CFA Level 1 Volume 3

How to Use the CFA Program Curriculum
	Errata
		Designing Your Personal Study Program
		CFA Institute Learning Ecosystem (LES)
		Feedback
Financial Statement Analysis
	Learning Module 1	Understanding Income Statements
		Introduction
		Components and Format of the Income Statement
		Revenue Recognition
			General Principles
			Accounting Standards for Revenue Recognition
		Expense Recognition: General Principles
			General Principles
		Issues in Expense Recognition: Doubtful Accounts, Warranties
			Doubtful Accounts
			Warranties
		Issues in Expense Recognition: Depreciation and Amortization
		Implications for Financial Analysts: Expense Recognition
		Non-Recurring Items and Non-Operating Items: Discontinued Operations and Unusual or Infrequent items
			Discontinued Operations
			Unusual or Infrequent Items
		Non-Recurring Items: Changes in Accounting Policy
		Non-Operating Items
		Earnings Per Share and Capital Structure and Basic EPS
			Simple versus Complex Capital Structure
			Basic EPS
		Diluted EPS: the If-Converted Method
			Diluted EPS When a Company Has Convertible Preferred Stock Outstanding
			Diluted EPS When a Company Has Convertible Debt Outstanding
		Diluted EPS: the Treasury Stock Method
		Other Issues with Diluted EPS and Changes in EPS
			Changes in EPS
		Common-Size Analysis of the Income Statement
			Common-Size Analysis of the Income Statement
		Income Statement Ratios
		Comprehensive Income
		Summary
		Practice Problems
		Solutions
	Learning Module 2	Understanding Balance Sheets
		Introduction and Components of the Balance Sheet
			Components and Format of the Balance Sheet
			Balance Sheet Components
		Current and Non-Current Classification
		Liquidity-Based Presentation
		Current Assets: Cash and Cash Equivalents, Marketable Securities and Trade Receivables
			Current Assets
		Current Assets: Inventories and Other Current Assets
			Other Current Assets
		Current liabilities
		Non-Current Assets: Property, Plant and Equipment and Investment Property
			Property, Plant, and Equipment
			Investment Property
		Non-Current Assets: Intangible Assets
			Identifiable Intangibles
		Non-Current Assets: Goodwill
		Non-Current Assets: Financial Assets
		Non-Current Assets: Deferred Tax Assets
		Non-Current Liabilities
			Long-term Financial Liabilities
			Deferred Tax Liabilities
		Components of Equity
			Components of Equity
		Statement of Changes in Equity
		Common Size Analysis of Balance Sheet
			Common-Size Analysis of the Balance Sheet
		Balance Sheet Ratios
		Summary
		Practice Problems
		Solutions
	Learning Module 3	Understanding Cash Flow Statements
		Introduction
		Classification Of Cash Flows and Non-Cash Activities
			Classification of Cash Flows and Non-Cash Activities
		Cash Flow Statement: Differences Between IFRS and US GAAP
		Cash Flow Statement: Direct and Indirect Methods for Reporting Cash Flow from Operating Activities
		Cash Flow Statement: Indirect Method Under IFRS
		Cash Flow Statement: Direct Method Under IFRS
		Cash Flow Statement: Direct Method Under US GAAP
		Cash Flow Statement: Indirect Method Under US GAAP
		Linkages of Cash Flow Statement with the Income Statement and Balance Sheet
			Linkages of the Cash Flow Statement with the Income Statement and Balance Sheet
		Preparing the Cash Flow Statement: The Direct Method for Operating Activities
			Operating Activities: Direct Method
		Preparing the Cash Flow Statement: Investing Activities
		Preparing the Cash Flow Statement: Financing Activities
			Long-Term Debt and Common Stock
			Dividends
		Preparing the Cash Flow Statement: Overall Statement of Cash Flows Under the Direct Method
