CFA 2022 Level I - SchweserNotes Book 2

SSV9X - 0969149105 Book 2: Financial Statement Analysis SchweserNotes™ 2022 Level I CFA® SSV9X - 0969149105 SCHWESERNOTES™ 2022 LEVEL I CFAđ BOOK 2: FINANCIAL STATEMENT ANALYSIS â2021 Kaplan, Inc All rights reserved Published in 2021 by Kaplan, Inc Printed in the United States of America ISBN: 978-1-0788-1600-7 These materials may not be copied without written permission from the author The unauthorized duplication of these notes is a violation of global copyright laws and the CFA Institute Code of Ethics Your assistance in pursuing potential violators of this law is greatly appreciated Required CFA Institute disclaimer: “CFA Institute does not endorse, promote, or warrant the accuracy or quality of the products or services offered by Kaplan Schweser CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.” Certain materials contained within this text are the copyrighted property of CFA Institute The following is the copyright disclosure for these materials: “Copyright, 2021, CFA Institute Reproduced and republished from 2022 Learning Outcome Statements, Level I, II, and III questions from CFA® Program Materials, CFA Institute Standards of Professional Conduct, and CFA Institute’s Global Investment Performance Standards with permission from CFA Institute All Rights Reserved.” Disclaimer: The SchweserNotes should be used in conjunction with the original readings as set forth by CFA Institute in their 2022 Level I CFA Study Guide The information contained in these Notes covers topics contained in the readings referenced by CFA Institute and is believed to be accurate However, their accuracy cannot be guaranteed nor is any warranty conveyed as to your ultimate exam success The authors of the referenced readings have not endorsed or sponsored these Notes SSV9X - 0969149105 CONTENTS Learning Outcome Statements (LOS) STUDY SESSION 5—Financial Statement Analysis (1) READING 15 Introduction to Financial Statement Analysis Exam Focus Module 15.1: Financial Statement Roles Module 15.2: Footnotes, Audit, and Analysis Key Concepts Answer Key for Module Quizzes READING 16 Financial Reporting Standards Exam Focus Module 16.1: Standards Overview Module 16.2: Financial Reporting Framework Key Concepts Answer Key for Module Quizzes STUDY SESSION 6—Financial Statement Analysis (2) READING 17 Understanding Income Statements Exam Focus Module 17.1: Income Statement Overview Module 17.2: Revenue Recognition Module 17.3: Expense Recognition Module 17.4: EPS and Dilutive Securities Module 17.5: Common-Size Income Statements Key Concepts Answer Key for Module Quizzes READING 18 Understanding Balance Sheets Exam Focus Module 18.1: Balance Sheet Introduction Module 18.2: Assets and Liabilities Module 18.3: Current Assets and Liabilities Module 18.4: Noncurrent Assets and Liabilities Module 18.5: Intangible Assets Module 18.6: Marketable Securities Module 18.7: Shareholders’ Equity and Ratios SSV9X - 0969149105 Key Concepts Answer Key for Module Quizzes READING 19 Understanding Cash Flow Statements Exam Focus Module 19.1: Cash Flow Introduction Module 19.2: The Direct and Indirect Methods Module 19.3: Converting Indirect to Direct Module 19.4: Free Cash Flow and Ratios Key Concepts Answer Key for Module Quizzes READING 20 Financial Analysis Techniques Exam Focus Module 20.1: Introduction to Financial Ratios Module 20.2: Financial Ratios, Part Module 20.3: Financial Ratios, Part Module 20.4: DuPont Analysis Module 20.5: More Financial Ratios Key Concepts Answer Key for Module Quizzes STUDY SESSION 7—Financial Statement Analysis (3) READING 21 Inventories Exam Focus Module 21.1: Cost Flow Methods Module 21.2: Inventory Systems Module 21.3: Converting LIFO to FIFO Module 21.4: Inventory Valuation Module 21.5: Inventory Analysis Key Concepts Answer Key for Module Quizzes READING 22 Long-Lived Assets Exam Focus Module 22.1: Capitalization vs Expensing Module 22.2: Depreciation Module 22.3: Impairment and Revaluation Module 22.4: Fixed Asset Disclosures Key Concepts Answer Key for Module Quizzes READING 23 SSV9X - 0969149105 Income Taxes Exam Focus Module 23.1: Tax Terms Module 23.2: Deferred Tax Liabilities and Assets Module 23.3: Deferred Tax Examples Module 23.4: Change in Tax Rates Module 23.5: Permanent Differences Key Concepts Answer Key for Module Quizzes READING 24 Non-Current (Long-Term) Liabilities Exam Focus Module 24.1: Bond Issuance Module 24.2: Discount and Premium Bonds Module 24.3: Issuance Cost, Derecognition, and Disclosures Module 24.4: Lease and Pension Accounting Key Concepts Answer Key for Module Quizzes STUDY SESSION 8—Financial Statement Analysis (4) READING 25 Financial Reporting Quality Exam Focus Module 25.1: Reporting Quality Module 25.2: Accounting Choices and Estimates Module 25.3: Warning Signs Key Concepts Answer Key for Module Quizzes READING 26 Applications of Financial Statement Analysis Exam Focus Module 26.1: Forecasting Module 26.2: Credit and Equity Analysis Key Concepts Answer Key for Module Quizzes Topic Quiz: Financial Statement Analysis Formulas Index SSV9X - 0969149105 LEARNING OUTCOME STATEMENTS (LOS) STUDY SESSION The topical coverage corresponds with the following CFA Institute assigned reading: 15 Introduction to Financial Statement Analysis The candidate should be able to: a describe the roles of inancial reporting and inancial statement analysis b describe the roles of the statement of inancial position, statement of comprehensive income, statement of changes in equity, and statement of cash lows in evaluating a company’s performance and inancial position c describe the importance of inancial