© CFA Institute. For candidate use only. Not for distribution.
FINANCIAL STATEMENT
ANALYSIS
CFA® Program Curriculum
2024 • LEVEL PREREQUISITE READING • VOLUME 3
,© CFA Institute. For candidate use only. Not for distribution.
©2023 by CFA Institute. All rights reserved. This copyright covers material written
expressly for this volume by the editor/s as well as the compilation itself. It does
not cover the individual selections herein that first appeared elsewhere. Permission
to reprint these has been obtained by CFA Institute for this edition only. Further
reproductions by any means, electronic or mechanical, including photocopying and
recording, or by any information storage or retrieval systems, must be arranged with
the individual copyright holders noted.
CFA®, Chartered Financial Analyst®, AIMR-PPS®, and GIPS® are just a few of the
trademarks owned by CFA Institute. To view a list of CFA Institute trademarks and the
Guide for Use of CFA Institute Marks, please visit our website at www.cfainstitute.org.
This publication is designed to provide accurate and authoritative information
in regard to the subject matter covered. It is sold with the understanding that the
publisher is not engaged in rendering legal, accounting, or other professional service.
If legal advice or other expert assistance is required, the services of a competent pro-
fessional should be sought.
All trademarks, service marks, registered trademarks, and registered service marks
are the property of their respective owners and are used herein for identification
purposes only.
, © CFA Institute. For candidate use only. Not for distribution.
CONTENTS
How to Use the CFA Program Curriculum vii
Errata vii
Financial Statement Analysis
Learning Module 1 Introduction to Financial Reporting 3
Introduction 4
The Objective of Financial Reporting 4
Accounting Standards Boards 5
Accounting Standards Boards 6
The International Financial Reporting Standards Framework 7
Qualitative Characteristics of Financial Reports 8
Constraints on Financial Reports 9
The Elements of Financial Statements 10
Underlying Assumptions in Financial Statements 11
Recognition of Financial Statement Elements 11
Measurement of Financial Statement Elements 11
Major Financial Statements 12
Financial Statements and Supplementary Information 13
Balance Sheet (Statement of Financial Position) 13
Statement of Comprehensive Income 17
Income Statement 18
Other Comprehensive Income 20
Statement of Changes in Equity and Cash Flow Statement 22
Cash Flow Statement 23
Summary 25
Practice Problems 27
Solutions 30
Learning Module 2 Income Statements 33
Introduction 34
Components and Format of the Income Statement 34
Revenue Recognition 40
General Principles 41
Accounting Standards for Revenue Recognition 41
Issues in Expense Recognition: Doubtful Accounts, Warranties 45
Doubtful Accounts 45
Warranties 46
Issues in Expense Recognition: Depreciation and Amortization 46
Non-Operating Items 50
Common-Size Analysis of the Income Statement 51
Common-Size Analysis of the Income Statement 51
Comprehensive Income 54
Summary 57
Practice Problems 60
indicates an optional segment
, © CFA Institute. For candidate use only. Not for distribution.
iv Contents
Solutions 62
Learning Module 3 Balance Sheets 63
Introduction and Components of the Balance Sheet 64
Components and Format of the Balance Sheet 64
Balance Sheet Components 65
Current and Non-Current Classification 67
Liquidity-Based Presentation 68
Current Assets: Cash and Cash Equivalents, Marketable Securities and
Trade Receivables 69
Current Assets 69
Current Liabilities 73
Non-Current Assets: Property, Plant and Equipment and Investment Property 77
Property, Plant, and Equipment 78
Investment Property 79
Non-Current Assets: Deferred Tax Assets 80
Components of Equity 81
Components of Equity 81
Statement of Changes in Equity 84
Summary 85
Practice Problems 88
Solutions 90
Learning Module 4 Cash Flow Statements 93
Introduction 94
Classification of Cash Flows and Non-Cash Activities 94
Cash Flow Statement: Direct and Indirect Methods for Reporting Cash
Flow from Operating Activities 97
Cash Flow Statement: Indirect Method under IFRS 98
Cash Flow Statement: Direct Method under IFRS 101
Cash Flow Statement: Direct Method under US GAAP 103
Cash Flow Statement: Indirect Method under US GAAP 106
Summary 108
Practice Problems 109
Solutions 111
Learning Module 5 Inventories 113
Introduction 114
Cost of Inventories 114
Inventory Valuation Methods 116
Specific Identification 117
First-In, First-Out (FIFO) 117
Weighted Average Cost 117
Last-In, First-Out (LIFO) 117
Calculations of Cost of Sales, Gross Profit, and Ending Inventory 118
Periodic versus Perpetual Inventory Systems 120
Comparison of Inventory Valuation Methods 123
The LIFO Method and LIFO Reserve 125
LIFO Reserve 126
indicates an optional segment
FINANCIAL STATEMENT
ANALYSIS
CFA® Program Curriculum
2024 • LEVEL PREREQUISITE READING • VOLUME 3
,© CFA Institute. For candidate use only. Not for distribution.
