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CFA Level I - Cheatsheet

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Section 1

CFA Level I - Cheatsheet

STUDY GUIDE

🎓 CFA Level I - Study Guide

📋 Course Structure

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📚 Financial Statement Analysis and Equity Investments
├── 📖 Chapter 1: Introduction to Financial Statement Analysis
│   ├── 🔹 Steps in the Financial Statement Analysis Framework
│   ├── 🔹 Roles of Financial Statement Analysis
│   └── 🔹 Importance of Regulatory Filings and Supplementary Information
├── 📖 Chapter 2: Analyzing Income Statements
│   ├── 🔹 Revenue Recognition Principles
│   ├── 🔹 Expense Recognition Principles
│   ├── 🔹 Nonrecurring Items and Accounting Changes
│   ├── 🔹 Earnings Per Share (EPS)
│   └── 🔹 Common-Size Income Statements and Income Statement Ratios
├── 📖 Chapter 3: Analyzing Balance Sheets
│   ├── 🔹 Intangible Assets and Marketable Securities
│   ├── 🔹 Goodwill
│   ├── 🔹 Financial Instruments
│   ├── 🔹 Non-Current Liabilities
│   └── 🔹 Common-Size Balance Sheets and Related Financial Ratios
├── 📖 Chapter 4: Analyzing Statements of Cash Flows
│   ├── 🔹 Cash Flow Statement Introduction and Direct Method CFO
│   ├── 🔹 Indirect Method CFO
│   ├── 🔹 Investing and Financing Cash Flows and IFRS/U.S. GAAP Differences
│   └── 🔹 Analyzing Statements of Cash Flows II
├── 📖 Chapter 5: Analysis of Inventories
│   ├── 🔹 Inventory Measurement
│   ├── 🔹 Inflation Impact on FIFO and LIFO
│   └── 🔹 Presentation and Disclosure
├── 📖 Chapter 6: Analysis of Long-Term Assets
│   ├── 🔹 Intangible Long-Lived Assets
│   ├── 🔹 Impairment and Derecognition
│   └── 🔹 Long-Term Asset Disclosures
├── 📖 Chapter 7: Topics in Long-Term Liabilities and Equity
│   ├── 🔹 Leases
│   ├── 🔹 Deferred Compensation and Disclosures
│   └── 🔹 Financial Statement Presentation and Disclosures
├── 📖 Chapter 8: Analysis of Income Taxes
│   ├── 🔹 Accounting Profit and Taxable Income
│   ├── 🔹 Deferred Tax Liabilities and Assets
│   ├── 🔹 Tax Rates and Disclosures
│   └── 🔹 Analyzing Deferred Tax Item Disclosures
├── 📖 Chapter 9: Financial Reporting Quality
│   ├── 🔹 Comparing Financial Reporting Quality and Quality of Reported Results
│   ├── 🔹 Spectrum for Assessing Financial Reporting Quality
│   ├── 🔹 Conservative and Aggressive Accounting
│   ├── 🔹 Motivations and Conditions for Low-Quality Financial Reports
│   ├── 🔹 Mechanisms that Discipline Financial Reporting Quality
│   ├── 🔹 Presentation Choices and Non-GAAP Measures
│   ├── 🔹 Accounting Methods to Manage Earnings
│   └── 🔹 Accounting Warning Signs
├── 📖 Chapter 10: Financial Analysis Techniques
│   ├── 🔹 Tools and Techniques Used in Financial Analysis
│   ├── 🔹 Calculating and Interpreting Activity, Liquidity, Solvency, and Profitability Ratios
│   ├── 🔹 Relationships Among Ratios and Company Evaluation Using Ratio Analysis
│   ├── 🔹 Application of DuPont Analysis
│   ├── 🔹 Uses of Industry-Specific Ratios
│   └── 🔹 Ratio Analysis and Other Techniques for Modeling and Forecasting Earnings
└── 📖 Chapter 11: Introduction to Financial Statement Modeling
    ├── 🔹 Development of a Sales-Based Pro Forma Company Model
    ├── 🔹 Behavioral Factors Affecting Analyst Forecasts
    ├── 🔹 Competitive Position and Porter's Five Forces
    ├── 🔹 Forecasting Industry and Company Sales and Costs
    └── 🔹 Choice of Forecast Horizon and Projections Beyond the Short-Term
Section 2

📖 Chapter 1: Introduction to Financial Statement Analysis

What this chapter covers: This chapter introduces the financial statement analysis framework, the roles of financial statement analysis, the importance of regulatory filings and supplementary information, and the implications of alternative financial reporting systems. It also identifies various information sources used in financial statement analysis.

