Financial Accounting and Reporting (FAR) is a four-hour section of the CPA exam. The overall format is 80% financial accounting topics, 10% governmental accounting, and 10% accounting for not-for-profit entities. Candidates believe it is the most difficult of the four sections, and the pass rate usually supports that belief. The topics tested cover four semester-long accounting courses.

1. Intermediate accounting—the first semester. Typical topics include the balance sheet, income statement, monetary current assets and current liabilities, fixed assets, inventory, and the introduction of basic time value of money issues. If you were studying from the world-famous Intermediate Accounting, 11th edition by Kieso, Weygandt, and Warfield, you would review chapters one through thirteen.
2. Intermediate accounting—the second semester: Topics such as accounting for bonds, pension, leases, deferred income taxes, investments, and stockholders’ equity are heavily tested. The statement of other comprehensive income and the statement of cash flows are keys. Special areas, such as recognizing accounting errors, accounting changes, and revenue, are always important topics.
3. Advanced accounting—a one-semester course: This course leads to an understanding of how to combine financial statement information to produce consolidated financial statements.
4. Governmental and not-for-profit accounting course: Usually this is a one-semester course or is taught as part of an advanced accounting course.

Just reading the list of testable topics is enough to make most candidates cringe. This is tough stuff. It’s no wonder that Financial Accounting Reporting is known as the most difficult area to pass on CPA exam. Candidates must have a knowledgeable command over 150 financial accounting standards as issued by the Financial Accounting Standards Board (FASB), 40-plus governmental accounting standards as issued by the Governmental Accounting Standards Board (GASB), and special accounting issues encountered in not-for-profit entities. What a huge list!

Financial Accounting Reporting is the most diverse CPA exam section. One minute you’re answering a question about a capital lease, and the next minute the subject is pension accounting. The amount of detail tested on this section is overwhelming. Preparing and following a study plan to guide you through the maze of numerous topics is almost a requirement for passing Financial Accounting Reporting. Candidates must know something about everything.

A common mistake is to study some topics very well and to overlook other subjects entirely. Do this and you are asking for failure. You must be well versed in numerous areas. The top-ten list of all-important subject areas for the Financial Accounting Reporting exam are:

1. Bonds

2. Pensions

3. Leases

4. Investment and financial instruments

5. Multiple-step income statement

6. Classified balance sheet

7. Converting information from cash to accrual and vice versa

8. Statement of cash flows

9. Other comprehensive income

10. Deferred income taxes

Any of these topics can be tested. Yes, there are other areas such as inventory, accounts receivable, cash, and the financial accounting concepts, that also must be studied. You will be asked questions about these topics, too, but this list identifies the key areas that remain the heart of the Financial Accounting Reporting exam. Think of the list as the classics of the CPA exam. Don’t leave home without your top-ten list of Financial Accounting Reporting knowledge.

It is dangerous to ignore governmental accounting and accounting for not-for-profit entities. For now, let’s focus on the topics covered in the two semesters of a college intermediate accounting class.

Financial Accounting Reporting Communications

Here’s where you can shine. It is not difficult to write about financial accounting topics. That’s right—the governmental accounting and accounting for not-for-profit entities issues are tested using only the multiple-choice question format. All of the simulations cover financial accounting issues.

This may change in coming CPA exam seasons. Review the concepts covered in The Communications Component—Formerly Called Essays. Recall that the exam is positively graded. You are awarded points for correct statements. Points are not deducted from your grade. Don’t be overly self-conscious.

Write well. Begin with a paragraph that clearly identifies a thesis statement. Use additional paragraphs to develop main ideas and to support what you say. Watch for fragments and run-on sentences. Watch for missing or incorrect punctuation, especially your comma usage. Don’t forget to run spell-check after each time you make a change in your answer. Proofread your memo after each change.

Let the words in the communications tab speak to you.

Example: Let’s say the requirement was to discuss with a client the topic of off balance-sheet risk of accounting. What does “to discuss” mean? You must complete two major tasks—define what off-balance-sheet risk is and give examples—and then you must make any statements that you feel will support your thoughts in the area. Don’t know anything about the topic of off-balance-sheet risk? Don’t worry—begin by rephrasing the question in a statement. Then, looking at the words “off-balance-sheet,” develop a definition that discusses the fact that some accounting transactions that are important to financial statement users could be omitted from the basic financial statement presentation. What effect would this have on the financial statement presentation? Certainly it would result in some activities that should be disclosed in the notes to the financial statements. The users must be made aware of all possible liabilities, even if the liabilities are not yet recorded. Try to list some examples.

Be careful when writing communication essays. Do not insert journal entries, and avoid referring to DR for debit and CR for credit. Speak in terms of an asset increasing or a liability decreasing rather than a debit and a credit. If you must discuss a formula to help the reader compute an amount, do not use numbers. The communication essays are answered with words.

Make statements such as: Add the amount of the actual interest paid for the period to the amount of accrued interest. Use common language. Accounting jargon will not help you earn points. Write in everyday terms.

Watch for a question that asks candidates how to “report” for a transaction. You must answer with a discussion of the financial statement, the exact section of the financial statement, and any information that should be disclosed in the statement notes. Always get readers to the correct financial statement, then lead them to the correct section of the statement, for example, current liabilities, and then discuss where (first, last etc.). Pretend you are preparing a map to guide readers to the exact place where that account would be shown. Reporting questions are easy and fun. Just use your financial statement knowledge.

