📊 Financial Statement Analysis

Financial Ratios — Liquidity, Profitability & Solvency Formulas

Complete guide to financial ratios: current ratio, ROE, debt-to-equity, profit margins, and more. Formulas, interpretation, and CFA Level 1 practice.

Key Concepts

Revenue Recognition

IFRS 15 / ASC 606: 5-step model. Recognize when performance obligation satisfied and control transfers to customer.

Expense Recognition (Matching)

Expenses matched to the revenues they help generate. Period costs expensed immediately; product costs match to sales.

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Formulas

From this module

Basic EPS

Basic EPS = (Net Income - Preferred Dividends) / Weighted Avg Common Shares

Where: Only common shareholders' income

Diluted EPS (Convertible Bonds)

Diluted EPS = (NI - PD + Interest×(1-t)) / (WACS + New shares from conversion)

Where: If-converted method: add back interest, add converted shares

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Master Formula Sheet -- Financial Statement Analysis

Basic EPS

EPS = (NI - Pref Div) / Wtd Avg Shares

Earnings per common share

Diluted EPS

Diluted EPS = (NI - Pref Div + Convertible Interest) / (Shares + Dilutive Securities)

Treasury stock method for options

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Decision Frameworks

Capitalize or Expense?

Use when:

  • Capitalize: future economic benefit expected (>1 year), cost reliably measurable
  • Expense: no future benefit, or benefit is uncertain

Avoid when:

  • Aggressive capitalization to inflate current profits — a red flag for earnings quality

Test Your Understanding

Capitalizing an expenditure rather than expensing it will initially:

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Full cheat sheet, flashcards, mind map, and quiz for Analyzing Income Statements.

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All 80+ CFA Level 1 formulas in one searchable reference page.

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