Your Ask Joey ™ Answer

CPA Exam FAR Tips to Remember on Exam Day

The Financial Accounting and Reporting (FAR) section of the CPA Exam is considered the hardest of the four sections by many. One of the main reasons for this is because of how much information is testable. The AICPA blueprint outlines the four sections of the FAR CPA Exam section and we cover this in much more detail in our FAR Exam study guide.

Just because studying for the FAR exam is challenging, doesn’t mean that it isn’t doable. Universal CPA Review has outlined an important tip for one topic of the FAR CPA Exam that is heavily tested on the exam.

Start a free 7-day trial with Universal CPA Review today.

Trade Receivables:

Trade receivables requires that you calculate the income statement impact and the balance sheet impact. On the FAR exam you should know both the percentage of sales method and the allowance method. The percentage of sales method is one of the allowance methods that is allowed under US GAAP. The method is tested on the FAR section of the CPA exam, and students in accounting courses are often tested on this concept as well.

The percentage of sales method focuses on the income statement (I/S) as the company will determine the amount of bad debt expense to record in the period based off revenue or credit related sales. From there, they will rollforward the allowance for doubtful accounts balance. This method is often used to record bad debt expense through the year and then another method (% of AR or AR aging method) is used to establish the ending allowance for doubtful accounts balance at the end of the period.

Example Percentage-of-Sales Method

Step 1) We’ll start by calculating bad debt expense that should be recorded based on the amount of credit sales in the period. Multiply the amount of credit sales by managements estimate, and you arrive at bad debt expense to record for the period.

Step 2) Once we have the amount of bad debt expense, we can plug that into the allowance for doubtful accounts rollforward, along with any write-offs or recoveries in the period, to determine the ending allowance for doubtful accounts balance.

The journal entry to record additional bad debt expense of $10,000 in the period would be as follows:


Back To All Questions

You might also be interested in...

  • Three Reasons to Become an Accountant

    If you’re someone who is intrigued by numbers, enjoys problem-solving and wants to help others, then accounting might be the perfect career for you. While some people may be put off by its unalluring reputation, accounting is an excellent career choice that has many benefits. In this article, we look at three of the reasons...

  • Qualified Retirement Planning: Tax Advantages & Disadvantages

    Home Advantages and Disadvantages of Tax-Free and Deferred-Tax Retirement Plans What are “qualified retirement plans” and how can they be effective for tax planning? Well, there are plenty of tax savings advantages to individuals contributing to tax-free retirement accounts, as well as tax-deferred retirement accounts. However, this doesn’t necessarily mean that there are no disadvantages...

  • CPA Evolution Survival Guide

    Download Your eBook by selecting the download icon in the top right-hand corner