 Hello and welcome to the session in which we would look at CPA exam questions that deals with two topics converting from cash to accrual and adjusting entries. Both of these topics converting from cash to accrual and adjusting entries are critical for your success on the CPA exam the day you take the exam. Therefore, if you are not ready, comfortable with these topics, I would suggest don't take the exam yet. So if you are studying for the CPA exam, I strongly suggest you visit my website farhatlectures.com. I don't replace your CPA review course. You might have a course that's fine. I can be a useful addition. I can add explanation, backup explanation, alternative explanation for your for your studies. I can also have additional resources, multiple choice through faults and exercises that's going to help you prepare for the exam. I can add 10 to 15 points to your CPA exam score. Your risk is one month of subscription. Your reward is potentially passing the exam. Are you willing to take that risk? And if not for anything, take a look at my website to find out how well or not well your university doing on the CPA exam. I do have resources for other accounting courses as well. Please connect with me on LinkedIn if you haven't done so and only then you can see the individuals that took the exam using my system. In conjunction with their CPA review course and they did very well. Please like this recording, share it, connect with me on Instagram and Facebook. So let's take a look at the first question. What is Adam accrual basis net accounting? So basically, so let's take a look at the first question. What's Adam company accrual basis net income? Simply put, we have some cash transaction and we have to convert them to accrual net income. So we're going from cash to accrual. Adam company maintains. And by the way, before I proceed, the reason why this, this concept is important converting from cash to accrual, because in the real world, most small and medium sized company, they keep their record based on cash. And part being a CPA working in a firm, your job is to convert the financial statements from cash to accrual. So that's why that topic is important and tested. So Adam maintain its record on a cash basis during 2021. Adam collected 723,000 from customers and paid 20,600 in expenses. Depreciation expense was 3100 would have been recorded on the accrual basis. So this is an accrual figure over the course over the course of the year, account receivable increased by 5,600, prepaid decreased by 2,600 and accrued liabilities decreased by 2,700. I believe this is really a good exercise to illustrate the concept of converting cash to accrual cash to accrual. Well, let's take a look at it. So what's net income? Well, net income is revenue minus expenses. So what we have to do is to first compute our revenue on an accrual basis, compute our expenses on accrual basis, then take revenues minus expenses. How do we starting with revenue? How do we convert revenue? Well, we know that we received from customers starting point 72300. That's fine. Now from an accrual perspective, we know that account receivable, notice here what we are told, account receivable increased. Let me go back here. We are starting with 72300 and we know account receivable increased by 5600. What does it mean? What does it mean when your account receivable goes up by 5600? Okay, your account receivable went up. Account receivable went up. It means you did work. Notice what happened. You did work, but you did not bill for it. I'm sorry. You did work, but you did not get paid. And maybe you did not bill. Okay, but definitely you were not paid for it. Therefore, this work of 5600 is not reflected in the 72300. Therefore, what we have to do, we have to add 5600 to your cash. Okay, so simply put, you did receive cash of 72300. That's fine. That's clearly revenue that you earned. At least we are not told any of it is unearned revenue. In addition to that, you are told account receivable went up. It means we're going to take 72300 plus the work that you are not paid for yet, but although you haven't been paid for it, it's revenue. So your total revenue, it's going to be 77900. Now, if your account receivable went down overall, if your balance went down, then we would have deducted. It means some of the cash you received was for previously performed work, but since your account receivable went up, we add. Now we're done with revenue. That's basically revenue. Now we have to compute expenses. We are starting with 20600 of expenses. That's given to us. That's how much we paid. We know that depreciation was 3100. So we have to add the depreciation expense 3100 if we are computing our cash, our accrual expense. So we're done with depreciation expense. Over the course of the year, account receivable increase, we're ready to care of that. That's part of revenue. Prepaid expenses decrease by 2600. So what happened here is your prepaid, your prepaid expenses went down. What does that mean? What does that mean that your prepaid expenses went down? It means you're expensing certain items. What does it mean when your prepaid expenses goes down? Your prepaid expenses goes down when you prepare the following adjusting entry. You debit an expense for just a thousand or specifically, let's do it 2600 and you credit prepaid expenses 2600. Your prepaid expenses went up. What does that mean? It means your expenses went up. If your prepaid expenses went down, your prepaid expenses went down. It means you are expensing them. What does that mean? It means you are recording an expense that you are not paying in cash now. You are recording an expense. Notice you are increasing an expense, but you are not paying for it cash. You are reducing your prepaid. Therefore, this is an expense from an accrual perspective. Therefore, you