 Hello and welcome to the session. This is Professor Farhat and the session we would look at previously used CPA questions released by the AI CPA. Those questions are the real deal. The AI CPA is the main source for CPA questions and specifically we're going to be covering FAR questions. As always, I would like to remind you to connect with me on LinkedIn if you haven't done so. YouTube is where I park my 1,500 plus accounting, auditing, finance and tax lectures. This is a list of all the courses that I covered, including CPA questions. On my website you'll have access to additional information and resources such as PowerPoint slides, notes, true, false, multiple choice. For example, I have the those questions listed in a PDF file and 2,000 plus CPA questions. So let's go ahead and take a look at the first question. As always, I would like to remind you to try to answer the question first, then look at my explanation and see if you got the right answer. SWIFT company has identified three operating segments that may require separate disclosure and SWIFT general-purpose financial statement for December 31st, year 2. Information for year 2 is as follows. They're given us the revenue, profit and assets for A, B and C and the total. Which of the segments are required to be separately disclosed in December 31st, year 2 financial statements? Well, how do we know? Well, if the segment represents 10% of assets, revenue or operating profit, it should be separately reported and so we have two tests. We have the 10% test, 10% of revenue, profit and assets and this is an application problem. So here you have to take some information and apply it. It's not it's not remembering and answering so it's going to require a little bit more of work, a little bit more of work. So what does that mean? Starting with A. A has revenue of 42, profit of 12,000 and assets of 470. Let's start with revenue. Is 42,000? Is 42,000 divided by 177 more than 10%? Let's find out. So you'll pull your calculator real quick on the exam day and you would say 42 divided by 177. That's more than 10%, tentatively A will be included. Let's look at B. If we look at B, we look at their assets, 800 is 800 divided by 1350 more than 10%. I would say B is also B because of the asset. Okay, because 800 is definitely more than 10% of 1350. Now at C, let's test C. So we know at least A and B are let's look at C. When it comes to revenue, it's 14,000 divided by 177. Whoops divided by 177. That's 7%. That's not good. Three, the absolute value of losses divided by 74 less than 10% and 80 divided by 1350. Let's see, go back here. 80 divided by 1350, that's less than 10%. It's less, but let me double check. 80 divided by 1350, not check. Let me show you, it's 5%. Therefore, none of the revenue reported revenue, report profit and loss and assets are they're all less than 10%. So A and B, it seems they are reportable division. Now we want to make sure that A and B remember there is the 10% and the 75. Let's make sure that A and B together they represent 75% and they could assure you they do because remember C is always less than 10% for all the revenues, expenses, for revenues, assets and reported profit and loss, it's less than 10%. It means together they represent around 90%. So A and B, the answer is A. Once again, on the exam day, you should be able to quickly, quickly answer these questions because if you are looking at, if you are looking at, you gotta make sure you know that 42 divided by 177 is 10% immediately. Also look at the large numbers, 800 divided by 1350 is 10%. Then, in real quick, you would know that these are less than 10%, therefore A and B is reportable. Let's take a look at this question. Susan's company prepared cash basis financial statements for the month ended January 31st. A summary of Susan's January activities is as follow. Credit sales 5600 collection of 1900 relating to January credit sales and accrued salaries of 1200. The question is by what amount will Susan's cash basis income for the month and the January 31st increase as a result of restating these activities to the accrual basis of accounting? So simply put, we're going from cash basis to accrual. As a result of going to accrual, how much would our net income be higher by? Well, here, this is also an application problem, but you have to think quickly. First of all, credit sales. Would credit sales be counted as revenue? Of course. Simply put, for the credit sales, we have revenue of 5600. Now, collection of 1000 relating to January credit sales. Here's what happened under the cash basis. So if we look under that because we prepared our financial statements under the cash basis, under the cash basis, what we did is we debited cash 1900. We credited revenue 1900. Guess what? If we're converting, if we're converting to accrual, we have to remove this revenue. Therefore, we have to remove 1900. What we call cash revenue, which is not really revenue under the accrual basis. So we have to remove this 1900 and we accrued salaries of 1200. Well, salaries is expense 1200. Therefore, it will take 5600 revenue minus 1900 minus 1200. We have a revenue of net income of 2500. Now, also what I'm going to do, I'm going to go a step further and show you the journal entries that we would have done under the accrual and under the under the cash basis. So under the accrual, we would have debited account receivable 5600 credited sales or revenue since I used revenue, let me use revenue, use revenue 5600. Then collection of 1900, what we did, this was not revenue. What happened is this was under the cash basis, under the cash basis, we have cash of 1900 and revenue of 1900. Therefore, when we are converting, we have to deduct, we have to deduct this 1900. Then for the 1200 accrued salaries, we debited salaries expense and I'm going much more in detail. This is not what you want to do on the exam day, but this is a review to make sure you understand what I did. Credited salaries payable 1200. Therefore, as I moved from cash basis to accrual, I counted my 5600 of revenue, removed the cash revenue and deducted my expense. Let's take a look at this question. Okay, Bailey company changed the accounting for insurance expense from cash basis to accrual basis. There's a lot of cash basis to accrual basis on the exam and in this recording, in January of the prior year, Bailey