Investors in debt securities are primarily concerned with the company's ability to service its debt through interest payments and principal repayment. On the other hand, equity investors, who essentially own a portion of the company, are interested in the firm's ability to distribute dividends and increase its overall value and share price.
What to Expect in CFA Level 1 Financial Statement Analysis?
The CFA Level 1 Financial Statement Analysis (FSA), formerly known as Financial Reporting and Analysis (FRA), is the second most weighty topic on the CFA exam after Ethics. FSA is fundamental not only to passing Level 1 but also to succeeding in the CFA Program overall. 20% of Level 1 readings are dedicated to the topic and cover a breadth of financial accounting knowledge. Candidates will study the various components of financial statements, how to assess their quality, and how to adjust data to improve their analysis and thus value companies and assets more accurately.
Exam Weighting
The CFA Financial Statement Analysis has a weight of 11-14%, so approximately 20-25 of the 180 CFA Level 1 exam questions focus on this topic.
| Topic Weight | No. of Learning Modules | No. of Formulas | No. of Questions |
|---|---|---|---|
| 11-14% | 12 | Nearly 100 | ca. 25 |
Level 1 Financial Statement Analysis Syllabus, Readings, and Changes
The CFA Level 1 Financial Statement Analysis section for 2026 includes 12 Learning Modules. One notable update is that Financial Reporting Standards content has been consolidated into the introductory module, streamlining the structure compared with previous years.
Introduction to Financial Statement Analysis
This first reading of Financial Statement Analysis introduces financial reporting roles and how to use various financial statements to evaluate a company’s performance and financial position. The reading also covers the importance of financial statement notes, the objective of audits, and information sources used by analysts.
Understanding Income Statements
Covers the components of the income statement and general principles and accounting standards for revenue and expense recognition. The reading also includes how earnings per share (EPS) is calculated and interpreted and the fundamentals of non-recurring items in financial analysis.
Understanding Balance Sheets
Provides detailed descriptions of balance sheet items (assets, liability, equity) and the uses and limitations of the balance sheet in financial analysis. The reading also contrasts current and noncurrent assets/liabilities and demonstrates how to calculate and interpret liquidity and solvency ratios.
Understanding Cash Flow Statements I and II
Cash flows from operating, investing, and financing activities are compared, contrasted, and classified. The readings detail how the cash flow statement is linked to the income and balance sheets and introduce several analytical ratios.
Inventories
Costs included in inventories are contrasted with costs counted as expenses. The reading explains important inventory valuation methods like FIFO and LIFO, the LIFO reserve and liquidation, and their relation to financial statements and ratios.
Long-Lived Assets
Details the difference between tangible and intangible assets, depreciation and amortization methods, and impairment, revaluation, and derecognition of long-term assets. The reading also covers finance and operating leases.
Non-Current (Long-Term) Liabilities
Covers financial statement presentation, disclosures, and derecognition of debt, as well as treating debt covenants in protecting creditors. The reading also includes descriptions of the effective interest method and how to calculate interest expense, amortization of bond discounts/premiums, and interest payments.
Income Taxes
Defines and distinguishes accounting profit and taxable income and the resulting deferred tax assets or liabilities, or valuation allowance. This is an essential reading as the material is typically less familiar to candidates.
Financial Reporting Quality
Provides tips on distinguishing between conservative and aggressive accounting and identifying the conditions that can lead to low-quality or fraudulent financial reports. The reading also details accounting methods for managing earnings, cash flow, and balance sheet items.
Financial Analysis Techniques
Covers tools and techniques used to analyze companies. The reading is highly theoretical and includes an overview of methods used to identify, calculate, and interpret activity, liquidity, solvency, profitability, and valuation ratios.
Introduction to Financial Statement Modeling
Candidates will learn to develop a sales-based pro forma company model and address behavioral factors’ impact on analyst forecasts. The course explores how a company’s competitive position, analyzed through Porter’s five forces, influences prices and costs. Additionally, candidates will gain expertise in forecasting sales and costs amid price inflation or deflation, with insights into choosing forecast horizons and extending projections beyond the short term.
