CFA level 1 FSA pre req readings

Objective of Financial Reporting

To provide financial information that is useful to users in making decisions about providing resources to the entity.

Importance of Financial Reporting Standards

They provide principles for preparing financial reports and determine the types and amounts of information that must be provided to users.

International Accounting Standards Board (IASB)

A standard-setting body whose principal objective is to develop and promote the use and adoption of a single set of standards.

Financial Reporting Standard-Setting Bodies

Typically independent, private, not-for-profit organizations that recognize, require, and set standards.

Regulatory Authorities

Government entities that enforce standards in financial reporting.

General Requirements for Financial Statements under IFRS

Set of guidelines that govern the preparation of financial statements to ensure transparency and comparability.

Statement of Financial Position

A financial statement that summarizes a company's assets, liabilities, and equity at a specific point in time.

Statement of Comprehensive Income

A financial statement that shows the total income and expenses of a company, including all non-owner changes in equity.

Statement of Changes in Equity

A financial statement that outlines the changes in equity from transactions with owners and other events during a period.

Statement of Cash Flows

A financial statement that provides information about cash inflows and outflows over a period.

Qualitative Characteristics of Financial Reports

Attributes that make financial information useful, including relevance, reliability, comparability, and understandability.

Constraints on Financial Reports

Limitations that affect the preparation of financial reports, such as cost versus benefit.

Required Reporting Elements

Components that must be included in financial reports, such as assets, liabilities, equity, income, and expenses.

Accounting Standards

Principles that guide the preparation of financial reports and dictate the information required for users.

FASB

Financial Accounting Standards Board, the standard-setting body for U.S. GAAP.

Convergence of Standards

The process of aligning and harmonizing different accounting standards to improve comparability.

Judgments in Financial Reporting

Estimates and decisions made by management that can affect the reported financial information.

Private Sector Self-Regulatory Organizations (SROs)

Organizations that develop and enforce standards in the private sector.

CFA Institute

An organization that provides education and sets standards for the investment profession.

Transparency in Financial Reporting

The quality of being open and clear about financial information, allowing users to make informed decisions.

Comparability in Financial Reporting

The ability to compare financial statements of different entities to identify similarities and differences.

Decision-Useful Information

Financial information that is relevant and helpful for users in making economic decisions.

IOSCO

International Organization of Securities Commissions made up of the regulators of different markets.

Core objectives of regulation

Efficient and transparent markets, protecting investors, ensuring that markets are fair, and reducing systemic risk.

SEC

Securities and Exchange Commission (U.S.) that oversees any company issuing securities in the U.S. subject to its rules/regulations.

Filings

Standardized forms that companies must submit to comply with SEC regulations.

Conceptual Framework

Objective to provide financial information useful in making decisions about providing resources to the entity.

Relevance

Information is relevant if it would affect or make a difference in user's decisions; material information is relevant.

Faithful representation

Information that is complete, neutral, and free from error.

Comparability

An enhancing qualitative characteristic that allows users to identify similarities and differences between entities.

Verifiability

Involves trade-offs; estimates are not verifiable.

Timeliness

Information must be available prior to making a decision.

Understandability

Information must be presented clearly and concisely.

Cost of providing information

Benefits should outweigh costs.

Assets

An economic resource controlled by the entity (what a company owns).

Liabilities

An obligation of the entity to transfer an economic resource (what a company owes).

Equity

Assets minus Liabilities.

Income

Increases in assets, decreases in liabilities that result in increases in equity (revenue + gains).

Expenses

Decreases in assets, increases in liabilities that result in decreases in equity (costs + losses).

Accrual accounting

Matching principle where revenue is recognized as earned.

Going concern

Assumption that a company will continue to operate.

Historical cost

Amount originally paid for an asset.

Amortized cost

Historical cost minus depreciation/amortization.

Current cost

Amount required today for replacement of an asset.

Realizable value

Amount realized from a sale of an asset.

Present value

Discounted value of future net cash inflows.

Fair value

Amount realized in a sale under normal market conditions.

Required Financial Statements

Includes Statement of financial position (Balance Sheet) and Statement of Comprehensive Income.

Notes to financial statements

Additional information provided to clarify and explain the financial statements.

fair presentation

Faithful representation of the effects of transactions.

accrual basis

An accounting method where revenue is recognized when earned, regardless of when cash is received.

materiality & aggregation

The principle that similar items are aggregated and presented separately from dissimilar items.

Balance Sheet

A financial statement that presents the accounting equation: Assets = Liabilities + Owner's Equity.

