Tackling Unknown AOs on the CFE

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How to Tackle Unknown AOs on the CFE

Picture this: You are writing Day 2 or Day 3 of the CFE. You just systematically completed a standard inventory valuation, worked through a variance analysis, and you are managing your time perfectly. You flip to the next appendix, read the first paragraph, and realize you are being asked for the accounting treatment of a crypto-backed joint venture in deep-sea mining.

Welcome to the “Unknown AO.”

Every year, the Board of Examiners (BOE) includes Assessment Opportunities (AOs) on the CFE that are completely non-routine, obscure, or nowhere to be found in your standard study templates. As a CPA exam coach here at Gevorg CPA, I see our candidates struggle with these issues very often. In the recent release of the May 2025 report, BOE told candidates to prepare better in this area. As part of our review of this most recent BOE report, we are tackling this issue within this article. We will highlight some of the key tactics we teach to handle these unknown AOs.

The Perspective Shift

Why does the BOE do this?

The BOE explicitly includes these unusual AOs because they want to see if you, as a future Canadian CPA, can handle the unknown in a professional environment. The test isn’t just about your technical memory; it’s about applying the CPA Way (Assess → Analyze → Conclude → Communicate) to an accounting scenario you have never encountered before.

They are testing your ability to process the unknown quickly, provide a commercially reasonable response, and move on. Spending 40 minutes hunting through Knotia for the perfect technical answer to one unknown FR AO is like spending three hours perfectly formatting the fonts on a balance sheet while leaving the income statement completely blank. You have robbed precious time from the routine AOs that actually guarantee your pass.

Remember: If it’s weird to you, it’s weird to everyone. You are competing against the curve. The candidate sitting next to you is grappling with this exact same issue. Keep your composure and execute your strategy.

Have a Planned Response

When you encounter the unknown in Financial Reporting, where we see the majority if Unknown AOs, you need to stop and think about the issue first before jumping to find the applicable handbook section. First, consider how to bucket the topic, then guide yourself to apply a framework:

1. Labeling the Unknown: Identification IS Half the Battle

First things first: simply identifying and labeling an AO as “unknown” is half the battle.

The unknown AO trap on the CFE happens when you panic and try to treat a non-routine AO exactly like a routine one. Trying to forcefully fit an obscure, software licensing issue into a standard 5-step IFRS 15 Revenue Recognition template won’t work, and it will certainly burn valuable time that should be spent tackling the rest of the exam.

True exam confidence doesn’t mean having a photographic memory of the CPA Canada Handbook. Confidence comes from knowing what is not routine. When you read a prompt and recognize that it is highly unusual, validate that professional judgment. Actively labeling it as an “Unknown AO” in your mind stops you from wasting time searching for a perfect template that does not exist.

2. Bucket the Issue

For technical FR AOs where you aren’t clear what it is, what the actual accounting issue is, and therefore what the actual GAAP standard to consider is, the trick is to first avoid panic. Stop and really think about: What IS the thing in question?

If you had to bucket it into a category, or describe it to someone, where does it fit?

Is it kind of like an asset? Is it a piece of equipment, is it cash, or an investment?
Is it kind of like a liability? Are you going to owe someone money?
Is it kind of like an expense? Has someone done work for you, or will you owe someone because of a service?
Is it kind of like equity? Have you issued shares, or granted an ownership stake?

For example: Imagine the case introduces a complex “government carbon emission credit.” Instead of freezing because you’ve never studied carbon credits, bucket it. The company purchased them, owns them, and will use them to avoid future fines. It holds future economic value, so it is kind of like an asset—specifically, an intangible one.

Thinking about the issue in this way is going to make your Knotia search significantly easier, and will help get you somewhere in terms of answering the “what is this?” question before you apply a formal framework.

3. Apply a Technical Framework

Once you have bucketed the issue, try searching Knotia. Search the specific trigger words right out of the case alongside your new bucket category. Grab the closest criteria you can find, framed with support from your bucketing activity above, and apply it. We say this often to our students, you need to practice desperate Knotia searches as part of your studying. You will quickly learn that searching in Knotia is not as slick as you would like it to be. The more specific and unique your search word is, the more useful the search result. Do not try this for the first time on exam date.

If your search comes up empty and you are completely lost in the Handbook, stop, and default to the three key components of any accounting standard:

Recognition: When does it go on the books?
Measurement: How much is it worth?
Disclosure: What do we tell the users of the financial statements?

