Financial Reporting and Analysis • Formulas CFA® Level 1 – 365 Financial Analyst 25/4/25, 20:00

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Financial Reporting and Analysis • Formulas CFA® Level 1

Ivan Kitov 

Need an all-in-one list with the Financial Reporting and Analysis formulas included in the CFA® Level 1
Exam? We have compiled them for you here. The relevant formulas have been organized and presented
by chapter. In this section, we will cover the following topics — Basics of Accounting, Income Statements,
Balance Sheets, Cash Flow Statements, Financial Analysis Techniques, Inventories, Income Taxes, Current
and Non-current Liabilities and Assets.

1. Basics of Accounting

Basic Accounting Equation

Assets = Liabilities + Equity

Net income

N et Income = Revenue − Expenses

Gross profit (income)

Gross prof it (income) = Revenue − Cost of goods sold

Operating profit (income)

Operating prof it (income) = P rof it bef ore interest and tax (PBIT ) = Gross prof it − Operating expenses

Profit Before Tax (PBT)

P rof it bef ore tax (PBT ) = PBIT − Interest expense

Net profit (income)

N et prof it (income) = PBT − T ax expense = Operating prof it − Interest Expense − T ax expense

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Financial Reporting and Analysis • Formulas CFA® Level 1 – 365 Financial Analyst 25/4/25, 20:00

2. Understanding Income Statements

Basic Earnings per Share (EPS)

N et Income − P ref erred Dividends

Basic EPS =
W eighted average number of common shares outstanding

Diluted Earnings per Share (DEPS)

Adjusted income available f or common shares

Diluted EPS =
W eighted average common and potential common shares outstanding

[N et Income − P ref erred dividends] + [Convertible pref erred dividends] + [Convertible debt inter
Diluted EPS =
(W eighted average shares) + (Shares f rom conv. pfd. shares) + (Shares f rom conversion of . conv. debt) + (Shares i

Gross profit margin

Gross prof it
Gross prof it margin =
Revenue

Net profit margin

N et prof it
N et prof it margin =
Revenue

3. Understanding Balance Sheets

Liquidity Ratios

Current ratio

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Financial Reporting and Analysis • Formulas CFA® Level 1 – 365 Financial Analyst 25/4/25, 20:00

Current assets
Current ratio =
Current liabilities

Quick ratio

Cash + Short–term marketable securities + Receivables

Quick ratio =
Current liabilities

Cash ratio

Cash + Short–term marketable securities

Cash ratio =
Current liabilities

Solvency Ratios

Long-term debt-to-equity

Long–term debt
Long–term debt–to–equity =
T otal equity

Total debt-to-equity

T otal debt
T otal debt–to–equity =
T otal equity

Debt ratio

T otal debt
Debt ratio =
T otal assets

Financial leverage

T otal assets
F inancial leverage =
T otal equity

Free Cash Flow Measures

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Financial Reporting and Analysis • Formulas CFA® Level 1 – 365 Financial Analyst 25/4/25, 20:00

FCFF = CFO + [Int × (1 − tax rate)] − FCInv

CFO = Cash flow from operations

Int = Cash interest paid
FCInv = Fixed capital investment (net capital expenditures)

FCFF = N I + NCC + [Int × (1–tax rate)] − FCInv − W CInv

N I = Net income
NCC = Non-cash charges (depreciation and amortization)
Int = Cash interest paid
FCInv = Fixed capital investment (net capital expenditures)
W CInv = Working capital investment

FCFE = CFO − FCInv + N et borrowing

CFO = Cash flow from operations

FCInv = Fixed capital investment (net capital expenditures)
N et borrowing = Debt issued – debt repaid

Cash Flow Ratios

Performance Ratios
Cash flow-to-revenue

Cash f low f rom operations

Cash f low–to–revenue =
Revenue

Cash-to-income

Cash f low f rom operations

Cash–to–income =
Operating income

Cash return-on-assets

Cash f low f rom operations

Cash return–on–assets =
Average total assets

Cash return-on-equity

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Financial Reporting and Analysis • Formulas CFA® Level 1 – 365 Financial Analyst 25/4/25, 20:00

