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- Herausgeber: John Wiley & Sons
- Kategorie: Bildung
- Sprache: Englisch
- Veröffentlichungsjahr: 2024
Pass the CPA exam with clear study material, online practice, and up-to-date content CPA Exam For Dummies gives you a solid overview of everything you need to know to pass the Uniform CPA Examination--updated to reflect the 2024 exam updates. Only about half of aspiring CPAs pass the test their first time around. You can be in that one-and-done group, thanks to the concrete study plans in this book. You'll also get access to online resources, including study questions for each section of the exam and digital flashcards so you can really know your stuff on test day. Passing your exam is not just about the nuts and bolts. If you want to score your highest, you'll also need to understand how the test is organized and what to expect on text day. This Dummies study guide has you covered, with an overview of the updated exam and strategies for doing your very best. * Review all content covered on the updated Uniform CPA Examination * Answer practice questions and study with digital flashcards to solidify your knowledge * Follow detailed study plans that will help you keep your test prep on track * Maximize your score, pass the test, and launch your career as a CPA Anyone on the CPA track needs a copy of CPA Exam For Dummies. It's great as a supplement to review and prep courses, or all on its own.
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CPA Exam For Dummies®
To view this book's Cheat Sheet, simply go to www.dummies.com and search for “CPA Exam For Dummies Cheat Sheet” in the Search box.
Table of Contents
Cover
Title Page
Copyright
Introduction
About This Book
Foolish Assumptions
Icons Used in This Book
Beyond the Book
Where to Go from Here
Part 1: Getting Started with the CPA Exam
Chapter 1: So You Want to Become a CPA
Added Responsibilities with a CPA Designation
Considering What a CPA Does
Comparing a CPA to Other Credentials
Understanding the CPA Licensing Requirements
Walking through CPA Exam Topics
Chapter 2: Getting Acquainted with the CPA Exam
Knowing What’s on the Exam
Understanding the Exam Format
Going Over the Skills You Need to Succeed on the Exam
Understanding How the Tests Are Weighted
How Did You Do? Knowing How the Exam Is Graded
Chapter 3: Applying, Scheduling, and Planning for Your Exam Day
Making Sure You’ve Met the Prerequisites
Applying to Take the Exam
Applying for Special Accommodations
Scheduling the Exam
Considerations Before the Exam
Arriving at the Test Center
Sitting at the Exam
Chapter 4: Implementing a Study Program
Reaching Your Goal of Passing the Exam
Setting an Overall Study Schedule
Creating a Study Plan for Each Test
Following Up after Your Tests
Chapter 5: Understanding the Types of CPA Questions
Adopting a Useful Mindset for Taking the Exam
Putting Together a Strategy for Multiple-Choice Questions
Considering Task-Based Simulations
Reviewing Six Key Concepts to Improve Your Score
Part 2: Discipline Tests
Chapter 6: Understanding the Business Analysis and Reporting Test
Using Business Analysis
Working with Technical Accounting and Reporting
Accounting for State and Local Governments
Chapter 7: Reviewing the Information Systems and Controls Test
Going Over Information Systems and Data Management
Evaluating Security, Confidentiality, and Privacy
Chapter 8: Going Over the Tax Compliance and Planning Test
Reviewing Tax Planning for Individuals
Thinking About Business Tax Compliance
Chapter 9: Discipline Practice Questions
Business Management
IT Issues
Financial Ratios and Metrics
Accounting Transactions
Taxation
Chapter 10: Answers and Explanations to Discipline Test Practice Questions
Business Management
IT Issues
Financial Ratios and Metrics
Accounting Transactions
Taxation
Part 3: Financial Accounting and Reporting
Chapter 11: Taking a Closer Look at the Financial Accounting and Reporting Test
Starting with Standards for Financial Statements
Going through the Accounts
Considering Important Transactions and Events
Accounting for Government Entities
Keeping Up with Not-for-Profits
Chapter 12: Financial Accounting and Reporting Practice Questions
Business Combinations and Consolidations
Basic Concepts
Error Correction
Accounting Changes
Financial Statements
Inventory
Fixed Assets
Monetary Current Assets and Liabilities
Present Value Fundamentals
Present Value Bonds
Present Value Debt Restructure
Present Value Pension
Present Value Leases
Deferred Taxes
Stockholders’ Equity
Investments
Statement of Cash Flows
Personal Financial Statements
Interim Reporting
Segment Reporting
Partnership Accounting
Chapter 13: Answers and Explanations to Financial Accounting and Reporting Practice Questions
Business Combinations and Consolidations
Basic Concepts
Error Correction
Accounting Changes
Financial Statements
Inventory
Fixed Assets
Monetary Current Assets and Liabilities
Present Value Fundamentals
Present Value Bonds
Present Value Debt Restructure
Present Value Pension
Present Value Leases
Deferred Taxes
Stockholders’ Equity
Investments
Statement of Cash Flows
Personal Financial Statements
Interim Reporting
Segment Reporting
Partnership Accounting
Part 4: Auditing and Attestation
Chapter 14: Taking a Closer Look at the Auditing and Attestation Test
Understanding the Engagement
Assessing the Company and Internal Controls
Performing Audit Procedures
Considering the Results of Your Audit Work
Going Over Accounting and Review Engagements
Moving through Professional Responsibilities
Chapter 15: Auditing and Attestation Practice Questions
Auditing and Review Services
Auditing with Technology
Audit Sampling
Engagement Planning
Evidence
Internal Control
Reporting
Professional Responsibilities
Chapter 16: Answers and Explanations to Auditing and Attestation Practice Questions
Auditing and Review Services
Auditing with Technology
Audit Sampling
Engagement Planning
Evidence
Internal Control
