Study guide
2.1 Financial Statements Overview
Series 65 Uniform Investment Adviser Law
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1 Introduction
About the Series 65 How to Use This Guide
2 Chapter 1: Economic Factors & Business Cycles
1.1 Business Cycles 1.2 Monetary Policy 1.3 Fiscal Policy 1.4 Inflation & Deflation 1.5 Interest Rates & Yield Curves 1.6 Global Economic Factors
3 Chapter 2: Financial Reporting & Analytical Methods
2.1 Financial Statements Overview 2.2 Accounting Fundamentals 2.3 SEC Filings & Annual Reports 2.4 Financial Ratios 2.5 Time Value of Money 2.6 IRR and NPV 2.7 Descriptive Statistics
4 Chapter 3: Types of Risk
3.1 Systematic (Market) Risk 3.2 Unsystematic (Company-Specific) Risk 3.3 Interest Rate & Reinvestment Risk 3.4 Inflation & Currency Risk 3.5 Liquidity Risk & Opportunity Cost 3.6 Risk Measurement & Portfolio Theory
5 Chapter 4: Cash Equivalents & Fixed Income Securities
4.1 Cash & Cash Equivalents 4.2 Treasury Securities 4.3 Agency Securities 4.4 Corporate Bonds 4.5 Municipal Bonds 4.6 Bond Pricing & Yields
6 Chapter 5: Equity Securities
5.1 Common Stock 5.2 Preferred Stock 5.3 Shareholder Rights & Corporate Actions 5.4 Equity Valuation Methods 5.5 ADRs, REITs & Other Equity Securities
7 Chapter 6: Pooled Investments
6.1 Mutual Funds 6.2 Mutual Fund Costs & Fees 6.3 Exchange-Traded Funds (ETFs) 6.4 Closed-End Funds & UITs 6.5 Hedge Funds & Private Equity
8 Chapter 7: Derivatives, Alternative Investments & Insurance Products
7.1 Options Basics 7.2 Options Strategies 7.3 Alternative Investments 7.4 Annuities 7.5 Life Insurance Products
9 Chapter 8: Client Types & Profiles
8.1 Individual Clients 8.2 Business Entity Clients 8.3 Trusts & Estates 8.4 Accredited & Qualified Investors 8.5 Suitability & Know Your Customer
10 Chapter 9: Portfolio Theory & Capital Markets
9.1 Modern Portfolio Theory 9.2 Capital Asset Pricing Model (CAPM) 9.3 Efficient Market Hypothesis 9.4 Risk & Performance Measures 9.5 Asset Allocation
11 Chapter 10: Portfolio Management Strategies
10.1 Investment Styles 10.2 Portfolio Management Techniques 10.3 Fixed Income Strategies 10.4 Return Calculations
12 Chapter 11: Tax Considerations & Retirement Planning
11.1 Capital Gains & Investment Taxes 11.2 Retirement Plans Overview 11.3 Individual Retirement Accounts (IRAs) 11.4 Education Savings Plans 11.5 Distributions & RMDs
13 Chapter 12: ERISA, Special Accounts & Performance Measures
12.1 ERISA Requirements 12.2 Special Account Types 12.3 Performance Measures & Reporting 12.4 QDROs & Special Situations
14 Chapter 13: Regulation of Investment Advisers
13.1 Investment Advisers Act of 1940 13.2 Registration Requirements 13.3 Recordkeeping Requirements 13.4 Custody Requirements 13.5 Exempt Reporting Advisers
15 Chapter 14: Regulation of Investment Adviser Representatives
14.1 IAR Definition & Requirements 14.2 Registration & Post-Registration 14.3 IARs of Federal Covered Advisers
16 Chapter 15: Regulation of Broker-Dealers & Agents
15.1 Broker-Dealer Definition 15.2 Agent Registration 15.3 Regulation Best Interest
17 Chapter 16: Securities Registration & Exemptions
16.1 Uniform Securities Act 16.2 Securities Registration Methods 16.3 Exempt Securities 16.4 Exempt Transactions
18 Chapter 17: Communications & Client Relationships
17.1 Advertising Rules 17.2 Social Media & Electronic Communications 17.3 Client Agreements & Disclosure 17.4 Proxy Voting & Other Obligations
19 Chapter 18: Ethics & Fiduciary Obligations
18.1 Fiduciary Duties 18.2 Prohibited Practices 18.3 Senior & Vulnerable Adult Protection 18.4 AML & Compliance Programs
2.1 Financial Statements Overview
Key Takeaways Explain This Topic AI
Financial statements show profitability, position, and cash flow.
Income statement measures profit over a period.
Balance sheet follows Assets = Liabilities + Equity.
Cash flow covers operating, investing, and financing.