©2023 by CFA Institute. All rights reserved. This copyright covers material written
expressly for this volume by the editor/s as well as the compilation itself. It does
not cover the individual selections herein that first appeared elsewhere. Permission
to reprint these has been obtained by CFA Institute for this edition only. Further
reproductions by any means, electronic or mechanical, including photocopying and
recording, or by any information storage or retrieval systems, must be arranged with
the individual copyright holders noted.
CFA®, Chartered Financial Analyst®, AIMR-PPS®, and GIPS® are just a few of the
trademarks owned by CFA Institute. To view a list of CFA Institute trademarks and the
Guide for Use of CFA Institute Marks, please visit our website at www.cfainstitute.org.
This publication is designed to provide accurate and authoritative information
in regard to the subject matter covered. It is sold with the understanding that the
publisher is not engaged in rendering legal, accounting, or other professional service.
If legal advice or other expert assistance is required, the services of a competent pro-
fessional should be sought.
All trademarks, service marks, registered trademarks, and registered service marks
are the property of their respective owners and are used herein for identification
purposes only.
, © CFA Institute. For candidate use only. Not for distribution.
CONTENTS
How to Use the CFA Program Curriculum vii
Errata vii
Financial Statement Analysis
Learning Module 1 Introduction to Financial Reporting 3
Introduction 4
The Objective of Financial Reporting 4
Accounting Standards Boards 5
Accounting Standards Boards 6
The International Financial Reporting Standards Framework 7
Qualitative Characteristics of Financial Reports 8
Constraints on Financial Reports 9
The Elements of Financial Statements 10
Underlying Assumptions in Financial Statements 11
Recognition of Financial Statement Elements 11
Measurement of Financial Statement Elements 11
Major Financial Statements 12
Financial Statements and Supplementary Information 13
Balance Sheet (Statement of Financial Position) 13
Statement of Comprehensive Income 17
Income Statement 18
Other Comprehensive Income 20
Statement of Changes in Equity and Cash Flow Statement 22
Cash Flow Statement 23
Summary 25
Practice Problems 27
Solutions 30
Learning Module 2 Income Statements 33
Introduction 34
Components and Format of the Income Statement 34
Revenue Recognition 40
General Principles 41
Accounting Standards for Revenue Recognition 41
Issues in Expense Recognition: Doubtful Accounts, Warranties 45
Doubtful Accounts 45
Warranties 46
Issues in Expense Recognition: Depreciation and Amortization 46
Non-Operating Items 50
Common-Size Analysis of the Income Statement 51
Common-Size Analysis of the Income Statement 51
Comprehensive Income 54
Summary 57
Practice Problems 60
indicates an optional segment
, © CFA Institute. For candidate use only. Not for distribution.
iv Contents
Solutions 62
Learning Module 3 Balance Sheets 63
Introduction and Components of the Balance Sheet 64
Components and Format of the Balance Sheet 64
Balance Sheet Components 65
Current and Non-Current Classification 67
Liquidity-Based Presentation 68
Current Assets: Cash and Cash Equivalents, Marketable Securities and
Trade Receivables 69
Current Assets 69
Current Liabilities 73
Non-Current Assets: Property, Plant and Equipment and Investment Property 77
Property, Plant, and Equipment 78
Investment Property 79
Non-Current Assets: Deferred Tax Assets 80
Components of Equity 81
Components of Equity 81
Statement of Changes in Equity 84
Summary 85
Practice Problems 88
Solutions 90
Learning Module 4 Cash Flow Statements 93
Introduction 94
Classification of Cash Flows and Non-Cash Activities 94
Cash Flow Statement: Direct and Indirect Methods for Reporting Cash
Flow from Operating Activities 97
Cash Flow Statement: Indirect Method under IFRS 98
Cash Flow Statement: Direct Method under IFRS 101
Cash Flow Statement: Direct Method under US GAAP 103
Cash Flow Statement: Indirect Method under US GAAP 106
Summary 108
Practice Problems 109
Solutions 111
Learning Module 5 Inventories 113
Introduction 114
Cost of Inventories 114
Inventory Valuation Methods 116
Specific Identification 117
First-In, First-Out (FIFO) 117
Weighted Average Cost 117
Last-In, First-Out (LIFO) 117
Calculations of Cost of Sales, Gross Profit, and Ending Inventory 118
Periodic versus Perpetual Inventory Systems 120
Comparison of Inventory Valuation Methods 123
The LIFO Method and LIFO Reserve 125
LIFO Reserve 126
indicates an optional segment
