CFA Program Level I — Financial Reporting & Corporate Issuers flashcards

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The three statements and their links, IFRS versus US GAAP, revenue, inventories, long-lived assets, deferred taxes, leases, bonds and pensions, EPS, ratios and DuPont, earnings quality, then governance, NPV and IRR, WACC and MM, with operating and financial leverage as background.

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Learn deck · part of CFA Program Level I · written against: CFA Program Level I curriculum topics; Standards of Practice Handbook, 12th edition (2024), including Standard I(E) Competence. Updated 2026-10-10.

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Which financial statement shows a company's position at a single point in time, and what identity must it satisfy?

The balance sheet (statement of financial position), which must satisfy assets = liabilities + equity.
Financial Statements
Which inventory cost method is allowed under US GAAP but prohibited under IFRS?

LIFO (last in, first out).

Watch out: a US company that uses LIFO for taxes must also use it in its financial statements (LIFO conformity).
IFRS vs US GAAP
When prices are rising and inventory levels are stable, how does LIFO compare with FIFO for COGS, gross profit and ending inventory?

LIFO gives higher COGS, lower gross profit and lower ending inventory, because the newest, costliest units are expensed first.

Watch out: when prices fall the effects reverse: LIFO then gives lower COGS and higher gross profit.
Inventories
A company capitalizes a cost rather than expensing it. What happens to net income and equity in the first year?

Net income and equity are higher in the first year; later years show lower income as the asset is depreciated, so profits are smoother over time.
Long-Lived Assets
How does a lessee account for a typical lease under IFRS 16?

It recognizes a right-of-use asset and a lease liability, then reports depreciation plus interest expense; only short-term and low-value leases may be kept off the balance sheet.

Watch out: IFRS 16 has no operating/finance split for lessees; ASC 842 keeps one.
Leases
How does the quick ratio differ from the current ratio?

The quick ratio excludes inventory and other less liquid current assets, using only cash, marketable securities and receivables over current liabilities.

Watch out: the cash ratio is stricter still, leaving out receivables as well.
Ratio Analysis
Which features distinguish a corporation from a sole proprietorship or general partnership?

A corporation is a separate legal entity with limited liability for owners and easy transfer of ownership, but it separates ownership from control and may face double taxation.

Watch out: in a limited partnership the general partner has unlimited liability, while limited partners are liable only up to their investment.
Ownership and Governance
What is net present value, and what is the decision rule?

The present value of a project's expected cash flows minus its initial investment; accept if NPV is positive. In symbols, $NPV = \sum_{t=0}^{N} \frac{CF_t}{(1 + r)^t}$ ⁠.
Capital Budgeting
A supplier offers terms of 2/10, net 30. What is the approximate annual cost of skipping the discount and paying on day 30?

About 44.6%, so paying early is usually worthwhile if cheaper financing is available. Computed as $(1 + \frac{0.02}{0.98})^{\frac{365}{20}} - 1$ ⁠.
Working Capital and Leverage
A bond is issued at a discount. Under the effective interest method, how does interest expense compare with the coupon, and how does the carrying amount change?

Interest expense exceeds the coupon, because it is the market rate at issue times the carrying amount; the difference amortizes the discount, so the carrying amount rises toward par.
Long-Term Liabilities

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About these cards

Review status: Second-reader reviewed, with corrections applied.

Checked against:

Checked against IFRS Standards (IAS 2, IAS 7, IAS 12, IAS 16, IAS 38, IFRS 15, IFRS 16) and FASB ASC 330, 606, 740 and 842 summaries (reference only; no text copied).
Checked against standard texts: Brealey, Myers & Allen, Principles of Corporate Finance, and Penman, Financial Statement Analysis and Security Valuation (reference only).

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