Five Reasons CFA Candidates Fail the CFA Exams (Part 5)

This post wraps up our five-part series on the most common hurdles facing candidates for the CFA designation. The first reason was too much time spent studying about studying, posted here. The second reason, planning a schedule around life and burnout, is a big one for those of us with a family and a full-time job. The difference between active and passive studying, is probably the biggest hurdle to success for most candidates. Last we looked at the myriad of resources available to candidates and using the right ones.

Today’s hurdle could just as easily have been titled, “I’m an ethical person, so why study ethics?” While the material on Ethics and Professional Standards is not the only one neglected by candidates, it is probably the most avoided. Sure, you need to have a good understanding of the entire curriculum but a look at the topic weights provided by the Institute makes it clear that some topics are a source of some major points.

Ethics, the easiest and most difficult topic on the exams


Candidates have a big opportunity with the ethics section though it still presents a problem for most. The topic area is tested at each level and is worth at least 10% of your exam points. The opportunity comes in the fact that the topic is the only one that really does not change much as you progress. You’ll see a couple of additional sections but these are relatively secondary against the core Code and Standards, which do not change. For candidates that give the topic its due at level I, the next two levels are that much easier.

The problem with the ethics material is twofold. Some candidates consider themselves to be fairly ethical people and so think that the answers on the exam will be intuitive. They neglect the topic and end up failing on the exam. Other candidates read the material, to the point of memorizing the Code and Standards, but neglect to do practice problems.

There are two types of ethics questions on the exam, those with no answer and those that seem to have two correct answers. You absolutely must practice the ethics problems provided by the Institute at the end of the chapters. You’ll be surprised by the level of ambiguity in some of the problems and how minute details can make the difference between one answer versus another. Don’t let the first time you are surprised by this be at the exam.

You need to know Financial Reporting & Analysis for the CFA designations??? Who Knew?

If not of equal importance to the ethics material, I would put FRA a close second. Unfortunately, a lot of candidates avoid this section as well. The material, much of it focused on accounting issues, may not be as interesting for some. It can also get extremely complicated and detailed on the level II exam.

Anyone that works in the industry, whether a charter holder or not, will tell you that understanding the financial statements is of the highest priority. As an analyst, you will need to develop models and an expert knowledge of how the company is reporting its business and how it all flows together. Spending extra time on the material will not only help you pass the exams, it will make your life so much simpler further down the road.

Equity and Fixed Income: The fun parts that aren’t so much fun anymore


Many candidates start the path to the charter because the love analyzing investments, whether in the equity or fixed income market. When they realize that it is a little more than just calculating the price-earnings ratio for the stock everyone is talking about… it becomes less fun.

The two topics can get extremely formula-intensive and most candidates only have experience in one of them. Avoid the temptation of only studying the topic in which you currently work or in which you think you want to work. First, you’ll need the points from each section to pass the exam. Also important though is the fact that you never know how your career will unfold or when you might want to work in another asset class.

Each level has its own idiosyncrasies and no one topic area will get you through every exam. The four topic areas above are extremely important but you still shouldn’t neglect the other five topics. Other posts on the blog talk about specific strategies for each level and can help you further focus your study plans.

Are there any hurdles to passing the exams that I forgot? What tripped you up the most? Let me know if you have any questions about the last five posts.

‘til next time, happy studyin’
Joseph Hogue, CFA

Last updated: March 26, 2018 at 21:23 pm

CFA Level 1 2018 Mock Exams, Question Bank, Summaries

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Mock exams (CFA Level 1 2 & 3)

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How to Use Mock and Practice Exams to Pass the CFA Exams

There may be a confusion in semantics here, I use the term ‘practice exam’ to mean a graded test over more than one topic area but not necessarily over all topics or for the six-hour exam format. ‘Mock’ exams, however, are graded tests that incorporate all topic areas at the CFA Institute area weightings and with the full six-hour time window. The difference in definitions may be minimal, but it’s important.

You should be using practice exams throughout your studying to gauge your retention of the material. Mock exams are particularly important for two reasons:

  • Getting used to sitting down for six-hours and putting your brain through some tough mental gymnastics. Don’t underestimate this. Fatigue can be a big problem with the exams and I have heard candidates say that by the last couple of hours, they were just writing in anything to get it over.
  • Mock exams will help you follow your progress through each topic area, refining your study in each topic where you are weak. The level 1 and 2 CFA exams have clearly defined topic weights with some areas clearly the focus of the exams.

Six Times a Charm

About nine weeks out from the exam, I would clear my dance schedule for Saturdays from 9am-4pm. Each Saturday I would take my laptop to the library and complete a mock exam using a question bank. After the exam was done, the scores for overall and within each topic area went into a spreadsheet to track my progress week to week.

Going to a quiet (non-home) location and completing the mock exam is important for another reason, state-dependent learning. This is a peculiar little trick your brain plays. State-dependent learning is a concept where you are better able to recall information when placed in similar situations in which you learned the info. We won’t go into all the biology, but you should study and practice in a similar environment where you will be taking the test. This means no more curling up in bed with the curriculum while the tv hums in the background.

I usually ended up taking at least six of these mock exams. As each progressed, I could build a confidence band around the estimate for my percentage in each topic area. While you may struggle on a particular exam and see your percentage fall in a topic, your averaged scores will be more accurate and reliable (gotta love that Quant Methods section). We know that no candidate with a score of 70% has ever failed the exam, so you should be aiming for something above this. I would aim for +80% in the core topics for the level 1 or 2 exams (Ethics, FRA, Equity, Fixed Income) while looking for at least 70-75% in the other topics. If my average in any topic fell below that target any given week, I would review it the next week.

This is in addition to other studying I would be doing these last couple of months. Flash-cards are a great way to quickly work through the material and review. With the time left, you may not be able to work through the official curriculum but might be able to make another pass through condensed study guides or summaries.

Coming down to the wire, you really need to fine-tune your program to make sure you get max points on the exam.

‘Til next time. Happy studyin’

Joe Hogue, CFA

You’re Waiting for the CFA Exam Results? Why?

Waiting for the CFA exam results can be excruciating for candidates but it may not matter as much as you think

Candidates worldwide are now waiting anxiously for their CFA exam results from the December test. That’s tens of thousands of candidates biting their nails and pacing the floor waiting for the CFA Institute to grade their exam.

