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Cfa1 4 Financial Reporting And Analysis Notes

Finance Notes > CFA Level 1 Notes

This is an extract of our Cfa1 4 Financial Reporting And Analysis document, which we sell as part of our CFA Level 1 Notes collection written by the top tier of University Of London (examined By LSE) students.

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CFA Level 1

Financial Reporting and Analysis

Financial Statements
Role of Financial Reporting
Provide info for investment decision making
Provide info about financial performance / position or any changes
Scopes of Decision Making
Equity Investment
M&A
Subsidiaries
Venture Capital / Private Equity Investment
Credit Rating
Compliance
Debt Rating
Cash Flow Forecast
Liquidity
The ability to meet short-term obligations
Solvency
The ability to meet long-term obligations
Financial Statements
Income Statement
Balance Sheet
Cash Flow Statement
Statement of Changes in Owners' Equity
Financial Notes and Supplementary Schedules
Management's Discussion and Analysis (Listed Companies)
Auditor's Reports
Management Report on Internal Control (Sarbanes-Oxley Act)
Income Statement
Provide info on financial results (performance) over a period of time
Report revenue and expenses
Net Income = Revenue - Expenses
Balance Sheet
Provide info on financial positions at a specific point in time
Owners' Equity = Assets - Liabilities 1 CFA Level 1

Financial Reporting and Analysis

Cash Flow Statement
Provide info on financial flexibility
Cash inflows / outflows derive from operating, investing and financing activities
Auditor's Report
Unqualified Opinion (FS gives True / Fair View)
Qualified Opinion (Some Limitations / Exceptions to Accounting Standards)
Adverse Opinion (FS materially departs from Accounting Standards)
Disclaimer of Opinion (Auditor are Unable to Issue an Opinion)
Accounting Organizations

1. International Accounting Standard Board (London)
International Financial Reporting Standards (IFRS)
Framework for the Preparation and Presentation of Financial Statements

2. Financial Accounting Standard Board (FASB) (U.S.)
Statements of Financial Accounting Standards (U.S. GAAP)

Other Sources of Information
Interim Report (Unaudited)
Provide update info on financial position / performance
Proxy Statement
Provide info on voting / management / stock performance / disclosures
Financial Statement Analysis Framework

1. Articulate Purpose and Context of Analysis

2. Collect Data

3. Process Data

4. Analyze / Interpret Processed Data

5. Develop / Communicate Conclusions and Recommendations

6. Follow Up
Phase 1: Articulate Purpose and Context of Analysis
Determine the Nature
Communicate with Client
Gather Institutional Guidelines
Provide Statement of Purpose / Objective
Formulate Questions
Provide Timetable 2 CFA Level 1

Financial Reporting and Analysis

Phase 2: Collect Data
Financial Statements
Industry / Economic Data
Discussions with Stakeholders
Site Visits
Phase 3: Top-down Approach to Data Collection
Analyze the Macroeconomic Environment
Analyze Industrial Competitive Environment
Analyze the Company
Phase 4: Process Data
Evaluate Financial Statements
Make Adjustments
Compute Financial Ratios / Graphs / Forecasts
Phase 5: Analyze / Interpret Processed Data
Give Analytical Results
Phase 6: Develop / Communicate Conclusions and Recommendations
Provide Reports
Offer Recommendations
Phase 7: Follow Up
Update Reports
Components of Equity Analyst Report
Summary and Investment Conclusion
Business Summary
Risks
Valuation
Historical and Pro Forma Tables
Financial Reporting
Business Activities
Operating Activities (Daily Business Functioning)
Investing Activities Acquisition / Disposal of Long-term Assets
Financing Activities (Obtaining / Repaying Capital)

3 CFA Level 1

Financial Reporting and Analysis

Items in Balance Sheet
Assets (Economic Resources)
Liabilities (Creditors' Claims on Economic Resources)
Owner's Equity (Residual Claims on Economic Resources)
Items in Income Statement
Revenue (Inflows of Economic Resources)
Expenses (Outflows of Economic Resources)
Net Income
Types of Assets
Current Assets (Inventory, Trade Receivables, Prepaid Expenses, Cash)
Noncurrent Assets (Property, Plant, Equipment)
Intangible Assets (Patents, Trademarks, Licenses, Copyright, Goodwill)
Financial Assets (Trading Securities, Investment Securities, Derivatives)
Current Liabilities
Trade Payables
Accrued Liabilities
Tax liabilities (Current, Deferred)
Minority Interests
Unearned Revenue
Debt / Bond Payable
Owners' Equity
Capital
Non-Current Liabilities
Retained Earnings
Reserve Liabilities
Revenue
Sales Revenue
Gains
Investment Income (Interest, Dividend)
Expenses
Cost of Goods Sold
Selling / General / Administrative Expenses
Depreciation / Amortization
Interest / Tax / Dividend Expenses 4 CFA Level 1