		Preparing the Cash Flow Statement: Overall Statement of Cash Flows Under the Indirect Method
		Conversion of Cash Flows from the Indirect to Direct Method
		Cash Flow Statement Analysis: Evaluation of Sources and Uses of Cash
			Evaluation of the Sources and Uses of Cash
		Cash Flow Statement Analysis: Common Size Analysis
		Cash Flow Statement Analysis: Free Cash Flow to Firm and Free Cash Flow to Equity
		Cash Flow Statement Analysis: Cash Flow Ratios
		Summary
		Practice Problems
		Solutions
	Learning Module 4	Financial Analysis Techniques
		Introduction
			The Financial Analysis Process
		Analytical Tools and Techniques
		Financial Ratio Analysis
			The Universe of Ratios
			Value, Purposes, and Limitations of Ratio Analysis
			Sources of Ratios
		Common Size Balance Sheets and Income Statements
			Common-Size Analysis of the Balance Sheet
			Common-Size Analysis of the Income Statement
		Cross-Sectional, Trend Analysis & Relationships in Financial Statements
			Trend Analysis
			Relationships among Financial Statements
		The Use of Graphs and Regression Analysis
			Regression Analysis
		Common Ratio Categories & Interpretation and Context
			Interpretation and Context
		Activity Ratios
			Calculation of Activity Ratios
			Interpretation of Activity Ratios
		Liquidity Ratios
			Calculation of Liquidity Ratios
			Interpretation of Liquidity Ratios
		Solvency Ratios
			Calculation of Solvency Ratios
			Interpretation of Solvency Ratios
		Profitability Ratios
			Calculation of Profitability Ratios
			Interpretation of Profitability Ratios
		Integrated Financial Ratio Analysis
			The Overall Ratio Picture: Examples
		DuPont Analysis: The Decomposition of ROE
		Equity Analysis and Valuation Ratios
			Valuation Ratios
		Industry-Specific Financial Ratios
		Research on Financial Ratios in Credit and Equity Analysis
		Credit Analysis
			The Credit Rating Process
			Historical Research on Ratios in Credit Analysis
		Business and Geographic Segments
			Segment Reporting Requirements
			Segment Ratios
		Model Building and Forecasting
		Summary
		References
		Practice Problems
		Solutions
	Learning Module 5	Inventories
		Introduction
		Cost of inventories
		Inventory valuation methods
			Specific Identification
			First-In, First-Out (FIFO)
			Weighted Average Cost
			Last-In, First-Out (LIFO)
		Calculations of cost of sales, gross profit, and ending inventory
		Periodic versus perpetual inventory systems
		Comparison of inventory valuation methods
		The LIFO method and LIFO reserve
			LIFO Reserve
		LIFO liquidations
		Inventory method changes
		Inventory adjustments
		Evaluation of inventory management: Disclosures & ratios
			Presentation and Disclosure
			Inventory Ratios
		Illustrations of inventory analysis: Adjusting LIFO to FIFO
		Illustrations of inventory analysis: Impacts of writedowns
		Summary
		Practice Problems
		Solutions
	Learning Module 6	Long-Lived Assets
		Introduction
		Acquisition of Property, Plant and Equipment
			Acquisition of Long-Lived Assets
			Property, Plant, and Equipment
		Acquisition of Intangible Assets
			Intangible Assets Purchased in Situations Other Than Business Combinations
			Intangible Assets Developed Internally
			Intangible Assets Acquired in a Business Combination
		Capitalization versus Expensing: Impact on Financial Statements and Ratios
		Capitalisation of Interest Costs
		Capitalisation of Interest and Internal Development Costs
		Depreciation of Long-Lived Assets: Methods and Calculation
			Depreciation Methods and Calculation of Depreciation Expense
		Amortisation of Long-Lived Assets: Methods and Calculation
