[jeff]

Welcome to the Q4 2017 CPA Exam Study Group for BEC. 🙂

Introduce yourselves and let your fellow NINJAs know when you plan to take your BEC exam.

The Five Steps (NINJA Framework): https://www.another71.com/pass-the-cpa-exam/

Jeff Elliott, CPA (KS) | Another71 | NINJA CPA | NINJA CMA | NINJA CPE

[jenpen]

Can anyone dumb this down for me? I feel like there has to be an easier way to come up with the answer than what the solution shows. (Sorry if this posts twice. I'm reposting since I tried to edit something and now can't find it.)

McLean, Inc., is considering the purchase of a new machine that will cost $150,000. The machine has an estimated useful life of three years. Assume for simplicity that the equipment will be fully depreciated 30, 40, and 30% in each of the three years, respectively. The new machine will have a $10,000 resale value at the end of its estimated useful life. The machine is expected to save the company $85,000 per year in operating expenses. McLean uses a 40% estimated income tax rate and a 16% hurdle rate to evaluate capital projects.

Discount rates for a 16% rate are as follows.

Present Value of an
Present Value of $1 Ordinary Annuity of $1
——————- ———————-
Year 1 0.8621 0.8621
Year 2 0.7432 1.6052
Year 3 0.6407 2.2459
What is the net present value of this project?

A.
$15,842

B.
$13,278

C.
$9,432

D.
$(35,454)

To determine the net present value of this project, set up an analysis of cash flows as follows:

Annual Annual Annual Annual
Before Tax Tax Aftertax Aftertax
Cash Flows Savings Cash Flow Net Income
———- ——- ——— ———-
Investment Year 0 (150,000) 0 (150,000) 0
Annual cash savings Year 1-3 85,000 (34,000) 51,000 51,000
Depreciation effect Year 1 18,000 18,000 (27,000)*
Year 2 24,000 24,000 (36,000)**
Year 3 18,000 18,000 (27,000)*
Gain on Disposal Year 3 10,000 (4,000) 6,000 6,000
These depreciation effects are calculated as follows:

Yr1 150,000 x .30 (depreciation) x .40 (tax rate) = 18,000
Yr2 150,000 x .40 (depreciation) x .40 (tax rate) = 24,000
Yr3 150,000 x .30 (depreciation) x .40 (tax rate) = 18,000

* 18,000 – (150,000 x .30 depreciation) = (27,000)
** 24,000 – (150,000 x .40 depreciation) = (36,000)
Now determine the Net Present Value of Annual Aftertax Cash Flow by year.

Annual Present Net
Aftertax Value Present
Cash Flow x of $1 = Value

Yrly Total: Yr 0 (150,000) x 1.0000 = (150,000)
Yr 1 (51,000 + 18,000) x 0.8621 = 59,485
Yr 2 (51,000 + 24,000) x 0.7432 = 55,740
Yr 3 (51,000 + 18,000 + 6,000) x 0.6407 = 48,053
——-
Total 13,278

AUD - 56 - 68 - 61 - 9/8/16
REG - 75
FAR - 7/15/16
BEC - TBD

Wiley CPAexcel and NINJA 10 Point Combo

[rencpa]

@Teal, thanks for the link.

According to the link, it looks ONE simulation & ONE WC are “free”, in addition to 12 questions. Amazing! I shot for Economics or IT as pretest simulations unless they are pretty easy! Unfortunately, we need to answer everything.

@Wolf, I will suggest to take a little bit break, however continue working the quizzes. Somebody mentioned reviewing until the score date. I like that idea. Personally, I may be doing that if my little son can handle a little bit longer without mommy. I will see.

[rencpa]

We have this question in a Becker book.

I am doing this a little bit different than Becker does.

annual saving: Saving per year x (1 – T)
annual depreciation: (Cost x Depr%) x T
SV (gain): SV (1-T)

Savings: $51/$51/$51K
+Depr: $18/$24K/$18
+SV $0/$0/$6
=Cash in $$69K/$75K/$69
PVof$1 xxx/xxx/xxx (I skipped this crazy numbers) 🙂
PV Cash in $59,478/$55,725/$48,075 = $163,278