4. Bare minimum: Case facts + so what + recommendation

When all else fails, write whatever reasonable accounting logic comes to mind, but you MUST apply case facts from the appendices, and you ALWAYS provide a recommendation.

You can draft the most logical analysis in the world, but if it doesn’t use the specific numbers, quotes, or situations provided in the case, you aren’t scoring points. You need to integrate the case facts (to Assess the situation), structure your logic using handbook criteria or the Big Three (to Analyze the issue), make a definitive journal entry or treatment recommendation (to Conclude), and ensure your advice is clear and actionable for the client (to Communicate). The BOE rewards candidates who make a decision over those who skip the issue.

Get support at Gevorg CPA

You don’t have to face the CFE curveballs alone, register for a Gevorg CPA CFE Prep program today.

We will help you navigate this exact challenge and much more. From mastering “Unknown AOs” to perfecting your time management and building rock-solid technical frameworks, we provide the grounded, strategic coaching you need to conquer the CFE.

Don’t leave your exam success to chance. Join us today.

What Day 1 Cases Will Be Tested in 2026, 2027 and 2028 CFEs?

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With the new 2027 CPA Professional Program, there are only a few CFEs remaining. The following Day 1 cases will be tested:

For the June 2026 CFE, the following Day 1 cases:

Karnat Bread Company Ltd. (KBC) v1
Viviana’s Trattoria Ltd. (VTL) v2

For the September 2026 CFE, the following Day 1 cases:

Singular Textiles Corporation (STC) v1
Meadowlark Entertainment Inc. (MEI) v2

There is no CFE in May 2027.

For the September 2027 CFE, the following Day 1 cases will be tested:

Singular Textiles Corporation (STC) v2
TBD, new case v1

For the September 2028 CFE, the following Day 1 cases will be tested:

TBD, prior case v2
TBD, new case v1

CFE Exam Coaching

If you need helping passing your CPA Canada CFE exam, please contact me and check my tutoring courses.

September 2025 CPA CFE Cases and Answers (Download)

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Similar to prior CPA Canada Common Final Exams (CFEs), the September 2025 CFE had two Day 1, one Day 2 and three Day 3 cases.

The following Day 1 cases were tested in September 2025:

Amuzu Parks Inc. (API) V2 (Download)
Meadowlark Entertainment Inc. (MEI) V1 (Download)

The following Day 2 and Day 3 cases were tested:

Day 2 (Download)
- Sky City Towers Inc. (SCT) (300 minutes)
Day 3 (Download)
- Capsule Clothing Inc. (CCI) (90 minutes)
- Fresh Air Beauty Inc. (FAB) (80 minutes)
- Bijou Inc. (Bijou) (70 minutes)

For the June 2026* CFE, the following Day 1 cases will be tested:

Karnat Bread Company Ltd. (KBC) v1
Viviana’s Trattoria Ltd. (VTL) v2

*(Note: Usually CFEs are in May and September. For 2026, the May 2026 CFE has been delayed to June [June 2 to June 4], so it’s referred to as June 2026 CFE in this post.)

For the September 2026 CFE, the following Day 1 cases will be tested:

Singular Textiles Corporation (STC) v1
Meadowlark Entertainment Inc. (MEI) v2

There is no CFE in May 2027.

For the September 2027 CFE, the following Day 1 cases will be tested:

Singular Textiles Corporation (STC) v2
TBD, new case v1

Where can I get the Day 1 MEI v1 solution?

CPA Canada will NOT release the solution to MEI v1 until 2027. In the interim, I will write a sample answer to MEI v1. You can download it at the cases section of the Gevorg, CPA website, when available.

Are Day 2 and Day 3 solutions available?

CPA Canada will release the official solutions to September 2025 CFE cases in May 2026.

Will I get MEI v1 solution in Capstone 2?

If you are registered for the Capstone 2 module for Spring 2026, you will NOT receive the solution to Day 1 MEI v1. You should download using the links above. If you are someone challenging the exam, such as an internationally trained accountant applying under MRA/MOU, please also download using the links above.

How do I prepare for the CFE?

There are several prep methods for the CFE. You will need to focus on these three items:

Technical knowledge
Case writing skills
Strategy

I speak a lot about these items on my YouTube channel and webinars. You can check out my latest webinar.

