Chartered Financial Analyst (CFA) Financial Statement Analysis Syllabus

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.

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.

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).

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.

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).

Define free cash flow to the firm (FCFF) starting from net income.

$$\text{FCFF} = \text{NI} + \text{NCC} + \text{Int}(1-t) - \text{FCInv} - \text{WCInv}$$ where NCC = non-cash charges, Int = interest expense, FCInv = fixed capital investment, WCInv = working capital investment.

Define free cash flow to equity (FCFE) from FCFF and from CFO.

$$\text{FCFE} = \text{FCFF} - \text{Int}(1-t) + \text{Net Borrowing}$$ and $$\text{FCFE} = \text{CFO} - \text{FCInv} + \text{Net Borrowing}$$

What is the DuPont 3-factor decomposition of return on equity (ROE)?

$$\text{ROE} = \underbrace{\frac{\text{NI}}{\text{Revenue}}}_{\text{Net Margin}} \times \underbrace{\frac{\text{Revenue}}{\text{Avg Assets}}}_{\text{Asset Turnover}} \times \underbrace{\frac{\text{Avg Assets}}{\text{Avg Equity}}}_{\text{Financial Leverage}}$$

Give the 5-factor (extended) DuPont decomposition of ROE.

$$\text{ROE} = \frac{\text{NI}}{\text{EBT}} \times \frac{\text{EBT}}{\text{EBIT}} \times \frac{\text{EBIT}}{\text{Rev}} \times \frac{\text{Rev}}{\text{Avg Assets}} \times \frac{\text{Avg Assets}}{\text{Avg Equity}}$$ (tax burden × interest burden × operating margin × asset turnover × leverage).

Define the current ratio and the quick (acid-test) ratio.

$$\text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}}$$ $$\text{Quick Ratio} = \frac{\text{Cash} + \text{Marketable Securities} + \text{Receivables}}{\text{Current Liabilities}}$$

Give the formulas for inventory turnover and days of inventory on hand (DOH).

$$\text{Inventory Turnover} = \frac{\text{COGS}}{\text{Average Inventory}} \qquad \text{DOH} = \frac{365}{\text{Inventory Turnover}}$$

Give the formula for the cash conversion cycle (net operating cycle).

$$\text{Cash Conversion Cycle} = \text{DOH} + \text{DSO} - \text{DPO}$$ where DSO = days sales outstanding (receivables) and DPO = days payables outstanding.

Define the interest coverage ratio and the debt-to-equity ratio.

$$\text{Interest Coverage} = \frac{\text{EBIT}}{\text{Interest Expense}} \qquad \text{Debt-to-Equity} = \frac{\text{Total Debt}}{\text{Total Equity}}$$

What inventory cost flow methods are permitted under IFRS versus US GAAP?

IFRS permits FIFO and weighted average cost (LIFO is prohibited). US GAAP permits FIFO, weighted average cost, and LIFO.

In a period of rising prices and stable/rising inventory, how do FIFO vs LIFO affect COGS, net income, ending inventory, and taxes?

FIFO gives lower COGS, higher net income, higher ending inventory (closer to current cost). LIFO gives higher COGS, lower net income, lower ending inventory, and lower taxes (in the US). LIFO better matches current costs to current revenues.

What is the LIFO reserve and how do you convert LIFO inventory to FIFO?

The LIFO reserve is the difference between FIFO and LIFO inventory values. $$\text{FIFO Inventory} = \text{LIFO Inventory} + \text{LIFO Reserve}$$ and FIFO COGS = LIFO COGS − (increase in LIFO reserve).

State the inventory valuation rule under IFRS versus US GAAP (for non-LIFO/retail methods).

IFRS: inventory measured at the lower of cost and net realizable value (NRV); write-ups (reversals) are allowed up to original cost. US GAAP (for LIFO/retail): lower of cost or market; (for others) lower of cost or NRV; reversals of write-downs are prohibited.

How are research and development costs capitalized vs expensed under IFRS and US GAAP?

US GAAP: generally expense both research and development as incurred (with exceptions, e.g., certain software). IFRS: research costs are expensed, but development costs are capitalized once technical and commercial feasibility is established.

Compare the straight-line, double-declining-balance, and units-of-production depreciation methods.