Cash f low f rom operations

Cash return–on–equity =
Average total equity

Cash flow per share

CFO − P ref erred dividends

Cash f low per share =
W eighted average number of common shares

4. Understanding Cash Flow Statements

Cash Flow Ratios

Coverage Ratios
Debt Coverage

Cash f low f rom operations

Debt coverage =
T otal debt

Interest Coverage

CFO + Interest paid + T axes paid

Interest coverage =
Interest paid

Reinvestment ratio

Cash f low f rom operations

Reinvestment ratio =
Cash paid to acquire long–term assets

Debt payment

Cash f low f rom operations

Debt payment =
Cash paid to repay long–term debt

Dividend payment

Cash f low f rom operations

Dividend payment =
Dividends paid

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Financial Reporting and Analysis • Formulas CFA® Level 1 – 365 Financial Analyst 25/4/25, 20:00

Investing and financing ratio

Cash f low f rom operations

Investing and f inancing ratio =
Cash outf lows f rom investing and f inancing activities

5. Financial Analysis Techniques

Activity Ratios
Annual sales
Receivables turnover =
Average receivables

Meaning: The efficiency of a company in collecting its trade receivables

365
Days of sales outstanding =
Receivables turnover

Meaning: The average number of days a company takes to collect its receivables from clients

Cost of goods sold

Inventory turnover =
Average inventory

Meaning: The efficiency of a company in terms of inventory management

365
Days of inventory on hand =
Inventory turnover

Meaning: The average inventory processing period

P urchases
P ayables turnover =
Average trade payables

Meaning: The efficiency of a company in allowing trade credit to suppliers

365
N umber of days of payables =
P ayables turnover ratio

Meaning: The average number of days a company takes to pay its suppliers

Revenue
F ixed assets turnover =
Average net f ixed assets

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Financial Reporting and Analysis • Formulas CFA® Level 1 – 365 Financial Analyst 25/4/25, 20:00

Meaning: The efficiency of a firm in utilizing its fixed assets

Revenue
W orking capital turnover =
Average working capital

Meaning: The efficiency of a firm in managing its working capital (current assets – current liabilities)

Revenue
T otal assets turnover =
Average total assets

Meaning: The efficiency of a firm in using its total assets to create revenue

Cash conversion cycle = Days of sales outstanding + Days of inventory on hand − N umber of days of payables

Meaning: The number of days a company takes to convert its investments in inventory and other resources into cash flows from sales

Revenue
Equity turnover =
Average total equity

Meaning: The efficiency of a firm in utilizing equity to create revenue

Liquidity Ratios

Current assets
Current ratio =
Current liabilities

Meaning: Ability to meet current liabilities (with total current assets)

Cash + M arketable securities + Receivables

Quick ratio =
Current liabilities

Meaning: Ability to meet current liabilities (with total current assets, excluding inventory)

Cash + M arketable securities

Cash ratio =
Current liabilities

Meaning: Ability to meet current liabilities (with cash and marketable securities only)

Cash + M arketable securities + Receivables

Def ensive interval =
Average daily expenditure

Meaning: The number of days a company can cover its average daily expenses with the use of current liquid assets only

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Financial Reporting and Analysis • Formulas CFA® Level 1 – 365 Financial Analyst 25/4/25, 20:00

Solvency Ratios

T otal debt
Debt–to–equity =
T otal shareholder’s equity

Meaning: Debt as a percentage of total equity

T otal debt
Debt–to–capital =
T otal debt + T otal shareholder’s equity

Meaning: Debt as a percentage of total capital

T otal debt
Debt–to–assets =
T otal assets

Meaning: Debt as a percentage of total assets

Average total assets

F inancial leverage =
Average total equity

Meaning: An indicator of a company’s debt financing usage

Earnings bef ore interest and taxes

Interest coverage =
Interest payments

Meaning: The ability to cover interest expenses

Earnings bef ore interest and taxes + Lease payments

F ixed charge coverage =
Interest payments + Lease payments

Meaning: The ability to cover interest and lease expenses

Profitability Ratios

Gross prof it
Gross prof it margin =
Revenue

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Financial Reporting and Analysis • Formulas CFA® Level 1 – 365 Financial Analyst 25/4/25, 20:00