Financial Reporting and Analysis

Bad Debt / Losses
Accounting Equations
Owners' Equity = Assets - Liabilities
Owners' Equity = Contributed Capital + Ending Retained Earnings
Net Income = Revenue - Expenses
Ending Retained Earnings = Beginning Retained Earnings + Net Income - Dividends
Contra Accounts
Used for entries that offset some part of the value of another account
Equipment (Asset) is offset in Depreciation (Expense)
Accrual Accounting
Unearned (Deferred) Revenue
Accrued (Unbilled) Revenue
Prepaid Expenses
Accrued Expenses
Valuation Adjustments
Adjust the values of assets / liabilities when required by accounting standards
Flow of Info in an Accounting System
Journal Entries / Adjusting Entries (business transactions sorted by date)
General Ledger / T-accounts (business transactions sorted by account)
Trial Balance / Adjusted Trial Balance (ending account balances)
Financial Statements
Financial Reporting Standards
Standard-Setting Bodies (Private Sector Organization)
International Accounting Standards Board (IASB)
Financial Accounting Standards Board (FASB)
International Organization of Securities Commission (IOSCO)
Regulatory Authorities
Securities and Exchange Commission (SEC) (U.S.)
Financial Services Authority (FSA) (UK)
European Securities Committee (ESC) (EU)
Objectives of IOSCO
5 CFA Level 1

Financial Reporting and Analysis

Protect investors
Ensure fairness, efficiency and transparency of markets
Reduce systematic risk
Significant Legislation
Securities Act 1933
Securities Exchange Act 1934 (creation of SEC)
Sarbanes-Oxley Act 2002 (creation of Public Company Accounting Oversight Board)
SEC Filings
Securities Offerings Registration Statement
Forms 10-K (US Registrant), 20-F (Non US Registrant), 40-F (Canadian Registrant)
Annual Report
Proxy Statement / Form DEF-14A
Forms 10-Q / 6-K (Interim Reports)
Other Filings
Form 8-K (Interim Report on Corporate Event)
Form 144 (Proposed Sale of Restricted Securities)
Forms 3, 4, and 5 (Beneficial Ownership of Securities)
Form 11-K (Annual Report of Employee Stock Purchase)
Qualitative Characteristics of Financial Statements
Understandability
Relevance (Materiality)
Reliability (Faithful, Substance over Form, Neutral, Prudent, Complete)
Comparability (Over Time / Across Companies)
Constraints on Financial Statements
Time
Cost
Measurement of FS Elements
Historical Cost
Current Cost (Cost to Replace an Asset)
Realizable (Settlement) Value (Sold Items)
Present Value (Discounted)
Fair Value (Expected Value of an Item if Sold)
FS Fundamental Principles 6 CFA Level 1

Financial Reporting and Analysis

Fair Presentation
Going Concern
Accrual Basis
Consistency
Materiality
Presentation Requirements
Aggregation (of similar items)
Separation (of dissimilar items)
No offsetting
Classified Balance Sheet (Current / Noncurrent)
Min Info
Comparative Info (info of previous years)
Disclosure in FS Notes
Accounting Policies
Estimated Uncertainty
Description of Company
Nature of Operations
Parent Company
FASB Framework vs IASB Framework
Purpose of the Framework
Both have similar a purpose
Purpose of IASB Framework is at the top of GAAP but FASB is not
FS Objectives
Both focus on providing relevant info
Same objectives for business / non-business FS in IASB, but different in FASB,
Underlying Assumption
IASB gives more emphasis on accrual and going concern assumptions
Primary Qualitative Characteristics
IASB: Relevance, Reliability, Comparability, Understandability
FASB Primary: Relevance, Reliability
FASB Secondary: Comparability, Understandability
Standard Setting Approach 7

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