How to Make Sense of CPA Exam Topics + More Study Tips
ICYMI: You don't need to watch every video and read every page of every chapter.
The first step to maximizing your study time is to know which concepts you need to focus on. When you think of FAR, for example, it has the most content which makes it seem nearly impossible to learn everything. You know more than you think - CPA studies can really have you questioning if you’re good enough or smart enough to pass these exams. Once you think logically about the scenario given in a question, the calculations and sequence of events start to make sense.
For example, if you didn’t know how to calculate Accounts Receivable Turnover ratio, think about what the ratio means. Accounts Receivable - amounts due from customers. Turnover - how many times has something been done. So, how many times has a company collected the credit balances from customers? What’s the offset to an Accounts Receivable entry? Sales. How many times does the company collect (or “turnover”) the credit balances from customers? If your credit sales are 50 and your average AR is 10, your AR Turnover ratio is 5. This means you collect money due from customers 5 times per year or every 73 days (365 per year/5). It’s good to understand the logic here: now that you, as a manager know that it takes 73 days to collect your receivables, you can compare that to your industry average to see how well (or not well) you’re doing. With 20% of your sales tied up in receivables, you are losing out on the ability to collect that cash and optimize your cash flow position. Suppose it takes you 40 days to pay bills….you will have a cash flow gap if you get paid every 73 days but you have to pay bills every 40 days. Now you have to figure out if you need to tighten your lending standards and ramp up your collection efforts, whatever needs to happen to get more cash in the door.
By understanding this logic, you can learn how to define the ratio, calculate it and interpret it. Many candidates will memorize the formula but not go further and understand what the formula is telling you about a business. Step back and think beyond the exam - in the real world, how will you benefit your client or employer? By telling them the AR Turnover is 5 - you’re not helping. Anyone with basic math skills can do that - how will you respond when they calculate this number on their own but come to you for expertise on what they should do? That’s where the value-add is, not in dividing 50 into 10.
Another time saving technique - what’s the opposite of AR? AP. So what do you think the AP Turnover ratio does? Hmmmm….maybe it measures the opposite of AR Turnover - how long it takes you to pay your suppliers. Instead of average AR, you’re using average AP and total purchases instead of credit sales. This is also referred to as Days Payable Outstanding or DPO.
Do yourself a favor and think deeper about these topics. After you watch a lecture or read a chapter, write out what you learned and THEN do the practice questions. Hopefully then it will make more sense. If it doesn't, join the CPA Candidate Coaching sessions and we can talk more about it.