CFA Level 1 - Financial Statement Analysis & Reporting Standards

The Balance Sheet presents a company's financial position at a specific point in time, showing its assets, liabilities, and owner's equity. It adheres to the accounting equation: $Assets=Liabilities+Equity$.

The Income Statement (or Profit & Loss Statement) reports a company's financial performance over a period of time, detailing revenues, expenses, gains, and losses to arrive at net income.

The Cash Flow Statement reports the cash generated and used by a company over a period of time, categorized into operating, investing, and financing activities.

The fundamental accounting equation is $Assets=Liabilities+Equity$. It signifies that all assets of a company are financed by either debt (liabilities) or equity (owner's contributions and retained earnings).

Current assets are expected to be converted into cash, sold, or consumed within one year or one operating cycle, whichever is longer (e.g., cash, inventory, accounts receivable). Non-current assets are long-term assets not expected to be converted into cash within one year (e.g., property, plant, equipment, intangible assets).

Return on Equity (ROE) measures the rate of return on the ownership interest (shareholders' equity) of the common stock owners. It indicates how much profit a company generates for each dollar of equity.
Formula: $ROE=\frac{\text{Net Income}}{\text{Average Shareholder Equity}}$

The 3-step DuPont Analysis breaks down ROE into three components: Net Profit Margin, Asset Turnover, and Equity Multiplier. It helps identify the drivers of ROE.
Formula: $ROE=\frac{\text{Net Income}}{\text{Sales}}\times \frac{\text{Sales}}{\text{Average Total Assets}}\times \frac{\text{Average Total Assets}}{\text{Average Shareholder Equity}}$
(Net Profit Margin $\times$ Asset Turnover $\times$ Equity Multiplier)