My Road to CFA

I have to say sorry to all of you that I have not written anything here for so longer. Nevertheless, the subscription number rise somehow, which I don't know why.

Why I suddenly write something here today? Because I have started a new blog: Wandering around Financial Cities (http://louis-fina.blogspot.com). I write there on finance, economics, and others. Do subscribe to my new blog.

To those who are concerned about the CFA exam, I am delighted to tell you all that I have passed the level I and now going for the level II. For those who will take the June exam, work hard together to pass!

I said in my introduction to this blog that I want to try my best to summarize the material I have read for my own note and for your reference. After I have finished the financial statement analysis material for once, and attempt to summarize, I found that I don't know where to start with. But I have to anyway, because actually producing the knowledge in words by yourself will help you to consolidate in your memory.

So perhaps I would like to start with the Statement of Cash Flow, because I don't know why I found it the most difficult part, especially when I first encountered this part. The problem is that unless you know well about things from Study sessions 9 and 10, that is hard to fully understand the construction of cash flow statement.

So first of all, the need for constructing a cash flow statement is that, due to the accrual concept and the matching principle, the revenue and cost are recognized not by the actual cash inflows or outflows, but whether the revenue has been "earned" and whether the cost has been "incurred". As a result, often time the revenue is booked on the income statement, but the cash has not been collected, or the cost has been booked on the income statement, but the cash has not been paid. Also, there are costs or expenses on the income statement which has no cash flow, like depreciation and amortization expenses, earnings from unconsolidated affiliates, etc. So statement of cash flow is needed to provide information for investors and creditors about the acutal cash collection and inputs.

The statement of cash flow are divided into three main parts. The first part is the cash flow from operating activities (CFO), which attempts to capture the cash flow from the normal operation of the firm, like sales, cost of good solds, working capital changes, and so on. The next part is the cash flow from financing activities (CFF), which captures the cash flow from financing of the firm like raising debt, repaying principal of debt or mortgage, issuing stocks, etc. Then comes the cash flow from investing activities (CFI), which includes the items like capital expenditures, investment in lands, purchasing of property, plants and equipment, etc. After these three parts, there will be a seperate line item to reconcile the differences arose from translation of foreign currencies. So the change in cash balance in that particular fiscal year can be found. The change in cash in the statement of cash flow will reconcile with the cash asset value in the balance sheet:

End Cash balance = Beginning Cash balance + change in cash (as in the statement of cash flow)

There are two ways of constructing the statement of cash flow as allowed in the US GAAP. The more widely used method is the indirect method, while the second method is the direct method. The difference between two ways of constructing the statement of cash flow lies in the construction of the CFO part of the statement.

(to be continued next time)

I have almost finished my first time review of the material for Financial Statement Analysis. As a person with no accounting background, it was like a torture to study Financial Statement Analysis (Study Sessions 7 to 10).

CFA is not an exam at an introductory level. Also consider that Financial Statement Analysis is the most important topic in the Level I exam. My advice is, read for more than one times, because it is really difficult, especially for people like me.

Financial Statement Analysis in CFA Level I emphasizes on the use of financial statements for analytic purposes, So the process of bookkeeping or doing journal entries are not required. But I found that knowledge in bookkeeping will at least help you a bit on understanding the material, so again, my suggestion is to get at least a basic understanding of those things.

To know more about bookkeeping and, most importantly, the double-entry method, please see an introduction in Wikipedia:

http://en.wikipedia.org/wiki/Double-entry_bookkeeping_system

It would be of great help if you have  a better understanding of Debits and Credits, which are quite different from the usage from normal "everyday-life" sense.

I finally received my graduation result. A nice surprise: I was awarded a Bachelor of Social Science with Honors, First Class.

My teacher in high school often ask us to work hard in the college and get the first class honor. It was partly because she graduated with First Class Honor too, and she thinks that it is so important to get a First Class Honor. However, there are only a few students within a department who would graduate with First Class Honor, and perhaps the majority of them would actually graduate with Second Class Honor Upper Division. Being able to graduate with First Class Honor is a matter of luck. If the graduating students of that year are of very high standard, you have a less chance of getting a First Class Honor.

So except that the First Class Honor would cheer me up a little bit for a little while, what's the use of that? I speculate that there is nothing so good about getting a First Class Honor: I am still jobless. Of course, if I am going to do graduate studies, I will have a bigger chance to be financed with scholarship. But I have given up graduate studies now, and looking for Banking/Finance jobs. Given my Social Science Degree, what's the use of a First Class Honor in Social Science in finding a Banking/Finance job. Seems nothing.

