One test on the CPA exam is all about the day-to-day work of accounting. The financial accounting and reporting (FAR) test covers topics related to accounting transactions and generating financial statements. Because this test requires a large amount of number crunching, you need to prepare carefully to succeed. This post covers tough concepts on the three largest sections of the FAR test. These sections total about 80% of the questions you’ll see on this test, so this FAR CPA Exam Breakdown will cover most of what you need come test day.
The AICPA website provides a detailed list of the specific topics you’ll see on each section of the CPA exam. When you start to prepare for the exam, print off that list of topics. Make sure that your study plan covers each of the topics listed by the AICPA.
FAR CPA Exam Breakdown – Overview
Below, we’ll dive into the three largest sections of the FAR test.
Concepts, Standards, Financial Statement Presentation
You’ll need to know about several different organizations that regulate the work of CPAs. The Securities and Exchange Commission (SEC), for example, regulates stocks and bonds. This concept can be confusing for CPA candidates.
Keep in mind that the SEC regulates CPAs in two ways. When securities are issued to the public for the first time, a CPA firm must audit the financial statements. Once securities start trading between investors, they must still file periodic financial statements with the SEC, including audited financial statements each year.
Make sure that you’re clear on the connections between the basic financial statements. For example, the revenue and expense accounts are closed to net income at the end of each month. Net income increases retained earnings (equity) in the balance sheet. A CPA candidate should be able to visualize these connections.
When financial statements are presented, the accounts are segregated into current and non-current assets and liabilities. Unless you’re told otherwise, you can assume that “current” means 12 months of less. A current asset, for example, is either cash- or will be converted into cash- within 12 months. A current liability, such as accounts payable, will be paid in cash within 12 months.
Another large section of the FAR test covers financial statement assertions. When a company issues financial statements, they are asserting (stating) certain points about those financials. For example, the company is asserting that the transactions are posted to the correct fiscal period.
Consider accounts payable. The company is asserting that they’ve reviewed their accounts payable balance to ensure that all payables are posted to the correct month or year.
This section of the test also covers revenue recognition. It’s important that a firm selects a revenue recognition method. They may decide to post revenue when the product is shipped to a customer. Once a business decides on a particular method, the company needs to consistently apply the policy. This approach allows a financial statement reader to compare revenue totals between periods.
Transactions, events and disclosures
One of the most difficult concepts on the FAR test is subsequent events. When something happens after year-end, what should be disclosed in the financials? If the event existed before year-end, it’s likely that you’ll need to disclose the event in the financial statements for the prior year. That may mean a footnote, or an adjustment to the financial statements.
Make sure that you have a document that helps you understand all of the subsequent events details.
Earnings per share (EPS) can also be a tricky area on the FAR test. Specifically, you need to understand the difference between diluted and non-diluted EPS. Diluted EPS means that the company earnings are spread over more common stock shares. If the number of shares is higher, the earnings per share will be lower.
To address this concept, make sure that you understand each type of security that can be converted into common stock. Convertible bonds, options, warrants and other securities can be converted into common stock. Diluted EPS assumes that any security that can be converted into common stock is converted.
As you study for the FAR test, take a hard look at each of these topics. Understanding each of these concepts can help you succeed on the FAR test. You’ll also want to spend some time studying governmental accounting and non-profit accounting, but these make up a smaller section of the test. Be judicious with your time and focus on the topics that have the biggest payoff.
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