Reporting
Professional Responsibilities
Part 5: Taxation and Regulation
Chapter 17: Taking a Closer Look at the Taxation and Regulation Test
Addressing the CPA’s Responsibilities
Mulling Over Business Law Issues
Taxing Individuals
Chapter 18: Taxation and Regulation Practice Questions
Agency
Bankruptcy
Business Structure
Contracts
Commercial Paper
Debtor-Creditor Relationships
Regulation of Employment
Federal Securities
Professional/Legal Responsibilities
Taxation
Property
Sales
Secured Transactions
Chapter 19: Answers and Explanations to Taxation and Regulation Practice Questions
Agency
Bankruptcy
Business Structure
Contracts
Commercial Paper
Debtor-Creditor Relationships
Regulation of Employment
Federal Securities
Professional/Legal Responsibilities
Property
Sales
Secured Transactions
Part 6: The Part of Tens
Chapter 20: Ten Common Mistakes on the CPA Exam
Skipping Your Notes When You Review Your Answers
Not Knowing the Language in Audit Reports
Not Understanding Segregating Duties
Applying Accounting Policy Inconsistently
Not Reviewing Financial Ratios by Type
Forgetting to Consider the Type of Taxation
Not Memorizing the Tax Format on Form 1040
Confusing Present Value and Future Value
Failing to Keep the Big Four Type of Costs Straight
Not Considering Employer Responsibilities for Individual Contractors
Chapter 21: Ten Important Formulas to Understand
Breakeven in Total Dollars and Units Sold
Accrued Interest Paid by a Bond Buyer
Double-Declining Balance Depreciation
Multi-Step Income Statement
Inventory Turnover
Receivable Turnover
Effective Interest Rate Method
Special-Order Profitability
Individual Taxation Formula: Form 1040
Liquidity and Solvency Formulas
Glossary of Accounting Terms
Index
About the Author
Advertisement Page
Connect with Dummies
End User License Agreement
List of Tables
Chapter 2
TABLE 2-1 Test Formats and Time Limits on the CPA Exam
TABLE 2-2 CPA Exam Skill Levels and Ranges
Chapter 11
TABLE 11-1 Activities on the Statement of Cash Flows
Guide
Cover
Table of Contents
Title Page
Copyright
Begin Reading
Glossary of Accounting Terms
Index
About the Author
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CPA Exam For Dummies®, 2nd Edition
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Introduction
So you’re interested in becoming a CPA, huh? Good for you! A CPA certification opens all kinds of doors for you professionally that are closed to accountants without this certification. Let me warn you, though: The CPA exam is challenging. You’re going to need to organize and study an enormous amount of data. Lucky for you, CPA Exam For Dummies makes studying for the exam easier.
About This Book
I took the CPA exam myself and passed it in the early ’90s. Passing all four sections took me multiple tries. I really struggled, and I now know why. I didn’t think through the process of creating and implementing a plan of study. I just dove in with no real plan of attack. I wrote this book, in part, to provide that attack plan for you.
I struggled for another reason, too. The test-prep material I used was comprehensive, covering all the topics that were on the exam in detail. What I needed was a text that explained the most frequently tested topics using examples that I could understand.
This book explains concepts by providing examples you may already understand. When my kids learned to tie their shoes, a friend of ours explained that you take the two shoestrings and “make them into elephant ears.” Because our kids could visualize an elephant’s big, floppy ears, the kids could make the loops to tie their shoes. They understood elephant ears, and that helped them with the shoe-tying concept. (At least two of our three children still know how to tie their shoes!)
When people ask me about test-preparation material, I explain that there are lots of great books, videos, and online resources out there. You can find some great material on the web for free. What’s missing, I believe, are tools to explain these complex ideas in a simple way. I hope that you get that clear explanation out of reading this book.
I wrote this latest edition of CPA Exam For Dummies so that each chapter can stand on its own. If you’re like me, you may glance at the table of contents of a book to find a specific topic. This book allows you to find that topic, read about it, and come back to the book later.
This book is your tool to understand and successfully complete the CPA exam, so you’ll see frequent references to “you” rather than “me.” Also, keep in mind that companies sell both products and services. You’ll see examples using both throughout the book. Some companies are manufacturers, and some are retailers. Instead of making a product, retailers typically buy inventory and sell it.
Also note that in accounting, you’ll find situations in which two or more terms mean the same thing. Here are some of the synonymous terms that you find in this book:
Cost of sales
has the same meaning as
cost of goods sold
.
Sales
and
revenue
mean the same thing.
Indirect costs
has the same meaning as
overhead costs
.
Predetermined, budgeted
, and
planned
all mean the same thing.
Audit report
and
audit opinion
are used interchangeably.
Net income
is also
profit
, for the purposes of this book.
Foolish Assumptions
I had to make some assumptions about you, the reader. As I wrote the book, here’s what I assumed:
You’re able to follow basic arithmetic and algebra.
Some of the items you need to calculate appear in the form of equations. The CPA exam often provides numbers that you need to plug into a formula. One number in the formula isn’t provided, so you use algebra to solve for the missing value.
You have a beginner’s level knowledge of how a business works.
You understand that sales less expenses equals profit. You’re aware that a business needs to have capital (cash, equipment, and so forth) to operate.
You’re taking a serious look at studying for and taking the CPA exam.
