 Hello and welcome to this session and this is Professor Farhad in which we would look at this CPA exam simulation What is the strategy when you have a CPA exam simulation? The first thing you do is you would look at the simulation to figure out what type of a simulation is this and if I just browse the Simulation I will know that this is a document review. There are five types of simulation One of them is a document review. What does that mean? It means I'm gonna look at some at a document Usually a memo and email something like this. I may have to make some changes Based on the exhibits that's given great That's the first thing. The next thing is What is the topic? What is the topic that I'm dealing with here? Let's take a look at what we are giving here real quick investor relation for Grey stack corporation has prepared a draft Press release to report second quarter earnings for year nine So I'm looking at some sort of a of a financial statement report review the draft press release and make any changes necessary to ensure it's accurate and consistent with the With the exhibits that are given to us and that's it. I know. What is the topic is about? I'm looking at a financial statement report and I want to make sure that what's in this letter. What's in this press release is basically accurate Before we proceed any further. I have a public announcement about my company far hat lectures calm Farhat accounting lectures is a supplemental educational tool That's gonna help you with your CPA exam preparation as well as your accounting courses My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles My accounting courses are aligned with your accounting courses broken down by chapter and topics. My resources consist of Lectures multiple choice questions through false questions as well as exercises go ahead start your free trial today So let's go ahead and get started. Well, what am I giving? I'm giving I'm giving various exhibits Consolidated statement of operation, which is net income. I'm giving the balance sheet I'm giving the statement of cash flow and I'm giving the notes You can take a look at them if you want to now or if I was in your shoes You know what should be in the balance sheet, you know what should be an income statement You know what should be in the notes. What's the statement of cash flow? What I will do I will start to read the letter and based on the letter. I will try to predict Where can I find the information? New York, Newtown, New York August 2nd year 9 Grace Stack Corporation today reported financial results for its second quarter and 6 month ended June 30th year 9 amount are expressed in thousands. It's gonna call them thousands except except per share amount the first statement Revenues for the second quarter of year 9 decreased 1331 or 8.5 percent to 18254 this is the first statement and they're basically asking me keep it deleted or is it something different? Before I do anything, where do you think you should go whether you want to confirm whether you want to keep it deleted or change it? where Well, if you start in the consolidated cash flow, you are wrong consolidated balance sheet You are wrong revenue is part of the statement of operation, which is the income statement. Well, pull the income statement Let's go ahead and pull the income statement. So I'm gonna pull the income statement and I want to see my my my Numbers and basically inspect the numbers determine whether these numbers are correct or not and what I'm doing is I am comparing year 9 June 30th to year 8 June 30th And what am I what what am I told? I am told that the second that the second quarter year 9 was a decrease. Let's see if was a decrease or not. I went from 16 16,000 923 to 18,000 254. So definitely this option is out So it's it's not it's an increase. It's an increase. Now what you have to do I'm gonna go back here and say, okay, let me take a look at my options here So it's I have to the original one is incorrect. No something happened. I can remove decrease decrease It's it's a B and C. So notice if I want to turn this into a multiple choice There are only three possible correct answers. So revenues for the second quarter increased By this much by 1000. Notice. They're all giving you the same the same number 1331 so it did increase by 1331 it did increase by 1331 to Like this is as simple as this to 18,000 254 Just inspecting knowing where you can find this information. You don't have it You don't you don't even have to do any computation, but if you take the 1331 the change and divided by the base here 16,000 923 you will get 7.9. You don't have to do that because by process of elimination This is the answer. It was increased by 1331 or 7.9. Now with your CPA review course Give you a simulation like this Maybe yes, maybe no, but without even anyone preparing you. This is even easier than a multiple choice Just knowing where to look for revenues and this is basic information basic information Therefore the answer is right there revenue for the second quarter Increased and it's 7.9. I didn't even use a calculator Now let's take a look at this statement the increase in revenues for year to date year 9 compared to the same period was due to higher sales In the home theater category with the increase being partially offset by lower sales and the company's audio and theme category So we are told the increase in revenue For for year to date has to do with the home theater category with an increase partially offset by lower sales in the company Audio theme now it would be nice if they gave me a segmented financial statement if they can show me The home