Corporate Issuers and Financial Statement Analysis: CFA Level 1 Course

Corporate Issuers and Financial Statement Analysis: CFA Level 1 Course

Azhar ul Haque Sario

Copyright

Copyright © 2025 by Azhar ul Haque Sario

All rights reserved. No part of this book may be reproduced in any manner whatsoever without written permission except in the case of brief quotations embodied in critical articles and reviews.

First Printing, 2025

[email protected]

ORCID: https://orcid.org/0009-0004-8629-830X

LinkedIn:  https://www.linkedin.com/in/azharulhaquesario/

Disclaimer: This book is free from AI use. The cover was designed in Canva.

Disclaimer: This book is an independent publication. It has not been authorized, sponsored, or otherwise approved by the CFA Institute. CFA® and Chartered Financial Analyst® are registered trademarks owned by the CFA Institute. The use of these trademarks is for identification purposes only under the nominative fair use doctrine and does not imply any affiliation with or endorsement by the CFA Institute.

Contents

Copyright

Course 1: Corporate Issuers

Organizational Forms, Corporate Issuer Features, and Ownership

Investors and Other Stakeholders

Corporate Governance

Working Capital and Liquidity

Capital Investments and Capital Allocation

Capital Structure

Business Models

Course 2: Financial Statement Analysis

Introduction to Financial Statement Analysis

Analyzing Income Statements

Analyzing Balance Sheets

Analyzing Statements of Cash Flows I

Analyzing Statements of Cash Flows II

Analysis of Inventories

Analysis of Long-Term Assets

Long-Term Liabilities and Equity

Analysis of Income Taxes

Financial Reporting Quality

Financial Analysis Techniques

Introduction to Financial Statement Modeling

About Author

Course 1: Corporate Issuers

Organizational Forms, Corporate Issuer Features, and Ownership

    1. Choosing Your Armor: A Guide to Business Structures

Starting a business is like stepping into an arena. Before you face the challenges, you must choose your armor. This choice—your business structure—is more than just paperwork; it defines how you move, how you fight, how you are protected, and how you share your victory.

Imagine the lone artisan, the freelancer who decides to turn their passion into a paycheck. They step into the arena wearing nothing but their own clothes. This is the sole proprietorship. There is no separation between the warrior and their work. Every coin earned is theirs to keep, a simple and direct reward. But every blow lands directly on them. A lawsuit from an unhappy client doesn't just threaten the business; it threatens their home, their savings, their entire world. This is the path of ultimate freedom and ultimate risk, like a tightrope walker with no safety net.

What if two warriors decide to fight back-to-back? They form a partnership, a pact of shared effort and shared destiny. A web developer and a graphic designer, for instance, can now take on bigger dragons together. They move with more power, and like the sole proprietor, the spoils of their adventures flow directly into their pockets without being taxed twice. They create an agreement—a map of their alliance—charting out who does what and how the treasure is split. But their fates are intertwined. If one partner makes a reckless move and gets sued, the other is just as liable. Their alliance, while powerful, means they share each other's vulnerabilities completely.

For those who need more than just skill and courage—for those who need to build a fortress—there is the corporation. This isn't just armor; it's a separate entity, a legal golem you create. The corporation itself can hold debt, sign contracts, and fight battles. This creates a powerful shield of limited liability. If the business is besieged by creditors, the founder’s personal castle remains untouched. This ironclad protection and its ability to sell small pieces of itself (stock) to raise vast sums of money make it the structure of choice for empires. But this power comes at a cost. The golem demands tribute: it is taxed on its profits, and then you are taxed again when you take your share, a phenomenon known as double taxation. Its creation and upkeep are also steeped in ritual and regulation.