This book is intended for the reader who has some interest in business or accounting and is considering adding to their skills by taking the CPA exam.
You may have taken some of the tests for the exam and not passed.
You may have several test-preparation books and resources already. You need a method to plan your study, and you need key exam concepts explained more clearly.
You’re willing to read, pause, and assess what you’ve read.
Learning the concepts for the CPA exam takes some effort. It’s not the sort of thing you can rush through. Although the text makes it easy to find information, understanding what you read takes some effort. Given the volume of information on the exam, you’ll likely need to go over the concepts several times to commit them to memory.
Icons Used in This Book
To make this book easier to read and simpler to use, I include some icons that can help you find and fathom key ideas and information.
This icon appears whenever an idea or item can help reinforce your understanding of a concept. A Tip may make it easier to remember a topic.
Whenever you see this icon, you know the information that follows is so important that it’s worth reading more than once.
Pay attention to the Warning icon to avoid pitfalls on the CPA exam.
Beyond the Book
In addition to what you’re reading right now, this book comes with a free access-anywhere Cheat Sheet that includes tips to help you prepare for the CPA exam. To get this Cheat Sheet, simply go to www.dummies.com and type CPA Exam For Dummies Cheat Sheet in the Search box.
You also get access to extra practice questions for each of the six possible tests on the CPA exam, as well as dozens of flashcards to help you practice your CPA vocab. To gain access to the online practice, all you have to do is register. Just follow these simple steps:
Register your book or ebook at
Dummies.com
to get your PIN. Go to
www.dummies.com/go/getaccess
.
Select your product from the dropdown list on that page.
Follow the prompts to validate your product and then check your email for a confirmation message that includes your PIN and instructions for logging in.
If you do not receive this email within two hours, please check your spam folder before contacting us through our Technical Support website at http://support.wiley.com or by phone at 877-762-2974.
Now you’re ready to go! You can come back to the practice material as often as you want — simply log on with the username and password you created during your initial login. No need to enter the access code a second time.
Your registration is good for one year from the day you activate your PIN.
Where to Go from Here
This book is organized so that you can go wherever you want to find complete information. Need to know about the regulation test, for example? Head to Chapter 17. If you want to know about the prerequisites for taking the CPA exam, start at Chapter 3. You can use the table of contents to find broad categories of information or the index to look up more specific things.
If you’re not sure where you want to go, you may want to start with Part 1. It gives you all the basic info you need to understand the CPA exam and points to places where you can find more-detailed information.
Part 1
Getting Started with the CPA Exam
IN THIS PART …
Find out what it takes to become a CPA — and why all the work is worth it.
Become familiar with the structure of the exam and what types of skills it tests.
Find out how to register for the exam and what to expect when you arrive on test day.
Put together a study plan that works around your busy life to ensure that you’re as successful as possible on the exam.
Get to know the types of questions you’ll see on the exam so that you can answer them with confidence.
Chapter 1
So You Want to Become a CPA
IN THIS CHAPTER
Considering the benefits of a CPA designation
Mulling over what a CPA does
Weighing the CPA credential with other designations
Acertified public accountant, or CPA, is a valuable credential in the world of accounting and finance. To gain the credential, a candidate must pass the CPA exam. Before you put in the work to prepare for the exam, though, make sure you understand the CPA designation.
In this chapter, you discover the added responsibilities that may come with a CPA designation. CPAs have a higher level of expertise and responsibility than non-CPA accounting professionals. As a result, many senior-level accounting positions require a CPA. Next, you go over the type of work that CPAs perform. The designation allows you to work in a variety of accounting positions. Finally, you look at a comparison of the CPA credential to other designations in the accounting profession.
Added Responsibilities with a CPA Designation
A CPA designation can allow you to advance your career beyond those people who simply earn an undergraduate degree. That’s because the CPA exam tests you on a set of skills that are more specific than you find in an undergraduate business program. Also, the sheer amount of information tested makes passing the exam a real accomplishment. In this section, you see some of the additional responsibilities that come with a job that requires a CPA credential.
Many successful people in business, government, and the not-for-profit world started out as CPAs. That may be because CPAs understand how an entire entity works. An accountant has to understand each process within an organization, because they’re responsible for posting the accounting transactions for those processes.
CPAs also generate the financial statements for the entity. To put together the statements, an accountant has to understand how the entire organization operates. It’s the CPA who often must answer to stakeholders regarding the financial statements. Stakeholders include regulators, lenders, and investors, to name a few. Here are some typical issues that a stakeholder may bring up with a CPA:
Balance sheet and debt: A potential lender to the company may want details on the amount of debt a business already owes to creditors. Some lenders compare the company’s total debt to total assets. That ratio indicates the assets a company can sell to pay off debt, assuming that the company can’t make payments of principal and interest.
You can compare this situation to using a car as collateral for a loan. If the car buyer can’t make the payments, the lender can sell the car to recover some (or all) of the amount loaned.
Stockholders and earnings:
A common-stock owner may look into the amount of earnings an entity generates. One measurement of earnings is
earnings per share
(EPS). EPS is defined as the company net profit divided by average common stock shares outstanding. This ratio explains the dollar amount of earnings that a business generates for each common stock share.
Average common stock
is defined as follows:
Many investors feel that EPS is an indication of a common stock’s value.
Regulatory requirements:
Regulators require many financial institutions to maintain a certain amount of
equity
, which is defined as assets minus liabilities. To a regulator, equity represents funds available for investors. If a financial institution violates a rule or regulation, the business can repay investors using its equity.