Technicals:

Know the key topics on each of the competencies
Distinguish depth from breadth
Debrief

Case writing skills:

It’s all about following the CPA Way
Know your case inside out
Integrate throughout the case

Strategy:

Prepare a study plan
Obtain study materials
Get support and resources

Pass the CPA Canada CFE Exam

We are Gevorg CPA Coaching Team. To get help with passing your exams, sign up for CPA CFE Review Course, for a comprehensive prep package.

How to Debrief a CPA Canada Case

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As you continue on your journey towards your CPA designation, being able to debrief and achieve competency efficiency becomes increasingly important. In fact, debriefing will likely become your main study method.

1. Know when to debrief

The most effective way to debrief is not too long after writing the case. This way, the case facts are fresh in your mind and time can be saved from avoiding having to read the case again. Debriefing the case the following day will be more realistic and effective in managing a work-study balance.

2. Understand the marking competencies and how it relates to you

CD – Know what you completed very well, but not always the optimal rank.
C – Know what you you completed correctly
RC / NC – Know what you were on the right track on, but needed to include more
NA – Know what assessment opportunities you missed

The objective is to achieve a C, noting that achieving a CD might mean you spent too much time on one assessment and could have used that time elsewhere. The goal is to do enough required for each assessment. Focus your attention on the assessments that are not at a level C.

3. Review the sample responses

A sample response will show the level of depth/breadth expected of a candidate writing under the time constraints. Review how you could have approached a quantitative and qualitative analysis more efficiently, what case facts might have been missed, etc. Think “What more did I need to include in my response?”.

4. Review the solution

The solution demonstrates a “best” response, meaning, under no time constraints. It should be noted that candidates are not expected to strive for perfection. However, the solution provides a resource to ensure that your notes are complete.

5. Create and organize your notes

Organize your notes by topic (i.e. Financial Reporting, Tax, etc.) and continue to add to them each debriefing session. Watch as your knowledge on the topics expand over time.

6. Give enough time to the debrief process

Do not rush the process of debriefing and making notes. Typically debriefing a case should take as long as it took you to write the case (i.e. debrief 2 hours for a 2 hour case).

While debriefing can be an intimidating process, it is a necessary process to ensure you are making the steps to improving with each and every case. Building this habit will make the CPA journey much more manageable.

Get effective CPA exam coaching

Check out Gevorg, CPA exam coaching and learn how to pass. Our comprehensive courses cover every stage of the CPA PEP process, including Assurance and CFE, ensuring you’re fully prepared. With a proven track record of helping over 4,500 students succeed, you can be next.

Audit Rollback Procedures Explained for CPA Students

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As you’re studying for your CPA Canada exams, especially for the Assurance elective and the Common Final Exam (CFE) – Assurance role, you’ll come across the concept of rollback audit procedures.

While the term might sound technical at first, rollback is a straightforward and effective audit technique. It’s used when prior year data is incomplete, unaudited, or needs to be verified indirectly. Think of it like time travel for auditors: you’re working backwards from the year-end to verify the beginning-of-year balance.

In this article, I’ll explain rollback procedures in more detail and give tips on how to detect it during the CPA exam.

What are audit rollback procedures?

Rollback procedures involve starting with an account’s year-end balance and then adjusting for year’s transactions to verify the opening balance. Put simply, it means working backwards through the year to check if the beginning balance makes sense based on what happened during the year.

Why would auditors use it? Well, rollback is used when the opening balance can’t be trusted on its own. For example, let’s say last year’s audit wasn’t done, or the client is new and their prior F/S weren’t audited. Instead of assuming the opening balance are correct, auditors use rollback to rebuild opening balances from what they can verify: ending balance and transactions during the year.

For example, let’s say a company has $200,000 in inventory at year-end. During the year, they purchased $500,000 of inventory and sold $450,000 worth. The auditors want to verify the prior year balance (ie, opening balance).

You may recall the following formula from your MA studies: “Ending Balance = Opening Balance + Purchases – Sales”. This formula can be re-arranged to be like this: “Ending Balance – Purchases + Sales = Opening Balance”

We can use this formula and perform a rollback to check the opening balance:

Year-end (Ending Balance): $200,000
Less: Purchases: $500,000
Add: Sales: $450,000
Equals (Opening Balance): $150,000

So opening inventory balance is $150,000. If the company’s records also say they started the year with $150,000 in inventory, that supports the the balance. If it doesn’t match, that’s a red flag and auditors would investigate further

Overall, auditors use rollback procedures when:

They didn’t audit the prior year’s financials
The client has incomplete records or prior year detail is missing
They need to verify opening balances (first-year audit or auditor switch)
They want to test cut-off around the year-end
They need to recalculate balances from partial data

Rollback procedures are commonly used in areas such as:

Inventory
PPE
Accounts Receivable

How do you recognize it during CPA exam?