But what if you want the fortress walls without the complicated rituals and double tribute? You might build a Limited Liability Company (LLC). This is the masterwork of modern business structures, a brilliant hybrid. It’s like wearing a suit of lightweight, flexible, yet incredibly strong mythril armor. It provides the personal asset protection of a corporation—that essential shield—but allows profits to pass through to the owners to be taxed only once, like a partnership. It’s the best of both worlds, offering protection without the burdensome weight of corporate formality, making it the champion’s choice for many modern ventures.

Finally, there is the path of the collective: the cooperative. This isn't about individual glory or profit. It’s a fellowship, owned and governed by the very people who use it—a farmers' market where the farmers own the stalls, or a credit union where the members are the owners. The goal isn't to create wealth for distant investors, but to serve the community it comprises. Profits are returned to the members like a shared harvest, strengthening the group as a whole. It’s a business model built on mutual benefit, a testament to the idea that we can go farther together.

2. The Corporate Blueprint: Anatomy of an Issuer

A corporation that offers shares or bonds to the public is known as a corporate issuer. But what is it, really? It’s a fascinating human invention—an economic lifeform, a legal person built not of flesh and blood, but of ideas, contracts, and capital. Understanding its anatomy reveals how modern commerce achieves its incredible scale.

The very soul of the corporation is its existence as a separate legal entity. This is the source of its magic. It is a shield, a firewall that divides the life of the business from the lives of its owners. The corporation can be sued, can go into debt, can fail spectacularly, but the shareholders who own it risk only the money they paid for their shares. Their personal assets are safe behind this legal wall. This limited liability is the bedrock promise that encourages people to invest in bold, risky ideas.

Its skeleton is built for endurance. A corporation has perpetual existence, meaning it's designed to be immortal. Unlike a person, its life isn't tied to its creators. Founders can retire, executives can leave, and entire generations of shareholders can pass on, but the corporation, as a legal entity, can sail on through time. This stability allows it to undertake projects that span decades and build legacies that outlive any single individual.

The lifeblood of a corporation is transferable ownership. Ownership is represented by shares, which are like liquid units of the company’s essence. In a public company, these shares can be bought and sold in an instant on a stock exchange, making it easy for investors to enter or exit their position. This liquidity is what allows capital to flow so freely through the economy, seeking out the most promising ventures.

Its brain is a unique, tiered structure. The owners—the shareholders—are like the citizens of a nation. They don't run the country day-to-day. Instead, they elect a Board of Directors, a sort of governing council, to set the grand strategy and protect their interests. This Board then appoints the officers—the CEO, CFO, and other executives—who act as the government, managing the daily operations. This separation of ownership and control allows for professional management, but it can also create tension if the goals of the managers stray from the will of the owners.

Finally, a corporation has a powerful metabolism: an unparalleled access to capital. By issuing stocks (equity) and bonds (debt) to a global pool of investors, it can raise astronomical sums of money. This ability to convert public belief into financial fuel is what powers massive innovation, global expansion, and the kind of world-changing projects that no individual or small partnership could ever dream of funding. In return for this power, however, corporate issuers must live a life of regulated transparency, constantly reporting on their health and activities to the public they serve.

3. Two Worlds: The Public Stage vs. the Private Fortress

While all corporations share a common DNA, they exist in two profoundly different worlds. The choice to be a public or private company dictates a business's entire way of life, pitting the allure of the global stage against the quiet strength of the private fortress.

To become a public company is to make a grand debut on the world stage through an Initial Public Offering (IPO). You are now a celebrity. Your name—your stock ticker—is broadcast across the globe, and your fortunes rise and fall in real-time for all to see. The primary reward for this fame is an almost limitless access to capital. You can invite millions of investors, from massive institutions to everyday people, to fund your dreams. This public market also offers a clear exit for founders and early investors, who can sell their shares and turn their years of hard work into tangible wealth.

But life in the spotlight is demanding. Public companies live in a glass house, constantly scrutinized by regulators like the SEC, by analysts, and by the public. They must confess their secrets in quarterly and annual reports, revealing everything from profits to executive pay. This transparency is meant to protect investors, but it’s a costly and heavy burden. Worse, the constant tick of the stock market creates immense pressure to deliver short-term results. This quarterly capitalism can force a company to sacrifice its long-term vision for a temporary boost in its stock price, forever performing for the applause of a fickle audience.