CFA Financial Statement Analysis Level 1 Sample Questions and Answers
The sample questions are typical of the probing multiple-choice questions on the L1 exam. During the exam, you have about 90 seconds to read and answer each question, carefully designed to test knowledge from the CFA Curriculum. UWorld’s CFA exam prep is built to expose you to exam-like questions and illustrate and explain the concepts tested thoroughly.
Using DuPont analysis, an analyst compiles the following data for a company:
| 20X7 | 20X6 | 20X5 | |
|---|---|---|---|
| Return on equity | 16.7% | 16.5% | 15.9% |
| Return on assets | 6.0% | 6.2% | 6.4% |
Based only on this information, and assuming revenue and net income were unchanged during this period, the most appropriate conclusion is that the company’s:
- leverage increased
- total asset turnover increased
- average shareholders’ equity increased
A manufacturing company that uses LIFO under US GAAP shows the following inventory-related information at the end of 20X8:
| Selected Data ($ millions) | |
|---|---|
| Cost of ending inventory | 100 |
| Selling price | 110 |
| Completing cost | 15 |
| Normal profit margin | 20 |
| Replacement cost | 70 |
Based on this data, the inventory amount reported on the balance sheet (in $ millions) is closest to :
- 70
- 75
- 95
An increase in the statutory tax rate will most likely:
- increase both deferred tax assets and deferred tax liabilities
- increase deferred tax assets and decrease deferred tax liabilities
- decrease deferred tax assets and increase deferred tax liabilities
What to Expect in CFA Level 2 Financial Statement Analysis?
CFA Level 2’s Financial Statement Analysis (FSA) is a pivotal and weighty subject, integral not only to Level 2 success but overall CFA proficiency. Candidates delve into a more nuanced exploration of concepts and principles introduced in Level 1 FSA, underscoring its significance in building a robust foundation for CFA achievement.
Exam Weighting
The CFA Level 2 Financial Statement Analysis has a weight of 10%-15% on the L2 exam, meaning that approximately 8-12 of the 88 CFA Level 2 exam questions or 2-3 item sets focus on this topic.
| Topic Weight | No. of Learning Modules | No. of Formulas | No. of Questions |
|---|---|---|---|
| 10-15% | 6 | Nearly 40 | ca. 8-12 or 2-3 item sets |
Level 2 Financial Reporting Analysis Syllabus, Readings, and Changes
The CFA Level 2 exam for 2026 includes six Learning Modules in the Financial Statement Analysis topic. A minor structural update was made in which the Financial Statement Modeling module; previously part of the Industry and Company Analysis area – has been refined, and a related reading has been reclassified from the Equity Valuation topic into FSA to improve curriculum alignment.
Intercorporate Investments
Describes the classification, measurement, and disclosure under International Reporting Standard (IFRS) for various investments and compares and contrasts to US GAAP. The reading also covers the effect of various accounting methods for intercorporate investments on financial statements and ratios.
Employee Compensation: Post-Employment and Share-Based
Look at strategies to explain and calculate measures of a defined benefit pension obligation, the effect of a defined benefit plan’s assumptions on the defined benefit obligation and periodic pension cost, and the effect of adjusting for pension items and other post-employment benefits reported in financial statement notes on financial statements and ratios.
Multinational Operations
Covers foreign currency transaction exposure, how currency fluctuations affect financial results, and how a company’s effective tax rate is affected by multinational operations. The reading also compares and contrasts presentations in reporting various currencies and the current rate and temporal methods.
Analysis of Financial Institutions
Describes the differences between financial institutions and companies and key aspects of financial institutions’ financial regulations. The reading also explains various approaches to analyzing banks, including the capital adequacy, asset quality, management, earnings, and liquidity and sensitivity (CAMELS) approach.
Evaluating Quality of Financial Reports
Demonstrates conceptual frameworks for assessing financial report quality (balance sheets, cash flow, etc.), including identifying potential issues that negatively affect quality. The reading also explains mean reversion in earnings and how the accrual component of earnings affects the speed of mean reversion.Integration of Financial Statement Analysis Techniques
Demonstrates frameworks for analyzing particular problems within financial statements (e.g., critiquing a credit card rating, valuing equity based on comparables, etc.). The reading also covers evaluating financial and reporting biases in the quality of a company’s financial data and recommends appropriate adjustments to improve quality and comparability with similar companies.Financial Statement Modeling
It focuses on the complexities of modeling pro forma financial statements and includes additional material on behavioral biases in forecasting.CFA Financial Statement Analysis Level 2 Sample Questions and Answers
The sample questions here are typical of the L2 exam’s complexity and depth: formatted as item sets, with a vignette to deliver a scenario that tests the CFA L2 Curriculum. (On the actual exam, each vignette applies to four questions; we’ve thrown in a couple extra to get a bit more learning in). And be sure to review the illustrated explanations we’ve provided for each question: UWorld’s question bank is designed to expose you to exam-like questions and explain the concepts tested thoroughly.
