CFA Level 2 Financial Statement Analysis: notes and free practice
CFA Level 2 Financial Statement Analysis evaluates more complex accounting effects and reporting choices. Identify the applicable method and standard, then trace their effects on earnings, financial position and comparability.
The key ideas, at a glance
Follow the ownership method
Read the visual, then follow the worked example below. Use the stated case assumptions.
Illustrative worked case
amount
- Opening
- 50
- Share of profit
- 3
- Distributions
- -1
- Ending
- 52
The 25% ownership share adds 3 of profit and subtracts 1 of dividends. No other adjustments are assumed.
| Concept | Rule or decision | Common mistake |
|---|---|---|
| Follow the ownership method | Equity-method carrying value = opening value + share of profit - dividends received | Equity-method profit and cash dividends are not interchangeable measures. |
| Identify the translation method | Current rate method: translation adjustment generally enters OCI | Foreign transaction gains and translation adjustments can have different accounting treatment. |
| Separate pension components | IFRS P&L here = service cost + net interest; remeasurement → OCI | Do not import this IFRS expense split into a different reporting framework without checking its rules. |
| Normalize before comparing | Recurring earnings = reported earnings - nonrecurring after-tax gains | Not every difference between earnings and cash flow is improper accounting. |
01Follow the ownership method
Equity-method carrying value = opening value + share of profit - dividends received
Watch for: Equity-method profit and cash dividends are not interchangeable measures.
02Identify the translation method
Current rate method: translation adjustment generally enters OCI
Watch for: Foreign transaction gains and translation adjustments can have different accounting treatment.
03Separate pension components
IFRS P&L here = service cost + net interest; remeasurement → OCI
Watch for: Do not import this IFRS expense split into a different reporting framework without checking its rules.
04Normalize before comparing
Recurring earnings = reported earnings - nonrecurring after-tax gains
Watch for: Not every difference between earnings and cash flow is improper accounting.
Selected 2026 study concepts. Match your preparation to your registered exam-year curriculum. These notes are not complete curriculum coverage.
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CFA Level II: 20 practice MCQs
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Put the method to work
One worked example, from facts to answer
Given
Associate carrying value 50; 25% of profit 12 and dividends 4.
Method
50 + 0.25 × 12 - 0.25 × 4 = 52.
Answer and interpretation
Ending carrying value is 52 with no other adjustments.
Original independent teaching example. Assumptions are stated above; this is not an official exam question or scoring key.
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10 free Financial Statement Analysis questions
Five mini-cases, two questions each. Read the case facts, choose an answer and review the method. Short teaching cases, not complete exam item sets or a mock.
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- Question 1 of 10Level II topic sample · Case 1 of 5Financial Statement AnalysisMultiple choice
Case facts
Orin buys a 30% associate stake for $90m and applies the equity method. After acquisition, the associate earns $20m and pays $8m in dividends. There are no basis differences, impairment, other comprehensive income or intercompany transactions.
Orin’s ending equity-method investment carrying value is:
Answer and explanations
90 + 0.30 × 20 - 0.30 × 8 = $93.6m under the stated assumptions.
Review the method- A: 96.0 adds the earnings share but ignores dividends received.
- B - correct: 90 + 0.30 × 20 - 0.30 × 8 = $93.6m under the stated assumptions.
- C: 90.0 ignores both the earnings share and distributions.
- Question 2 of 10Level II topic sample · Case 1 of 5Financial Statement AnalysisMultiple choice
Case facts
Orin buys a 30% associate stake for $90m and applies the equity method. After acquisition, the associate earns $20m and pays $8m in dividends. There are no basis differences, impairment, other comprehensive income or intercompany transactions.
How much associate profit does Orin recognize in its earnings?
Answer and explanations
Orin recognizes 30% × $20m = $6.0m; dividends reduce the investment separately.
Review the method- A - correct: Orin recognizes 30% × $20m = $6.0m; dividends reduce the investment separately.
- B: 2.4 is dividends received, not the equity-method earnings share.
- C: 3.6 is the net carrying-value increase after dividends.
- Question 3 of 10Level II topic sample · Case 2 of 5Financial Statement AnalysisMultiple choice
Case facts
Vela purchases 80% of a business for $420m. The fair value of the noncontrolling interest is $100m and fair value of identifiable net assets is $460m. Use full goodwill. In the next full year, adjusted subsidiary profit is $50m and ownership is unchanged.
Vela’s acquisition-date full goodwill is:
Answer and explanations
Consideration 420 + fair-value NCI 100 - identifiable net assets 460 = $60m.
Review the method- A: 40 does not follow from the supplied full-goodwill measurement.
- B: 100 is the fair value of NCI, not goodwill.
