Study Guide 4 Accounting

[Mallory Chowansky]

Thecontent outline for the AAT Test appears below. If you do not feel comfortable with your basic financial and/or managerial accounting knowledge, you might consider purchasing and reading through one or both of the following study guides:

The 75-question exam is designed to focus on the concepts and skills developed in a freshman, first-semester course. Basic, general topics such as debits and credits, the accounting equation, and the accounting cycle would be reviewed, as well as more advanced topics such as internal controls, valuation, and cash flows.

If you still have some time left, it would be good if you could brush up on some other conceptual topics. Read on how businesses implement internal controls in order to prevent cash leakages in the system. Consider how allowances are made for uncollectible accounts (bad debts) and how adjustments are made for long-term assets as well as the corresponding journal entries for the gains and losses for the sale of such.

Explanation: An overstatement in the ending inventory would reduce cost of goods sold, causing it to be understated. Meanwhile, since gross income is the difference between sales and cost of goods sold, it would be overstated.

Explanation: Goods which have the terms FOB Destination are only recognized as inventory from the buyer's perspective once it is received by the buyer, not when it is still in transit. This is because FOB Destination means that the buyer is free from the responsibility of the goods until it reaches his or her hands. Therefore, it is not yet recognized as inventory in the buyer's books.

Explanation: Typically, accounts payable are incurred whenever we make a purchase from a supplier on account. This type of transaction is associated with the daily operations of a company, and is therefore classified as an operating activity. Alternatively, we can analyze this transaction through the shortcut we have explained above. Since accounts payable is a current liability, we can conclude that it is an operating activity.

Explanation: The accounting entity or separate entity concept is one of the generally accepted accounting principles (GAAP). It states that whatever the owner owns (or owes) is apart and distinct from whatever the company owns (or owes). Therefore, in accounting, personal expenses such as the rent of the owner's house should not be considered as an operating expense in the books of the company. Whenever the owner would use company funds for personal use, it should be instead be recorded as a withdrawal from the owner's capital account.

Explanation: Using the asset method, when supplies and similar items are bought, they are first recorded as an asset as opposed to an expense. Therefore, an expense is not recorded when the office supplies are paid, neither when they are received or bought. An adjusting entry is to be made by the company (usually at the end of the month, period, or year) when the office supplies are used. Only then would the office supplies that are used be considered as an expense. This would be reflected in the income statement. Meanwhile, the office supplies still unused would remain as an asset.

While quite short on the study side of things, the official CLEP book is the go-to final practice test. Since this is the only official practice test available, I normally use it as my final spot check before taking the test.

REA offers a great combination of CLEP study tips, exam study materials, and detailed practice tests. This book functions well as the central pillar of a strong CLEP prep strategy, with resources like the Official CLEP Study Guide (above) providing a great final practice test at the end.

This study guide is meant to give those who may not have access to certain resources a proper starting point and overview on how all of the necessary financial concepts flow together. There certainly exist more comprehensive guides that will walk you through specific questions and how to answer them, but our goal is to drive an understanding of these technical concepts as a whole.

Typically, interviewers evaluate accounting concepts by asking you to describe how a change in one item on a financial statement would flow through to the other two statements. This competency check may take the form of a question like:

There are lots of ways to ask this type of accounting question (by referencing any of the line items on a financial statement), but once you have a thorough understanding of how each line item is calculated and relates to each other, you will ace these questions.

If you want to understand what a house is worth, it would be a great idea to figure out what similar houses in similar areas have sold for before. But houses come in all shapes and sizes, so you would have to adjust each to calculate a price / square foot. You could also calculate price / bedroom, or price / window, really any way you

think appropriate to equalize the comparison.

While the first two analyses compare a business to other businesses, a DCF is a valuation technique that looks at how much cash a business expects to generate. Interviewers might ask you to walk me through a DCF," which just means to describe the major lines and calculations you would use to get to a valuation.

Put simply, a DCF looks at how much cash a business expects to generate for all investors, and then values the cash flows based on the likelihood (or risk) that the business achieves that forecast relative to other potential investments. Said differently, a DCF values the cash flows based on the return the investors would require to be willing to invest in the business relative to other opportunities available to them.

All of this requires assumptions of the business forecast, the debt available to finance the purchase, the interest and debt payback terms, the sale value at the end of owning the business, and the return required by the investor.

The final area of technical questions may relate to how transactions are typically completed. This includes all of the logistics, timelines, and legal requirements of selling or buying a business, raising debt or equity capital, or restructuring a company. Each transaction type is unique and is worth learning about at a high level. You should focus on the transaction types where you are interested in pursuing a career as most investment banks separate by specialization area. When you interview, you will most likely interview with a person who specializes in one of these areas, and you should be prepared to answer related questions.

The Certified Government Financial Manager (CGFM) credential exemplifies experience and proficiency, distinguishing individuals who have made a significant commitment to their professional development.

The Journal of Government Financial Management (Journal), a quarterly publication produced by AGA since 1950, is a valuable resource in the profession, featuring articles and columns from practitioners and academics with insights based on research and experience.

The current edition of the three CGFM study guides is 2022. The 2024 edition of the CGFM study guides will be released mid-summer. For more information on the CGFM examinations update, please visit the 2024 CGFM Examinations Update page.

AGA is offering an informational webinar on the 2024 updates to the CGFM study guides for $30 per person. If time allows, the instructor will also take general questions on all three courses. It's a great opportunity for candidates needing additional support on content outline topics.

CGFM study guides are available in the VitalSource bookstore as a six-month subscription. The guides can be viewed on- and off-line, and through their Bookshelf app. To buy or access the online guides, click on the corresponding link below:

What should I know about the 2022 edition of the study guides?

The updates to Study Guide 1 are minor and mostly involve updating the examples, statistics and links, and some clarification of language. If candidates are already using the 2019 edition to prepare for CGFM exam 1, we do not suggest purchasing the 2022 edition.

Updates to Study Guide 2 are more extensive and involve a number of revisions in response to several federal regulations (including updates to lease and land standards (SFFAS 54 and 59), MD&A project and updates to A-136) and state and local regulations (including GASB statements 84-98, as applicable). If candidates want to use this study guide to prepare for CGFM exam 2, we suggest obtaining the 2022 edition for exams to be taken after July 2022. Alternatively, for those who already have the 2019 edition, we recommend supplementing it by visiting the applicable government sites to learn more about the recent regulation changes.

Please note that all references to the name and acronym for Comprehensive Annual Financial Report (CAFR) were updated to the new name and acronym of Annual Comprehensive Financial Report (ACFR) in all study guides, as applicable.

Do you sell just the updated pages of the printed study guides?

Since the updates often revise and move a large number of pages throughout the study guides, AGA does not offer specific updated pages.

If I plan to use the study guide to prepare for the CGFM examination, when should I buy the study guide?

AGA recommends that CGFM candidates obtain the most current edition of the study guide within 6 months of their planned examination date.

Are CGFM study guides required for CGFM examinations?

No. Neither CGFM study guides, nor CGFM courses are required to sit for the CGFM examinations. CGFM study guides and courses are separate from CGFM examinations and are based on the publicly-available examination content outlines.

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