CFA Level 1 FRA: Our Cheat Sheet

Note: this cheat sheet is updated for the latest 2023’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 and continuously updated, 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

cfa level 1 fra

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.

2023 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 Topic 3 which contains 12 Learning Modules (LMs).

Here’s the summary of FRA chapter readings:

Learning ModuleSub-topicDescription
1Introduction to Financial Statement AnalysisDiscusses the scope and framework of financial statement analysis, introduces the major financial statements as a starting point.
2Financial Reporting StandardsMainly focuses on the IFRS framework and its comparison with US GAAP.
3Understanding Income StatementsLooks at general principles of revenue and expense recognition, non-recurring items and EPS in the income statements that you’ll come across in financial analysis.
4Understanding Balance SheetsWalks through each component of the balance sheet in detail: assets (current and long term), liabilities (current and long term) and equity.
5Understanding Cash Flow StatementsExplains the connection of cash flow to income and balance sheet, while introducing a myriad of ratios for analysis which serves as an exam question favorite.
6Financial Analysis TechniquesThis is a broader, more theoretical chapter which gives an overview of the tools an analyst could use in analyzing a company.
7InventoriesCompares and contrasts the key inventory valuation methods (LIFO, FIFO, etc) and how it impacts inventory ratios and financial analysis.
8Long-lived AssetsReviews the treatment of long term assets from acquisition, depreciation/amortisation, revaluation, impairment and derecognition of these assets, with an introduction to finance versus operating leases which you should know the difference of.
9Income TaxesThis is a section you need to master, as many exam questions tests your knowledge of the difference between taxable and accounting profit, and what contributes to a deferred tax liability or asset (DTL or DTA).
10Non-current (Long-term) LiabilitiesLooks at the accounting, presentation and disclosure of long-term debt and introduces leverage and coverage ratios in evaluating solvency of a company.
11Financial Reporting QualityDiscusses conservative and aggressive accounting practices and some tips on how to detect them.
12Financial Statement Analysis: ApplicationsThis chapter covers a few working examples of typical analyst adjustments to financial reports in investment analysis, tying together the knowledge learned from this topic area into everyday applications.

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.

LM1: Introduction to Financial Statement Analysis

curious glasses inspect

4 types of audit reports

Audit OpinionWhat does this mean?
UnqualifiedThis is issued when the financial statements presented are free of material misstatements and are in accordance with GAAP.

This is the best report a company can receive from an external auditor, as it means a company’s financial health is fairly presented in the financial statements.
QualifiedThis is issued when one or two situations encountered did not comply with GAAP. However, the rest of the financial statements are fairly presented.
AdverseAn adverse audit opinion is the opposite of an unqualified opinion. This means that the financial statements of the company audited are materially misstated and generally do not comply with GAAP.
DisclaimerA disclaimer opinion is issued when the auditor could not form, and consequently refuses to present, an opinion on the financial statements.

Accrual accounting

TypeDescriptionAsset or Liability?
Unearned revenueCash received before goods/services providedLiability
Accrued revenueCash not yet received after goods/services providedAsset
Prepaid expensesCash paid before expense incurredAsset
Accrued expensesCash not yet paid after expenses incurredLiability

LM2: Financial Reporting Standards

annual report presentation

IASB’s IFRS financial reporting framework

Objective of financial statementsProvide financial information about reporting entity that is useful in making decision about providing resources to the entity
Qualitative characteristics of financial statements – 2 fundamental qualitative characteristics are: Relevance and Faithful Representation.

– 4 supplementary qualitative characteristics are: Comparability, Verifiability, Timeliness, Understandability.
Required reporting elements– Assets, liability, equity
– Revenue and expenses
Constraints– Tradeoff between reliability and timeliness
– Cost
– Intangible aspects
Assumptions– Accrual basis
– Going concern

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

LM3: Understanding Income Statements

paying shop transaction

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.

