Common-size Cash Flow Statements
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Study Session 6
Reading 15 – Introduction to Financial Statement Analysis
–LOS 15a: describe the roles of financial reporting and financial statement analysis
–LOS 15b: describe the roles of the statement of financial position, statement of comprehensive income, statement of changes in equity, and statement of cash flows in evaluating a company’s performance and financial position
–LOS 15c: describe the importance of financial statement notes and supplementary information — including disclosures of accounting policies, methods, and estimates — and management’s commentary
–LOS 15d: describe the objective of audits of financial statements, the types of audit reports, and the importance of effective internal controls
–LOS 15e: identify and describe information sources that analysts use in financial statement analysis besides annual financial statements and supplementary information
–LOS 15f: describe the steps in the financial statement analysis framework
Reading 16 – Financial Reporting Standards
– LOS 16a: describe the objective of financial statements and the importance of financial reporting standards in security analysis and valuation
– LOS 16b: describe roles and desirable attributes of financial reporting standard-setting bodies and regulatory authorities in establishing and enforcing reporting standards
– LOS 16c: describe the International Accounting Standards Board’s conceptual framework, including the objective and qualitative characteristics of financial statements, required reporting elements, and constraints and assumptions in preparing financial statements
– LOS 16d: describe general requirements for financial statements under International Financial Reporting Standards (IFRS)
– LOS 16e: describe implications for financial analysis of differing financial reporting systems and the importance of monitoring developments in financial reporting standards
Study Session 7
Reading 17 – Understanding Income Statements
– LOS 17a: describe the components of the income statement and alternative presentation formats of that statement
– LOS 17b: describe general principles of revenue recognition and accrual accounting, specific revenue recognition applications (including accounting for long-term contracts, installment sales, barter transactions, gross and net reporting of revenue), and implications of revenue recognition principles for financial analysis
– LOS 17c: calculate revenue given information that might influence the choice of revenue recognition method
– LOS 17d: describe general principles of expense recognition, specific expense recognition applications, and implications of expense recognition choices for financial analysis
– LOS 17e: describe the financial reporting treatment and analysis of non-recurring items (including discontinued operations, unusual or infrequent items) and changes in accounting policies)
– LOS 17f: distinguish between the operating and non-operating components of the income statement
– LOS 17g: 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
– LOS 17h: distinguish between dilutive and antidilutive securities and describe the implications of each for the earnings per share calculation
– LOS 17i: convert income statements to common-size income statements
– LOS 17j: evaluate a company’s financial performance using common-size income statements and financial ratios based on the income statement
– LOS 17k: describe, calculate, and interpret comprehensive income
– LOS 17l: describe other comprehensive income and identify major types of items included in it
Reading 18 – Understanding Balance Sheets
– LOS 18a: describe the elements of the balance sheet: assets, liabilities, and equity
– LOS 18b: describe uses and limitations of the balance sheet in financial analysis
– LOS 18c: describe alternative formats of balance sheet presentation
– LOS 18d: distinguish between current and non-current assets and current and noncurrent liabilities
– LOS 18e: describe different types of assets and liabilities and the measurement bases of each
– LOS 18f: describe the components of shareholders’ equity
– LOS 18g: demonstrate the conversion of balance sheets to common–size balance sheets and interpret common–size balance sheets
– LOS 18h: calculate and interpret liquidity and solvency ratios
Reading 19 – Understanding Cash Flow Statements
– LOS 19a: compare cash flows from operating, investing, and financing activities and classify cash flow items as relating to one of those three categories given a description of the items
– LOS 19b: describe how non-cash investing and financing activities are reported
– LOS 19c: contrast cash flow statements prepared under International Financial Reporting Standards (IFRS) and US generally accepted accounting principles (US GAAP)