It helps to have gone into the exams with the confidence of passing but even the most self-assured candidates will have a tough time until results are released. The Institute gives itself up to 60 days to release Level I exam result.

It seems like an incredibly long time to wait given the stress around the exams and the work you put in studying…but does it really matter? Of course it would be great to pass the CFA exam but is there a bigger picture you’re overlooking?

The Zen Approach to the CFA Exams

Maybe it doesn’t help much if you’re sitting there wondering your fate for the next year. The low pass rate on the CFA exam means just about every candidate is going to have some doubt as to whether they’ll be spending another 300 hours before next June.

But if you think about the long-term and how much one year really matters within your entire career, it starts to look a little less significant. For many candidates without the necessary work requirements for the charter, you may have years before you can use the designation and passing the exams certainly won’t mean an end to long hours studying how to be a better analyst.

Passing the exam may seem like your top goal in life right now but which is more important, barely making it through to the next level or truly mastering the material? Many of you are probably thinking it’s much better to pass the exam now and worry about mastering the material later but taking one more year to really understand the profession isn’t that bad an idea.

Putting all this in perspective helps to handle a CFA fail as well. I’m not trying to jinx your results but historically half the candidates won’t pass their exam. Getting the bad news means telling everyone that wished you well and dealing with it every time someone asks you how it went.

Resist the urge to find an excuse to blame for not passing the exam. You just weren’t ready and there’s nothing wrong with having to retake the exam. You’re in good company with most candidates having to repeat at least one level of the CFA. Look at it as an opportunity to not only get a better understanding of the curriculum but to learn from whatever study habits held you back from passing. Not only will you be ready to take on the exam next year but you’ll have learned to pull yourself up from defeat and push yourself harder in the future.

Besides being much more relaxed about waiting for CFA exam results, taking the ‘no worries’ perspective of the exam can actually help you study and prepare for next year. If you’re less worried about scoring points and figuring out the tricks to passing the exam, you’ll be better prepared to just study and learn the curriculum. Instead of spending hours ‘studying’ about studying for the exam and trying to game the system, you’ll spend that time more efficiently mastering the curriculum and becoming a better financial professional. And that’s what it’s all about!

‘til next time, just relax!
Joseph Hogue, CFA

Last updated: January 4, 2018 at 7:47 am

18 Amazing benefits FinQuiz Question-bank offers

FinQuiz Question Bank offers thousands of questions developed by our full time charter holders team members.

Compatibility

1. FinQuiz Question bank is compatible and works well with all operating systems (Android, Mac, PC, iPhone, iPad).

Creating a test:

2. Select your desired single or multiple study sessions or readings.
3. Further filter your Test through the following subcategories (see screen shot below)

4. Customize the Test (screen shot)

The Test:

5. Provide feedback (get answer from out team in no time)

6. Add your personal notes

7. Like Question

8. Zoom in (out)

9. Bookmark question

10. Review a single question’s explanation or all explanations

11. Select questions per page

12. Explanations are with references

13. Print your test

After the Test:

14. Review your selected questions and explanation

15. Search by Question ID  (Test summary screen shot below)

16. See how others are doing

17. Mistakes Overview (categorize your incorrect answers)

Performance Monitor:

18. Graphical view of your performance

Visit: www.finquiz.com/blog/shop

 

 

 

 

 

 

 

 

Computer based CFA Exam by CFA Institute

The recent launch of Question Bank on CFA Institute’s website gives us strong
confidence that computer based CFA exams will be offered in future, increasing
the frequency of exam dates and more freedom.

Our Lifetime Membership means complete freedom from purchase of CFA Prep Products. Customers who can spend a one-time $1050 get to choose which product they need for which exam level and when they need it – they get everything, always.

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10 Minute Review of CFA Ethics and Standards

Even with the change to topic area weights on the CFA exams this year, CFA Ethics and Professional Standards remain extremely important. It is a lot of material but fortunately doesn’t change much from year to year and you’ve got a real opportunity to carry over some points to each exam if you learn it early.

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5 Things I Wish I Knew about the CFA Level I Exam

Last week, I listed out the things I wish I knew before each level of the CFA exams. For the most part, these were the general ideas that relate well across all three levels. This week, I am reminiscing back to those bygone days of the Level I CFA exam.
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Study Groups | candidates probably making the same mistakes that you are making

One of the most difficult aspects of the CFA exams is that you are basically on your own. Sure there are study groups but these are composed of candidates in the same exam level and probably making the same mistakes that you are making.
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CFA Level 1 – Download Free Formula Sheet – PDF

Reading through the LinkedIn group lately, someone was asking about the difficulty of the CFA Level 1 exam and how it related to another professional exam. A couple of candidates commented how tough the material was and how much there was of it.

I just had to smile.
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CFA Level I Formula Sheet December 2016 – Download Free PDF

 

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Last updated: October 18, 2017 at 3:12 am

Best Places to Study for the CFA Exam

Find the perfect spot for studying the CFA curriculum to remember more on test day

Hopefully you’ve already found your perfect CFA study location but just in case you still need to find a place for that crucial last-month studying, I thought we would look at the best places to study. Put your mind to it and you could study just about anywhere but a great study location will help you master the material and get every point possible.

Even if you’ve already got a study spot for your CFA journey, read through the points to a great study location and ask yourself if your study place is all it could be. You might be able to improve your hideaway or might even decide to look for another.

What Makes a Great Study Location?

Most study locations have one of two problems, too many distractions…or not enough distractions. Sounds confusing but consider the phenomenon of state-dependent learning. This is the idea that are brains can be trained to recall things depending on an environment, whether you like it or not. Study exclusively in a super-quiet space and you might find it maddening trying to recall things on the test in the exam room. This means your ideal study location is going to be some place public but where people are generally quiet.

A great study location should be comfortable but not too much so. You should have access to a chair that won’t annoy you after a few hours on your backside but not one so comfortable that you fall asleep. Find somewhere with upright chairs (no beanbags!) and tables or desks.

You don’t have to keep just one study location for the exam. Using a few different places might help you deal with different distractions and recall the curriculum no matter where you study. Evaluate your study performance each day on the way home, deciding if you need a different location or what you can do at your current spot.

Besides finding the perfect study location, don’t overlook finding the perfect time to study as well. If you aren’t comfortable getting up early Saturday morning to study…you might want to start practicing. I used Saturday mornings for the month before the CFA exam to take practice exams and see where I needed more work in the curriculum. By the time I went to the real exam, it was like I sat for it several times already.

