Study Notes for CFA® Level II – Financial Reporting and Analysis – offered by AnalystPrep

Study Notes for CFA® Level II – Financial Reporting and Analysis – offered by AnalystPrep

Study Session 5

Reading 11: Intercorporate Investment

-a. Describe the classification, measurement, and disclosure under International Financial Reporting Standards (IFRS) for investments in financial assets, investments in associates, joint ventures, business combinations, and special purpose and variable interest entities;

-b. Compare and contrast IFRS and US GAAP in the classification, measurement, and disclosure of investment in financial assets, investments in associates, joint ventures, business combinations, and special purpose variable interest entities;

-c. Analyze how different methods used to account for intercorporate investments affect financial statements and ratios;

Reading 12: Employee Compensation: Post-Employment and Shared-Based

-a. Contrast types of employee compensation;

-b: Explain how share-based compensation affects the financial statements;

-c: Explain how to forecast share-based compensation expense and shares outstanding in a financial statement model and their use in valuation;

-d: Explain how post-employment benefits affect the financial statements;

-e: Explain financial modeling and valuation considerations for post-employment benefits

Reading 13: Multinational Operations

-a. Compare and contrast presentation in (reporting) currency, functional currency, and local currency;

-b. Describe foreign currency transaction exposure, including accounting for and disclosures about foreign currency transaction gains and losses;

-c. Analyze how changes in exchange rates affect the translated sales of the subsidiary and parent company;

-d. Compare the current rate method and the temporal method, evaluate how each affects the parent company’s balance sheet and income statement, and determine which method is appropriate in various scenarios;

-e. Calculate the translation effects and evaluate the translation of a subsidiary’s balance sheet and income statement into the parent company’s presentation currency;

-f. Analyze how the current rate method and the temporal method affect financial statements and ratios;

-g. Analyze how alternative translation methods for subsidiaries operating in hyper-inflationary economies affect financial statements and ratios;

-h. Describe how multinational operations affect a company’s effective tax rate;

-i. Explain how changes in the components of sales affect the sustainability of sales growth;

-j. Analyze how currency fluctuations potentially affect financial results, given a company’s countries of operation;

Reading 14: Analysis of Financial Institutions

-a. Describe how financial institutions differ from other companies;

-b. Describe key aspects of financial regulations of financial institutions;

-c. Explain the CAMELS (capital adequacy, asset quality, management, earnings, liquidity, and sensitivity) approach to analyzing a bank, including key ratios and its limitations;

-d. Describe other factors to consider in analyzing a bank;

-e. Analyze a bank based on financial statements and other factors;

-f. Describe key ratios and other factors to consider in analyzing an insurance company;

Study Session 6

Reading 15: Evaluating Quality of Financial Reports

-a. Demonstrate the use of a conceptual framework for assessing the quality of a company’s financial reports;

-b. Explain potential problems that affect the quality of financial reports;

-c. Describe how to evaluate the quality of a company’s financial reports;

-d. Evaluate the quality of a company’s financial reports;

-e. Describe the concept of sustainable (persistent) earnings;

-f. Describe indicators of earnings quality;

-g. Explain mean reversion in earnings and how the accruals component of earnings affects the speed of mean reversion;

-h. Evaluate the earnings quality of a company;

-i. Describe indicators of cash flow quality;

-j. Evaluate the cash flow quality of a company;

-k. Describe indicators of balance sheet quality;

-l. Evaluate the balance sheet quality of a company;

-m. Describe sources of information about risk;

Reading 16: Integration of Financial Statement Analysis Techniques

-a. Demonstrate the use of a framework for the analysis of financial statements, given a particular problem, question, or purpose (e.g., valuing equity based on comparable, critiquing a credit rating, obtaining a comprehensive picture of financial leverage, evaluating the perspectives given in management’s discussion of financial results);

-b. Identify financial reporting choices and biases that affect the quality and comparability of companies’ financial statements and explain how such biases may affect financial decisions;

-c. Evaluate the quality of a company’s financial data and recommend appropriate adjustments to improve quality and comparability with similar companies, including adjustments for differences in accounting standards, methods, and assumptions;

-d. Evaluate how a given change in accounting standards, methods, or assumptions affects financial statements and ratios;

-e. Analyze and interpret how balance sheet modifications, earnings normalization, and cash flow statement related modifications affect a company’s financial statements, financial ratios, and overall financial condition.

Reading 17: Financial Statement Modeling

-a. Compare top-down, bottom-up, and hybrid approaches for developing inputs to equity valuation models & b. Compare “growth relative to GDP growth” and “market growth and market share” approaches to forecasting revenue;

-c. Evaluate whether economies of scale are present in an industry by analyzing operating margins and sales levels;

-d. Demonstrate methods to forecasting cost of goods sold and operating expenses;

-e. Demonstrate methods to forecast non-operating items, financing costs and income taxes;

-f. Describe approaches to balance sheet modeling;

-g. Demonstrate the development of a sales-based pro forma company model;

-h. Explain how behavioral factors affect analyst forecasts and recommend remedial actions for analyst biases;

-i. Explain how competitive factors affect prices and costs;

-j. Judge the competitive position of a company based on Porter’s five forces analysis;

-k. Explain how to forecast industry and company sales and costs when they are subject to price inflation or deflation;

-l. Evaluate the effects of technological developments on demand, selling prices, costs, and margins;

-m. Explain considerations in the choice of an explicit forecast horizon;

-n. Explain an analyst’s choices in developing projections beyond the short-term forecast horizon;

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