 Hello and welcome to the session. This is Professor Farhad. In this session, I would look at several CPA questions released from the AI CPA, the source of CPA questions. Those questions will cover the BEC section of the exam. As always, I would like to remind you to connect with me on LinkedIn if you haven't done so. YouTube is where you would need to subscribe. I have 1500 plus accounting, audit and tax and finance lectures. This is a list of all the courses that I cover, including hundreds, if not thousands of CPA questions. On my website, you will find additional resources such as PowerPoint slides, notes, true, false, multiple choice. And if you're studying for your CPA exam, 2000 plus CPA questions, I strongly suggest you visit my website to see if I can help you in any way, shape or form. Let's go ahead and take a look at the questions that we need to go over today. Okay, let's take a look at the first question. A U.S. manufacturer has production operation in Mexico. The product costs 116.5 pesos to produce and ship to Europe, where the product sells for 20 euros. If .1099 U.S. dollars are required to buy one Mexican pesos and .08928 U.S. dollars are required to buy a euro, what amount of U.S. dollars is the profit on sale? I would say this is a very straightforward question. There's a lot of numbers being thrown at you here, but it's pretty straightforward. So let's go ahead and take a look at how you solve this question. So simply put, they're asking you, what is the profit and specifically in U.S. dollars? So what is the issue here? Well, if you know the cost and the sale, which you know both the cost and the sale, but they are in a foreign currency, simply put, what you have to do is you have to convert the cost, which is in pesos, to U.S.D., you have to convert the sales, which is in euro, to U.S.D. as well. So pretty straightforward. Let's go ahead and take a look at this question, although it looks intimidating, but it's not intimidating at all. So if we look at the cost, the cost is 116.50, which is in pesos, and they told us you can convert this into .1099. So let's take a look at this and see how much would that be equivalent in U.S. dollar. So if we take 100 and give me one moment, please, my calculator, okay, 116.5 times .1099. So we just find out it's $12.80 U.S. set. So this is U.S.D., that is our cost in U.S. dollar. Now our sale, we're going to sell it for 20, for 20, for 20 euros, and we know we can convert at .08928. We're going to do the same exact thing. So we're going to go ahead, pull the calculator again, and on the exam, there's a calculator on the screen, which I will show you in a moment, but you want to make sure you get used to the calculator by going to the AICPA website and being familiarize yourself with that calculator, because you want to be as comfortable as possible, .8, not .08, .8928. So the selling price is 17.85. I'm going to deduct the cost, which is, notice it's a pretty straightforward problem, and your profit is $5.05, which is the rounded 5.06. Now again, as I just said, you want to get used to the calculator that the AICPA gives you. So use this calculator, and the reason you want to use it is because you have access to it on the exam. Therefore, the answer for this question is .5.06. Pretty straightforward. Again, they try to intimidate you by giving you a lot of numbers and foreign currency, but you'll be lucky to get this question. Okay, let's take a look at the second question. A project should be accepted if the present value of the cash flow from the project is what? You have five options, and you need to know this. If you are given this question, you should know the answer is like 10 seconds, and you should be able to answer this question. Well, when is the project acceptable? When the present value is greater than the initial investment? Now, if you don't know anything about net present value, or if you don't know anything about the discounted cash flow method, then you should not take the exam. What do I mean by this? Go to my YouTube, or go to my website, and I have plenty of lessons about the present value of cash flow. Plenty. I would say maybe 15 different lessons with examples. But if you get this question on the exam, you should be very, very lucky that you did because it should take you only 10 seconds. So when should you accept the project? When the present value is greater. Think about it. If you invested $100,000, you want your return. You want your return to be greater, your future cash flow to be greater than the initial investment. And again, you need to practice this in numbers, but this is just a theoretical question. Make sure you know it. Let's take a look at this question. Which of the following decision-making techniques is the most useful to a manager who's attempting to increase the profitability in an area, but who has a problem with limited capacity of operation of a critical machine? So here's what's happening here. In this question, they're giving you four different terms. And what the AI CPA is telling us here is, you could be tested about those four different terms. So the question is, do you know those four different terms? If you know those four different terms, it should take you, again, this is a 10 to 15 second question. I