Level I Financial Reporting and Analysis

Access to all Level I financial reporting and analysis (FRA) articles until the next Level I exam date

When one company buys securities (stock or bonds) issued by another company, the accounting treatment for those investments depends on the amount of influence/control that the investing company has over the issuing company.  When the investor has no influence (generally assumed when the investment represents less than 20% ownership), then the investment is treated as […]

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A lease is a contract that lets one party use an asset owned by another party, in exchange for periodic payments. The owner of the asset is the lessor; the user of the asset is the lessee. For the purposes of financial reporting, leases are divided into two categories, based on the economic substance of […]

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A lease is a contract that lets one party use an asset owned by another party, in exchange for periodic payments. The owner of the asset is the lessor; the user of the asset is the lessee. For the purposes of financial reporting, leases are divided into two categories, based on the economic substance of […]

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A lease is a contract that lets one party use an asset owned by another party, in exchange for periodic payments.  The owner of the asset is the lessor; the user of the asset is the lessee.  For the purposes of financial reporting, leases are divided into two categories, based on the economic substance of […]

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The definition of the cash conversion cycle (CCC) is easiest to remember if you draw a timeline of events surrounding inventory and sales.  There are four events of interest: The day that you purchase the inventory; we’ll assume that you buy it on credit – creating accounts payable – and pay for it at a […]

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Calculating earnings per share (EPS) is relatively straightforward: calculate earnings (available to common shareholders), then divide it by the weighted-average number of shares of common stock outstanding (WACSO).  However, there are possibly two EPS calculations that you need to show on an income statement: basic EPS and fully diluted EPS: Basic EPS uses the existing […]

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One key to computing earnings per share (EPS) is computing the number of shares of common stock to use in the denominator; we call this number the weighted average common shares outstanding (WACSO).  There are two ways to calculate WACSO; I’ll cover both. There are several transactions than can change the number of shares of […]

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It is certainly possible to learn everything you need to know about financial reporting and analysis (for both Level I and Level II) without understanding fully credits and debits, but it is unquestionably more difficult than if you do understand them.  The good news is that they’re not difficult to understand. Income statements gave rise […]

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A useful skill to develop is that of writing out a quick, simple, general income statement. Here is an example that you should be able to reproduce in 10 – 15 seconds during the exam: \begin{align}&\ \ Sales\\ &\underline{–\ COGS}\\ &=\ Gross\ Profit\\ &\underline{–\ SG\&A}\\ &=\ EBITDA\\ &–\ Depreciation\\ &\underline{–\ Amortization}\\ &=\ EBIT\\ &\underline{–\ Interest}\\ […]

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FRA is unquestionably one of the more difficult topic areas for Level I candidates, because it requires memorization of a lot of ideas, rather than developing those ideas from first principles.  There are, however, some ideas in FRA that can be developed from first principles, which will make them easier to recall on exam day.  […]

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