Statements link through net income and ending cash.
Last updated: October 2026
Investment advisers rely on financial statements to evaluate companies, compare investment opportunities, and make sound recommendations to clients. Understanding these documents is essential for analyzing the fundamental value of securities.
Why Financial Statements Matter
Financial statements provide a standardized way to measure a company's:
- Financial position (what it owns and owes)
- Profitability (how much it earns)
- Cash generation (actual money flowing in and out)
Without this information, investment recommendations would be based on speculation rather than analysis.
- The Three Primary Financial Statements
- 1. Income Statement (Profit & Loss Statement)
The income statement shows a company's profitability over a period of time (typically a quarter or year). It answers the question: "Did the company make money?"
- Component Description Formula/Example
- Revenue (Sales) Money earned from operations Total sales of goods/services
- Cost of Goods Sold (COGS) Direct costs to produce goods Materials, labor, manufacturing
- Gross Profit Profit before operating expenses Revenue - COGS
- Operating Expenses Indirect costs SG&A, R&D, depreciation
- Operating Income (EBIT) Earnings before interest and taxes Gross Profit - Operating Expenses
- Interest Expense Cost of debt financing Interest paid on loans/bonds
- Net Income Final profit ("bottom line") After all expenses and taxes
Key Insight : Revenue (top line) shows market demand; net income (bottom line) shows what's left for shareholders.
2. Balance Sheet (Statement of Financial Position)
The balance sheet shows a company's financial position at a specific point in time —like a snapshot photograph. It answers the question: "What does the company own and owe?"
The Fundamental Accounting Equation: Assets = Liabilities + Shareholders’ Equity \text{Assets} = \text{Liabilities} + \text{Shareholders' Equity} Assets = Liabilities + Shareholders’ Equity
- Assets = Liabilities + Shareholders' Equity
- What company owns What company owes Owners' stake
- This equation must always balance —hence the name "balance sheet."
Asset Categories:
- Type Examples Liquidity
- Current Assets Cash, marketable securities, accounts receivable, inventory Convertible to cash within 1 year
- Long-term Assets Property, plant, equipment (PP&E), intangible assets, goodwill Held for more than 1 year
Liability Categories:
- Type Examples Due Date
- Current Liabilities Accounts payable, short-term debt, accrued expenses Due within 1 year
- Long-term Liabilities Bonds, long-term loans, deferred taxes Due after 1 year
Shareholders' Equity Components:
- Common Stock — Par value of shares issued
- Additional Paid-in Capital — Amount received above par value
- Retained Earnings — Cumulative profits not paid as dividends
- 3. Statement of Cash Flows
The cash flow statement shows how cash moved in and out of the company during a period. It answers the question: "Where did the money actually go?"
Three Sections:
- Section What It Covers Examples
- Operating Activities Cash from core business Collections from customers, payments to suppliers
- Investing Activities Cash for buying/selling long-term assets Equipment purchases, investment sales
- Financing Activities Cash from debt and equity Borrowing, stock issuance, dividends paid
Why This Statement Is Critical:
A company can be profitable on the income statement but still run out of cash. This happens when:
- Customers don't pay on time (receivables pile up)
- Inventory builds up faster than sales
- Capital expenditures consume cash
- How the Statements Connect
The three financial statements are interconnected:
- Net Income from the income statement flows to Retained Earnings on the balance sheet
- Net Income is the starting point for Cash from Operations on the cash flow statement
- Ending Cash on the cash flow statement matches Cash on the balance sheet
- In Practice: How Investment Advisers Use This
Analyzing a company's financial health:
- Compare revenue growth over multiple periods
- Look for sustainable profit margins
- Ensure cash flow supports net income (quality of earnings)
- Evaluate balance sheet strength (low debt, adequate liquidity)
Red Flags to Watch For:
- Revenue growing but cash flow declining
- Inventory and receivables growing faster than sales
- Increasing debt levels with no corresponding asset growth
- Declining margins over time
- On the Exam
The Series 65 exam tests your ability to:
- Identify what each statement shows (period vs. point in time)
- Understand the fundamental accounting equation
- Distinguish between current and long-term items
- Recognize the three sections of the cash flow statement
- Analyze the relationship between net income and cash flow
Common question formats include identifying which statement contains specific information or understanding the accounting equation.
- Key Takeaways
- Income Statement : Shows profitability over a period (revenue minus expenses = net income)
- Balance Sheet : Shows financial position at a point in time (Assets = Liabilities + Equity)
- Cash Flow Statement : Shows actual cash movements in three categories
- A company can be profitable but cash-poor—always review cash flows
- The statements are interconnected: net income flows to retained earnings and starts cash flow
- Investment advisers use all three statements together to form a complete picture