🔑 Essential Concepts & Applications

Concept/PrincipleDefinition/ExplanationApplicationsExam Relevance
Financial Statement Analysis FrameworkSix-step process for analyzing financial statements.Investment decisions, credit analysis.Questions on steps and their order.
Roles of FSAUsing financial statement information to make economic decisions.Investing, lending, credit rating.Identifying the purpose of FSA.
Regulatory FilingsSEC filings like 10-K, 10-Q, 8-K.Understanding company performance and compliance.Questions on filing requirements.

🛠️ Problem Solving

Problem Type A: Identifying the correct step in the FSA framework. Setup: "When you encounter a scenario describing a specific action in financial analysis." Method: "Match the action to one of the six steps in the framework." Example: "An analyst gathers financial statements and industry data. This is Step 2: Gather Data."

Problem Type B: Determining the appropriate regulatory filing for a specific event. Setup: "If given a description of a corporate event." Method: "Identify the filing (e.g., 8-K for significant events, 10-K for annual reports)." Example: "A company announces a major acquisition. This requires filing an 8-K."

🧮 Solved Example

Problem: Place the following steps of the financial statement analysis framework in the correct order: Analyze/interpret data, Gather data, Report conclusions, State objective, Process data, Update analysis.

Given: The six steps of the financial statement analysis framework.

Steps:

  1. State the objective and context
  2. Gather data
  3. Process the data
  4. Analyze and interpret the data
  5. Report the conclusions or recommendations
  6. Update the analysis
"
✅
Answer: 1. State objective, 2. Gather data, 3. Process data, 4. Analyze/interpret data, 5. Report conclusions, 6. Update analysis.

⚠️ Common Mistakes

❌ Mistake 1: Confusing the order of steps in the FSA framework. ✅ How to avoid: Memorize the correct sequence and understand the logical flow.

❌ Mistake 2: Misidentifying the purpose of different regulatory filings. ✅ How to avoid: Review the descriptions of each form (10-K, 10-Q, 8-K, etc.).

📖 Chapter 2: Analyzing Income Statements

What this chapter covers: This chapter focuses on analyzing income statements, covering revenue and expense recognition principles, non-recurring items, earnings per share, and the use of common-size income statements and financial ratios.

🔑 Essential Concepts & Applications

Concept/PrincipleDefinition/ExplanationApplicationsExam Relevance
Revenue RecognitionRecognizing revenue when earned and realized or realizable.Applying the five-step process.Scenarios requiring revenue recognition decisions.
Expense RecognitionMatching expenses with related revenues.Identifying aggressive vs. conservative policies.Questions on expense recognition methods.
Earnings Per Share (EPS)Net income available to common shareholders divided by weighted average shares outstanding.Calculating basic and diluted EPS.EPS calculation problems.

🛠️ Problem Solving

Problem Type A: Applying the five-step revenue recognition process. Setup: "When given a scenario involving a contract with performance obligations." Method: "Identify the contract, performance obligations, transaction price, allocation, and when obligations are satisfied." Example: "A software company sells a license and provides ongoing support. Recognize revenue for the license when delivered and support over the service period."

Problem Type B: Calculating basic and diluted EPS. Setup: "If given net income, preferred dividends, shares outstanding, and potentially dilutive securities." Method: "Calculate basic EPS first. Then, assess the dilutive effect of convertible securities and options." Example: "Net income = 1M,Preferreddividends=1M, Preferred dividends = 100K, Shares outstanding = 500K. Basic EPS = (1M−1M - 100K) / 500K = $1.80."