mean, I know the answer immediately. If you know, once you know limited capacity, you need to know what limited capacity goes with. But anyway, we have to go over all four concepts together. Let's start with cost-volume profit analysis or cost-variance analysis. Well, is the answer is cost-variance analysis. Is cost-variance analysis related to limited capacity? And the answer is no. Cost-variance analysis is related to break-even analysis. And what's a break-even analysis? It's when the manager make what if decision changes in cost, such as variable cost, fixed cost, and revenue to determine the effect on the bottom line. So it cost-variance analysis is a very important concept on the exam, but it's not for this question. This question is asking about limited capacity. So you should be able to, you know, if you understand cost-variance analysis, you should not select this question. Is it the balance scorecard? Well, what is the balance scorecard? Basically, the balance scorecard is an accounting report, and it's something you need to be familiar with. I cover balance scorecard as well as cost-variance analysis pretty much on my website and on my YouTube. But the balance scorecard is basically an accounting report that look at accounting and non-accounting information and at critical success factors for the company to evaluate the performance of employees as well as managers. So it has nothing to do with limited capacity. Is it EOQ, the economic order quantity? Again, that's an important concept, but that's not what we are looking at here. The EOQ, the economic order quantity, you need to know what it is. It's the model to determine the quantity to minimize the ordering cost as well as the carrying cost. So by process of elimination, we still have the theory of constraint, and the answer is the theory of constraint. And what is the theory of constraint? It's a theory that maximizes the efficiency operation of the company by focusing on the weakest area, what we call the bottleneck. So every time the company has a problem and issue, simply put, your strength is based on your weakest area. So as long as you can improve your weakest area, that's where your limited capacity is, improve your weakest area, and you should be able to remove the bottlenecks. And this is called the theory of constraint. There's an interesting book written about this. I can't think of the name of it. I believe it's called The Goal, actually, The Goal. Now, I remember it's The Goal. Actually, the author is an Israeli author. It's a very famous book. It's called The Goal. It's all about the theory of constraint. So I recommend you read this book, but it's about this theory. Okay, but you need to know. So simply put, you need to know all these four terms, because the question could match any of this. So there's something you need to know for the exam. I do cover all these terms on my website as well on my YouTube. Let's take a look at this question. A company headquarter in the US has operation in 27 countries. The company purchases subsidiaries to expand operation into another country last year. According to COSO, you need to know everything about COSO. Which of the following provide the strongest mechanism for monitoring control in the new foreign venture? So here, be careful when they ask about the strongest. That means there could be several strong ones, but they're looking for the strongest. Now, here you have to use your knowledge, you have to use your common sense. Okay, let's take a look at C. An accounting and control manual is being distributed. Do you think that's a good thing? They just simply gave you the manual thing. Is this a good internal control? I would say that's not a bad idea to let the subsidiaries know what the controls are. But just by giving them the internal control, do you think that's good enough? I would say this is good, but not good enough. Let's look at B. Ethics and fraud training is being conducted. That's good, too. You want to give them some training in ethics and fraud, so they are aware of the ethical values of the company and what's considered fraud and what's not considered fraud. So those two are good. You want to give them the accounting manual, you want to give them, you want to let them know aware about ethics and fraud. But is that good enough? Let's see if we have something else. Management has oversight over litigation and foreign regulation. Well, that's good. Management should have oversight over litigation because they're responsible because if the company is sued, they want to know what the risk in their country, as well as the foreign regulation in the country that they operate. So these are all good. But let's take a look at A. A, it says internal audit is being performed. There we go. I would say between all of those, if the company performed an internal audit, sends their auditor to examine if everything is being done correctly. I would say that's the strongest thing because now they are on the ground and they are doing the work on the ground to examine if the manual is being followed, if the ethic training is being followed, and if they are being conducted and if they are being followed in the actual world. So I would say the best answer is an internal audit is being performed. The