CFA Financial Statement Analysis - CFA L1 Smart Tips To Pass

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Hello and a warm welcome to another important section of the CFA Level 1 Exam i.e., Financial Statement Analysis (FSA). In this introductory lecture, we will discuss the strategy to deal with this area and how to nail it down in the exam.

We start with the accounting equation which is Assets minus Liabilities is equal to Equity (A-L=E). This is arguably the most important equation of this section. It is the foundation of the Balance Sheet Framework.

Now, it's time to expand the accounting equation into a more granular form. We first turn our attention to the 'A' of the accounting equation i.e., Assets. We can further expand assets into Current Assets & Non-Current Assets. This lecture discusses the following current assets:

1. Cash

2. A/c Receivables

3. Marketable Securities

4. Inventory

One of the non-current assets i.e., Goodwill is also discussed at the end of the lecture.

This lecture discusses the following non-current assets and current liabilities:

1. Property Plant & Equipment (PPE)  - Non-Current Asset

2. A/c Payables - Current Liability

3. Short-term debt (STD) - Current Liability

The following ratios from the balance sheet are discussed in this lecture:

1. Current Ratio (Current Assets / Current Liabilities)

2. Leverage Ratio (Assets / Liabilities)

The following accounts from the balance sheet are also discussed:

1. Long-Term Debt - Non-Current Liability

2. Retained Earnings - Equity

3. Shareholders Capital - Equity

Finally, the Balance Sheet Framework concludes with a transition from the beginning balance sheet to the ending balance sheet.

Now we turn our attention to another financial statement known as 'The Cash Flow Statement'. This lecture introduces the audience to the Cash Flow Statement and cash-basis accounting. The lecture also compares the cash flow statement and the balance sheet framework.

Depending on the nature of the transaction, each cash inflow and cash outflow can be classified into any one of the three types of Cash Flow Statements:

1. Cash Flow from Operations (CFO)

2. Cash Flow from Investments (CFI)

3. Cash Flow from Financing (CFF)

Finally, once we have created all three cash flow statements, it's time to connect them to the Balance Sheet. Watch this lecture to understand this important final step of the process.

Throughout this course we will celebrate your progress at 25%, 50%, 75% and 100%. I really want you to succeed but you need to take action and keep going so look forward to these milestones of progress. I will see you there and cheer you on as you keep going from one milestone to the next >>

Now we focus on the third financial statement i.e., 'The Income Statement'. Unlike the cash flow statement based on the cash basis of accounting, the income statement uses the accrual basis of accounting. We start with the world's most simple income statement:

                                                                      Revenue - Expenses = Profit

In this lecture, we start with the Revenue Recognition Rules. A seller has to meet certain conditions for recognising revenue in the income statement. This involves the concept of Accrual Basis Accounting.

To recognise an expense in the income statement, first, we need to understand the matching principle. The matching principle is especially important in the concept of accrual accounting. The matching principle states that businesses should match related revenues and expenses in the same period. They do this in order to link the costs of an asset or revenue to its benefits.

Now going further down the income statement, we now discuss the Cost of Goods Sold (COGS), Gross Profit and then Selling General & Administrative (SG&A) expenses in this lecture.

Next, EBITDA is discussed in this lecture.

Let's understand the concept of Depreciation and Amortisation with an example in this lecture.

The following accounts from the income statement are discussed in this lecture:

• Operating Profit - Earning Before Interest Tax (EBIT)

• Interest Expense

• Earning Before Tax (EBT)

• Tax Expense

• Net Income

Important ratios from the income statement are also discussed:

• Gross Profit Margin

• Operating Profit Margin

• Net Profit Margin

• Return on Equity (ROE)

Finally, once we have prepared the income statement, it's time to connect it to the Balance Sheet. Watch this lecture to understand this important final step of the process.

This lecture is a foreshadowing of the coming topics in this course, which include:

• Other Comprehensive Income (OCI) & Classification of Marketable Securities

• Inventories

• Depreciation, Amortisation, Impairment of Assets

• Basic and Diluted EPS

• Bond Accounting

• In-Direct method of preparing Cash flow from Operations (CFO) Statement

• Income Tax (Deferred Tax Assets & Deferred Tax Liabilities)

Marketable securities can be classified into one of the following three categories:

1. Available for Sale

2. Held For Trading

3. Held To Maturity

Marketable securities are either equity or debt instruments. Their values change with time. Learn how these changes impact the balance sheet and the Other Comprehensive Income (OCI). Since Marketable Securities are either equity or debt instruments, they give dividends or interest income. Watch this lecture to learn how these earnings impact the income statement.

