Actuarial Notes

International Financial Statement Analysis

By Thomas R. Robinson · Wiley · 2020

Study guide: Exam CFE-201

A CFA Institute Investment Series textbook that Wiley describes as providing the most up-to-date detail for the successful assessment of company performance and financial position regardless of country of origin. It covers all aspects from financial reporting mechanics and standards to understanding income statements and balance sheets, with guidance toward effective analysis techniques. This is the 4th edition, of 1,008 pages, published in February 2020.

On the syllabus

  • Exam CFE-201 — Ch. 6 Financial Analysis Techniques (2a); Ch. 9 Income Taxes (2c); Ch. 11 Financial Reporting Quality (2a, 2b); Ch. 15 Multinational Operations (2c).

Preface

Acknowledgments

About the CFA Institute Investment Series

1 Introduction to Financial Statement Analysis

  • 1 Introduction
  • 2 Roles of Financial Reporting and Financial Statement Analysis
  • 3 Primary Financial Statements and Other Information Sources
    • 3.1 Financial Statements and Supplementary Information
    • 3.2 Other Sources of Information
  • 4 Financial Statement Analysis Framework
    • 4.1 Articulate the Purpose and Context of Analysis
    • 4.2 Collect Data
    • 4.3 Process Data
    • 4.4 Analyze/Interpret the Processed Data
    • 4.5 Develop and Communicate Conclusions/Recommendations
    • 4.6 Follow-Up
  • 5 Summary

2 Financial Reporting Standards

  • 1 Introduction
  • 2 The Objective of Financial Reporting
  • 3 Standard-Setting Bodies and Regulatory Authorities
    • 3.1 Accounting Standards Boards
    • 3.2 Regulatory Authorities
  • 4 The International Financial Reporting Standards Framework
    • 4.1 Qualitative Characteristics of Financial Reports
    • 4.2 Constraints on Financial Reports
    • 4.3 The Elements of Financial Statements
    • 4.4 General Requirements for Financial Statements
  • 5 Comparison of IFRS with Alternative Reporting Systems
  • 6 Monitoring Developments in Financial Reporting Standards
    • 6.1 New Products or Types of Transactions
    • 6.2 Evolving Standards and the Role of CFA Institute
  • 7 Summary

3 Understanding Income Statements

  • 1 Introduction
  • 2 Components and Format of the Income Statement
  • 3 Revenue Recognition
    • 3.1 General Principles
    • 3.2 Accounting Standards for Revenue Recognition
  • 4 Expense Recognition
    • 4.1 General Principles
    • 4.2 Issues in Expense Recognition
    • 4.3 Implications for Financial Analysis
  • 5 Non-Recurring Items and Non-Operating Items
    • 5.1 Discontinued Operations
    • 5.2 Unusual or Infrequent Items
    • 5.3 Changes in Accounting Policies
    • 5.4 Non-Operating Items
  • 6 Earnings per Share
    • 6.1 Simple versus Complex Capital Structure
    • 6.2 Basic EPS
    • 6.3 Diluted EPS
    • 6.4 Changes in EPS
  • 7 Analysis of the Income Statement
    • 7.1 Common-Size Analysis of the Income Statement
    • 7.2 Income Statement Ratios
  • 8 Comprehensive Income
  • 9 Summary

4 Understanding Balance Sheets

  • 1 Introduction
  • 2 Components and Format of the Balance Sheet
    • 2.1 Balance Sheet Components
    • 2.2 Current and Non-Current Classification
    • 2.3 Liquidity-Based Presentation
  • 3 Current Assets and Current Liabilities
    • 3.1 Current Assets
    • 3.2 Current Liabilities
  • 4 Non-Current Assets
    • 4.1 Property, Plant, and Equipment
    • 4.2 Investment Property
    • 4.3 Intangible Assets
    • 4.4 Goodwill
    • 4.5 Financial Assets
    • 4.6 Deferred Tax Assets
  • 5 Non-Current Liabilities
    • 5.1 Long-term Financial Liabilities
    • 5.2 Deferred Tax Liabilities
  • 6 Equity
    • 6.1 Components of Equity
    • 6.2 Statement of Changes in Equity
  • 7 Analysis of the Balance Sheet
    • 7.1 Common-Size Analysis of the Balance Sheet
    • 7.2 Balance Sheet Ratios
  • 8 Summary