other ones are all good. I mean, they're all good, but this is the strongest answer. And let's take a look at this last question. And this last question is very interesting. So I'm going to go ahead and snip it so this way we can go over this. And this question deals with variances, variance analysis. So let's take a look at this question. Okay, sorry, there's something wrong with my screen, but I will try to manage as much as possible because it's only showing half. A company predicted it would manufacture 10,000 units of finished goods during March. The direct labor standard indicated that each unit of finished goods required 2.4 hours of direct labor at a standard wage of $20, totaling $48 per hour. That's the standard rate. During March, the company actually made 9,000 units of finished goods, production used 2.5 labor hours. So they used a little bit more than the standard. And the company actually paid $21 per hour. Also, they paid more than the standard totaling $52.50 per unit. What amount of the company direct labor rate variance? So you have to be very careful here to ask me specifically about rate variance, not efficiency variance and not total variance. So what I'm going to do, I'm going to look at this question from a comprehensive perspective and go over the explanation because it's very important. Although this topic is heavily covered on my YouTube, under my managerial accounting as well as cost accounting, but this is an opportunity for you to look at this question. So I'm going to use the three column method to explain this concept. And this method I recommend that you understand pretty well before you sit for the exam. So what are the three column method? Well, you have to take actual quantity times actual price. This is, I call this column one and I go to column three. I take standard quantity times the standard price. Then in between column two, I will take actual quantity times the standard price. And if you don't understand what I'm doing now, I'm going to finish this, but this is why you need to go to my website to learn a little bit more because all what I'm doing here is reviewing the concept. So what is the actual quantity? The actual quantity was 9,000 unit and they spent 2.5 hours. That's the actual quantity. And the actual price that they paid is $21. Now what was the standard quantity? The standard quantity for 9,000 unit should have been 2.4 hours and the standard price was $20. Now in this question, they are not asking you whether it's favorable or unfavorable. They're just asking you for the variance, but I can tell you right now it's unfavorable because they spend more time. So efficiency is unfavorable and they spend more money, 21 versus 20, but they're not asking you whether it's favorable or unfavorable. They're asking you only for the variance, but it is unfavorable for both. And remember, the difference between one and two is the rate variance, which is this is what they're asking us about, and the difference between two and three is the efficiency variance. It means they use more time than they should have and one and two, it means they spend more money than they should have. Now all what we need to do now is find column two. Column two is actual quantity, which is 9,000 times 2.5 and the standard price is times 0.2. Now we need to perform the computation. I already performed the computation, so if there's any answers, please let me know. So for column one, the answer is 472,500. For column two, the answer is 450,000 and you can do the math if you would like to on your own just for to save time. And for column three, the answer is 732,000. Remember, you have actually and you have three correct answers here. So I'm going to show you what I mean. You have three correct answers. First, they're asking you only for the rate variance. So the rate variance is the difference between one and two. The difference between one and two is 22,500. So the answer is 22,500. So notice what happened. Some students, they take the difference between column one and column three. If you take the difference between column one and column three, this is the total variance and the answer would be 40,500. So if you look at the total variance, you would think the answer is 40,500, but that's not what they're asking you. They could be asking you about this. They could be asking you about the total variance and the answer will be 40,500. Or they could be asking you about the efficiency variance, which is the difference between two and three and the difference between two and three is 18,000, but that's the efficiency variance. They're asking about the rate variance, not the efficiency variance. So notice you have three correct answers, but you have to know what are they looking for. And I don't know what the 25,000 here, but you don't want to select this. So the answer is 22,500. 22,500. So I would like to end this recording by telling you if you have any questions, any comments, if you need more resources about what you just saw, the three-column method, go to my YouTube, go to my website, subscribe. You're going to study for your CPA once in your lifetime. It's a lifetime investment. Go ahead, subscribe. I'm always here to help you. Stay motivated. Good luck and see you on the other side of success.