You can understand equity using this example. Assume that a company sells all of the assets for cash and uses the cash to pay all liabilities. Any amount of cash that is left over is equity.
Considering What a CPA Does
A big advantage of the CPA credential is that it increases the variety of tasks an accountant can perform. Like many professionals, a CPA may specialize in a field or branch out into other areas of the profession.
This section explains what a CPA does and specific types of positions that are staffed by CPAs. Many of the jobs are useful in a variety of industries. Retailers and manufacturers, for example, both need tax returns and financial statements prepared. Although specific industry knowledge is important, CPAs have a set of skills that are largely transferrable.
Many businesses will hire accountants without a CPA to operate in accounting positions with less responsibility. A staff accountant handling accounts receivable or accounts payable may not have a CPA designation. Other positions with more responsibility will require a CPA. The company controller and chief financial officer are typically CPAs.
Accounting work and controller positions
One big distinction between types of accounting work is accounting versus tax. Accounting is thought of as posting transactions and generating financial statements. Tax, on the other hand, refers to tax planning and filing tax returns. This section discusses accounting work.
A chief executive officer (CEO) is responsible for hiring senior management, and one of those positions is chief financial officer (CFO). The CFO has overall responsibility for all financial matters of an organization. Here are some specific tasks that a CFO must manage:
Controllership:
Controllership
refers to maintaining control over the financial transactions of a company. The CFO needs to ensure that the accounting transactions are posted correctly.
Controllership
also refers to generating accurate and timely financial statements shortly after the end of each month and year.
Treasury:
Treasury
refers to the cash needs of a company. Businesses use debt and equity in some combination to raise
capital
, which refers to the cash and other assets the company acquires to fund the business. The decision on how much debt or equity to raise is in the hands of the CFO. The CFO plans for short-term cash needs to operate the company each month. The CFO also plans for long-term financing needs, such as planning for an expensive purchase (building, equipment, machinery, and the like).
Financial strategy:
The CFO has overall responsibility for financial strategy. This includes analyzing company profit by department or product line. A CFO is expected to recommend how each department can make changes to improve profit. Because nearly every company has a limited amount of capital, the CFO needs to analyze how that capital should be used to maximize earnings. That may mean buying a new piece of equipment for Department A and closing the operations of Department B. A CFO works closely with the company’s operations managers to make processes more efficient.
The CFO is both an accountant and a manager. Here are some of the positions the CFO will hire and manage:
Controller and treasurer:
The CFO hires a controller to manage the accounting transactions and financial-statement process. They also hire a treasurer to manage the treasury activities.
Accounting manager:
A CFO, using input from the controller, may hire one or more accounting managers. These managers are responsible for certain areas of the controllership process. One manager, for example, may handle the company’s accounts receivable process. That manager processes sales, receivables, and bad-debt transactions. The position also includes reporting financial results to the controller and CFO.
Staff accountant:
Accounting managers, in turn, hire staff accountants. This type of position is responsible for the day-to-day transactions of a company. If the staff accountant works with accounts receivable, they review incoming customer payments and reduce accounts receivable. That same person analyzes credit sales and posts accounts receivable. A staff accountant position may be the first position you work in as a CPA.
Not all companies have all the accounting positions I explain here. A small company may have a CFO, controller, and a few staff accountants; no accounting managers are needed to manage the company’s accounting work.
Auditing, reviews, and compilations
CPAs fill the role of a third-party auditor. An auditor is a CPA who is independent of the company under audit. Independence means that the only relationship that the CPA has with the business is the fee paid for the audit. An audit occurs when an auditor performs procedures on the company’s financial statements. The auditor uses the procedures to gather evidence about the financial statements. After completing an audit, the CPA provides a written opinion on whether the financial statements are free of material misstatement.
When discussing an audit, the word “material” refers to a misstatement (mistake) that is large enough to impact the opinion of the financial statement reader. So how large? Well, materiality is a matter of judgment. A $200 misstatement may not get the reader’s attention, but a $30,000 misstatement is reason to question the accuracy of the numbers.
Reviewing jobs in the field
CPA firms perform audits. These organizations are typically partnerships formed by CPAs. Here are some of the positions you find in a CPA firm:
Partner:
A partner has an investment in the partnership. The partner is responsible for the management of a particular group of audit clients. Like a CFO, the partner selects an audit staff and manages the audit. Audits involve layers of review. The audit partner is responsible for the final review of the audit work.
Manager:
A manager works for the partner. Each manager may be responsible for several audits that are in process at the same time. The manager reviews the work of the audit staff below them. The manager is the main contact for the audit client’s staff.
Senior:
A senior has day-to-day responsibility for the audit work performed. This individual is present at the client’s offices during the audit’s fieldwork.
Fieldwork
refers to when the auditors gather evidence at the client’s offices. The auditor and the client agree on when and how long fieldwork will take place.
Staff accountant:
Staff accountants perform the bulk of the audit procedures. This may include testing accounting transactions using company documents or interviewing the client’s staff. If you join a CPA firm’s audit department, you’ll probably start as a staff auditor.
Going over the audit process
When planning an audit, the CPA firm creates an audit program. An audit program documents the procedures that will be performed for each area of the audit. An audit of cash, for example, will include a review of the client’s bank account reconciliations. The auditor will use the bank statement and the client’s cash activity to review the reconciliation of each bank account.