Rollback procedures are needed when direct evidence for an opening balance isn’t available. It is your go-to audit procedure when:

The client switched auditors and you didn’t audit the prior year
You’re testing opening balances
You want to verify cut-off accuracy
The client’s records are incomplete or unreliable

To get full marks on your CPA exam case, be clear and specific. Write a procedure like below:

“Perform rollback procedures by adjusting the current year’s ending balance for relevant transactions (e.g., purchases, sales, depreciation) to verify the accuracy of the opening balance.”

This shows markers that you understand both the purpose and the mechanics of the procedure.

Exam scenarios

Below are some common exam scenarios where speaking about rollback procedure makes sense.

Scenario: First-Year audit engagements

Context: Auditor is performing an audit for first time of client, thus they have no direct audit evidence from prior year’s financials. Auditor is still responsible for obtaining sufficient and appropriate audit evidence to ensure the opening balances don’t contain material misstatements

Approach: Prior year working papers are unavailable or not fully reliable, because the previous audit firm did not share sufficient documentation. This means we must perform rollback procedures.

Procedure: Perform rollback procedure by recalculating the opening balance using the audited year-end balance and current year transaction details (such a JEs, GL, trial balance) to ensure the opening balances are not materially misstated in the absence of prior audited figures.

Scenario: Change in auditors

Context: A client changes audit firms, so the new auditor inherits balances that they didn’t originally verify. The risk increases if the prior auditor’s workpapers aren’t accessible or if there are concerns about prior audit quality.

Approach: Rollback procedure is necessary as the opening balances are inherited. It’s used to gather objective evidence rather than relying on unconfirmed prior year data.

Procedure: Perform rollback procedure by tracing transactions from the opening balance to the audited year-end balance using current year supporting documents, specifically invoices, JEs, bank statements, to ensure the opening balances are independently verified without relying on prior audit work.

Scenario: Cutoff testing or prior period errors

Context: Inventory purchase was recorded in early January but it might actually relate to December

Approach: If this cutoff is incorrect, it affects both inventory valuation and COGS, which impacts gross profit. You can recommend a rollback procedure here, because it allows auditors to determine whether the opening balances reflect appropriate cutoffs.

Procedure: Perform rollback on inventory balances using the year-end inventory figure and purchase activity near year-end to ensure transactions are recorded in the correct period and opening inventory reflects accurate cutoff.

Conclusion

Rollback audit procedures are used when dealing with opening balances, cut-off errors, or incomplete prior-year data.

They’re common and can appear in CPA exams. Consider rollback when you see the following next time:

Prior year not audited
Opening balance questionable
Transactions well-documented but the start of year is messy…

Extra resources

Don’t struggle with Assurance technicals. Check out Gevorg, CPA exam coaching and learn how to pass. Our comprehensive courses cover every stage of the CPA PEP process, including Assurance and CFE, ensuring you’re fully prepared. With a proven track record of helping over 4,500 students succeed, you can be next.

Variance Analysis Explanation for CPA Students

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Management Accounting (MA) competency area is tough. Most of us haven’t worked in the manufacturing industry, so understanding terms like “joint costing” and “cost driver” is challenging. Of all concepts in MA, the variance analysis (VA) comes up most often in the CPA exams.

If you’ve ever thought: “How do I solve variance analysis? How do I memorize all the formulas?”, you’re not alone. This is one of the top questions CPA students ask me when studying for Core 2, PM and CFE exams. Lets dive in and learn how to tackle VA.

Understanding Variance Analysis (VA)

Mastering VA is not not about memorizing 20+ formulas, it’s about understanding the why behind them. What actually works when studying VA is understanding the logic. Think of variances as telling a story:

What did we plan?
What actually happened?
Why is there a difference?
Who caused it?

Once you understand the story, the formulas are easier to build, even if you forget the exact one.

