CFA LEVEL 1 question with correct
answers 2023 graded A+
Financial Statement Analysis Framework - correct answer provides an overview of the methodology used
by analysts to consistently analyze financial statements
1. articulate the purpose and context of analysis
2. collecting data
3. process the data
4. analyzing and interpreting the processed data
5. develop/communicate conclusions and recommendations
6. follow up
Scope of Financial Statement Analysis - correct answer - analysis is based on financial statements is
performed by equity investors interested in valuation, lenders interested in liquidity, suppliers interested
in future business, and analysts working to recommend security purchases, mergers, credit and lending,
debt ratings, and forecasting
Balance Sheet - Assets - correct answer - assets are items owned by a company that will benefit the
company in the future
- found on balance sheet; include current/noncurrent
- required to be listed separately under IFRS
- typically shown on balance sheet at historical cost
Income Statement - Introduction - correct answer - reports revenues, expenses, and profit or loss for a
company on a consolidated basis over a short period of time
,- revenues are matched with expenses incurred to earn the revenue, and the net result is a profit or a
loss for the period
- when the company reports on a consolidated basis, they include all companies they own in one income
statement
Statement of Changes in Equity (1) - correct answer - reconciles the balance in equity from the beginning
of a period to the end of a period
- equity is composed of paid-in capital, retained earnings, other comprehensive income, and minority
interests
- statement of changes in equity reconciles the beginning equity balance with the period-ending equity
balance by analyzing the changes in the four components of equity
Beginning equity +/- increase/decrease in paid-in capital + net income (or minus net loss) - dividends
paid +/- changes in other comprehensive income +/- changes in minority interest
Balance Sheet - Liabilities - correct answer - future obligations of a company, which may be monetary or
non-monetary
- include current/non-current liabilities
- required to be listed separately under IFRS as a means of helping analysts in identifying threats to
liquidity
Financial Notes (footnotes) and Supplementary Schedules - correct answer - required part of the
financial reports and contain essential information about the company's accounting policies, methods,
and estimates, many of which are essential for analysis
Statement of Comprehensive Income - correct answer - requirement under IFRS
,- comprised of both profit and loss for the period and other items affecting equity
- presented as one or two statements, with one being the income statement
- includes the traditional statement of operations and a second component presenting items that affect
owners' equity but are not share transactions
- component is called Other Comprehensive Income (OCI)
- OCI reports certain gains and losses that bypass the income statement and end up as adjustments to
owner's equity
- OCI includes fair value changes, items reclassified to profit and loss, and other non-owner changes in
equity
- AOCI is included as a separate line item in the equity section
* US GAAP allows corporations to present OCI as part of the statement of changes in equity as opposed
to being part of the comprehensive income statements
Management Discussion and Analysis - correct answer - provides readers with information needed to
understand a company's financial condition, changes in financial condition, and results of operations
5 Elements
1. nature of the business
2. management's objectives and strategies
3. company's significant resources, risks, relationships
4. results of operations
5. critical performance measures
, Auditor's Reports - correct answer - performed by qualified, independent auditors
- opinion is based on the audit procedures performed that are designed to provide reasonable assurance
the statements fairly present the results of operations and financial condition of the company in
accordance with applicable accounting standards
- opinions may be unqualified, qualified, adverse, or disclaimed
Introductory Paragraph - sets forth the statements to be audited and the responsibilities of both
management to prepare the statements and auditors to audit the statement
Scope Paragraph - describes the nature of the audit process and procedures that serve as a basis for the
auditor's opinion
Opinion Paragraph - states the auditor's opinion concerning if the statements fairly present the
company's financial position and result of operations free of material misstatements in conformity with
applicable accounting standards
Auditor's Opinions - correct answer Unqualified Opinion - (most common) auditor found no material
misstatement and believes the statements fairly reflect the results of operations and financial condition
of the company, in compliance with applicable accounting standards
Qualified Opinion - auditor found something material that does not comply with the applicable
accounting standards; this exception doesn't invalidate the statement as a whole, though, and the
auditor will explain the qualification in the audit report
Adverse Opinion - the auditor found material misstatements of such an extent that the statements taken
as a whole do not fairly represent the results of operations and financial condition in compliance with
applicable accounting standards (really rare)
Disclaimer of Opinion - auditor cannot complete the audit, not issuing an opinion; also rare
