 Hello and welcome to this session in which we will go over a multiple choice questions that deals with the statement of cash flow. The statement of cash flows is an important topic, extremely important on the exam. And this topic is challenging is because you need to have a good basic understanding of your accrual accounting, of your basic account, of your debits, credits, increases, decreases. So you have to know how to analyze the accounts very well. This information, what's given in front of you is a form of a multiple choice. I can turn this easily into form of a simulation. I'll show you how I will do that in a moment. But those were the answer choices. And this questions was posted. I posted this questions on my LinkedIn account. So if you have not connected with me on LinkedIn, please do so. On my LinkedIn account, I do post various posts about accounting the CPA exam. And please take a look at my LinkedIn recommendation, people that uses my material and pass the CPA exam. On my website, farhatlectures.com, you will find additional resources. For example, if you're studying for your CPA exam for you, to click on that, and you will have sub menus for various supplemental courses, whether you are studying with Becker, Roger, Gleam, Wiley, you could click on the course and the course is aligned. It's supplement that doesn't replace it supplement your CPA review course. And I do have the CPA previous really released questions. If you are taking accounting courses, you can click on intermediate accounting. If you are taking managerial accounting, if you are taking governmental accounting, governmental is very, very popular because many students struggle with governmental accounting. Please take a look and one subscription give you access to all the material. Let's go ahead and take a look at this exercise. So I'm going to show you how this exercise that's this multiple choice, I can turn it into a simulation. So that's why simulation should not intimidate you if you are well prepared. Here's what we are saying the property, plant and equipment is of Adam company was 145,000 and 50,000 respectively as of December 31st, year one. So rather than give you the statement, I can give you maybe the accounting system. I can give you the general ledger for property, plant and equipment and the accounting ledger for accumulated depreciation and show you the balances of 145 and 150 simply put, regardless, from your perspective, you should be thinking I have property, plant and equipment. My beginning balance is 145. I do have accumulated depreciation and my balance is 50,000. This is what you are giving immediately put job that job that down. First of all, before you do this, ask what you are being asked and the question is, what's the amount of the depreciation expense on the statement of cash flow to reconcile net income to cash flow from operating simply put, what is the amount of depreciation expense that's on the income statement. That's basically the question during year two. The company purchase an asset for 25,000, which is property, plant and equipment to replace an old asset with a historical cost of 20 from a T account, you added 25 to property, plant and equipment and you removed 20. The old asset was sold for 2000 and resulted in a gain of 1000. Okay. Then at December 31st, year two, this is year two, the carrying value of Adam company property, plant and equipment was 85,000. Adam uses the indirect method to compute the cash flow from activities and they're asking you how much depreciation expense did we have? Well, again, you have to, this is like basically a puzzle, a puzzled question. Okay. And also to turn this into a simulation rather than telling you we sold it for 2000. I can give you the closing, papers showing you that it was sold for 2000. Okay. And rather than tell you we purchase an asset for 25, I can show you the purchase order. I show you the closing entry, the closing papers that we purchased something for 25. So you can turn this into easily into a simulation, but that's beside the point. Let's go ahead and solve this problem. We know that we started with property, plant and equipment of 45, we added 25,000, then we get removed of an asset for 20 simply put ending property, plant and equipment was 150. All what I did is giving the information, which is beginning balance purchases and sale. Now, once I know my property, plant and equipment is 150. I'm also told that my book value, the carrying value was 85. How do we compute the carrying value? The carrying value is computed by taking property, plant and equipment minus accumulated depreciation. Well, my accumulated depreciation must have been the difference and that must be 65,000. Now, I found out that my accumulated depreciation ending balance should be 65,000. And I know that I sold an asset. I know from the information giving that I sold an asset for 2000. The asset has a historical cost of 20. And I know I made the gain of 1000. Well, now I have to find out what I sell an asset. When you sell an asset, you also have to get rid of its accumulated depreciation. So simply put this $20,000 here. Once I removed it, I had to debit accumulated depreciation because the asset comes with accumulated depreciation property, plant and equipment. They come with that. And when they leave your balances, they leave with accumulated depreciation. But the question is how much was this asset was depreciated? Well, here we go. Here's what we know. I know I sold it for two. I know the proceeds. What I received is 2000. And I also know that ahead again of 1000. In other words, the proceeds, 1000 of the proceeds is considered a gain. The remainder of the proceeds, it means it covered the book value of the asset. So the other 1000 is book value of the asset. Well, that's good. It means the asset had a book value of 1000. The asset that I sold had a book value of 1000 because if I purchased it for two, I must have purchased it 1000 above its book value. Well, I know the cost is 20,000. To make the asset with a book value of 1000, well, it means accumulated depreciation with this asset. It means accumulated depreciation was 19,000. So this is the cost. This is the implied accumulated depreciation. And this is the book value. And how do I know the book value should be 1000 because I pay 2000. I sold it for two and it resulted and again. It means I sold it 1000 more than the book value. 1000 more than the book value is 2000. Now I know that I removed 19,000 of accumulated depreciation related to this asset. At this point, I am ready to compute my answer. Why? Because I need to know now also during the year I booked depreciation. But depreciation now is easy to find. So simply put, I started with 50. I subtract 19. Then the difference should be 65,000. What does that mean? It means my accumulated depreciation must have been 34,000. Why? For this to balance, this was giving. This was implied. This was computed. All what I'm looking for, this becomes a plug. And the plug is 34,000. So notice this exercise. You need to have a good understanding of how property, plant, and equipment work and how accumulated depreciation works. So if you get to your statement of cash flows and you're like, it's challenging. It's not because the statement of cash flow challenging. It's because you might be lacking in understanding how property, plant, and equipment works and how accumulated depreciation works. And remember, the statement of cash flows, you have to deal with AR. You have to deal with account receivable. You have to deal with inventory. You have to deal with accrued liabilities. You have to deal with your dividend. You have to deal with your retained earnings. So the statement of cash flows would require you, basically test you on everything that you have learned up to that point. Therefore, what I suggest you do, if you are studying for the exam, I do cover the statement of cash flow in depth, whether it's in my CPA review courses or in my intermediate accounting courses, go to my website, farhatlectures.com, and believe me, I will make you an expert in these topics. So once you are ready to take the exam, you'll be well prepared. Good luck. Study hard, invest in yourself. The CPA exam is worth it. Don't shortchange yourself. Study hard, and of course, stay safe.