# CFA Level 1 FRA: Our Cheat Sheet

Want to pass your exams? Start preparing the right way.
My email is and I'm preparing for

Note: this cheat sheet is updated for the latest 2022’s curriculum.

Ah, I remember the days where I looked at the sheer volume of formulae and concepts in CFA Level 1 FRA (Financial Reporting and Analysis, or Financial Statement Analysis called nowadays) in despair. And how I felt 5x worse when studying Level 2’s FRA section…

Financial Reporting and Analysis is one of the largest hurdles in the CFA exams, especially for Level 1 and Level 2. That’s why we decided to create our Cheat Sheet series of articles, which focuses on one specific topic area for one specific CFA Level.

More Cheat Sheets will be published in the coming weeks, sign up to our member’s list to be notified first.

By referring to the CFA Learning Outcome Statements (LOS), we prioritize and highlight the absolute key concepts and formula you need to know for each topic. With some tips at the end too!

Use the Cheat Sheets during your practice sessions to refresh your memory on important concepts.

Let’s dive in – this is a MONSTER article for a monstrous topic 🙂 Bookmark and come back to it often!

## CFA Level 1 FRA: An Overview

FRA is a key foundational topic for CFA Level 1, which forms a basis for Level 2 learnings, but drops off at Level 3.

FRA has the second largest topic weighting after Ethics in Level 1. This is one of the unmissable topic areas – key to passing Levels 1 and 2, and therefore key to the entire CFA program.

2022 CFA Level 1 Financial Reporting and Analysis’ topic weighting is 13%-17%, which means 23-31 questions of the 180 questions of CFA Level 1 exam is centered around this topic.

It is covered in Study Sessions 5-8, which includes Reading 15-26.

Here’s the summary of FRA chapter readings:

This topic area is bread-and-butter for a wide range of financial roles, including buy and sell-side analysts, asset managers, wealth managers and investment bankers.

In essence, the CFA Level 1 Financial Reporting and Analysis topics teaches you how to:

– read and understand each component of the financial statements;
– assess whether these reported financials are fair, and if not, how to make adjustments to these numbers for the purpose of your valuation analysis;
– independently value an asset or a company for investment purposes.

## Reading 16: Financial Reporting Standards

### General requirements for financial statements under IFRS

1. Fair representation
2. Going concern
3. Accrual basis
4. Materiality and aggregation
5. No offsetting
6. Frequency of reporting
7. Comparative information
8. Consistency

## Reading 17: Understanding Income Statements

### Basic EPS

\small Basic \space EPS=\frac{Net \space Income - Preferred \space Dividends}{Weighted \space Average \space Number \space of \space Shares \space Outstanding}

Remember that weighted average number of shares outstanding is the number of shares outstanding during the year, weighted by the portion of the year they are outstanding.

Stock splits and stock dividends are applied retrospectively to the beginning of the year, so the old shares are converted to the new shares for consistency.

One more thing, please ignore dividend paid to common shareholders. Only preference shareholders matter here.

### Diluted EPS

\scriptsize Diluted EPS=\frac{{Net \choose Income}-{Preferred \choose Dividends}+{Convertible \space Preferred \choose Dividends}+{Convertible \space \choose Debt \space Interest}(1-t)}{{Weighted \space \choose avg \space shares}+{Shares \space from \space conversion \space of \choose convertible \space preferred \space shares}+{Shares \space from \space conversion \space of \choose convertible \space preferred \space debt}+{Shares \space issuable \choose from \space stock \space options}}

Remember that:

• For preference shares, we need to subtract the preference dividends in the numerator, as well as add on the new shares issued from the conversion in the denominator.
• For convertible bonds, we need to add the after-tax interest in the numerator, as well as add on the new shares issued from the conversion in the denominator.
• For stock options, use the Treasury stock method.

## Reading 19: Understanding Cash Flow Statements

### Free cash flow to firm (FCFF)

FCFF = NI + NCC + [Int * (1-t)] – FCInv – WCInv
= CFO + [Int * (1-t)] – FCInv

where: NI = net income, NCC = non-cash charges, Int = interest expense, t = tax rate, FCInv = fixed capital investment, WCInv = working capital investment

### Free cash flow to equity (FCFE)

FCFE = CFO – FCInv + Net Borrowing

FCFE is the cash flow available to a company’s stockholders after all operating expenses and borrowing costs (principal and interest) have been paid, and necessary working capital and fixed capital investments have been made.

## Reading 20: Financial Analysis Techniques

### Dupont analysis: decomposition of ROE

\small
\begin{align*}
ROE&=\frac{Net \space income}{Average \space total \space assets} \times \frac{Average \space total \space assets}{Average \space shareholders' \space equity}
\newline&= ROA \times Leverage \space ratio
\end{align*}
\small
\begin{align*}
ROE&=\frac{Net \space income}{Revenue} \times \frac{Revenue}{Average \space total \space assets} \times \frac{Average \space total \space assets}{Average \space shareholders' \space equity}
\newline&= Net \space profit \space margin \times Asset \space turnover \times Leverage \space ratio
\end{align*}
\scriptsize
\begin{align*}
ROE&=\frac{Net \space income}{EBT} \times \frac{EBT}{EBIT} \times \frac{EBIT}{Revenue} \times \frac{Revenue}{Average \space total \space assets} \times \frac{Average \space total \space assets}{Avg \space shareholders' \space equity}
\newline&= Tax \space burden \times Interest \space burden \times EBIT \space margin \times Asset \space turnover \times Leverage \space ratio
\end{align*}

