CFA level 1
December 2018
Source: Apple Inc. annual report and CFA curriculum
Financial Statement Analysis: An Introduction
Roles of financial reporting and financial statement analysis
Financial reporting refers to the way companies show their financial
performance to investors, creditors, and other interested parties by preparing
and presenting financial statements.
The role of financial statement analysis is to use the information in a
company’s financial statements, along with other relevant information, to
make economic decisions.
Source: CFA curriculum
Components of Financial statement
The balance
sheet
IS The income statement (also known as the statement of
operations or the profit and loss statement)
BS The balance sheet (also known as the statement of
financial position or statement of financial condition)
The statement of changes in equity reports the amounts
and sources of changes in equity investors’ investment in
The income
OE the firm over a period of time
The statement of
statement changes in
equity
The statement of cash flows
The statement of CFS Operating cash flows
cash flows Investing cash flows
Financing cash flows
Source: CFA curriculum
Source: Apple Inc. annual report
Source: Apple Inc. annual report
Source: Apple Inc. annual report
Source: Apple Inc. annual report
Source: Apple Inc. annual report
Are they linked to each other?
Financial statement notes and supplementary
information
• Financial statement notes ( footnotes)
• Provide information about accounting methods, assumptions, and estimates
used by management
• Audited
• 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
Source: CFA curriculum
Financial statement notes and supplementary
information
• Management’s discussion and analysis (MD&A)
• IFRS guidance recommends that management commentary address the
nature of the business, management's objectives, the company's past
performance, the performance measures used, and the company's key
relationships, resources, and risks
• Some parts of MD&A may be unaudited
• Forward looking statements
• How would you brag about your company?
Source: CFA curriculum
Source: Apple Inc. annual report
Audits
• An audit is an independent review of an entity’s financial statements
• The standard auditor’s opinion contains three parts:
Source: CFA curriculum
Opinion of Audit
Adverse opinion
Unqualified opinion
Qualified opinion
Disclaimer of opinion
Interim reports are not audited
Source: CFA curriculum
Quiz
1. An audit report explains exceptions to the accounting principles.
Which can be a probable opinion?
a) Unqualified opinion
b) Qualified opinion
c) Adverse opinion
2. An audit report explains going concern assumption. The report
mention which of the following opinion:
a) Adverse opinion
b) Qualified opinion
c) None of these
Break time- 3 more concepts to cover today
Understanding Income statement – 2 classes
• 1 Theory
• 1 Practise
Understanding Balance sheet – 1 class
Understanding cash flow statements – 2 classes
Inventories – 2 classes
Long lived assets – 2 classes
Income taxes – 2 classes
Non- current liabilities – 3 classes
Bonus class: Financial ratios & IFRS vs U.S. GAAP policies – 1 class
Internal controls
• Processes by which the company ensures that it presents accurate financial
statements.
• The auditor can provide this opinion separately
Type of reports
• Annual reports: Audited
• Interim reports (Quarterly / Semi-annual): not necessarily audited
Source: CFA curriculum
Financial statement analysis framework
• State the objective and context
• Gather data
• Process the data
• Analyze and interpret the data
• Report the conclusions or recommendations
• Update the analysis – V. V. important
Source: CFA curriculum
The basic accounting equation
• Assets = liabilities + owners’ equity [ A = L + OE]
• Assets = Liabilities
+ contributed capital
+ beginning retained earnings
+ revenue
– expenses
– dividends
BASE analysis
Source: CFA curriculum
Double-entry accounting
• A way of systematically recording the financial transactions of a
company so that each transaction is recorded twice
• Owner‘s investments and revenues increase owner‘s equity, while
owner‘s withdrawals and expenses decrease owner‘s equity
• Revenues increase owner‘s equity, just as an increase in owner‘s capital does
• Purchase Equipment for Cash [A + -]
• Purchase Supplies on Credit [A+ L+]
• Provide Services for Cash [A+ OE+]
• Payment of Expenses in Cash [A- OE-]
• By definition, increases in expenses yield decreases in equity
Source: CFA curriculum
Quiz
Apple Inc. borrows $50,000 cash from Bank. How does this transaction affect the accounting equation for Apple Inc.?
a. Assets increase by $50,000; liabilities increase by $50,000; no effect on equity.
b. Assets increase by $50,000; no effect on liabilities; equity increases by $50,000.
c. Assets increase by $50,000; liabilities decrease by $50,000; no effect on equity.
d. No effect on assets; liabilities increase by $50,000; equity increases by $50,000.
e. No effect on assets; liabilities increase by $50,000; equity decreases by $50,000.
An analyst has compiled the following information regarding RDZ, Inc.
Liabilities at year-end €1,000 Contributed capital at year-end €1,000
Beginning retained earnings €500 Revenue during the year €4,000
Expenses during the year €3,800 There have been no distributions to
owners. The analyst’s estimate of total assets at year-end should be
closest to:
A. €2,300.
B. €2,500.
C. €2,700.
Source: CFA curriculum
CFA curriculum example
• C is correct. Ending retained earnings is first determined by adding
revenue minus expenses to beginning retained earnings to obtain
€700. Total assets would be equal to the sum of liabilities, contributed
capital, and ending retained earnings: €1,000 + €1,000 + €700 =
€2,700.
Source: CFA curriculum
An analyst’s examination of the performance of a company is most
likely to include an assessment of a company’s:
a) assets relative to its liabilities.
b) MD&A.
c) cash flow generating ability.
