Week 7: Financial Reporting & Analysis

Last week hopefully provided a little bit of a breather compared to Economics. This week is going to be fairly light as well in terms of effort required. Please do fill in your week 6 progress report if you have not already. I do realize that it is extremely difficult to keep up the enthusiasm week after week as you press through this program. In many ways the psychology needed to finish the CFA® Program is similar to that of a marathon runner. Whether you have ever attempted a marathon or not, you can imagine that it is a pretty uncomfortable experience as you are in the midst of it. The brain is constantly looking for a way out, and there are always plenty of good reasons to stop running.

The best running advice that I have ever received (that applies equally well to studying for the CFA® Program) is to focus your mind on running to the next lamp post and nothing else. If you start dwelling on how many miles/kilometers you have yet to run you are much more likely to give up, but pretty much no matter how exhausted you are, you can probably get yourself past the next lamp post through will power, and then the next one and before you know it you are by the finish line.

In a similar fashion when studying for the CFA Program, if all you focus on is generating genuine curiosity about the answers to the current LOS that you are searching for, or how to answer an end of chapter question, and make this your entire focus, then you will get lost in time, and soon enough you will have mastered another reading, and then another one, and before you know it you are already more than 40% through the program (which is your current status if you have followed this program so far).

The week to come

This week we are covering the remaining 3 readings in the second Financial Reporting and Analysis (FRA) study session. The first 2 readings provide a walk through of Balance Sheets and Cash Flow Statements. The final reading is on financial analysis techniques (e.g. various ratios used for comparative purposes). We are also going to tackle the first reading in the third FRA study session about Inventories.

There are 87 end of chapter questions distributed over the 4 readings (just above 20 for each). You should therefore be able to work through your first iteration of the end of chapter questions for each reading in just above half an hour (maintaining the 1.5 minute per question pace required for the exam). Now in these readings you will find a very high concentration of formulas/ratios (particularly reading 28). It might seem like a lot of work, but I would recommend that you create a flashcard for every single financial ratio that you come across in the reading (any formula that is highlighted either in a heading, bold font or table). Practicing your ability to quickly recall these formula/ratio definitions flicking through your flashcards is a very efficient use of your time. Trust me, you will be grateful that you took time out to do this come exam time.

I realize that some of the formulas are a bit loosely defined (e.g. the capital adequacy ratio in reading 38, exhibit 19), I would still spell out what it says in the table on the flip side of the card.

  • As always please ensure that you write down and answer the LOS on flashcards as you work your way through each reading. The combined effort of question practice and LOS statement “hunting” will ensure that you are focused on seeking out the most important information as you progress through each reading. Also as described above, please continue to create flashcards with key concepts and formulas. As previously discussed you can either opt to create “old school” cardboard flash cards, or download a flash card app for your smartphone (a free and easy to use option is Quizlet). Personally I have yet to find a smartphone app that deals well with formulas, if you stumble across one, please let me know. Once done with each reading attempt the flashcards and make a note in your question log about the flashcards that you struggle to answer on your first attempt.
  • As always please ensure that you attempt the end of chapter questions for each reading in the underlying curriculum. As you answer the questions make a note of the most difficult ones (especially whenever you resort to guessing) in your question log. Review your answers thoroughly (particularly those that you got wrong) and add these questions to your question log as well.
  • Lastly the day after you have wrapped up each reading attempt only the challenging flashcards and end of chapter questions from your question log. Revise your answers and make a note of those that you are still struggling with. Continue this process for as many days as required until you have mastered all. Really work hard to understand the difficult questions, you do not just want to be able to recite the answer, you need to actually understand how it is derived.

Looking back over the previous weeks: Where did you conduct most of your studying? Have you managed to find a quiet spot where you can sit and focus undisturbed for hours? Or are you carrying out most of your studying on public transport or in a room full of distractions (TV, friends/family, internet access etc.) competing for your attention? The positive impact on your comprehension from having a supportive study environment should not be underestimated. If you haven’t committed to do so already, you owe yourself to seek out a supportive study environment for the reminder of the study program (e.g. an empty meeting room, library or a quiet room in your home).

Once you are done with this weeks tasks, don’t forget to fill in your week 7 progress report.

Talk to you next week!

In week 8 we are completing Financial Reporting and Analysis.

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