		The Revaluation Model
		Impairment of Assets
			Impairment of Property, Plant, and Equipment
			Impairment of Intangible Assets with a Finite Life
			Impairment of Intangibles with Indefinite Lives
			Impairment of Long-Lived Assets Held for Sale
			Reversals of Impairments of Long-Lived Assets
		Derecognition
			Sale of Long-Lived Assets
			Long-Lived Assets Disposed of Other Than by a Sale
		Presentation and Disclosure Requirements
		Using Disclosures in Analysis
		Investment Property
		Summary
		Practice Problems
		Solutions
	Learning Module 7	Income Taxes
		Introduction
		Differences Between Accounting Profit and Taxable Income
		Current and Deferred Tax Assets and Liabilities
			Deferred Tax Assets and Liabilities
		Determining the Tax Base of Assets and Liabilities
			Determining the Tax Base of an Asset
			Determining the Tax Base of a Liability
		Changes in Income Tax Rates
		Temporary and Permanent Differences Between Taxable and Accounting Profit
			Taxable Temporary Differences
			Deductible Temporary Differences
			Examples of Taxable and Deductible Temporary Differences
		Exceptions to the Usual Rules for Temporary Differences
			Business Combinations and Deferred Taxes
			Investments in Subsidiaries, Branches, Associates and Interests in Joint Ventures
		Unused Tax Losses and Tax Credits
		Recognition and Measurement of Current and Deferred Tax
			Recognition of a Valuation Allowance
			Recognition of Current and Deferred Tax Charged Directly to Equity
		Presentation and Disclosure
		Comparison of IFRS and US GAAP
		Summary
		Practice Problems
		Solutions
	Learning Module 8	Non-Current (Long-Term) Liabilities
		Introduction
		Bonds Payable & Accounting for Bond Issuance
			Accounting for Bond Issuance
		Accounting for Bond Amortisation, Interest Expense, and Interest Payments
		Accounting for Bonds at Fair Value
		Derecognition of Debt
		Debt Covenants
		Presentation and Disclosure of Long-Term Debt
		Leases
			Examples of Leases
			Advantages of Leasing
			Lease Classification as Finance or Operating
			Financial Reporting of Leases
			Lessee Accounting—IFRS
			Lessee Accounting—US GAAP
			Lessor Accounting
		Introduction to Pensions and Other Post-Employment Benefits
		Evaluating Solvency: Leverage and Coverage Ratios
		Summary
		Practice Problems
		Solutions
	Learning Module 9	Financial Reporting Quality
		Introduction & Conceptual Overview
			Conceptual Overview
		GAAP, Decision Useful Financial Reporting
			GAAP, Decision-Useful, but Sustainable?
		Biased Accounting Choices
			Within GAAP, but “Earnings Management”
		Departures from GAAP
		Differentiate between Conservative and Aggressive Accounting
			Conservatism in Accounting Standards
			Bias in the Application of Accounting Standards
		Context for Assessing Financial Reporting Quality
			Motivations
			Conditions Conducive to Issuing Low-Quality Financial Reports
		Mechanisms That Discipline Financial Reporting Quality
			Market Regulatory Authorities
			Auditors
			Private Contracting
		Detection of Financial Reporting Quality Issues: Introduction & Presentation Choices
			Presentation Choices
		Accounting Choices and Estimates
			How Accounting Choices and Estimates Affect Earnings and Balance Sheets
		How Choices that Affect the Cash Flow Statement
		Choices that Affect Financial Reporting
		Warning Signs
			1) Pay attention to revenue.
			2) Pay attention to signals from inventories.
			3) Pay attention to capitalization policies and deferred costs.
			4) Pay attention to the relationship of cash flow and net income.
			5) Other potential warnings signs.