### Converting LIFO to FIFO

• FIFO Inventory = LIFO Inventory + LIFO Reserve
• FIFO COGS = LIFO COGS – change in LIFO Reserve
• FIFO Net Income = LIFO Net Income + change in LIFO Reserve * (1-t)
• FIFO Retained Earnings = LIFO Retained Earnings + LIFO Reserve * (1-t)

### Revaluation of long lived assets

• IFRS allows the use of cost model or revaluation model, but US GAAP only allows cost model.
• If a revaluation initially decreases asset value, this is recognized as a loss in income statement. In future, if a revaluation subsequently increases asset value, the increase – to the extent that it reverses the amount previously decreased – is recognized as a gain in income statement. Any excess gains beyond the reversal amount is recognized directly in equity as a revaluation surplus.
• If a revaluation initially increases asset value, the increase goes directly in equity as a revaluation surplus. A subsequent decrease in the valuation amount first reduces the revaluation surplus, and any excess beyond the reversal amount is recognized as a loss in income statement.

### Impact of tax rate changes

Income tax expense = Income tax payable + Change in DTL – Change in DTA

## Reading 24: Non-current (Long-term) Liabilities

### Finance lease classification under US GAAP

A lease must be classified by a lessee as a finance lease if any one of the 5 criteria below is met:

• Ownership transfer: Ownership of the asset is transferred to the lessee at the end of the lease term.
• Purchase option: Lessee has the option to purchase the asset and is likely to do so.
• Lease term: The lease term covers most of the leased asset’s useful life.
• Minimum lease payment: The present value of lease payments at inception is close to the asset’s fair value.
• Specialized asset: the asset is highly specialized and only the lessee can use it without modification, and has no alternative use to the lessor.

If none of the criteria above is met, then the lessee should classify the lease as an operating lease under US GAAP.

IFRS requires all leases to be treated the same manner as finance lease under US GAAP.

### Lessee accounting

IFRS has one accounting model for both finance or operating lease for lessees, but US GAAP has different accounting models for each.

### Lessor accounting

• The accounting for lessors are the same under US GAAP & IFRS (yay!). There are different treatments for finance lease and operating lease.

## CFA Level 1 FRA Tips

Unfortunately there is no shortcut to mastering FRA – you’ll have to set aside adequate time in your study plan (get yours free here) to learn this topic area thoroughly.

As mentioned earlier in the article, there is a lot of testable material in the vast amount of readings in the CFA exams.

Not only does the FRA have a 13-17% weighting in the CFA Level 1 exams but FRA can sometimes be weaved into other topic area questions. This topic isn’t a fringe one, so don’t skirt around it – tackle it head-on.

Here are some tips to get you fighting-fit in FRA:

• Make practice front and center of your FRA plan:
• Lots of practice questions help solidify your understanding, so make sure you line them up.
• Try to attempt all the end-of-chapter questions to get used to the breadth of items that can crop up in the actual exam.
• FRA questions can require a lot of reading and calculation so time management and answering speed will be crucial as well.
• Videos can help a lot:
• There are likely a lot of confusing concepts or calculations that you may get lost in repeatedly.
• A good way to break the cycle of confusion is to simply spend a few minutes on YouTube, or find a third party provider that presents concepts well on video.
• Find an explanation of the specific concept – sometimes all you need is someone to take you through one example.
• Pay attention to IFRS and GAAP:
• ‘IFRS vs GAAP’ questions are a favorite in the CFA exams, so make notes on what the differences and similarities are between the two accounting standards and make sure you have them memorized.
• Build a 3-statement financial model:
• To truly understand FRA you’ll need to master the balance sheet, income statement and cash flow statement.
• A good way to achieve this is to build a simple 3-statement financial model – not nearly as intimidating as it sounds.
• Pick your favourite company, download their financial reports and get started – preferably with a financial modelling book.

More Cheat Sheet articles will be updated over the coming weeks. Get ahead of other CFA candidates by signing up to our member’s list to get notified.

Meanwhile, here are other related articles that may be of interest:

### 20 thoughts on “CFA Level 1 FRA: Our Cheat Sheet”

1. Hello, there are formula on the cheatsheet which is not visible due to error – “katex is not defined”. Can somebody help me with this?

• Hi Sujaan, I don’t see it myself. Which chapter reading is this?

2. L1 cheat sheets had been a great help!
Would love Level 2 cheat sheets!!

• Hoping to work on 2023 ones! 🙂 L2 is a beast -_- ||

3. typo?
FIFO Net Income = FIFO Net Income + Change in LIFO Reserve * (1-t)
should be
FIFO Net Income = LIFO Net Income + Change in LIFO Reserve * (1-t)

• Yes Flerken Cat! Thanks for spotting this, corrected 🙂

4. Super helpful and well done! Thank you for all these cheatsheets.

Just one question, “FIFO Net Income = FIFO Net Income + change in LIFO Reserve * (1-t)”, is it FIFO NI in the second part of the formula or LIFO NI? Thanks

5. can anyone of you send me this cheat sheet in PDF Formate….

• This is in our to-do list – but for now we don’t have any PDF cheat sheets available. You can always access them online though – with the benefit of them always being updated!

Cheers

• I’m afraid not, sorry! So far we’re finding that it’s more advantageous to maintain an online, always-updated version, since PDFs can get outdated.

6. Hello Sophie,

Thank you for the summaries. Please could you do same summaries for Economics, Fixed Income, Portfolio Management and Alternative Investments

• Hi Ifeoma, it’s in the plans, but as you know good summaries take time, so we will roll out our new Cheat Sheets in the next few months. Hope your studies are going well!

• Hi Linnette12, glad you found it helpful. As FRA is such a large section, I’ve focused on the key chapters with concepts/formulae you need to know, leaving out reading 29-30 as they are relatively straightforward and shorter vs. the rest.