statement notes and supplementary information—including disclosures of accounting policies, methods, and estimates —and management’s commentary d describe the objective of audits of inancial statements, the types of audit reports, and the importance of effective internal controls e identify and describe information sources that analysts use in inancial statement analysis besides annual inancial statements and supplementary information f describe the steps in the inancial statement analysis framework The topical coverage corresponds with the following CFA Institute assigned reading: 16 Financial Reporting Standards The candidate should be able to: a describe the objective of inancial reporting and the importance of inancial reporting standards in security analysis and valuation b describe the roles of inancial reporting standard-setting bodies and regulatory authorities in establishing and enforcing reporting standards c describe the International Accounting Standards Board’s conceptual framework, including qualitative characteristics of inancial reports, constraints on inancial reports, and required reporting elements d describe general requirements for inancial statements under International Financial Reporting Standards (IFRS) e describe implications for inancial analysis of alternative inancial reporting systems and the importance of monitoring developments in inancial reporting standards STUDY SESSION The topical coverage corresponds with the following CFA Institute assigned reading: 17 Understanding Income Statements The candidate should be able to: a describe the components of the income statement and alternative presentation formats of that statement b describe general principles of revenue recognition and accounting standards for revenue recognition c calculate revenue given information that might in luence the choice of revenue recognition method SSV9X - 0969149105 d describe general principles of expense recognition, speci ic expense recognition applications, and implications of expense recognition choices for inancial analysis e describe the inancial reporting treatment and analysis of non-recurring items (including discontinued operations, unusual or infrequent items) and changes in accounting policies f contrast operating and non-operating components of the income statement g describe how earnings per share is calculated and calculate and interpret a company’s earnings per share (both basic and diluted earnings per share) for both simple and complex capital structures h contrast dilutive and antidilutive securities and describe the implications of each for the earnings per share calculation i formulate income statements into common-size income statements j evaluate a company’s inancial performance using common-size income statements and inancial ratios based on the income statement k describe, calculate, and interpret comprehensive income l describe other comprehensive income and identify major types of items included in it The topical coverage corresponds with the following CFA Institute assigned reading: 18 Understanding Balance Sheets The candidate should be able to: a describe the elements of the balance sheet: assets, liabilities, and equity b describe uses and limitations of the balance sheet in inancial analysis c describe alternative formats of balance sheet presentation d contrast current and non-current assets and current and non-current liabilities e describe different types of assets and liabilities and the measurement bases of each f describe the components of shareholders’ equity g demonstrate the conversion of balance sheets to common-size balance sheets and interpret common-size balance sheets h calculate and interpret liquidity and solvency ratios The topical coverage corresponds with the following CFA Institute assigned reading: 19 Understanding Cash Flow Statements The candidate should be able to: a compare cash lows from operating, investing, and inancing activities and classify cash low items as relating to one of those three categories given a description of the items b describe how non-cash investing and inancing activities are reported c contrast cash low statements prepared under International Financial Reporting Standards (IFRS) and US generally accepted accounting principles (US GAAP) d compare and contrast the direct and indirect methods of presenting cash from operating activities and describe arguments in favor of each method e describe how the cash low statement is linked to the income statement and the balance sheet f describe the steps in the preparation of direct and indirect cash low statements, including how cash lows can be computed using income statement and balance sheet data g demonstrate the conversion of cash lows from the indirect to direct method h analyze and interpret both reported and common-size cash low statements SSV9X - 0969149105 i calculate and interpret free cash low to the irm, free cash low to equity, and performance and coverage cash low ratios The topical coverage corresponds with the following CFA Institute assigned reading: 20 Financial Analysis Techniques The candidate should be able to: a describe tools and techniques used in inancial analysis, including their uses and limitations b identify, calculate, and interpret activity, liquidity, solvency, pro itability, and valuation ratios c describe relationships among ratios and evaluate a company using ratio analysis d demonstrate the application of DuPont analysis of return on equity and calculate and interpret effects of changes in its components e calculate and interpret ratios used in equity analysis and credit analysis