 Hello, and welcome to this session in which we would work a CPA exam simulation that deals with financial ratios. Those same financial ratios, they could be tested in a typical CPA exam question. In my opinion, if you can solve this exercise or CPA exam simulation, then you should be quite familiar and quite comfortable with financial ratios. Before I start, I would like to remind you if you are studying for your CPA exam or if you are taking accounting courses to check out my website, especially if you are studying for your CPA exam. I don't replace your CPA course, so I don't replace your backer, Roger, Glyme or Wiley. I can't and I don't. What I can do, I can be a useful addition as a supplementary material to those courses. I can add 10 to 15 points to your CPA exam. I strongly suggest you check out my website, if not for anything, just to see how well your university, on average, did on the CPA exam. This gives you an idea how rigor is your accounting program. This data is available on my website. Also, what I'm asking you to do is to take a chance. You are risking practically right now $30 to check out my website and to try it. And are you willing to take that risk to improve your grades substantially? Because the way I present information is differently than your CPA course. Your CPA course reviews the material with you. I teach, I teach you the material. I don't assume anything. I go slowly and I don't assume you know anything in contrast to these guys where they assume you know it and the review with you. That's the main difference. I also have many accounting courses for accounting students. I strongly suggest you check out my website, connect with me on LinkedIn and check out my LinkedIn recommendation. LinkedIn recommendations are actual people who already used my material to pass the exam. Check out what they say about my material. Please like this recording. Share it. If it helps you, it means it might help other people as well. Connect with me on Instagram and Facebook. Let's go ahead and start to answer the questions here. So we have the following ratios from the December 31st, 2022 financial statements of Adam Corporation, total owner's equity 950,000. So they're giving us the answers for the ratios, the current ratio, the asset test ratio, and they're asking us to compute the current assets, the quick assets, the current liabilities, working capital, long term assets, long term debt. Now these ratios are not comprehensive. This is not all the ratios that you are responsible for on the exam. But if you can deal with these ratios, if you can wrap your head around them, if you know how to solve them, then you should be okay with solving other ratios. Again, I have many recordings and many explanation about ratios. So you might be asking, how do I start with this? How do I find current ratio? I already memorized the formula. How do I find current assets? I have current ratio while current ratio is current assets divided by current liabilities. I don't have current liabilities. So I cannot really deal with current assets then. Quick assets. Quick assets divided by current liabilities give me the asset test ratio. I have the answer, but I don't know what my quick, I don't know what my current liabilities. So for A and B, I don't have current liabilities. So how do I solve this? Well, C, it's asking me for current liabilities. Now that's not very helpful. D, working capital, current assets minus current liabilities. Well how do I solve this? Well, let's start with what we have. Also they're asking for long term assets and long term debt. Okay? So how would you approach a problem like this? The owner's equity is giving. They are giving us 950,000 in owner's equity. Now what do we, what else are we giving? Well, we are giving ratios about owner's equity. Since you are giving ratios about owner's equity, you can start from here. Since you are giving the ratios. What does that mean? It means they're telling you if you take owner's equity, which you have to, always when you, in the ratios, when the ratio reads something to something x to y, it means x divided by y. Here what they're saying, owner's equity to total asset equal to 0.4 to 1, which is 0.4 because 0.4 divided by 1 is the same thing as 0.4. So here's what they're telling us from this first ratio. I could either start with this one or this one. It doesn't matter. I'm going to start with total, total equity to total assets. I have total equity, 950,000. I don't have my total assets, so I'm going to call this assets. I'm going to call it x. But here x is assets equal to 0.4. All what I have to do now is solve for x. Solve for x. Well, if I solve for x, it's going to give me 0.4x equal to 950, okay? x equal to 950 divided by 0.4. Let me pull my calculator and start to compute these figures. So let's go ahead. Here's the calculator. Let me make sure because we're going to need it. Let it stick here somewhere. 950,000 divided by 0.4. That's going to give me total assets of 2,375. So now I know my total assets. So now total assets 2,375,000. Well, that's good, but none of the questions are asking me for total asset. So that's not really that good, but it's good. I'm starting. So now I know my total assets, okay? So total assets, total assets, this number here is 2,375,000. I'm going to do the same thing to find my total liabilities because I have owner's equity to total that. I can't find total that. Although that's not one of the questions, but that's how you have to think about it. You have to solve it that way. Again, I will use the same concept, 950 divided by x, which is total that. Now x is total that equal to 2 to 3. So the ratio is 2 divided by 3. Now I'm going to solve 2x. I'm going to cross multiply equal to 950 times 3 equal to 2,850,000. Now I'm going to solve for x. I'm going to divide both sides by 2. It's going to give me 1,425,000. Well, there we go. I have my total that now, 1,425,000. Well, that's good, but I haven't answered any of the questions that I am being asked to answer, which is they're not asking for total asset. They're not asking for total that. But now I have total assets and total that. What else can I do now from this information? Well, let's take a look. I am told that current assets to total assets. I don't have current assets. Now I have total assets. Now I have total assets is 2,375,000. Current assets to total asset equal to 0.321. It means relative to my total assets, 30% of my total assets are current assets. That's good. I can find my current assets, which is they're asking me for current assets. Now I'm starting to actually answer the questions. So simply put, current assets, I don't know current assets. I know total assets is 2,375,000. And that's equal to 0.3. 