Are you in struggle to passing the Financial Accounting and Reporting (FAR) section on the CPA Exam? You’re not alone. This is known as the most difficult of the four sections, and the pass rate usually supports that belief. The topics tested cover a four semester-long accounting courses. But, as you may very well know there are thousands of CPA who passed the Financial Accounting and Reporting Section (oherwise they are not CPAs). If they can, you can too! What you need is a courage, confident and a solid strategy.
Well, of course each testing may (and most likely) has different content and different difficulties level, however, the overall format is 80% financial accounting topics, 10% governmental accounting, and 10% accounting for not-for-profit entities. This is tough stuff. I know as everybody does, indeed it is tough topic. That’s why difficult to pass, Financial Accounting Reporting is 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. Here are the main topics:
- Intermediate accounting—the first semester on the course. It containsthe balance sheet, income statement, current assets and current liabilities, fixed assets, inventory, and some introduction of basic time value of money issues. Get the Intermediate Accounting, 11th edition by Kieso, Weygandt, and Warfield, you can find them in chapter 1st to 13th.
- Intermediate accounting—the second semester: Accounting for pension, Accounting for bonds, leases, deferred income taxes, investments, and stockholders’ equity. The statement of other comprehensive income and the statement of cash flows are the key. And some special areas: recognizing accounting errors, accounting changes, and revenue, are always important topics.
- Advanced accounting—a one-semester course: They topic is the Consolidated Financial Statement Reporting and Intercompany transaction.
- Governmental and not-for-profit accounting course: This is another one-semester course or is taught as part of an advanced accounting course.
The amount of detail tested on this section is undoubtly overwhelming. More over, FAR 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. Preparing and following a study plan to guide you through the maze of numerous topics is almost a requirement for passing Financial Accounting Reporting.
Winning Strategy-1: You must know some of everything on every topic! A common mistake is to study some topics very well and to overlook other subjects entirely. You must be well versed in numerous areas.
Any of the following topics can be tested. Here is the top-ten list of all-important subject areas for the Financial Accounting Reporting exam are:
- Multiple-step income statement
- Classified balance sheet
- Converting information from cash to accrual and vice versa
- Statement of cash flows
- Other comprehensive income
- Deferred income taxes
- Investment and financial instruments
Any more topic that most likely be included in the test? Yes, you won the bet! There are other areas such as inventory, accounts receivable, cash, and the financial accounting concepts, that also must be studied. But the top 10 most important topic identifies the key areas that remain the heart of the Financial Accounting Reporting exam.
So, the Winning Strategy-2: Don’t leave home without your top-ten list of Financial Accounting Reporting knowledge. However, it is dangerous to ignore governmental accounting and accounting for not-for-profit entities.
Learn “Financial Accounting Reporting” 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.
- If your answer is not there, slowly work it again.
- 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.
Financial Accounting Reporting Communications
Good news! It is not difficult to write about financial accounting topics, many candidates win in this area. 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. Here are the strategy:
- Review the concepts covered in “The Communications Component” (formerly called “Essays“.) The exam is positively graded: you are awarded points for correct statements. Points are not deducted from your grade.
- Write well, and 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.
- 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). Example of statements: “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:
- Save the Research tab for last. 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.
- Order the Financial Accounting Research System (Financial Accounting Reporting) software from the AICPA. 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.
Governmental And Not-For-Profit Accounting
- Not-for-profit accounting is very similar to accounting for other financial statement issues. 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.
- The focus is on accounting for donor contributions. You 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.
Some Final Words on The FAR Section Strategy
Financial accounting is the heart of what any accounting students learned in college. It is only natural to feel overwhelmed here. Yes, Financial Accounting Reporting is difficult, of course, the material is tough, diverse, and quantitative. If you are having trouble answering the questions, remember that so is everyone else. You studied, you practiced, and you reviewed. You can pass the Financial Accounting Reporting section with some help! Carve those words in your heart. 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.
The Final winning strategy: 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
Purchase CPA exam review materials to learn this topics. By using them, you can quickly bring yourself up to speed. As you work through the questions on the CPA exam, 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. 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 what it takes to pass the Financial Accounting and Reporting (FAR) section of the CPA exam! Thousand people have passed this section. There is no doubt that you can pass it too!