f explain the requirements for segment reporting and calculate and interpret segment ratios g describe how ratio analysis and other techniques can be used to model and forecast earnings STUDY SESSION The topical coverage corresponds with the following CFA Institute assigned reading: 21 Inventories The candidate should be able to: a contrast costs included in inventories and costs recognised as expenses in the period in which they are incurred b describe different inventory valuation methods (cost formulas) c calculate and compare cost of sales, gross pro it, and ending inventory using different inventory valuation methods and using perpetual and periodic inventory systems d calculate and explain how in lation and de lation of inventory costs affect the inancial statements and ratios of companies that use different inventory valuation methods e explain LIFO reserve and LIFO liquidation and their effects on inancial statements and ratios f demonstrate the conversion of a company’s reported inancial statements from LIFO to FIFO for purposes of comparison g describe the measurement of inventory at the lower of cost and net realisable value h describe implications of valuing inventory at net realisable value for inancial statements and ratios i describe the inancial statement presentation of and disclosures relating to inventories j explain issues that analysts should consider when examining a company’s inventory disclosures and other sources of information k calculate and compare ratios of companies, including companies that use different inventory methods l analyze and compare the inancial statements of companies, including companies that use different inventory methods The topical coverage corresponds with the following CFA Institute assigned reading: SSV9X - 0969149105 22 Long-Lived Assets The candidate should be able to: a identify and contrast costs that are capitalised and costs that are expensed in the period in which they are incurred b compare the inancial reporting of the following types of intangible assets: purchased, internally developed, acquired in a business combination c explain and evaluate how capitalising versus expensing costs in the period in which they are incurred affects inancial statements and ratios d describe the different depreciation methods for property, plant, and equipment and calculate depreciation expense e describe how the choice of depreciation method and assumptions concerning useful life and residual value affect depreciation expense, inancial statements, and ratios f describe the different amortisation methods for intangible assets with inite lives and calculate amortisation expense g describe how the choice of amortisation method and assumptions concerning useful life and residual value affect amortisation expense, inancial statements, and ratios h describe the revaluation model i explain the impairment of property, plant, and equipment and intangible assets j explain the derecognition of property, plant, and equipment and intangible assets k explain and evaluate how impairment, revaluation, and derecognition of property, plant, and equipment and intangible assets affect inancial statements and ratios l describe the inancial statement presentation of and disclosures relating to property, plant, and equipment and intangible assets m analyze and interpret inancial statement disclosures regarding property, plant, and equipment and intangible assets n compare the inancial reporting of investment property with that of property, plant, and equipment The topical coverage corresponds with the following CFA Institute assigned reading: 23 Income Taxes The candidate should be able to: a describe the differences between accounting pro it and taxable income and de ine key terms, including deferred tax assets, deferred tax liabilities, valuation allowance, taxes payable, and income tax expense b explain how deferred tax liabilities and assets are created and the factors that determine how a company’s deferred tax liabilities and assets should be treated for the purposes of inancial analysis c calculate the tax base of a company’s assets and liabilities d calculate income tax expense, income taxes payable, deferred tax assets, and deferred tax liabilities, and calculate and interpret the adjustment to the inancial statements related to a change in the income tax rate e evaluate the effect of tax rate changes on a company’s inancial statements and ratios f identify and contrast temporary versus permanent differences in pre-tax accounting income and taxable income g describe the valuation allowance for deferred tax assets—when it is required and what effect it has on inancial statements h explain recognition and measurement of current and deferred tax items i analyze disclosures relating to deferred tax items and the effective tax rate reconciliation and explain how information included in these disclosures affects a SSV9X - 0969149105 .. .Book 2: Financial Statement Analysis SchweserNotes? ?? 20 22 Level I CFA? ? SSV9X - 0969149105 SCHWESERNOTES? ?? 20 22 LEVEL I CFA? ? BOOK 2: FINANCIAL STATEMENT ANALYSIS ? ?20 21 Kaplan, Inc All rights... Disclaimer: The SchweserNotes should be used in conjunction with the original readings as set forth by CFA Institute in their 20 22 Level I CFA Study Guide The information contained in these Notes covers topics contained in the readings referenced by CFA Institute and is believed to be... Module Quizzes READING 22 Long-Lived Assets Exam Focus Module 22 .1: Capitalization vs Expensing Module 22 .2: Depreciation Module 22 .3: Impairment and Revaluation Module 22 .4: Fixed Asset Disclosures