CFA Level I Exam · Financial Analysis Techniques

Financial Analysis Process and Tools for CFA Level I

Updated 7 October 2026 · Fact-checked

The financial analysis process is a six-step framework: state the purpose and context, collect data, process the data, analyze and interpret it, develop and communicate conclusions, and follow up. Tools include ratios, common-size statements, graphs, regression and forecasting. You solve questions by matching the tool to the purpose.

Understand Financial Analysis Process and Tools

Financial statement analysis turns raw reported numbers into a decision. The decision might be whether to lend to a company, buy its shares, or compare it with a rival. The framework keeps you from jumping straight into ratios without knowing what question you are answering.

The CFA framework has six phases. 1. State the objective and context: what is the purpose, who is the audience, what is the deadline and what resources are available. 2. Collect input data: financial statements, notes, industry and economic data, and discussions with management or suppliers. 3. Process the data: compute ratios, build common-size statements, make adjustments, and prepare charts or forecasts. 4. Analyze and interpret the processed data: this is where you answer the question. 5. Develop and communicate conclusions and recommendations: in a form that follows the required format and standards. 6. Follow up: update the analysis as new information arrives.

Data sources include the annual report (financial statements, notes, and management commentary), the auditor's report, interim reports, regulatory filings, earnings calls, press releases, and external sources such as industry data, peers' reports and economic statistics. Primary company disclosures are usually the base. Other sources add context.

The main tools are these:
- Ratios express one number relative to another, so firms of different size can be compared.
- Common-size statements express each line item as a percentage of a base. On the income statement the base is revenue. On the balance sheet it is total assets.
- Graphs show trends, composition and relationships at a glance.
- Regression and other statistical tools relate variables and support forecasts.

No tool gives an answer alone. Ratios depend on accounting choices, so you compare them over time, against peers and against the industry. Judgement about why a number changed matters more than the number itself.

Key formulas to remember

Six phases of the framework: Purpose and context → Collect data → Process data → Analyze and interpret → Develop and communicate conclusions → Follow up; Learn the order. Questions often ask which phase an activity belongs to.
Common-size income statement item: Line item ÷ Revenue × 100; Revenue is the base. Net profit margin is the bottom line of this statement.
Common-size balance sheet item: Line item ÷ Total assets × 100; Total assets is the base, so the right-hand side also sums to 100%.
Ratio: Ratio = Numerator ÷ Denominator; Interpret relative to history, peers and industry, not in isolation.

How to solve Financial Analysis Process and Tools questions

Use this method for any question on the framework or the tools.

1Read the stem and identify what is being asked: a phase of the process, a data source, or a tool.
2If it names an activity, place it in the six-phase order. Gathering is phase 2, computing ratios is phase 3, interpreting is phase 4.
3If it describes a purpose, match it to the tool. Comparing firms of different size points to ratios or common-size statements. Trends over time point to graphs or trend analysis.
4For a common-size question, confirm the base: revenue for the income statement, total assets for the balance sheet.
5Do any needed arithmetic, dividing the line item by its base.
6Eliminate options that put a step out of order, use the wrong base, or treat a tool as sufficient on its own.
7Check that your answer addresses the stated purpose and context.

Quickest way: Order and base check

When to use it: For framework-phase and common-size questions under time pressure.

Label the activity: planning, collecting, processing, interpreting, communicating or follow-up.
Match it to the six-phase order and pick the option that fits.
For common-size, say the base aloud: revenue or total assets.
Divide, compare with the options, and pick the one that matches.

Common mistakes in Financial Analysis Process and Tools

Putting ratio calculation in the analysis and interpretation phase.
Computing and interpreting feel like one activity.
Fix: Calculation and adjustment belong to processing. Interpretation is a separate phase that answers the question.
Using the wrong base for common-size statements.
Students use total assets for everything.
Fix: Income statement uses revenue. Balance sheet uses total assets.
Skipping the purpose and context phase.
Data and numbers feel more concrete than planning.
Fix: Remember that the first phase defines the question, audience and resources. Everything else follows from it.
Treating a ratio as meaningful on its own.
A single number looks like an answer.
Fix: Always compare with the firm's history, peers and industry, and consider accounting differences.
Forgetting the follow-up phase.
Students think the analysis ends with the recommendation.
Fix: The framework ends with follow-up: revisiting conclusions as new information arrives.

Worked examples

Example 1

An analyst downloads a company's annual report and three years of peer filings, then reads the management commentary. Which phase of the financial analysis framework is this?

A. Collect input data
B. Process the data
C. Analyze and interpret the processed data

Show the solution

Downloading reports and reading commentary is gathering information.
No calculations or adjustments have been made yet, so it is not processing.
Nothing has been interpreted, so it is not the analysis phase.

Answer: A. Collect input data.

Example 2

A company has revenue of $800 million, cost of goods sold of $520 million and net income of $56 million. In a common-size income statement, what are the gross profit percentage and the net income percentage?

A. Gross 35%, net 7%
B. Gross 35%, net 10.8%
C. Gross 65%, net 7%

Show the solution

Base is revenue, $800 million.
Gross profit = 800 − 520 = $280 million.
Gross profit % = 280 ÷ 800 = 35%.
Net income % = 56 ÷ 800 = 7%.
Option C uses COGS as 65% of revenue, which is the cost share, not gross profit.

Answer: A. Gross 35%, net 7%.

Exam tips

Memorize the six phases in order. Questions usually place one activity and ask which phase it is.
In common-size questions, check the base before you divide.
Expect questions that ask which tool suits a purpose, such as comparing firms of different size.
Reject options that claim one ratio or one source is enough to reach a conclusion.
There is no penalty for a wrong answer, so always choose one option, narrowing to two by order and base checks.

Practice questions from Financial Analysis Techniques

Financial Analysis Process and Tools in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Financial Analysis Process and Tools: frequently asked questions

What are the steps in the financial analysis framework?

There are six: state the objective and context, collect input data, process the data, analyze and interpret it, develop and communicate conclusions, and follow up. Questions test the order and which activity belongs where.

What are the main tools of financial analysis?

They are ratios, common-size statements, graphs, and statistical tools such as regression and forecasting. Each suits a different purpose, such as comparing firms or showing trends.

What is a common-size statement?

It expresses every line item as a percentage of a base. The base is revenue for the income statement and total assets for the balance sheet. It lets you compare firms of different size and track changes over time.

What sources of data do analysts use?

They use financial statements and notes, the auditor's report, management commentary, interim reports, regulatory filings and external industry or economic data. Company disclosures are the base, and outside data adds context.