Everyone involved with the CPA firm’s audit will follow the steps in the audit program. After the staff accountant or senior completes a step on the audit program, the manager and the audit partner will review the work. The senior reviews the work of each staff accountant. The multiple layers of review ensure that each step in the audit program is performed and that sufficient audit evidence has been gathered.
After the audit evidence is gathered during fieldwork, the senior and manager work on the audited financial statements. Each number in the financial statements is audited to some extent. The auditors compare their audit results with the company’s financials. If differences exist, the auditor may propose an adjustment.
An adjustment is a proposed accounting entry to correct the financial statements. That correction may be to fix an error or to clarify an accounting issue. Adjustments are also posted based on judgments and estimates. A bank, for example, estimates the dollar amount of loans that won’t be repaid. The bank then posts an entry to account for bad debt expense. An auditor may propose that the bad debt expense be increased or decreased.
The client can accept the adjustment and post the accounting entry. A client may also reject posting the adjustment. If the client rejects the proposed adjustment, that decision may impact the auditor’s decision on the audit opinion. For example, an auditor may feel that the dollar amount of the adjustment requires disclosure to the financial-statement reader. The auditor may add language to the audit opinion about this area of concern.
CPA firms perform other projects that aren’t considered audits, such as reviews and compilations. In these instances, the auditor isn’t giving an opinion as to whether the financial statements are presented fairly. Instead, the CPA reviews the financials for proper formatting and reasonableness. If you work for a CPA firm, you’ll probably work on several types of engagements.
Preparing tax returns
Besides auditing, the other large area of business for a CPA firm is tax preparation. You’ll find that larger CPA firms provide both audit and tax services. Smaller firms may provide only tax services. Given the complexity of the IRS tax code, many CPAs who specialize in tax issues work on tax preparation and planning year-round.
Depending on the size of the firm, you may see the same partner, manager, senior, and staff structure that I discuss in the earlier section “Reviewing jobs in the field.” If you’re interested in pursuing a CPA career by opening your own small business, preparing tax returns may be a way to start.
When you consider a career in either audit or tax, keep these thoughts in mind:
Seasonality of tax: Working in tax requires a tremendous number of hours between January 1 and April 15. That’s because corporate and other business tax returns as well as personal tax returns are due in the March and April timeframe. To succeed as a tax preparer, you need the ability to maintain a focus on detail while working long hours.
Audit work includes heavy hours during the same timeframe. Most companies have a December 31 year-end, so the first quarter of the following year is a busy time for organizing and preparing year-end financial information. However, auditors can plan work and perform some procedures before December 31. In addition, some companies have fiscal year-ends that are at different points during the year. As a result, the work of an auditor can be more spread out during the year than tax work.
Less interaction:
Generally, tax preparers spend more time in the office working on technical issues. Audit, on the other hand, requires time at the client location. Fieldwork represents time at the client’s offices performing work and talking to client personnel. If you’re more outgoing and prefer more human interaction, audit may be a better choice than a career in tax.
Travel:
Auditors need to travel to client locations. Sometimes that travel may be difficult to plan and predict. If fieldwork takes longer than expected, an auditor may need to stay out of town longer. Generally, auditors try to work heavy hours while out of town. This approach allows them to finish the fieldwork as soon as possible. Tax accountants, on the other hand, generally travel much less.
Both audit and tax work require you to spend time on continuing education. As you see later in this chapter, some continuing education is required by the CPA profession. You’ll need to spend even more time learning about your field. If you’re an auditor, you’ll learn about the industries of the clients you audit. Tax specialists need to stay on top of changes in the tax code.
Larger CPA firms have auditors who specialize in particular industries. They might, for example, develop an expertise in financial service audits. Most of the audits you work on will be in that area. As you learn more, you’ll be able to complete audit procedures more quickly. You’ll also be better prepared to ask the client intelligent questions.
Audit clients want the CPA firm to staff the audit with accountants who know their industry. That knowledge means that the auditor can minimize the time that they need with client personnel. The audit process goes more quickly, and the CPA firm can spend less time on fieldwork.
Branching out into other careers
CPAs often become successful leaders in a variety of fields. One reason is that accountants work with a company ’s entire operation. CPAs see how each department operates and how it contributes to company profit. It naturally follows that a CPA can move into company management, because they know how everything works.
Given this concept, many people obtain their CPA credential with the intention of moving into a non-accounting career. Here are just a few examples of careers that are staffed by CPAs:
Company management:
Broad knowledge of a company’s business allows a CPA to move into management positions. The controller of the furniture manufacturing division, for example, may be a candidate for the vice president of operations. The controller must understand operations to handle the division’s accounting properly.
Financial analyst:
Financial analysts perform work for company senior management. Analysts also work for investment companies that recommend stocks and bonds of other businesses as investments for their clients. Many of the skills you learn and use as a CPA are transferrable to this career.
Bankers and other lenders:
Bankers and other lenders make decisions about a company’s ability to generate sufficient earnings to make loan payments. Lenders analyze the balance sheet to determine whether a business has sufficient assets to serve as collateral for a loan. This work requires many of the skills used by CPAs.
Comparing a CPA to Other Credentials
Two credentials are similar to the CPA designation: chartered financial analyst (CFA) and certified valuation analyst (CVA). As you move forward in your career, you may consider getting one of these other credentials, along with your CPA designation. Many people who work in these two fields have experience as CPAs.