LM4: Understanding Balance Sheets


Accounting for gains or losses on marketable securities

Held-to-MaturityAvailable-for-SaleTrading Securities
Balance SheetCost or
Amortized Cost
Fair ValueFair Value
Dividend, Interest &
Realized Gains & Losses
Income StatementIncome StatementIncome Statement
Unrealized Gains & LossesNot reportedOther Comprehensive Income (OCI)Income Statement

LM5: Understanding Cash Flow Statements

finance data cashflow

IFRS vs US GAAP for cash flow components

Dividend paidOperating / FinancingFinancing
Interest paidOperating / FinancingOperating
Dividends receivedOperating / InvestingOperating
Interest receivedOperating / InvestingOperating
All taxesGenerally categorized as operating. A portion can be categorized as financing or investing if attributable to these areas.Operating
Format of statementBoth direct and indirect formats are allowed, but direct is preferred.Both direct and indirect formats are allowed, but direct is preferred. A reconciliation of net income to cash flow from operating activities must be provided for any method.

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.

LM6: Financial Analysis Techniques

finance data presentation

Activity ratios

Activity ratiosFormula
Inventory turnover(Cost of goods sold) / (Avg inventory)
Days of inventory on hand (DOH) 365 / (Inventory turnover)
Receivables turnoverRevenue / (Average Receivables)
Days of sales outstanding (DSO)365 / (Receivables Turnover)
Payables turnover(Purchases) / (Average Trade Payables)
Number of days of payables(365) / (Payables Turnover)
Working capital turnover(Revenue) / (Average Working Capital)
Fixed asset turnover(Revenue) / (Average Net Fixed Assets)
Total asset turnover(Revenue) / (Average Total Assets)

Liquidity ratios

Liquidity ratiosFormula
Current ratio(Current assets) / (Current liabilities)
Quick ratio(Cash + Marketable securities + Receivables) / (Current liabilities)
Cash ratio(Cash + Marketable securities) / (Current liabilities)
Defensive interval ratio (Cash + Marketable securities + Receivables) / (Daily cash expenditures)
Cash conversion cycle= Days of inventory on hand (DOH)
+ Days of sales outstanding (DSO)
– Number of days of payables

Solvency ratios

Solvency ratiosFormula
Debt to asset ratio(Total debt) / (Total assets)
Debt to capital ratio(Total debt) / (Total debt + Total shareholder’s equity)
Debt to equity ratio(Total debt) / (Shareholder’s equity)
Financial leverage ratio(Average total assets) / (Average total equity)
Interest coverage ratio(EBIT) / (Interest payments)
Fixed charge coverage ratio(EBIT + Lease payments) / (Interest payments + Lease payments)

Profitability ratios

Profitability ratiosFormula
Gross profit margin(Gross profit) / Revenue
Operating profit margin(Operating income) / Revenue
Pretax marginEBT / Revenue
Net profit margin(Net profit) / Revenue
Operating ROA(Operating income or EBIT) / (Average total assets)
Return on assets (ROA)(Net income) / (Average total assets)
Return on total capitalEBIT / (Short term debt + long term debt + equity)
Return on equity (ROE)(Net income) / (Equity)
Return on common equity (ROCE)(Net income – preferred dividends) / (Average common equity)

Dupont analysis: decomposition of ROE

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
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
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

Valuation ratios

Valuation ratiosFormula
P/E(Price per share) / (Earnings per share)
Dividend payout ratio(Common share dividend) / (Net income attributable to common shares)
Retention ratio (RR)1 – Dividend payout ratio
Sustainable growth rate (g)Retention rate x ROE

LM7: Inventories

stock inventory check boxes

LIFO vs FIFO with rising prices and stable inventory levels

Income TaxesLowerHigher
Earnings before Taxes (EBT)LowerHigher
Earnings after Taxes (net income)LowerHigher
Ending inventoryLowerHigher
Working capitalLowerHigher
Cash flow (after tax)HigherLower

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)

