2026 Level 1 - Financial Statement Analysis

A comprehensive set of flashcards summarizing key vocabulary and concepts from financial statement analysis.

Financial Statement Analysis Framework

The steps followed to analyze financial statements which include determining the purpose, collecting and processing data, analyzing data, and communicating conclusions.

Regulatory Filings

Documents submitted to regulatory bodies such as the SEC and European authorities that contain crucial financial information concerning a company.

Management Commentary (MD&A)

A section of financial reports that provides management's narrative regarding the company’s financial condition and operational results.

Audit Reports

Independent assessments of the financial statements providing reasonable assurance that the statements are free from material misstatement.

Intangible Assets

Non-monetary assets without physical substance, such as patents and trademarks, which can be identified and generate future economic benefits.

Goodwill

The excess of the purchase price over the fair value of identifiable assets and liabilities in a business acquisition.

Free Cash Flow (FCF)

Cash generated by the business that is available for distribution to investors after necessary capital expenditures.

Earnings Per Share (EPS)

A financial metric calculated as net income divided by the number of outstanding shares of common stock.

Liquidity Ratios

Measures used to evaluate a company's ability to meet short-term obligations, including the current ratio and quick ratio.

Profitability Ratios

Metrics that assess a company's ability to generate earnings relative to its revenue, assets, or equity, including gross margin and net profit margin.

Common Size Analysis

Financial analysis technique that expresses all items in the financial statements as a percentage of a common figure, such as total revenue or total assets.

Deferred Tax Assets and Liabilities

Temporary differences between accounting income and taxable income reported on the balance sheet that can result in future tax benefits or obligations.

Step 1 of Analysis Framework

Articulate the purpose and context of analysis by identifying the information needed and the objectives.

Step 2 of Analysis Framework

Collecting data by acquiring financial statements, industry data, and economic information.

Step 3 of Analysis Framework

Processing data by performing computations, such as ratio analysis or common-size statements.

Step 4 of Analysis Framework

Analyzing and interpreting data to provide a basis for recommendations or conclusions.

Step 5 of Analysis Framework

Developing and communicating conclusions or recommendations through a formal report.

Step 6 of Analysis Framework

Follow-up by periodically updating the analysis to reflect new information or trends.

Unqualified Audit Opinion

An auditor's report stating that financial statements are presented fairly in all material respects.

Qualified Audit Opinion

An opinion issued when financial statements are fairly presented except for a specific limited deviation.

Adverse Audit Opinion

An opinion issued when financial statements are materially misstated and do not conform to standards.

Disclaimer of Opinion

Issued when the auditor is unable to express an opinion due to a significant limitation in scope.

Proxy Statement

A document providing information for shareholders to vote on corporate matters at annual meetings.

Income Statement

A statement reporting the company's revenues and expenses over a specific period of time.

Balance Sheet

A report showing the company's financial position (assets, liabilities, and equity) at a specific point in time.

Cash Flow Statement

A report detailing cash inflows and outflows from operating, investing, and financing activities.

Vertical Common-Size Analysis

An analysis where each line item on a financial statement is expressed as a percentage of a base figure (e.g., total assets or revenue).

Horizontal Common-Size Analysis

An analysis comparing financial results across time periods, expressing each period's data as a percentage of a base year's value.

Current Ratio Formula

Current Ratio = \frac{Current\ Assets}{Current\ Liabilities}

Quick Ratio Formula

Quick\ Ratio = \frac{Cash + Marketable\ Securities + Receivables}{Current\ Liabilities}

Cash Ratio Formula

Cash\ Ratio = \frac{Cash + Marketable\ Securities}{Current\ Liabilities}

Inventory Turnover Formula

Inventory\ Turnover = \frac{Cost\ of\ Goods\ Sold}{Average\ Inventory}

Days Inventory on Hand (DIH)

DIH = \frac{365}{Inventory\ Turnover}

Receivables Turnover Formula

Receivables\ Turnover = \frac{Revenue}{Average\ Accounts\ Receivable}

Days Sales Outstanding (DSO)

DSO = \frac{365}{Receivables\ Turnover}

Payables Turnover Formula

Payables\ Turnover = \frac{Purchases}{Average\ Accounts\ Payable}

Total Asset Turnover Formula

Total\ Asset\ Turnover = \frac{Revenue}{Average\ Total\ Assets}

Working Capital Turnover Formula

Working\ Capital\ Turnover = \frac{Revenue}{Average\ Working\ Capital}

Gross Profit Margin Formula

Gross\ Profit\ Margin = \frac{Gross\ Profit}{Revenue}

Operating Profit Margin Formula

Operating\ Profit\ Margin = \frac{Operating\ Profit}{Revenue}

Net Profit Margin Formula

Net\ Profit\ Margin = \frac{Net\ Income}{Revenue}

Return on Assets (ROA) Formula

ROA = \frac{Net\ Income}{Average\ Total\ Assets}

Return on Equity (ROE) Formula

ROE = \frac{Net\ Income}{Average\ Total\ Equity}

Debt-to-Equity Ratio

Debt-to-Equity = \frac{Total\ Debt}{Total\ Shareholders'\ Equity}

Interest Coverage Ratio (Times Interest Earned)

Interest\ Coverage = \frac{EBIT}{Interest\ Expense}

Sustainability Growth Rate Formula

Sustainable\ Growth = ROE \times (1 - Dividend\ Payout\ Ratio)

3-Stage DuPont Analysis ROE

ROE = Net\ Profit\ Margin \times Asset\ Turnover \times Leverage\ Ratio

Dividend Payout Ratio Formula

Payout\ Ratio = \frac{Dividends\ Declared}{Net\ Income}

Retention Rate (b)

Retention\ Rate = 1 - Dividend\ Payout\ Ratio

Operating Cycle Formula

Operating\ Cycle = Days\ Inventory\ on\ Hand + Days\ Sales\ Outstanding

Cash Conversion Cycle (CCC)

CCC = DIH + DSO - Number\ of\ Days\ in\ Payables

Basic Earnings Per Share (EPS)

Basic\ EPS = \frac{Net\ Income - Preferred\ Dividends}{Weighted\ Average\ Shares\ Outstanding}

Weighted Average Shares Outstanding

The number of shares outstanding adjusted for stock splits and share repurchases during the period.