		Summary
		References
		Practice Problems
		Solutions
	Learning Module 10	Applications of Financial Statement Analysis
		Introduction & Evaluating Past Financial Performance
			Application: Evaluating Past Financial Performance
		Application: Projecting Future Financial Performance as an Input to Market Based Valuation
			Projecting Performance: An Input to Market-Based Valuation
		Projecting Multiple-Period Performance
		Application: Assessing Credit Risk
		Screening for Potential Equity Investments
		Framework for Analyst Adjustments & Adjustments to Investments & Adjustments to Inventory
			A Framework for Analyst Adjustments
			Analyst Adjustments Related to Investments
			Analyst Adjustments Related to Inventory
		Adjustments Related to Property, Plant, and Equipment
		Adjustments Related to Goodwill
		Summary
		References
		Practice Problems
		Solutions
Corporate Issuers
	Learning Module 1	Corporate Structures and Ownership
		Introduction
		Business Structures
			Sole Proprietorship (Sole Trader)
			General Partnership
			Limited Partnership
			Corporation (Limited Companies)
		Public and Private Corporations
			Exchange Listing and Share Ownership Transfer
			Share Issuance
			Going Public from Private — IPO, Direct Listing, Acquisition
			Life Cycle of Corporations
		Lenders and Owners
			Equity and Debt Risk–Return Profiles
			Equity vs. Debt Conflicts of Interest
		Summary
		Practice Problems
		Solutions
	Learning Module 2	Introduction to Corporate Governance and Other ESG Considerations
		Introduction
		Stakeholder Groups
			Shareholder vs. Stakeholder Theory
			Shareholders
			Creditors/Debtholders
			Board of Directors
			Managers
			Employees
			Customers
			Suppliers
			Governments
		Principal–Agent and Other Relationships
			Shareholder and Manager/Director Relationships
			Controlling and Minority Shareholder Relationships
			Manager and Board Relationships
			Shareholder vs. Creditor (Debtholder) Interests
		Corporate Governance and Mechanisms to Manage Stakeholder Risks
			Shareholder Mechanisms
			Creditor Mechanisms
			Board of Director and Management Mechanisms
			Employee Mechanisms
			Customer and Supplier Mechanisms
			Government Mechanisms
		Corporate Governance and Stakeholder Management Risks and Benefits
			Operational Risks and Benefits
			Legal, Regulatory, or Reputational Risks and Benefits
			Financial Risks and Benefits
		ESG Considerations in Investment Analysis
			Introduction to Environmental and Social Factors
			Evaluating ESG-Related Risks and Opportunities
		Environmental, Social, and Governance Investment Approaches
			ESG Investment Approaches
			ESG Market Overview
		Summary
		References
		Practice Problems
		Solutions
	Learning Module 3	Business Models & Risks
		Introductory Context/Motivation
		What Is a Business Model?
			Business Model Features
			Customers, Market: Who
			Firm Offering: What
			Channels: Where
			Pricing: How Much
			Value Proposition (Who + What + Where + How Much)
			Business Organization, Capabilities: How
			Profitability and Unit Economics
		Business Model Types
			Business Model Innovation
			Business Model Variations
			E-Commerce Business Models
			Network Effects and Platform Business Models
			Crowdsourcing Business Models
			Hybrid Business Models
		Business Models: Financial Implications
			External Factors
			Firm-Specific Factors
		Business Risks
			Summary
		Macro Risk, Business Risk, and Financial Risk
			Risk Impacts Are Cumulative
		Business Risk: A Closer Look
			Industry Risks
			Industry Definition
			Company-Specific Risks
		Financial Risk
			Measuring Operating and Financial Leverage
		Summary
		Practice Problems
		Solutions
	Learning Module 4	Capital Investments
		Introduction
		Types of Capital Investments
			Business Maintenance
			Business Growth
		The Capital Allocation Process
		Investment Decision Criteria
			Net Present Value
			Internal Rate of Return
		Common Capital Allocation Pitfalls
		Corporate Use of Capital Allocation
		Real Options
			Timing Options
			Sizing Options
			Flexibility Options
			Fundamental Options
		Summary
		Practice Problems
		Solutions
	Learning Module 5	Working Capital & Liquidity
		Introduction
		Financing Options
			Internal Financing
			External Financing: Financial Intermediaries
			External Financing: Capital Markets
		Working Capital, Liquidity, and Short-Term Funding Needs
		Liquidity and Short-Term Funding
			Primary Sources of Liquidity
			Secondary Sources of Liquidity
			Drags and Pulls on Liquidity
		Measuring Liquidity
		Evaluating Short-Term Financing Choices
		Summary
		Practice Problems
		Solutions