Income Statement

A financial statement that summarizes revenues and expenses over a period, resulting in net income or loss.

Net Income

The total revenue minus total expenses.

Other Comprehensive Income (OCI)

Items that impact owner's equity but are not the results of transactions with shareowners.

Total Comprehensive Income (TCI)

Calculated as Net Income plus Other Comprehensive Income.

Cash Flow Statement

A statement that reports the sources and uses of cash from operations, investing, and financing.

Common-size income statement

An income statement where each line item is expressed as a percentage of total revenue.

Comprehensive income

The total change in equity from non-owner sources.

Revenue recognition

The accounting principle that determines when revenue is recognized in the financial statements.

Expense recognition

The principle that expenses should be recognized in the same period as the revenues they help to generate.

Operating components

Parts of the income statement that relate to the core business operations.

Non-operating components

Parts of the income statement that relate to secondary activities not central to the business operations.

Financial performance evaluation

The process of assessing a company's financial health using financial ratios and common-size statements.

Income Statement (IS)

Presents a company's financial results over a period of time.

Revenue

Amounts charged for goods/services in the ordinary activities of the business, reported as a 'net' figure after estimated returns, rebates, discounts, etc.

Gross Profit/Margin

Calculated as Revenue minus Cost of Goods Sold (COGS), expressed as a percentage of Revenue.

Operating Profit/Margin

May or may not include non-operating income/expenses.

Net Income/Margin

The bottom line of the income statement, representing total profit after all expenses.

Accounts Receivable

Revenue recognized when payment is received after delivery of goods/services.

Unearned Revenue

Revenue recognized when payment is received before delivery of goods/services.

Performance Obligations

Distinct goods/services that a customer can benefit from on its own, which can be separated from other goods/services in a contract.

Matching Principle

Concept of matching costs with revenues, where product costs are directly related to revenue and period costs are related to operations regardless of revenue levels.

Doubtful Accounts

Estimation of the amount that would be uncollectible, typically derived from past experiences, and expensed on the income statement for reporting purposes.

Direct Write-Off Method

An accounting method where an expense is recognized only when a default occurs.

Warranties

Estimated expenses based on the level of sales and past experiences, expensed on the income statement for reporting purposes.

Core Principle of Revenue Recognition

Revenue recognized to reflect the transfer of goods/services to customers in an amount that reflects the consideration to be received.

Five Steps of Revenue Recognition

1. Identify the contract(s) with a customer. 2. Identify the separate/distinct performance obligations in the contract. 3. Determine the transaction price. 4. Allocate the price to the performance obligations. 5. Recognize revenue when a performance obligation is satisfied.

Contract

An agreement between parties that establishes obligations and rights, existing only if collectability is probable.

IFRS

International Financial Reporting Standards, which may present income statements as separate statements or a single statement of comprehensive income.

GAAP

Generally Accepted Accounting Principles, which may present income statements similarly to IFRS.

Multi-step Income Statement

An income statement format that separates operating revenues and expenses from non-operating revenues and expenses.

Operating Expenses

Expenses incurred in the normal course of business operations, which may include selling, general, and administrative expenses.

Income from Associates

Income derived from investments in associated companies.

Discontinued Operations

Parts of a business that have been disposed of or are classified as held for sale.

Depreciation

Costs of physical assets allocated over the period of time during which they provide economic benefits.

Amortization

Costs of intangible assets allocated over the period of time during which they provide economic benefits.

Cost Model

A method of depreciation where the asset is depreciated based on its cost minus salvage value.

Revaluation Model

A method of depreciation where the asset is revalued to fair value and then depreciated.

Straight-Line (S.L.) Method

A method of depreciation that allocates an equal amount of depreciation expense each year.

Accelerated Methods

Depreciation methods that allocate a greater proportion of the cost to the early years of the asset's life.

Useful Life

The estimated period over which an asset is expected to be used.

Salvage Value

The estimated residual value of an asset at the end of its useful life.

Net Income (NI)

The total profit of a company after all expenses have been deducted from revenues.

Gross Profit Margin

Gross profit divided by sales, indicating the effectiveness at manufacturing or purchasing.

Operating Profit Margin

Operating profit divided by sales, indicating the effectiveness at operations.

Net Income Margin

Net income divided by sales, measuring overall effectiveness.

Non-Operating Items

Items typically reported separately that include gains or losses from investing or financing activities.

Common Size Analysis

An analysis where each line item is expressed as a percentage of revenue.