Passage
Lang & Bauer Group (LBG) is a German company that reports using IFRS. LBG has two retirement benefit plans: a defined contribution plan, open to all employees, and a defined benefit plan, closed to new participants.
LBG’s chief executive officer, Emma Schuster, asks the chief financial officer, Jan Berger, to outline the current situation of the company’s retirement benefit plans. Berger explains that the plans have distinct features, and although the accounting treatment of the defined contribution plan is relatively simple, the defined benefit plan requires a more detailed analysis. Berger presents the following information from the defined benefit plan:
| Exhibit 1 Lang & Bauer Retirement Plan Information | |
|---|---|
| (EUR millions) | 20X8 |
| Discount rate assumption | 5.00% |
| Current service costs | 1,250 |
| Past service costs | 850 |
| Actuarial loss (gain) | 200 |
| Employer contribution | 2,300 |
| Benefits paid | 1,800 |
| Actual return on plan assets | 900 |
| Pension obligation at beginning of year | 13,000 |
| Fair value of plan assets at beginning of year | 11,400 |
Berger warns Schuster that this information relies on some key assumptions, and that changes in these assumptions would have material effects on the estimates of benefit obligations and periodic pension costs. Berger lists the discount rate, the annual compensation growth, and life expectancy as some of these key assumptions.
Schuster asks Berger to prepare a comparison with defined benefit plans of LBG’s peers in Europe and in the United States. Berger explains that, since US companies comply with US GAAP, there are several differences in the way that pension costs are recognized in the profit and loss (P&L) and other comprehensive income (OCI) statements. Schuster asks Berger to provide examples of how the accounting treatment under US GAAP differs from the treatment under IFRS. Berger states that under US GAAP:
Example 1: Actuarial losses (gains) recognized in OCI are not subsequently amortized to P&L.
Example 2: The effects of plan amendments on obligations for prior services are recognized in P&L.
Example 3: Differences between actual and expected return on assets result in an actuarial loss or gain.
Which of the following best describes a feature of LBG’s defined contribution plan?
- Contributions and payments are usually made through a pension trust.
- The employer is not responsible for the investment risk of the plan assets.
- An increase in compensation levels will increase the future plan obligation.
Based on Exhibit 1, the defined benefit pension obligation (in EUR millions) at the end of the year is closest to:
- 13,950
- 14,150
- 15,950
Based on Exhibit 1, the fair value of plan assets (in EUR millions) at the end of the year is closest to:
- 10,500
- 12,800
- 14,600
What Is the CFA Level 3 Financial Statement Analysis?
There are no distinct readings for CFA Level 3 Financial Statement Analysis. It is one of several foundational topics that the CFA Level 3 exam tests implicitly while focusing on Portfolio Management.
How to Study for the CFA Financial Statement Analysis?
- The Level 1 FSA curriculum is the elephant in the room for the CFA exam. If you have no accounting background and don’t know a balance sheet from an income statement, you can get through it, but plan to devote serious time to it.
- If you have an accounting background, don’t skip over this lightly. In the CFA curriculum, accounting is a means to an end, financial statement analysis, so there’s a lot more to it.
- Both Levels 1 and 2 require a lot of attention to and—let’s face it—memorization of detail, all of which will be a lot easier if you learn the logic behind the systems.
- The CFA curriculum assumes IFRS throughout, but still requires knowledge of US GAAP and the differences between the two, especially as that affects financial statement analysis.
- Each level’s curriculum builds on the last, so be sure you build a solid understanding to go forward.
- The math is not complex, but accounting is about recording and measuring performance, so you will have to understand the math.