LM8: Long-lived Assets


Capitalizing vs expensing: impact on financial statement

Net income (1st year)HigherLower
Net income (future years)LowerHigher
Total assetsHigherLower
Shareholders’ equityHigherLower
Cash flow from operations (CFO)HigherLower
Cash flow from investing (CFI)LowerHigher
Income variabilityLowerHigher
Debt to equity ratioLowerHigher
Interest coverage (1st year)HigherLower
Interest coverage (future years)LowerHigher
ROA and ROE (1st year)HigherLower
ROA and ROE (future years)LowerHigher

Depreciation methods

Depreciation methodsDepreciation expense formula
Straight line(Original cost – Salvage value) / Depreciable life
Double declining balance (DDB)2 / (Depreciable life) x Book value at beginning of year t
Units of production(Cost – Salvage value) / (Total output) x Output units at time 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.

IFRS vs GAAP: Impairment of Property, Plant & Equipment and Intangible Assets

Assets tested for impairment annuallyAssets tested for impairment only when firm may not recover carrying value through future use.
An asset is impaired when carrying value > recoverable amountAn asset is impaired when carrying value > undiscounted future cash flows
If impaired, the asset is written down to recoverable amount and a loss is recognized.If impaired, the asset is written down to fair value and a loss is recognized.
Subsequent recoveries are allowed, but cannot exceed historical costLoss recoveries are not permitted

LM9: Income Taxes

tax bill

Deferred Tax Assets (DTA) & Deferred Tax Liabilities (DTL)

Deferred Tax Assets (DTA)Deferred Tax Liability (DTL)
DefinitionCreated when income tax payable exceeds income tax expense due to temporary difference.

This means that taxable income is higher than accounting profit.
Created when income tax payable is less than income tax expense due to temporary difference.

This means that taxable income is lower than accounting profit.
Examples– Assets tax base > carrying amount
– Liability’s carrying amount > tax base
– Assets carrying amount > tax base
– Liability’s tax base > carrying amount

Impact of tax rate changes

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

LM10: 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.

Balance sheetIFRS does not allow operating lease classification.

For finance lease: at inception, the PV of future lease payments is recognized as an asset and related debt as a liability.

Asset is depreciated on a straight line basis. Lease payable is amortized. Asset and liability portion differ over the lifetime of the lease.
Similar treatment as IFRS for finance lease.

For operating lease (like a rental agreement): at inception, the PV of future lease payments is recognized as an asset and the related debt as a liability.

Both asset and lease payable are amortized the same way. Hence, asset and liability portion will always equal each other.
Income statementInterest expense = liability at the beginning of period x discount rateFinance lease: similar treatment as IFRS.

Operating lease: interest and amortization expense is reported as one single lease payment (not separated out), treated as an operating expense.
Cashflow statementInterest expense of finance lease payment can be classified as operating or financing cashflow.

Finance lease principal payment is a financing cashflow.
Finance lease: Interest portion of lease payment is classified as an operating cashflow.

Operating lease: a single lease expense is recorded as operating cashflow. Interest and principal repayments are NOT reported separately.

Lessor accounting

  • The accounting for lessors are the same under US GAAP & IFRS (yay!). There are different treatments for finance lease and operating lease.
Operating leases
Finance leases
Balance sheetAsset is recognized on the balance sheet.Lease asset is removed from the balance sheet.

Lease receivable (PV of future lease payments) and residual value is reported.
Income statementLease income and depreciation expense is reported.Interest income on lease receivable is reported as revenue.
Cashflow statementLease payments received are classified as operating cashflow.Lease payments received are classified as operating cashflow.

CFA Level 1 FRA Tips

sharing ideas

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 published and continuously updated. 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?

  2. 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)

  3. 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

    • 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!

  4. 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.

  5. This summary is very helpful, thank you for sharing!
    Noticed a typo though, it should be
    Sustainable growth rate (g) = Retention rate x ROE


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