Financial Statement Analysis (FSA) is the most technically demanding topic at Level I and carries 11–14% exam weight. It covers the three financial statements (income statement, balance sheet, cash flow statement), IFRS vs US GAAP differences, ratio analysis, and off-balance-sheet items. Mastery requires not just ratio formulas but the ability to interpret what ratios say about a company's quality, sustainability, and risk.
IFRS vs GAAP differences: LIFO is prohibited under IFRS; development costs can be capitalised under IFRS (expensed under GAAP); IFRS uses revaluation model for PP&E (GAAP: cost model only); IFRS allows reversal of impairment (GAAP does not for goodwill).
Cash flow classification: under IFRS, interest paid may be operating or financing; dividends paid may be operating or financing; under US GAAP both are operating. Interest received and dividends received: IFRS allows operating or investing; US GAAP requires operating.
Revenue recognition (IFRS 15 / ASC 606): five-step model — identify contract, identify performance obligations, determine transaction price, allocate price, recognise when/as obligation is satisfied.
Long-lived asset accounting: capitalising vs. expensing — capitalising raises assets and equity in year 1, lowers expenses, raises net income; over time, depreciation catches up. An analyst should adjust reported income for capitalisations that appear aggressive.
Mixing up operating vs. non-operating items when calculating EBIT. Gains on asset sales are non-operating; restructuring charges are usually included in operating income on the income statement but should be adjusted in analysis.
Forgetting that under the indirect method, an increase in accounts receivable is subtracted from net income (cash collected < revenue recognised) and an increase in accounts payable is added.
Treating a high current ratio as always good — a very high current ratio may indicate poor inventory management or excessive idle cash rather than genuine liquidity strength.
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