In stark contrast, a private company lives within a fortress. Its ownership is a closely-guarded secret, held by a small circle of founders, a family, or private equity firms. They answer to no one but themselves. This privacy is their greatest asset. Free from the glare of public scrutiny and the tyranny of quarterly earnings reports, they can afford to be patient. They can cultivate long-term strategies, invest in projects that won't pay off for years, and protect their operational secrets from competitors. Their governance is a council of allies, not a chaotic public forum, allowing for swift, unified decisions.

The price of this privacy is a more limited arsenal. Raising capital is a quieter, more arduous affair, relying on bank loans or negotiations with a handful of powerful investors. There is no open market for their shares. This illiquidity means owners can't easily cash out. Selling a stake is a complex, private transaction, not a simple click of a button. Control is concentrated, and the vision is pure, but the resources are finite.

Ultimately, the choice is a philosophical one. Do you seek the vast resources and liquidity of the public stage, accepting the costs of fame and scrutiny? Or do you value the autonomy, privacy, and long-term focus of the private fortress, content with the deliberate pace of building from within? Each path has created giants, and each represents a different definition of success.

Investors and Other Stakeholders

1. The Financiers' Duet: The Steady Hand and the Skyward Bet

Imagine a company isn't just a ship, but a grand expedition to climb a formidable mountain. To even begin, the expedition needs two very different kinds of backers: the pragmatic Base Camp Manager and the daring Summit Team. This is the essential duet of debt and equity, of lenders and shareholders.

Lenders are the Base Camp Managers. They are the masters of logistics, the guardians of safety. When they provide capital, it's like stocking the base camp with ropes, oxygen, and food. They aren’t dreaming of the summit’s glory; they are focused on a successful, predictable operation. Their claim is a contract, as solid and dependable as the ground beneath them. They hand over their resources in exchange for a simple, solemn promise: You will pay us back, on time, with a little extra for our trouble (interest). Their motivation is the quiet hum of capital preservation and a steady, reliable return.

Because their reward is capped—they only get back what was agreed upon—their entire focus is on mitigating disaster. They are obsessed with the weather reports (cash flow statements) and the climbers' health (financial stability). They write the rulebook, known as covenants, which might say, Don't attempt that risky new route or Don't throw a lavish party until your supplies are replenished. In the catastrophic event of an avalanche (bankruptcy), the Base Camp Managers have first claim on any salvaged equipment. They get their gear back before anyone else. They are the voice of caution, ensuring the expedition doesn't run out of rope before it even leaves the ground.

Shareholders are the Summit Team. They are the adventurers, the ones with their eyes locked on the peak. When they invest, they are buying a place on the climbing team, lacing up their boots for the ascent. Their claim isn't written in a contract; it's a bet on reaching the top. They are entitled to what's left over—the glory, the breathtaking views, the fame—but only after every rope, carabiner, and food packet has been paid for. This is their residual claim, a position of exhilarating risk.

They aren't motivated by the steady interest payments of the base camp. They crave the exponential reward of standing on the summit: capital appreciation. They believe the expedition will not just succeed but will discover a new route, becoming legendary and making their stake in it priceless. They may receive periodic supply drops from the company's surplus (dividends), but their real prize is the soaring value of the journey itself. As part-owners, they get to vote on the expedition's leader and the overall strategy. Should we climb the treacherous North Face for a chance at eternal glory? The Summit Team gets to weigh in. Their fortune is lashed directly to the fate of the climb, making them the engine of ambition and the bearers of ultimate risk.

The dynamic tension between the Base Camp’s prudence and the Summit Team’s ambition is what propels the entire enterprise forward. Management is the lead climber, tethered to both, listening to the cautious advice from below while feeling the powerful pull toward the sky above.