Diluted EPS

An EPS calculation that includes the impact of all potentially dilutive securities like options and convertible bonds.

Antidilutive Security

A security that would increase EPS if converted or exercised; it is excluded from diluted EPS calculations.

Gross Profit

Gross\ Profit = Revenue - Cost\ of\ Goods\ Sold

Operating Income (EBIT)

Earnings before interest and taxes; calculated as Gross Profit minus Operating Expenses.

Working Capital

Working\ Capital = Current\ Assets - Current\ Liabilities

Financial Leverage Ratio

Financial\ Leverage = \frac{Average\ Total\ Assets}{Average\ Total\ Equity}

Direct Method for Cash Flow

A method of reporting operating cash flows by listing specific cash receipts and payments.

Indirect Method for Cash Flow

A method of reporting operating cash flows by adjusting net income for non-cash items and changes in working capital.

Operating Cash Flow (CFO)

Cash generated or used by a company's core business operations.

Investing Cash Flow (CFI)

Cash related to the purchase and sale of long-term assets and investments.

Financing Cash Flow (CFF)

Cash related to activities such as issuing debt, repurchasing stock, or paying dividends.

Revenue Recognition: Step 1

Identify the contract with the customer.

Revenue Recognition: Step 2

Identify the separate performance obligations in the contract.

Revenue Recognition: Step 3

Determine the transaction price.

Revenue Recognition: Step 4

Allocate the transaction price to the performance obligations.

Revenue Recognition: Step 5

Recognize revenue when (or as) the entity satisfies a performance obligation.

Accrual Accounting

An accounting method where revenue is recorded when earned and expenses when incurred, regardless of cash timing.

Matching Principle

The accounting principle that requires expenses to be recorded in the same period as the revenues they help generate.

FIFO Inventory Method

Assumes the first items placed in inventory are the first ones sold.

LIFO Inventory Method

Assumes the last items placed in inventory are the first ones sold (not allowed under IFRS).

Average Cost Inventory Method

Assigns a cost to inventory based on the weighted average cost of all similar items available for sale.

LIFO Reserve

The difference between inventory reported under FIFO and inventory reported under LIFO.

LIFO Liquidation

Occurs when a company using LIFO sells more units than it buys, dipping into older, lower-cost inventory layers.

Net Realizable Value (NRV)

NRV = Estimated\ Selling\ Price - Estimated\ Completion\ and\ Disposal\ Costs

Lower of Cost or NRV

The rule used to value inventory under IFRS; the inventory is written down if NRV falls below cost.

Capitalizing an Expense

Recording a cost as an asset on the balance sheet rather than an expense on the income statement.

Straight-Line Depreciation Formula

Annual\ Depreciation = \frac{Cost - Salvage\ Value}{Useful\ Life}

Double Declining Balance Depreciation

An accelerated depreciation method computed as twice the straight-line rate applied to the beginning book value.

Impairment of Assets

Occurs when the carrying amount of an asset exceeds its recoverable amount.

Recoverable Amount (IFRS)

The higher of an asset's fair value less costs to sell or its value in use.

Goodwill Impairment

Goodwill is not amortized but must be tested for impairment at least annually.

Deferred Tax Liability (DTL)

Created when tax expense in the income statement is greater than taxes payable due to temporary differences.

Deferred Tax Asset (DTA)

Created when taxes payable are greater than tax expense in the income statement due to temporary differences.

Valuation Allowance

A contra-asset account used to reduce a DTA if it is more likely than not that some portion of it will not be realized.

Solvency Ratios

Ratios used to measure a company's ability to meet long-term obligations, such as debt-to-equity.

Activity Ratios

Ratios that measure how efficiently a company performs day-to-day tasks, such as inventory turnover.

Comprehensive Income

The change in equity during a period from transactions and other events from non-owner sources; comprises Net Income and OCI.

Other Comprehensive Income (OCI)

Items like unrealized gains on available-for-sale securities or foreign currency translation adjustments.

Treasury Stock

Shares of a company's own stock that it has repurchased from the open market and held in its treasury.

Operating Lease

A lease treated as a simple rental agreement where the lessee does not take ownership risks.

Finance Lease (Capital Lease)

A lease that transfers substantially all risks and rewards of ownership to the lessee.

Effective Interest Rate

The interest rate used to calculate interest expense based on the carrying amount of a bond/liability.

Zero-Coupon Bond

A bond that pays no periodic interest and is issued at a deep discount to par value.

Financial Risk

Risk associated with a company's use of debt and the potential inability to meet interest and principal payments.

Business Risk

Risk related to the company's operations and environment, independent of its capital structure.

Standard Costing

An inventory costing method that uses predetermined costs for materials and labor.

Fixed Asset Turnover

Fixed\ Asset\ Turnover = \frac{Revenue}{Average\ Net\ Fixed\ Assets}