 and welcome to this session. This is Professor Farhad. In this session, we would look at CPA questions that deals with financial accounting standard. These topics are surely covered on the CPA exam far section as well as intermediate accounting. As always, I would like to remind you to connect with me on LinkedIn. If you haven't done so, YouTube is where you would need to subscribe. I have 1,700 plus accounting, auditing, tax, finance, audit, as well as Excel tutorial. For example, this topic here is covered on the CPA exam as well as in my intermediate accounting course. If you like my lectures, please like them, share them. It doesn't cost you anything. If they benefit you, it means they might benefit other people, share the wealth, connect with me on Instagram. On my website, farhadlectures.com, you will find additional resources to supplement your CPA preparation or your accounting courses. So if you are looking to earn those 10 to 15 extra points to move on with your life and pass the CPA exam, I strongly suggest you check out my website. Today, we're going to be looking at this conceptual framework for financial reporting. It's very important. Before you sit for the CPA exam, you have a good understanding about this conceptual framework. This conceptual framework by itself, in my opinion, it's worth 10, could be up to 15% of your CPA exam, especially on the multiple choice questions. Also, not understanding the conceptual framework, you're going to have hard time understanding accounting theory in general, because if you don't understand the objective of financial reporting, if you don't understand the elements of financial reporting, if you don't understand the qualitative characteristics, if you don't understand the principles, then you're going to have hard time understanding accounting in general. So by itself, it's relevant to the test. It's important percentage-wise, but also to your understanding that's important. So I do cover this topic in my intermediate accounting course way, way in depth. I would say I would have two to three hours of lectures and practice to help you understand this conceptual framework. But today, we're going to be looking at some questions, some questions that deals with this conceptual framework, as well as maybe another question that doesn't deal with it, but mostly we're going to be focusing on this topic. According to the FASB and the IASB conceptual framework, neutrality is a component of what? Is it faithful representation? Is it relevance? Is it one of them, or is it both or neither? So it's A, B, C and D. Well, here's what we need to know. First, hopefully you understand. The first thing when you look at this question, you need to understand that faithful representation and relevance are two fundamental, two different fundamental qualities. What do I mean by this? It means fundamental qualities we have relevant and faithful representation. So most likely, if you know that they are two fundamental, most likely it's not going to be both, so you can take out one. Now, if I have to guess, if I don't know anything about this topic, how do I approach this? Well, what is neutrality? What is neutrality? Neutrality means what does it mean you're being neutral? It means you're not being biased. What does it mean you're not being biased? It means you are telling the truth. You are telling the truth. Well, if I have to choose between relevant and faithful representation, which of these two would most likely represent the truth? Well, I would say faithful representation. It means you are making a representation that's truthful. And to be truthful, you have to be neutral. If I have to guess, I'll go with A, one only because neutrality is part of faithful representation. And if we go back here and we look at faithful representation, we say that neutrality number two is part of faithful representation in addition to completeness and free from error. So if I have to guess, but it's very important. Once you understand what they means, it's easier kind of to read between the lines and read the meanings. So this is how I would look at it. Okay. So let's take a look at another question. Which of the following fundamental qualitative characteristic of financial reporting? Here they're asking us, you have to be very careful. They're asking us, which of the following is a fundamental? Well, fundamental qualitative characteristic, we have two fundamental qualitative characteristics. We have relevance and faithful representation. Once again, you have to have this picture copied in your mind. So fundamental qualities we have to, we have relevance A, faithful representation two. Now within relevance and faithful representation, we have those additional components such as neutrality to illustrate faithful representation and relevance. Therefore, which one are the two? Fundamental, I would say both, A and C, relevance and faithful representation. Once again, understanding those topics will help you tremendously answer those questions quickly on the CPA exam. I would say those questions, every individual should, you know, before you walk under the exam, you say, bring them on, give me as many questions as those, because you can be prepared, well prepared as long as you understand them. And you have to do a little bit of memorization, but understanding them will save you on the exam day. You have to, you have to, you have to memorize that relevance and faithful representation, those are two fundamental qualities. Then within each one of them, they do have various components, three components. Then we have what's called enhancing qualities, enhancing qualities that applies to all, then you have to know what the enhancing qualities are. Okay, so that's why on the exam day, those should be easy, peasy questions. The underlying concept that govern gain contingencies under gap. So which concept, which concept govern, explain the rule for gain contingencies and for contingencies in general, whether it's gain or loss? Okay, the first thing we have to know, the first thing when you go on to the exam, we don't report gain contingency, gain contingencies. We do report loss contingencies, but not gain. Now that's the first thing you, you're like contingencies. Well, gain contingencies. We don't report gain contingencies. Why? The question is why? You can memorize it, but if you understand why, it's much easier. In accounting, as accountant, think of accountant people. They wear glasses. I don't, I do wear glasses. They're very conservative people. We are very careful. So