Financial Accounting Reporting Research

Review the concepts the research components:

How Many Hits? Save the Research tab for last. Don’t spin your wheels. Think about the key search term, put quote marks around the phrase, type it in, and hit ENTER. Spelling counts—you must spell all words in the phrases correctly. If you need assistance, open the Communications tab, type the phrase, hit SPELL-CHECK, and see how the words are spelled. Usually you can use the words and phrases that are used in the question requirement.

Shame on you if you do not take advantage of the free AICPA offer. Order the Financial Accounting Research System (Financial Accounting Reporting) software. It’s free—all you need do is to register at the CPA exam Web site, www[dot]cpaexam[dot]org, and enter your notice to schedule (NTS) number. You are allowed to practice with this software for six months. One or two hours of practice with the software and you can be a pro.

Financial Accounting Reporting: Learn Step-By-Step

How can you possibly learn all of the concepts tested in this area? Use review materials that summarize the key concepts, present the important formulas and algorithms, and discuss the disclosures according to generally accepted accounting principles. Don’t be tempted to study your financial accounting texts. They contain too much information. This area is already overwhelming—avoid trying to study everything. Study only what’s on the CPA exam.

When you work multiple-choice questions, whether they test financial, governmental, or not-for-profit accounting, study by covering up the answer choices. Teach yourself to work with the question data and to ignore the answer choices. Work the formulas and then uncover the answers to see the amount you just calculated. The idea here is to first visualize the formula, write it down on your scratch paper, and then plug in the numbers. Errors occur because candidates use the incorrect formula, make math mistakes, or miss the real issue. Perhaps you plugged the numbers into the formula incorrectly.

If your answer is not there, slowly work it again. Continue to believe in your abilities. If on the second time through, your answer is still not there, sit back and ask yourself if you have the correct formula or if you could be falling into a trap, such as using numeric data that is irrelevant to the issue.

Practice computing the answer using formulas. If you are well studied, you do know how to compute the answer—it’s just a matter of methodically applying your knowledge.

Governmental And Not-For-Profit Accounting

Use the same multiple-choice technique as just discussed. Governmental accounting represents 10% of the total Financial Accounting Reporting points, as does not-for-profit accounting. You have some tough choices of what to do with your time. If you choose to ignore governmental accounting because you are uncomfortable in this area, you will make a huge mistake. You must at least learn the basics.

Not-for-profit accounting is very similar to accounting for other financial statement issues. The focus is on accounting for donor contributions. Candidates must know how to prepare a statement of activities and a statement of cash flows for a not-for-profit entity. Buy a good review manual, and use it as a guide to learn the basics. A 70 to 75% understanding of the overall material is enough to carry you to a passing score.

Avoid a negative outlook. Financial accounting is the heart of what we learned in college. It is only natural to feel overwhelmed here. The material is tough, diverse, and quantitative. Yes, Financial Accounting Reporting is difficult. If you are having trouble answering the questions, remember that so is everyone else. You studied, you practiced, and you reviewed. Yet the material seems foreign as you take the CPA exam. What happened to all of your knowledge? Stop! Take a reality check. You can pass the Financial Accounting Reporting section with some help. Remain hopeful.

The AICPA will help you by equating your score. Points are added to your raw score to improve your performance. In the past, as many as 10 to 15 points may have been added to candidates’ raw scores. If this is true, you only had to earn a raw score of 60% to pass the Financial Accounting Reporting section. Although the AICPA no longer uses curve points, points still are added to your score. Believe in yourself—you can pass the Financial Accounting Reporting section. Relax, take a deep breath, and keep on fighting to answer each and every question. Remain confident.

Don’t let self-doubt creep in. Hang tough and don’t give up too early!

Don’t leave home for the Financial Accounting Reporting exam until you have studied these governmental accounting topics.

• Governmental funds
• How to prepare the government-wide financial statements
• How to reconcile the governmental and proprietary funds to arrive at the numbers on the government-wide financial statements
• How to record a general fund budget
• How to close the budgetary entries
• Other financing sources and uses
• Non-exchange revenues
• Encumbrance accounting
• Capital assets and infrastructure

To learn these topics, purchase CPA exam review materials. By using them, you can quickly bring yourself up to speed.

As you work through the questions on the CPA exam, do not grade yourself. See each question as a separate challenge. If you must guess, go ahead and do so. Everyone, even those who have earned a grade of a 99, had to guess on some questions. Your job is to answer the questions. Expect to guess. Leave the grading to the AICPA.

Forget about what you don’t know. It’s too late to improve your knowledge when you are sitting in the Prometric test center. Move on with confidence. It is found by CPA tutor experts that candidates who fail the Financial Accounting Reporting exam do so not because they are not smart enough to learn the concepts, but because they just give up too early. Plan to spend at least four weeks of solid study learning and practicing the Financial Accounting Reporting topics after you have taken a review course. Sound like a lot of work? It is! It is what it takes to review the Financial Accounting Reporting area. It is what it takes to pass this area. It is what it takes to pass CPA exam. You must hang tough! There is no simple solution—learn the concepts, practice the concepts, and you will prevail!