CFA Level I · CFA Level I Exam

Analyzing Balance Sheets: formula sheet

Full chapter guide

Key formulas

Accounting equation: Assets = Liabilities + Equity; Equity is the residual: Equity = Assets − Liabilities.
Working capital: Working capital = Current assets − Current liabilities; Only available directly from a classified balance sheet.
Current ratio: Current ratio = Current assets ÷ Current liabilities; A basic liquidity measure; above 1 means current assets exceed current liabilities.
Common-size balance sheet item: Item % = Line item ÷ Total assets × 100; Use total assets as the base for every line, including liabilities and equity.
Current classification rule: Current if realized or settled within the operating cycle or 12 months of the reporting date; An item is current if it is expected to be realized or settled within the operating cycle or within 12 months, whichever applies. Do not treat it as a 'longer of' test.
Net receivables: Net receivables = Gross receivables − Allowance for doubtful accounts; This is the balance sheet carrying amount.
Ending allowance: Ending allowance = Beginning allowance + Bad debt expense − Write-offs + Recoveries; Recoveries are written-off amounts later collected. Write-offs reduce the allowance but do not create expense.
Net realisable value: NRV = Estimated selling price − Estimated costs to complete and sell; Used for the IFRS inventory test.
Inventory carrying amount (IFRS): Carrying amount = Lower of cost and NRV; Write-down = Cost − NRV when NRV is lower. Reversals are allowed up to original cost.
Inventory roll-forward: Ending inventory = Beginning inventory + Purchases − Cost of goods sold; Rearrange to find purchases or COGS.
Receivables days: Days sales outstanding = Average receivables ÷ Revenue × 365; A rising figure may signal collection problems or aggressive revenue recognition.
Goodwill (full or partial): Goodwill = Consideration transferred − Fair value of identifiable net assets acquired (assets − liabilities); Under IFRS with a non-controlling interest, you may use partial goodwill (NCI at its share of net assets) or full goodwill (NCI at fair value). US GAAP uses full goodwill.
Carrying amount: Carrying amount = Cost − Accumulated depreciation (or amortization) − Accumulated impairment losses; Under the revaluation model, start from the latest fair value instead of cost.
Straight-line depreciation: Annual depreciation = (Cost − Residual value) ÷ Useful life; Residual value is deducted. The same logic applies to amortization of finite-life intangibles, usually with no residual value.
IFRS impairment test: Impairment loss = Carrying amount − Recoverable amount, if positive. Recoverable amount = higher of (fair value less costs of disposal) and (value in use); Value in use is the present value of expected future cash flows from the asset.
US GAAP impairment test (held for use): Step 1: impaired if carrying amount > undiscounted expected cash flows. Step 2: loss = carrying amount − fair value; Two steps. Impairment losses are not reversed under US GAAP.
Revaluation accounting: Increase: OCI (revaluation surplus), unless reversing a prior loss in profit or loss. Decrease: first against surplus, then profit or loss; Applies under IFRS only.
Amortized cost, end of period: Opening carrying amount + interest income (opening amount × effective rate) − cash received (coupon) − principal repaid − impairment; Interest income is based on the effective rate, not the coupon rate. Discounts accrete up, premiums amortize down.
Debt asset classification rule: Hold to collect + SPPI → amortized cost; Collect and sell + SPPI → FVOCI; otherwise → FVTPL; Both tests must be passed for amortized cost or FVOCI. Failing SPPI forces FVTPL.
Equity investment rule: Default FVTPL; irrevocable election to FVOCI if not held for trading; With the FVOCI election, no recycling of gains to P&L; dividends go to P&L.
Fair value hierarchy: Level 1 = quoted identical in active market; Level 2 = observable inputs; Level 3 = unobservable inputs; The level of the item is set by the lowest-level input that is significant to the measurement.
Unrealized gain or loss: Fair value − carrying amount; Goes to P&L for FVTPL and to OCI for FVOCI.
Bond carrying amount (amortized cost): Ending carrying amount = Beginning carrying amount + Interest expense − Cash coupon paid; Interest expense = beginning carrying amount × effective interest rate at issue per period. Under IFRS, issue costs reduce the initial carrying amount and the effective rate is recomputed to include them. With no issue costs, it equals the market yield at issue.
Deferred tax liability: DTL = (Carrying amount − Tax base) × Tax rate; For an asset with carrying amount above tax base. Use the enacted tax rate expected to apply when the difference reverses.
Unearned revenue roll-forward: Ending unearned revenue = Beginning + Cash received in advance − Revenue recognized; Useful to back out revenue or cash collected.
IFRS provision recognition test: Present obligation + outflow probable + reliable estimate = recognize provision; If any test fails, disclose a contingent liability or nothing if remote.
Current portion of long-term debt: Principal due within 12 months = current liability; The rest stays non-current.
Accounting equation: Assets = Liabilities + Owners' equity; Equity is the residual. Use it to find equity when assets and liabilities are given.
Retained earnings roll-forward: Ending RE = Beginning RE + Net income − Dividends declared; Use dividends declared, not paid. Add any other direct adjustments only if the question gives them.
Comprehensive income: Comprehensive income = Net income + Other comprehensive income; OCI includes translation adjustments, certain fair value gains and losses, pension remeasurements and some hedge gains and losses.
AOCI roll-forward: Ending AOCI = Beginning AOCI + OCI for the period; OCI items are recorded net of tax unless the question says otherwise.
Total equity: Total equity = Contributed capital + Retained earnings + AOCI and other reserves − Treasury stock (+ non-controlling interest, if shown); Treasury stock is subtracted. Check whether non-controlling interest is included in the figure asked for.
Shares outstanding: Shares outstanding = Shares issued − Treasury shares; Use outstanding shares for EPS and dividends.
Equity change from buyback: Buyback: cash falls and equity falls by shares repurchased × price per share; Total assets fall by the same amount.
Vertical common-size item: Line item ÷ Total assets × 100%; Use total assets as the base for every balance sheet line, including liabilities and equity.
Current ratio: Current assets ÷ Current liabilities; Includes inventory, so it is the broadest liquidity measure.
Quick ratio: (Cash + Marketable securities + Receivables) ÷ Current liabilities; Also written as (Current assets − Inventory − Prepaids) ÷ Current liabilities. Use the version the data supports.
Cash ratio: (Cash + Marketable securities) ÷ Current liabilities; The strictest liquidity test.
Working capital: Current assets − Current liabilities; A currency amount, not a ratio.
Debt-to-assets: Total debt ÷ Total assets; Share of assets financed by debt.
Debt-to-capital: Total debt ÷ (Total debt + Total shareholders' equity); Capital here is debt plus equity, not total assets.
Debt-to-equity: Total debt ÷ Total shareholders' equity; Can exceed 1.0 for highly leveraged firms.
Financial leverage: Average total assets ÷ Average total equity; Also called the equity multiplier. Always at least 1 when equity is positive.

