What CFA Level 1 Financial Reporting & Analysis actually tests
FRA is 11-14% of the Level 1 exam:
| Area | What it covers |
|---|---|
| Reporting Framework | IFRS vs. US GAAP, qualitative characteristics, conceptual framework |
| Income Statement | Revenue recognition, EPS, comprehensive income |
| Balance Sheet | Current vs. non-current items, working capital, equity |
| Cash Flow Statement | Direct vs. indirect method, free cash flow |
| Financial Analysis | Liquidity, solvency, profitability, activity ratios, DuPont decomposition |
| Inventories | FIFO, LIFO, weighted average, LIFO reserve |
| Long-Lived Assets | Depreciation methods, impairment, revaluation |
| Income Taxes | Deferred tax assets/liabilities, valuation allowance |
| Non-Current Liabilities | Bond accounting, lease classification, pension obligations |
| Intercorporate Investments | Held-to-maturity, available-for-sale, trading, equity method, consolidation |
Recent context
As of 2026, formal convergence between IFRS and US GAAP has effectively ended — the FASB and IASB now run independent standard-setting agendas rather than joint projects, meaning the real, structural differences between the two frameworks (inventory methods, revaluation, lease and pension treatment) aren't going away. That's exactly the material Level 1 tests, and it's not a temporary gap that's about to close.
Sample question: DuPont ROE Decomposition
Financial Reporting & Analysis · Medium difficulty
A company has a net profit margin of 8%, total asset turnover of 1.5×, and a financial leverage ratio (assets/equity) of 2.0×. Using the DuPont decomposition, what is the company's Return on Equity?
A. 12%
B. 16%
C. 24%
D. 30%
The correct answer is C — 24%.
DuPont ROE = Net Profit Margin × Asset Turnover × Financial Leverage = 8% × 1.5 × 2.0 = 24%. The decomposition shows this ROE is being driven meaningfully by leverage (2.0×), not just operating profitability — a distinction that matters when comparing two companies with the same headline ROE but very different risk profiles.
DuPont ROE = Net Profit Margin × Asset Turnover × Financial Leverage = 8% × 1.5 × 2.0 = 24%. The decomposition shows this ROE is being driven meaningfully by leverage (2.0×), not just operating profitability — a distinction that matters when comparing two companies with the same headline ROE but very different risk profiles.