5 Understanding Cash Flow Statements

  • 1 Introduction
  • 2 Components and Format of the Cash Flow Statement
    • 2.1 Classification of Cash Flows and Non-Cash Activities
    • 2.2 A Summary of Differences between IFRS and US GAAP
    • 2.3 Direct and Indirect Methods for Reporting Cash Flow from Operating Activities
  • 3 The Cash Flow Statement: Linkages and Preparation
    • 3.1 Linkages of the Cash Flow Statement with the Income Statement and Balance Sheet
    • 3.2 Steps in Preparing the Cash Flow Statement
    • 3.3 Conversion of Cash Flows from the Indirect to the Direct Method
  • 4 Cash Flow Statement Analysis
    • 4.1 Evaluation of the Sources and Uses of Cash
    • 4.2 Common-Size Analysis of the Statement of Cash Flows
    • 4.3 Free Cash Flow to the Firm and Free Cash Flow to Equity
    • 4.4 Cash Flow Ratios
  • 5 Summary

6 Financial Analysis Techniques

  • 1 Introduction
  • 2 The Financial Analysis Process
    • 2.1 The Objectives of the Financial Analysis Process
    • 2.2 Distinguishing between Computations and Analysis
  • 3 Analytical Tools and Techniques
    • 3.1 Ratios
    • 3.2 Common-Size Analysis
    • 3.3 The Use of Graphs as an Analytical Tool
    • 3.4 Regression Analysis
  • 4 Common Ratios Used in Financial Analysis
    • 4.1 Interpretation and Context
    • 4.2 Activity Ratios
    • 4.3 Liquidity Ratios
    • 4.4 Solvency Ratios
    • 4.5 Profitability Ratios
    • 4.6 Integrated Financial Ratio Analysis
  • 5 Equity Analysis
    • 5.1 Valuation Ratios
    • 5.2 Industry-Specific Ratios
    • 5.3 Historical Research on Ratios in Equity Analysis
  • 6 Credit Analysis
    • 6.1 The Credit Rating Process
    • 6.2 Historical Research on Ratios in Credit Analysis
  • 7 Business and Geographic Segments
    • 7.1 Segment Reporting Requirements
    • 7.2 Segment Ratios
  • 8 Model Building and Forecasting
  • 9 Summary

7 Inventories

  • 1 Introduction
  • 2 Cost of Inventories
  • 3 Inventory Valuation Methods
    • 3.1 Specific Identification
    • 3.2 First-In, First-Out (FIFO)
    • 3.3 Weighted Average Cost
    • 3.4 Last-In, First-Out (LIFO)
    • 3.5 Calculation of Cost of Sales, Gross Profit, and Ending Inventory
    • 3.6 Periodic versus Perpetual Inventory Systems
    • 3.7 Comparison of Inventory Valuation Methods
  • 4 The LIFO Method
    • 4.1 LIFO Reserve
    • 4.2 LIFO Liquidations
  • 5 Inventory Method Changes
  • 6 Inventory Adjustments
  • 7 Evaluation of Inventory Management
    • 7.1 Presentation and Disclosure
    • 7.2 Inventory Ratios
    • 7.3 Financial Analysis Illustrations
  • 8 Summary

8 Long-Lived Assets

  • 1 Introduction
  • 2 Acquisition of Long-Lived Assets
    • 2.1 Property, Plant, and Equipment
    • 2.2 Intangible Assets
    • 2.3 Capitalizing versus Expensing: Impact on Financial Statements and Ratios
    • 2.4 Capitalization of Interest Costs
    • 2.5 Capitalization of Internal Development Costs
  • 3 Depreciation and Amortization of Long-Lived Assets
    • 3.1 Depreciation Methods and Calculation of Depreciation Expense
    • 3.2 Amortization Methods and Calculation of Amortization Expense
  • 4 The Revaluation Model
  • 5 Impairment of Assets
    • 5.1 Impairment of Property, Plant, and Equipment
    • 5.2 Impairment of Intangible Assets with a Finite Life
    • 5.3 Impairment of Intangibles with Indefinite Lives
    • 5.4 Impairment of Long-Lived Assets Held for Sale
    • 5.5 Reversals of Impairments of Long-Lived Assets
  • 6 Derecognition
    • 6.1 Sale of Long-Lived Assets
    • 6.2 Long-Lived Assets Disposed of Other than by a Sale
  • 7 Presentation and Disclosures
  • 8 Investment Property
  • 9 Summary

