CFA Level 1 - Financial Statement Analysis & Quantitative Methods Flashcards

Question 1

Present Value (PV) Formula

Accepted Answer

The formula to calculate the present value of a future amount is $PV = \frac{FV}{(1+r)^n}$, where $FV$ is Future Value, $r$ is the discount rate per period, and $n$ is the number of periods.

Question 2

Future Value (FV) Formula

Accepted Answer

The formula to calculate the future value of a present amount is $FV = PV 	imes (1+r)^n$, where $PV$ is Present Value, $r$ is the interest rate per period, and $n$ is the number of periods.

Question 3

Ordinary Annuity vs. Annuity Due

Accepted Answer

An **Ordinary Annuity** has payments occurring at the *end* of each period. An **Annuity Due** has payments occurring at the *beginning* of each period, meaning it earns one extra period of interest compared to an ordinary annuity.

Question 4

Perpetuity

Accepted Answer

A perpetuity is a stream of equal payments that are expected to continue forever. Its present value is calculated as $PV = \frac{PMT}{r}$, where $PMT$ is the periodic payment and $r$ is the discount rate.

Question 5

Effective Annual Rate (EAR)

Accepted Answer

The Effective Annual Rate (EAR) is the actual annual rate of return earned or paid on an investment or loan, considering the effect of compounding. It is calculated as $EAR = (1 + \frac{	ext{Stated Annual Rate}}{m})^m - 1$, where $m$ is the number of compounding periods per year.

Question 6

Net Present Value (NPV)

Accepted Answer

NPV is the sum of the present values of all cash inflows and outflows associated with a project or investment. A positive NPV indicates that the project is expected to be profitable after accounting for the time value of money.

Question 7

Key Components of an Income Statement

Accepted Answer

The income statement reports a company's financial performance over a period. Key components include Revenue, Cost of Goods Sold (COGS), Gross Profit, Operating Expenses, Operating Income (EBIT), Interest Expense, Taxes, and Net Income.

Question 8

Revenue Recognition Principle

Accepted Answer

The revenue recognition principle dictates that revenue should be recognized when it is earned (i.e., when goods or services are delivered or performed), regardless of when cash is received.

Question 9

Matching Principle (Expense Recognition)

Accepted Answer

The matching principle requires that expenses be recognized in the same period as the revenues they helped generate. If an expense cannot be directly tied to revenue, it is expensed in the period incurred.

Question 10

The Accounting Equation

Accepted Answer

The fundamental accounting equation is $Assets = Liabilities + Equity$. It represents the balance sheet and shows that a company's assets are financed by either debt (liabilities) or owner's capital (equity).

Question 11

Current vs. Non-Current Assets/Liabilities

Accepted Answer

**Current Assets** are expected to be converted to cash or used within one year or one operating cycle. **Non-Current Assets** are long-term assets. Similarly, **Current Liabilities** are obligations due within one year, while **Non-Current Liabilities** are long-term obligations.

Question 12

Components of Shareholder's Equity

Accepted Answer

Shareholder's Equity typically includes:
*   **Common Stock/Paid-in Capital:** Funds from share issuance.
*   **Retained Earnings:** Accumulated net income not distributed as dividends.
*   **Other Comprehensive Income (OCI):** Unrealized gains/losses not yet in net income.
*   **Treasury Stock:** Shares repurchased by the company.

Question 13

Cash Flow from Operating Activities (CFO) - Examples

Accepted Answer

CFO includes cash flows from a company's primary revenue-generating activities. Examples: cash received from customers, cash paid to suppliers, cash paid for salaries, cash paid for interest and taxes.

Question 14

Cash Flow from Investing Activities (CFI) - Examples

Accepted Answer

CFI includes cash flows from the purchase or sale of long-term assets and investments. Examples: cash paid to purchase property, plant, and equipment (PP&E), cash received from selling PP&E, cash paid/received from buying/selling other companies' debt or equity.

Question 15

Cash Flow from Financing Activities (CFF) - Examples

Accepted Answer

CFF includes cash flows from debt and equity transactions. Examples: cash received from issuing bonds, cash paid to repay debt, cash received from issuing stock, cash paid for dividends, cash paid to repurchase stock.

Question 16

Direct vs. Indirect Method for CFO

Accepted Answer

Both methods yield the same CFO. The **Direct Method** shows actual cash inflows and outflows from operations (e.g., cash received from customers). The **Indirect Method** starts with Net Income and adjusts for non-cash items and changes in working capital to arrive at CFO.

Question 17

LIFO vs. FIFO Impact on Financials (Rising Prices)

Accepted Answer

In a period of **rising prices**:
*   **LIFO:** Higher COGS, Lower Net Income, Lower Inventory value, Lower Taxes.
*   **FIFO:** Lower COGS, Higher Net Income, Higher Inventory value, Higher Taxes.

Question 18

LIFO Reserve

Accepted Answer

The LIFO Reserve is the difference between the inventory value reported under FIFO and the inventory value reported under LIFO. It represents the amount by which LIFO inventory is understated compared to FIFO inventory.

Question 19

Converting LIFO COGS to FIFO COGS

Accepted Answer

To convert LIFO COGS to FIFO COGS:
$FIFO 	ext{ COGS} = LIFO 	ext{ COGS} - (	ext{Ending LIFO Reserve} - 	ext{Beginning LIFO Reserve})$
This adjustment accounts for the change in the LIFO reserve during the period.

Question 20

Converting LIFO Inventory to FIFO Inventory

Accepted Answer

To convert LIFO Inventory to FIFO Inventory:
$FIFO 	ext{ Inventory} = LIFO 	ext{ Inventory} + 	ext{Ending LIFO Reserve}$
This adds back the cumulative difference in inventory valuation.

Question 21

DuPont Analysis (3-Component Breakdown)

Accepted Answer

DuPont Analysis breaks down Return on Equity (ROE) into three components:
$	ext{ROE} = 	ext{Net Profit Margin} 	imes 	ext{Asset Turnover} 	imes 	ext{Financial Leverage}$
$	ext{ROE} = (\frac{	ext{Net Income}}{	ext{Sales}}) 	imes (\frac{	ext{Sales}}{	ext{Average Total Assets}}) 	imes (\frac{	ext{Average Total Assets}}{	ext{Average Shareholder's Equity}})$

Question 22

Net Profit Margin Formula

Accepted Answer

Net Profit Margin measures how much net income is generated per dollar of sales.
$	ext{Net Profit Margin} = \frac{	ext{Net Income}}{	ext{Revenue}}$

Question 23

Asset Turnover Formula

Accepted Answer

Asset Turnover measures how efficiently a company uses its assets to generate sales.
$	ext{Asset Turnover} = \frac{	ext{Revenue}}{	ext{Average Total Assets}}$

Question 24

Financial Leverage Formula (DuPont)

Accepted Answer

Financial Leverage (Equity Multiplier) measures the extent to which a company uses debt to finance its assets.
$	ext{Financial Leverage} = \frac{	ext{Average Total Assets}}{	ext{Average Shareholder's Equity}}$

CFA Level 1 - Financial Statement Analysis & Quantitative Methods

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