Task-based simulations are a significant portion of your overall score on each section of the CPA exam. These CPA simulations require you to apply accounting knowledge to a particular situation.
CPA simulations are more complex than multiple-choice questions and are often similar to a case study requiring high level problem solving skills. To reduce your anxiety about CPA exam simulations, you’ll need a solid study plan and all the tips covered below!
Understand The Resources
Each simulation question gives you access to authoritative literature, and you need to be familiar with each type of resource from which they are derived:
- AICPA Professional Standards: Resource provided for the Auditing and Attestation (AUD) test.
- FASB Codification: Resource available for the Financial Accounting and Reporting (FAR) test.
- Tax Code: Used as a resource in the Regulation (REG) test.
As you study for CPA exam simulations, use these resources. Become familiar with them and your study preparation will be much easier. Remember to search these resources and find the information you need to answer a question if you get stuck.
You may also be asked to use a spreadsheet for calculations. If you’re familiar with Excel, the spreadsheets on the exam should be familiar to you. Otherwise, it may not be a bad time to brush up!
Have A Plan Of Attack
When you see a simulation question, you need a plan of attack.
Here’s what I mean:
- Question the content: Start by writing down some words and phrases to help you recall facts about the topic. The most important step in the audit of inventory is to perform a physical count, which compares the detailed inventory listing to the items on hand. Each physical item is tagged for an inventory count. You might write down “inventory count”, and “inventory tags” to jog your memory.
- Using authoritative literature: You may also have access to authoritative literature, such as the AICPA Professional Standards text for the AUD exam. You can then use the phrases that you wrote down to perform a search, such as “inventory audit” or “inventory count”. Once the computer pulls up the correct reference, keep the reference handy to review later.
- Multiple-choice questions: You may have some multiple-choice questions on the same topic in your test. Answering or revisiting those earlier questions may help you remember important facts about the simulation.
Use this process to gather the information you need to answer a CPA simulation question.
To answer CPA exam simulations effectively, it’s important to understand the types of questions that are asked. If you’re familiar with these categories, you’ll be able to determine the purpose of the question quickly and answer them effectively.
- Process Evaluation: The CPA exam asks questions about a particular business process and may require you suggest changes to improve the process. If you’re asked to analyze a manufacturing process, for example, you may find out that production slows when a certain vendor does not ship raw materials on time. The production process would improve if the company can find another vendor who can ship materials on time.
- Analysis: You may be asked to analyze financial statement data, and to identify potential problems in the business. For example, if the percentage increase in accounts receivable is growing faster than the percentage growth in credit sales, a firm may eventually run short on cash.
- Problem solving and judgment: The accounting profession requires the use of judgment; you may see simulation questions that require you to use judgment to support a point of view. If there is uncertainty about when to post an expense, for example, the accounting principle of conservatism requires a CPA to post the expense sooner, rather than later. You may be asked to apply that principle to a particular accounting transaction.
Keep reading for more specific tips on CPA exam simulations:
Recognize Consistent Use Of Policies
Here’s another helpful hint:
A company must consistently use the same accounting policies each year in order for the financial statements to be comparable. For example, if a firm uses the first-in, first out (FIFO) method of accounting for inventory, they must stick with that method each year. In the same way, a business must use the same depreciation method from one year to the next.
You might be wondering: what does this have to do with my upcoming CPA exam?
There are some dead giveaways on exam questions when the issue of accounting policies is involved. For example, any change in policy should be a red flag to you. In most cases, a change in policy requires a company to report the impact on net income resulting from the change. So if a hypothetical firm changes from the FIFO inventory method to last-in, first out (LIFO) method, the impact on net income must be disclosed.
Understand Relevant vs. Fixed Costs
Both the FAR and BEC tests may ask questions regarding relevant costs: costs that may change based on a particular decision. Alternatively, they may ask about fixed costs, which aren’t relevant because they cannot be changed.
A good example of a relevant vs. fixed cost is a special order that comes into a business near the end of the month. These are different from fixed costs, such as the lease payment on a factory building, that have already been paid for using sales and profits generated earlier in the month. As a result, these fixed costs are not included as a cost when pricing a special order, making it a relevant cost.
Want to know the best part?
A firm may be able to reduce the price of a special order because fixed costs are not included.
Brush Up On Adjusting Entries
A FAR simulation question may ask you to post adjusting entries, which are required for accrual accounting. This is an area of confusion for exam candidates, so remember that an adjusting entry requires one income statement account and one balance sheet account.
If you owe $5,000 in payroll expenses in the last week of December, for example, and the payroll won’t be paid until early January of the next year, here is your adjusting entry:
- Debit wage expense: $5,000 (Income statement account)
- Credit accrued wages payable: $5,000 (Balance sheet account)
When payroll is paid in January, the wages payable account is debited (to remove the liability), and the cash account is credited to make the payment.
Remember to use one income statement account and one balance sheet account for adjusting entries. Consequently, you’ll be able to approach any relevant CPA simulations the right way.
Simulation questions on the CPA exam can seem overwhelming, because they require more work than the multiple-choice items. But if you enter the exam with an understanding of the questions and a plan of attack, you can answer questions accurately.
Here’s a quick recap of the terms and concepts outlined above:
- Process evaluations are a type of scenario commonly encountered when answering CPA exam simulations. After being given an example of a business’ process, you may be asked what can be done to improve it.
- Accounting policies are consistent in the vast majority of cases. That means that any questions regarding the use of accounting policies will most likely require consistency with prior examples.
- Relevant costs are business expenses that will increase or decrease based on variable factors.
- Fixed costs, on the other hand, will remain the same consistently.
- Adjusting entries is a component of accrual accounting. It requires an income statement account and a balance sheet account.
Thanks for reading and good luck on your upcoming CPA exams!