– LOS 19d: distinguish between the direct and indirect methods of presenting cash from operating activities and describe arguments in favor of each method
– LOS 19e: describe how the cash flow statement is linked to the income statement and the balance sheet
– LOS 19f: describe the steps in the preparation of direct and indirect cash flow statements, including how cash flows can be computed using income statement and balance sheet data
– LOS 19g: demonstrate the conversion of cash flows from the indirect to direct method
– LOS 19h: analyze and interpret both reported and common-size cash flow statements
– LOS 19i: calculate and interpret free cash flow to the firm, free cash flow to equity, and performance and coverage cash flow ratios
Reading 20 – Financial Analysis Techniques
– LOS 20a: describe tools and techniques used in financial analysis, including their uses and limitations
– LOS 20b: classify, calculate, and interpret activity, liquidity, solvency, profitability, and valuation ratios
– LOS 20c: describe relationships among ratios and evaluate a company using ratio analysis
– LOS 20d: demonstrate the application of DuPont analysis of return on equity and calculate and interpret effects of changes in its components
– LOS 20e: calculate and interpret ratios used in equity analysis and credit analysis
– LOS 20f: explain the requirements for segment reporting and calculate and interpret segment ratios
– LOS 20g: describe how ratio analysis and other techniques can be used to model and forecast earnings
Study Session 8
Reading 21 – Inventories
– LOS 21a: distinguish between costs included in inventories and costs recognised as expenses in the period in which they are incurred
– LOS 21b: describe different inventory valuation methods (cost formulas)
– LOS 21c: calculate and compare cost of sales, gross profit, and ending inventory using different inventory valuation methods and using perpetual and periodic inventory systems
– LOS 21d: calculate and explain how inflation and deflation of inventory costs affect the financial statements and ratios of companies that use different inventory valuation methods
– LOS 21e: explain LIFO reserve and LIFO liquidation and their effects on financial statements and ratios
– LOS 21f: demonstrate the conversion of a company’s reported financial statements from LIFO to FIFO for purposes of comparison
– LOS 21g: describe the measurement of inventory at the lower of cost and net realisable value
– LOS 21h: describe implications of valuing inventory at net realisable value for financial statements and ratios
– LOS 21i: describe the financial statement presentation of and disclosures relating to inventories
– LOS 21j: explain issues that analysts should consider when examining a company’s inventory disclosures and other sources of information
– LOS 21k: calculate and compare ratios of companies, including companies that use different inventory methods
– LOS 21l: analyze and compare the financial statements of companies, including companies that use different inventory methods
Reading 22 – Long-Lived Assets
– LOS 22a: identify and contrast costs that are capitalised and costs that are expensed in the period in which they are incurred
– LOS 22b: compare the financial reporting of the following types of intangible assets: purchased, internally developed, acquired in a business combination
– LOS 22c: explain and evaluate how capitalising versus expensing costs in the period in which they are incurred affects financial statements and ratios
– LOS 22d: describe the different depreciation methods for property, plant, and equipment and calculate depreciation expense
– LOS 22e: describe how the choice of depreciation method and assumptions concerning useful life and residual value affect depreciation expense, financial statements, and ratios
– LOS 22f: describe the different amortisation methods for intangible assets with finite lives and calculate amortisation expense
– LOS 22g: describe how the choice of amortisation method and assumptions concerning useful life and residual value affect amortisation expense, financial statements, and ratios
– LOS 22h: describe the revaluation model
– LOS 22i: explain the impairment of property, plant, and equipment and intangible assets
– LOS 22j: explain the derecognition of property, plant, and equipment and intangible assets
– LOS 22k: explain and evaluate how impairment, revaluation, and derecognition of property, plant, and equipment and intangible assets affect financial statements and ratios
– LOS 22l: describe the financial statement presentation of and disclosures relating to property, plant, and equipment and intangible assets
– LOS 22m: analyze and interpret financial statement disclosures regarding property, plant, and equipment and intangible assets