Static vs Flexible

The backbone of VA is static and flexible budgets. Here’s how they work:

Static Budget:
- This is the original plan, based on expected volume.
- Formula: Static Budget Variance = Actual Result – Static Budget
- Why we use it: Checks if sales revenue or fixed costs met expectations. It doesn’t adjust if you sell more/less units than expected, which is why it’s called “static.”
- Example: Company A budgeted $1,000 travel expenses. Actual were $1,500. The static variance is $500 unfavourable.
Flexible Budget:
- This adjusts the budget to the actual volume of sales or production.
- Formula: Flexible Budget Variance = Actual Result – Flexible Budget
- Why we use it: It shows whether price or quantity changed. It’s most often used in manufacturing where price and quantity drive the costs.
- Example: Company B budgeted to pay $4 per metal sheet but ended up paying $5 per sheet. They used 2,000 sheets in production. Using the formula (AP – SP) × AQ, we get $2,000 unfavorable variance (= ($5 – $4) × 2,000).

Focus on “Big 6” variances

There are 6 core variances that come up with most on MA questions. Here they are:

Variance	Formula (Actual – Standard)	Interpretation
Price (DM)	(AP – SP) × AQ	Paid more/less for materials
Quantity (DM)	(AQ – SQ) × SP	Used more/less materials
Rate (DL)	(AR – SR) × AH	Labour cost more/less per hour
Efficiency (DL)	(AH – SH) × SR	Took more/less time than planned
Sales Mix Variance (SMV)	(Actual Sales Mix % – Budgeted Sales Mix %) x Total Actual Sales x Budgeted CM per unit	Impact on CM from selling a different mix of products than planned.
Sales Quantity Variance (SQV)	(Actual Qty Sold−Budgeted Qty Sold) × Budgeted CM per unit	Impact on CM from selling a different total quantity of products than planned.

Above, the “P” stands for “Price”, the “Q” for “Quantity”, the “R” for “Rate” and “H” for “Hours”. The “CM” means contribution margin. The terms “Standard” and “Budgeted” mean the same thing: the planned cost.

Here are my top tips to help you understand and remember these formulas.

Tip#1: The 3 Buckets

Variances can be sorted into three categories: (1) Price/Rate, (2) Quantity/Efficiency, (3) Volume. Every time you see a variance, ask yourself: “Is this about price, quantity, or volume?”

- Price/Rate: This measures how much you paid per unit/hour.
- Quantity/Efficiency: Measures on how much material/labour you used
- Volume: How many units you produced/sold.

Tip#2: Same Patterns

Notice that the above formulas follow the same pattern. Inside the parentheses, we always deduct Actual and Standard. The name of the variance is always what’s inside the parentheses. For example, let’s say you get a Core 2 MCQ that asks: “Calculate the direct material price variance.” Since it’s asking for “Price” variance, this tells you that inside the parentheses, you’re gonna use “P”.

Outside the parentheses, we multiply by the opposite. For example, when we have “price” in the parentheses, we multiple by “quantity”. When we have “quantity” in the parentheses, we multiple by “price.” This is true for the first four, but the SMV and SQV involve the CM.

Tip#3: Explain the Cause

Calculating the variance is not the end. Once you calculate the variances, you must then determine the root cause of the variance. Once that’s done you can then make a recommendation. Common causes include:

For efficiency variance:
- Higher scrappage due to lower quality materials, resulting in unfavourable variance.
- Extra training time for unskilled workers resulted in unfavourable efficiency variance.
- Increased usage of materials due to poor fit/install issues with low-quality product.
- Manual labour increased due to equipment downtime.
For price/rate variance:
- Lower quality materials purchased, leading to favorable variance (ie, better price than expected)
- Use of unskilled workers at lower wage rates led to favourable rate variance.
- Overtime and higher hourly wage rates due to rework caused by low-quality materials.

Extra resources

Don’t struggle with MA. Check out Gevorg, CPA exam coaching and learn the strategies to pass. Our comprehensive courses cover every stage of the CPA PEP process, including Core 2 and PM, ensuring you’re fully prepared. With a proven track record of helping over 4,500 students succeed, you can be next.

CFE Day 1: Quants Constraint vs. Financial Analysis

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When you write the CPA Canada Day 1 Common Final Exam (CFE), you’re expected to find – and recognize in your Situational Analysis Framework (SAF) – two types of quantitative items: 1) financial analysis and 2) quantitative big picture (quant BP) issues. Students often ask me what’s the difference between the two. Let’s review in this post.