Quick revision

Assets = Liabilities + Equity, always.
Current ratio = current assets ÷ current liabilities; quick ratio excludes inventories and often prepaid items.
Cash ratio = (cash + short-term marketable securities) ÷ current liabilities.
Inventory is reported at the lower of cost and net realisable value under IFRS; IFRS allows reversals of write-downs, but only up to the amount of the original write-down, so inventory never goes above original cost.
IFRS does not permit LIFO; in rising prices FIFO gives higher inventory and higher profit than LIFO.
Goodwill is not amortized; it is tested for impairment at least annually.
Under IFRS, impairment losses on assets other than goodwill can be reversed; under US GAAP they cannot for assets held for use.
Research costs are expensed; development costs may be capitalized under IFRS once criteria are met.
Financial assets are measured at amortized cost, fair value through OCI or fair value through profit or loss, depending on the business model and cash flow features.
A deferred tax liability arises when a temporary difference makes the carrying amount of an asset greater than its tax base (or the carrying amount of a liability less than its tax base). The tax paid now is lower than the accounting tax expense, for example because of accelerated tax depreciation, and the difference reverses in future periods, when taxable income is higher. Permanent differences do not create one.
Debt-to-equity = total debt ÷ total equity; debt-to-assets = total debt ÷ total assets.
Common-size balance sheet divides every line by total assets.

Common mistakes

Treating the whole long-term debt as non-current Fix: Split out the portion due within 12 months and show it as a current liability.
Using total liabilities or equity as the base for common-size percentages Fix: On the balance sheet, always divide by total assets.
Treating a write-off of a specific receivable as a new expense. Fix: The expense was booked when the allowance was created. A write-off reduces gross receivables and the allowance by the same amount, so net receivables are unchanged.
Using selling price instead of NRV in the inventory test. Fix: Always subtract estimated costs to complete and sell from the selling price before comparing to cost.
Amortizing goodwill or indefinite-life intangibles. Fix: Remember: goodwill and indefinite-life intangibles are tested for impairment at least annually, not amortized.
Using the lower of fair value less costs of disposal and value in use as recoverable amount. Fix: Recoverable amount is the HIGHER of the two. Management would use or sell the asset, whichever gives more.
Treating all debt securities as fair value on the balance sheet. Fix: Debt held to collect with SPPI is at amortized cost, and market price changes are ignored.
Sending FVOCI equity gains to P&L on sale. Fix: For equity elected at FVOCI, gains are never recycled to P&L. Only dividends hit P&L.
Using the coupon rate to compute interest expense on a bond. Fix: Interest expense is opening carrying amount × market yield at issue. The coupon only sets the cash paid.
Treating unearned revenue as revenue when cash arrives. Fix: Record a liability until you deliver. Recognize revenue only as performance happens.

Exam tips

Questions often test classification of one item. Apply the 12-month or operating cycle test before looking at options.
For common-size questions, check the base is total assets. Wrong-base distractors are common.
Know why banks use liquidity-based formats: a current/non-current split is less meaningful for them.
Remember the equity components, especially OCI reserves and non-controlling interest, since they can appear as answer options.
Always compute NRV with both costs to complete and costs to sell removed. Option C style traps use the selling price alone.
Read whether the question says IFRS or US GAAP. Reversal rules are a favourite test point.
For allowance questions, draw the roll-forward in one line. Expense adds, write-offs subtract.
Remember that a write-off leaves net receivables unchanged, and expect a conceptual question on this.