- C - correct: Consideration 420 + fair-value NCI 100 - identifiable net assets 460 = $60m.
- Question 4 of 10Level II topic sample · Case 2 of 5Financial Statement AnalysisMultiple choice
Case facts
Vela purchases 80% of a business for $420m. The fair value of the noncontrolling interest is $100m and fair value of identifiable net assets is $460m. Use full goodwill. In the next full year, adjusted subsidiary profit is $50m and ownership is unchanged.
How much of the subsidiary’s adjusted next-year profit is attributable to NCI?
Answer and explanations
The noncontrolling share is 20% × $50m = $10m, given unchanged ownership.
Review the method- A: 40 is the parent’s 80% share of subsidiary profit.
- B - correct: The noncontrolling share is 20% × $50m = $10m, given unchanged ownership.
- C: 50 is total subsidiary profit before allocating ownership interests.
- Question 5 of 10Level II topic sample · Case 3 of 5Financial Statement AnalysisMultiple choice
Case facts
A subsidiary’s functional currency differs from its parent’s presentation currency. The current rate method applies. Its opening net assets of 100 foreign units remain unchanged: no profit, distributions or capital flows occur. The rate rises from 0.80 to 0.90 parent units per foreign unit.
The unchanged subsidiary net assets create a translation adjustment of:
Answer and explanations
100 × (0.90 - 0.80) = +10 parent units because the foreign currency strengthened.
Review the method- A - correct: 100 × (0.90 - 0.80) = +10 parent units because the foreign currency strengthened.
- B: The exchange-rate increase raises, rather than lowers, translated net assets.
- C: 90 is ending translated net assets, not the adjustment.
- Question 6 of 10Level II topic sample · Case 3 of 5Financial Statement AnalysisMultiple choice
Case facts
A subsidiary’s functional currency differs from its parent’s presentation currency. The current rate method applies. Its opening net assets of 100 foreign units remain unchanged: no profit, distributions or capital flows occur. The rate rises from 0.80 to 0.90 parent units per foreign unit.
Under the specified current rate method, that translation adjustment is generally recognized in:
Answer and explanations
The current-rate translation adjustment generally enters OCI and accumulates in equity, not current profit.
Review the method- A: Translating unchanged net assets does not create revenue.
- B: The translation adjustment is not an operating cash inflow.
- C - correct: The current-rate translation adjustment generally enters OCI and accumulates in equity, not current profit.
- Question 7 of 10Level II topic sample · Case 4 of 5Financial Statement AnalysisMultiple choice
Case facts
An IFRS sponsor has an opening net defined-benefit liability of $40m. The discount rate is 5%, current service cost $6m and remeasurement loss $3m. There are no contributions, benefit payments, settlements, past service costs or other movements. Net interest uses the opening net liability.
The sponsor’s pension cost in profit or loss under the supplied IFRS assumptions is:
Answer and explanations
Service cost 6 + net interest 40 × 5% = $8m; the $3m remeasurement loss goes to OCI.
Review the method- A: 6 includes service cost but omits net interest.
- B - correct: Service cost 6 + net interest 40 × 5% = $8m; the $3m remeasurement loss goes to OCI.
- C: 11 incorrectly adds the OCI remeasurement loss to profit-or-loss cost.
- Question 8 of 10Level II topic sample · Case 4 of 5Financial Statement AnalysisMultiple choice
Case facts
An IFRS sponsor has an opening net defined-benefit liability of $40m. The discount rate is 5%, current service cost $6m and remeasurement loss $3m. There are no contributions, benefit payments, settlements, past service costs or other movements. Net interest uses the opening net liability.
With no other movements, the closing net defined-benefit liability is:
Answer and explanations
40 + 6 + 2 + 3 = $51m; service cost, interest and the remeasurement loss all increase the liability.
Review the method- A - correct: 40 + 6 + 2 + 3 = $51m; service cost, interest and the remeasurement loss all increase the liability.
- B: 48 omits the remeasurement loss from the liability reconciliation.
- C: 43 includes only the remeasurement loss and omits service cost and interest.
- Question 9 of 10Level II topic sample · Case 5 of 5Financial Statement AnalysisMultiple choice
Case facts
A firm reports earnings of $80m, including a nonrecurring after-tax disposal gain of $12m. Comparable recurring earnings last year were $64m. Operating cash flow is $45m and average net operating assets are $200m. For this exercise, define cash-flow accruals as reported earnings minus operating cash flow.
The firm’s comparable recurring earnings growth is:
Answer and explanations
Recurring earnings are 80 - 12 = 68; (68 / 64 - 1) × 100 = 6.25%.
Review the method- A: 25% uses reported earnings including the disposal gain.
- B: 18.75% is the disposal gain divided by prior recurring earnings.
