 Hello and welcome to the session in which we would look at few CPA questions that were sent to me by viewers who wanted me to take a look at them and explain it a little bit differently. Now, these questions I would consider they are basic in a sense that if you don't know how to solve these questions, you are not ready for the CPA exam yet. Maybe not this question, the specific questions, but maybe this question, which I will go over shortly. But the first question deals with the time value of money. If you are not comfortable with the time value of money, you should not sit for the CPA exam, whether you are going for FAR or BEC because the CPA exam is covers time value of money in two different sections. So how can I help you? Well, on farhatlectures.com, you would learn about the time value of money in the tails. So I don't replace your CPA review course. Farhat Lectures don't replace your CPA review course. I can be a useful addition to your CPA review course. I can add 10 to 15 points to your CPA review course, to your CPA exam score, actually, and your CPA review course by helping you understand the material differently. Your risk is $29.99 to subscribe. Try it for a month. If not, if you don't like it, you can cancel. Your potential gain is passing the exam. Now, if not for anything, take a look at my website to see how well your university is doing on the CPA exam. I do have resources for other accounting courses as well. Also, if you have not connected with me on LinkedIn, please do so. And like this recording, share it with others, connect with me on Instagram, Facebook, Twitter, and Reddit. So let's take a look at the first question. Adam is investing in a new manufacturing equipment with a three-year life. The new equipment is expected to save the company and operating cost $40,000 in each of the first two years, and by $30,000 in year three. The present value of $1 at 14%, they're giving us the value, the time value money for the annuity at 14%. What is the present value of those savings? Now, as always, in my opinion, all CPA questions, they should go down to 50-50 immediately. So if you have a basic understanding of the material, you should be able to eliminate two choices immediately. And if you have to guess, it's better to guess 50-50 rather than guessing 25%, selecting one of the four. You could be able to guess 50-50, bring it down to two choices. What are we saying here? So if you understand the time value of money, you should be able to go down to 50-50 immediately. And let me show you what's happening here. Adam is investing in a new company, and this new equipment, and this equipment will save Adam $40,000 in year one. This is year one, $40,000 in year two, and in year three, $30,000. That's the deal. Now, and they're asking us, what is the present value of those savings? What's the present value of those savings? 40,000 plus 40,000 plus 30,000 equal to 110. So the present value of those savings cannot be 110, so I will take out D. Also, the present value cannot be 108. If you know anything about discounting, and you're discounting at 14%, the answer has to be a little bit less than 110. Now, if you are giving any number over 110, it's easy elimination, but definitely 110 is easy elimination. So if a student selected 110, it means they know zero about the time value of money. They should not be even signing up for the exam yet. So D is out. Also, 108, you should not be selected. If 110 is not selected, 108 should not be selected, because 108 is very close to 110, and if you're discounting this amount over three years, it should be way below 108. I will take out A as well. Now, I'm down to 50, 50. If I have to guess, I can guess 50, 50. I don't even have to guess 50, 50. I'm just going to perform a small computation and be able to find the answer. Now, what I'm going to do is this. I see 40,000 and 40,000, this looks like an annuity. So we have a period of two, annuity of two at 40,000. I'm going to find the present value of this annuity. Start with the easy part. 40,000 times 1.65, and that's going to give me 60,000. At this point, I'm done. Hold on a second, there's no answer as a 60,000. Well, I don't have to even go any further. Once I know the present value of the two amounts is 60,000, all I have to say is this. This 30,000 has to be discounted at 14%. And this is a single payment. And I don't have the discount value for a single payment. I don't care. I know if I add, if I know I have part of the answer is 60,000, the remainder has to be less than 60,000. So the answer cannot be more than 90,000. Therefore, I take out B. Because if I add 30,000 exactly, the answer is 90,000. But I cannot add 30,000. I have to discount the 30,000. Therefore, the answer has to be less than 90,000. And 96 is more than 90,000. Therefore, the answer is C. Now you're saying, could you prove that to me? Of course I can. So what I'm gonna do, I'm gonna find the present value of this 30,000. Well, I don't have the present value of a single payment. But what I can do is I have the present value of the annuity. And to go from period two to period three, you added one, one period at 14%. So what I'm gonna do, I'm gonna take 2.32. And this is where your time value of money comes into place. And this is where four-hat lectures will help you tremendously. If I take 2.3, which is the factor, minus 1.65, it's gonna give me the difference, 0.67. And that's the difference of single payment at three years, 0.67. If I take 20,000, which is the, I'm not sorry, not 20,000, 30,000, the amount I need to discount times 1.67. Because this is the single annuity factor. And that's gonna give me 20,100. And 20,100 plus 60,000, those two numbers together will give me 86,100. I did not even have to go through the third step, okay? So notice they give you the question in a sense that, as long as you know that the present value of 40,000 is 60,000, if you know anything about the time value of money, you don't have to perform this computation. You know the answer should be 86,000. And all CPA questions, let's say the majority of the majority, you should be able to eliminate two choices. And if you'd have a little bit of knowledge, you should be able to get the right answer. Let's take a look at this question. The company has a total labor variance. And by the way, somebody asked me this question and I can tell this person, if you're listening, obviously you're gonna be listening because you emailed me this question. Don't sit for the exam yet because you're not ready. And about variances, Farhat lectures can help you tremendously. Let's go over this question. The company had a total labor variance of 30,000 and a labor efficiency variance of 30,000 unfavorable. And the question is, what's the labor price, the labor price variance was what? Favorable six, unfavorable six, unfavorable 66, and favorable 66. So the person did not know whether it's favorable or unfavorable. The person knew the amount, but did not know whether it's favorable or unfavorable. Regardless, they're not ready. How do you solve this problem? Well, you know, the total labor variance is 30,000, I'm sorry, the total labor variance is 30,000. I forgot to put down favorable. Okay, it's favorable. So we have a total labor variance of 30,000 favorable. Okay, I missed that word. I did not type it, sorry, 30,000 variable. So here's what's gonna happen. We have 30,000 favorable variance. Okay, now, total labor variance. Now, the total labor variance is composed of two subvariances. One is the efficiency variance, and one is the price variance. What I call dollar is the price and quantity is the efficiency. And they're telling you the quantity, the efficiency variance was unfavorable. So this is like negative 36,000. This is negative 36,000. The efficiency variance was unfavorable. Well, I have a total favorable for everything for labor, 30. This must be favorable. Why? Because I end up favorable. So I have to have enough favorable. So the enough favorable is 66,000. Because if the price variance is 66,000 favorable, I'm giving the 36,000 quantity efficiency unfavorable. If I net them out, they will give me a favorable of 30,000. Okay, again, this topic is covered in details in farhatlectures.com. Again, at the end of this recording, I will invite you to visit my website, farhatlectures.com. I don't replace your CPA review course. I'll make your CPA review course more interesting, better for you, and prepare you better for the exam. Study hard and stay safe. Good luck.