CFA Level 1: Financial Statement Analysis

2 Elements of Financial Reporting Quality (L8)

• Faithful representation (Absence of material, Completeness & Neutrality)

• Relevance

Auditors (L8)

A discipling mechanism that focuses on checking accounts and see if there is any mistreatment.

Regulators (SEC) (L8)

A discipling mechanism that focus on revenue recognition as a big area of interest.

Audit Report (L1)

An independent review of a company’s financial statements that must be presented as true & fair. Under US GAAP they must provide an opinion on company’s internal controls.

Qualified Auditor Opinion (L1)

A type of auditor opinion that states exceptions to accounting principles, due to a company's financial statements are generally fair, but contain material misstatements or limitations that are not pervasive.

Unqualified Auditor Opinions (L1)

A type of auditor opinion that states a unmodified or clean opinion, due to indications that a company’s financial statements are presented fairly, in all material respects, and in accordance with GAAP or IFRS and no significant misstatements and that the financial records are reliable.. Considered the best type of auditor opinion.

Adverse Opinion (L1)

A type of auditor opinion that states that the financial statements are not presented fairly, due to a company's financial statements are materially misstated, not prepared according to GAAP, and do not accurately represent its financial position. Considered the most serious type of opinion.

Disclaimer of Opinion (L1)

A type of auditor opinion that states the inability to form an opinion, due to sufficient evidence.

Footnotes (L1)

Additional information presented in primary financial statements. It is used as the basis of representation, and describing accounting methods, and estimates.

Lessee (L6)

The party who directs how the asset is used, and receives benefits from the asset over a contract.

• Makes standard periodic payments.

• Avoid ownership risks such as obsolesce, low up front payments, & effective interest rates lower than unsecured borrowing.

Lessor (L6)

Legal owner of said asset, who grants the rights to use in exchange for periodic payments.

• Increase market for products & interest incomes.

Tax Base of Asset (L7)

Amount deductible for tax purposes in future period as economic benefits are realized.

6 Stages of Financial Analysis

I. Articulate

II. Collect Data

III. Process Data

IV. Analyze Data

V. Draw Conclusion

VI. Follow Up

Articulate (L1)

A stage of financial statement analysis that states what is trying to be achieved and what is the general output.

Collect Data (L1)

A stage of financial statement analysis in which company visits, look at trade journals, and collect data from financial statements.

Process Data (L1)

A stage of financial statement analysis that focuses on creating data visualization and computing ratios.

Analyze Data (L1)

A stage of financial statement analysis that describes data and interpretations.

Draw Conclusion (L1)

A stage of financial statement analysis that lists recommendations and draw conclusions from the data.

Follow Up (L1)

A stage of financial statement analysis that focuses on updating analysis and conduct a follow up.