share balances for subsidiary companies
Case
11: Deferment of lease payments
Case
12: Disclosure of prior period adjustments in the statement of cash flows
Case
13: Measurement and recording of payments for sick days
Case
14: Comparative cash flow statements
Case
15: Social security benefits as assets
Case
16: Recording a stock dividend as a stock split
Case
17: Gain on a nonmonetary exchange
ADVANCED ACCOUNTING Cases
Case
1: Reporting of letters of guarantee notes payable
Case
2: Factors affecting minority interest control
Case
3: Profits and losses in the investment in foreign currencies
Case
4: Amortization of foreign currency transaction gains and losses
Case
5: Reflection of expensed computer programs on consolidated financial
statements
Case
6: Classification of a proposed financial instrument as a hedge
Case
7: Disclosure of proceeds and payments from cash flow hedging activities
Case
8: Proper valuation of a “guaranteed” business combination
GOVERNMENT AND NOT-FOR-PROFIT ACCOUNTING
Cases
Case
1: Recognition restricted or non-restricted assets that are promised but not
received
Case
2: Affect of “permanent” reductions in the value of “promised” assets
Case
3: Disclosure and classification on a company’s Statement of cash Flows
Case
4: Disclosure of potential interest rate swings and commercial paper by a city
Case
5: Capital and operating leases between related parties
Case
6: Elimination of profits on intercompany sales
Case
7: Reporting of funds and potential obligations on bonds issued for third
parties
Case
8: Disclosure of payments made to agents or brokers
Case
9: Accrual of vacation time of unestablished employees
AUDITING Cases
Case
1: Communication with predecessor auditors
Case
2: Interim financial information
Case
3: Outside services for inventory counts
Case
4: Supplementary disclosures
Case
5: Restating prior years’ financial statements
Case
6: Independence in a review or compilation engagement
Case
7: Qualified report and account classification
Case
8: Re-issuance of financial statements
Case
9: Communication with audit committees
Case
10: Accounting for assets held for sale
Case
11: Accompanying Informtion
TAX Cases
Case
1: When should gross income be accrued?
Case
2: Stock purchased by an employee
Case
3: Income sourcing- international
Case
4: Business deductions
Case
5: Deduction for foreign travel
Case
6: Contingent liabilities
INTERMEDIATE ACCOUNTING - Cases
Case
1:
Mead Motors purchases an automobile for its new car inventory from Generous
Motors, which finances this transaction through its financial subsidiary,
Generous Motors Credit Company (GMCC).
Mead pays no funds to Generous Motors or GMCC until it sells the
automobile. Mead must then repay the
balance of the loan plus interest to GMCC.
How should Mead report the acquisition and repayment transactions in its
Statement of Cash Flows?
Case
1 Solution:
Problem
Identification: How should a company report, if at all, cash and
non-cash transactions owed to an entity’s financial subsidiary?
Keywords:
Cash flows; financ* subsidiaries; operating income.
Conclusion: Per
ASC 230-10-50-5), Mead should exclude transactions that involve no cash payments
or receipts. However, per 230-10-45-17,
it should record cash payments to GMCC for repayments of principle (and
interest thereon) due to suppliers or their subsidiaries as operating cash
(out) flows.
Case
2:
Narda Corporation agreed to sell all of its capital stock to Effie Corporation
for three monthly payments of $200,000.
After Effie made the first required payment, it ceased making other
payments. The stock subscription
agreement states that Effie, thus, forfeits its payments and is entitled to no
other future consideration. How should
Narda record the $200,000 forfeited payment?
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