Friday 21 June 2019

CFA Institute Investment Foundations Program: Chapter 7 – Financial Statements (Part I)


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:

Which of the following is an example of an operating expense?
 
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