Level I Financial Reporting and Analysis

Access to all Level I financial reporting and analysis (FRA) articles until the next Level I exam date

Occasionally, you will need to know how to compute free cash flow to equity (FCFE) given free cash flow to the firm (FCFF), or how to compute FCFF given FCFE.  The formulae are relatively easy, but for sake of completeness I thought that I’d write a short article on them Recall that the formula for […]

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The idea of free cash flow is fairly straightforward: it’s cash flow that a company may use in any way it chooses (within reason, of course; for example, we’ll consider only legal uses here).  There are several types of (and, consequently, definitions for) free cash flow.  In this article, I’ll describe one of those: free […]

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The idea of free cash flow is fairly straightforward: it’s cash flow that a company may use in any way it chooses (within reason, of course; for example, we’ll consider only legal uses here).  There are several types of (and, consequently, definitions for) free cash flow.  In this article, I’ll describe one of those: free […]

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No discussion of conservative methods vs. aggressive methods would be complete without a clear definition of what we mean by these two categories of methods.  Therefore, let’s start there: Conservative accounting methods are those that report lower net income in the current period, and (potentially) higher net income in future periods. Aggressive accounting methods are […]

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I apologize in advance: this article’s long. Every inventory method has two important characteristics: How will costs be assigned to cost of goods sold (COGS) and ending inventory (EI)? When will those costs be assigned to COGS and EI? There are four possible answers to the first question: First-in, first-out (FIFO) Last-in, first-out (LIFO) Average […]

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A useful skill to develop is that of writing out a quick, simple, general cash flow statement.  Here is an example that you should be able to reproduce in 10 – 15 seconds during the exam: \begin{align}&\ \ \ \ \ \ Cash\ Flow\ from\ Operations\ (CFO)\\ &+\ Cash\ Flow\ from\ Investing\ (CFI)\\ &\underline{+\ \ […]

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A useful skill to develop is that of writing out a quick, simple, general balance sheet. Here is an example that you should be able to reproduce in 10 – 15 seconds during the exam: \begin{align}&Current\ Assets\\ &PP\&E\\ &\underline{Intangible\ Assets}\\ &=\ Total\ Assets\\ \\ &Current\ Liabilities\\ &\underline{\ Long-term\ Liabilities}\\ &=\ Total\ Liabilities\\ \\ &Capital\ Stock\\ […]

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There are two methods to arrive at a company’s cash flow from operations (CFO): the direct method and the indirect method.  Companies that file their financial statements with the SEC are required to use the indirect method to present CFO, covered here.  The direct method is covered in a companion article. The idea of the […]

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There are two methods to arrive at a company’s cash flow from operations (CFO): the direct method and the indirect method.  Companies that file their financial statements with the SEC are required to use the indirect method to present CFO, covered in a companion article.  Because the direct method is not required by the SEC […]

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A lease is a contract that lets one party use an asset owned by another party, in exchange for periodic payments.  The owner of the asset is the lessor; the user of the asset is the lessee.  For the purposes of financial reporting, leases are divided into two categories, based on the economic substance of […]

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