Comparing the Best Study Locations for CFA Candidates

Library – This one is always first on the list of best study locations. The public but quiet spot mimics a testing environment perfectly. Many libraries even have different options like cubicles, study rooms, tables and couches. If you don’t have a library nearby, a bookstore can work just as well.

Coffee Shops – these will test your ability to ignore distractions and the availability of caffeine is a big plus in my book. Every once in a while, someone will walk in that wants to be the center of attention and will throw you off your concentration. It’s not a great study location but nice for a change of pace.

Classrooms – can make for good study locations if the school will give you access during off-hours. You might not get as many distractions as you will during the CFA exam but the environment will be very similar otherwise.

Public park – Studying outside can be peaceful if you live in the suburbs but it’s tough to lay out everything and you’ll probably have to sit on the ground. Staying awake can be a problem, especially after studying a couple of hours, and the weather can interrupt your whole day.

Maybe it’s not strictly a study location but have you considered a study-vacation? This is my favorite CFA study strategy and usually reserved for the last week before the exam. Go somewhere for a few days or more, whether 100 miles away or thousands of miles. Turn off the cell phone and don’t check your email. Set an aggressive 10-hour daily study schedule and relax the other six hours enjoying the sites. Your hotel room is an ok study location but try out a few parks and the nearest library as well. It’s the perfect combination of hardcore studying and relaxation before the exam.

Now for the worst study location, your own home! Ok, so maybe it’s better than trying to study in the middle of a rock concert but the home can be a crappy place to study. I understand it’s easy and there’s no travel time but there are just too many distractions at home. From talking to family or friends to grabbing a ‘quick’ bite to eat, you’ll lose half of your study time to little breaks. If you can get to one of these other study locations in 20 minutes or less, go for it.

‘til next time, happy studying wherever you are!
Joseph Hogue, CFA

CFA Level 1 Curriculum Review: Financial Statement Analysis

Reading 28 in the CFA curriculum combines the financial statements with key ratios and analysis

This is the fifth week of our CFA Level 1 review of the financial statement material. Reading 28 is your first look into the financial statement analysis and techniques that will make up a big portion of your CFA level 2 exam. In all, financial reporting and analysis accounts for 20% of your level 1 points and up to 20% of the second exam.

Check out the introduction to CFA Level 1 Financial Statements
Check out the CFA Level 1 Income Statement Review
Check out the CFA Level 1 Balance Sheet Review
Check out the CFA Level 1 Statement of Cash Flows Review

Some of the ratios and financial analysis techniques you’ll see in reading 28 have already been discussed in the separate readings on each financial statement. Besides specific techniques used in analysis, pay attention to assumptions used in different techniques and the limitations of each method.

Ratios and Common-Size Financial Statement Analysis

Ratios in financial statement analysis offer a way to standardize information and compare results across companies. It can be used to compare current results with past performance as well. Ratio analysis is limited across companies because each might operate in a slightly different product category or market. Differences in accounting practices can distort ratios and there’s no definite set of ratios that will tell you all you need about a company.

Activity ratios measure management efficiency in day-to-day operations. I’ve included some of the most common ratios used below. Activity ratios are also called asset utilization ratios. Notice that when you use Balance Sheet data in a ratio with another financial statement, you need to take the average of the beginning and ending number reported on the Balance Sheet.

cfa activity ratiosSolvency ratios measure the firm’s ability to meet long-term obligations. Liquidity ratios measure the firm’s ability to meet short-term obligations. Pay attention to the Cash Conversion Cycle which reflects the number of days a company’s cash is tied up in the operating cycle. The conversion cycle equals the number of days inventory plus days receivable outstanding minus the number of days accounts payable outstanding.

Understand the difference between operating leverage and financial leverage. Operating leverage comes from using fixed costs in the company’s business and magnifies the effect of sales growth on operating income. Financial leverage comes from the use of debt and magnifies the effect of changes in EBIT on net income.

cfa debt and liquidity ratiosProfitability ratios measure overall performance and margins. Gross, operating and net margin are used often to show different ideas of profitability.

cfa profitability ratiosIt may seem like a lot of ratios to memorize but they are fairly easy to remember after some repetition. Write the ratios and a brief explanation on some flash cards and review them each day until you’ve mastered the concept.

Common-size financial statement analysis is helpful in spotting trends within a company’s results as well as comparing accounting line items across firms. A horizontal common-size statement compares an accounting item like sales or operating expenses against itself from another year. It’s helpful in finding growth across time in each line item. A vertical common-size statement compares an accounting item against another line in the same year, usually against sales or total assets. It’s helpful in comparing the proportion of a line item in one company against another.

For common-size analysis on the balance sheet, you’ll use total assets as the common item. For analysis on the income statement, sales are used as the common item for comparison.

There’s quite a bit more in reading 28 including DuPont Analysis and some important ratios for equity analysis. All the ratios in the reading could easily show up on the CFA exam since they’re pretty easy to test in a quick question. The best way to approach the material is to understand the concept of the ratio. Instead of just rote memorization of the equation, understand what the components are and how they relate to each other. You’ll find it much easier to remember the mountain of ratios and equations for the exam.

‘til next time, happy studying
Joseph Hogue, CFA

CFA Review: Level I Statement of Cash Flows

This is the fourth week of our CFA Level 1 review of the financial statement material. We look at the Statement of Cash Flows this week, a statement that shows the inflows and outflows of cash over the period. Actual cash flow is much harder to manipulate compared to the income statement so analysts use this statement heavily in their work. Make the Statement of Cash Flows your new best friend.

Check out the introduction to CFA Level 1 Financial Statements

Check out the CFA Level 1 Income Statement Review

Check out the CFA Level 1 Balance Sheet Review

Understanding the Statement of Cash Flows

Like the Income Statement, the Statement of Cash Flows shows activity over the period. Remember, this is different from the Balance Sheet which shows assets, liabilities and equity only at one point in time. To compare Cash Flow numbers with Balance Sheet data, you’ll need to take an average of the beginning and ending balance sheet number for an appropriate comparison.

Understand also that cash flow is not the same as net income. Income is an accounting idea based on revenue earned and matched expenses but may not mean the company is generating cash.

A company’s cash flows are separated into one of three sections; operating, investing and financing.