9 Income Taxes

  • 1 Introduction
  • 2 Differences between Accounting Profit and Taxable Income
    • 2.1 Current Tax Assets and Liabilities
    • 2.2 Deferred Tax Assets and Liabilities
  • 3 Determining the Tax Base of Assets and Liabilities
    • 3.1 Determining the Tax Base of an Asset
    • 3.2 Determining the Tax Base of a Liability
    • 3.3 Changes in Income Tax Rates
  • 4 Temporary and Permanent Differences Between Taxable and Accounting Profit
    • 4.1 Taxable Temporary Differences
    • 4.2 Deductible Temporary Differences
    • 4.3 Examples of Taxable and Deductible Temporary Differences
    • 4.4 Temporary Differences at Initial Recognition of Assets and Liabilities
    • 4.5 Business Combinations and Deferred Taxes
    • 4.6 Investments in Subsidiaries, Branches, Associates, and Interests in Joint Ventures
  • 5 Unused Tax Losses and Tax Credits
  • 6 Recognition and Measurement of Current and Deferred Tax
    • 6.1 Recognition of a Valuation Allowance
    • 6.2 Recognition of Current and Deferred Tax Charged Directly to Equity
  • 7 Presentation and Disclosure
  • 8 Comparison of IFRS and US GAAP
  • 9 Summary

10 Non-Current (Long-Term) Liabilities

  • 1 Introduction
  • 2 Bonds Payable
    • 2.1 Accounting for Bond Issuance
    • 2.2 Accounting for Bond Amortization, Interest Expense, and Interest Payments
    • 2.3 Current Market Rates and Fair Value Reporting Option
    • 2.4 Derecognition of Debt
    • 2.5 Debt Covenants
    • 2.6 Presentation and Disclosure of Long-Term Debt
  • 3 Leases
    • 3.1 Lessee accounting
    • 3.2 Lessor accounting
  • 4 Introduction to Pensions and Other Post- Employment Benefits
  • 5 Evaluating Solvency: Leverage and Coverage Ratios
  • 6 Summary

11 Financial Reporting Quality

  • 1 Introduction
  • 2 Conceptual Overview
    • 2.1 GAAP, Decision-Useful, Sustainable, and Adequate Returns
    • 2.2 GAAP, Decision-Useful, but Sustainable?
    • 2.3 Biased Accounting Choices
    • 2.4 Departures from GAAP
    • 2.5 Differentiate between Conservative and Aggressive Accounting
  • 3 Context for Assessing Financial Reporting Quality
    • 3.1 Motivations
    • 3.2 Conditions Conducive to Issuing Low-Quality Financial Reports
    • 3.3 Mechanisms That Discipline Financial Reporting Quality
  • 4 Detection of Financial Reporting Quality Issues
    • 4.1 Presentation Choices
    • 4.2 Accounting Choices and Estimates
    • 4.3 Warning Signs
  • 5 Summary

12 Applications of Financial Statement Analysis

  • 1 Introduction
  • 2 Application: Evaluating Past Financial Performance
  • 3 Application: Projecting Future Financial Performance
    • 3.1 Projecting Performance: An Input to Market-Based Valuation
    • 3.2 Projecting Multiple-Period Performance
  • 4 Application: Assessing Credit Risk
  • 5 Application: Screening for Potential Equity Investments
  • 6 Analyst Adjustments to Reported Financials
    • 6.1 A Framework for Analyst Adjustments
    • 6.2 Analyst Adjustments Related to Investments
    • 6.3 Analyst Adjustments Related to Inventory
    • 6.4 Analyst Adjustments Related to Property, Plant, and Equipment
    • 6.5 Analyst Adjustments Related to Goodwill
  • 7 Summary

13 Intercorporate Investments

  • 1 Introduction
  • 2 Basic Corporate Investment Categories
  • 3 Investments in Financial Assets: IFRS 9
    • 3.1 Classification and Measurement
    • 3.2 Reclassification of Investments
  • 4 Investments in Associates and Joint Ventures
    • 4.1 Equity Method of Accounting: Basic Principles
    • 4.2 Investment Costs That Exceed the Book Value of the Investee
    • 4.3 Amortization of Excess Purchase Price
    • 4.4 Fair Value Option
    • 4.5 Impairment
    • 4.6 Transactions with Associates
    • 4.7 Disclosure
    • 4.8 Issues for Analysts
  • 5 Business Combinations
    • 5.1 Acquisition Method
    • 5.2 Impact of the Acquisition Method on Financial Statements, Post-Acquisition
    • 5.3 Th e Consolidation Process
    • 5.4 Financial Statement Presentation Subsequent to the Business Combination
    • 5.5 Variable Interest and Special Purpose Entities
    • 5.6 Additional Issues in Business Combinations That Impair Comparability
  • 6 Summary