theater category versus the audio and theme category, but I don't see this I did not see this in the income statement. So what would I find this information? I'll have to go to the notes of the financial statements. So let's go to the notes of the financial statements and I should be able to see something about revenues or explanation of the increase in revenues Let's see note one is background and basis of presentation. I should ignore this for now. No, two is net income per share I'm not talking about this No, three shareholders equity. No note for inventory. I'm this is not inventory related note five account receivable account receivable is Technically sales because account receivable is the result of sales and note six is legal proceeding. My answer must be in note five Account receivable represent amount do from customers. Well, that we know this the company provide for any dissipated credit losses We're not dealing with credit losses. I would skip this one at the beginning of year nine the company discontinued its volume rebate described below Okay, so near by and something happened. They discontinued its volume rebate program during year nine the company launched a program that Offer extended payment term to long-term customers with high credit rating in history of timely payment The program has resulted in an increase of in sales over the prior period During the six-month period and the June 30th year nine the company provided major customer significant volume rebate These volume rebate were accounted for for an accrual For an accrual basis as a reduction in revenue in the period in which the related revenue was recognized So it has to do something with the rebate. So let's take a look and look at our at our options What are the options? To change this answer basically, let me close the notes. Let's go back and see Well, the options is it has nothing to do. I didn't say anything about the home theater category So that's not gonna keep in the original one. There was a reason for the increase Let's start from the bottom the increase in revenue compared to the same period was due to seasonal nature of the business We're not told anything about the seasonal nature of the business the increase in revenue to date year nine compared to the same year in Year eight was due to a significant customer going bankrupt. I didn't read anything about this It would have been like a note if that's a major event What's left is this one the increase in revenue for year to date year nine compared to the same period was due to the higher than normal Sales volume rebate offered during year eight. You remember they they discontinued that volume rebate So this led to the increase and that's the answer Let's take a look at this statement operating income for year nine to date was 3741 a decrease of 1045 or 27.9 from the operating income from the same period of year eight. So now they're saying The operating income decrease and this is the amount evaluate the statement. Where would you go? To look for operating income. Well, I would go to the income statement. Okay, so I'm gonna go to the income statement I'm gonna pull the income statement and look at operating income. So I'm gonna go to the income statement and look at Operating income and I'm comparing operating income Year to date six month year to date year nine To year eight. This is what I'm looking for. This is what I'm looking for. This is what I'm looking for Okay, so notice operating income from year eight to year nine Operating income went down operating income for the year to date six month went down from 4786 to 3471 now you want to compute the you want to compute the difference because you know, you don't know what the difference is and Let's see what the options are Here it says Let me see what the original statement a decrease of 1045 Okay, so if I take the difference of these two It is 1045 the difference between these two now what I would do is I will let me let me pull the calculator You want to get used to using the calculators? So get the calculator ready There means the ICPA calculators Let me just go ahead and Grabbing the calculator so you can see the computation here Okay now, so I'm looking at a 4,786 minus 3,741 and that's 1045 I'm gonna take the difference and divide the difference by the base here Which is four thousand seven hundred and eighty six four thousand seven hundred and eighty six and that's twenty one point eight three Twenty one point eight three which is twenty one point eight percent Okay, twenty one point eight. Let's go back To see if we have that that is an answer So it's not twenty seven point nine. It's a decrease of 1045 or twenty one point eight percent and that's the answer. Let's see if there's something else that I misread something It's a decrease. It's not an increase. It's a decrease. It's a decrease and it's by that much All we have to know is do you know how to compute the difference in percentage? No CPA review company. No one can help you if you don't know how to do this No one can help you. Therefore what you do is being calm You know this this this looks intimidating at the beginning, but now you're looking there's not much There's no meat to this simulation except it looks intimidating, but there's no meat to it really Let's look at this statement here the increase in selling general administrative expenses Was due to ongoing litigation with the former employee resulting in an increase of 600 illegal fees during year nine What we are told is are we gonna keep it deleted the increase was due to 511 unrealized loss The increase in SG&A expense was due to an increase