Financial Statement Analysis Framework | CFA Level I FSA

In this lesson, we’ll discuss a generic framework for financial statement analysis. This framework can be summarized into six main steps:

1. State the Objective and Context

Before diving into the analysis, it’s essential to understand its purpose. Consider the following:

• What questions does the analysis seek to answer?
• What form should the information be presented in?
• What resources and time are available for the analysis?

2. Gather Data

Next, collect the required data to answer the specific questions. This includes:

• Company’s financial statements
• Relevant data on the industry and economy
• Qualitative understanding of the company’s business, competitive stance, and future directions

To gather qualitative data, consider interviewing the company’s management, suppliers, and customers, or even visiting company sites.

3. Process Data

Transform the raw data into meaningful metrics for analysis by:

• Making adjustments to financial statements for comparison purposes
• Calculating financial ratios
• Preparing exhibits like graphs and common-size balance sheets

4. Analyze and Interpret

With the processed data, analyze and interpret the output to answer the questions stated in the first step. Decide what conclusions or recommendations the information supports.

5. Prepare a Report

Create a report highlighting conclusions or recommendations with supporting information. Ensure compliance with the Code and Standards relating to investment analysis and recommendations. Clearly distinguish between opinions and facts.

6. Update the Analysis

The process doesn’t end with the report. Periodically review and update the analysis to determine if the original conclusions and recommendations are still valid. Repeat these steps and update the conclusions or recommendations as necessary.

And there you have it—a quick overview of the financial statement analysis framework. Don’t worry if you don’t grasp all the concepts yet; we’ll revisit many of them throughout the course.