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CFA Level I Updated
What are the key differences in cash flow classification between IFRS and US GAAP?
Under US GAAP, interest paid and received go to CFO, dividends paid to CFF, and dividends received to CFO — with no flexibility. IFRS allows companies to classify interest and dividends across CFO, CFI, or CFF, which creates comparability challenges for analysts.
How do you calculate basic EPS versus diluted EPS?
Basic EPS equals net income minus preferred dividends divided by weighted average shares outstanding. Diluted EPS adjusts for potentially dilutive securities: stock options use the treasury stock method (adding only incremental shares), while convertible bonds and convertible preferred use the if-converted method (adjusting both numerator and denominator).
How is a sale-and-leaseback transaction accounted for, and when is the 'sale' not really a sale?
In a sale-and-leaseback, if the transfer qualifies as a sale, the seller-lessee recognizes only the portion of the gain attributable to the rights actually transferred to the buyer. If the transfer fails the sale criteria, the entire transaction is treated as a financing arrangement.
How do straight-line and double-declining-balance depreciation affect financial statements differently?
Straight-line and double-declining-balance depreciation produce the same total expense over an asset's life but allocate it differently. DDB front-loads expense, resulting in lower income and assets in early years, with a crossover point occurring around mid-life.
What is GIPS and why should I care about it for CFA Level I?
GIPS is a voluntary global standard for presenting investment performance. Key principles: firm-wide compliance, inclusion of all portfolios in composites, time-weighted returns, and prohibition of cherry-picking results.
How do I use the Gordon Growth Model to value a stock? It seems too simple to actually work.
The Gordon Growth Model values a stock as V₀ = D₁/(r-g). While seemingly simple, it works well for mature companies with stable dividend growth but breaks down when growth approaches the required return or for non-dividend payers.
How do I calculate diluted EPS using the treasury stock method and if-converted method?
Diluted EPS uses the treasury stock method for options/warrants (assuming exercise and share repurchase) and the if-converted method for convertible bonds/preferred stock. Always test for anti-dilution by comparing per-share impact to basic EPS.
How do stock dividends and stock splits affect the EPS calculation?
Stock dividends and stock splits are treated retroactively in EPS calculations, as if they occurred at the beginning of the earliest period presented. All prior-period EPS figures must be restated. This is because these events do not raise cash or change economic ownership. When combined with share issuances for cash, apply the split factor retroactively but weight the issuance from its actual date.
How does bond premium amortization work under the effective interest method, and why does interest expense decrease over time?
Under the effective interest method, interest expense equals the carrying value times the market yield. For a premium bond, the carrying value decreases each period as the premium is amortized, causing interest expense to decline while the fixed coupon stays the same.
What does a p-value actually mean? I keep getting the interpretation wrong on practice exams.
The p-value is the probability of obtaining results at least as extreme as observed, assuming the null hypothesis is true. It is NOT the probability that the null is true — this is the most common misinterpretation on the CFA exam.
How do you compare municipal bond yields to taxable bonds? I keep getting tax-equivalent yield wrong.
Municipal bonds are typically exempt from federal income tax, so direct yield comparisons are misleading. Use the tax-equivalent yield formula: TEY = Muni Yield / (1 - Marginal Tax Rate) to compare fairly.
How do inventory write-downs work under IFRS vs US GAAP, and can they be reversed?
IFRS uses lower of cost and NRV (with reversals allowed), while US GAAP uses lower of cost or market (replacement cost bounded by NRV ceiling and NRV minus normal profit floor, with no reversals). This creates different write-down amounts and subsequent-period impacts.
What determines whether an asset or liability is classified as current vs. noncurrent?
Classification as current depends on whether the item will be realized, sold, consumed, or settled within the normal operating cycle or 12 months. The operating cycle can exceed 12 months for certain industries. IFRS and US GAAP differ on how refinancing agreements affect liability classification.
How do you apply the if-converted method to convertible bonds for diluted EPS?
The if-converted method for convertible bonds assumes conversion at the beginning of the period. Add back after-tax interest expense to the numerator and add the conversion shares to the denominator. For mid-year issuances, weight the adjustments from the issue date. For actual conversions during the year, apply the if-converted assumption only for the pre-conversion period.
How does the IFRS 9 expected credit loss model work for impairment of financial instruments?
The IFRS 9 expected credit loss model uses a three-stage approach. Stage 1 instruments use 12-month ECL, while Stages 2 and 3 use lifetime ECL. Instruments move between stages based on whether credit risk has significantly increased since initial recognition.
Can someone walk through a realistic CFA ethics case study? I need practice identifying violations.
This case study identifies five violations across one week: front-running (VI-B), unfair dealing (III-B), use of material nonpublic information (II-A), undisclosed referral fees (VI-C), and CFA designation misuse (VII-B).
What framework should I use for industry analysis on the CFA exam?
The CFA Level I curriculum emphasizes Porter's Five Forces and the Industry Life Cycle Model. Porter's framework assesses competitive intensity, while the life cycle model identifies where an industry stands in its evolution.
How are foreign currency transactions recorded and what exchange rate do you use?
Foreign currency transactions are initially recorded at the spot rate on the transaction date. Monetary items (receivables, payables) are remeasured at the closing rate on each balance sheet date, with gains/losses in the income statement. Non-monetary items at historical cost are not remeasured.
What's the difference between single-step and multi-step income statements, and which is better for analysis?
Single-step income statements lump all revenues and expenses together for one net income calculation, while multi-step formats provide intermediate measures like gross profit and operating income. Analysts strongly prefer multi-step because it reveals the sources and sustainability of profitability.
How do you identify anti-dilutive securities and exclude them from diluted EPS?
Anti-dilutive securities increase EPS when included and must be excluded from diluted EPS. Options are anti-dilutive when exercise price exceeds market price. Convertible securities are anti-dilutive when their per-share impact exceeds basic EPS. Securities must be ranked from most to least dilutive and tested sequentially, stopping when a security increases diluted EPS.
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