– LOS 22n: compare the financial reporting of investment property with that of property, plant, and equipment
Reading 23 – Income Taxes
– LOS 23a: describe the differences between accounting profit and taxable income and define key terms, including deferred tax assets, deferred tax liabilities, valuation allowance, taxes payable, and income tax expense
– LOS 23b: 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 financial analysis
– LOS 23c: calculate the tax base of a company’s assets and liabilities
– LOS 23d: calculate income tax expense, income taxes payable, deferred tax assets, and deferred tax liabilities, and calculate and interpret the adjustment to the financial statements related to a change in the income tax rate
– LOS 23e: evaluate the impact of tax rate changes on a company’s financial statements and ratios
– LOS 23f: identify and contrast temporary versus permanent differences in pre–tax accounting income and taxable income
– LOS 23g: describe the valuation allowance for deferred tax assets—when it is required and what impact it has on financial statements
– LOS 23h: explain recognition and measurement of current and deferred tax items
– LOS 23i: analyze disclosures relating to deferred tax items and the effective tax rate reconciliation and explain how information included in these disclosures affects a company’s financial statements and financial ratios
– LOS 23j: identify the key provisions of and differences between income tax accounting under International Financial Reporting Standards (IFRS) and US generally accepted accounting principles (GAAP)
Reading 24 – Non-Current (Long-Term) Liabilities
– LOS 24a: determine the initial recognition, initial measurement and subsequent measurement of bonds
– LOS 24b: describe the effective interest method and calculate interest expense, amortisation of bond discounts/premiums, and interest payments
– LOS 24c: explain the derecognition of debt
– LOS 24d: describe the role of debt covenants in protecting creditors
– LOS 24e: describe the financial statement presentation of and disclosures relating to debt
– LOS 24f: explain motivations for leasing assets instead of purchasing them
– LOS 24g: explain the financial reporting of leases from a lessee’s perspective
– LOS 24h: explain the financial reporting of leases from a lessor’s perspective
– LOS 24i: compare the presentation and disclosure of defined contribution and defined benefit pension plans
– LOS 24j: calculate and interpret leverage and coverage ratios
Study Session 9
Reading 25 – Financial Reporting Quality
– LOS 25a: distinguish between financial reporting quality and quality of reported results (including quality of earnings, cash flow, and balance sheet items)
– LOS 25b: describe a spectrum for assessing financial reporting quality
– LOS 25c: distinguish between conservative and aggressive accounting
– LOS 25d: describe motivations that might cause management to issue financial reports that are not high quality
– LOS 25e: describe conditions that are conducive to issuing low-quality, or even fraudulent, financial reports
– LOS 25f: describe mechanisms that discipline financial reporting quality and the potential limitations of those mechanisms
– LOS 25g: describe presentation choices, including non-GAAP measures, that could be used to influence an analyst’s opinion
– LOS 25h: describe accounting methods (choices and estimates) that could be used to manage earnings, cash flow, and balance sheet items
– LOS 25i: describe accounting warning signs and methods for detecting manipulation of information in financial reports
Reading 26 – Financial Statement Analysis: Applications
– LOS 26a: evaluate a company’s past financial performance and explain how a company’s strategy is reflected in past financial performance
– LOS 26b: demonstrate how to forecast a company’s future net income and cash flow
– LOS 26c: describe the role of financial statement analysis in assessing the credit quality of a potential debt investment
– LOS 26d: describe the use of financial statement analysis in screening for potential equity investments
– LOS 26e: explain appropriate analyst adjustments to a company’s financial statements to facilitate comparison with another company
(Reading 22 until 2018 – Financial Reporting Mechanics)
– LOS 22a: describe how business activities are classified for financial reporting purposes
– LOS 22b: explain the relationship of financial statement elements and accounts, and classify accounts into the financial statement elements
– LOS 22c: explain the accounting equation in its basic and expanded forms
– LOS 22d: describe the process of recording business transactions using an accounting system based on the accounting equation
