Time is precious.
So, you’re coming down to the wire for your FAR test, and you’re running short on time. You need to get the most out of the limited amount of time you have, and you need a plan. Use these three tips about the most heavily tested areas of the exam to cram for the FAR test, get the most out of your available study time, and pass the test.
Connections to retained earnings
The FAR test involves tons of number crunching, but I’ve seen many CPA candidates have trouble with the transactions that change retained earnings. Think about it this way:
Retained earnings is (all net income since the firm started) less (all cash dividends paid since the firm started).
Now, there are some other variables, but this explanation helps candidates visualize what’s going to in retained earnings. General Electric (GE), for example, was founded in 1892, and GE’s retained earnings balance is essentially all net income since 1892 less all cash dividends paid since that date.
Earnings per share (EPS): basic vs. diluted
The difference between these two versions of EPS is covered on every FAR test, and the concept can be explained using chocolate milk. When you add chocolate drink mix to milk, it dilutes — it spreads out — and that’s just what happens with diluted EPS. Assume, for example, that ABC Manufacturing’s EPS is ($1 million earnings / 100,000 common stock shares), or $10 per share. Dilution means that every security that can be converted into common stock is converted, and that may include rights, warrants, stock options, convertible preferred stock, and convertible bonds. Assume that ABC’s dilution results in 100,000 additional shares of common stock. Here’s the key point: that same $1 million in earnings is “spread over” more shares, so the new EPS is ($1 million earnings / 200,000 common stock shares), or $5 per share.
Pension expenses: the money in the bucket
I’ve noticed that many CPA candidates are intimidated by pension questions — mostly because the language of pension accounting is difficult. Think about a pension as a bucket: the employer (and sometimes the employee) contribute dollars into the bucket, and investment earnings also increases the money in the bucket. Pension expenses and any investment losses reduce in the money in the bucket.
If you’re under the gun and need to cram for the FAR test, use these three tips to answer more questions correctly and succeed on the CPA exam.