14 Employee Compensation: Post-Employment and Share-Based

  • 1 Introduction
  • 2 Pensions and Other Post-Employment Benefits
    • 2.1 Types of Post-Employment Benefit Plans
    • 2.2 Measuring a Defined Benefit Pension Plan\u0026rsquo;s Obligations
    • 2.3 Financial Statement Reporting of Pension Plans and Other Post-Employment Benefits
    • 2.4 Disclosures of Pension and Other Post-Employment Benefits
  • 3 Share-Based Compensation
    • 3.1 Stock Grants
    • 3.2 Stock Options
    • 3.3 Other Types of Share-Based Compensation
  • 4 Summary

15 Multinational Operations

  • 1 Introduction
  • 2 Foreign Currency Transactions
    • 2.1 Foreign Currency Transaction Exposure to Foreign Exchange Risk
    • 2.2 Analytical Issues
    • 2.3 Disclosures Related to Foreign Currency Transaction Gains and Losses
  • 3 Translation of Foreign Currency Financial Statements
    • 3.1 Translation Conceptual Issues
    • 3.2 Translation Methods
    • 3.3 Illustration of Translation Methods (Excluding Hyperinflationary Economies)
    • 3.4 Translation Analytical Issues
    • 3.5 Translation when a Foreign Subsidiary Operates in a Hyperinflationary Economy
    • 3.6 Companies Use Both Translation Methods at the Same Time
    • 3.7 Disclosures Related to Translation Methods
  • 4 Multinational Operations and a Company\u0026rsquo;s Effective Tax Rate
  • 5 Additional Disclosures on the Effects of Foreign Currency
    • 5.1 Disclosures Related to Sales Growth
    • 5.2 Disclosures Related to Major Sources of Foreign Exchange Risk
  • 6 Summary

16 Analysis of Financial Institutions

  • 1 Introduction
  • 2 What Makes Financial Institutions Different?
    • 2.1 Global Organizations
    • 2.2 Individual Jurisdictions\u0026rsquo; Regulatory Authorities
  • 3 Analyzing a Bank
    • 3.1 The CAMELS Approach
    • 3.2 Other Factors Relevant to Analysis of a Bank
    • 3.3 An Illustration of the CAMELS Approach to Analysis of a Bank
  • 4 Analyzing an Insurance Company
    • 4.1 Property and Casualty Insurance Companies
    • 4.2 Life and Health Insurance Companies
  • 5 Summary

17 Evaluating Quality of Financial Reports

  • 1 Introduction
  • 2 Quality of Financial Reports
    • 2.1 Conceptual Framework for Assessing the Quality of Financial Reports
    • 2.2 Potential Problems that Affect the Quality of Financial Reports
  • 3 Evaluating the Quality of Financial Reports
    • 3.1 General Steps to Evaluate the Quality of Financial Reports
    • 3.2 Quantitative Tools to Assess the Likelihood of Misreporting
  • 4 Earnings Quality
    • 4.1 Indicators of Earnings Quality
    • 4.2 Evaluating the Earnings Quality of a Company (Cases)
    • 4.3 Bankruptcy Prediction Models
  • 5 Cash Flow Quality
    • 5.1 Indicators of Cash Flow Quality
    • 5.2 Evaluating Cash Flow Quality
  • 6 Balance Sheet Quality
  • 7 Sources of Information about Risk
    • 7.1 Limited Usefulness of Auditor\u0026rsquo;s Opinion as a Source of Information about Risk
    • 7.2 Risk-Related Disclosures in the Notes
    • 7.3 Management Commentary (Management Discussion and Analysis, or MD\u0026amp;A)
    • 7.4 Other Required Disclosures
    • 7.5 Financial Press as a Source of Information about Risk
  • 8 Summary

18 Integration of Financial Statement Analysis Techniques

  • 1 Introduction
  • 2 Case Study: Long-Term Equity Investment
    • 2.1 Phase 1: Define a Purpose for the Analysis
    • 2.2 Phase 2: Collect Input Data
    • 2.3 Phase 3: Process Data and Phase 4: Analyze/Interpret the Processed Data
    • 2.4 Phase 5: Develop and Communicate Conclusions and Recommendations (e.g., with an Analysis Report)
    • 2.5 Phase 6: Follow-up
  • 3 Summary

Glossary

About the Editors

About the CFA Program

Index

Sources

  • International Financial Statement Analysis, 4th Edition (Wiley) — the publisher's product page: edition, ISBN 978-1-119-62805-7 (hardcover), February 2020, 1,008 pages, the description for the lead, the author it names (Thomas R. Robinson; the syllabus cites "Robinson et al") and the full table of contents; each chapter's "Learning Outcomes", "References" and "Practice Problems" entries are not repeated here, and page numbers are dropped
  • CFE 201 Syllabus, Mar 2027/Jul 2027 (SOA) — the edition (4th, 2020), the four assigned chapters and their learning outcomes