CFA Level 1 - Must Knows 274 Questions with
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1. Financial Statement Analysis Framework: provides an overview of the method- ology used by
analysts to consistently analyze financial statements
a) articulate the purpose and context of analysis
b) collecting data
c) process the data
d) analyzing and interpreting the processed data
e) develop/communicate conclusions and recommendations
f) follow up
2. Scope of Financial Statement Analysis: - analysis is based on financial state- ments is performed by
equity investors interested in valuation, lenders interested in liquidity, suppliers interested in future
business, and analysts working to recommend security purchases, mergers, credit and lending, debt
ratings, and forecasting
3. Balance Sheet - Assets:
- assets are items owned by a company that will benefitthe company in the future
- found on balance sheet; include current/noncurrent
- required to be listed separately under IFRS
- typically shown on balance sheet at historical cost
4. Income Statement - Introduction:
- reports revenues, expenses, and profit orloss for a company on a consolidated basis over a
short period of time
- revenues are matched with expenses incurred to earn the revenue, and the netresult is a
profit or a loss for the period
- when the company reports on a consolidated basis, they include all companiesthey own
in one income statement
5. Statement of Changes in Equity (1):
- reconciles the balance in equity from thebeginning of a period to the end of a period
- equity is composed of paid-in capital, retained earnings, other comprehensiveincome,
and minority interests
- statement of changes in equity reconciles the beginning equity balance with the period-
ending equity balance by analyzing the changes in the four components ofequity
, CFA Level 1 - Must Knows 274 Questions with
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Beginning equity +/- increase/decrease in paid-in capital + net income (or minus netloss) - dividends paid
+/- changes in other comprehensive income +/- changes in minority interest
6. Balance Sheet - Liabilities:
- future obligations of a company, which may bemonetary or non-monetary
- include current/non-current liabilities
- required to be listed separately under IFRS as a means of helping analysts in identifying
threats to liquidity
7. Financial Notes (footnotes) and Supplementary Schedules: - required part of the financial reports
and contain essential information about the company's accounting policies, methods, and estimates, many
of which are essential for analysis
8. Statement of Comprehensive Income:
- requirement under IFRS
- comprised of both profit and loss for the period and other items affecting equity
- presented as one or two statements, with one being the income statement
- includes the traditional statement of operations and a second component present-ing items that
affect owners' equity but are not share transactions
- component is called Other Comprehensive Income (OCI)
- OCI reports certain gains and losses that bypass the income statement and endup as adjustments
to owner's equity
- OCI includes fair value changes, items reclassified to profit and loss, and other non-owner
changes in equity
- AOCI is included as a separate line item in the equity section
* US GAAP allows corporations to present OCI as part of the statement of changesin equity as opposed
to being part of the comprehensive income statements
9. Management Discussion and Analysis:
- provides readers with information needed to understand a company's financial condition, changes in
financial condi-tion, and results of operations
5 Elements
, CFA Level 1 - Must Knows 274 Questions with
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i. nature of the business
ii. management's objectives and strategies
iii. company's significant resources, risks, relationships
iv. results of operations
v. critical performance measures
10. Auditor's Reports:
- performed by qualified, independent auditors
- opinion is based on the audit procedures performed that are designed to providereasonable assurance
the statements fairly present the results of operations and financial condition of the company in
accordance with applicable accounting stan-dards
- opinions may be unqualified, qualified, adverse, or disclaimed
Introductory Paragraph - sets forth the statements to be audited and the respon- sibilities of both
management to prepare the statements and auditors to audit thestatement
Scope Paragraph - describes the nature of the audit process and procedures that serve as a basis for the
auditor's opinion
Opinion Paragraph - states the auditor's opinion concerning if the statements fairlypresent the
company's financial position and result of operations free of material misstatements in conformity with
applicable accounting standards
11. Auditor's Opinions:
Unqualified Opinion - (most common) auditor found no ma-terial misstatement and believes the
statements fairly reflect the results of operationsand financial condition of the company, in compliance
with applicable accounting standards
Qualified Opinion - auditor found something material that does not comply with the applicable
accounting standards; this exception doesn't invalidate the statement as a whole, though, and the auditor
will explain the qualification in the audit report
Adverse Opinion - the auditor found material misstatements of such an extent thatthe statements taken
as a whole do not fairly represent the results of operations andfinancial condition in compliance with
applicable accounting standards (really rare)
Disclaimer of Opinion - auditor cannot complete the audit, not issuing an opinion;also rare
, CFA Level 1 - Must Knows 274 Questions with
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*required under U.S. GAAP to express opinion on company's internal control system(not required under
IFRS)
12. Cash Flow Statement - Introduction:
- reports the cash generated and ex-panded during a fiscal period
- statement of cash flow differs from an income statement in that it converts all the
transactions into cash changes within a time period
- cash flows are important as it shows a company's ability to pay its short-term
obligations (liquidity) and ability to pay its long-term obligations (solvency)
- made up of operating activities, investing activities, financing activities, and sup-
plemental activities
- Indirect Method: starts with income statement and adjusts it to cash flow
-
Direct Method: (FASB preferred) provides information about cash flows from operations
directly; sum of all cash flows then equal net cash increase or decreasefrom normal operations of
the company
13. Mechanics of Financial Reporting - Introduction:
- financial statements aredeveloped from the records within an accounting system that have
recorded all transactions for a business over a period of time
-they provide information to end users that will be used for decision making; they follow
rules of balancing debits and credits, as well as ensuring that assets is equalto liabilities + equity;
and then they often require adjusting entries to ensure the matching of revenues and associated
expenses
14. Chart of Accounts/Common Accounts: Chart of Accounts - large list of everyaccount that will be
needed for operation of the business, absorbing the details
of every transaction during the accounting period, and in summation of thosetransactions
Common Asset Accounts - cash/cash equivalents, accounts receivable, prepaidexpenses, inventory,
PPE, intangible assets
Common Liability Accounts - accounts payable, unearned revenue, notes payable,bonds payable
