Community Q&A
Expert-verified answers to your financial certification questions. Ask, learn, and connect with fellow candidates.
CFA Level I Updated
How are financial assets classified under IFRS 9, and what determines whether gains go through P&L or OCI?
IFRS 9 classifies financial assets into amortized cost, FVOCI, or FVPL based on two tests: the business model test and the SPPI (contractual cash flow characteristics) test. If cash flows are not solely principal and interest, the asset defaults to FVPL regardless of business model.
What are the key differences between IFRS and US GAAP for asset impairment testing?
IFRS uses a one-step test comparing carrying value to recoverable amount (higher of fair value less costs of disposal and value in use), while US GAAP uses a two-step test with an undiscounted cash flow screen first. The biggest difference: IFRS allows impairment reversal, GAAP does not.
When and why do I use ANOVA instead of multiple t-tests?
ANOVA tests whether three or more group means are equal using a single F-test, avoiding the inflated Type I error rate from running multiple t-tests. The F-statistic compares between-group variance to within-group variance.
What is securitization and how do mortgage-backed securities (MBS) actually work?
Securitization is the process of transforming illiquid assets like individual mortgages into tradable securities. It involves pooling loans in a Special Purpose Vehicle and issuing tranched securities with different risk/return profiles.
What are the common adjustments when converting net income to cash flow from operations using the indirect method?
The indirect method starts with net income and adds back non-cash expenses like depreciation, removes non-operating gains and losses, and adjusts for working capital changes. Current asset increases are subtracted and current liability increases are added.
What are soft dollar standards, and when do they create an ethical problem?
Soft dollars use client commissions to pay for research and services. They are permissible only when the services directly benefit clients' investment decision-making process, are properly documented, and disclosed to clients.
Can someone apply Porter's Five Forces to a real industry? I need a concrete example.
Let's analyze the commercial airline industry using all five forces. It's one of the most illustrative examples because nearly every force works against profitability, explaining historically low returns on capital.
What is the difference between FCFF and FCFE, and when would you use each one?
FCFF is cash available to all capital providers (debt and equity), while FCFE is cash available only to equity holders after debt obligations. FCFF adds back after-tax interest to net income; FCFE adds net borrowing but excludes interest. FCFE equals FCFF minus after-tax interest plus net borrowing.
How do temporary differences create deferred tax assets and liabilities?
Deferred taxes arise because accounting and tax rules recognize items in different periods. A DTL appears when taxable income will be higher in the future (e.g., accelerated tax depreciation), while a DTA appears when taxable income will be lower in the future (e.g., warranty provisions recognized on books before tax deduction).
How do I interpret a simple linear regression output for CFA Level I?
Simple regression models Y = b₀ + b₁X + ε. The slope (b₁) is the change in Y per unit change in X, the intercept (b₀) is the Y value when X is zero, and R² measures the proportion of Y's variation explained by X.
How do duration and convexity measure interest rate risk? I need an intuitive explanation.
Duration and convexity together give you a complete picture of how a bond's price responds to interest rate changes. Think of duration as the first-order effect and convexity as the second-order correction.
What are the most important non-cash items that get adjusted in the cash flow statement, and where do they show up?
Non-cash items include depreciation, amortization, impairments, stock-based compensation, deferred taxes, bond discount/premium amortization, unrealized FX gains/losses, and gains/losses on asset sales. Each must be added back or subtracted in the indirect method to reconcile net income to actual cash flow.
How does the DuPont decomposition of ROE work? I need both 3-factor and 5-factor versions.
DuPont analysis breaks ROE into fundamental drivers. The 3-factor version decomposes ROE into profit margin, asset turnover, and leverage. The 5-factor version further separates tax burden and interest burden.
Is current yield ever misleading? When should I NOT rely on it?
Current yield is the quickest bond income metric but it has significant blind spots. It fails for deep discount bonds, short maturities, callable bonds, and floating-rate notes. YTM is generally the superior total return measure.
How do you calculate and interpret accounts payable turnover and days payable outstanding?
Accounts payable turnover equals COGS (or purchases) divided by average accounts payable. Days payable outstanding is 365 divided by payable turnover. A higher DPO means the company takes longer to pay suppliers, which reduces the cash conversion cycle but may signal liquidity concerns if excessive.
How do you capitalize an operating lease and what changes on the financial statements?
Capitalizing a lease means recording a right-of-use asset and lease liability equal to the present value of future lease payments. This increases both assets and liabilities on the balance sheet, raises leverage ratios, and shifts expense recognition from a flat rental charge to depreciation plus interest.
What does R-squared really tell you, and what are its limitations?
R² measures the proportion of Y's variation explained by the model. While ranging from 0 to 1, a high R² can be misleading in cases of spurious correlation, overfitting, or non-linear relationships.
How do days inventory outstanding feed into the cash conversion cycle, and what does a negative CCC mean?
Days inventory outstanding measures how long inventory sits before being sold, and feeds into the cash conversion cycle alongside DSO and DPO. A negative CCC means the company collects from customers before paying suppliers, which is a sign of strong working capital efficiency.
What is the sustainable growth rate and how is it connected to ROE and retention?
The sustainable growth rate (g = ROE x retention ratio) is the maximum rate a company can grow without issuing new equity. It connects directly to the Gordon Growth Model as the estimated growth input.
How should I interpret the interest coverage ratio, and what level indicates financial distress?
The interest coverage ratio divides EBIT by interest expense. A ratio below 2x is a warning sign, while above 5x indicates comfortable coverage. Context matters -- stable industries can operate with lower coverage than cyclical ones. Covenant triggers typically range from 2.0x to 3.5x.
Want unlimited access?
You've browsed several pages. Sign in to save your spot, bookmark questions, and unlock all 488 CFA Level I community questions plus expert-verified study materials.
Have a Question? Ask Our Experts
Register to ask questions, get expert-verified answers, and connect with fellow certification candidates preparing for CFA, FRM, CIA, CPA, and EA exams.