Make a “little spreadsheet”, write them in columns and lines… It is hard to do it here, but hope you can understand my point. I used “/” to separate columns (each year)

~~~~~ ***** ~~~~~~~

Gross PV Cash in $163,278
<Gross PV Cash out> <$150,000>
= NPV $13,278

Pretty much the same you did. I think it is important to write the calculations a certain way in order to get the answer faster. I doubt there is a shortcut on this question. I be happy to see one too!

[jenpen]

@rencpa Thank you so much! I see what's going on now and was able to decipher the solution. It was confusing me initially.

AUD - 56 - 68 - 61 - 9/8/16
REG - 75
FAR - 7/15/16
BEC - TBD

Wiley CPAexcel and NINJA 10 Point Combo

[RB]

Jennifer – I was 90% through writing this explanation before I got a phone call! I see responses but I'm going to give you mine because dang it I worked through the problem again. Also, for what its worth there are a few different ways to approach this which should all lead to the same result. My approach is slightly different than the explanation, maybe this is easier to think about or maybe its harder, depending on how you work. Offered here;

Net present value is cash in and cash saved each year. Cash, so net of tax always (unless they say tax effect is ignored, only saw one problem say that)

If you see a problem like this I usually break it out into separate pieces for each individual cash flow or effect.

1 – how much depreciation “shield” do you have each year? In this case it’s not a uniform amount so you need to calculate each year separately, so total value, $150,000, x 30% in year 1, x $40% tax rate, x the PV factor of $1 in 1 year.
Then, year 2 is the same at 40% and PV factor of $1, 2 years out
Year 3, 30% depreciation, PV 3 years out

(Do the PV factors make sense? If not I can elaborate on those at some point. For this question, PV of $1 is how much a dollar in a year or 2 years is worth today, because the company could be making 16% on that dollar if they had it today, so a dollar a year later is not worth as much as if you gave me a dollar today. An annuity is the same its just a stream of payments. If you want to verify, if you add up the PV factor of $1 for year 1 and year 2 and year 3 it will equal the PV factor of the annuity for 3 years , or 2.2459 here.)

So we have our sum of depreciation tax savings, that’s going to be one piece of cash in

So far we have
($150,000) (cash out)
+44,887.20 (Depreciation saved cash in)

2 – you will save $85,000 per year. So $85,000, less tax impact because that’s essentially additional earnings, so $85,000 * (1-0.4) or 60%, the company will “see” 60% of that money. Since they give both factors you can either times that (+$51,000) x each PV factor, or you can use the value of an ordinary annuity since it’s a level cash flow. $51,000 * 2.2459 = , that’s piece 2.
(MATH PEOPLE, if they give you annuity factors, use those factors do not use the actual formula for PV or annuities, I have and gotten practice questions wrong because my answer was too precise due to the fact that their factors are rounded off and mine were not)

Then 3 – what’s the other final year cash flow, that’s the sale and tax impact, or $10,000 x 60% (because that’s a gain at that point because the machine’s book / tax value is $0) = $6,000 cash IN, now discounted at the rate of 0.6407 = +$3,844.20

So we have our 4 pieces
($150,000) cash out
+$44,887.20 depreciation savings (calculated)
+$114,540.90 = NPV of operating cash flows
+$3,844.20

Add those 4 up = $13,272 net present value. My answer is $6 off because the MCQ uses rounding earlier than the calculation I just ran in excel.

Does that make sense? Can I clarify this any further for you?

[RB]

Starved, ren, and everyone else: TAKE A BREAK after your exam. Ren spend some time with your little one.

If you are really nervous then review, but no more than 6-8 hours per week. Maybe aim to read through your notes once or twice a week and do random MCQ. But lord slow it down and take a break! You're working your butts off up to it, breathe for a few days.

[jenpen]

@RB Thank you so much for taking the time to do that! This is what I was hoping for. Taking things piece-by-piece is how I try and work through problems so that makes complete sense to me. And thankfully FAR helped me to understand the PV tables, so I've got those down pretty well. I like seeing how other people work through problems, too. It helps me get a better understanding of what's actually happening.

And yes, I've gotten questions incorrect because of rounding, also. In that scenario, if I go with the one closest to my calculation I typically get it right, but I try to figure out how I was wrong by looking through the explanations. It's one of the many reasons I prefer the Ninja test bank – the explanations are generally better than the ones I see in Wiley's (I have no experience outside of these two programs).

AUD - 56 - 68 - 61 - 9/8/16
REG - 75
FAR - 7/15/16
BEC - TBD

Wiley CPAexcel and NINJA 10 Point Combo

[rencpa]

RB, soon I am going to really call you my/our Teacher 🙂 Pretty impressive explanation. As Jennifer, I like to see a different way to solve a question. My applause!

NO WAY I considered studying as much as I have been studying lately. Impossible lol I meant what you said. Maybe some questions per day (maybe none!) I badly miss my family. We have some plans for Christmas (regardless of my score). I am not a child, but *I* want my Christmas tree as much as my son!! 🙂 Well, and snow… but I doubt we are going to have any where I am! It is nice to dream…