what does that mean? We are conservative. We use conservatism. So the reason why we don't repair gain contingencies, gain contingencies means we are expecting a gain, because we don't want to be too outgoing. We just want to be conservative. Once we receive the gain, once we, the gain is guaranteed in our pocket, then we report the gain. But if we have a loss, if there is a chance, we are going to lose a chance that we are going, a good chance we are going to lose and we can, and we know how much we are going to lose, then we would report as a loss contingency. But both of them, loss and gain contingencies, they follow the concept of conservatism, conservatism. And that's why we don't report gain contingencies, because as accountant we are conservative. Now you need to know what consistency is. Consisting means using the same principles from period to period. That's very important. Materiality, you have to know what materiality is. Materiality is an entity specific. So for example, we don't say, for example, materiality and throw a number at materiality and say, this is what materiality is in accounting. On the contrary, each company has a different size, different balance sheet, different income statements. So materiality is entity specific in a sense that if you, the underreport or overreport a certain number, is it material or not, depending on your entity size and circumstances, not only quantitative, we have quantitative and qualitative factors. So it's not, doesn't govern gain contingencies. And we looked at faithful representation a minute earlier, faithful representation, you need to know that that's a fundamental quality in addition to relevance. So conservatism deals with gain contingencies. Let's take a look at this question. Which of the following is a correct statement regarding the third revenue? And if you get this question, it'll be like, okay, great. This is an easy PZ question. If you don't under, if you cannot answer this question, if you don't know what is the third revenue, then I would say don't sit for the exam yet. You need to do a little bit more. Okay. A, the third revenue result from services that have not yet been built, but have been performed. Oh, no, no, no, no. This statement is correct, but that's not the third revenue. If anything, this statement is accrued revenue. It means you did the work, you did not build a client. Okay. So you know, services that have not been built, you did not build them, but you perform them. So you did the work, but you did not build them. Well, you have revenue. It's accrued revenue, but not the third revenue. B, so A is out. The third revenue reported on the books of one company to a transaction mirror accrued expenses reported on the books of another transaction. Oh, no, that's also kind of the definition of very similar to A. So when it's a mirror transaction, if it's an accrued revenue for me, if I haven't billed you, well, you did not receive a bill yet, you have an accrued expense. So A and B basically deals with accrued revenue and the opposite is accrued expense. The opposite on the other side of the transaction. C, the third revenue is reported as a liability until the services have been performed. And the answer is yes. The third revenue is the same thing as unearned revenue. It's a liability. That's correct. So the third revenue is reported as a liability until the services has been performed. Yes, this is what the third revenue is. I am deferring. I will book my revenue later. When is that later? Later is when I perform the service. Therefore, the answer is C, but you want to check out D just to make sure you cover your basis if you have time. The third revenue represent amount that have not yet been received in cash. On the contrary, the third revenue is received in cash. That's why it's the third you have not performed it yet, but have been earned. It has not been, it has not been earned. That's the problem. It has not been earned. Which of the following accounting changes would receive a prospective treatment on the income statement? We have prospective and retrospective. We have to know the difference between prospective and retrospective. Prospective means you will make the changes today this year and you don't look backward. You look forward. Going forward, you will follow the changes. Retrospective, retro means you have to go back. Retrospective means you have to go back and change prior financial statements. So it's very important to know which changes are treated as prospectively, which changes are treated retrospectively. So let's take a look at see what we are given here. Here they are already telling you which one are prospective. So we're not dealing with retrospective. So they're already telling you is it one or two, only one, only two, both or neither. Okay. One, changes in depreciation method and this throw the students off all the time. Changes in depreciation method. When we make a change, for example, go from straight line to the double declining balance or from the double declining balance, the sums of years digit. How do we treat the change? Do we change the current year and future years or do we go back and change the prior year? And you have to understand this is tricky because when I say straight line to double declining, you're thinking you're changing accounting method, you are not. They are estimates. So when you have estimates, changes in estimate are treated prospectively because we do estimates all the time. Also, it sounds like an accounting principle. It's not. Depreciation method are technically estimate. So definitely one will keep one will take out B because we know one is included and we take out D. All we have to know now is changes in the useful life of an asset. Is this a prospective or the retrospective? I said a second ago, any estimate and what you do when you estimate the useful life, you can change your estimate. Estimates are treated prospectively, prospectively. Simply put, C is the answer because both of these are considered estimate. And when you have a change in estimate, a change in estimate is treated prospectively. These and all these topics as well as many other topics are covered on my website, farhatlectures.com in detail plus practice questions, CPA questions, lectures. Once again, if you want to invest in your CPA and pass your CPA exam, check out my website. Study hard. You're going to invest a lot. You're going to make a lifetime investment. Don't shortchange yourself. Study hard and stay safe, especially during those coronavirus days. Good luck.