A. Financial Statement Analysis

Comparative financial statement analysis
a. Common size financial statements
b. Common base year financial statements
c. Financial trend analysis
Financial ratios
a. Liquidity
b. Leverage
c. Activity
d. Profitability
e. Market
Profitability analysis
a. Income measurement analysis
b. Revenue analysis
c. Cost of sales analysis
d. Expense analysis
e. Variation analysis
Special issues
a. Impact of foreign exchange rate changes on financial statements
b. Effects of changing prices and inflation
c. Impact of changes in accounting treatment
d. Accounting and economic concepts of value and income
e. Earnings quality

The candidate should be able to:

a. for the balance sheet and income statement, prepare and analyze common-size financial statements (i.e., calculate percentage of assets and sales, respectively; also called vertical analysis)
b. for the balance sheet and income statement, prepare a comparative financial statement horizontal analysis (i.e., calculate year-over-year trends for every item on the financial statement compared to a base year)
c. calculate the growth rate of individual line items on the balance sheet and income statement
d. analyze financial statement data to identify patterns and trends that can be used to make business decisions

Note: see the CMA Exam Financial Ratio Summary The candidate should be able to:

a. calculate and interpret the current ratio, the quick (acid-test) ratio, the cash ratio, the cash flow ratio, and the net working capital ratio
b. explain how changes in one or more of the elements of current assets, current liabilities, and/or unit sales can change the liquidity ratios and calculate that impact
c. demonstrate an understanding of the liquidity of current liabilities

d. define solvency and distinguish from liquidity
e. define operating leverage and financial leverage
f. calculate degree of operating leverage and degree of financial leverage
g. demonstrate an understanding of the effect on the capital structure and solvency of a company with a change in the composition of debt vs. equity by calculating leverage ratios
h. calculate and interpret the financial leverage ratio (equity multiplier) and determine the effect of a given change in capital structure on this ratio
i. calculate and interpret the following ratios: debt-to-equity, long-term debt-toequity, and debt-to-total assets
j. define, calculate, and interpret the following ratios: fixed charge coverage (earnings to fixed charges), interest coverage (times interest earned), and cash flow to fixed charges
k. discuss how capital structure decisions affect the risk profile of a company

l. calculate and interpret accounts receivable turnover, inventory turnover, and accounts payable turnover
m. calculate and interpret days sales outstanding in receivables, days sales in inventory, and days purchases in accounts payable
n. define and calculate the operating cycle and the cash cycle of a company
o. calculate and interpret total asset turnover and fixed asset turnover

p. calculate and interpret gross profit margin percentage; operating profit margin percentage; net profit margin percentage; and EBITDA margin percentage
q. calculate and interpret ROA and ROE

r. calculate and interpret the market/book ratio and the price/earnings ratio
s. calculate and interpret book value per share
t. identify and explain the limitations of book value per share
u. calculate and interpret basic and diluted EPS
v. calculate and interpret earnings yield, dividend yield, dividend payout ratio, and shareholder return

w. identify the limitations of ratio analysis
x. demonstrate a familiarity with the sources of financial information about public companies and industry ratio averages
y. evaluate the financial strength and performance of an entity based on multiple ratios

The candidate should be able to:

a. demonstrate an understanding of the factors that contribute to inconsistent definitions of “equity,” “assets,” and “return” when using ROA and ROE
b. determine the effect on return on total assets of a change in one or more elements of the financial statements
c. identify factors to be considered in measuring income, including estimates, accounting methods, disclosure incentives, and the different needs of users
d. explain the importance of the source, stability, and trend of sales and revenue
e. demonstrate an understanding of the relationship between revenue and receivables and revenue and inventory
f. determine and analyze the effect on revenue of changes in revenue recognition and measurement methods
g. analyze cost of sales by calculating and interpreting the gross profit margin
h. distinguish between gross profit margin, operating profit margin, and net profit margin, and analyze the effects of changes in the components of each
i. define and perform a variation analysis (percentage change over time)
j. calculate and interpret sustainable equity growth

The candidate should be able to:

a. demonstrate an understanding of the impact of foreign exchange rate changes on financial statements
- 1. identify and explain issues in the accounting for foreign operations (e.g., historical vs. current rate and the treatment of translation gains and losses)
  1. define functional currency
  1. calculate the financial ratio impact of a change in exchange rates
  1. discuss the possible impact on management and investor behavior of volatility in reported earnings
b. demonstrate an understanding of the impact of inflation on financial ratios and the reliability of financial ratios
c. describe how to adjust financial statements for changes in accounting treatments (principles, estimates, and errors) and how these adjustments impact financial ratios
d. distinguish between book value and market value, and distinguish between accounting profit and economic profit
e. identify the determinants and indicators of earnings quality and explain why they are important