Chartered Financial Analyst (CFA) Financial Statement Analysis Syllabus

Financial Statement Analysis syllabus — full chapter and topic list

Expand any chapter to see its topics and sub-topics. This is the whole examinable outline for Financial Statement Analysis in Chartered Financial Analyst (CFA), not a summary of it.

1. 1

   Financial Reporting Framework and Mechanics

   3 topics

   • Introduction to Financial Statement Analysis
     • Roles of financial reporting and analysis
     • The financial statement analysis framework
   • Financial Reporting Standards
     • IFRS vs. US GAAP and the conceptual framework
     • Role of the SEC and standard-setting bodies
   • Analyzing Statements: Mechanics
     • The accounting equation and double-entry bookkeeping
     • Accruals, adjustments, and the financial reporting cycle
2. 2

   The Major Financial Statements

   4 topics

   • Understanding the Income Statement
     • Revenue recognition principles
     • Expense recognition and non-recurring items
     • EPS calculation: basic and diluted
   • Understanding the Balance Sheet
     • Asset and liability measurement bases
     • Components of equity and common-size analysis
   • Understanding the Cash Flow Statement
     • Operating, investing, and financing activities
     • Direct vs. indirect method
     • Free cash flow measures (FCFF, FCFE)
   • Financial Analysis Techniques
     • Activity, liquidity, solvency, and profitability ratios
     • DuPont decomposition of ROE
     • Credit and equity analysis ratios
3. 3

   Analysis of Key Accounting Items

   4 topics

   • Inventories
     • FIFO, LIFO, and weighted average cost methods
     • LIFO reserve adjustments and inventory write-downs
   • Long-Lived Assets
     • Capitalization vs. expensing
     • Depreciation, amortization, and impairment
     • Revaluation model under IFRS
   • Income Taxes
     • Deferred tax assets and liabilities
     • Effective vs. statutory tax rate reconciliation
   • Non-Current Liabilities
     • Bond accounting and effective interest method
     • Leases (lessee and lessor accounting)
     • Pension and post-employment benefit accounting
4. 4

   Advanced FSA and Quality of Earnings (Level II)

   4 topics

   • Intercorporate Investments
     • Investments in financial assets and associates
     • Business combinations and the acquisition method
     • Variable interest and special purpose entities
   • Multinational Operations
     • Foreign currency transaction exposure
     • Translation methods: current rate vs. temporal
   • Analysis of Financial Institutions
     • CAMELS framework for banks
     • Analyzing insurance companies
   • Evaluating Financial Reporting Quality
     • Earnings quality and accrual measures
     • Warning signs and aggressive accounting choices
     • Beneish M-score and Altman Z-score models

Financial Statement Analysis flashcards for Chartered Financial Analyst (CFA)

25 of 52 cards from the Financial Statement Analysis deck — real questions with worked answers.

1. What is the primary objective of financial statement analysis?

   To use information in a company's financial statements, along with other relevant information, to make economic decisions — for example, evaluating a company's ability to generate future cash flows, its solvency, and its creditworthiness for equity or credit investment.

2. Name the four core financial statements and what each primarily reports.

   Income statement (financial performance over a period), balance sheet (financial position at a point in time), cash flow statement (cash inflows/outflows over a period), and statement of changes in equity (owners' equity movements over a period).

3. What is the difference between the auditor's role and management's role regarding financial statements?

   Management prepares the financial statements and is responsible for them; the independent external auditor provides an opinion on whether the statements are fairly presented and free of material misstatement, in conformity with the applicable accounting standards.

4. What are the three types of audit opinions an auditor may issue, plus the worst case?

   Unqualified (clean) opinion, qualified opinion (one or more exceptions to standards), and adverse opinion (statements materially depart from standards and are not fairly presented). The worst case is a disclaimer of opinion, where the auditor is unable to issue an opinion.

5. What is the accounting equation (balance sheet identity)?

   $$\text{Assets} = \text{Liabilities} + \text{Owners' Equity}$$

6. State the expanded accounting equation including retained earnings components.

   $$\text{Assets} = \text{Liabilities} + \text{Contributed Capital} + \text{Beginning RE} + \text{Revenue} - \text{Expenses} - \text{Dividends}$$

7. What are the two main bodies that set financial reporting standards globally, and what frameworks do they issue?

   The IASB (International Accounting Standards Board) issues IFRS, used in many countries; the FASB (Financial Accounting Standards Board) issues US GAAP, used in the United States. Securities regulators (e.g., the SEC, IOSCO members) enforce them.