What’s Financial Analysis?

Financial analysis is about getting a picture of a company’s financial health. It involves financial ratio and trend analysis where you compare different F/S elements, like revenues, profits, and various ratios. Financial analysis in Day 1 doesn’t need to be in-depth, you can keep it brief.

To know what financial analysis to perform in the Day 1 exam, you need to pay close attention to the details provided in the case.

For example, in the CPA Canada CFE Day DHC v1 case below, Appendix III provides various benchmarks, comparing company to the industry for the years 2022 and 2019 as follows:

When you see these ratios, it’s a signal to discuss some of these ratios.

You don’t have to discuss all of them nor answer the “so what“, but you gotta compare the key ratios of company vs industry, and state whether it decreased or increased. To know which ratios are important enough to discuss, look for BOD objectives in your case. For example, if the BOD wants to achieve a better current ratio in the next three year, this is a key ratio. If the BOD wants to achieve a better occupancy rate, this is a key ratio.

Here’s an example response:

About 3-4 bullet points like above are enough. You don’t need to do anything further except to integrate it to your analysis (discussed below).

What are Quantitative Big Picture issues?

Big picture issues in general are overarching, pervasive issues that impact all the other issues in the case and relate to the company’s overall strategic direction.

Big picture issues can be quantitative and qualitative. As quantitative, they can be financial or non–financial.

Quant BP issues involve constraints, basically limitations on resources that the company needs. Financially these are cash constraints, like company has $10M spending available. Non-financially these are resource constraints, like company has raw materials of only 10M kg.

As I teach in my popular CFE tutoring classes, these are crucial to include in your strategic analysis, recommendations, and overall recommendation. You cannot proceed with that strategic option if it exceeds the constrained resource. For example, if the investment requires more cash than the company has, even if all factors suggest the option is profitable and the pros outweigh the cons, you can’t suggest to proceed with it, unless the company can come up with a way to mitigate it. For example, they can accept a strategic issue to sell part of the company to raise cash and use that cash for other investments.

Here are some examples of quant BP constraints:

Cash flow constraints
Lending constraints
Covenants
Management time constraint
Materials constraint
Space constraint

These can be tricky to spot because they require reading between the lines. For example, Day 1 might hint at a covenant tied to the company’s bank loan without explicitly saying it’s a constraint.

How to Integrate Financial Analysis and Quant BP Issues

Now you learned what are Quant BP issues and Financial Analysis. How do you add those into your response? First, you have to put them in your SAF. Second, you need to integrate factors from the SAF into your analysis of the strategic and other issues in order to pass Day 1.

You can add your financial analysis in either or both quantitative and qualitative of strategic options.

Here’s an example of a student integrating their financial analysis into their quantitative analysis in DHC Version 1 case:

Above student tied strategic issue analysis back to their financial analysis by explaining how it will impact DHC’s ratios overall.

Quant BP issues can also be integrated within either or both quantitative or qualitative. Here’s an example of a student response from CPA Canada Day 1 KTI, Version 1 exam:

In this example, the student integrated the supply constraint of having limited tea leaves available due to KTI’s two contracts expiring from their SAF into their quantitative analysis. The impact on the tea supply is calculated under the scenario that KTI doesn’t renew the May 2025 contract. There would be 1.6M kg in additional tea available to KTI, which is favorable given their limitation on tea supply.

The student also integrated the supply constraint within their qualitative analysis in the scenario the contract is renewed as follows:

Conclusion

Remember the key differences between financial analysis and quantitative BP constraints: financial analysis assesses how the company is doing financially, using ratios and trends, while quant BP issues are constraints that must be considered in your analysis of all strategic options and all recommendations. Both financial analysis and quantitative constraints should be mentioned in your SAF and then integrated, either or both within your quantitative and qualitative analysis of each strategic option.

Extra Resources

CFE pass rates are lowest on record at 67.3%.

Check out Gevorg’s CFE Review – Day 1 with Marking. This highly rated tutoring program boasts 91% pass rate and provides supplemental mock CFE Day 1 case, live classes, on-demand video lessons, templates, handouts, technical study notes, to help you become a CPA.

CFE Day 1: How to Find the Cash Constraint

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As you’re studying for the CPA Canada Common Final Exam (CFE), you’ll notice that Day 1 of the exam is structured differently from that of Day 2 and Day 3.