This section covers another important reading from financial statement analysis i.e., "Inventories". Firms must select a cost flow method (known as the cost flow assumption under U.S. GAAP and the cost flow formula under IFRS) to allocate the inventory cost to the income statement (COGS) and the balance sheet (ending inventory).

Under IFRS, the permissible methods are:

1. Specific identification.

2. First-in, First-out.

3. Weighted average cost.

U.S. GAAP permits these same cost flow methods, as well as the Last-In, First-Out (LIFO)

method. LIFO is not allowed under IFRS.

This lecture focuses on Last-In, First Out (LIFO) Method.

In this lecture, we will discuss the second cost flow method known as FIFO.

Under the first-in, first-out (FIFO) method, the first item purchased is assumed to be the first item sold. The advantage of FIFO is that ending inventory is valued based on the most recent purchases, arguably the best approximation of current cost. Conversely, FIFO COGS is based on the earliest purchase costs. In an inflationary environment, COGS will be understated compared to the current cost. As a result, earnings will be overstated.

Lastly, learn about the impact of LIFO and FIFO cost flow methods on the three financial statements accounts and ratios. At the end of the lecture, learn about Periodic and Perpetual Inventory Systems.

Throughout this course we will celebrate your progress at 25%, 50%, 75% and 100%. I really want you to succeed but you need to take action and keep going so look forward to these milestones of progress. I will see you there and cheer you on as you keep going from one milestone to the next >>

This section is all about Depreciation, Amortisation, & Impairment. The first few lectures will be about different methods of depreciation and amortisation. Next, we will discuss the difference between depreciation and impairment.

We begin here in this first video lecture with an introduction to depreciation. Then, the first method of depreciation, known as the "Straight-Line Method", is discussed.

Here we start the discussion of accelerated methods of depreciation. One commonly used accelerated depreciation method is the "Double Declining Balance (DDB) Method". In this method, each year, an asset's net book value is reduced by a factor of 2 divided by its useful life. Remember that the salvage or residual value term is not present in the formula of DDB. Therefore, check at the start of every period that the asset's net book value is higher than its salvage or residual value.

In this lecture, you will learn how to use morse code to compare the book values of the depreciating asset on the balance sheet using the two different depreciation methods (Straight-Line & Double Declining Balance). Depreciation expenses using the morse code will also be compared for both the methods of depreciation.

In the second half of the lecture, you will learn the essential calculator skills to calculate depreciation expense (and net book value) using either one of the two methods discussed previously.

In this lecture, first, we will discuss the type of questions you should expect in the exam from depreciation. Then, another important concept known as the "Amortisation" of intangible assets will be discussed.

In the last video lecture of this section, we will discuss the following two topics:

• Goodwill (An intangible asset with indefinite life and unidentifiable)

• What is Impairment and how it is different from depreciation and amortisation?

The concept of Earning Per Share (EPS), both BASIC & DILUTED, has been a long-time favourite for CFA Examiners. It's almost a must-appear topic for the CFA Level 1 Exam. Here in this section, we will discuss the following concepts:

• Basic EPS (concept & calculation)

• Diluted EPS (concept & calculation)

• Calculation of Weighted Average Number of Common Shares (WANCS) for the Year

• Impact of Stock Splits, Reverse Stock Splits, and Stock Dividends on WANCS

• The difference between Simple Capital Structure and Complex Capital Structure

• To check whether a convertible preferred stock, convertible bond and options are dilutive or anti-dilutive.

We start here in this lecture with the first concept i.e., Basic EPS and WANCS.

In this lecture, you will learn the differences between a Simple Capital Structure and a Complex Capital Structure.

Watch and learn the concept of Diluted EPS in this lecture. Also, we will be discussing Convertible Preferred Stock. We will check whether it is dilutive or anti-dilutive with an example.

Finally, in this last lecture of the section, we will be discussing Convertible Bonds and Stock Options/Warrants. Using an example and sample data, we will individually check if they are dilutive or anti-dilutive. 

Throughout this course we will celebrate your progress at 25%, 50%, 75% and 100%. I really want you to succeed but you need to take action and keep going so look forward to these milestones of progress. I will see you there and cheer you on as you keep going from one milestone to the next >>