2. The Company's Orbit: A Universe of Stakeholders

A company is not a machine. It’s a living, breathing entity with a complex web of relationships, like a person at the center of a bustling community. To see a business as only serving its owners is like saying a person’s only purpose is to make themselves rich. The truth is far more intricate and beautiful. A company's success is defined by the health of all its relationships—with its family, its friends, its neighbors, and itself. These are its stakeholders.

Let's walk through the company’s inner circle and wider orbit:

Shareholders are the Ambitious Parents. They brought the company into being and have a deep, vested interest in seeing it grow up to be wildly successful and wealthy. Their primary hope is for a spectacular return on their emotional and financial investment. They dream of seeing their child become a titan of industry, which translates to a rising share price and generous dividends. They get a say in the big life choices, hoping to steer their offspring toward maximum profitability and influence.

Employees are the Heart and Hands. They are the very life force of the company, the ones who pour their talent, energy, and time into its daily existence. Their needs are visceral: a fair wage to live on, a safe place to work, a sense of security, and the chance to learn and grow. They want to feel respected and valued, to know that their work has meaning. A company with a broken heart or weak hands, no matter how ambitious its parents, will ultimately falter.

Customers are the Partners in a Relationship. A company's survival hinges on its ability to woo and maintain the loyalty of this group. The customer’s interest is simple: Do you offer something that makes my life better, at a price I find fair? Can I trust you? They crave reliability, quality, and a sense that they are heard. A company that betrays this trust—with a shoddy product or a dismissive attitude—will find itself quickly and devastatingly single.

Suppliers are the Trusted Allies. These are the partners who provide the essential tools and ingredients the company needs to function. Their interests are built on a foundation of mutual respect and reliability. They need to be paid on time, treated fairly, and to have a stable, predictable partnership. They are the roots that feed the tree; if the roots wither from neglect, the whole organism suffers.

Lenders are the Cautious Mentors. As we've seen, they are the financially-minded advisors who provided crucial early support. Their interest is purely in the company’s financial discipline. Are you living within your means? Can you honor the commitments you made to me? They watch the bank account, not the daily drama, focused solely on the return of their principal plus interest.

The Community is the Neighborhood. A company doesn't exist in a vacuum; it lives on a street, in a town. The community wants it to be a good neighbor. This means providing local jobs, paying taxes, keeping the street clean (not polluting), and maybe even sponsoring the local little league team. A company that acts like a bad neighbor—loud, messy, and selfish—will soon find itself unwelcome, its social license to operate revoked by angry residents.

Government and Regulators are the Laws of the Land. This group sets the ground rules for everyone. Their interest is in ensuring the company plays fair, respects the law, protects the public, and contributes its share to society's upkeep through taxes. They are the ultimate referees, holding the power to penalize or even shut down a company that refuses to operate within the established bounds of society.

The true art of leadership is not just chasing profits for the parents, but orchestrating a harmony between all these competing, legitimate needs. It's about building a legacy, not just a balance sheet.

3. The Company's Soul: Reading the ESG Character Report

For decades, we judged a company by its financial vital signs—its revenue, its profit, its assets. This was its annual physical exam. But today, savvy investors know that a healthy body can still house a troubled soul. They are now demanding a character report, a deeper look into a company's conscience. This is the world of Environmental, Social, and Governance (ESG) factors. It’s not about how much money a company makes, but how it makes its money.

E for Environmental: How It Treats Its Home

This is the measure of a company’s relationship with Planet Earth. Is it a graceful tenant or a destructive slob? Investors are no longer ignoring the ecological bill coming due.

    Climate & Carbon Footprint: Does the company walk heavily or lightly on the earth? What is its carbon shadow? Is it a glutton for fossil fuels, or is it turning its face toward the sun and wind for power? This is about its long-term viability on a changing planet.

    Resource Thirst: Does it drink greedily from the world’s finite