8. List the two fundamental qualitative characteristics of useful financial information under the IASB Conceptual Framework.

   Relevance (capable of making a difference in decisions, including materiality) and faithful representation (complete, neutral, and free from error).

9. List the four enhancing qualitative characteristics of financial information.

   Comparability, verifiability, timeliness, and understandability.

10. What are the required reporting elements that correspond to performance and to financial position under the IASB framework?

    Performance elements: income and expenses. Financial position elements: assets, liabilities, and equity.

11. Define the accrual basis of accounting and how it differs from cash basis.

    Under accrual accounting, revenue is recognized when earned and expenses when incurred (matched to revenue), regardless of cash timing. Cash basis recognizes transactions only when cash is received or paid. Accrual is required under both IFRS and US GAAP.

12. What is the general 5-step revenue recognition model under IFRS 15 / ASC 606?

    1) Identify the contract; 2) Identify the performance obligations; 3) Determine the transaction price; 4) Allocate the transaction price to the obligations; 5) Recognize revenue when (or as) each performance obligation is satisfied.

13. Distinguish accruals from valuation adjustments as the two categories of accounting adjustments.

    Accruals arise from timing differences between cash flows and accounting recognition (e.g., unearned revenue, accrued expenses, prepaid expenses, accrued revenue). Valuation adjustments restate asset/liability carrying values to fair or net realizable value (e.g., marketable securities marked to market).

14. On the income statement, how is gross profit calculated?

    $$\text{Gross Profit} = \text{Revenue} - \text{Cost of Goods Sold}$$

15. Define basic EPS and give its formula.

    Basic EPS measures earnings available to each common share. $$\text{Basic EPS} = \frac{\text{Net Income} - \text{Preferred Dividends}}{\text{Weighted Average Common Shares Outstanding}}$$

16. Give the formula for diluted EPS using the treasury stock method for options.

    $$\text{Diluted EPS} = \frac{\text{NI} - \text{Pref. Div} + \text{Conv. Pref. Div} + \text{Conv. Debt Interest}(1-t)}{\text{Wtd. Avg. Shares} + \text{Conv. Pref. Shares} + \text{Conv. Debt Shares} + \text{Options}}$$ where dilutive securities are included only if they reduce EPS.

17. What is the difference between operating and non-operating income?

    Operating income (EBIT in many contexts) results from a company's core business activities. Non-operating income arises from peripheral activities — for a non-financial firm this includes interest income, interest expense, dividend income, and gains/losses on investments.

18. Define comprehensive income and its two components.

    Comprehensive income is the change in equity during a period from transactions other than with owners. $$\text{Comprehensive Income} = \text{Net Income} + \text{Other Comprehensive Income (OCI)}$$

19. Name typical items reported in Other Comprehensive Income (OCI).

    Foreign currency translation adjustments, unrealized gains/losses on certain debt (FVOCI) securities, certain pension (remeasurement) adjustments, the effective portion of cash flow hedge gains/losses, and (under IFRS) revaluation surpluses on PP&E/intangibles.

20. How are current and non-current items classified on a balance sheet?

    Current assets/liabilities are expected to be realized or settled within one year or the operating cycle, whichever is longer (e.g., cash, receivables, inventory; payables, short-term debt). Non-current items extend beyond that horizon (e.g., PP&E, long-term debt).

21. List the main components of stockholders' (owners') equity.

    Contributed (paid-in) capital, preferred stock, treasury stock (contra), retained earnings, accumulated other comprehensive income (AOCI), and non-controlling (minority) interest.

22. Distinguish goodwill from identifiable intangible assets and state how each is treated post-acquisition.

    Goodwill arises only in a business combination as the excess of purchase price over the fair value of identifiable net assets; it is not amortized but tested annually for impairment. Identifiable intangibles (e.g., patents, licenses) with finite lives are amortized; indefinite-life intangibles are tested for impairment.

23. What are the three sections of the cash flow statement?

    Cash flow from operating activities (CFO), cash flow from investing activities (CFI), and cash flow from financing activities (CFF).

24. How does the classification of interest and dividends paid/received differ between IFRS and US GAAP on the cash flow statement?

    US GAAP: interest paid, interest received, and dividends received are CFO; dividends paid are CFF. IFRS allows flexibility — interest and dividends received may be CFO or CFI, and interest and dividends paid may be CFO or CFF.

25. Give the indirect-method starting point for computing CFO and the general adjustments.

    Start with net income, then: add back non-cash charges (depreciation, amortization, impairment), remove non-operating gains/losses, and adjust for changes in working capital (subtract increases in operating assets, add increases in operating liabilities).

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