FAR Exam Format and Content

The financial accounting and reporting (FAR) test covers topics related to accounting transactions and generating financial statements. This test is all about the day-to-day work of accounting. An FAR test includes 90 multiple-choice questions and 7 simulations. This test requires the largest amount of number crunching on the CPA exam. Use these tips to prepare for the FAR test.

 

Start by making connections

Before you dive into studying for this exam, step back and take a deep breath. To succeed on this test, you need to understand how the basic financial statements are connected.

Learning accounting is a lot like putting together a puzzle. The financial statements connections are the easy pieces of the puzzle. Once you understand these connections, you can build on that understanding.

The income statement formula, for example, is (revenue – expenses = net income). Net income is connected to the balance sheet. The balance sheet formula is (assets – liabilities = equity). Net income increases the equity section of the balance sheet.

There are two other financial statements that are also heavily tested. Both the statement of cash flows and the statement of retained earnings appear frequently on the FAR test. Make sure that you understand how all of these financial statements are connected.

 

Basis of accounting

When a company starts doing business, the firm will choose an accounting basis. The basis is important, because it has a huge impact on how you report profit. Nearly all businesses choose the accrual method of accounting.

The accrual uses the matching principle. This principle states that you match revenue earned with expenses incurred to generate that revenue. Say, for example, that you manufacture jeans. You sell pairs of jeans in April that were manufactured in February.

Here’s how the accrual method would post the accounting activity. The costs you incurred in February (materials, labor costs) are posted to your inventory account. In April, when you sell the jeans, you reduce inventory and increase costs of sales- an expense account. You’ve matched the revenue from the April sale with a cost of sales in April.

You should avoid using the cash basis of accounting. This method recognizes revenue when you make a cash deposit. When you write a check, you post an expense. So, the cash basis relies solely on activity in your checkbook.

Using the jeans example, the cost incurred to produce the jeans would be expensed when those expenses are paid- maybe in February or March. The revenue for the April sale would not be recorded until the customer pays. Well, that might not be until June. The cash basis disconnects revenue from expenses. This method creates financial statements that are less clear and confusing.

 

Why an account is used

Another strategy to have success on the FAR test is to understand why a certain account is used. Assume that you’re reviewing current assets in the balance sheet, for example. You’re working with prepaid insurance. OK- why is this account used?

We all pay insurance premiums for future coverage- maybe for the next 6 months. When you make that payment, you post the amount to prepaid insurance. As months go by, you move each month’s insurance premium amount to insurance expense. The prepaid insurance balance declines over time.

Go through this same thought process with each type of account.

Many CPA candidates fee particular time pressure when they take the FAR test. Use these tips to reduce your anxiety and enter the test with confidence.

 
 
 
 

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