The analogy that I keep hearing which I find to reflect the change in difficulty is “Level 1 is a mile wide and a foot deep. Level 2 is a mile wide and a mile deep.”
Essentially in level 2 you have to fully understand the concepts and their inner workings to have a fair shot at the majority of the quesitons. Level 1 you can get away with a basic understanding in an isolated case.
Giving you an example to try and illustrate the difference between a level 1 and a level 2 question, consider a question in the FR&A section that is trying to test your knowledge on inventory accounting choices.
A level 1 question may appear as:
In a rising cost environment, a company that reports its inventory using the LIFO method compared to the FIFO method will most likely report inventory that is:
a) Higher.
b) Lower.
c) The Same.
This is a pretty straight forward question that tests your knowledge of different inventory accounting methods. Now a level 2 question may appear as:
XYZ’s change in choice of inventory accounting method will result in a reported net income that is:
a) $41 million higher.
b) $41 million lower.
c) $37 million lower.
As you can see, not only do you have to understand the differences in accounting methods, you need to also understand their effects on different parts of the financial statements, as well as be able to do the calculations. So in this case, you will need to understand how cost of goods sold changes with accounting methods, and calculate the changes in COGS. But, you also have to understand that the higher/lower COGS will result in higher/lower taxable income, so you have to include the tax effect.
So you really do need to master the material for level 2 because there are many things you have to take into account and understand how they work together. An inventory question is still pretty simple, but this gets exponentially more difficult when they ask you to, for example, calculate the value of a forward rate agreement 30 days into the contract based on interest rate movements. There is just no way you can do this in a proper time frame unless you know the material inside and out.
But don’t let this scare you, you simply just need to respect the amount of material you’re going to learn, and leave enough time to fully cover and master everything.
I hope this helps. Feel free to ask any questions.