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CFA Refresher Readings

 

Financial Statement Analysis: Study Session 9

Learning Outcome Statements

 

“Analysis of Inventories”
The practitioner should be able to:

  • Compute ending inventory balances and cost of goods sold using the LIFO, FIFO, and average cost methods to account for product inventory
  • Explain the relationship among and the usefulness of inventory and cost of goods sold data provided by the LIFO, FIFO, and average cost methods when prices are (1) stable or (2) changing
  • Compare and contrast the effect of the different methods on cost of goods sold and inventory balances and discuss how a company's choice of inventory accounting method affects other financial items such as income, cash flow, and working capital
  • Compare and contrast the effects of the choice of inventory method on profitability, liquidity, activity, and solvency ratios
  • Indicate the reasons that a LIFO reserve might decline during a given period and evaluate the implications of such a decline for financial analysis
  • Illustrate how inventories are reported in the financial statements and how the lower-of-cost-or-market principle is used and applied

 

“Analysis of Long-Lived Assets: Part I – The Capitalization Decision”
The practitioner should be able to:

  • Demonstrate the effects of capitalizing versus expensing on net income, shareholders' equity, cash flow from operations, and financial ratios
  • Determine which intangible assets, including software development costs and research and development costs, should be capitalized, according to U.S. GAAP and international accounting standards

 

“Analysis of Long-Lived Assets: Part II – Analysis of Depreciation and Impairment”
The practitioner should be able to:

  • Demonstrate the different depreciation methods and explain how the choice of depreciation method affects a company's financial statements, ratios, and taxes
  • Demonstrate how modifying the depreciation method, the estimated useful life, and/or the salvage value used in accounting for long-lived assets affect financial statements and ratios
  • Determine the average age and average depreciable life of a company's assets using the company's fixed asset disclosures
  • Explain and illustrate the use of impairment charges on long-lived assets, and analyze the effects of taking such impairment charges on a company's financial statements and ratios
  • Discuss accounting requirements related to remedying environmental damage caused by operating assets and explain the financial statement and ratio effects that result from the application of those requirements

 

"Analysis of Income Taxes"
The practitioner should be able to:

  • Explain the key terms related to income tax accounting and the origin of deferred tax liabilities and assets
  • Demonstrate the liability method of accounting for deferred taxes
  • Discuss the use of valuation allowances for deferred tax assets, and their implications for financial statement analysis
  • Explain the factors that determine whether a company's deferred tax liabilities should be treated as a liability or as equity for purposes of financial analysis
  • Distinguish between temporary and permanent items in pretax financial income and taxable income
  • Calculate and interpret income tax expense, income taxes payable, deferred tax assets, and deferred tax liabilities
  • Calculate and interpret the adjustment(s) to the deferred tax accounts related to a change in the tax rate
  • Interpret a deferred tax footnote disclosure that reconciles the effective and statutory tax rates
  • Analyze disclosures relating to, and the effect of, deferred taxes on a company's financial statements and financial ratios
  • Compare and contrast a company's deferred tax items and effective tax rate reconciliation (1) between reporting periods and (2) with the comparable items reported by other companies

 

"Analysis of Financing Liabilities"
The practitioner should be able to:

  • Distinguish between operating and trade debt related to operating activities and debt generated by financing activities, and discuss the analytical implications of a shift between the two types of liabilities
  • Determine the effects of debt issuance and amortization of bond discounts and premiums on financial statements and financial ratios
  • Analyze the effect on financial statements and financial ratios of issuing zero-coupon debt
  • Classify a debt security with equity features as a debt or equity security and demonstrate the effect of issuing debt with equity features on the financial statements and ratios
  • Describe the disclosures relating to financing liabilities, and discuss the advantages/disadvantages to the company of selecting a given financing instrument and the effect of the selection on a company's financial statements and ratios
  • Determine the effects of changing interest rates on the market value of debt and on financial statements and ratios
  • Calculate and describe the accounting treatment of, and economic gains and losses resulting from, the various methods of retiring debt prior to its maturity
  • Analyze the implications of debt covenants for creditors and the issuing company

 

"Leases and Off-Balance-Sheet Debt"
The practitioner should be able to:

  • Discuss the incentives for leasing assets instead of purchasing them, and the incentives for reporting the leases as operating leases rather than capital leases
  • Contrast the effects of capital and operating leases on the financial statements and ratios of lessees and lessors
  • Describe the types of off-balance-sheet financing and analyze their effects on selected financial ratios
  • Distinguish between sales-type leases and direct financing leases and explain the effects of these types of leases on the financial statements of lessors