CFA Level I Exam · Introduction to Financial Statement Analysis

Financial Statement Analysis Framework: Steps and Phases

Updated 7 October 2026 · Fact-checked

The financial statement analysis framework is a six-phase process: articulate the purpose and context of the analysis, collect input data, process the data, analyze and interpret the processed data, develop and communicate conclusions and recommendations, and follow up. In exam questions, match each described activity to its phase.

Understand Financial Statement Analysis Framework

Financial statement analysis is not one calculation. It is a repeatable process that moves from a question to a conclusion. The CFA curriculum describes it as a framework of six phases. The framework keeps the analyst focused on the task and stops the work from becoming a pile of ratios with no purpose.

Phase 1 is to articulate the purpose and context of the analysis. You decide what question you are answering, who the audience is, what form the output takes, and what time and resources you have. A credit analyst and an equity analyst start with different questions, so they will collect and weigh data differently.

Phase 2 is to collect input data. You gather financial statements, other financial data, industry and economy data, and information from management, suppliers, customers and competitors. Phase 3 is to process the data. This is where you adjust statements, calculate ratios, prepare common-size statements, build charts and run forecasts or statistical tests.

Phase 4 is to analyze and interpret the processed data. You turn numbers into meaning: why did margins fall, is leverage rising, are the results consistent with the business model? Phase 5 is to develop and communicate conclusions and recommendations, for example in a research report, following the required format and stating assumptions and limitations. Phase 6 is the follow-up: you update the analysis as new information arrives and revisit your conclusions and the decision.

The exam tests this as a classification skill. A stem describes what an analyst does, and you pick the phase. It may also ask what an analyst should do before or after a given activity. Learn what belongs in each phase, and the order.

Key formulas to remember

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.

How to solve Financial Statement Analysis Framework questions

Use this method for any question that describes an analyst's work and asks for the phase, the order or the next step.

1Read the stem and underline the verb describing the activity, such as define, gather, adjust, calculate, interpret, recommend or revisit.
2Ask what the analyst is producing: a question, raw data, processed numbers, an explanation, a recommendation or an update.
3Map the verb to a phase: define the objective means phase 1; gather means 2; calculate or adjust means 3; interpret means 4; communicate or recommend means 5; revisit means 6.
4If the stem asks for the next or previous step, count forward or back one phase from the one you identified.
5Eliminate options from the wrong side: any option that starts analysis before the purpose is set, or follow-up before conclusions, is wrong.
6Check the remaining option against the exact wording, since interpretation and calculation are easy to confuse.

Quickest way: Verb-to-phase shortcut

When to use it: Use this for any one-line classification question, about 30 to 60 seconds per item.

Memorise the sequence with the key verbs: Define, Collect, Process, Analyze, Conclude, Follow up.
Match the stem's main verb to one of the six.
If two options seem to fit, decide by the output the activity produces: objective, raw data, processed numbers, explanation, recommendation or update.
Cross out the option that breaks the order.

Common mistakes in Financial Statement Analysis Framework

Putting ratio calculation in the analysis and interpretation phase.
Calculating ratios feels like analysis, so students name phase 4.
Fix: Computing ratios, common-size statements and forecasts is phase 3, processing. Phase 4 is explaining what the results mean.
Starting with data collection.
Real work often begins by pulling statements, so the order seems natural.
Fix: The purpose and context come first. The purpose decides which data is needed.
Treating recommendations as the last step.
Students assume the process ends when the report is delivered.
Fix: Phase 6, follow-up, comes after communication. The analyst updates the analysis as new information arrives.
Mixing up collecting data and processing data.
Adjusting statements for comparability sounds like gathering information.
Fix: Phase 2 obtains inputs. Any adjustment, calculation or transformation of those inputs is phase 3.
Thinking the framework applies only to equity research.
Examples often involve investment recommendations.
Fix: The framework applies to credit analysis, equity analysis, mergers and other uses. Only the purpose and output change.

Worked examples

Example 1

An analyst at an asset manager is asked whether to add a manufacturer's bonds to a portfolio. Before opening any financial statements, she writes down the question, the audience, the report format and the deadline. Which phase is she in?
A. Collect input data
B. Articulate the purpose and context of the analysis
C. Develop and communicate conclusions

Show the solution

The verb is writing down the question, audience, format and deadline.
The output is a defined objective, not data or numbers.
Defining the objective, audience, format and time limits is phase 1, purpose and context.
Option A is phase 2, which comes later. Option C is phase 5, which comes much later.

Answer: B

Example 2

An analyst has collected three years of statements for a retailer. She now converts them to common-size statements and computes the current ratio and operating margin. What is the next phase after she finishes, and what will it involve?
A. Follow-up, updating the analysis
B. Collect input data, gathering more statements
C. Analyze and interpret the processed data, explaining what the results mean

Show the solution

Collecting is done. Common-size statements and ratios are processing activities, so she is in phase 3.
The next phase after processing is phase 4, analysis and interpretation.
In that phase she explains why margins moved and what the ratios imply about the business.
Option A is phase 6, which skips two phases. Option B returns to phase 2, which is already done.

Answer: C

Exam tips

Learn the six phases in order. Stems often ask for the phase before or after a given activity.
Separate computing from interpreting. Calculations belong to processing; explanations belong to analysis and interpretation.
With three options, remove the one that breaks the sequence first, then decide between the other two on the output of the activity.
Expect stems with real-sounding scenarios rather than phase names. Translate the activity into a phase yourself.
This topic is short. Do not spend more than the suggested 90 seconds per question; guess if unsure, since wrong answers carry no penalty.

Practice questions from Introduction to Financial Statement Analysis

Financial Statement Analysis Framework in other exams

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

Financial Statement Analysis Framework: frequently asked questions

What are the steps of the financial statement analysis framework in CFA Level I?

There are six: articulate the purpose and context, collect input data, process the data, analyze and interpret the processed data, develop and communicate conclusions and recommendations, and follow up. The order is fixed, and each phase has a distinct output.

Is there a mnemonic for the framework?

You can use the verbs Define, Collect, Process, Analyze, Conclude, Follow up, or make your own phrase from the first letters D-C-P-A-C-F. Whatever you use, be sure you can say what each phase produces, since the exam describes activities rather than naming phases.

What is the difference between processing data and analyzing data?

Processing creates the numbers: adjustments, ratios, common-size statements, charts and forecasts. Analysis and interpretation explain what those numbers mean for the question set in phase 1.

Does the framework change for different analysts?

The six phases stay the same. What changes is the purpose, the data you need and the form of the output. A credit analyst and an equity analyst follow the same process with different questions.