CFA Level 1 Volume 3

✍ Scribed by CFA Institute

• Publisher: CFA Institute
• Year: 2023
• Tongue: English
• Leaves: 803
• Category: Library

✦ Table of Contents

How to Use the CFA Program Curriculum
Errata
Designing Your Personal Study Program
CFA Institute Learning Ecosystem (LES)
Feedback
Financial Statement Analysis
Learning Module 1 Understanding Income Statements
Introduction
Components and Format of the Income Statement
Revenue Recognition
General Principles
Accounting Standards for Revenue Recognition
Expense Recognition: General Principles
General Principles
Issues in Expense Recognition: Doubtful Accounts, Warranties
Doubtful Accounts
Warranties
Issues in Expense Recognition: Depreciation and Amortization
Implications for Financial Analysts: Expense Recognition
Non-Recurring Items and Non-Operating Items: Discontinued Operations and Unusual or Infrequent items
Discontinued Operations
Unusual or Infrequent Items
Non-Recurring Items: Changes in Accounting Policy
Non-Operating Items
Earnings Per Share and Capital Structure and Basic EPS
Simple versus Complex Capital Structure
Basic EPS
Diluted EPS: the If-Converted Method
Diluted EPS When a Company Has Convertible Preferred Stock Outstanding
Diluted EPS When a Company Has Convertible Debt Outstanding
Diluted EPS: the Treasury Stock Method
Other Issues with Diluted EPS and Changes in EPS
Changes in EPS
Common-Size Analysis of the Income Statement
Common-Size Analysis of the Income Statement
Income Statement Ratios
Comprehensive Income
Summary
Practice Problems
Solutions
Learning Module 2 Understanding Balance Sheets
Introduction and Components of the Balance Sheet
Components and Format of the Balance Sheet
Balance Sheet Components
Current and Non-Current Classification
Liquidity-Based Presentation
Current Assets: Cash and Cash Equivalents, Marketable Securities and Trade Receivables
Current Assets
Current Assets: Inventories and Other Current Assets
Other Current Assets
Current liabilities
Non-Current Assets: Property, Plant and Equipment and Investment Property
Property, Plant, and Equipment
Investment Property
Non-Current Assets: Intangible Assets
Identifiable Intangibles
Non-Current Assets: Goodwill
Non-Current Assets: Financial Assets
Non-Current Assets: Deferred Tax Assets
Non-Current Liabilities
Long-term Financial Liabilities
Deferred Tax Liabilities
Components of Equity
Components of Equity
Statement of Changes in Equity
Common Size Analysis of Balance Sheet
Common-Size Analysis of the Balance Sheet
Balance Sheet Ratios
Summary
Practice Problems
Solutions
Learning Module 3 Understanding Cash Flow Statements
Introduction
Classification Of Cash Flows and Non-Cash Activities
Classification of Cash Flows and Non-Cash Activities
Cash Flow Statement: Differences Between IFRS and US GAAP
Cash Flow Statement: Direct and Indirect Methods for Reporting Cash Flow from Operating Activities
Cash Flow Statement: Indirect Method Under IFRS
Cash Flow Statement: Direct Method Under IFRS
Cash Flow Statement: Direct Method Under US GAAP
Cash Flow Statement: Indirect Method Under US GAAP
Linkages of Cash Flow Statement with the Income Statement and Balance Sheet
Linkages of the Cash Flow Statement with the Income Statement and Balance Sheet
Preparing the Cash Flow Statement: The Direct Method for Operating Activities
Operating Activities: Direct Method
Preparing the Cash Flow Statement: Investing Activities
Preparing the Cash Flow Statement: Financing Activities
Long-Term Debt and Common Stock
Dividends
Preparing the Cash Flow Statement: Overall Statement of Cash Flows Under the Direct Method
Preparing the Cash Flow Statement: Overall Statement of Cash Flows Under the Indirect Method
Conversion of Cash Flows from the Indirect to Direct Method
Cash Flow Statement Analysis: Evaluation of Sources and Uses of Cash
Evaluation of the Sources and Uses of Cash
Cash Flow Statement Analysis: Common Size Analysis
Cash Flow Statement Analysis: Free Cash Flow to Firm and Free Cash Flow to Equity
Cash Flow Statement Analysis: Cash Flow Ratios
Summary
Practice Problems
Solutions
Learning Module 4 Financial Analysis Techniques
Introduction
The Financial Analysis Process
Analytical Tools and Techniques
Financial Ratio Analysis
The Universe of Ratios
Value, Purposes, and Limitations of Ratio Analysis
Sources of Ratios
Common Size Balance Sheets and Income Statements
Common-Size Analysis of the Balance Sheet
Common-Size Analysis of the Income Statement
Cross-Sectional, Trend Analysis & Relationships in Financial Statements
Trend Analysis
Relationships among Financial Statements
The Use of Graphs and Regression Analysis
Regression Analysis