answers 2023 graded A+
Financial Statement Analysis Framework - correct answer provides an overview of the methodology used
by analysts to consistently analyze financial statements
1. articulate the purpose and context of analysis
2. collecting data
3. process the data
4. analyzing and interpreting the processed data
5. develop/communicate conclusions and recommendations
6. follow up
Scope of Financial Statement Analysis - correct answer - analysis is based on financial statements is
performed by equity investors interested in valuation, lenders interested in liquidity, suppliers interested
in future business, and analysts working to recommend security purchases, mergers, credit and lending,
debt ratings, and forecasting
Balance Sheet - Assets - correct answer - assets are items owned by a company that will benefit the
company in the future
- found on balance sheet; include current/noncurrent
- required to be listed separately under IFRS
- typically shown on balance sheet at historical cost
Income Statement - Introduction - correct answer - reports revenues, expenses, and profit or loss for a
company on a consolidated basis over a short period of time
,- revenues are matched with expenses incurred to earn the revenue, and the net result is a profit or a
loss for the period
- when the company reports on a consolidated basis, they include all companies they own in one income
statement
Statement of Changes in Equity (1) - correct answer - reconciles the balance in equity from the beginning
of a period to the end of a period
- equity is composed of paid-in capital, retained earnings, other comprehensive income, and minority
interests
- statement of changes in equity reconciles the beginning equity balance with the period-ending equity
balance by analyzing the changes in the four components of equity
Beginning equity +/- increase/decrease in paid-in capital + net income (or minus net loss) - dividends
paid +/- changes in other comprehensive income +/- changes in minority interest
Balance Sheet - Liabilities - correct answer - future obligations of a company, which may be monetary or
non-monetary
- include current/non-current liabilities
- required to be listed separately under IFRS as a means of helping analysts in identifying threats to
liquidity
Financial Notes (footnotes) and Supplementary Schedules - correct answer - required part of the
financial reports and contain essential information about the company's accounting policies, methods,
and estimates, many of which are essential for analysis
Statement of Comprehensive Income - correct answer - requirement under IFRS
,- comprised of both profit and loss for the period and other items affecting equity
- presented as one or two statements, with one being the income statement
- includes the traditional statement of operations and a second component presenting items that affect
owners' equity but are not share transactions
- component is called Other Comprehensive Income (OCI)
- OCI reports certain gains and losses that bypass the income statement and end up as adjustments to
owner's equity
- OCI includes fair value changes, items reclassified to profit and loss, and other non-owner changes in
equity
- AOCI is included as a separate line item in the equity section
* US GAAP allows corporations to present OCI as part of the statement of changes in equity as opposed
to being part of the comprehensive income statements
Management Discussion and Analysis - correct answer - provides readers with information needed to
understand a company's financial condition, changes in financial condition, and results of operations
5 Elements
1. nature of the business
2. management's objectives and strategies
3. company's significant resources, risks, relationships
4. results of operations
5. critical performance measures
, Auditor's Reports - correct answer - performed by qualified, independent auditors
- opinion is based on the audit procedures performed that are designed to provide reasonable assurance
the statements fairly present the results of operations and financial condition of the company in
accordance with applicable accounting standards
- opinions may be unqualified, qualified, adverse, or disclaimed
Introductory Paragraph - sets forth the statements to be audited and the responsibilities of both
management to prepare the statements and auditors to audit the statement
Scope Paragraph - describes the nature of the audit process and procedures that serve as a basis for the
auditor's opinion
Opinion Paragraph - states the auditor's opinion concerning if the statements fairly present the
company's financial position and result of operations free of material misstatements in conformity with
applicable accounting standards
Auditor's Opinions - correct answer Unqualified Opinion - (most common) auditor found no material
misstatement and believes the statements fairly reflect the results of operations and financial condition
of the company, in compliance with applicable accounting standards
Qualified Opinion - auditor found something material that does not comply with the applicable
accounting standards; this exception doesn't invalidate the statement as a whole, though, and the
auditor will explain the qualification in the audit report
Adverse Opinion - the auditor found material misstatements of such an extent that the statements taken
as a whole do not fairly represent the results of operations and financial condition in compliance with
applicable accounting standards (really rare)
Disclaimer of Opinion - auditor cannot complete the audit, not issuing an opinion; also rare