Checking out the chartered financial analyst (CFA) credential
A chartered financial analyst (CFA) uses several skill sets to perform analysis on both companies and investment opportunities. You can find out details about the designation at www.cfainstitute.org. To obtain this credential, an individual must pass three exams, which are referred to as levels 1, 2, and 3. Here are some of the topics tested on the CFA exams:
Quantitative methods:
Many of these concepts are taught in statistics classes, which you’ve likely taken if you’ve completed an undergraduate business or accounting degree. Quantitative methods include time value of money, probability, and other types of analysis.
Economics:
This area includes the study of supply and demand, business cycles, inflation, and foreign currency exchange rates.
Corporate finance:
Corporate finance goes over the decision-making process of raising capital and investing capital in a business.
Portfolio management:
This area covers the concept of portfolio management and wealth planning. These areas refer to decisions about the types of investments a money manager selects. CFA exams cover many types of investments, including derivatives.
If you’re more interested in analysis than generating financial statements, you may prefer working as a CFA.
Mulling over the certified valuation analyst (CVA) credential
A valuation places a dollar value on assets that may be difficult to value. A good example is an intangible asset, such as a patent, customer list, or trademark. A CVA takes a set of financial statements and performs additional work to compute company valuations.
A business may need to obtain a valuation in several circumstances. When a buyer and seller are negotiating the sale of a company, the parties may hire a CVA to compute the company’s value. The price paid for the business may be very different from the book value of the assets, which is defined as assets minus liabilities.
Most industries have valuation benchmarks that drive the price paid for companies in that industry. Say, for example, that clothing manufacturers typically have a sale price based on three times the annual sales in dollars. In that case, the buyer and seller will compute three times sales and include that amount in their negotiation of a price for the company. CVAs explain and provide this type of analysis.
CVAs may also be involved when the value of a company must be determined in a legal matter. If two partners are in a legal dispute over their share of the company’s value, a CVA may be retained to determine the value of the partnership.
You can find out more on the CVA designation at www.nacva.com.
Understanding the CPA Licensing Requirements
The Uniform CPA Examination is developed and graded by the American Institute of CPAs, or AICPA, which is the world’s largest member association for the accounting profession. The AICPA exists to set accounting standards and to support and expand the accounting profession. You can find lots of great information at their website (www.aicpa.org).
The purpose of the CPA exam is to fulfill one of several requirements for a license to practice public accounting. Passing the exam qualifies you to be certified by a state. Although the exam is the same in every state, you obtain a license to practice from a State Board of Accountancy.
A certified public accountant is someone who has earned a license in their state. Check out www.thiswaytocpa.com to find out the requirements for your state. Each state has requirements that address three specific areas: education, experience, and ethics.
Going over education requirements
All states require a bachelor’s degree to meet the education requirement, and the degree does not have to be in accounting. CPA candidates must also have 150 semester hours of college credit.
States added the extra hours to the education requirement because they feel that a bachelor’s degree doesn’t cover all the skills sets needed for the CPA profession. The accounting profession adds rules and regulations each year. These added requirements mean that the CPA candidate needs a larger body of knowledge. As technology becomes more complex, the CPA must learn more to use technology effectively.
Meeting the experience requirement
Most states require at least two years of experience in the accounting profession. The type of experience required also varies by state. In some cases, the work must be with a public accounting firm. Many firms will hire accountants who are not yet CPAs. These accountants work lower level accounting positions until they pass the CPA exam. At that point, they may be promoted into positions with more responsibility.
Some companies will help an employee pay for the CPA exam and a review course. Ask potential employers whether they offer this type of benefit.
Addressing ethics
State Boards view ethics as very important because CPAs have a great deal of responsibility. CPAs fill most of the senior accounting positions at companies. One primary responsibility is to generate financial statements. If an unethical CPA produces financial statements that are intentionally incorrect, the impact can be enormous.
Because the CPA’s potential impact on stakeholders is so great, nearly all State Boards of Accountancy require an ethics exam, known as Rules of Professional Conduct. Many also require continuing education for CPAs in the field of ethics.
Walking through CPA Exam Topics
To pass the CPA exam, you must pass four exams. Here are the first three:
Auditing and attestation (AUD):
This test covers the process of planning and implementing an audit. The test requires you to know a great deal of the language that’s used to write audit opinions. Reviews, compilations, and other engagements are on the AUD test.
Financial accounting and reporting (FAR):
The FAR test covers the nuts and bolts of working as an accountant. You need to know how to account for a variety of accounting transactions, including accrual entries. This test also covers financial-statement presentation.
Regulation (REG):
REG covers many issues you may see in a business law class, including agency and sales law concepts. A large portion of the REG test addresses taxation of businesses, trusts, and estates as well as individual taxation.
CPA candidates choose the fourth exam based on their areas of interest and the work they prefer. Candidates choose one of three discipline exams: Business Analysis and Reporting, Information Systems and Controls, or Tax Compliance and Planning. Head over to Part 2 for more information on the discipline exams.
Chapter 2
Getting Acquainted with the CPA Exam
IN THIS CHAPTER
Understanding the topics on the CPA exam
Going over how the exam is administered
Walking through the specific skills outline
Looking at scoring
After you decide to get the CPA credential, you need to become familiar with the CPA exam. In this chapter, you do just that. You find out about the four tests that make up the exam. From there, you move on to understanding the exam format. The format section of this chapter goes over the different ways the exam tests your knowledge and skills. Some questions require problem-solving skills, and others focus on completing a task within a simulation. Finally, you gain an understanding of how the exam is graded.