Jennifer, your exam is on Thursday. Correct? Mine on Saturday. Hope I am not going to be the only one left on this forum studying for BEC.

[jenpen]

@rencpa Yes, I'm taking it on Thursday. I finally feel like I'm getting ready for this exam. I just need to lock down a few concepts and I feel more confident. I have tax school today and then I'll study for the next 2.

I'm sure you won't be alone as I'm sure there are others taking the exam this weekend. I have a concert with my daughter Friday otherwise I would have been Saturday. I would like the extra days. And we will likely stick around to help as much as we can.

AUD - 56 - 68 - 61 - 9/8/16
REG - 75
FAR - 7/15/16
BEC - TBD

Wiley CPAexcel and NINJA 10 Point Combo

[rencpa]

Good luck to you with your final 2 days of studying! Thank you for cheering me up. Enjoy your time with your daughter! I bet she is missing mommy. Plus, YOU need and deserve a beak.

Speaking about the kids… Just got a phone call that my son needs to be picked up (got sick?) This is not the best news. Well, before each exam I had something happening. Maybe it is a good sign (?)

Good luck to all of you guys with studying/exam!

[rencpa]

I would appreciate some help with leverage, operational and financial. I did the questions, but I do't think I comfortable with the topic.

What would be another good formula for FL? I remember FL = A/E, but I am confused about what other formula (s)

Thanks.

[RB]

Operating leverage – based on fixed operating costs which are independent of sales. High investment equals high operating leverage, more risk and fluxuation of returns. This is one or greater since your percentage change
(% change in EBIT) / (% change in sales)
How much more we make for each dollar sale. Higher is riskier but better returns
Can also be calculated by ratio of fixed costs to variable costs (fixed / variable)
Operating leverage is considered a measure of efficiency, R.I. is not

Financial Leverage – goes up as debt goes up and equity down, high leverage means small income change has higher earning impact. (Uses EPS because based on equity)
(% change in EPS) / (% change in EBIT)

Operating leverage is based on fixed costs, financial leverage is based on debt

Straight from my notes, does this help at all?

Also remember any % change we use is always (New minus Old) / (Old), to get the % change, same for percentage change in EPS, EBIT, price level, etc.

[rencpa]

@RB! Does this help at all? You are kidding me, right. PRINTED! Your notes are treasure. Wonder who was teaching who in your BEC classes. Interesting!

Thank you very much! This is the easiest explanation I have seen/heard.

[Teal]

Does anyone have a good way to remember overhead variances? All the MC questions ask them different ways, and I have trouble with each different one!!

FAR (66,68) Aug 26
REG (66) July 25
AUD (66) December 1st
BEC - October 3rd

[RB]

Teal –

There are pieces of the fixed OH variance that I still had some conceptual trouble getting down pat. But, on page 12 of this thread I have an explanation for Variable OH variances, take a look at that and see if that helps for that piece at least.

I will also say for point coverage I wouldn't expect alot on overhead variances, variances themselves are likely to come up, but its unlikely you'll get more than say, 2 points on OH variances. BUT I could also see them sneaking a sim in to have you run through all of them, who knows.

If you have an hour or two to block off, write out a quick summary of each variance formula, and look at the overall variances – Basically between master (planned budget), then you have the flexible budget, then you have the actual results.

Write it out, write out an example with some numbers and try to understand it conceptually as a whole, it can make the individual pieces click. Thats what I needed to do.

This line is from my notes: (Volume variance is master to flexible, flexible budget variance is flexible to actual) (The rest is additional clarification)

ALL variances (except FOH which works slightly differently) have 2 variance components, an efficiency variance of some type and a price/rate/spending variance. First, looking at

which will be the difference in master to flexible – because any deviation at that level of production will be based on how efficient we used our stuff. That's our volume / efficiency piece. For example, OH Volume
Variance is the volume or efficiency piece, so what we actually applied less what we should have applied (standard rate) at that production level. Then you will have a spending variance, specifically with VOH this is clearer, okay we actually paid $12 per unit but planned to pay $10 per unit, so the spending variance uses price difference ($12 – $10) X actual amounts purchased.

Okay, it's late and I am a bit tired so I will say it's completely possible I mixed something up in there and gave you the wrong ones or swapped them.

Here's what I will tell you to do –

1 – Look at my explanation on page 12 (of this thread) first.

2 – Write out a little map or lines for Master Budget, flexible budget, and actual amounts incurred.
Get a good understanding of how ALL the variances fit between those items, it will make ALL of the variance click so much easier.

[Author]

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