– LOS 22e: describe the need for accruals and valuation adjustments in preparing financial statements
– LOS 22f: describe the relationships among the income statement, balance sheet, statement of cash flows, and statement of owners’ equity
– LOS 22g: describe the flow of information in an accounting system
– LOS 22h: describe the use of the results of the accounting process in security analysis
2024 Curriculum
Learning Module 1 – Introduction to Financial Statement Analysis
LOS a: describe the steps in the financial statement analysis framework
LOS b: describe the roles of financial statement analysis
Learning Module 2 – Analyzing Income Statements
Learning Module 3 – Analyzing Balance Sheets
LOS a: explain the financial reporting and disclosures related to intangible assets
LOS b: explain the financial reporting and disclosures related to goodwill
LOS c: explain the financial reporting and disclosures related to financial instruments
LOS d: explain the financial reporting and disclosures related to non-current liabilities
LOS e: calculate and interpret common-size balance sheets and related financial ratios
Learning Module 4 – Analyzing Cash Flows Statement 1
LOS a: describe how the cash flow statement is linked to the income statement and the balance sheet
LOS c: demonstrate the conversion of cash flows from the indirect to direct method
Learning Module 5 – Analyzing Cash Flow Statements 2
LOS a: analyze and interpret both reported and common-size cash flow statements
Learning Module 6 – Analysis of Inventories
Learning Module 7 – Analysis of Long-Term Assets
Learning Module 8 – Topics in Long-Term Liabilities and Equity
LOS a: explain the financial reporting of leases from the perspectives of the lessors and lessees
Learning Module 9 – Analysis of Income Taxes
Learning Module 10 – Financial Reporting Quality
LOS b: describe a spectrum for assessing financial reporting quality
LOS c: explain the difference between conservative and aggressive accounting
Learning Module 11 – Financial Analysis Techniques
LOS b: calculate and interpret activity, liquidity, solvency, and profitability ratios
LOS c: describe relationships among ratios and evaluate a company using ratio analysis
LOS e: describe the uses of industry-specific ratios used in financial analysis
LOS f: describe how ratio analysis and other techniques can be used to model and forecast earnings
Learning Module 12 – Introduction to Financial Statement Modeling
LOS a: demonstrate the development of a sales-based pro forma company model
Sergio Torrico
2021-07-23
Excelente para el FRM 2
Escribo esta revisión en español para los hispanohablantes, soy de Bolivia, y utilicé
AnalystPrep para dudas y consultas sobre mi preparación para el FRM nivel 2 (lo tomé una sola vez y aprobé muy bien), siempre tuve un soporte claro, directo y rápido, el material sale rápido cuando hay cambios en el temario de GARP, y los ejercicios y exámenes son muy útiles para practicar.
diana
2021-07-17
So helpful. I have been using the videos to prepare for the CFA Level II exam. The videos signpost the reading contents, explain the concepts and provide additional context for specific concepts.
The fun light-hearted analogies are also a welcome break to some very dry content.
I usually watch the videos before going into more in-depth reading and they are a good way to avoid being overwhelmed by the sheer volume of content when you look at the readings.
Kriti Dhawan
2021-07-16
A great curriculum provider. James sir explains the concept so well that rather than memorising it, you tend to intuitively understand and absorb them.
Thank you ! Grateful I saw this at the right time for my CFA prep.
nikhil kumar
2021-06-28
Very well explained and gives a great insight about topics in a very short time. Glad to have found Professor Forjan's lectures.
Marwan
2021-06-22
Great support throughout the course by the team, did not feel neglected
Benjamin anonymous
2021-05-10
I loved using AnalystPrep for FRM.
QBank is huge, videos are great.
Would recommend to a friend
Daniel Glyn
2021-03-24
I have finished my FRM1 thanks to AnalystPrep. And now using AnalystPrep for my FRM2 preparation. Professor Forjan is brilliant. He gives such good explanations and analogies. And more than anything makes learning fun. A big thank you to Analystprep and Professor Forjan. 5 stars all the way!
michael walshe
2021-03-18
Professor James' videos are excellent for understanding the underlying theories behind financial engineering / financial analysis. The AnalystPrep videos were better than any of the others that I searched through on YouTube for providing a clear explanation of some concepts, such as Portfolio theory, CAPM, and Arbitrage Pricing theory. Watching these cleared up many of the unclarities I had in my head. Highly recommended.