CFA Level 1 - ACCTN

Defined contribution pension plan

worker has the investment risk

Cash Ratio

(Cash + Marketable Securities)/CL, the more conservative liquidity measure

Underfunded DB

(PV of pension liability > pension plan assets) recognized as liability on b/s

4 criteria for capital vs. operating lease

1. Bargain purchase option? 2. Transfer of leased property to lessee? 3. Lease period greater than or equal to 75% of asset's economic life? 4. PV of lease payments greater than or equal to 90% of asset's FMV?

Debt to Assets

Total Debt/Total Assets

Convertible debt test for antidilution

conv debt interest/add'l shares<basic EPS ->dilutive

Convertible preferred stock test for antidilution

conv pref stock div/add'l shares < basic eps -> dilutive

Debt Payment

CFO/Cash Repayments of Long-term Debt

Dividend Payment

CFO/Dividends Paid

Cash to Income

CFO/Operating Income(EBIT)

Reporting long-lived assets (GAAP)

Cost Model. Cost = acquisition cost. Long-lived assets reported at cost - accumulated depreciation.

Days Inventory on Hand

Days in the Reporting Period/Inventory Turnover

DTA (Deferred Tax Asset)

Income Tax Expense on B/s <income taxes paid (paid more taxes to the government); pretax income on i/s<taxable income

DTL (Deferred Tax Liability)

Income Tax Expense on B/s > Income Taxes paid (owe future taxes to the government); pretax income on the i/s>taxable income

Capitalization of Interest Cost during construction (GAAP)

Interest costs directly related to a company's construction of a long-lived asset are capitalized. The capitalized interest is added to the value of the asset and flow to the i/s through the depreciation of the asset

Bonds issued at a discount

Interest expense increases over time

FIFO Inventory

LIFO Inventory+LIFO Reserve

Change of inventory method (GAAP)

LIFO to another method: Change of accounting principle - retrospective adjustment. Change in LIFO: prospective only.

Direct (Statement of Cash Flow)

Start with cash received from customers. For this method, ignore noncash items when calculating CFO

Debt to Equity

Total Debt/Total Shareholders' Equity

Expensing

cash outflow now and charged immediately against income on I/S

Revenue Recognized

to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in an exchange for those goods or services

# of correlations need to know in a multivariate normal dist.

((n)*(n-1))/2

cost of trade credit

(1+(%discount/1-%discount)^365/days past discount -1

EAR

(1+periodic rate)^m - 1 ....period rate =stated rate/m. ear increases at a decreasing rate with more frequent compounding, apr does not

Quick Ratio

(CA-Inventory)/CL

Cash Flow per Share

(CFO-Preferred Dividends)/# of shares of common stock outstanding

Fixed Charge Coverage

(EBIT+Lease Payments)/(Interest Payments+Lease Payments)

Veblen good

(Gucci bag) one for which a higher price makes the good more desirable. demand curve slopes up

Basic EPS

(NI - preferred divs)/Weighted average number of shares of common stock

Gross Profit Margin

(Rev - COGS)/Rev

percentage discount from face value

(face value-price)/face value

Units of production

(original cost-salvage value/life in output units)*output units in the period

EPS after buyback

(total earnings (eps before*shares outstanding before)-after tax cost of funds (planned buyback * price at rime of buy back*after tax cost of borrowing))/shares outstanding after buyback (initial shares minus buyback)

approximate percentage change in bond price

-ModDur*Change in YTM

In order for price discrimination to work

1) have a downward sloping demand curve, 2) have at least two identifiable groups of customers with different price elasticities of demand, 3) must be able to prevent customers in the lower-price group from reselling the product to customers in the higher-price group.

Common market

1. All barriers to import and export of goods and services among the countries are removed. 2. All countries adopt a common set of trade restrictions with non-members. 3. All barriers to the movement of labor and capital goods among member countries are removed.

Economic Union

1. All barriers to import and export of goods and services among the countries are removed. 2. All countries adopt a common set of trade restrictions with non-members. 3. All barriers to the movement of labor and capital goods among member countries are removed. 4. Member countries establish common institutions and economic policy for the union

Monetary Union

1. All barriers to import and export of goods and services among the countries are removed. 2. All countries adopt a common set of trade restrictions with non-members. 3. All barriers to the movement of labor and capital goods among member countries are removed. 4. Member countries establish common institutions and economic policy for the union 5. All countries adopt a single currency.

Inventory write-down impacts on statements/ratios

1. An inventory write-down Decreases current and total assets. 2. Current Ratio decreases. However, quick ratio is unaffected. 3. Inventory turnover is increased, which decreases days' of inventory on hand and the cash conversion cycle. 4. Decrease in assets increases total asset turnover and increases the debt to asset s ratio. 5. Equity is decreased, increasing the debt to equity ratio. 6. Increase in COGS reduces gross margin, operating margin, and net margin. 7. ROA and ROE are decreased in early periods, increased in later periods.

