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May 5, 2026
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Financial statement analysis is a critical part of the CFA® Level I exam. To perform well on this section of the exam, you need a solid understanding of financial statement analysis concepts and techniques.
Studying for the CFA Level I Financial Statement Analysis topic requires a comprehensive approach that includes both theoretical knowledge and practical application of the subject matter.
Make sure to cover all of the financial statement analysis readings
Master the basics before diving into more complex subtopics
Solidify your understanding of financial ratios
Practice analyzing financial statements using specific CFA level I sample questions and mock exams throughout your prep
Stay organized to keep track of your progress
Learning Outcome Statements while studying for a CFA exam refer to specific skills and concepts you should possess within an exam topic whereas exam topics describe the broader body of knowledge you should have. For example, the Financial Statement Analysis exam topic at Level I has lots of LOSs that you’ll need to learn.
An example of a CFA LOS for Financial Statement Analysis is “describe the steps in the financial statement analysis framework.”
“I’m not training to become an accountant, why do I need to understand how the financial statements are produced?” This is a common question from Level I CFA candidates. As you explore this CFA topic, you will discover there are a variety of ways financial statements can be produced, while still abiding by accounting standards.
For example, some firms will follow IFRS (the international accounting standards) while others will follow U.S. GAAP (other country-specific accounting standards do also exist but are outside the scope of the CFA syllabus).
It is crucial as an analyst to understand where these differences lie and be able to adjust financial statements so appropriate comparisons can be made between potential investments, for example. On top of this, a large focus is on the analysis of various ratios which cover areas such as liquidity - and these can only be fully understood if the candidate understands the background behind these ratios.
The main sections of a set of financial statements are
balance sheets
statements of comprehensive income (comprising the income statement and other comprehensive income)
cash flow statements
These three sections are the main focus of the Level I curriculum but you also need to have an awareness of the statement of changes in owners’ equity, and the explanatory notes.
The Financial Statement Analysis topic represents 11%-14% of the Level I exam, which is approximately 19-25 questions. This topic area is tested in the morning session, alongside Quantitative Methods, Economics, and Corporate Finance.
It depends on your background if Financial Statement Analysis will be difficult for you. For the majority of Level I candidates, Financial Statement Analysis is one of the harder topics. Although it assumes no prior knowledge, the level of detail of some of the later readings can be tricky if the fundamentals haven’t been fully understood yet.
It’s recommended you first spend time understanding the bigger picture (covered in the first 6 readings) if you are struggling with the detail of the later readings. For those of you with some level of accounting background, you may find this an easier topic. Just remember this is an analyst exam, not an accounting one, so ensure you are focusing throughout on how the area would affect your analysis.
Financial Statement Analysis is a weighty topic on the CFA Level I exam so it's definitely one you want to start in your 6-month CFA level I study guide, to give yourself time to take it steadily.
You might find it helpful to break up the studying into smaller chunks, interspersing with other areas such as Alternative Investments that are more discursive.
Below are overviews of each Level I Financial Statement Analysis readings and what you are expected to learn.
The first reading of the topic will be particularly important if you have limited or no prior experience with financial statements. It introduces the concept of financial statement analysis and discusses what sources of information can be helpful for financial analysts such as the audit report, footnotes to financial statements, and the Management’s Discussion and Analysis (MD&A).
There is also a brief introduction to the main financial statements (income statement, balance sheets, and statement of cash flows) which are covered in subsequent readings. The final LOS provides the six steps of the financial statement analysis framework.
Learning the components of the income statement and the different ways it can be presented is crucial for financial analysts to understand the historic and future performance of a firm. This reading includes many calculations such as recognizing revenue, depreciation, and cost of goods sold (COGS).
One of the tougher areas of this reading is the calculation of EPS and DEPS. We are introduced to Common-Size Income Statements, which is a useful way to compare the Income Statements of two competitors, especially those of different sizes.
The balance sheet is broken down into three main categories - assets, liabilities, and equity. Assets and Liabilities are broken down further into current and noncurrent, and this reading takes each in turn and introduces you to the typical items you would expect to see when looking at a balance sheet.
One of the trickier areas is the different IFRS and U.S. GAAP treatment for marketable securities such as equity investment and derivatives. Similar to the prior reading, there is an introduction to Common-Size Balance Sheets, as well as some very important liquidity and solvency ratios.