Knowing What’s on the Exam
The CPA exam consists of four separate tests, three required core examination tests and one discipline test of your choice, which mirror the types of tasks a CPA may have to perform. For example, some accountants perform audits and other third-party reviews of financial statements, and those tasks are tested in the auditing and attestation (AUD) test. The following sections provide an overview of each of the six tests, four of which you will take for the CPA exam.
The AICPA’s document “Uniform CPA Examination Blueprints” explains the tests in detail, listing the percentage of test questions for each particular topic. For example, the document explains that “ethics, professional responsibilities, and general principles” questions make up 15 to 25 percent of the AUD test. Knowing which areas have the most questions can help you study effectively. You can schedule each test individually, and you can take the tests in any order. To search for and download the document, visit the AICPA website, www.aicpa.org.
You register for each test individually, and you can decide the order in which to take the tests. Each test has a 4-hour time limit, so you don’t take all four tests in the same day.
The three discipline tests
CPA candidates choose one of the three discipline tests when they take the CPA exam. You can decide which test you take based on your strongest area of interest and expertise. Here’s an overview of the three discipline tests.
Choosing the business analysis and reporting (BAR) test
If you’re interested in working as an auditor or eventually as a CFO, the BAR test may be the right choice for you. This test focuses on financial statement analysis and reporting, technical accounting, and company operations management. When you study for BAR, you’ll dig into more complex accounting topics, including business combinations. These topics prepare you to audit company financials and to make complex accounting decisions.
Going with the information systems and controls (ISC) test
Businesses have a growing amount of data available to manage operations, and data must be monitored and protected from potential theft. The ISC test covers technology and business controls, and addresses information systems, security, and IT audits. If you’re interested in IT management issues, take the ISC test.
Studying for the tax compliance and planning (TCP) test
This test is a fit for CPA candidates interested in advanced tax issues and financial planning strategies involving taxes. The test covers individual tax topics, including transactions that are included in gross income and gift tax issues. Advanced business topics include the tax impact of business formations, company sales, and consolidations.
Financial accounting and reporting
The three required core tests are financial accounting and reporting (FAR), auditing and attestation (AUD), and taxation and regulation (REG).
One of the core tests covers financial accounting and reporting transactions. Accountants have guidelines on how to record accounting transactions and present financial statements. The process of creating financial statements is called financial reporting. For example, suppose you have a bank loan. The loan requires you to repay a part of the $10,000 of the principal amount (the original amount borrowed) each year. Financial reporting requires you to separate the amount due within a year (a current liability) from the remaining loan balance (a long-term liability). Now the financial-statement reader can make a more informed decision about the company’s debt position. If a large amount of the principal is due within a year, that might put a strain on the company’s available cash.
The FAR part of the exam frequently tests your ability to
Prepare and review source documents and post activity in the accounting records (
Source documents
are the original records that support an accounting transaction, such as an invoice from a client or a shipping document.)
Identify which financial accounting and reporting methods are appropriate for a given situation
Perform financial analysis, including variance and trend analysis
Produce financial reports to meet regulatory requirements
Auditing and attestation
The auditing and attestation (AUD) test involves concepts that are related to auditing financial statements and other engagements. An engagement is the work that a client hires an accountant to perform. An audit takes place when a CPA firm performs procedures on a company’s financial statements. Based on those procedures, the auditing firm provides an audit opinion.
Here are some of the frequently tested areas in the AUD part of the exam:
Accepting the audit or attestation engagement
Understanding the entity and the entity’s controls over accounting procedures
Performing audit procedures and assessing audit evidence
Evaluating audit findings and writing the audit report
Taxation and regulation
The taxation and regulation (REG) test covers the ethics and professional responsibilities of a CPA. It also addresses business law and federal taxation.
Here, the exam describes business situations and asks whether the accountant’s behavior is ethical, based on professional standards. For example, suppose a CPA who is performing an audit of Acme Company also owns a business that sells raw materials to Acme. Professional standards require that a CPA performing an audit be independent of the client. Independence means that the CPA’s only business relationship with the company is the audit work being performed. Because the CPA has an additional business relationship with Acme Company, the CPA is not independent. The accountant should resign from the audit.
The REG test also addresses the behavior of clients. Say that Timberrr Lumber has a policy that sales revenue is posted to the accounting records when goods are shipped to a customer. Timberrr is having a poor sales month and wants to post as many sales in the last few days of the month as possible. On the 29th day of the month, the lumber company receives a $5,000 order from a customer and posts that amount as sales revenue. Because that transaction isn’t consistent with Timberrr’s revenue recognition policy (the $5,000 order hasn’t been shipped yet), a CPA performing an audit on Timberrr should insist that the $5,000 sales revenue be removed from the accounting records.
Financial statements are the responsibility of company management. A company accountant or outside CPA firm can recommend changes to the accounting records. However, management is ultimately responsible for generating financial statements that fairly present the company’s financial position.
Completing the tax portion of the REG test is similar to the process of preparing tax returns. The candidate needs to know many of the rules for both individual and corporate taxation. The exam provides details about a tax client, and you have to calculate the tax impact of those details.
Finally, the REG test covers your basic knowledge of business law. It includes topics such as contracts, the relationship between agents and principals, and the Uniform Commercial Code (UCC).
Understanding the Exam Format
Many people have more success on an exam if they can visualize what will happen after they walk into the room to take the test. In this section, you find out about the technical aspects of the CPA exam and the types of questions you encounter.
Navigating the online tests
You take the CPA exam by computer. Here are some important features of the exam software:
Toolbar: The toolbar displays the test and the testlet you’re currently taking. A testlet is a section of a test; the regulation test, for example, contains two testlets of multiple-choice questions.
