Section A — Financial
Statement Analysis
A sample from our CMA Part 2 Short Notes. Full notes cover all 9 topic groups across 16 study units — ratio analysis, earnings quality, DuPont, EPS, and more.
Published income statements don't show EBIT or EBT as line items — but the CMA exam uses them constantly. You must know how to derive them from the income statement.
| Measure | What it Includes | What it Excludes |
|---|---|---|
| Operating Income | Revenues + Core business expenses (COGS, SG&A) | Interest income/expense, non-operating items, taxes |
| EBIT | Operating Income + Interest income + Non-operating gains/losses + Discontinued ops (pre-tax) | Interest expense, taxes |
| EBT | EBIT minus interest expense | Income taxes only |
| Income from Continuing Ops | Everything above "Discontinued operations" line including taxes | Discontinued operations |
| Net Income | All items including discontinued ops | Nothing |
Operating Income ≠ EBIT unless the company has no interest income, non-operating gains/losses, or discontinued operations. The exam loves to test this distinction.
Use Income from Continuing Operations (not Net Income) to forecast future performance — discontinued operations won't repeat.
Express every line item as a percentage of a base figure. For the income statement, base = Net Sales (100%). For the balance sheet, base = Total Assets (100%). Allows comparison between companies of different sizes.
- Compare across companies: Remove the effect of size — a $10M company vs. a $10B company become comparable
- Spot cost structure issues: If COGS% is rising, margins are being squeezed
- Balance sheet: Inventory = 35% of assets → high for a service company, normal for a retailer
Analyze how each line item changes over time. Two formats: (1) Index-number (base year = 100), or (2) Annual % change (growth rate).
Good for multi-year trend lines. Shows cumulative growth.
Shows year-over-year growth rate. Easy to spot acceleration or slowdown.
- Horizontal analysis reveals trends — is the company improving or deteriorating?
- Combine with vertical analysis: if revenue grows but COGS% also grows, profitability is shrinking
Ratios turn raw numbers into meaningful relationships. A ratio alone means nothing — it must be compared against: prior periods (trend), industry benchmarks, or management targets.
| Category | What It Measures | Primary Users |
|---|---|---|
| 1. Liquidity | Ability to pay short-term obligations when due | Short-term creditors, banks, suppliers |
| 2. Leverage / Solvency | Ability to pay long-term obligations; financing mix | Long-term creditors, bondholders |
| 3. Activity | Efficiency in managing assets (AR, inventory, AP) | Management, analysts |
| 4. Profitability | Per-share metrics + overall company profitability | Equity investors, analysts |
- Rule 1 — Use Average Balances: When a ratio mixes an income statement number with a balance sheet number, use the average balance sheet balance (beginning + ending ÷ 2).
- Rule 2 — Both balance sheet items: Year-end balances are fine.