My switch to Finance is a dramatic one, and also a difficult one. That is the reason for me to take the CFA, because I want to learn, and I want to prove to others that I know those things. CFA is really tough, but I believe in myself.

My goal is to get a equity analysis job in first-tier investment banks. I believe in myself: sooner or later, I will be able to get one.

In CFA level I exam, financial statement analysis is the most important topic, which accounts for 20% of the total exam. I have no accounting background, as I am a social science student, the whole accounting thing is really new and strange for me. I felt that it is extremely difficult at first.

In CFA level I exam, there are 4 study sessions committed to financial statement analysis. Study session 7 is the introduction to financial statements, analysis of statement of cash flow, and diversity of accounting standards. Study session 9 is inventory accounting and analysis of long-term assets. Study session 10 is not income tax analysis, financing liabilities and off-balance sheet items. Study session 8 is ratio analysis and EPS.

These four study sessions are really highly related. It might seems to be extremely difficult at first to analyze the statement of cash flow before you know at least a little bit on depreciation and disposal of long-term asset (like PP&E, etc), which is discussed in study session 10. I can say that my initial difficulties in doing the study session 8 was that I really don't know about depreciation and disposal!

As a result, it is very difficult for anybody who has no accounting background to review these study sessions, because many times if you have not studied study sessions 9 and 10, you would not know what's going on in session 7. So from my experience, my recommendation is that if you encounter difficulties at some points, the better way would be to skip that and go ahead, and return that those points later. In this way, you may get a better insights on those points.

Job hunting is indeed very frustrating for me.

Partly (or mainly) because of my background as a social science student, and partly because I was once very academic and research oriented in college, I do not have much knowledge in finance, and I do not have much social network. That is perhaps the major problem for me in the process of switching to finance.

Also, social science students are generally not keen on earning a big money, so people around you would not bother to talk about applying summer internships or any jobs, so we miss many chances to explore the world of business and finance.

I remembered that it was a very hard decision to give up studying an MPhil in my home department and switch to finance. And it is also very hard to switch. I don't know if anyone have similar experience with me and would provide me some insights on what to do with my career in finance.

Indeed, I really freak out today, after doing an interview in a bank yesterday, which I don't know if I should be confident in getting that offer. Can't god just give me some luck to enter the finance sector first?

I will be taking the Level 1 exam in the coming December, and I have started studying it. For a person without much of the finance background, the preparation is quite painful.

The Level 1 exam 2007 consists of 18 study sessions. SS 1 is ethics, which I have skipped for the moment. SSs 2 and 3 are quantitative methods, which cover topics like time value to money, probability, basic statistics, hypothesis testing and correlation and regression. SS2 to 3 are relatively easy for me because as a social science student, we do have statistical training in undergraduate studies (of course, social scientist always misuse and abuse statistics, but that's not important for the time being).

SSs 4 to 6 are Economics, which covers microeconomics, macroeconomics, and global economic analysis. So far I have finished SS4, which is relatively easy, as it is not much more advanced than the introductory economic course I have taken in my college. I hope that the remaining 2 SSs in Economics will be not too difficult.

So far the most difficult study sessions for me are the 4 sessions of financial statement analysis (FSA). FSA 1-4 are difficult for people like me, with zero accounting background. But it is very important, not only because it accounts for the largest proportion of questions in the actual CFA Level 1 exam, but also that it is one of the most important things in making sound investment decision, especially if you are believer of fundamental analysis (not technical analysis).

For the remaining sessions, I have really touched on them. They are Corporate finance, Portfolio Management, Equity Analysis, Fixed income, derivatives, and alternative investment. I haven't read them, so I cannot really make any comment at this moment. But I guess they are built on the previous study sessions. So for me, at this moment, would be to master the material in SSs 2 to 11, then I may have a better time in the remaining two books of material.

Last night, I started to toy with the idea of creating a blog about my own road to CFA.

The reason is quite simple. If you are a candidate of CFA, you will know. CFA is an exam in which the scope is unimaginably large and so difficult. When you finish reading the material for one study session and read another, soon you will forget about the study session you have read before. I started to toy with the idea of blogging my progress of studying partly because this is a medium or platform for me to record my thoughts on the material, and also it will serves as a place for me to make notes for myself. Also, it would serve as a place that readers and I can discuss.

Overall I find it not a bad idea to start, so I now start.

Perhaps you would like to know who I am. I am a fresh graduate from one of the top University in Hong Kong, I am a social science student. It would be funny that I, as a social science, would take CFA exam. Anyway, I have taken it, for learning more knowledge on finance, and for gaining qualification for me to switch to finance industry. I hope this blog will keep running in the future, so that readers and I can share not only about CFA, but also on various topics in finance, investment, and perhaps about life too.

So this is a short introduction.