The toolbar also displays the amount of time remaining to complete the exam and provides a calculator and exit button. For more complex portions of the exam, the toolbar gives you access to a spreadsheet tool. The spreadsheet allows you to perform some simple calculations (add, multiply, and so on), just like an Excel document. For more complex formulas, you’ll need to use your calculator. Because the CPA exam requires you to know many formulas, you won’t find those formulas in the spreadsheet tool.
Tabs:
Some exam questions, called
simulations
, provide extra information that you use to solve the question. You can access this info using tabs at the top left portion of the screen.
Navigation between questions:
The question numbers for your current testlet are listed at the bottom of the screen, and the question you’re currently working on is inside a red box. At a glance, you can see which question you’re on and how many questions remain in the testlet. The computer presents the questions in numbered order. You have the ability to skip a question as well as the ability to go back to any question to review or change an answer.
Testlet directions:
Each of the four tests (FAR, AUD, and so on) is divided into testlets. When you begin each testlet, you see directions for completing questions in that section of the test. The directions are displayed at the far left at the bottom of the screen, to the left of the numbered questions.
Multiple-choice questions:
To answer a multiple-choice question, click on the radio button next to the single best answer. If you want to change your answer, click on the radio button for your new answer choice.
Task-based simulation questions:
Task-based simulations provide extra resources to complete a question. After working on the question, you input your answer on the computer screen. In some cases, you choose an answer from a drop-down menu. For a journal entry, you may type in the accounts and dollar amounts to post the entry. Finally, you may be asked to type in paragraphs of text to answer in an essay format. The test provides spellcheck and some other features you may use with other word processing programs, such as Microsoft Word.
For more help on how to use the CPA exam software, watch the tutorial on the AICPA website (www.aicpa-cima.com/).
Encountering different types of questions
You can divide the CPA exam questions into two broad categories:
Knowledge and understanding:
The exam uses multiple-choice questions to test your knowledge and understanding of facts and figures. This is the you-know-it-or-you-don’t part of the exam.
Application of a body of knowledge:
Task-based simulations test your ability to apply knowledge to an accounting situation. The exam provides you with resources, such as a page of authoritative literature or a spreadsheet, and you have to figure out what to do with them.
The later section “Going Over the Skills You Need to Succeed on the Exam” outlines the skills you need to pass the CPA exam and relates those skills to each type of test question.
Looking at the structure of the tests
Table 2-1 shows the number and kinds of questions you find on each test. All four tests on the CPA exam include multiple-choice questions and task-based simulations, which are case studies.
TABLE 2-1 Test Formats and Time Limits on the CPA Exam
Section
Section Time
Multiple-Choice Questions (MCQs)
Tasked-Based Simulations (TBSs)
AUD — Core
4 hours
78
7
FAR — Core
4 hours
50
7
REG —Core
4 hours
72
8
BAR — Discipline
4 hours
50
7
ISC — Discipline
4 hours
82
6
TCP — Discipline
4 hours
68
7
CREATING THE TESTS
All the questions you see on the exam have been reviewed extensively to ensure that they’re technically correct and to verify that there’s one best (or correct) answer for each question. The AICPA refers to this process as subject matter review. If a question involves judgment, it needs to have one answer choice that’s better than the others listed. A question testing a calculation or a fact needs one correct answer.
The CPA exam includes pretest questions so that the test-makers can see whether the questions are suitable for a future CPA exam. Part of that evaluation is how well (or poorly) students answer a pretest question on an actual exam.
The subject matter review also ensures that each exam question tests the content in the AICPA’s document “Uniform CPA Examination Blueprints.”
Each test contains both operational and pretest questions. Operational questions are scored and included in your grade. Pretest questions aren’t graded (see the nearby sidebar “Creating the tests” for details). CPA candidates answer as many questions as they can and don’t know which are operational or pretest questions.
The multiple-choice questions within each test are divided into three groups called testlets. Each exam question is assigned a medium or difficult rating, which is taken into account when your exam is scored (see the later section “How Did You Do? Knowing How the Exam Is Graded”).
Most exam candidates take only one test on a single day. As you can see in Chapter 4, you should plan your study over a period of months. It isn’t necessary to take more than one test on one day.
As mentioned earlier, you take the three core tests and choose one discipline test. You can take the tests in any order, and the period of time to complete all four tests is the same. You also follow the same procedures for canceling and scheduling a new test date. You’ll find more details on scheduling your tests in Chapter 3.
Going Over the Skills You Need to Succeed on the Exam
One challenge for you as a CPA exam candidate is that you must switch gears as you move through the tests. With multiple-choice questions, you need to have a plan to eliminate incorrect answer choices. Writing a memo or a set of directions, on the other hand, requires you to put your thoughts in a logical order.
You may shift gears more smoothly if you know the skills you need to succeed on the exam. In the following sections, you take a look at simulations in detail and assess the skills needed to answer simulation questions. For a strategy for answering multiple-choice questions, see Chapter 5.
Some questions move beyond asking you to define a concept. Simulations require you to apply a body of knowledge to an accounting issue. You’re given a variety of tools, which may include a calculator, a spreadsheet, or some authoritative literature, and you have to figure out how to use those resources to complete a task.
Every CPA must apply knowledge to a particular type of business or industry. This skill is used by a CPA firm auditing a client and by the CPA who works for a particular corporation. The exam tests your ability to assess a company’s business environment. That assessment may include the following skills:
Evaluation of a business process:
In this case,
evaluation