Common Ratio Categories & Interpretation and Context
Interpretation and Context
Activity Ratios
Calculation of Activity Ratios
Interpretation of Activity Ratios
Liquidity Ratios
Calculation of Liquidity Ratios
Interpretation of Liquidity Ratios
Solvency Ratios
Calculation of Solvency Ratios
Interpretation of Solvency Ratios
Profitability Ratios
Calculation of Profitability Ratios
Interpretation of Profitability Ratios
Integrated Financial Ratio Analysis
The Overall Ratio Picture: Examples
DuPont Analysis: The Decomposition of ROE
Equity Analysis and Valuation Ratios
Valuation Ratios
Industry-Specific Financial Ratios
Research on Financial Ratios in Credit and Equity Analysis
Credit Analysis
The Credit Rating Process
Historical Research on Ratios in Credit Analysis
Business and Geographic Segments
Segment Reporting Requirements
Segment Ratios
Model Building and Forecasting
Summary
References
Practice Problems
Solutions
Learning Module 5 Inventories
Introduction
Cost of inventories
Inventory valuation methods
Specific Identification
First-In, First-Out (FIFO)
Weighted Average Cost
Last-In, First-Out (LIFO)
Calculations of cost of sales, gross profit, and ending inventory
Periodic versus perpetual inventory systems
Comparison of inventory valuation methods
The LIFO method and LIFO reserve
LIFO Reserve
LIFO liquidations
Inventory method changes
Inventory adjustments
Evaluation of inventory management: Disclosures & ratios
Presentation and Disclosure
Inventory Ratios
Illustrations of inventory analysis: Adjusting LIFO to FIFO
Illustrations of inventory analysis: Impacts of writedowns
Summary
Practice Problems
Solutions
Learning Module 6 Long-Lived Assets
Introduction
Acquisition of Property, Plant and Equipment
Acquisition of Long-Lived Assets
Property, Plant, and Equipment
Acquisition of Intangible Assets
Intangible Assets Purchased in Situations Other Than Business Combinations
Intangible Assets Developed Internally
Intangible Assets Acquired in a Business Combination
Capitalization versus Expensing: Impact on Financial Statements and Ratios
Capitalisation of Interest Costs
Capitalisation of Interest and Internal Development Costs
Depreciation of Long-Lived Assets: Methods and Calculation
Depreciation Methods and Calculation of Depreciation Expense
Amortisation of Long-Lived Assets: Methods and Calculation
The Revaluation Model
Impairment of Assets
Impairment of Property, Plant, and Equipment
Impairment of Intangible Assets with a Finite Life
Impairment of Intangibles with Indefinite Lives
Impairment of Long-Lived Assets Held for Sale
Reversals of Impairments of Long-Lived Assets
Derecognition
Sale of Long-Lived Assets
Long-Lived Assets Disposed of Other Than by a Sale
Presentation and Disclosure Requirements
Using Disclosures in Analysis
Investment Property
Summary
Practice Problems
Solutions
Learning Module 7 Income Taxes
Introduction
Differences Between Accounting Profit and Taxable Income
Current and Deferred Tax Assets and Liabilities
Deferred Tax Assets and Liabilities
Determining the Tax Base of Assets and Liabilities
Determining the Tax Base of an Asset
Determining the Tax Base of a Liability
Changes in Income Tax Rates
Temporary and Permanent Differences Between Taxable and Accounting Profit
Taxable Temporary Differences
Deductible Temporary Differences
Examples of Taxable and Deductible Temporary Differences
Exceptions to the Usual Rules for Temporary Differences
Business Combinations and Deferred Taxes
Investments in Subsidiaries, Branches, Associates and Interests in Joint Ventures
Unused Tax Losses and Tax Credits
Recognition and Measurement of Current and Deferred Tax
Recognition of a Valuation Allowance
Recognition of Current and Deferred Tax Charged Directly to Equity
Presentation and Disclosure
Comparison of IFRS and US GAAP
Summary
Practice Problems
Solutions
Learning Module 8 Non-Current (Long-Term) Liabilities
Introduction
Bonds Payable & Accounting for Bond Issuance
Accounting for Bond Issuance
Accounting for Bond Amortisation, Interest Expense, and Interest Payments
Accounting for Bonds at Fair Value
Derecognition of Debt
Debt Covenants
Presentation and Disclosure of Long-Term Debt
Leases
Examples of Leases
Advantages of Leasing
Lease Classification as Finance or Operating
Financial Reporting of Leases
Lessee Accounting—IFRS
Lessee Accounting—US GAAP
Lessor Accounting
Introduction to Pensions and Other Post-Employment Benefits
Evaluating Solvency: Leverage and Coverage Ratios
Summary
Practice Problems
Solutions
Learning Module 9 Financial Reporting Quality
Introduction & Conceptual Overview
Conceptual Overview
GAAP, Decision Useful Financial Reporting
GAAP, Decision-Useful, but Sustainable?