Things to remember about direct and indirect method

1. CFO is calculated differently, but the result is the same under both methods. 2. the calculation of cfi and cff is identical under both methods. 3. there is an inverse relationship between changes in assets and changes in cash flows. in other words, an increase in an asset is a use of cash, and a decrease in an asset is a source of cash. 4. There is a direct relationship between changes in liabilities and changes in cash flows. in other words, an increase in a liability is a source of cash, and a decrease in a liability is a use of cash. 5. Sources of cash are positive numbers (inflows) and uses of cash are negative numbers (outflows)

How futures and forwards are similar

1. Can be either deliverable or cash-settled 2. Have contract prices set so each side of the contract has a value of zero value at the initiation of the contract

Capital account

1. Capital transfers - include debt forgiveness and goods and financial assets that migrants bring when they come to a country or take with them when they leave. these include the transfer of title to fixed assets and of funds linked to the purchase or sale of fixed assets, gift and inheritance taxes, death duties, and uninsured damage to fixed assets. 2. Sales and purchases or non-financial assets - that are not produced assets include rights to natural resource and intangible assets, such as patents, copyrights, trademarks, franchises, and leases.

three sources of returns from investing in a fixed rate bond

1. Coupon and principal payment 2. Interest earned on coupon payments that are reinvested over the investor's holding period for the bond 3. any capital gain or loss if the bond is sold prior to maturity

Comparable valuation using price multiples (advantages)

1. Evidence that some price multiples are useful for predicting stock returns. 2. Widely used by analysts 3. readily available 4. They can be used in time series and cross sectional comparisons 5. EV/EBITDA multiples are useful when comparing firm values independent of capital structure or when earnings are negative and the p/e ratio cannot be used

How futures and forwards differ

1. Futures trade on organized exchanges. Forwards are private contracts and typically do not trade. 2. Futures are standardized, forwards are custom contracts satisfying the specific needs of the parties involved. 3. A clearinghouse is the counterparty to all futures contracts. Forwards are contracts with the originating counterparty and therefore have credit risk. 4. The government regulates futures markets. forward contracts are usually not regulated and do not trade in organized markets.

Financial account

1. Government owned assets abroad - include gold, foreign currencies, foreign securities, reserve position in the IMF, credits and other long term assets, direct foreign investment, and claims against foreign banks. 2. Foreign owned assets in the country - are divided into foreign official assets and other foreign assets int he domestic country. these include domestic government and corporate securities, direct investment in the domestic country, domestic country currency, and domestic liabilities to foreigners reported by domestic banks.

Current account

1. Merchandise and services - consists of all raw materials and manufactured goods bought, sold, or given away. Services include tourism, transportation, and business and engineering services, as well as fees from patents and copyrights on new technology, software, books, and movies. 2. Income receipts - include foreign income from dividends on stock holdings and interest on debt securities. 3. Unilateral transfers - one way transfers of assets, such as money received from those working abroad and direct foreign aid. In the case of foreign aid and gifts, the capital account of the donor nation is debited.

Six factors that determine option prices

1. Price of the underlying asset - for call options, the higher the price of the underlying, the greater its intrinsic value and the higher the value of the option. Conversely, the lower the price of the underlying, the less its intrinsic value and the lower the value of the call option. In general, call option values increase when the value of the underlying asset increases. 2. The exercise price - a higher exercise price decreases the value of call options and a lower exercise price increases the values of call options. 3. The risk free rate of interest - an increase in the risk free rate will increase call option values, and a decrease in the risk free rate will decrease call option values. 4. Volatility of underlying - this is what makes options valuable. If there were no volatility in the price of the underlying asset, options would always be equal to their intrinsic values and time or speculative value would be zero. An increase in volatility increases values of both put and call options. 5. Time to expiration - b/c volatility is expressed per unit of time, longer time to expiration effectively increases expected volatility and increases the value of a call option. Less time to expiration decreases the time value of a call option so that as expiration its value is simply its intrinsic value. 6. Costs and benefits of holding the asset - if there are benefits of holding the underlying asset (dividend or interest pmts on securities or a convenience yield on commodities), call values are decreased and put values are increased.

3 objectives of financial market regulation according to IOSCO

1. Protect investors. 2. Ensure fairness, efficiency, and transparency of markets. 3. Reduce systemic risk

Benefit of derivatives markets

1. Provide price info 2. Allow risk to be managed and shifted among market participants 3. Reduce transaction costs.

Ranking of quality of financial reporting

1. Reporting is compliant with gaap and decision useful; earnings are sustainable and adequate. 2. Reporting is compliant with gaap and decision useful, but earnings quality is low. 3. Reporting is compliant with gaap, but earnings quality is low and reporting choices and estimates are biased. 4. reporting is compliant with gaap, but the amount of earnings is actively managed to increase, decrease, or smooth reported earnings. 5. Reporting is not compliant with gaap; although the numbers presented are based on the company's actual economic activities. 6. Reporting is not compliant and includes numbers that are essentially fictitious or fraudulent.