0.3 divided by 1. It's 0.3. Now all I have to do is solve for x or current assets. Current assets equal to 0.3 times 2,375. And now I'm going to find my current assets. 2,375,000 times 0.3. That's going to give me current assets of 712,500. I just answered my first requirement, 712,500. So notice I had to go through two. I did not have to do that first, but I did that. So I had to find out how do I solve this. So solve what you have. So I'm done with A. Now, quick assets. Can I find what my quick assets are? Okay. Well, I really don't know what my quick assets are, but I'm giving current ratio. Current ratio. And what is the current ratio? Well, current ratio, let me erase this, I don't need this. Current ratio is current assets divided by current liabilities. I'm giving. Now I don't have current liabilities, but now I have current assets. Current assets divided by current liabilities equal to 1.4 to 1, or just simply 1.4. Now I do have current assets. So 712,500 divided by current liabilities equal to 1.4. Now, 1.4 current liabilities equal to 712,500. Current liabilities equal to 712,500 divided by 1.4. I just, I'm going to find out my current liabilities. 712,500 divided by 1.4. Whoops. Divide, yes, let me do this again. 712,500 divided by 1.4. That doesn't make any sense. Let me see what did I do wrong. Current assets, which is 712,500 divided by current liabilities divide both sides by 1.4. That's correct. But one more time, 712,500 divided by 1.4. That's equal to 508, 508, oh, sorry. This is the mistake that I made. Current ratio equal to three, not 1.4, sorry. Okay. So now what I have to do is take 712,500 divided by three, sorry. So okay, so this is three. Not 1.4, this is three. Okay. So current liabilities are current liabilities, which is part of the requirement 237,500. I also found my current liabilities. Now, if I have my current liabilities, I might be able to find my quick assets. Why? Because if we take quick assets, divide them by current liabilities, it's going to give me a ratio of 1.4. The one that I was working with. Now I can solve. Why? Because I have current liabilities. Now I can take quick assets, because I don't know what they are. I know my current liabilities are 237,500 equal to 1.4. So quick assets equal to 237,500 times 1.4. Equal to 237,500 times 1.4, times 1.4. And that's going to give me 300. My quick assets are 332,500. 332,500. I'm done with my quick assets. Now working capital. What is working capital? Working capital is current assets, minus current liabilities. You have to know these. So memorizing the formula is important, but you have to know how to apply the formula. They're not going to ask you like, what is, you could, you could, you could see on the exam question, like working capital equal to, and they'll give you four options. Okay, I would say this will be considered an easy question. They're starting to test your knowledge, whether you are familiar with financial ratios, but you could also see working capital in a different format. So you have to know how to come up with working capital. Now I have current assets, 712,500, minus 237,500, and that's going to give me 475,000. So my working capital is 475,000. Okay, now, what else? What else? What else? They're asking me for long-term assets. Long-term assets. Well, can I find long-term assets? Now I can, how? Because I have my total assets. My total assets are 2,375,000. This is the total assets. If I deduct from them, current assets, 712,500, what's left is long-term assets. So this is how I find long-term assets. And if I do the computation, long-term assets equal to 1,662,500, and that's my long-term assets. Well, same thing. They're asking me for long-term liabilities. How do I find long-term liabilities? Same exact concept. I do have total debt. Total debt equal to 1,425,000. I have current debt 237,500. If I take total debt minus current debt, it's gonna give me my long-term debt, which will give me 1,187,500. 1,187,500. Once again, when I started, I said, are these all the financial ratios you will need to know for the CPA exam? Absolutely not. There are many other ratios, profitability ratios, liquidity ratios, a solvency ratios, stock market ratios, turnover, maybe I mentioned turnover. So you have to be familiar, very familiar with your ratios when you sit for the exam. Once again, I'm gonna invite you, forhatlectures.com will help you understand these ratios, not review them with you in a form of mnemonic to help you memorize them. I would explain each ratio separately. All what I'm asking you is to give it a chance. Check it out. Are you willing to risk $30 to just check it out? If you don't like it, the reason I say risk is you can't cancel. You're not gonna get your money back, but you would lose $30 if you don't like it. I have my courses mapped out to match your course. So it's easy for you to follow. The only difference is I go in the material little bit more in details. Anyhow, please like this recording, stay safe, study hard, and good luck.