CFA Level 1 FRA tips

Dear CFA Program Level I Candidate, We all thank those of you who have found this series useful and sent in your letters of appreciation.

So far we have seen a few tricks in the topics of Corporate Finance, Economics, and Fixed Income. These subjects cover a total of 30%.

In this session we will discuss the Commandments and Sins of the topic that has the highest weight in you exam. That’s right! It’s Financial Reporting and Analysis.

  1. The best way to remember the differences between IFRS and US GAAP is: IFRS is mostly logic-based in its approach and allows more flexibility / discretion based on substance of the transaction while US GAAP is mostly rule-based and leaves no room for judgement.
  2. While answering a question with respect to ratios: Always ensure that there is consistency in the numerator and denominator in a ratio; for example, if you are calculating ROE, the numerator should have a profit figure that is available for equity shareholders (Profit after tax less preferred dividend) since the denominator has equity share capital.
  3. To understand whether an item should be capitalized or expensed: Remember the Matching Principle – any cost item (or a portion of it) that can be matched to the revenue of the current period should be expensed rest all should be capitalized.
  4. Remember, Goodwill is not amortized but is tested annually for impairment.
  5. Two checks for sales type lease:
    1. Lessor is the manufacturer of the item being leased, and
    2. PV of the future cash flows from lease payments exceeds the carrying value / purchase price of the item being leased, indicating a Gross Profit on the sale
  6. Fraud triangle’s first two buckets – due to incentives and pressures & due to opportunity for fraud are clearer and easier to remember; try to map items / fraud cases into these buckets, else by default it can be clubbed in the third bucket.
  7. We hope that the above points were useful for your preparation. We will send you such useful information before the exam. If you want to know about a particular topic please write to us at care@edupristine.com.