- C - correct: Recurring earnings are 80 - 12 = 68; (68 / 64 - 1) × 100 = 6.25%.
- Question 10 of 10Level II topic sample · Case 5 of 5Financial Statement AnalysisMultiple choice
Case facts
A firm reports earnings of $80m, including a nonrecurring after-tax disposal gain of $12m. Comparable recurring earnings last year were $64m. Operating cash flow is $45m and average net operating assets are $200m. For this exercise, define cash-flow accruals as reported earnings minus operating cash flow.
Using the exercise’s stated accruals definition, accruals divided by average net operating assets equal:
Answer and explanations
(Reported earnings 80 - operating cash flow 45) / 200 = 17.5%, a signal to investigate rather than proof of error.
Review the method- A: 22.5% is operating cash flow divided by average net operating assets.
- B - correct: (Reported earnings 80 - operating cash flow 45) / 200 = 17.5%, a signal to investigate rather than proof of error.
- C: 40.0% uses reported earnings without subtracting cash flow.
Four ideas to put to work
Find the method you need
Start with: Financial statements, equity ownership, accounting versus cash flow and reporting-currency conventions.
METHOD 01
Follow the ownership method
Equity-method carrying value = opening value + share of profit - dividends received
- Under the equity method, recognize the investor’s share of adjusted earnings.
- Dividends reduce the investment carrying value rather than adding earnings again.
- For full goodwill, add consideration and fair-value NCI, then subtract identifiable net assets.
Worked example
- Given
- Associate carrying value 50; 25% of profit 12 and dividends 4.
- Calculate / decide
- 50 + 0.25 × 12 - 0.25 × 4 = 52.
- Result
- Ending carrying value is 52 with no other adjustments.
Watch for: Equity-method profit and cash dividends are not interchangeable measures.
Practise this ideaMETHOD 02
Identify the translation method
Current rate method: translation adjustment generally enters OCI
- Identify functional and presentation currencies before selecting the method.
- With unchanged net assets, isolate the translation effect of the exchange-rate movement.
- Do not apply a current-rate translation conclusion to temporal-method remeasurement.
Worked example
- Given
- Unchanged net assets 80 F; rate rises from 1.10 to 1.20 D/F.
- Calculate / decide
- 80 × (1.20 - 1.10) = 8 D.
- Result
- A positive 8 D translation adjustment goes to OCI under the stated method.
Watch for: Foreign transaction gains and translation adjustments can have different accounting treatment.
Practise this ideaMETHOD 03
Separate pension components
IFRS P&L here = service cost + net interest; remeasurement → OCI
- Calculate net interest from the opening net liability and discount rate.
- Keep the specified remeasurement out of profit or loss under IFRS.
- Reconcile the liability using all expenses, OCI and actual plan cash flows.
Worked example
- Given
- Opening liability 20; discount rate 4%; service cost 3; remeasurement loss 1.
- Calculate / decide
- P&L = 3 + 0.8 = 3.8; ending liability = 20 + 3.8 + 1 = 24.8.
- Result
- No cash flows assumed; the remeasurement loss enters OCI.
Watch for: Do not import this IFRS expense split into a different reporting framework without checking its rules.
Practise this ideaMETHOD 04
Normalize before comparing
Recurring earnings = reported earnings - nonrecurring after-tax gains
- Remove identified nonrecurring items on a consistent after-tax basis.
- Compare like-for-like recurring earnings across periods.
- Investigate large accruals; a warning signal is not proof of misstatement.
Worked example
- Given
- Reported earnings 70 include a one-off after-tax gain of 10; prior recurring earnings 50.
- Calculate / decide
- (70 - 10) / 50 - 1 = 20%.
- Result
- Comparable recurring growth is 20%, not the 40% reported growth.
Watch for: Not every difference between earnings and cash flow is improper accounting.
Practise this ideaQuestions about this topic
- Why must I identify the accounting method before comparing ratios?
- Different methods can recognize or present assets, liabilities and income differently. Trace those differences through the ratio’s numerator and denominator before interpreting economic performance.
- Does a distribution always represent new investment income?
- No. For a simple equity-method investment, distributions generally reduce the carrying amount while relevant investee profit is recognized separately. Read the method and facts to avoid double counting.
- Can high reported earnings coexist with weak reporting quality?
- Yes. Inspect recognition, estimates, cash-flow consistency and disclosures. A large earnings figure alone does not establish faithful reporting or sustainable performance.
Sources and curriculum scope
Official outlines establish curriculum scope. The explanations and worked examples are independent teaching material; the sources do not verify or endorse them.
- 2026 CFA Level II outline: Financial Statement Analysis
- CFA Institute: Level II exam and item-set format
- 2026 CFA Level 2 curriculum outline
- 2027 CFA Level 2 curriculum outline
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