Straight-line: $$\frac{\text{Cost} - \text{Salvage}}{\text{Useful Life}}$$ allocates cost evenly. Double-declining balance (accelerated): $$\frac{2}{\text{Life}} \times \text{Beginning Book Value}$$ (ignores salvage until book value hits it). Units-of-production allocates by actual usage/output.

How is impairment recognized for long-lived assets under IFRS vs US GAAP?

IFRS: impaired when carrying amount > recoverable amount (higher of fair value less costs to sell and value in use); impairment loss = the excess, and reversals are allowed. US GAAP: a two-step test — recoverability (carrying amount > undiscounted future cash flows) then loss = carrying − fair value; reversals are prohibited.

Under IFRS, what are the cost model and revaluation model for measuring PP&E after recognition?

Cost model: carry at cost less accumulated depreciation and impairment. Revaluation model: carry at fair value at revaluation date less subsequent depreciation; increases go to revaluation surplus (OCI) unless reversing a prior loss. US GAAP permits only the cost model.

Distinguish a deferred tax liability (DTL) from a deferred tax asset (DTA).

A DTL arises when taxable income < accounting (pretax) income now, so more tax will be paid later (e.g., accelerated tax depreciation). A DTA arises when taxable income > accounting income now, so future tax will be lower (e.g., tax loss carryforwards, warranty accruals).

Define the effective tax rate and write the income tax expense relationship.

$$\text{Effective Tax Rate} = \frac{\text{Income Tax Expense}}{\text{Pretax Income}}$$ $$\text{Income Tax Expense} = \text{Taxes Payable} + \Delta\text{DTL} - \Delta\text{DTA}$$

What is a valuation allowance for deferred tax assets, and how is it treated under each framework?

Under US GAAP, a valuation allowance (a contra account) reduces a DTA when it is more likely than not that some/all of it will not be realized; it can be adjusted up or down. IFRS does not use a separate valuation allowance — the DTA is recognized directly only to the extent realization is probable.

How do effective interest and the carrying value behave for a bond issued at a discount?

A discount bond is issued below face (coupon < market rate). Interest expense = beginning carrying value × market (effective) rate, which exceeds the coupon paid; the carrying value rises toward par each period as the discount amortizes.

Give the journal logic for interest expense under the effective interest method.

$$\text{Interest Expense} = \text{Beginning Bond Carrying Value} \times \text{Market Yield at Issuance}$$ Amortization of discount/premium = Interest Expense − Coupon Payment; this amount adjusts the carrying value.

How is a finance (capital) lease accounted for by the lessee under the current standards?

The lessee recognizes a right-of-use asset and a lease liability at the present value of lease payments. The asset is amortized and the liability accrues interest; for a finance lease, expense is front-loaded (interest + amortization), and principal repayment is CFF while interest is CFO (US GAAP) or per policy (IFRS).

What are the three categories for accounting of intercorporate investments and their typical ownership thresholds?

Investments in financial assets / no significant influence (typically <20%, fair value or amortized cost); associates / significant influence (20–50%, equity method); business combinations / control (>50%, consolidation with non-controlling interest).

Describe the equity method of accounting for an investment in an associate.

The investment is recorded at cost and increased by the investor's proportionate share of the associate's net income (and decreased by its share of losses and by dividends received). The pro-rata net income appears as a single line on the investor's income statement (one-line consolidation).

Contrast the current rate (translation) method with the temporal (remeasurement) method for foreign currency financial statements.

Current rate method (used when functional = local currency): assets/liabilities at current rate, equity at historical, income at average; translation gain/loss goes to CTA in OCI. Temporal method (used when functional = parent/reporting currency): monetary items at current rate, non-monetary at historical; remeasurement gain/loss flows through net income.

For a bank, name key analytical frameworks and ratios specific to financial institutions.

CAMELS framework (Capital adequacy, Asset quality, Management, Earnings, Liquidity, Sensitivity to market risk). Key Basel metrics include the common equity tier 1 ratio, the liquidity coverage ratio (LCR), and the net stable funding ratio (NSFR); plus net interest margin and the provision for loan losses for asset quality.

What is the difference between conservative and aggressive accounting choices, and which signals lower reporting quality?

Aggressive choices increase reported earnings/financial position in the current period (e.g., early revenue recognition, capitalizing costs, understating reserves) and tend to lower reporting quality and sustainability. Conservative choices defer income/accelerate expense. Neither extreme is ideal, but earnings-inflating bias is a red flag for low-quality, potentially unsustainable earnings.