While a Balance Sheet will give you the cash balance of the firm at the reporting date, the Cash Flow Statement helps us to reconcile the cash movement over the year. All cash flows are categorized as either operating, investing or financing activities, and this reading shows us how to produce a cash flow statement, as well as convert between the two methods (direct and indirect) of calculating the cash flow from operating activities (CFO).
This reading introduces common-size cash flow statements, then shows how to calculate two key measures of free cash flow (FCFE and FCFF) that you will need to know for the valuation models in the Equities topic area.
Inventory, the stock a firm holds, must be measured at the lower of cost and net realizable value (NRV). The cost can be calculated using different methods such as FIFO and AVCO (and LIFO under U.S. GAAP), and this reading introduces the calculations for these, alongside considering the impact of the chosen method on ending Inventory balances, as well as the impact on COGS in the Income Statement.
Beyond this, it is important for an analyst to be able to convert between the different methods (FIFO versus LIFO is the main focus at Level I), as well as understand the differences in perpetual versus periodic inventory systems, and impairments.
Generally, if a firm spends money on an item that is expected to provide future economic benefits for more than one period, it is likely to be classified as a long-lived asset. After covering this reading you will be able to identify whether expenditure is a long-term asset, whether it should be depreciated/amortized during its life, and how to deal with disposing of the asset. This covers tangible, intangible, and financial assets, and also considers valuation matters such as impairments and revaluations.
This reading addresses leases from both the lessee and lessors’ perspectives, as well as pension accounting (which will be covered in greater depth at Level II) and share-based compensation.
Income taxes tends to be one of the topics CFA candidates struggle with most at Level I - but don’t forget this is just one small element within the large Financial Statement Analysis topic. The focus of this question is deferred tax, which represents the difference in taxes calculated based on the accounting income and taxes calculated based on the tax legislation in the appropriate jurisdiction.
The reading introduces permanent and temporary differences (only temporary differences lead to deferred tax) and demonstrates how to calculate the deferred tax liabilities and assets on the Balance Sheet, alongside the tax expense on the Income Statement. It considers what impact a change in tax rates would have on these figures, as well as some of the key tax accounting differences between IFRS and U.S. GAAP.
Financial reporting quality is a short reading that covers the differences between financial reporting quality and the quality of reported results and explains how choices made across the financial statements (such as the depreciation policy chosen) can affect the reported earnings and financial position of the firm. It’s crucial an analyst takes this into account to make an informed decision about the firm in question.
There are many ratios in the financial analysis techniques reading, which can be derived from the financial statements studied above. The exam focus here is to understand what each one is measuring and to interpret the results when comparing to the prior year or another firm/industry, for example. One of the most important ratios is the DuPont formula which decomposes Return on Equity (ROE) into its different components.
The final reading in Financial Statement Analysis discusses how analysts model pro forma financial statements and what factors might affect these projections. This reading sets the stage for the more detailed industry and company analysis that is addressed in the Equities topic area.
As you work through the material, pay attention to the differences between the IFRS and U.S. GAAP treatment of the area you’re looking at. While the fundamentals of accounting - and a lot of the policies - are the same, there are some important differences.
As an analyst potentially comparing two sets of financial reports which use different accounting standards, it’s important to understand the differences, making this an examiner’s favorite.
For Financial Statement Analysis specifically, the most important calculator functions to be happy with are depreciation (2nd 4) and bond amortization (2nd 9), alongside the Time Value of Money buttons which are crucial throughout the syllabus.
Answer these five CFA practice questions to test your readiness for the Level I Exam.
Financial Statement Analysis is a slightly smaller portion of the Level II exam than the Level I exam, and builds on the foundations learned at Level I, particularly the more general readings such as Understanding Balance Sheets and Financial Reporting Standards.
Some topics are looked at in more detail such as pension accounting, whereas other topics are introduced for the first time at Level II such as multinational operations (where parent and subsidiary companies have financial statements in different currencies).
Looking for more guidance on how to prepare for Financial Statement Analysis? Enroll in one of our CFA Level I Premium study packages to receive expert instruction, CFA Program study materials, and more. Give yourself the best chance to prepare, practice, and perform on the CFA exam.
Written by Kaplan Schweser experts, reviewed by Craig Prochaska, CFA.
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