CFA Level I · CFA Level I Exam

Introduction to Financial Statement Analysis: formula sheet

Full chapter guide

Key formulas

Accounting equation: Assets = Liabilities + Equity; Holds at every balance sheet date. Equity is the residual claim.
Equity roll-forward: Closing equity = Opening equity + Profit + OCI + Share issues − Buybacks − Dividends; The statement of changes in equity explains this movement. Other items may also appear.
Total comprehensive income: Total comprehensive income = Profit or loss + Other comprehensive income; OCI items do not pass through profit or loss in the period they arise.
Change in cash: Net change in cash = CFO + CFI + CFF (plus FX effect on cash, if any); Ties to the change in cash and equivalents on the balance sheet.
Statement timing: Balance sheet = point in time; income, equity changes, cash flows = period; A common elimination clue in questions.
Unqualified opinion: Fairly presented, in all material respects; Clean opinion. Reasonable assurance, not a guarantee.
Qualified opinion: Fairly presented, except for a specific matter; Cause is a material but not pervasive departure or scope limitation.
Adverse opinion: Not fairly presented; materially misstated; Misstatements are material and pervasive. The auditor has the evidence and concludes the statements are misstated.
Disclaimer of opinion: No opinion given; Auditor could not obtain sufficient evidence, and the possible effects are both material and pervasive.
Internal control opinion: Effective or not effective; Covers controls over financial reporting, separate from the statement opinion. Required for US-listed accelerated and large accelerated filers.
Six phases in order: 1 Purpose and context → 2 Collect data → 3 Process data → 4 Analyze and interpret → 5 Develop and communicate conclusions → 6 Follow-up; The order is fixed. Purpose always comes first, and follow-up always comes last.
Phase 1 outputs: Purpose, audience, output format, nature and function of the analysis, time and resource limits; Decided before any data is collected.
Phase 2 inputs: Financial statements + other financial data + industry and economic data + management, supplier, customer and competitor information; Collecting only; no calculation yet.
Phase 3 activities: Adjust data, compute ratios, common-size statements, graphs, forecasts, statistical tests; Processing produces numbers; it does not yet explain them.
Phase 4 to 6 summary: Interpret results → recommend and communicate with assumptions and limits → update as new information arrives; Interpretation is a different phase from computation.

Quick revision

Financial statement analysis supports decisions by evaluating a company's performance and financial position.
Equity analysts focus on value and returns; credit analysts focus on ability to repay debt.
The core statements are the balance sheet, the statement of comprehensive income, the statement of changes in equity and the cash flow statement.
Notes to the statements are part of the financial statements and give policies and detail.
Management commentary is useful context but is not the same as the audited statements.
An unqualified (clean) opinion says the statements are fairly presented in all material respects.
A qualified opinion signals a specific departure or limitation; an adverse opinion says the statements are materially misstated.
A disclaimer of opinion means the auditor could not form an opinion.
An audit gives reasonable assurance, not a guarantee against error or fraud.
The framework runs from defining the purpose and context through collecting data, processing, analysing and interpreting, to reporting and updating.
Ratios and comparisons mean little without context such as the industry and the company's own history.
Read each question for the exact term asked; wrong options are often close in wording.

Common mistakes

Treating financial reporting and financial statement analysis as the same thing. Fix: Remember that reporting is preparing and presenting information, while analysis is using it to reach a decision.
Assuming analysis ends once ratios are calculated. Fix: The goal is a decision or conclusion. Ratios are inputs to judgement about performance, position and forecasts.
Treating MD&A as part of the financial statements. Fix: Remember that the four primary statements and the notes form the financial statements, while MD&A is supplementary information outside them.
Saying the balance sheet reports performance over a year. Fix: The balance sheet is a snapshot at one date. Performance over a period appears in the income statement and the statement of cash flows.
Thinking an unqualified opinion guarantees the numbers are accurate or free of fraud. Fix: Remember it is reasonable assurance of fair presentation in all material respects.
Mixing up adverse opinion and disclaimer of opinion. Fix: Adverse means the auditor has evidence the statements are misstated. Disclaimer means the auditor lacks evidence, the possible effects are material and pervasive, and no opinion is given.
Putting ratio calculation in the analysis and interpretation phase. Fix: Computing ratios, common-size statements and forecasts is phase 3, processing. Phase 4 is explaining what the results mean.
Starting with data collection. Fix: The purpose and context come first. The purpose decides which data is needed.

Exam tips

Read for the user and the decision first. That usually identifies the right answer.
Watch for reversed definitions of reporting and analysis. Examiners use this as a trap.
Remember that analysts often adjust reported numbers and use sources beyond the statements.
Questions are three-option, so eliminate any option that mismatches the user type, then compare the last two.
Expect this topic to be linked to the analysis framework and statement components, so study them together.
Questions often test the point-in-time versus period distinction. Use it to eliminate an option fast.
Know that OCI sits between profit and total comprehensive income, and that it accumulates in equity.
Be ready to separate notes (part of the statements) from MD&A (supplementary).