add 2600 because your prepaid expenses went down. As a result, your accrual expenses went up. The 2600 is added. By the way, when your supplies went down as well, when your supplies went down, it means your supplies expense went up. That will be in addition to the accrual, just FYI. You need to know in case you are giving another current asset. Accrual liabilities decrease. Now, what does that mean? When does your accrual liabilities decrease? Well, when do we decrease liabilities? Well, we decrease liabilities by debiting liabilities, or if you want to call them accrued liabilities. When do we decrease accrued liabilities? Accrued liabilities debit 2700 credit cash. Let me do the entry here. So, what we did is we debited, overall we debited accrued liabilities 2700, and how do you pay your liabilities? You pay them with cash 2700. Now, this is the actual entry that took place, but what happened is when you paid that cash, you considered the cash an expense. This is not an expense. This 2700 reduction in your liabilities is not an expense because you are paying off your liabilities. Therefore, I have to back out, let me put it in a different color. I have to back out because my liabilities went up 2700. I have to back it out out of my cash expenditure because I did credit cash, but I did not record an expense. Notice I debited accrued liabilities. Therefore, it's not an expense. Therefore, I have to take it out. The opposite would have been true if I told, if I'm told my liabilities increased. If my liabilities increase, that means I am recording expenses by crediting liabilities. It becomes, so my expenses going up, but not cash liabilities going up. I would have add more expenses, but now it's the opposite. So, let's go ahead and compute our expenses. So, we're starting with 2600 plus 3100 plus 2600 minus 2700 equal to 23600. This is my accrual expenses. Now, all what I have to do is take my revenue, 77,900 minus my accrual expenses, 23,600, and that's going to give me an answer of 54,300. Now, I doubted that they will give you a multiple choice that's this long on the exam day. They may give you less accounts to worry about, not three because here we adjusted one to four accounts we had to worry about. They might, but I doubted. But you still have to be very comfortable with this accrual to cash basis orbit. Here, what we did is we went from cash, what we did in this exercise, we went from cash to accrual, which is something you have to know. Then when you learn about the cash flow statement, you have to do the opposite. You have to go from accrual to cash. You have to know both. You have to be very comfortable with both. Let's take a look at this exercise. On December 31st, 2020, Adam had a balance in its prepaid account of 60,400. Well, let's draw a prepaid account. And we put in there 60,400. During 2021, 98,000 was paid for insurance. So we increased this account 98,000. At the end of 2020, after adjusting entries were recorded, the balance in the prepaid was 48,000. The balance is 48,000. What was insurance expense? That's pretty straightforward. So we started with 60,400. We added to it 98,000. Then somehow we subtracted from the expense to end up with 48. And what's the number? Well, if my math is right, 110,400. And this is the account. Therefore, what we did is we debited expense, 110,400. We credited prepaid, 110,400. And this is what they're asking us for. Okay. Adam collected premium of 18,000 from customers, 18 million, I'm sorry, 80 million 100 during the year. The adjusted balance and the deferred premium account increased from four to 9.1. So the deferred revenue, again, we can call it the third revenue, or we can call it unearned revenue in case, you know, your CPA review course call it something else. So you know that the third and unearned are the same. The balance went from 4.0 to 9.1 million. What is Adam revenue from the insurance premium recognize during the year? Okay. So we collected 18 million. When we collect, when we collect the premium, we debit cash. So this is should be credit because it's a liability went from four to 9.1. So how does it work? When we collect the premium, when we collect the premium, we debit cash, we credit the third revenue. So if we collected 18.1 million, 18.1, 18.1. So here we're going to do 18.1. This is the amount that we collected. Now, what is the revenue? Well, the revenue is the amount that we took out of the deferred and we put it into revenue. So the amount that went out of the deferred and went to revenue is the amount that we are looking for. So simply put, we took 4.1 plus we took 4.1, we started with 4.1. We added 18.1 to it. Okay. That's 22.2. Then we subtract, then we end up with 9.1. It means we took out 13.1 million. I'm sorry, 9.1 million. We took out there for it's 13 million. So let me do it again. So we started with four. We collected 18.1 and we end up with 9.1 minus 9.1. It means we took out of the third revenue and we made that revenue. We earned 13 million. Therefore, the answer is B as in boy. So this is a revenue. So notice here, we are finding out the revenue. Remember, what affects revenue? Usually two accounts, a count receivable, which in the first problem, I showed you how to convert revenue from cash to a cruel. Here, what we're doing is we're figuring out revenue based on the deferral. So be careful how to deal with both. At the end of this recording, I'm going to invite you again to visit my website, farhatlectures.com. Once again, I don't replace your CPA review course. Matter of fact, I have my CPA review material mirror image your course. So it will work hand in hand with your course. Give me a shot. Try me. I can help you pass the exam. I have helped so many other people before. It's worth a subscription. Good luck, study hard and stay safe.