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Level 1

Study Session 8
Notes By James Haischer, CFA
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Key:
New LOS for 2000

Number
1 A.

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Report Error/ Typo:

Modified LOS from 1999

LOS

Old LOS from 1999

Answer

Accounting Income and Assets: The Accrual Concept

1 A. a)

Discuss different revenue

recognition methods and
their implications for
financial analysis.

At time of sale: revenue recognized at time of sale;

Percentage of Completion: recognizes revenues in proportion to work
completed
Completed Contract: recognizes revenues and costs at end of contract period
Installment: recognizes revenue as received in payments.
Cost recovery: cash receipts are accounted for recovery of costs until all costs
are covered then revenue is recognized.

1 A. b)

Describe components of
net income.

Sales
Cost of Goods Sold
=
Gross Margin
Operating Expenses
=
Operating Income aka EBIT (Earnings Before Interest & Taxes)
Interest & Taxes
Discontinued operations, extraordinary items, effects of accounting changes
=
Net Income

1 A. c)

Discuss ways that

management can
manipulate earnings by
using its discretion in
presenting financial
statements.

*Deferral and accrual of expenses or revenue.

*Different methods/lives of amortization/depreciation.
*Expensing vs capitalization of certain expenses.
*Timing of recognization of revenue earning process.
*Classification of items in income statement such as extraordinary events.

1 A. d)

Identify the appropriate

revenue recognition
method, given the status
of completion of the
earning process and the
assurance of payment.

At time of sale: earning process complete; payment assured.

Percentage of Completion: earning process incomplete; payment assured.
Completed Contract: earning process complete; payment assured.
Installment: earning process incomplete; payment assured.
Cost recovery: earning process incomplete; payment not assured.

1 A. e)

Calculate and analyze the

effects on the financial
statements of the choice
among revenue
recognition methods in
accounting for long-term
contracts.

Completed Contract Method: revenue delayed and then recognized in lump

sum.
Percentage of Completion Method: revenue smoothed, recognized as a stream
over life of project.

Learning Outcome Statements Copyright 1999, Level 1 CFA Study Guide. Reproduced and Republished with permission from
the Association for Investment Management and Research. All Rights Reserved. The Association for Investment Management and
SM
SM
Research (AIMR ) does not endorse, promote, review, or warrant the accuracy of the products or services offered by
Pass101.com, Inc. Notes Copyright 1999, Pass101.com, Inc. All Rights Reserved.

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Level 1

Study Session 8
Notes By James Haischer, CFA

Number
1 A. f)

LOS
Describe the types and
analysis of unusual or
infrequent items,
discontinued operations,
extraordinary items, and
accounting changes.

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Answer
Key is to identify a firms permanent income!
Separate recurring from nonrecurring items.
Unusual items: either unusual in nature or infrequent, but not both. Reported as
an operating item. Example: impairment or restructuring cost.
Discontinued operations: discontinuation or sale of business segment.
Extraordinary items: unusual in nature and infrequent in occurrence and are
material in amount. Example: gains and losses on the early retirement of debt.
Accounting Changes: cumulative impact on prior period earnings, net of tax.
Example: adoption of new accounting standards.

1 A. g)

Describe the components

of the balance sheet.

Assets: Cash, Marketable securities, Accounts receivable, Inventory, Prepaid

expenses, Deferred Taxes, Fixed assets, Capital leases, Investments, Prepaid
pension costs, Intangible assets.
Liabilities: Accounts payable, Current liabilities, ST debt, Capital leases,
Pension & postretirement liabilities, LT Debt, Minority interest.
Equity: Shareholders equity, Comprehensive income adjustments; translations,
minimum pension liabilities, unrealized gains/losses.

1 A. h)

1 B.

Describe the format,

classification, and use of
each component of the
Statement of
Shareholders' Equity.

Preferred Stock
Common Stock
Treasury Stock
Retained Earnings

Analysis of Cash Flows

1 B. a)

Explain the relevance of

cash flows to analyzing
business activities.

To predict the firms ability to generate cash from current operations and examine
trends in investing and financing activities.

1 B. b)

Describe the elements of

operating cash flows.

Direct Method: Cash flow classified by collections and payments.

Indirect Method: Net income adjusted for noncash items such as depreciation,
accruals, reclassification of items to investing and financing sections.

1 B. c)

Describe the elements of

investing cash flows.

Purchases/Sales of plant assets

Investments in affiliates
Short-term investment changes

1 B. d)

Describe the elements of

financing cash flows.

Dividends
Changes in debt
Common stock issuance
Treasury stock changes

1 B. e)

Classify a particular item

as an operating cash flow,
an investing cash flow, or
a financing cash flow.

See above

Learning Outcome Statements Copyright 1999, Level 1 CFA Study Guide. Reproduced and Republished with permission from
the Association for Investment Management and Research. All Rights Reserved. The Association for Investment Management and
SM
SM
Research (AIMR ) does not endorse, promote, review, or warrant the accuracy of the products or services offered by
Pass101.com, Inc. Notes Copyright 1999, Pass101.com, Inc. All Rights Reserved.

Sponsorship Available

Level 1

Study Session 8
Notes By James Haischer, CFA

Number
1 B. f)

LOS

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Answer

Present, explain, and

See questions
interpret a statement of
cash flows using the direct
and indirect methods.

Key:
New LOS for 2000

Modified LOS from 1999

Old LOS from 1999

Learning Outcome Statements Copyright 1999, Level 1 CFA Study Guide. Reproduced and Republished with permission from
the Association for Investment Management and Research. All Rights Reserved. The Association for Investment Management and
SM
SM
Research (AIMR ) does not endorse, promote, review, or warrant the accuracy of the products or services offered by
Pass101.com, Inc. Notes Copyright 1999, Pass101.com, Inc. All Rights Reserved.