Revenue

Meaning: Gross profitability as a percentage of total revenue

Operating income (EBIT )

Operating prof it margin =
Revenue

Meaning: Operating profitability (before interest and tax) as a percentage of total revenue

EBT
P re–tax margin =
Revenue

Meaning: Operating profitability (before tax) as a percentage of total revenue

N et income
N et prof it margin =
Revenue

Meaning: Net profitability as a percentage of total revenue

N et income
Return on assets (ROA) =
Average total assets

Meaning: Net profitability (excluding interest and taxes) as a percentage of total invested funds

Operating prof it (EBIT )

Operating return on assets (ROA) =
Average total assets

Meaning: Net profitability (including interest and taxes) as a percentage of total invested funds

Operating prof it (EBIT )

Return on total capital =
Average total capital

Meaning: Operating profitability as a percentage of total capital

N et income
Return on equity (RoE) =
Average equity

Meaning: Net profitability as a percentage of total equity

Valuation Ratios

N et Income − P ref erred dividends

Earnings per Share (EPS) =
Outstanding number of common shares

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Financial Reporting and Analysis • Formulas CFA® Level 1 – 365 Financial Analyst 25/4/25, 20:00

Meaning: Income earned per 1 common share outstanding

Share price
P rice earnings (P /E) ratio =
Earnings per share (EPS)

Meaning: The price that investors are willing to pay per $1 of earnings

M arket capitalization
P /E ratio (company wide) =
N et income

Meaning: Total price that investors are willing to pay for a company’s Net income

Dividend per share

Dividend yield =
Current share price

Meaning: The “portion “of a share price that is distributed as dividends

N et income − Dividends declared

Retention rate (RR) =
N et income

Meaning: The “portion” of Net income that is reinvested in the company

Dividends declared
Dividend payout =
N et income

Meaning: The “portion” of Net income that is distributed as dividends

Sustainable growth rate (g) = RR × ROE

Meaning: Equity growth rate

DuPont Analysis

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Financial Reporting and Analysis • Formulas CFA® Level 1 – 365 Financial Analyst 25/4/25, 20:00

Inventories

Where:
FIFO = First-in, First-out method
LIFO = Last-in, First-out method

Ending inventory = Beginning inventory + P urchases − Cost of goods sold (COGS)

Cost of goods sold (COGS) = Beginning inventory + P urchases − Ending inventory

F IFO inventory = LIFO inventory + LIFO reserve

Delta Cash = LIFO reserve × T ax rate

Delta Cash = Excess cash saved on the valuation method

F IFO retained earnings = LIFO retained earnings + LIFO Reserve × (1 − T ax rate)

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Financial Reporting and Analysis • Formulas CFA® Level 1 – 365 Financial Analyst 25/4/25, 20:00

F IFO COGS = LIFO COGS − (Ending LIFO reserve − Beginning LIFO reserve)

Long-Lived Assets

Cost − Salvage (residual) value

Straight–line depreciation expense =
U sef ul lif e

2 × (Cost − Accumulated depreciation)

Double–declining balance(DDB) depreciation expense =
U sef ul lif e

Double-declining balance (DDB) depreciation expense = Double the straight-line depreciation rate

Cost − Salvage value

U nits of production depreciation expense = × Output units in the period
Lif e in output units

Ending PPE net book value = (Original) Cost − Accumulated depreciation

Accumulated depreciation
Average age =
Annual depreciation expense

Historical cost
T otal usef ul lif e =
Annual depreciation expense

Ending PPE net book value

Remaining usef ul lif e =
Annual depreciation expense

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Income tax expense = T axes P ayable + Δ Def erred T ax Liabilities (DT L) − Δ Def erred T ax Assets (DT A)

Income tax expense

Eff ective tax rate =
P re–tax income

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