Cash Flow from Operations is the cash generated from normal day-to-day operations. Throughout the cash flow statement, it will be important to distinguish between inflows and outflows of cash. Cash inflows for operations include: collection on sales and accounts receivable, receipt of interest or dividends. Cash outflows for operations include: payments to suppliers and accounts payable, payments to employees, interest payments and payment of income taxes.

Cash Flow from Investing Activities is the purchase or sale of long-term assets, assets like PP&E or long-term investments that will help generate sales for years to come. Cash inflows for investing include sales of non-current assets. Cash outflows here include the purchase of non-current assets.

Cash Flow from Finance is the borrowing and repayment of debt, issuing stock or paying dividends. Cash inflows include issuing stock or bonds. Cash outflows include paying debt or dividends and buying back shares.

The Statement of Cash Flows is connected to the balance sheet through cash. The sum of the three cash sections on the statement, plus the beginning balance of cash from the balance sheet will equal the ending cash balance for the end of the period.

cfa level 1 review statement of cash flows formatYou are going to be spending a lot of your time working through cash flow statements as a new analyst. The Statement of Cash Flows can be constructed from information given on the other two financial statements. The best way to understand the statement, and a must-know topic for the CFA exams, is mastering the two methods for calculating and reporting the statement: the Direct and Indirect methods.

I’m not going to write out the methods here. It’s something you need to write out and study in detail and both methods are shown in the curriculum and in the Finquiz Notes. It can seem tedious to practice through the methods but you need to do it to learn how the statement is constructed through cash changes. Practice with real company financial statements to see if you come out with the same numbers.

Cash Flow Analysis

Performance ratios used with the Statement of Cash Flows include: cash flow to sales, cash return to assets or equity, and cash flow per share. These are all pretty easy to remember and not nearly as important as two other concepts in the reading.

Other than a basic understanding of the cash flow statement, the most important section in the reading is on Free Cash Flow to the Firm (FCFF) and Free Cash Flow to Equity (FCFE). You will use these two concepts throughout the curriculum and absolutely must master them.

Free Cash Flow to the Firm (FCFF) is the cash flow available to all capital providers (debt and equity) and equals:

Net income + Net noncash Charges (depreciation and amortization) – Investment in working capital – Investment in Fixed capital + after tax interest expense

The calculation for FCFE is fairly easy but you need to make sure not to get the components confused with FCFF. FCFE is CFO minus investments in fixed capital plus net borrowing, or the cash flow available to common equity holders without placing a burden on operations.

FCFE can be more volatile than other cash flow measures because of the capital expenditures spending, so you might have to use a multi-year average if the test question mentions it. Though you will probably not be asked to do so on the test, some analysts adjust CFA for nonrecurring expenses before calculating FCFE. A big focus in the CFA curriculum is conservative practices, almost always favored when a choice is given. Adjusting items for non-recurring events and taking the average of volatile accounts over a period of time are more conservative and provide a more stable estimate.

Make sure you can go from FCFF to FCFE or can get there from multiple routes. Thinking through the various accounts and why they are included will help get these concepts down. PRACTICE, PRACTICE, PRACTICE.

FCFF = CFO + interest(1-tax rate) – Fixed Capital Investment

FCFF = EBITDA(1-tax rate)+depreciation expense(tax rate) + (increase in deferred tax) – (investments in fixed and working capital)

FCFE = FCFF – interest(1-tax rate) + net borrowing

Most CFA candidates haven’t had as much experience with the Statement of Cash Flows or haven’t taken time to really master the direct and indirect method so spend some time on the reading to really understand the statement.

‘til next time, happy studyin’
Joseph Hogue, CFA

Last updated: October 18, 2017 at 10:34 am

CFA Review: Level I Balance Sheet

Master this introductory material on the balance sheet in the 2016 CFA Level 1 curriculum to breeze through tougher concepts later

This is our third week of reviewing the CFA Level 1 Financial Statement material, following the introductory reading and income statement analysis last week.

We begin on our review of the Balance Sheet, reading 26 of the CFA Level 1 curriculum, this week. The balance sheet is not quite as talked about among investors as the income statement but is no less important. Understand how the balance sheet relates to the other two statements, especially how assets are depreciated and expensed.

Understanding the Balance Sheet

The Balance Sheet financial statement is different from the other statements in that it is a snapshot in time rather than a presentation of activity over the period. The Balance Sheet shows assets, liabilities and owner’s equity as of the last day in the reporting period.

Assets represent economic resources of the company, resources that can be used to generate cash or sales. Liabilities are current or future obligations of the company, representing an outflow of economic benefit. Owner’s equity represents the remaining assets or economic resources after all creditors (liabilities) are paid. This gives rise to the balancing of the Balance Sheet with Assets equaling liabilities and equity.

Assets and liabilities are presented in terms of liquidity. Assets that are highly liquid like cash or those that can be converted to cash are show first. Those liabilities that are expected to be paid within a year are shown first in short-term liabilities. The remaining assets and liabilities are shown in long-term accounts because they are expected to be used or paid out over more than a year.

cfa level 1 review balance sheetUnderstand that some of the assets on the Balance Sheet will have a contra-asset and the difference between historical value and net. Accounts receivable is offset by the allowance for doubtful accounts for Net Receivables. Property, Plant and Equipment is offset by depreciation for its net value.

There is a lot of accounting concepts on the balance sheet but you must know them to be a good analyst. You’ll go into more detail on how inventories, long-term assets and other accounts are depreciated, expensed and recorded in other readings. If you don’t have a strong background in accounting, it’s imperative that you spend the time necessary to master this introductory material so you can understand the more detailed readings.

The differences between U.S. GAAP and IFRS reporting can be tedious and confusing. It’s best if you put together a table for each financial statement. Label the different accounting items (inventory, PP&E, etc) down the left-side column followed by columns for GAAP and IFRS. This makes for a quick review of the differences that you can use a few times a day until you’ve got them committed to memory.

An important distinction on the Balance Sheet is the classification of financial assets. Financial assets (liquid assets in stocks and other securities) are either classified as Held-to-Maturity, Held-for-Trading, or Available-for-Sale. How the asset is classified will affect how it’s value is recorded and how the gains/losses show through to the income statement.

  • Held-to-Maturity assets are measured at amortised or historical costs and no unrealized gains/losses are reported.
  • Held-for-Trading assets are recorded at fair value and marked to market with unrealized gains/losses recognized as profit/loss on the income statement and in retained earnings.
  • Available-for-Sale assets are recorded at fair value with unrealized gain/loss recognized on Other Comprehensive Income and accumulated within owner’s equity.

