Financial Statement Analysis: CFA® Level I

It is 11–14% of the 2027 Level I exam. 54 learning outcomes across 12 learning modules.

530+ practice questions and 22 formula cards on this topic in the app.

Introduction to Financial Statement Analysis

• Explain the purpose of financial reporting and of analysing financial statements
• Set out the financial statements and the information that supplements them
• Explain the auditor's report and the kinds of opinion an auditor may give
• Use the framework for analysing financial statements
• Tell accrual accounting apart from cash accounting

Analyzing Income Statements

• Set out the parts that make up an income statement
• Explain the rules for when revenue is recognised
• Say when expenses are recognised and how matching works
• Explain non-recurring items and how analysts adjust for them
• Work out earnings per share on a basic and a diluted basis
• Build a common-size income statement and explain what it shows
• Work out profitability margins and explain what they mean

Analyzing Balance Sheets

• Set out the elements that make up a balance sheet
• Explain the bases used to measure assets and liabilities
• Explain how assets and liabilities are split into current and non-current
• Explain how marketable securities are classified and measured
• Build a common-size balance sheet and explain what it shows
• Explain how goodwill is accounted for and disclosed

Analyzing Statements of Cash Flows I

• Tell apart cash flows from operating, investing and financing activities
• Explain how the three financial statements connect to one another
• Contrast the direct and indirect presentation of operating cash flow
• Restate an indirect-method cash flow statement in direct form

Analyzing Statements of Cash Flows II

• Derive FCFF and FCFE, the free cash flows to the firm and to its shareholders, using the cash flow statement
• Analyse a cash flow statement

Analysis of Inventories

• Contrast FIFO with the weighted average cost method
• Contrast cost flow methods for inventory and explain the LIFO reserve
• Explain how inventory is carried at cost or net realisable value, whichever is lower
• Analyse how the choice of inventory method changes financial ratios

Analysis of Long-Term Assets

• Explain how capitalising a cost differs in effect from expensing it
• Contrast depreciation methods and analyse how estimates change the results
• Explain how intangibles are amortised and how assets are impaired
• Explain the revaluation model and how assets are derecognised

Topics in Long-Term Liabilities and Equity

• Explain how a lessee accounts for leases
• Explain how bonds payable are accounted for
• Explain defined benefit pension obligations and how they flow through the statements
• Explain how share-based compensation is accounted for
• Explain how a lessor accounts for leases

Analysis of Income Taxes

• Tell current tax expense apart from deferred tax
• Explain deferred tax assets and liabilities and the valuation allowance
• Explain what the reconciliation of the effective tax rate shows
• Work out the effective, statutory and cash rates of tax and contrast them

Introduction to Financial Statement Modeling

• Construct a pro forma income statement driven by sales
• Explain how behavioural biases distort analysts' forecasts and ways to offset them
• Show how inflation and a firm's competitive standing shape sales and cost forecasts
• Justify the length of an explicit forecast period and how to project past its end

Financial Reporting Quality

• Set out the range of quality in financial reporting
• Explain the circumstances that give rise to poor-quality reporting
• Spot red flags that point to poor-quality financial reporting

Financial Analysis Techniques

• Work out liquidity, solvency and activity ratios and explain what they mean
• Break return on equity into its parts with DuPont analysis
• Explain where ratio analysis falls short and how segment data can be used
• Work out coverage and solvency ratios and explain what they mean
• Work out liquidity and activity ratios and explain what they mean
• Explain ratios specific to particular industries and how ratios help forecast earnings