In a previous article, we introduced the CFA Institute
Investment Foundation Program (Read
more here). It is a free program
designed for anyone who wants to enter or advance within the investment
management industry, including IT, operations, accounting, administration, and
marketing. Candidates who successfully
pass the online exam earn the CFA Institute Investment Foundations Certificate.
There are total of 20 Chapters in 7 modules, covering all
the essential topics in finance, economics, ethics and regulations. This series of articles will highlight the
core knowledge of each chapter.
Chapter 7 provides an overview of financial statements. The
learning outcome of chapter 7 is as follows:
·
Describe the roles of standard setters,
regulators, and auditors in financial reporting;
·
Describe information provided by the balance
sheet;
·
Compare types of assets, liabilities, and
equity;
·
Describe information provided by the income
statement;
·
Distinguish between profit and net cash flow;
·
Describe information provided by the cash flow
statement;
·
Identify and compare cash flow classifications
of operating, investing, and financing activities;
·
Explain links between the income statement,
balance sheet, and cash flow statement;
·
Explain the usefulness of ratio analysis for
financial statements;
·
Identify and interpret ratios used to analyse a
company’s liquidity, profitability, financing, shareholder return, and
shareholder value.
Financial statements are read and analysed by many people to
assess a company’s past and forecasted performance. Accounting standards guide the gathering,
analysis, and presentation of information in financial statements.
Regulators support accounting standards by recognising them
and enforcing them. Auditors are
independent accountants who express an opinion about the financial statements’
preparation and presentation. This opinion helps determine how much reliance to
place on the financial statements.
The balance sheet (or statement of financial position or
statement of financial condition) provides a statement of the company’s
financial position at one point in time. The balance sheet shows the company’s
assets, liabilities, and equity.
The income statement (or profit and loss statement or
statement of operations) identifies the profit (or loss) generated by a company
during a given time period. The profits
reported on the income statement are not the same as net cash flows. Revenues
and expenses, which are used to calculate profit, are measured on an accrual
basis rather than when they are received or paid in cash.
The statement of cash flows identifies the sources and uses
of cash during a period and explains the change in the company’s cash balance
reported on the balance sheet. The
statement of cash flows shows how much cash was received or spent, as well as
for what the cash was received or spent. Cash inflows and outflows are
classified into three kinds of activities on the cash flow statement:
operating, investing, and financing.
Sample Question:
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