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CFA Level I Exam · Introduction to Financial Statement Analysis

Financial Statements and Their Components for CFA Level I

Updated 7 October 2026 · Fact-checked

A full set of financial statements under IFRS has four primary statements: the statement of financial position (balance sheet), the statement of comprehensive income, the statement of changes in equity and the statement of cash flows. The notes accompany them. To answer questions, identify what each reports, whether it shows a point in time or a period, and how they link.

Understand Financial Statements and Their Components

Financial statements are the company's formal report of its economic position and results. There are four primary statements, plus the notes. Each answers a different question. The balance sheet (statement of financial position) shows what the company owns (assets), what it owes (liabilities) and the owners' residual claim (equity) at one point in time. The other statements cover a period.

The income statement (statement of profit or loss, or statement of comprehensive income) reports revenue, expenses and profit for a period. Under IFRS, profit or loss plus other comprehensive income (OCI) gives total comprehensive income. OCI holds gains and losses that bypass profit, such as some foreign currency translation effects.

The statement of changes in equity reconciles opening equity to closing equity. It shows profit, OCI, dividends, share issues and buybacks, and other movements. It is the bridge between the income statement and the equity section of the balance sheet.

The statement of cash flows reports cash inflows and outflows, classified as operating, investing and financing activities. It explains why cash changed, which profit alone cannot do.

The notes are part of the financial statements. They give accounting policies, estimates, breakdowns of line items, contingencies and related-party details. Management commentary (MD&A) is different. It is supplementary information. It gives management's view of results, risks and outlook. Analysts read both. The primary statements and the notes together form the audited financial statements; MD&A is outside them.

Key formulas to remember

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.

How to solve Financial Statements and Their Components questions

Use the same approach for any question about statements and their components.

  1. 1Identify what the question asks: a statement's purpose, a line item's location, or a link between statements.
  2. 2Decide if the item is a balance (point in time) or a flow (period). Balances belong on the balance sheet; flows belong elsewhere.
  3. 3Place the item: assets, liabilities or equity; revenue or expense; OCI; operating, investing or financing cash flow.
  4. 4If the item is explanatory detail, policy or a contingency, it belongs in the notes. If it is management's opinion or outlook, it is MD&A, not an audited statement.
  5. 5For link questions, trace the item: profit and OCI flow to equity; dividends reduce equity and appear in financing cash flows.
  6. 6For numerical roll-forwards, apply the equity or accounting equation and solve for the unknown.
  7. 7Check the answer against the other two options and confirm it matches the exact wording of the question.

Quickest way: Point-in-time versus period, then place the item

When to use it: Use for most conceptual questions where you have about 90 seconds.

  1. Ask: balance or flow? This often removes one option immediately.
  2. Match the item to its statement by purpose: position, performance, equity movement, cash movement, or explanation.
  3. Treat anything described as management's view or outlook as MD&A, outside the audited statements.
  4. For roll-forwards, write the equity formula and plug in the numbers.

Common mistakes in Financial Statements and Their Components

  • Treating MD&A as part of the financial statements.

    It appears in the same annual report and covers the same results.

    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.

    Students mix up balances with flows.

    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.

  • Putting all gains and losses in profit.

    Students ignore OCI.

    Fix: Some items go directly to OCI and then to equity. Total comprehensive income is profit plus OCI.

  • Thinking the statement of changes in equity only shows dividends.

    Dividends are the best-known equity movement.

    Fix: It reconciles opening to closing equity, including profit, OCI, share issues, buybacks and dividends.

  • Assuming profit equals cash generated.

    Both measure results over a period.

    Fix: Profit uses accruals. The statement of cash flows shows actual cash movements, so the two can differ a lot.

Worked examples

Example 1

A company reports opening equity of €500 million. During the year, profit was €80 million, OCI was a loss of €10 million, dividends paid were €30 million and no shares were issued or repurchased. What is closing equity? A. €520 million B. €540 million C. €560 million

Show the solution
  1. Start with opening equity: €500 million.
  2. Add profit: 500 + 80 = 580.
  3. Add OCI, which is −10: 580 − 10 = 570.
  4. Subtract dividends: 570 − 30 = 540.
  5. There are no other movements, so closing equity is €540 million.

Answer: B. €540 million

Example 2

Which of the following is part of the audited financial statements under IFRS? A. Management's discussion of future outlook B. Notes describing accounting policies and estimates C. A chairman's letter to shareholders

Show the solution
  1. Management outlook and the chairman's letter are management's views. They are supplementary information, not part of the statements.
  2. Notes describing policies and estimates form an integral part of the financial statements.
  3. Eliminate A and C. B remains.

Answer: B. Notes describing accounting policies and estimates

Exam tips

  • 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).
  • For equity roll-forwards, list every movement with its sign before adding.
  • There is no penalty for wrong answers, so always pick one after eliminating one option.

Practice questions from Introduction to Financial Statement Analysis

Financial Statements and Their Components in other exams

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

Financial Statements and Their Components: frequently asked questions

What are the four financial statements in CFA Level I?

They are the balance sheet, income statement, statement of changes in equity and statement of cash flows. The notes accompany them, and together they form the full set under IFRS.

What is the difference between the balance sheet and the income statement?

The balance sheet shows assets, liabilities and equity at one date. The income statement shows revenue, expenses and profit over a period.

What is the statement of changes in equity?

It reconciles opening equity to closing equity for the period. It shows profit, OCI, share transactions and dividends.

Is MD&A part of the financial statements?

No. MD&A is management's commentary and is supplementary information. The notes, by contrast, are part of the financial statements.