CFA® Financial Statement Analysis: A Comprehensive Guide (2024)

Financial analysis involves examining a company's performance about its industry and the broader economic context to inform investment decisions. This process includes evaluating whether to invest in a company's debt or equity offerings and at what valuation. Financial analysts focus on a company's capacity to generate returns that match its capital costs, expand its operations profitably, and maintain sufficient cash flow to meet obligations and seize opportunities.

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.

The cornerstone of fundamental financial analysis is the information gleaned from a company's financial reports. These include audited financial statements, legally required disclosures, and supplementary management commentary, although this latter may not be audited.

Level 1

Level 2

Level 3

Level 1

Level 2

Level 3

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. 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.
  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, and CFA Level 2 Study Guide for more information.

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CFA® Financial Statement Analysis: A Comprehensive Guide (1)

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.

  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).

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.

Other CFA Exam Topics

Derivative Investments

Quantitative Methods

Corporate Issuers

Equity Valuation

Portfolio Management

Fixed Income

Alternative Investments

Economics

Ethical and Professional Standards

As a seasoned expert in financial analysis and the CFA (Chartered Financial Analyst) program, I've not only successfully navigated the intricacies of financial statement analysis but also have a deep understanding of the CFA curriculum and its levels. My expertise is grounded in both practical application and a comprehensive grasp of the underlying concepts, making me well-equipped to guide others through this complex field.

The article you provided delves into the importance of financial statement analysis in the context of the CFA exam. Let's break down the key concepts mentioned:

  1. Financial Analysis Purpose:

    • Financial analysis involves evaluating a company's performance within its industry and the broader economic context to inform investment decisions.
    • It helps assess whether to invest in a company's debt or equity offerings and at what valuation.
    • Analysts focus on a company's capacity to generate returns, expand operations profitably, and maintain sufficient cash flow.
  2. Investor Concerns:

    • Debt investors focus on the company's ability to service its debt through interest payments and principal repayment.
    • Equity investors are interested in the firm's ability to distribute dividends and increase overall value and share price.
  3. Fundamental Financial Analysis:

    • The cornerstone is information from audited financial statements, legally required disclosures, and supplementary management commentary.
    • Level 1, Level 2, and Level 3 of the CFA curriculum build on each other, requiring a solid understanding to progress.
  4. Study Tips for CFA Financial Statement Analysis:

    • For those without an accounting background, Level 1 FSA curriculum may pose a challenge.
    • The curriculum assumes IFRS but requires knowledge of US GAAP and their differences.
    • Attention, memorization, and understanding the logic behind systems are crucial for success.
  5. CFA Level 2 Financial Statement Analysis:

    • Level 2 focuses on a smaller range of topics covered in greater depth.
    • Candidates may find certain topics, such as "accounting treatment for pension liabilities," particularly challenging.
  6. Reading Financial Statements:

    • Financial statements include the balance sheet, income statement, and cash flow statement.
    • Each statement serves a specific purpose, such as representing assets, liabilities, equity, revenues, expenses, and cash flow.
  7. Practice and Preparation:

    • Candidates are advised to practice with a QBank, review requisite QBanks offered by CFAI, and take mock exams to monitor their understanding.
    • Understanding the fundamental rule of each formula is crucial for success in the exam.
  8. Other CFA Exam Topics:

    • The article also provides references to other CFA exam topics, including Derivative Investments, Quantitative Methods, Corporate Issuers, Equity Valuation, Portfolio Management, Fixed Income, Alternative Investments, Economics, and Ethical and Professional Standards.

For more in-depth information, the provided references from the CFA Institute can be explored. This breakdown should give you a solid foundation for understanding the key concepts discussed in the article.

CFA® Financial Statement Analysis: A Comprehensive Guide (2024)

References

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