CFA Level 2: Financial Reporting Part 1 - Introduction

Adjusting reported financial statements of public companies for the purposes of comparing them or assessing their stand alone valuations is long time CFA exam material.  Entry level equity and credit analyst jobs require proficiency in financial statement analysis.  Today is world of on-demand financial data, with services such as Bloomberg.  However, if an analyst is supporting a stock recommendation, merger valuation, or bond underwriting, he or she must be able to critically interpret the publicly reported financial statement data and revise it to reflect economic reality.  Revisions can be based on company disclosures in the footnotes to public financial statements; known market values may also be used to replace reported book values, when revising a company’s financials.  The footnotes of a US GAAP or IFRS-IAS reporting company will discuss its inventory accounting methods, accounting for long-lived assets, and its accounting treatment of leases.  The items sets the test taker will see could potentially be nothing more than a set of financial statements followed by a series of footnotes.

This tutorial will explore issues in understanding inventory and long-lived asset accounting when analyzing company financial data.

In total, the test taker can reasonably expect three to four item sets (18-24 questions) on material related to financial reporting/financial statement analysis and financial reporting could possibly be the most tested section on the exam.  While studying accounting for inventories, long-lived assets, and leases, the student is strongly encouraged to think about how these issues could be presented within the item set format or a story, set of financial statements with footnotes, a table of accounting policies and ratios, or some other format.

Material Covered

I.          Inventory accounting issues with Financial Statements and Financial Ratios.

II.        Long-lived Asset accounting issues with Financial Statements Financial Ratios.

III.       Leases

Important Notes:

U.S. GAAP & IFRS-IAS: While there are some specific standards references, this sheet is largely fundamental in nature and the candidate should refer to Study Session 5 of the 2012 Level II CFA Program Curriculum © to determine requirements in understanding formal discrepancies between U.S. generally accepted accounting principles (GAAP) and international standards (referred to in this study sheet as IFRS-IAS).

Financial Ratios: Many financial ratios can be impacted by adjustments to a company’s inventory and long lived assets; some of the ratios will be used as examples in this study sheet and the student needs to refer to the official CFA curriculum for more additional of financial ratios.