CFA - Focus Area in Financial Reporting

I could think of the following as the focus area in Financial reporting for the Level 1 Exam.
Candidates should go through this and have good grasp on the following areas.
Session 7
1. Understand the key items (asset/liability etc) in financial statements (balance sheet/P&L statement)
2. Role of auditor – situation in which auditor can give adverse opinion etc
3. Steps in financial statement analysis framework
4. Role of bodies like FASB, IAS
5. IFRS framework
6. Disclosures to be done by the companies for significant accounting policies

Session 8
1. Understand the various revenue recognition methods and the applicability in various scenarios 2. Differentiate between operating and non-operating income
3. Understand and remember non-recurring items (discontinued operation, extraordinary items, unusual or infrequent items)
4. Calculation of basic and diluted earnings per share – VERY Important
5. Understand difference between dilutive and anti-dilutive, treasury stock method – sure to get one question on this area
6. Remember which items are not included in Income statement but are directly mentioned in equity
7. Understand the implication of accrual method on balance sheet – that is how it leads to asset and liabilities (deferred revenue/customer advances etc)
8. Off balance sheet disclosures and items
9. Components of owner’s equity
10. Understand the various cash flow (operating/investing/financing); should be able to calculate the operating cash flow from both direct and indirect method; CFA institute will try to confuse by putting items that are non-operating in nature; so you should remember which items are part of operating cash flow
11. Calculate Free cash flow to equity and free cash flow to firm – remember the formula
12. There are various cash flow ratios; remember to calculate them

Session 9 –This is the most important session in FRA (Inventories/Long-Lived Assets/Income tax/Lease). Questions would be analytical in nature

1. Inventory – Understand the LIFO and FIFO methods, the implication of using one method over the other on Income statement and balance sheet. Understand LIFO Reserve and what happens when a company changes its method from LIFO to FIFO – Equity increases(by Lifo reserve *(1-t))
2. Implication on financial statement when using one of the methods when prices are increasing , decreasing and stable
3. Impact on ratios due to different methods (Very Important)
4. When can a LIFO reserve decline – understand LIFO Liquidation
5. Depreciation methods – should be able to calculate the remaining book value, depreciation in a particular year, differences between the methods, understand which method would result in higher profit/cash flows/taxes.
6. Calculate average age, life of depreciable assets etc.. these figures have been tested on and off in the exam
7. Amortization of intangible – know the calculation steps
8. Asset retirement obligation – very likely to be tested in the exam – considering the activities of environmental activists
9. What happens to CFO/Net profit etc when an asset is sold at loss/profit
10. Impairment – when can that be done and what are the implication on financial assets
11. Effect of revaluation
12. Understand how Deferred tax asset and liability can be generated due to regular business activities
13. Understand the definition income tax expense, income taxes payable – questions can be asked on this
14. What happens to DTA/DTL/Income tax expense/income tax payable when taxes increase / decrease – very important
15. What happens to the DTL of a growing company – understand permanent and temporary items
16. Valuation allowance
17. Effective tax rate and the basis of comparison across different firms
18. Difference in IFRS and US GAAP from taxation point of view
19. Amortization of Bond discount and premium – very important
20. Effect of interest rate on market value of debt and associated financial ratios
21. Remember how to classify a lease as capital lease - very important
22. Capital and Operating Lease - Motivation of leasing; effect on ratios; when should one go for operating or financing lease
23. Sales type lease from lessor point of view and how is it different from direct financing lease – one question from this area
24. Understand take or pay/throughput/sales of receivables with or without recourse – one analytical question from this area

Session 10 –DuPont/ differences in IFRS And GAAP are frequently tested in the exam. New materials are added to on shenanigans, red flags and become important considering the current economic situation.
1. DuPont ratio – very important – don’t learn the formula as institute will not give straight items to calculate- expect some twist and hence you should know how the formula has come. Extended DuPont can be remembered, but make sure to understand the derivation
2. Ratios on equity/credit analysis
3. Remember all the ratios that are mentioned – institute can throw anyone – important is to understand the implication on liquidity ratio when cash is paid to suppliers etc.
4. Red flags – read the chapter and should be able to identify the warning signs
5. Shenanigans – important section and can expect questions related to all four ways to manipulate earnings (payables – stretching, financing), sell of receivable and offsetting of diluted earnings through buyback.
6. Comparison of firms by comparing the financial statements and ratios, projections
7. IFRS and GAAP – differences and common points.

Knowledge Varsity