CFA® Financial Statement and Analysis

Summary, Syllabus, Topics, and Sample Questions (L1, L2, L3)

Financial analysis assesses a company's performance in relation to its industry and economic environment to make an investment recommendation or decision. Financial analysts' opinions and recommendations frequently concern giving capital to businesses—specifically, whether to invest in their issues of debt or equity and at what price. A debt securities investor is concerned about the company's ability to pay interest and repay the amount borrowed. An equity securities investor is a firm owner with a residual interest, who is concerned about the company's ability to pay dividends and to realize an increase in value and stock price.

Overall, financial analysis evaluates a company's ability to create a return on capital that is at least equivalent to the cost of that capital, grow its activities profitably, and create enough cash to satisfy obligations and pursue opportunities.

The information obtained from a company's financial reports is the starting point for fundamental financial analysis. These financial reports include audited financial statements, regulation-required additional disclosures, and any accompanying (unaudited) management commentary.

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Study Tips for the CFA Financial Statement Analysis

  1. 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.
  2. And if you do 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.
  3. 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.
  4. 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.
  5. Each level’s curriculum builds on the last, so be sure you build a solid understanding to go forward.
  6. The math is not complex, but accounting is about recording and measuring performance, so you will have to understand the math.
  7. 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.

Visit our CFA Level 1 Study Guide, CFA Level 2 Study Guide, and CFA Level 3 Study Guide for more information.

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 and 12 readings, 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. 1) A balance sheet is a representation of an organization’s assets, liabilities, and equity. 2) 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. 3) A company’s ability to generate cash to pay debts, cover operating expenses, and make investments is assessed using the cash flow statement (CFS). Here is a sample question around income statements.
After moving through a QBank the best method to monitor your current understanding of the content is taking Mock exams. UWorld’s mock 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.
Financial statements are written documents that describe a company’s operations and financial performance. 1) The balance sheet is a snapshot of an organization’s assets, liabilities, and stockholders’ equity. 2) The income statement is primarily concerned with a company’s revenues and expenses over a given time period. After subtracting expenses from sales, the statement yields a profit amount known as net income. 3) The cash flow statement (CFS) assesses a company’s ability to generate cash to pay debts, cover operating expenses, and make investments. Here is a sample question around income statements.

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.

Other CFA Exam Topics

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