Balance Sheet Analysis

As with the reading on the Income Statement, the analysis here is fairly light with just some ratios. The reading is focused more on the accounting concepts for the Balance Sheet while other readings will go deeper into the analysis.

In ratio analysis, you must remember to adjust your Balance Sheet numbers when using them with numbers from the other financial statements. It’s easier than it sounds, you just need to take the average of the beginning and ending values for the Balance Sheet number.

For example, the Days Sales Outstanding ratio is found by taking the average of the beginning and ending receivables on the balance sheet and then dividing by sales or credit sales from the income statement.

Make sure you understand and remember the liquidity ratios and the solvency ratios. These are very basic and will be used throughout the CFA exams and your job as an analyst.

Liquidity Ratios: Current, Quick (acid-test), Cash
Solvency Ratios: Long-term Debt to Equity, Debt to Equity, Financial Leverage

We’ll continue with the Statement of Cash Flows next week and then a week for financial statement analysis. Make sure you are scheduling enough study time to read through the curriculum, work practice problems and then review study notes. It’s only this repetitive system of studying that will allow you to commit the material to memory.

‘til next time, happy studying
Joseph Hogue, CFA

Last updated: October 18, 2017 at 11:01 am

CFA 2016 Review: Level I Income Statements

We started our review of the CFA level 1 financial statement material last week with a basic understanding of the financial statements and the framework in analysis. A lot of this introductory material is extremely basic but you should resist the urge to speed through it. Financial Statement Analysis accounts for up to 20% of the points on all three CFA exams and you will need to use it every day during your career as an equity analyst. Most importantly, you’ll need most of this introductory material to understand more detailed concepts and formulas on the CFA Level 2 and Level 3 exams.

We jump right into it this week with a look at the income statement, the major accounting concepts and statement analysis. The income statement is likely the most talked about in the financial press of the three principal financial statements though you’ll spend just as much time as an analyst on the other two statements. We’ll be using the Finquiz notes to the CFA curriculum.

Understanding the Income Statement on CFA Level 1

The income statement represents the company’s profitability over a period of time, either a quarter or through the year. Analysts use the income statement to evaluate the quality of a company’s earnings and earnings growth rate.

CFA income statement structureIncome statements have a fairly basic layout that starts with sales or revenue and then deducts expenses, taxes, interest and other items to arrive at net income.

You should remember the requirements for revenue recognition under IFRS and U.S. GAAP. The general rules plus recognition of special cases like long-term contracts is highly testable material, especially quick calculations like the percentage-of-sales methodology.

Income from operations is an important number because it shows the operational earnings power of the firm. The operating margin, operating profits divided by sales, can be used to judge the operational efficiency of the company compared to competitors. Operating earnings are sometimes referred to as Earnings Before Interest and Taxes (EBIT) and an important valuation multiple will be on EBITDA, which adds back depreciation and amortization.

Everything below net income from operations is referred to as “below the line” and includes many items that are not part of normal operational activities. The definition and reasons why an activity is reported below the line as non-operating items is very important. Understand the difference between Extraordinary Items (not allowed under IFRS) and Unusual or Infrequent Items.

  • Extraordinary Items are both infrequent and unusual, such as losses on natural disasters and expropriations.
  • Unusual or Infrequent Items are either/or and are generally reported as part of continuing operations of a company. Common items are restructuring charges or gains/losses on sales of an asset.

CFA inventory costing methodsExpense recognition around inventory will be very important material so master the LIFO, FIFO and weighted-average costing methods. You’ll see whole readings on this later so getting the basics here will make the more detailed readings easier to grasp. An important point is the effect of different costing methodology on Cost of Goods Sold.

Understand how to calculate Weighted Average Number of Shares Outstanding over a period as well as the difference between a simple and complex capital structure. Understand the difference between basic EPS and diluted EPS along with which securities are used in the calculation of dilution (i.e. options, warrants, convertible debt, convertible preferreds).

CFA Level 1 Income Statement Analysis

The focus on the CFA level 1 exam is placed on understanding the layout and accounting of the income statement rather than detailed analysis. The analysis in Reading 25 is fairly basic and just covers common-size statements and margins.

Common-size financial statements are a way of comparing statement items against a major line item like sales or assets. In vertical common-size analysis, you find the percentage of each line item relative to sales for each year. This is helpful in seeing if particular expenses have become larger or smaller in significance. In horizontal common-size analysis, you base each line item off of itself in a common year. It helps to see changes in expenses over the years.

Three margin ratios are common in income statement analysis,

  • Gross margin is the percentage of revenue after cost of sales and may help show different competitive strategies across companies
  • Operating margin is the percentage of revenue after operating expenses and is valuable in showing how well management controls costs
  • Net margin is income divided by sales and shows the overall income statement profitability

This basic statement analysis is detailed further in Reading 28 of the CFA level 1 curriculum which brings the financial statements together for a closer look at analysis and ratios. These are some of the most important readings you’ll cover within the curriculum and for your job as an analyst so make sure you spend as much time as it takes to master the material.

‘til next time, happy studyin’
Joseph Hogue, CFA

CFA Level 1 Review: Understanding Financial Statements

Don’t neglect this basic information on financial statements in the CFA curriculum

One of the most important topic areas in the CFA curriculum is Financial Statement Analysis, which accounts for upwards of 20% of each exam’s points. Reading 22 of the CFA Level 1 curriculum is your first step into the world of financial statement analysis and a critical skill you’ll need during your career.

I thought it would be helpful to point out some of the highlights of the Finquiz Study Notes on the reading and some other tips to the Level 1 CFA material within financial statement analysis. Over the next few weeks, we’ll cover the other key topic areas and readings in the CFA level 1 exam to help you get the most points possible.

An Introduction to Financial Statement Analysis

The Finquiz study notes for Reading 22 is eight pages long and covers all the learning outcome statements for the material. Rather than a substitute for the curriculum, Finquiz notes are meant to complement your reading of the CFA curriculum to make sure you cover all the material and reinforce the most important points.

The overview section on financial statements and supplementary information is a brief outline of purpose for the financial statements and other information you’ll need to research as an analyst.

Balance Sheet – a snapshot of the company’s financial position at one moment in time. The ‘snapshot’ idea is important because the other financial statements show activity over the entire period. Since the balance sheet differs in presentation, you’ll need to adjust the numbers when comparing against the other statements, i.e. taking an average of the beginning and ending balance sheet amounts.

