The financial accounting and reporting (FAR) test requires the most number-crunching. This test covers what you’ll spend most of your time on when you start your accounting career. The test requires you to use many types of formulas, and to understand the process of accounting. It covers types of accounts, accounting transactions, and accounting principles:
Using formulas: This test covers many of the day-to-day tasks you’ll encounter as a CPA, such as posting accounting transactions. You’ll need to memorize a list of formulas. A common question on the FAR test requires you to use the formula for ending inventory, which is Beginning inventory + Purchases – Cost of goods sold = Ending inventory. The test question may provide three of the numbers in the formula and ask you to solve for the missing number.
Understanding accounts: The FAR test requires you to understand a company’s chart of accounts, which is the list of accounts a firm uses to post accounting transactions. You need to understand how accounts are classified on the balance sheet, income statement, and other financial statements.
Cash basis versus accrual basis accounting: These two concepts appear on every FAR test. With cash basis, you post revenue when you deposit customer funds. Expenses are recorded when you write checks. The accrual basis, on the other hand, posts revenue when it’s earned. Typically, you earn revenue when you deliver a product or perform a service for a client. Expenses are posted when incurred. Accrual accounting is not driven by cash inflows and outflows.