recorded insurance expense of 24,000 for the cash purchase of a four-year insurance policy. Let me explain to you what happened. What they did is they debited insurance expense, that's the prior year of 240,000 and they credited cash 240,000. This was the prior year. This is the prior year in January of the prior year. This is prior year. How should Bailey report the insurance transaction in the current year financial statement? Now they moved from cash basis. This is what they did under the cash basis. They moved to accrual. Well, let's start with this. If we have a policy of 240,000 and it's going to serve us for four years, every year we need to expense 60,000. Simply put, for the current year, here's what we have to do. For the current year, we need to have insurance expense 60,000. Also, remember in the prior year, we expensed 240,000. I'm sorry. We expensed, yes, 240,000. We expensed 240,000. Well, last year, we have to back out of that. We have to back out of that. So we have to reduce it. We have to reduce it by 180,000. Why 180,000? Because we only need to expense 60,000. Now, can we credit insurance expense? I'm sorry. Can we credit insurance expense and the answer, no. We don't credit insurance expense because insurance expense, this account is gone when we close the account. What do we have to do? To back out, we have to credit retained earnings. We have to credit retained earnings 180,000 because we need to back out of retained earnings 180,000. Then this entry does not balance. So if we back it out, so here's what happened. So we pay 240,000. 60,000 was for year one. 60,000 was for year two, which is this year. Now, what's left is 120. That 120 becomes prepaid. Then we debit prepaid. I'm just going to abbreviate prepaid, prepaid 120,000. Now on the exam, you have to move a little bit faster. I'm going slower, but you have to move a little bit faster. Let's just show you how it works. For example, let's go with this. Debit to prepaid 180, no. We no longer have 180 of prepaid. We only have 120 of prepaid because year one went by, year two went by. A is out. B, as a 60 debit to insurance expense, you have to be careful. Yes, this is part of it. We have to debit insurance expense 60, but that's not the only thing. Do we have to debit insurance expense 60? Yes. Debit to prepaid asset 120? Yes. And we have to credit the retained earnings. We have to take out of retained earnings 180. Therefore, the answer is C. Let's go to D. As a debit to insurance expense 180? No, we did not expense 180 yet. So we take it out and C is the answer. So this question, yes, it may take you a minute or two to solve, but you have to do it very quickly and you have to eliminate the answers as early as possible. The answers that don't make any sense. Let's take a look at this question. What amount should rune report as cash in its December 31st balance sheet? Well, runes checkbook balance on December 31st was 10,000. On that date, rune held the following items in the safe. Okay. So it's showing 10,000. They have a 4,000 check payable to rune post data January 1st, not included. That's correct. We don't include it in the December 31st checkbook. So this is correct. There's nothing to worry about. A thousand dollar check payable to rune deposited December 15 and included in the December 31st checkbook. But the check was returned by the banks. September 30th stamped NSF non-sufficient. The check was redeposited on January 1st and cleared January 9th. Well, guess what? For this year, we have to back out the 10,000. Also, it was cleared year two. It was cleared January 1st. It was redeposited January 1st, cleared January 9th. But in year one, the year in question, that check was no good because we don't know whether it's going to clear or not in January. Therefore, the answer is 9,000. The answer is A. Okay. Because for that year, as far as we know, the money was not there. Okay. We deposited, hoping the money will be there. It happened to be there, but we cannot make that assumption. Let's take a look at this question. This company converted from FIFO method for inventory valuation to LIFO for financial statement and tax purposes. So they went from FIFO to LIFO. During the period of inflation, what does that mean? It means prices are rising. When there's inflation, prices are rising. What would MEST ending inventory and income taxes payable? What would MEST ending inventory and income taxes payable using LIFO be higher or lower than FIFO? So as the result of the switch, what's going to happen to ending inventory and what's going to happen to income taxes payable or simply income? Because if income is more, income taxes payable is more. Okay. So let's talk about ending inventory. What happened when you switch from FIFO to LIFO? LIFO stands for last in first out. What does that mean? It means the inventory that you purchased recently that have high prices is going away. What does that mean? It means your inventory consists of FIFO. Well, FIFO inventory has lower cost. Therefore, inventory will be lower. So lower, we can take out B. We can take out D. So inventory will be lower. So it's either A or C. Now we're down to 50-50. Now, if prices are rising, if prices are rising, if prices are rising, and we are matching, if prices are rising, and we are matching last in first out, well, it means our cost is high. It means our profit. If prices are rising, it means profit. If we're using LIFO, profit is lower. If profit is lower, tax is lower. Our taxes is lower. Our income taxes payable is lower. Therefore, income taxes payable is lower. That's the answer. The answer is A. So our ending inventory will have a lower value because we're using FIFO inventory now. And our income will be lower because we're using LIFO for cost of goods sold. As income is lower, your income taxes payable is lower. Well, the answer is A. In the next session, we would look at additional CPA questions that deals with FAR that are previously used by the on the CPA exam, on the actual CPA exam. As always, please visit my website for additional resources, including if you want to download what I have access to the questions I have, I made it available to you. Study hard and I strongly suggest you subscribe. It's worth it. It's an investment in your career. You only study for the CPA once. Get it done. Use all your resources. Good luck.