The balance sheet categorizes everything broadly into assets, liabilities and owners’ equity. Within assets and liabilities, the items are also categorized by short-term and long-term in terms of liquidity.

The Income Statement is the financial results of a company over the quarterly or annual period. Revenues and expenses are recorded according to accrual accounting principles meaning they are matched appropriately though may not reflect actual cash activity.

Your first task will be to understand the difference between items that go in normal operating expenses and those that appear below because they are unusual or infrequent. You’ll also need to understand the general layout of the income statement and ratios like gross margin, operating margin and net margin.

While the income statement is popular with investors, you’ll spend much of your time on the Statement of Cash Flows as an analyst. The statement is an accounting of the actual cash flows of the business over the period. Since it represents actual cash flows, it is less easily manipulated by management compared to the income statement so a very valuable tool for analysis.

Cash flows are separated into three categories:

  • Operating cash flows are generated from normal day-to-day business operations
  • Cash flows from investing are attributed to the company’s long-term investing and disposal of assets
  • Cash flows from financing are attributed to the company’s use and sources of capital like debt and returning cash to shareholders

The Statement of Changes in Owners’ Equity is not quite as important as the other financial statements but you will still need a basic understanding of the components and how it relates to the other statements. Components of the statement include: paid-in capital, retained earnings, minority interests and other comprehensive income.

Beyond these four statements, you will also need to remember what supplementary information can be found in the financial statement footnotes and the Management Discussion & Analysis. These supplementary schedules and items are not as important as the financial statements but you’ll need to know what they include.

You won’t use the Auditor’s Report for much of anything but need to know the layout of the report as well as the difference between the four types of opinion.

  • Unqualified opinion – indicates that the financial statements appear to be free of material misstatements and are prepared in accordance with accounting principles
  • Qualified opinion – indicates some exceptions to accounting standards and perhaps some concerns about the company
  • Adverse opinion – indicates material misstatements and problems in the presentation according to accounting principles
  • Disclaimer of opinion – is given when an auditor is unable to issue an opinion

CFA Level 1 Review: Financial Statement Analysis Framework

The steps in the analysis framework are not as important as the process itself. Working through the readings on each financial statement will give you a good idea of the process. You might want to briefly look over each of the six steps in the process but it is unlikely that you’ll be tested on knowing the name of a specific step.

  • Articulate purpose and context of the analysis – why are you performing the analysis?
  • Collect input data – from financial statements and other sources
  • Process data – adjusting financial statements, ratios and comparing data on common-size
  • Analyze and interpret – produce analytical results
  • Develop and communicate conclusions
  • Follow-up

You’ll go into much more detail on the financial statements and FSA further into the curriculum. Some of this introductory material may seem overly simplified and unnecessary. If you have significant accounting or analysis experience, you can probably skim through it quickly but I would warn against skipping it entirely. The CFA curriculum is very well constructed to be a progressive learning process. Learning the basics in these introductory chapters will make subsequent chapters easier to understand. Skipping the seemingly easy stuff risks missing out on something you will need to know later in the curriculum.

‘til next time, happy studyin’
Joseph Hogue, CFA

What do you need to pass the CFA Level 1 Exam?

By far the most common question we get at Finquiz is, “What does it take to pass the CFA level 1 exam?” It’s a valid question considering only 42% of CFA level 1 candidates passed the June 2015 exam.

How can more than half of the candidates taking an exam fail to achieve a passing score? What does the CFA Institute expect you to know before moving on to the second exam?

Of course, the Institute doesn’t make things any easier by not releasing their minimum passing score. We know that no candidate has failed any of the exams with a score of 70% or higher but we’re never given the minimum score for any testing year.

But there are ways to approach the exam to determine what you need to do to be confident of passing. Looking at the topic weights and understanding how the CFA level 1 curriculum is tested can give you the edge you need to push you above the mysterious passing score.

CFA Level 1 Most Important Topics

Every study plan should start off by looking at what is being tested and how important it is to the overall exam. The CFA Institute releases the topic weights for the three exams each year with changes occurring only rarely.

2016 CFA Exam Topic Weights

2016 CFA Exam Topic Weights

The CFA exam topic weights factor heavily into our study strategy to pass the CFA level 1 exam. Topic weights have changed only slightly since I studied for the level 1 exam in 2009 and the key topics haven’t changed. Ethics and Financial Reporting & Analysis continue to be the most tested topics. You should also notice that Equity Investments and Fixed Income, while only worth 10% of your level 1 exam are worth a much bigger percentage in the other two exams. Focusing on these other two topics as well will help you save time when you do pass the first exam.

It may be a little disappointing but there really is no secret to passing the CFA level 1 exam. The exam covers a huge range of topics and can seem overwhelming for many candidates. Fortunately, the test doesn’t get very far into the details of the subject matter. The curriculum is tested on a basic understanding, a mastery of the big picture and the relationships between different concepts.

This means that you shouldn’t spend too much time on any particular topic or reading. Make sure you master the four core topic areas in terms of weighting but read through the entire curriculum multiple times to get a strong overview of everything.

The CFA Institute regularly releases its candidate study survey that nearly always shows an average of 300 hours studying by successful candidates. While candidates in the level 2 exam might spend a majority of time on FRA and level 3 candidates probably spend more time on the essay section, level 1 candidates should spread their time out more evenly.

Trying to spend 300 hours reading through the same curriculum is only going to lead to burn out. You need to mix up your study resources so studying stays fresh enough that you don’t get bored. This means reading the curriculum, reviewing notes, working practice problems, studying flash cards and even reviewing difficult concepts on YouTube when available.

CFA Level 1 Study Plan: Tortoise or the Hare

If you are reading this for the 2015 December level 1 exam, just two months out from now, you may need to kick your study plan into overdrive depending on how far along you are in the curriculum. You will want to start taking mock exams and practice exams by November to gauge your progress. Aim for a target of 75% or better in each topic area to give yourself some room for error on the actual exam.

Multiple resources are the key for covering the material from different perspectives and reviewing the curriculum multiple times. With thousands of pages in the official curriculum, you may not have time to read through it again and still do the necessary practice problems and mock exams. Try shifting more time to review notes and flash cards to cover the material more quickly.

