Financial Statement Analysis

CFA® Level II, published weight 10–15%. Intercorporate investments, pensions, multinationals, report quality.

What the outline covers

Intercorporate Investments
Employee Compensation: Post-Employment and Share-Based
Multinational Operations
Analysis of Financial Institutions
Evaluating Quality of Financial Reports
Integration of Financial Statement Analysis Techniques

Sample questions

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Question 1

An investor holds 30% of an investee and exercises significant influence. Compared with proportionate consolidation, the equity method will report:

A. Higher revenue and higher total assets
B. The same net income but lower revenue and lower total assets
C. Lower net income and higher total assets
D. The same revenue but different net income

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B. The equity method reports a single line for both the investment and the share of income. Net income is identical; revenue and assets are not grossed up.

Reading: FSA — Intercorporate Investments, LOS 1.c

Question 2

A sponsor lowers the discount rate used to value its defined benefit obligation. All else equal, this will:

A. Decrease the PBO and improve funded status
B. Increase the PBO and worsen funded status
C. Leave the PBO unchanged
D. Increase plan assets

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B. A lower discount rate raises the present value of future benefits, increasing the PBO and reducing the funded status.

Reading: FSA — Employee Compensation: Post-Employment, LOS 2.c

Question 3

A subsidiary’s functional currency is its local currency. The appropriate translation method and the treatment of the resulting adjustment are:

A. Temporal method; gain or loss in net income
B. Current rate method; adjustment in other comprehensive income
C. Temporal method; adjustment in OCI
D. Current rate method; gain or loss in net income

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B. When the functional currency is the local currency, the current rate method applies and the cumulative translation adjustment goes to OCI, not income.

Reading: FSA — Multinational Operations, LOS 3.b

Question 4

Which of the following is the strongest indicator of low reporting quality rather than merely low results quality?

A. Declining margins across several periods
B. A large one-off restructuring charge
C. Frequent, unexplained changes in accounting estimates that raise reported income
D. A cyclical downturn in revenue

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C. Reporting quality concerns the faithfulness of the numbers. Repeated income-increasing estimate changes point to biased reporting, not just poor performance.

Reading: FSA — Evaluating Quality of Financial Reports, LOS 5.b

Question 5

In analysing a bank, which ratio most directly addresses the adequacy of loss absorption capacity?

A. Common equity tier 1 ratio
B. Net interest margin
C. Cost-to-income ratio
D. Loan-to-deposit ratio

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A. CET1 measures the highest-quality capital against risk-weighted assets, which is precisely the loss-absorption question. The others address profitability or funding.

Reading: FSA — Analysis of Financial Institutions, LOS 4.b

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