 Hello, and welcome to the session in which I would look at two CPA exam questions that deals with several topics that you need to be familiar with at the same time, such as current ratio, dividend, working capital, retained earnings, current liabilities, and cash account. Now, if you are looking at all these at the same time, you might be thinking that's a lot of information I have to keep track of. But what I want to illustrate in this session specifically that the CPA exam really tests your basic knowledge. So you're going to see after I go over those two questions that all what you need to know to answer those questions that they look intimidating is basic journal entries from your financial accounting 101 course. The point I am trying to make is this, the CPA exam questions usually test you about basic concepts and accounting. Now those basic concept, they could be packaged in a way that's a little bit intimidating. So the best way to be prepared is to really know your basics. How do you know your basics? Well, this is what I can offer you for hot lectures.com. I don't replace your CPA review course. When you take your CPA review course, they assume you know your basics. They assume you have learned this information. They assume you already. Oftentimes, that's that's not a true assumption for many reasons. One is you graduated a year or two, five or 10 or 15 years ago. That's one reason. The other reason is although you graduated recently, you did not really learn your basics or if you didn't learn them, you didn't learn them well or you forgot them or the college did not really teach you properly what you need to know. So this is where for hot lectures.com where I can compensate my explanation you're going to see will compensate for this any weakness that you have, any gaps in your education that you have for hot lectures can help you. And here's my offer to you and I'm going to tell you what your risk is. My offer is one month of subscription. That's your risk. Are you willing to risk one month of subscription to find out whether my system can tremendously help you? They give you that that vitamin pill that steroid that's going to help you tremendously pass the exam. 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 college courses as well. If you haven't connected with me on LinkedIn, please do so. Take a look at my LinkedIn recommendation. Like this recording share it with others. If it's helping you, it means it might help other connect with me on Instagram, Facebook, Twitter and Reddit. So let's take a look at those two questions. And as I said, as I'm going to be illustrating, I'm going to show you that basic knowledge from your financial accounting 101 will help you solve CPA questions as long as you have that strong basic, strong basic knowledge. Let's take a look at this question. Adam Corporation has a current ratio of two to one. How will this payment of cash dividend declared two weeks ago affect the following? So you have to read the question very carefully. They're asking us how will the payment of cash dividend declared two weeks ago affect the following? So the question is, you made the payment now. So it was declared and you made the payment. Now all what you have to know about this is, do you know what does the payment entails or what does the declaration entails? Well, you have, here you have to be thinking very quickly on the exam, but I'm going to show you how you should be thinking about this. When a company declared dividends, they debit retained earnings, they reduce retained earning and they credit dividend payable. And we're going to make it $10. So the company declared dividend of $10. This is two weeks ago. Now they paid the dividend. When they pay the dividend, they debit dividend payable and since they paid the dividend, they will credit cash. So this is the entry that they're really asking about. I just, I did this entry before so you know what am I doing the following entry? Okay. So this is, and you should know this by heart. This is basic accounting the journal entry for dividend. Now what they're telling you is this, you have your current assets, divide them by current liabilities. Your current ratio is two to one. Simply put, you have 200 assets and 100 liabilities. Now you made a payment of $10. What is that going to do? What's the payment going to do when you make a payment of $10? Well, your current assets because you paid in cash will go down by $10. And your current liabilities, dividend payable, will go down by $10. Now your figures are 190 to 90. Okay. Let's do this computation real quick. Let's do this computation and find out what is 190 divided by 90 is. So let's do that. Let me get the calculator here and we can do it real quick. I mean, you should know that it's going to go up, but I just want to, I just want to do the computation, but you should know at this point, you should not be doing this computation. You should know by heart, it's going to be 2.21. So immediately the current ratio, it's going to be 2.11. So I can eliminate D, I can eliminate, I'm sorry, I can eliminate B, I can eliminate D. So the current ratio, it's going to increase. Now, what about working capital? What's the effect on working capital? What is working capital? Working capital is current assets minus current liabilities. Well, before the payment, 200 minus 100 equal to 100. So working capital was 100. 190 minus 90 equal to 100. So what happened to working capital? Working capital did not, was not really affected. No effect. Therefore, the answer is A. So again, the key here is to know current ratio, current assets divided by current liabilities. You should know this by heart. You should know that once simply put, if you want to memorize it, you can. If you reduce your current assets and your current liabilities, once you reduce your current liabilities, your current ratio will improve. So immediately you would know that it should increase just by knowing your liabilities are going down. And I will go down to A and C. Now working capital is current assets minus current liabilities. If I'm reducing both numbers by the same amount, the difference should not, should be the same. Therefore, working capital is no effect. The answer is A. Now on the exam, obviously you have to think very quickly, but on the exam, if you know your basics, then you'll be able to answer this question. Okay, let's take a look at the second question. How does a declaration of dividends? So notice here, we have in the first problem, I'm asking you about the effect of the cash payment, payment of dividends here. They're asking you about the declaration effect, the following account. Well, again, real quick, you need to know what is the entry for the declaration. And here we go. Here's the entry. We debit retained earnings, we credit dividend payable. Easy. When we debit retained earnings, retained earnings go down. So we can eliminate B, because B it says retained earning increase, and we're left with A, C and D. That's not, that's not very helpful. Current liabilities. Current liabilities went up when we declared the dividend. Therefore, guess what? The only, so no effect is out, no effect is out, current liabilities is here. Therefore, the answer is C, based on this basic journal entry that you need to know from financial accounting. And indeed, the cash account is not affected, just to confirm, because when you declare, there is no effect, notice declaration. Cash account is affected when you pay the second entry right here. Therefore, the answer is C. So notice, these two questions, they look intimidating, they look at a lot of work, but they're based on this basic journal entry for cash dividend. And this is what I was, this is the point I was trying to make earlier at the beginning of this recording. So know on your basics, basic accounting, like literally, I mean financial accounting 101, know it really well, will help you tremendously. I'm not saying if you know your financial accounting 101, you will pass the exam. But what I'm saying is if you don't know your financial accounting 101 by heart, you will find difficulty. If you know your financial accounting 101 by heart, then you will move to intermediate, it will, it will reinforce that knowledge, which in turn will help you to pass the CPA exam or part of the CPA exam, which is far, which is usually the most difficult for most students. Again, I don't replace your CPA review course. I can do that. I wish I can do that. I can do that. Okay. But what I can do, I'm a useful addition. I'm a supplement to your CPA review course. Your risk is one month of subscription. As I said earlier, give me a try. Your CPA is a lifetime investment. Don't shortchange yourself. The CPA is worth it. Study hard. Good luck. And of course, stay safe.