CFA Level I · CFA Level I Exam · Introduction to Financial Statement Modeling
An analyst is building a financial statement model for a manufacturing company. Which step in the modeling process most likely comes first?
The first step is understanding the company's business, its industry and the purpose of the model. This shapes the choice of drivers, the level of detail and the forecast horizon. Forecasting line items and comparing output with the market price are carried out only after that groundwork.
- AForecasting revenue and expense line items
- BUnderstanding the company's business, industry and the purpose of the modelCorrect
- CComparing the model's output with the current market price
Explanation
The modeling process starts with understanding the business, its industry and the purpose of the model, because these determine which drivers and structure are suitable. Forecasting line items and comparing output with market prices come later, after the model is built.
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