- Here are some hints/steps when reviewing financial statements:
- Clearly define the analysis' goal and context: the target audience, timeline, and primary topic of the analysis.
- Gather information: Gather the information needed to respond to the questions posed in step 1.
- Data processing: To synthesize the data, perform computations and create charts or other outputs.
- Examine and understand the information: Examine the data and draw conclusions or make recommendations based on it.
- Conclusions and recommendations should be developed and communicated.
- Follow-up: Update and evaluate the data on a regular basis to see if it still supports the initial conclusion.
For more information, visit our CFA Level 1 Study Schedule, Level 2 Study Schedule and Level 3 Study Schedule
Frequently Asked Questions
In contrast to Level 1, the Financial Statement Analysis Level 2 focuses on a smaller range of previously covered topics. However, these topics are covered in greater depth and detail. With about 100 formulas, L1 is often considered one of the most difficult and important topics of the CFA Level 1 exam. The Level 2 curriculum contains only 6 readings but covers the material in depth. Candidates routinely find “accounting treatment for pension liabilities” to be particularly difficult due to the depth of technical information. Consider this when allocating study time to the readings.
The best way to study for the exam is practicing with a QBank across all chapters and readings. With UWorld’s CFA Level 2 test prep that integrates active learning, studying and practicing FSA questions will be easier than ever. Candidates are also advised to review requisite QBanks offered by CFAI to get a better understanding of the curriculum.
Financial statements are written papers that detail the operations and financial performance of a business.
- A balance sheet is a representation of an organization’s assets, liabilities, and equity.
- A company’s revenues and expenses over a certain time period are the focus of the income statement. The statement provides a profit amount known as net income after subtracting expenses from sales.
- A company’s ability to generate cash to pay debts, cover operating expenses, and make investments is assessed using the cash flow statement (CFS).
After moving through a QBank the best method to monitor your current understanding of the content is taking Mock exams. UWorld’s CFA practice exams closely replicate the actual CFA L1 exam experience to help you prepare and boost your confidence on test day. Like the actual CFA exam, our mock exams consist of two 2-hour, 15-minute sessions, each with 90 multiple-choice questions spanning multiple subjects and not included in the standard QBank.
Understanding the fundamental rule of each formula will help you unlock related concepts and formulas. Think of it as learning the grammatical structures of a new language rather than memorizing phrases one by one. As you build this foundation of understanding, reinforce it through repetition and application. Take a look at our CFA L1 Formula sheet for further resources and tips.
The Financial Statement Analysis syllabus includes income statement analysis, balance sheet fundamentals, cash flow statement interpretation, revenue recognition, inventory and long-lived asset accounting, taxation, financial reporting quality, ratio analysis, intercorporate investments, and pension accounting, with Level 1 focusing on foundational concepts and Level 2 emphasizing adjustments, valuation implications, and analytical depth.
FSA accounts for approximately 11–14% of the Level 1 exam, translating to about 23–30 questions, and around 10–15% of the Level 2 exam, typically one to three item sets depending on the cycle; this makes FSA one of the most heavily tested and influential topics across the first two levels.
Level 1 FSA builds foundational understanding of financial statements, ratios, and accounting mechanics, while Level 2 requires deeper analysis, including intercorporate investments, pension accounting, inventory adjustments, revenue recognition variations, and the impact of accounting choices on valuation, making it significantly more analytical and interpretation-based.
FSA is not a stand-alone topic in Level 3, but key concepts such as earnings quality, cash flow interpretation, and accounting adjustments appear within Portfolio Management readings, where they influence valuation, capital market expectations, and asset allocation decisions.
The most challenging FSA topics include pension accounting, intercorporate investments, deferred tax assets and liabilities, revenue recognition adjustments, lease accounting, and evaluating financial reporting quality, especially at Level 2 where candidates must interpret the economic impact of accounting choices across multiple statements.
Yes. The CFA curriculum tests both IFRS and US GAAP, with candidates expected to understand key similarities, differences, and the impact of each framework on financial ratios, earnings quality, asset valuation, and comparability across firms.
Ratio analysis and accounting adjustments are central to FSA and frequently tested at both Level 1 and Level 2; candidates must understand how changes in accounting assumptions or estimates affect profitability, liquidity, leverage, and valuation metrics across the financial statements.