Preparing for the CPA exam doesn’t have to feel overwhelming - especially when you focus on understanding the material instead of just memorizing it. As a CPA and someone who’s been in your shoes, I know how critical the FAR section is - not just for passing the exam, but for building a strong foundation in your accounting career.
In this tutorial, I break down the Income Statement: what the accounts mean, how they connect to the Balance Sheet, Statement of Cash Flows, and Statement of Owner’s Equity, and why these connections matter in financial reporting. These are concepts you’ll revisit throughout the CPA exam and in real-world accounting.
Watch the video below for practical CPA exam tips, accounting strategies, and real-life examples that will help you master the material, prepare smarter, and grow as a confident and career-ready accounting professional. Let’s get into it!
FAR Exam Tutorial Recap
Nikki discusses the different formats an income statement can take, including the single-step and multi-step approaches. She notes that while the single-step format is sometimes seen on the CPA exam, the multi-step format is more common in real-world accounting practice, as it provides more detailed breakdowns of revenue, cost of goods sold, and operating expenses.
Overview of the Income Statement @ 0:02
Nikki provides an overview of the income statement (also called the profit and loss statement or P&L), explaining that it is where the "business story is told" by capturing a company's revenue, expenses, and net income for an accounting period. She notes that the income statement is typically the first financial statement reviewed during a month-end close process.
Importance of Proper Expense Classification @ 9:14
Nikki emphasizes the importance of accurately classifying expenses as either cost of goods sold or operating expenses, as misclassifications can distort the company's margins and profitability. She explains that this is a common issue she has seen in real-world accounting.
Non-Operating Income/Expenses and EBITDA @ 11:00
Nikki discusses the items that appear below the operating income line on the income statement, such as interest, gains/losses, and discontinued operations. She notes that many companies focus on EBITDA (earnings before interest, taxes, depreciation, and amortization) as a key metric, as it excludes these non-operating items.
Practicing Income Statement Concepts @ 14:00
Nikki recommends that students create their own practice quizzes on income statement topics after reviewing the material, as a way to solidify their understanding. She suggests starting with the income statement before moving on to other financial statements.
Keep Learning
Understanding the Income Statement is just the beginning. As you dive deeper into the FAR section and beyond, having a clear grasp of how financial statements connect will set you apart - not only on the CPA exam but in your accounting career. If you found this tutorial helpful and want to take your preparation or career growth to the next level, I’ve got more for you.
Explore my full content library for accounting guidance and CPA exam tutorials or book a coaching session to get personalized strategies tailored to your CPA exam journey or career goals. Don’t just prepare - stand out as a confident, knowledgeable accounting professional.
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