Step by Step in the CFA terms and language
CFA is packed full of a lot of terms to be learned. We were taking it in chunks and looking back now, I realized that a lot was learned in the Corporate Financial Accounting Course. There is a need to take time to understand and assimilate all that was learned.
The 3rd Financial Statement
The 3rd Financial statement learned is the Change in Owner’s equity. From the discussions and learning here, the investors in a particular company will be able to understand how well their investment is being nurtured and grown or is being destroyed. The example talked about how a company can retain their earnings aka retained earnings to grow the initial contributed capital. This statement captures the changes either increase or decrease the Owner’s equity. This statement shows if Equity has grown by additional capital injection or if it has shrunk. One of the four basic financial statements is a statement of changes in equity. It functions similarly to the statements of changes in owner’s equity for sole proprietorships, partners’ equity for partnerships, shareholders’ equity for corporations, and taxpayers’ equity  for governmental financial statements.
The statement describes changes in a company’s share capital, accumulated reserves, and retained earnings for the reporting period. It details changes in the ownership stake in the company as well as how retained earnings or surplus is used from one accounting period to the next. Typical line items include operating gains or losses, dividends paid, share issuance or redemption, revaluation reserve, and any other items charged.
Owner’s Equity= Asset – Liability
The Fourth Financial Statement
The 4th Financial Statement- Cash Flow Statement or statement of cash flow.
This reports the Company’s Cash activities generated from the Operating Activities, Investing Activities, and financial activities.
The cash inflow and outflow of the business are essentially the focus of the cash flow statement. The statement of cash flows is a useful analytical tool for assessing a company’s short-term viability, particularly the Company’s capacity to pay its debts.
Examples of people that are interested in cash flow statements are:
- Accounting staff who must determine if the company can afford wages and other immediate costs
- Prospective lenders or creditors.
- Potential investors who must determine whether the business is financially stable
- Employees or contractors who want to know if the organization can afford remuneration
- Company Directors oversee the company’s governance and are accountable for making sure that the company does not conduct business with insolvent shareholders.
The Fifth Financial Statement AKA the Plus 1
The fifth financial statement otherwise known as the Plus One is Notes to Financial Statements
Notes to financial statement capture specific assumptions that accountants used to prepare a company’s income statement, balance sheet, statement of changes in financial position, or statement of retained earnings are disclosed in the notes to the financial statements. To comprehend these materials in their entirety, you must read the notes.
The “basis for accounting”—whether cash or accrual rules were used to create the documents—and the techniques utilized to report amortization/depreciation charges are often explained in the first notes in the series.
The remaining notes further describe the method used to calculate the figures. The reader is provided with the knowledge necessary to conduct an in-depth analysis.
Highlighting and summarizing the Financial Statements
In summary, Financial Statements are Four plus one namely:
- Statement of Financial Position OR Balance Sheet
- Statement of Profit OR loss aka. Income statement
- Statement of Change in Owner’s equity
- Cash Flow Statement
- The Plus One- Notes to the Financial Statement
We spent time during the first intensive week learning how to first recognize an accounting transaction (there must be an exchange of value) and post a transaction into an Account. The rule of double entry. Understand increase and decrease based on the impact of the account. Use the positive + sign to represent increases and use the negative – sign to represent decreases. The word Debit or Credit must never be used in these postings. The importance is understanding how the accounting transaction has impacted 5 identified Accounts namely:
- the Assets
- Owners’ Equity
- Revenue and
This was just the beginning of the journey into the CFA World. These basic terms came in handy when we were trying to understand the 10 years’ financial statements of Lufthansa Group and Turkish Airlines during the Capstone Project. The Capstone Project buhaha is another matter for another day. As we prepare for the CFA exams coming up in less than 1 Month, the 19th of November, it is expected that all Terms learned during the entire CFA journey must be internalized, assimilated, and understood to stand a chance in answering the required questions on CFA.