If you are studying for the 2016 CFA level 1 exam next June, then you’ve got more time to prepare. Start reading through the curriculum in December or January at the latest. Once you’ve worked through the official curriculum once, you can start reviewing using other resources to reinforce the material.

Given the low pass rates on the CFA exams, you’re best bet is to over-study for the test. Plan an aggressive study strategy and go into the exam super-confident that you know the material. It’s far better to over-study than to have to spend another year reviewing the material because you didn’t study enough.

‘til next time, happy studyin’
Joseph Hogue, CFA

Study Groups for the December Level 1 CFA Exam

With the start of the study season for the December Level 1 Exam comes a rush of calls for study groups in CFA groups on the internet and locally. Studying for the CFA exams can be an extremely solitary and uncertain pursuit so candidates look for help and confidence in groups.

But should you join a study group for the CFA exam? If you do join a group, how much time should you commit and what are the advantages or disadvantages?

We’ve posted a few articles on the Finquiz CFA blog about participating in groups but I thought I would reinforce some of the most important ideas. We’ll look at some study group options, benefits and risks to watch out for before tackling the question of whether you should join a study group for the CFA exams.

What are your options for CFA Study Groups?

I remember studying for the CFA exams, from 2009 through 2011, and joining study groups. Since then, technology has brought new options to CFA study groups but candidates are still using the old methods as well.

First, you’ve got the old school method of in-person study groups. Maybe I haven’t grown up with the technology that enables the other study groups but I still like in-person groups above all others. They take a little longer, through travel time, and a little more coordination to set up but these study groups can be an indispensable networking tool. Through your study time together, you’ve got a chance to develop a real friendship with some of the people that will lead the profession in your city or region.

There are live study groups that meet over Skype or Google Hangouts. This is the next best thing to the in-person groups. You lose a little of the interpersonal nature because you can’t really talk one-on-one with anyone but it’s still face-to-faces so you can build some good connections. Virtual groups can save a lot of travel time and are easier to put together than in-person groups.

Next you’ve got web-enabled study groups on Facebook and in other website forums. These can range in formality from an open forum that allows posting to a closed-group that controls the study plan and questions. You lose a lot of the networking benefit unless you interact with members outside the group. The benefit is that they allow everyone to post and reply on their own schedule.

Lastly, you’ve got the newest type of CFA study groups in messaging software like WhatsApp. These are so popular that they are continuously the most commented discussions in the CFA Candidates LinkedIn group. I’ve gotten mixed reviews from candidates about these groups. They can be helpful because you can multi-task while participating, checking in occasionally on new messages, but you lose all of the networking benefit to groups. I sat in on one of the groups a few times and the flow of messages can get overwhelming.

What are the risks you want to avoid in a CFA study group?

The biggest risk to any study group is going off-topic and letting the group go unorganized. It’s fine to trade a few off-topic comments here and there, that’s all part of being sociable, but it helps to set a schedule and bring the group back on topic quickly.

  • Don’t make the same person act as schedule-keeper every meeting. Nobody wants to be the bad guy, constantly nagging the group to stay on topic. Rotate the role each time the group meets.
  • Everyone in the group has to make the same commitment to the process and the schedule. You’re not accountable to anyone for grades like in school groups but the group breaks down if one or a few people are always missing or forget to read their assignment.

In-person groups and internet-live groups should probably be limited to about six people or less. This helps make sure that everyone has a chance to participate and that you don’t get too many people talking at once. Forum and chat groups can include more people but it still helps if there are a limited number of ‘virtual’ seats. Having hundreds of people participate makes it difficult to differentiate between the real contributors and those just hanging out.

Don’t be afraid to question someone’s answer or rationale behind an answer. You will either learn where you were wrong, improving your own score on the exam, or you will avoid everyone learning the wrong material which will improve everyone’s score. On the same note, don’t take it personally when someone questions one of your answers. You are all there to learn.

Should you join a CFA study group?

Now that you know your options, some of the benefits and the risks to joining a CFA study group, you can make a better decision whether to join one or not. Study groups can be an inefficient way of learning the material, eating up your time and possibly even giving you misinformation from wrong answers. They can also be great motivators through the group support system and an excellent way to network.

I participated in study groups and I would recommend everyone try them out at least once. Maybe I’m old fashioned but I still prefer the in-person groups to any other method. Try putting together a weekly or bi-weekly group in your area, close enough that no one has to travel more than 20 minutes for the group. Limit the group to under two hours and stay on schedule. Going out socially after the group can help keep group-time focused.

I would caution against participating in more than two groups. Spending more than a few hours a week in group is seriously going to cut into your study time. Groups can be great for discussing problems and questions but they are not as efficient as reading the material yourself and working end-of-chapter questions.

If you can’t manage to coordinate an in-person study group or a live-internet group, you might try one of the forum or chat groups. You might have better luck than I did with these groups but remember to keep it organized and on-topic.

I’d love to hear how you are using CFA study groups to further your studying and prepare for the exam. Let me know if I missed any pointers or any of the risks you’ve seen in groups.

‘til next time, happy studyin’
Joseph Hogue, CFA

You need someone at steering wheel in any group. Copyrights FinQuiz

You need someone at steering wheel in any group. Copyrights FinQuiz

Countdown to the December CFA Exam – Here’s your Strategy

There’s just 13 weeks left to the December level 1 CFA exam and you should be starting your preparation if you haven’t started already. Two deadlines have passed for registration and only the final deadline remains to get your seat at the exam.

We just finished up our review of the Code & Standards topic area of the exam but I thought I would start us off again with a few words on getting ready for the December exam. Despite the roughly 50% of candidates that do not pass any given exam, preparing for the three exams can actually be relatively easy if you know the process.

That’s not to say that studying and passing the exam will be easy but that too many CFA candidates make it more stressful than it needs to be. Understand how the Level 1 CFA exam is tested and build yourself an outline for your study plan and you’ll find it much easier to make it through the exam.

How to Pass the December Level 1 CFA Exam

It’s been said that the Level 1 CFA exam is like a lake one-mile wide and an inch deep. It’s an appropriate analogy because the breadth of the material in the curriculum can seem endless, but you will not drown in the details.

In this first exam, the CFA Institute wants to introduce you to the world of asset management and analysis. They do not expect you to be a world-class analyst after reading the curriculum but to have a good base of understanding on the many topic areas and how they fit together.

