NISM CFA Level 1, Financial Statement Analysis. Updated Jun 2026, 16-minute read.
CFA Level 1 Financial Statement Analysis — Income Statement, Balance Sheet, Cash Flows
Financial Statement Analysis (FSA) is the second-highest weighted topic in CFA Level 1 (11–14%, ~20 questions). It is also a foundation for Level 2 equity and fixed income analysis. The CFA FSA curriculum focuses on using financial statements to evaluate company performance and compare across IFRS and US GAAP reporting standards.
Key takeaways
- Income Statement: Revenue recognition (% completion vs point in time), operating vs non-operating income, EPS (basic vs diluted)
- Balance Sheet: Current vs non-current classification, assets = liabilities + equity identity, working capital
- Cash Flow Statement: Operating (direct vs indirect), investing, financing — know how to classify each type
- IFRS vs US GAAP key differences: Interest paid (IFRS: operating or financing; GAAP: operating), dividends received (IFRS: operating or investing; GAAP: operating)
- Inventories: FIFO vs LIFO vs Weighted Average — LIFO not permitted under IFRS; LIFO reserve adjustments
- Long-lived assets: Depreciation methods (straight-line vs accelerated vs units of production), impairment testing
- Income taxes: Deferred tax assets (DTA) and deferred tax liabilities (DTL) — taxable vs temporary differences
- Financial ratios: Liquidity (current, quick), solvency (D/E, interest coverage), profitability (ROE, ROA, net margin), activity (asset turnover)
The Three Core Financial Statements
Income Statement
Shows profitability over a period. Structure:
- Revenue (Net Revenue = Gross Revenue − Returns, Discounts)
- − Cost of Goods Sold (COGS) = Gross Profit
- − Operating Expenses (SG&A, R&D, D&A) = Operating Income (EBIT)
- ± Non-Operating Items (Interest income, interest expense) = EBT (Earnings Before Tax)
- − Income Tax = Net Income
Revenue Recognition (IFRS 15 / ASC 606): Recognise revenue when (or as) performance obligations are satisfied. Key: point-in-time vs over-time recognition.
Balance Sheet
Snapshot at a point in time. Assets = Liabilities + Equity.
- Current Assets: Cash, Accounts Receivable, Inventory, Prepaid Expenses (convertible to cash within 12 months)
- Non-Current Assets: PP&E, Intangibles, Investments, Goodwill
- Current Liabilities: Accounts Payable, Short-Term Debt, Accrued Liabilities
- Non-Current Liabilities: Long-term bonds, deferred tax liabilities, lease obligations
- Equity: Common stock + Additional paid-in capital + Retained earnings + AOCI (Accumulated Other Comprehensive Income) − Treasury stock
Cash Flow Statement
Tracks actual cash movements — the most difficult to manipulate.
- Operating (CFO): Cash from core operations. Indirect method: Net Income ± Non-cash items (add back D&A) ± Changes in working capital.
- Investing (CFI): Purchase/sale of PP&E, investments, acquisitions. Usually negative for growing firms.
- Financing (CFF): Debt issuance/repayment, equity issuance, dividends paid, share buybacks.
IFRS vs US GAAP — Key Differences for Level 1
| Item | IFRS | US GAAP |
|---|---|---|
| LIFO Inventory | Not permitted | Permitted |
| Inventory write-down reversal | Permitted (to NRV) | Not permitted |
| Development costs | Capitalised if criteria met | Expensed (except software) |
| Property revaluation | Revaluation model permitted | Historical cost only |
| Interest paid (CF classification) | Operating or Financing | Operating only |
| Dividends paid (CF classification) | Operating or Financing | Financing only |
| Interest received (CF classification) | Operating or Investing | Operating only |
| Dividends received (CF classification) | Operating or Investing | Operating only |
| Goodwill impairment | Annual impairment test (no amortisation) | Annual impairment test (no amortisation) |
Inventory Methods — FIFO vs LIFO vs Weighted Average
Inventory method affects COGS, gross profit, inventory balance, and taxes.
| In Rising Price Environment | FIFO | LIFO | Weighted Average |
|---|---|---|---|
| COGS | Lowest | Highest | Middle |
| Gross Profit | Highest | Lowest | Middle |
| Inventory (Balance Sheet) | Highest (most current) | Lowest (oldest costs) | Middle |
| Tax Liability | Highest | Lowest (US GAAP only) | Middle |
LIFO Reserve: US GAAP firms using LIFO disclose the LIFO reserve. To compare with FIFO firms: Adjust Inventory = LIFO Inventory + LIFO Reserve. Adjust COGS = LIFO COGS − Change in LIFO Reserve.
Key Financial Ratios
Liquidity Ratios
- Current Ratio = Current Assets / Current Liabilities (>1 = can cover short-term obligations)
- Quick Ratio = (Cash + ST Investments + AR) / Current Liabilities (excludes inventory)
- Cash Ratio = (Cash + ST Investments) / Current Liabilities (most conservative)
Solvency (Leverage) Ratios
- Debt-to-Equity = Total Debt / Total Equity
- Interest Coverage = EBIT / Interest Expense (>3 = comfortable; <1.5 = distress risk)
- Debt-to-Assets = Total Debt / Total Assets
Profitability Ratios
- Gross Margin = Gross Profit / Revenue
- Operating Margin = EBIT / Revenue
- Net Profit Margin = Net Income / Revenue
- ROA = Net Income / Average Total Assets
- ROE = Net Income / Average Equity
DuPont Analysis of ROE
3-factor: ROE = Net Margin × Asset Turnover × Equity Multiplier
5-factor: ROE = Tax Burden × Interest Burden × EBIT Margin × Asset Turnover × Leverage
Use DuPont to identify whether ROE improvement is driven by profitability (margin), efficiency (turnover), or leverage — important for quality of earnings analysis.
Frequently asked questions
How many FSA questions are in CFA Level 1?
Financial Statement Analysis makes up 11–14% of CFA Level 1, translating to approximately 20–25 questions out of 180. It's the second or third highest-weighted topic after Ethics and Equity. FSA is also critical preparation for Level 2, where it becomes a foundation for equity and fixed income analysis.
Is IFRS or US GAAP more heavily tested in CFA Level 1?
Both are tested, but IFRS tends to dominate because CFA Institute is global and IFRS is the international standard used in most countries. US GAAP appears in comparative contexts (especially inventory, interest/dividends classification, development cost treatment). Exam questions often present a scenario and ask which standard applies or how treatment differs.
Written by Arpan Das.
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