How Engineers Should Approach Their CFA Exam Preparation
There are certain topics in the CFA Level 1 curriculum that make engineers very uncomfortable. These topics are not difficult, but since engineers have not studied the basics of finance and accounts in school and college, they find it intimidating. Making matters worse, during classroom training sessions, when everyone with a commerce background is able to grasp these concepts easily, engineers feel out of place and this increases the level of uneasiness, sometimes leading to frustrations.
The idea of this article is to identify what particular topics cause trouble for engineers while preparing for the CFA Level 1 exam and how to approach them in order to minimize the feelings of frustrations. But before we do that, engineers need to be aware that they need to put in a lot more time and effort in preparing for the exam than someone who has a finance / accounts background. Engineers have to cover up for all those years in school and college when they were studying science while others were honing their finance and accounting skills.
The two topics that engineers should spend more time on are Financial Reporting and Analysis (FRA) and Corporate Finance (CF). At the time of posting this article, the combined weight of these two topics in Level 1 exam is varies between 20 – 30%. Therefore it becomes extremely important to get a good understanding of all the material covered under these two topics. Let's start with FRA.
Financial Reporting & Analysis:
FRA has three readings dedicated to Income Statement, Balance Sheet and Cash Flow statement. It is important to understand the structure and each individual component of these financial statements. In addition, the relationships between these statements are also important, i.e. how a change in one statement impacts the others, how numbers flow from one statement to the other. For example, understanding the impact of revenue / cost recognition methods on profitability and ratios. This material forms the base for the topics that follow in FRA such as:
· Basic EPS / Diluted EPS
· Inventory cost flow methods
· Income taxes
· Pension plans
Even in corporate finance, thorough understanding of the financial statements is essential in the following areas:
· Weighted Average Cost of Capital (WACC)
· Measures of Leverage
· Working Capital Management
Engineers should not rely only on supplementary study notes such as Schweser for the above-mentioned topics. These topics are covered at length in CFA Institute books and hence should be used as the primary mode of study. Remember that candidates from varied backgrounds appear for the CFA exam and the CFA Institute has designed their study material keeping the same in mind.
In case a candidate has joined any coaching classes, he / she should read these topics at-least once before they attend the class. I have seen engineers in tears during the class when they have not read the material beforehand. They feel like driving a truck on a Formula 1 circuit, unable to catch up.