🧮 Solved Example

Problem: A company has net income of 2,000,000,preferreddividendsof2,000,000, preferred dividends of 200,000, and 1,000,000 shares outstanding. It also has 100,000 options outstanding with an exercise price of 20.Theaveragemarketpriceofthestockis20. The average market price of the stock is 25. Calculate basic and diluted EPS.

Given: Net Income = 2,000,000PreferredDividends=2,000,000 Preferred Dividends = 200,000 Shares Outstanding = 1,000,000 Options: 100,000, Exercise Price = 20,AverageMarketPrice=20, Average Market Price = 25

Steps:

  1. Basic EPS = (Net Income - Preferred Dividends) / Shares Outstanding = (2,000,000−2,000,000 - 200,000) / 1,000,000 = $1.80
  2. Treasury Stock Method: Shares issued from options = 100,000. Shares repurchased = (100,000 * 20)/20) / 25 = 80,000. Net increase in shares = 100,000 - 80,000 = 20,000.
  3. Diluted EPS = 1,800,000/(1,000,000+20,000)=1,800,000 / (1,000,000 + 20,000) = 1.76
"
✅
Answer: Basic EPS = 1.80,DilutedEPS=1.80, Diluted EPS = 1.76

⚠️ Common Mistakes

❌ Mistake 1: Forgetting to subtract preferred dividends when calculating EPS. ✅ How to avoid: Always remember to deduct preferred dividends from net income before calculating EPS.

❌ Mistake 2: Incorrectly applying the treasury stock method for diluted EPS. ✅ How to avoid: Carefully calculate the number of shares repurchased using the average market price.

📖 Chapter 3: Analyzing Balance Sheets

What this chapter covers: This chapter covers the analysis of balance sheets, including the financial reporting and disclosures related to intangible assets, goodwill, financial instruments, and non-current liabilities.

🔑 Essential Concepts & Applications

Concept/PrincipleDefinition/ExplanationApplicationsExam Relevance
Intangible AssetsNon-physical assets like patents and trademarks.Accounting for purchased vs. internally generated intangibles.Questions on amortization and impairment.
GoodwillExcess of purchase price over fair value of net assets in an acquisition.Testing for impairment.Goodwill impairment scenarios.
Financial InstrumentsContracts creating a financial asset for one party and a liability for another.Classifying and measuring financial instruments.Questions on fair value accounting.

🛠️ Problem Solving

Problem Type A: Determining the accounting treatment for intangible assets. Setup: "When given information about the creation or acquisition of an intangible asset." Method: "Distinguish between purchased and internally generated intangibles. Apply the appropriate accounting method (cost or revaluation)." Example: "A company purchases a patent. It is recorded at cost and amortized over its useful life."

Problem Type B: Calculating liquidity ratios. Setup: "If given current assets and current liabilities." Method: "Apply the formulas for current ratio, quick ratio, and cash ratio." Example: "Current assets = 500K,Currentliabilities=500K, Current liabilities = 250K. Current ratio = 500K/500K / 250K = 2."

🧮 Solved Example

Problem: A company has current assets of 1,000,000,currentliabilitiesof1,000,000, current liabilities of 500,000, inventory of 300,000,andcashof300,000, and cash of 200,000. Calculate the current ratio and quick ratio.

Given: Current Assets = 1,000,000CurrentLiabilities=1,000,000 Current Liabilities = 500,000 Inventory = 300,000Cash=300,000 Cash = 200,000

Steps:

  1. Current Ratio = Current Assets / Current Liabilities = 1,000,000/1,000,000 / 500,000 = 2
  2. Quick Ratio = (Current Assets - Inventory) / Current Liabilities = (1,000,000−1,000,000 - 300,000) / $500,000 = 1.4
"
✅
Answer: Current Ratio = 2, Quick Ratio = 1.4

⚠️ Common Mistakes

❌ Mistake 1: Forgetting to test goodwill for impairment annually. ✅ How to avoid: Remember that goodwill is not amortized but must be tested for impairment.

❌ Mistake 2: Incorrectly calculating liquidity ratios. ✅ How to avoid: Use the correct formulas and ensure you are using the appropriate balance sheet items.

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