Important LOS(s) for revision

Have any of you guys made a list of LOS(s) which are maybe tricky / have a high probability of coming in the exam and should be re-revised? It will be great if you could either share that or comment on this post naming those LOS(s).

Thanks a bunch for your help

I don’t know about probabilities, but I for one would feel awkward if I missed the test by not being able to

  • value and price a swap

  • soft dollar standards (oh! so difficult!)

  • key requirements of the ROS (research obj…)

  • the 5 standards carrying over to New P. Inv. rule: care, caution, impartiality, loyalty, skill

  • the ANOVA matrix (how to calculate MSE and all that)

  • inventory valuation’s depreciation under GAAP and IFRS: the terms ‘net realizable value’ (nrv) and ‘market value’ (aka replacement cost) and the boundaries with the corridor nrv and nrv - profit margin (pfmg). IFRS: min[cost, nrv]. GAAP: min[cost, market] where nrv > market > nrv-pfmg. Remember: It’s GAAP that has the corridor, IFRS goes straight at net realizable value without the corridor.

  • how to amortize a bond held-to-maturity and what it’s value on the B/S is. In Schwesre mocks it often shows up to determine the impact on net income.

  • pension expense and how a firm’s contributions above its economic pension expense is seen as reduction of principal (read: of PBO) so ordinary contributions goes as operating cash flow but excess part as financing cash flow. (Ugh!)

  • that you start with I/S when translating under current rate and with B/S when translating temporal. For temporal, retained earnings is the plug figure. Derive what net income must be to get to that number. For the all current you start with NI on the I/S, find retained earnings, throw it up on the balance sheet and find out how much gap there is to make assets and liability side balance.

Here is some more stuff:

  • to tell the difference between which accounts you bring in when you calculate Working Capital, and which ones you bring in when you calculate Operating Assets. Cash and cash equivalents are part of working capital, but not operating assets. Similarly: operating liabilities are total liabilities minus total debt (long and short).

  • The formula for after-tax cash flow in Corporate Finance: CF = (S - C - D)(1-T) + D where you bring back the effect of D (depreciation).

  • economic income and it’s component economic depreciation (changes in market value) and after-tax cash flow.

  • economic profit = EVA = NOPAT - $WACC = EBIT(1-t) - WACC * invested capital, where invested capital is net Working Cap + net Fixed Assets = book value of LT debt + book value of equity = liability side minus operating liabilities.

  • residual income = NI - equity charge where the equity charge is the required rate on equity times equity.

  • MVA = market value added = difference between LT debt and equity, and the book value of invested capital.

  • corporate government best practices (the chairman is not the CEO and all that)

  • the boundaries for Herfindahl: 1000-1800 and changes of 100 and 50 for the moderately and highly concentrated industry.

  • formulas for evaluating merger bid: Value to target, value to acquirer and the adjustment formula for pricing the target when bought with stock: N x P(AT).

  • Porter’s 5 forces (1) bargaining power of suppliers, (2) ditto customers, (3) rivalry, (4) theat of entry, (5) substitutes. And the 5 components of industry analysis: (a) classification, (b) external factors (technology, government, social changes, demography, foreign influence), © demand ana, (d) supply ana., (e) profitability ana.

  • PVGO, that you divide E by r to get to the “perpetual” then remove that from pesent value (the price) to get to the PVGO.

  • sustainable growth rate g = PRAT. Profit margin x Retention ratio x Asset turnover x Financial leverage = (NI-div)/NI x (NI/sales) x (sales/total assets) x (total assets/equity). Cf. DuPont and the formula g = b x ROE where ROE comes out of DuPont.

  • Those formulas for FCFF and FCFE. FCFF = NI + I(1-t) + Dep - FCInv - WCInv, and FCFE = FCFF - I(t-t) + net borrowing. Rememer that NI can be replaced: NI = (EBIT - Interest)(1-t) and NI = (EBITDA - Interest - Depr)(1-t). Also remember that (FCInv - Dep)*DR + (WCInv)*DR will give you required Net Borrowing and that DR = debt/(debt+equity) and not D/E.

