Financial Statement Analysis: Study Session 9
Study Session Materials
Complete List of CFA Program Readings
Topic Overview
Inventories, Long-Term Assets, Deferred Taxes, and On-
and Off-Balance-Sheet Debt
The readings in this study session examine specific categories of assets
and liabilities that are particularly susceptible to the impact of
alternative accounting policies and estimates. Analysts must understand
the effects of alternative policies on financial statements and ratios,
and be able to execute appropriate adjustments to enhance comparability
between companies. In addition, analysts must be alert to differences
between a company's reported financial statements and economic
reality.
The description and measurement of inventories require careful attention
because the investment in inventories is frequently the largest current
asset for merchandizing and manufacturing companies. For these companies,
the measurement of inventory cost (i.e., cost of goods sold) is a
critical factor in determining gross profit and other measures of company
profitability. Long-term operating assets are often the largest category
of assets on a company's balance sheet. The analyst needs to scrutinize
management's choices with respect to recognizing expenses associated with
the operating assets because of the potentially large impact such choices
can have on reported earnings.
A company's accounting policies (such as depreciation choices) can cause
differences in taxes reported in financial statements and taxes reported
on tax returns. The reading “Analysis of Income Taxes” discusses several
issues that arise relating to deferred taxes.
Both on- and off-balance-sheet debt affect a company's liquidity and solvency, and have consequences for its long-term growth and viability. The notes of the financial statements must be carefully reviewed to ensure that all potential liabilities (e.g., leasing arrangements and other contractual commitments) are appropriately evaluated for their conformity to economic reality. Adjustments to the financial statements may be required to achieve comparability when evaluating several companies, and may also be required to improve credit and investment decision-making.
View learning outcome statement (LOS) for reading objectives.
Complete List of CFA Program Readings
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“Analysis of Inventories” Ch. 6, pp. 192-215 and pp. 219-220, The Analysis and Use of Financial Statements, 3rd edition, Gerald I. White, Ashwinpaul C. Sondhi, and Dov Fried (Wiley, 2003) |
View LOS |
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“Analysis of Long-Lived Assets: Part I – The
Capitalization Decision” Ch. 7, pp. 227-240, including Box 7-1, and pp. 242-244, The Analysis and Use of Financial Statements, 3rd edition, Gerald I. White, Ashwinpaul C. Sondhi, and Dov Fried (Wiley, 2003) |
View LOS |
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“Analysis of Long-Lived Assets: Part II – Analysis
of Depreciation and Impairment” Ch. 8, pp. 257-278 and pp. 280-282, The Analysis and Use of Financial Statements, 3rd edition, Gerald I. White, Ashwinpaul C. Sondhi, and Dov Fried (Wiley, 2003) |
View LOS |
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“Analysis of Income Taxes” Ch. 9, pp. 290-314, including Boxes 9-1 and 9-2, The Analysis and Use of Financial Statements, 3rd edition, Gerald I. White, Ashwinpaul C. Sondhi, and Dov Fried (Wiley, 2003) |
View LOS |
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“Analysis of Financing Liabilities” Ch. 10, pp. 322-332 and pp. 337-352, The Analysis and Use of Financial Statements, 3rd edition, Gerald I. White, Ashwinpaul C. Sondhi, and Dov Fried (Wiley, 2003) |
View LOS |
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“Leases and Off-Balance-Sheet Debt” Ch. 11, pp. 363-383, including Box 11-1, and pp. 386-393, The Analysis and Use of Financial Statements, 3rd edition, Gerald I. White, Ashwinpaul C. Sondhi, and Dov Fried (Wiley, 2003) |
View LOS |