The Day 1 exam is considered indirect, which means the assessment opportunities (AOs) aren’t as clearly laid out for you. For example, instead of being told directly to do a NPV calculation for your quantitative analysis, you may need to figure out which financial tool to use based on the information you’re provided.

Likewise, identifying the big picture issues, such as the cash constraint, is also a key challenge on Day 1, because this may require you to read between the lines to uncover it.

What is cash constraint?

A few years ago, passing Day 1 was simple. You had to prepare a Situational Analysis Framework (such as KSF, SWOT, etc.), analyze 3-4 strategic issues, analyze 1-2 operational issues, and prepare an overall recommendation.

Day 1 exams are now more complicated. CPA Canada Board of Examiners has introduced several layers of big picture issues. These are overarching, pervasive issues that affect all other issues. They relate to strategic direction of the company (referred to as “SD”), interrelation of issues (which we call “IRI”), non-monetary constraints and cash constraints. This cash constraint big picture issue means that the company has limited financial resources for investments. For example, they may have $2M available, while strategic issues may require $4M or $5M or higher. It’s a constraint you have to be careful to not recommend over the limit. You can think of this like a credit card limit that should not be exceeded.

Why is finding cash constraint important?

Simply put, you need it to pass Day 1. Cash constraint is a big picture issue that you need to tackle in order to score a “Yes” on the “Conclude and advise” AO.

Below is the feedback guide for the Conclude and advise AO from a Day 1 case, which shows how you’ll be marked.

When your overall assessment is determined, you must score a Yes on Conclude and advise to score a Clear Pass.

Below is what will see in your Automatic Feedback Report, if you don’t address the big picture issue and you’re unsuccessful at passing the Day 1 exam:

How to spot the cash constraint?

You might find that the cash constraint is mentioned directly in the case or you might have to dig a little deeper. Here are some places in the case where you can look for information about a cash constraint:

1) The narrative (introduction)
2) Transcript of the board meeting
3) The company’s financial statements, if provided
4) Appendix with financing information, if provided

Below are examples to help you understand better.

1) The narrative

Often, you’ll find the cash constraint mentioned in the first few pages of the case.

Below is an excerpt from the first page of the CPA Canada JRP Version 2 Day 1 case. The highlighted section below tells you that JRP only has $5M available for investments – that’s your cash constraint!

Here’s another example from NPF v1 case:

2) Transcript of the Board Meeting

Sometimes discussions among BOD members reveal cash constraints. In the below excerpt from the CPA Canada API Day 1 case, Jacob, one of the founding shareholders of API, points out the company’s cash constraint. He mentions that although there is $20M available for financing, any new investments must generate enough cash flow to cover the debt. That’s a clear sign of a cash constraint.

3) Financial Statements (if provided)

If the case doesn’t directly mention a cash constraint, that doesn’t mean there isn’t one! If you’re provided with financial statements, specifically a balance sheet or cash flow statement, be sure to review them. If the case doesn’t mention cash constraint anywhere, you should treat the cash balance on the F/S as the constraint. For example, in DHC v2 exam case below, the cash balance was given in the financial statements and not mentioned anywhere else:

4) Appendix with financing information (if provided)

This is not the same as “financial statements”, this is financing options. You may be provided with an appendix that details the financing available to the company to fund new investments. Below is an example from the CPA Canada CTI v1 Day 1 case:

Conclusion

Day 1 of CFE is more complicated now. Always remember to take a step back and consider if you need to address any big picture issues, such as a cash constraint. Regardless of whether the cash constraint is made obvious or not, it’s important for you to comment on how each proposal could impact the constraint. The cash constraint should be incorporated into your situational analysis, conclusion for each strategic option and overall recommendation. Not addressing it may hold you from passing Day 1!

Extra Resources

CFE pass rates are now at the lowest level on record at just 67.3%. Capstone 2 provides three mock exam cases, only 2 of which are marked. This provides you with limited practice opportunities for Day 1, with cases that are not accurate representations of the actual exam.

Check out Gevorg’s CFE Review – Day 1 with Marking. This highly-rated exam tutoring program provides supplemental mock CFE Day 1 case authored by Gevorg, CPA to simulate the actual exam so that you can practice the types of questions that may be asked. In addition, you’ll get access to live classes, on-demand video lessons, templates, handouts, technical study notes, and much more.