  • How to algebraically use Gordon’s formula to get to leading P/E, trailing P/E, P/S as profit margin x trailing P/E, and P/B as (ROE - g)/(r- g)

  • NPV method and IRR method to come up with the fraction f for private equity

  • valuing a swap, a FRA (with implied forward rates), put-call parity when the Stock is replaced by a Future.The delta (percentage change in option for 1% change in underlying) as N(d1) from Black-Scholes.

  • the standard deviation for a two-asset portfolio [think: (a + b)^2 = (a^2 + b^2 + 2ab)]

  • the equally weighted portfolio: portfolio variance goes towards average covariance or, equivalently, average variance times rho.

  • beta is covariance for asset and market divided by market’s variance. Replace covariance with rho x std dev asset x std dev market and abbreviate --> rho x std dev asset / std market.

  • intercept of macroeconomic models is expected return since those models work with “surprices” (no surprices you get what you expect) but the APT is an equlibrium-model based on true risk premia so the intercept is the risk-free rate, same as for CAPM but with more risk factors.

  • foreign currency risk premium and it’s relation to the expected changes in spot rates, and the interest rate differential = LOS 62e + 62h.

  • “a new asset will contribute to the portfolio if the Sharpe ratio of the new asset is LARGER than the product of the Sharpe ratio of the portfolio with the correlation of the new asset’s return with the current portfolio’s return”.

  • “underlying earnings” = “persistent core earnings”.

  • all those basic ratios from the Level I formula sheet


I like this list because it’s all stuff I feel comfortable with like a cozy blanket and it gets my vote, but the real question is Why this list?

Why not? Why do you ask? Maybe you would have preferred to have a list listing actual LOS numbers? But you can do that translation yourself very quickly since you already knew the curriculum.

In any case people interpret questions and answers as they like, there’s no right or wrong way to post in a thread. I wrote the list for me, it is important - to me.

@jsalvar: Why did you quote the entry by the way? It was unnecessary with a lengthy quote since the original was just above… I’ve often seen how people quote lengthy entries and then just add a one-liner at the bottom, and always thought it is a waste of space especially since that one-liner not always add anything that is interesting to anybody.


two points for you.

i see that the quote can be undesireable, you make a good point about the economy of space and it would have followed nicely without the quote. i never really thought about the waste of space, but it seems like good form especially since it is a long post. frankly, quite surprised about the rebuke and meanness with which you deliver your remarks, but its your life.

secondly, i am not sure how you interpreted my comments and again, blown away by your reaction, but i will clarify because i do think its an interesting question. i actually do like your list of LOS becuase they are what i have seen from the sample sweiser and mock exams . i worked through those problems and would probably plenty of them wrong again but at least it is stuff i have seen and have a feel for.

that mock exam however totally blew me away and now i am definitely wondering if i have been focusing on the wrong subjects. i ask myself what does have the highest probability of showing up? what does the cfai want to make sure you know and how do they determine what it is they want you to know? most importantly, given that i have a finite amount of time to study, what do i focus on?

one definite indication must be the changes in the LOS 2011-2012 right? items eliminated are no longer important to the cfai, and newly added items must definitely carry some importance for whatever reason, be it changes in accounting standards, contemporary financials hot issues (pensions, hedgefunds, enron), etc.

i also suspect the financial industry, the constituents or customers of the cfai, has some direct or indirect influence as to what the cfai chooses to teach. afterall, in order to continue to be a going concern they must stay relevant to the industry and must promote principals and skills relevant to the industry, dont you think?

so, the questions was whats the most tricky/high probability?

your list, was it especially tricky? do you feel there is a high probability? if so, why? is it what you have reapeatedly on sample exams you have taken? do you believe they form a core foundation for financial analysis? do you use the concepts in your work everyday? have you taken the exam in the past? did you just pull them out of a hat?

did you really just write the list for yourself - then posted it on a public forum?

i ask Why? because i want to understand your reasons and the reasons of any other poster who shares their ideas. I assume you are an intelligent, perhaps slightly frazzeled person and i totally understand, (i really do!) so I would like to know why you chose what you did?

like you said, there is no right way or wrong way to post in a thread (except for me apparently, he he), and there is no right or wrong answer. can you share your thoughts, insights?


Thanks a bunch Wawa for your inputs, those were helpful.

Any other important LOS(s) anyone?