The fourth subject in CFA Level-1 exam is Financial Reporting & Analysis (FRA). It also, like with Ethics & Professional Standards, has a weightage of 15%.
Two major standards are used in Accounting - IFRS (International Financial Reporting System) & US-GAAP (Generally Accepted Accounting Principles). This subject of FRA in CFA Level-1 exam focuses on IFRS to analyze the various financial statements. The main topics within this subject are
To analyze whether a stock is overvalued or undervalued, FCFE (Free Cash Flow to Equity) method is used with CAPM model. In case of a firm, FCFF (Free Cash Flow to Firm) is used with WACC model. The data points to perform these calculations are obtained from the three very important financial statements - balance sheet, profit-and-loss statement and cash flow statement. Thus, one can notice that FRA is a very important subject, covering very vital topics.