CFA Level 1 - Secret Sauce (not mine)
What are financial statement notes (footnotes)? - ANS 1) details about the information
summarized in the financial statements
2) summarize accounting methods and assumptions, estimates, contingencies, acquisitions and
disposals.
3) *They are audited.*
4) discuss the fiscal period covered by the statements and the inclusion of consolidated entities
5) additional information on items such as business acquisitions or disposals, legal actions,
employee benefit plans, contingencies and commitments, significant customers, sales to related
parties, and segments of the firm
What is management's commentary (MD&A)? - ANS *required to discuss *
1) trends, significant events and uncertainties that affect the firm's liquidity, capital resources
and results of operations
2) effects of inflation
3) impact of off-balance-sheet obligations and contractual obligations
4) accounting policies that require significant judgement by management
5) forward-looking expenditures and divestitures
*not required to discuss*
1) discontinued operations
2) extraordinary items, and other unusual or infrequent events
*some parts may be unaudited; one of the most useful sections of the annual report*
What is "other comprehensive income"? - ANS changes which result from *foreign currency
translation, minimum pension liability adjustments, or unrealized gains and losses on
investments (securities held-for-trading)*; flows to accumulated other comprehensive income on
balance sheet
What is the super duper expanded accounting equation? - ANS assets = liabilities
+ contributed capital
+ beginning retained earnings
+ revenue - expenses - dividends
What are the 4 owner's equity accounts? - ANS 1) capital (par value of common stock)
2) additional paid-in capital
3) retained earnings
4) *accumulated other comprehensive income (OCI)*
,What are the *two* qualitative characteristics that make financial information *useful*? - ANS
RF
1) relevance
2) faithful representation
What are the three characteristics of *relevance*? - ANS PCM
1) predictive value
2) confirmatory value
3) materiality
What are the three characteristics of *faithful representation*? - ANS CNF
1) complete
2) neutral (absence of bias)
3) free from error
What are the three aspects of a *coherent financial reporting framework*? - ANS TCC
1) transparency
2) comprehensiveness
3) consistency
What are the 4 *qualitative characteristics* that enhance relevance and faithful representation
under IFRS? - ANS CTVU
1) comparability
2) verifiability
3) timeliness
4) understandability
What are the major differences between GAAP and IFRS? - ANS 1) IASB: performance
elements are income and expenses
*FASB: performance elements are revenues, expenses, gains, losses, and comprehensive
income*
2) *FASB*: an asset as a future economic benefit
*IASB*: an asset is a resource from which a future economic benefit is expected
3) The word *probable* is used by the FASB to define assets and liabilities
4) *FASB does not allow the values of most assets to be adjusted upward*
What is the net income formula? - ANS = revenues
- ordinary expenses
+ other income
- other expense
+ gains - losses
OR
= ending equity
What is the percentage of completion method? - ANS outcome of long-term contract *CAN BE*
reliably measured; same for IFRS and GAAP; *more aggressive*; income and balance sheet will
differ from completed contract - cash flows are not different
net income = [(total cost incurred / total cost) x total revenue] - total cost incurred
What is the "under completed contract method"? - ANS when outcome of a long-term contract
*CANNOT* be reliably measured
*IFRS*: pairs revenue and expense together, costs are expensed when incurred and profit is
recognized only at completion.
*GAAP*: revenue, expense and profit are recognized ONLY when the contract is completed
What is the formula for straight-line depreciation? - ANS = (orig cost - *salvage value*) /
depreciable life
What is the formula for double-declining balance? - ANS = *2 / depreciable life in years x book
value at beg of year*; *does not use salvage value but depreciation stops when residual value
has been reached*
Where are discontinued operations reported? - ANS same for both US GAAP and IFRS; must
be physically and operationally distinct from the rest of the firm; management has decided to
dispose of but either hasn't done so or did dispose of in the current period after the operation
had generated income or losses; reported separately in the income statement, net of tax, after
income from continuing operations; should be excluded by the analyst when forecasting future
earnings
What are extraordinary items? - ANS US GAAP: *unusual AND infrequent items*; reported
separately net of tax and appears on the income statement below discontinued operations
IFRS: *does not allow extraordinary treatment in the income statement
What are unusual or infrequent items? - ANS events which are either unusual in nature or
infrequent in occurrence but not both; included in income from continuing ops & reported before
tax.
EX:
1) G/L from from sale of assets or part of business
2) Provisions for environmental remediation, impairments, write-offs, write-downs, restructuring.
3) Integration expense for recently acquired business
What is the basic EPS formula? - ANS net income - preferred dividends
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weighted avg of common shares out
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