CFA Level 1 FSA: Our Cheat Sheet

Note: this cheat sheet is updated for the latest 2024 and 2025’s curriculum.

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

Financial Statement 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 FSA: An Overview

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

FSA 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.

2025 CFA Level 1 Financial Statement Analysis’ topic weighting is 11%-14%, which means 20-25 questions of the 180 questions of CFA Level 1 exam is centered around this topic.

It is covered in Topic 5 which contains 12 Learning Modules (LMs).

Here’s the summary of FSA 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 Statement 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

4 types of audit reports

Accrual accounting

LM2: 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.

LM3: Analyzing Balance Sheets

Accounting for gains or losses on marketable securities

LM4 & 5: Analyzing Statements of Cash Flow I & II

IFRS vs US GAAP for cash flow components

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: Analysis of Inventories

LIFO vs FIFO with rising prices and stable inventory levels

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)

LM7: Analysis of Long-Term Assets

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

LM8: Topics in Long-Term Liabilities and Equity

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.

LM9: Analysis of Income Taxes

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

Impact of tax rate changes

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

LM10: Financial Reporting Quality

Depreciation methods

LM11: Financial Analysis Techniques

Activity ratios

Liquidity ratios

Solvency ratios

Profitability ratios

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*}

Valuation ratios

LM12: Introduction to Financial Statement Modeling

A straightforward chapter to read. Know your Porter’s five forces!

CFA Level 1 FSA Tips

Unfortunately there is no shortcut to mastering Financial Statement Analysis – 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 FSA have a 11-14% weighting in the CFA Level 1 exams but FSA 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 FSA:

• Make practice front and center of your FSA 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.
  • FSA 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 FSA 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:

• CFA Level 1 Cheat Sheets series: Quant Methods | Economics | Corporate Issuers | Derivatives | Fixed Income | Equity Investments | Ethics | Alt Investments | Portfolio Management
• CFA Level 1: How to Prepare and Pass CFA in 18 Months
• CFA Level 1 Tips: Top 10 Advice from Previous Candidates
• 18 Actionable Ways to Improve Your Study Memory
• How to Study Effectively: Proven Methods that Work for CFA, FRM and CAIA
• The Ultimate Guide to CFA Practice Questions