Your job is to keep this in mind when studying for the December level 1 CFA exam. Make sure you have a good understanding of all the topics and can begin to see how many of the topics relate to each other. The sheer volume of material will seem overwhelming sometimes but the difficulty of the questions is ultimately not a problem.

How do you build this idea into your study plans for the December level 1 CFA exam? You need to make it through the curriculum multiple times. This will help commit it to memory and will make sure you get a broad understanding of everything. Do not spend so much time on details or any one topic area that you cannot make it through all the material.

Besides the official curriculum, a set of study notes makes this more easily achievable. FinQuiz Notes are designed to be used with the curriculum instead of substituting for it. This means they’re shorter than other study notes packages and can help you get the broader picture of the material more quickly. Read through a topic or study session one week then follow it up with a review of the study notes the next week for better absorption.

Check out our basic strategy on how to pass the CFA exams
Check out a more detailed strategy on how to pass the CFA level 1 exam

Getting to December: An Outline for Study Plans

  • Registration ends for the 2015 December CFA exam on September 16th, register here
  • Plan out your study schedule
    • You’ll want to read through the curriculum at least once with time enough to review over the last month
    • Plan on working at least the end-of-chapter questions for each reading and consider a question bank with additional item sets
    • Plan on at one or two days a week with no studying so you do not get burned out on the curriculum
    • Try scheduling the entire last week off from work and devoting it to a last-week review
  • Keep to your study schedule at all costs! It’s only a few months and the odds are high that you’ll have to retake if you do not take this seriously.
  • Check your passport right now! The information must match that provided on your CFA exam registration and the passport must not expire before the exam date. Still time to get it fixed if you check now.
  • Admission tickets will be available several weeks before the exam. Check the information on your ticket as soon as you receive it.
  • One week before the exam, gather all the materials that you’ll take to the exam in one spot. Better to have these ready than to be looking for them the night before the exam.
  • Several days before the exam, check the route to the testing location (if possible) for detours or road work. Ask a local candidate to check the route or if there are typically traffic problems on Saturday mornings.
  • Plan on arriving at the testing center several hours early. This will allow you any last-minute problems and still get you to the exam on time.

We’ll cover parts of the CFA exam prep outline over the next few months to make sure you stay on track for the exam. Try to work a little ahead of your study schedule just in case something comes up to set you back a little. Too many candidates work right at their schedule or a little behind and then get set way back on any minor hurdle. Stay ahead of schedule and go into the exam with the confidence that you WILL pass.

‘til next time, happy studyin’
Joseph Hogue, CFA

Copyrights FinQuiz.com

Copyrights FinQuiz.com

Ethics Practice Roundup for CFA Level 1 Exam

We’ve covered eight practice problems in the CFA Level 1 ethics material over two prior posts, available by clicking CFA Level 1 Ethics and CFA Level 1 Ethics Practice. This post will wrap up our practice problem review and look at a few key points to the Ethics and Standards topic area.

At the very least, you need to cover every end-of-chapter question in the Ethics study sessions at least once during your CFA exam prep. You may also want to consider a question bank of item sets as well to get a little more practice. The Ethical & Professional Standards topic area accounts for 15% of your CFA level 1 score.

Not only will you need to master the material for the exam, you’ll see it again in the CFA level 2 and level 3 exams where it’s worth as much as 15% of your score on each. The fact that you could see questions on all three exams covering roughly the same material makes for a great opportunity. Learn the material early in level 1 and you will save a lot of study time leading up to the other exams.

CFA Level 1 Ethics Practice Problem Review

We’ll work two more practice problems in this post. Be sure to check out the prior two posts for eight more ethics practice problems. When you’re working the problems, make sure you read through the given answer to get an understanding for how the CFA Institute is looking at the ethical dilemmas.

CFA Ethics Question #1

Tom Hart works for IAM Investment Management, a struggling firm that is likely to close soon under the weight of redemptions. Tom wants to start a small independent practice so he will have something to work on if the firm closes. Which of the following statements is correct under the Code and Standards?

A. CFA Institute members and candidates are prohibited from pursuing independent practice that might be in competition with their employer.

B. Tom needs to obtain written consent from his employer for the independent practice since it could result in compensation or other benefits in competition with the firm.

C. Since the firm is likely to close, Tom does not need permission from his employer and can start his independent practice. He must disclose his independent practice only when he starts making money.

CFA Ethics Question #2

Meg and June have been good friends since high school and are sitting down to a cup of coffee. Meg, the CFO of a large retail clothing chain, mentions that sales are booming and the quarterly results should look very good. June, an investment adviser, writes a research report to clients suggesting they buy shares of a retail exchange traded fund on the potential for high industry sales this quarter. June also buys shares of the fund, which includes shares of Meg’s company, for her personal account.

A. June violated the Code and Standards by buying shares of the fund but not by making the recommendation to clients.

B. June did not violate the Code and Standards by either action because she did not directly act on the information by buying shares of Meg’s company.

C. June violated the Code and Standards by both actions, buying shares of the fund and recommending that clients do so.

Question #1 Answer: B

Under Standard IV – loyalty, members and candidates may undertake independent practice as long as they get written permission from their employer. The requirement is not contingent on actual compensation or benefits but the potential. This is like the ‘perception of conflict’ standard held by the Institute. All necessary disclosures and requirements must be upheld if there is the potential or perception of conflict in a scenario.

Question #2 Answer: C

June violated Standard II – material non-public information because both her purchase and recommendation appears directly related to the information she received from Meg. The information would likely influence the share price of the fund¸ making it material, and it is non-public because it has not yet been released.

Wrap-up of CFA Level 1 Ethics Practice

Many of the ethics questions on the exams will offer one answer that the action was not a violation and then two questions that claim a violation but for different reasons. For this reason, you not only have to know if an action is a violation of the Code and Standards but also why it is a violation. Practicing ethics problems will help to practice matching violations to specific Standards.

Another favorite of the CFA Institute is the problem where someone makes two statements and the candidate must decide whether one, both or neither statement is a violation of the Code and Standards. One statement is usually clearly a violation or not but the other is often ambiguous. For these, you really need to study the Standards for claims that can be made and things you can say.

The ethics material on the CFA exams is actually not too difficult if you spend a little extra time studying before the first exam. I earned 70% + on the topic in the second and third exam without spending a lot of time refreshing just because I drilled on the material extensively while studying for the first exam. Do the same and you shouldn’t have any problems.

‘til next time, happy studyin’
Joseph Hogue, CFA

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