in the provision for income the increase in SG&A expense So they all they all tell you it's an increase So you don't if you look at it's if you look it's an increase You don't even have to look it's an increase Okay, because they're all telling you it's an increase if one of them told you it was a decrease Then you have to look to see then you would look at the income statement to see whether it was an increase or a decrease So no, it's an increase now. We need an explanation for that increase The only place where you can find explanation about the figures are the notes of the financial statements I'm gonna pull the notes and I'm gonna go to the notes and I think I saw a legal proceeding at the end I'm gonna jump to that because I already saw this in April Year 8 the former employee sued the company alleging wrongful termination the former employee Seeking damages of $10,000 Discovery is ongoing related to this lawsuit the company has incurred legal costs of 800 And 200 during the six month June 30th year 9 and year 8. Well, this is the difference. So yeah, it looks like this This looks like this. This is why we have additional cost What does that mean? It means The increase is in Selling general administrative was due to an ongoing litigation with a former employee that increased it by 600 The original statement is correct. I don't have to do anything Let's take a look at the last one Because you can read the other ones if you choose to but the other ones are correct You're you're evaluating the last state of the statement that you need to change If the warrant's outstanding were exercise and fold diluted net income per share for year 9 To date with decrease to 0.0 0.0 6. Well, I know when I looked at the notes and there was something about earnings per share Okay, I'm gonna go back to net income per share or earnings per share Let me go go here and take a look at this Let me just increase the size And what they did here they computed. Let me just make this is more Readable, I guess Okay, a little bit more. Okay So I I'm giving net income for basic and diluted net income per share I'm giving the denominator Okay, so I'm giving all all what's needed the denominator for diluted So I'm giving everything that's needed and I'm giving the basic and the diluted And notice here in the denominator We are we are we are factoring The five thousand warrant. They are factored That looks like the the the statement that says Uh, they are not factored No, they are factored into the computation because they're saying if they were factored The the diluted will be point zero six. No point zero six. It's it's factored and it's point 11 That statement is incorrect. But let's see if we are. Yeah, that's the you don't need it because it's factored but let's see what What other options we have It's definitely wrong The warrant outstanding were exercised in full Uh, the basic net income per shift the date would increase to The warrant are factored if the warrant outstanding were exercised They are factored if the warrant exercised if the warrant outstanding were exercised. They were already factored so You need to delete the statement because when they when they Computed diluted earnings per share. They factored that So let's go ahead and recap what we just did one is what type of simulation document review No one can teach you this like if you don't know how to compute the differences from year to year Well, you'll be in trouble because no cpa review company will help you do this In other words, they cannot predict what's on the exam, but this is a released a icpa Simulation so you might see something like this the key is to stay calm say I know this Okay, and the more exhibits they give you in my opinion The easier as the is the is the simulation think about from the from the examiner I mean They want to keep it consistent and if they give you too many exhibits, they have to keep it consistent for themselves They have to keep it easy and notice what's good What's good about this is we answered five different question and each question is independent from the other So don't panic when you have a simulation Because sometime each question is independent from the other. So if you didn't get revenue, right You might get operating income, right? You might get the Selling general and administrative or you might get the diluted earnings per share Stay calm stay calm Have confidence in yourself have confidence in your ability go to far hat lectures. This is what I can help I can help you increase your understanding of the concept and really there's nothing I can do the only added value I did here is to kind of get you familiarize And more comfortable if you are giving something like this because document review is evaluating whether that statement is correct or not How do you do that? You have to look at the evidence now if you don't know for example That revenues if you go to the balance sheet or you go to the Notes and you know revenue should be on the income statement If they're asked if they're telling me about the change in revenue they're telling me about the change in operating cash flow Well, you go to the state. I don't even oh, I didn't even open this Consolidated statement. We didn't even open it. It was not even needed. No information was about it So if you wasted your time inspecting this Well, you wasted your time But this is an example where that's why I did not open them until I needed them when I open them I will scan them see what's in there. Then I will go back and focus on each one separately Good luck guys. Um, study hard. The CPA exam is worth it and stay safe