Biased Accounting Choices
Within GAAP, but “Earnings Management”
Departures from GAAP
Differentiate between Conservative and Aggressive Accounting
Conservatism in Accounting Standards
Bias in the Application of Accounting Standards
Context for Assessing Financial Reporting Quality
Motivations
Conditions Conducive to Issuing Low-Quality Financial Reports
Mechanisms That Discipline Financial Reporting Quality
Market Regulatory Authorities
Auditors
Private Contracting
Detection of Financial Reporting Quality Issues: Introduction & Presentation Choices
Presentation Choices
Accounting Choices and Estimates
How Accounting Choices and Estimates Affect Earnings and Balance Sheets
How Choices that Affect the Cash Flow Statement
Choices that Affect Financial Reporting
Warning Signs
1) Pay attention to revenue.
2) Pay attention to signals from inventories.
3) Pay attention to capitalization policies and deferred costs.
4) Pay attention to the relationship of cash flow and net income.
5) Other potential warnings signs.
Summary
References
Practice Problems
Solutions
Learning Module 10 Applications of Financial Statement Analysis
Introduction & Evaluating Past Financial Performance
Application: Evaluating Past Financial Performance
Application: Projecting Future Financial Performance as an Input to Market Based Valuation
Projecting Performance: An Input to Market-Based Valuation
Projecting Multiple-Period Performance
Application: Assessing Credit Risk
Screening for Potential Equity Investments
Framework for Analyst Adjustments & Adjustments to Investments & Adjustments to Inventory
A Framework for Analyst Adjustments
Analyst Adjustments Related to Investments
Analyst Adjustments Related to Inventory
Adjustments Related to Property, Plant, and Equipment
Adjustments Related to Goodwill
Summary
References
Practice Problems
Solutions
Corporate Issuers
Learning Module 1 Corporate Structures and Ownership
Introduction
Business Structures
Sole Proprietorship (Sole Trader)
General Partnership
Limited Partnership
Corporation (Limited Companies)
Public and Private Corporations
Exchange Listing and Share Ownership Transfer
Share Issuance
Going Public from Private — IPO, Direct Listing, Acquisition
Life Cycle of Corporations
Lenders and Owners
Equity and Debt Risk–Return Profiles
Equity vs. Debt Conflicts of Interest
Summary
Practice Problems
Solutions
Learning Module 2 Introduction to Corporate Governance and Other ESG Considerations
Introduction
Stakeholder Groups
Shareholder vs. Stakeholder Theory
Shareholders
Creditors/Debtholders
Board of Directors
Managers
Employees
Customers
Suppliers
Governments
Principal–Agent and Other Relationships
Shareholder and Manager/Director Relationships
Controlling and Minority Shareholder Relationships
Manager and Board Relationships
Shareholder vs. Creditor (Debtholder) Interests
Corporate Governance and Mechanisms to Manage Stakeholder Risks
Shareholder Mechanisms
Creditor Mechanisms
Board of Director and Management Mechanisms
Employee Mechanisms
Customer and Supplier Mechanisms
Government Mechanisms
Corporate Governance and Stakeholder Management Risks and Benefits
Operational Risks and Benefits
Legal, Regulatory, or Reputational Risks and Benefits
Financial Risks and Benefits
ESG Considerations in Investment Analysis
Introduction to Environmental and Social Factors
Evaluating ESG-Related Risks and Opportunities
Environmental, Social, and Governance Investment Approaches
ESG Investment Approaches
ESG Market Overview
Summary
References
Practice Problems
Solutions
Learning Module 3 Business Models & Risks
Introductory Context/Motivation
What Is a Business Model?
Business Model Features
Customers, Market: Who
Firm Offering: What
Channels: Where
Pricing: How Much
Value Proposition (Who + What + Where + How Much)
Business Organization, Capabilities: How
Profitability and Unit Economics
Business Model Types
Business Model Innovation
Business Model Variations
E-Commerce Business Models
Network Effects and Platform Business Models
Crowdsourcing Business Models
Hybrid Business Models
Business Models: Financial Implications
External Factors
Firm-Specific Factors
Business Risks
Summary
Macro Risk, Business Risk, and Financial Risk
Risk Impacts Are Cumulative
Business Risk: A Closer Look
Industry Risks
Industry Definition
Company-Specific Risks
Financial Risk
Measuring Operating and Financial Leverage
Summary
Practice Problems
Solutions
Learning Module 4 Capital Investments
Introduction
Types of Capital Investments
Business Maintenance
Business Growth
The Capital Allocation Process
Investment Decision Criteria
Net Present Value
Internal Rate of Return
Common Capital Allocation Pitfalls
Corporate Use of Capital Allocation
Real Options
Timing Options
Sizing Options
Flexibility Options
Fundamental Options
Summary
Practice Problems
Solutions
Learning Module 5 Working Capital & Liquidity
Introduction
Financing Options
Internal Financing
External Financing: Financial Intermediaries
External Financing: Capital Markets
Working Capital, Liquidity, and Short-Term Funding Needs
Liquidity and Short-Term Funding
Primary Sources of Liquidity
Secondary Sources of Liquidity
Drags and Pulls on Liquidity
Measuring Liquidity
Evaluating Short-Term Financing Choices
Summary
Practice Problems
Solutions