What it was like to take the 1917 CPA Exam

Accountants are familiar with the challenge that is the CPA exam. But not everybody knows its rich history.

The CPA exam was developed as a test that the precursor organization to the AICPA used as an admissions requirement for membership. The organization now known as the AICPA started offering the exam to state accounting boards around the country for use in general licensure in 1917.

Prior to 1917, each state had its own licensure exam that CPA candidates were required to take, according to Dale Flesher, CPA, Ph.D., a professor of accountancy and associate dean at the School of Accountancy at the University of Mississippi. He says New York was the first state to develop an exam in 1896.

By 1952, all states had started using the CPA exam put out by the organization that eventually became known as the AICPA in 1957.

For the next 51 years, until 2003, the exam could be taken twice per year, and it was strictly a pencil-and-paper affair. But in 2004, the exam began to be administered via computer.

The exam has evolved over the years to reflect changes in business and to continue effectively assessing the professional content knowledge fundamental to protecting the public interest. The next change is coming in April 2017, when the next version of the CPA exam takes effect. To mark this milestone, we look back at the 1917 CPA exam. Here is a sampling of the 39 questions, which were all essay, from that test.

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Auditing

1. What do you understand to be meant by a balance-sheet audit? What is its scope?

2. The officers of a company of which you are the auditor elected by the stockholders submit to you for audit a balance-sheet in which the following item appears:

Miscellaneous reserves (including premium on stock) …………… $248,000.00

On investigation you find the item is made up as follows:

General reserve …………………….……$86,000.00

Operating reserves …………………………6,000.00

Provision for plant depreciation ………….46,000.00

Provision for amortization of leaseholds..40,000.00

Provision for bad debts ……………….….36,000.00

Premium on capital stock sold …………..34,000.00

                                                      ————————-

                                                      ……….$248,000.00

What recommendation would you make to the officers and what course would you take if your recommendation were not followed?

3. State what you consider to be the most important special problems arising in one of the following classes of audits and how you would deal with such problems:

(a) Stock brokers.

(b) Moving-picture producers.

(c) Breweries.

(d) Clubs and institutions.

(e) Retail stores.

(f) Land companies.

(g) Executorship accounts.

4. What steps should be taken to verify the cash balance appearing on a balance-sheet of a company in whose cash book bank and cash transactions are kept together where the auditor has not had the opportunity of making the verification on the date of the balance-sheet? To what points should special attention be given?

Commercial Law

1. State all the legal requisites of a valid sale.

2. What is the provision of the statute of frauds with respect to sales of goods, wares and merchandise?

3. Define or describe void, voidable and unenforcible contracts.

4. What simple contracts are required to be in writing?

5. A contract executed and delivered in California is the subject matter of a suit in New York. What laws will govern the validity of the contract, and what laws will govern the remedy? State the rule in such cases?

Accounting Theory and Practice—Part I

1. A, B and C formed a partnership. A agreed to furnish $10,000, B and C each $7,000. A was to manage the business and receive one-half of the profits; B and C were each to receive one-fourth. A supplied merchandise worth $8,500, but no additional cash. B turned over $5,500. The business was conducted by A for some time, but without keeping exact books. While managing the business A purchases additional merchandise amounting altogether to $75,000 and made sales of $100,000. The cash received and paid out for the partnership was not kept separate from A’s personal cash. In order to straighten out matters, B took over the management. He found receivables amounting to $20,000 and of these he collected $4,500. The merchandise still on hand he sold for $500. These receipts he deposited in a bank to the credit of the firm. The remaining accounts proved worthless. The outstanding accounts payable amounted to $2,000, of which $1,500 had been incurred in purchasing merchandise and $500 for expenses. These accounts he paid. A presented vouchers showing that during his management he had paid other expenses of $2,400. By mutual agreement B was held to be entitled to $100 on account of interest on excess capital contributed and A and C were to be charged $75 each for shortage in contribution of capital.

(a) Prepare trading and profit and loss accounts and accounts of each of the partners, indicating the final adjustment to be made in closing up the partnership.

(b) Show how the above final adjustment would be modified if A proved to have no assets or liabilities outside the partnership.

2. A machine costing $81.00 is estimated to have a life of four years, with a residual value of $16.00. Prepare a statement showing the annual charge for depreciation according to each of the following methods:

(a) Straight line.

(b) Constant percentage of diminishing value.

(c) Annuity method.

(For convenience in arithmetical calculation assume the rate of interest to be 10 per cent.)

Discuss the significance of each of the methods.

Accounting Theory and Practice—Part II

1. A corporation was formed which acquired several plants, issuing therefor $17,000,000 bonds and $24,000,000 stock. It was well known at the time that this capitalization exceeded the true value of the assets (including goodwill) acquired, to an extent of $11,000,000. In the first year, after paying expenses and interest on bonds, the business yielded considerable net income. May such net income be used to pay dividends, or must it be first applied towards making up the $11,000,000?

2. What are organization expenses? How are they to be treated in accounts? At what point do expenses cease to be organization expenses and become operating expenses?

Is the deficiency in the early years of a corporation’s activities (whether an actual loss or a deficiency between the earnings and the normal rate of return) similar to organization expenses? How should such deficiencies be treated in the accounts? To what extent is such a deficiency similar to interest paid during construction? Should such deficiencies be carried on the balance-sheet? If so, should they be written off, and how and when? May the deficiencies representing the difference between actual earnings and normal rate of return be capitalized, in the strict sense of having capital stock issued to a corresponding sum? State clearly just who is affected, and how, by the different methods of treating the items mentioned above.

Alex Granados is a freelance writer based in Raleigh, N.C. To comment on this story, email Chris Baysden, senior manager—newsletters at the AICPA.