Tax Accounting differences - IFRS

1. Revaluation of fixed assets and intangible assets - Deferred taxes are recognized in equity. 2. Undistributed profit from an investment in a subsidiary - Deferred taxes are recognized unless the parent is able to control the distribution of profit and it is probable the temporary difference will not reverse in the future. 3. Undistributed profit from an investment in a joint venture - Deferred taxes are recognized unless the venturer is able to control the sharing of profit and it is probable the temporary difference will not reverse in the future 4. Undistributed profit from an investment in an associate firm - Deferred taxes are recognized unless the investor is able to control the sharing of profit and it is probable the temporary difference will not reverse in the future. 5. Deferred tax asset recognition - Recognized if probable that sufficient taxable profit will be available to recover the tax asset. 6. Tax rate used to measure deferred taxes - Enacted or substantively enacted tax rate. 7. Presentation of deferred taxes on balance sheet - netted and classified as noncurrent.

Tax Accounting Differences (US GAAP)

1. Revaluation of fixed assets and intangible assets - n/a, no revalutation allowed. 2. Undistributed profit from an investment in a subsidiary - No deferred taxes for foreign subsidiaries that meet the indefinite reversal criterion. No deferred taxes for domestic subsidiaries if the amounts are free. 3. Undistributed profit from an investment in a joint venture - No deferred taxes for foreign corporate JVs that meet the indefinite reversal criterion. 4. Undistributed profit from an investment in an associate firm - Deferred taxes are recognized from temporary differences. 5. Deferred tax asset recognition - Recognized in full and then reduced if more likely than not that some or all of the tax asset will not be realized. 6. Tax rate used to measure deferred taxes - Enacted tax rate only. 7. Presentation of deferred taxes on balance sheet - classified as current or noncurrent based on the classification of the underlying asset or liability.

Three replications of future payoffs we can describe

1. Risky asset+derivative=Risk free rate 2. Risky asset-risk free asset= -derivative position 3. Derivative position-risk free asset=-risky asset

Financial Statement Analysis framework

1. State the objective and context. 2. Gather Data 3. Process Data 4. Analyze and Interpret Data 5. Report the conclusions or recommendations 6. Update analysis

Swaps are similar to forwards in several ways

1. Swaps typically require no pmt by either party at initiation 2. Swaps are customized 3. Swaps are not traded in any organized secondary market 4. Swaps are largely unregulated 5. Default risk is an important aspect of the contracts 6. Most participants in the swaps market are large institutions. 7. Individuals are rarely swaps market participants.

Revenue is recognized from services rendered (IASB)

1. The amount of revenue can be reliably measured. 2. There is a probable flow of economic benefits. 3. The stage of completion can be measured. 4. The cost incurred and cost of completion can be reliably measured.

Revenue is recognized from the sale of goods (IASB)

1. The risk and reward of ownership is transferred. 2. There is no continuing control or management over the goods sold. 3. Revenue can be reliably measured. 4. There is a probable flow of economic benefits 5. The cost can be reliably measured

Four criteria to determine whether revenue should be recognized (SEC)

1. There is evidence of an arrangement between the buyer and seller. 2. The product has been delivered or the service has been rendered. 3. The price is determined or determinable. 4. The seller is reasonably sure of collecting money.

discounted cash flow model (advantages)

1. They are based on the fundamental concept of discounted pv and are well grounded in finance theory 2. they are widely accepted in the analyst community

Asset based models (advantages)

1. They can provide floor values 2. They are most reliable when the firm has primarily tangible short term assets, assets with ready market values, or when the firm is being liquidated 3. They are increasingly useful for valuing public firms that report fair values.

code of ethics - 6 components

1. act with integrity, competence, diligence, respect, and in an ethical manner with the public, clients, prospective clients, employers, employees, colleagues in the investment profession, and other participants in the global capital markets. 2. Place the integrity of the investment profession and the interest of clients above their own personal interests. 3. Use reasonable care and exercise independent professional judgment when conducting investment analysis, making investment recommendations, taking investment actions, and engaging in other professional activities. 4. Practice and encourage others to practice in a professional and ethical manner than will reflect credit on themselves and the profession. 5. Promote the integrity and viability of the global capital markets for the ultimate benefit of society. 6. Maintain and improve their professional competence and strive to maintain and improve the competence of other investment professionals.

To make statements prepared under LIFO comparable to those of FIFO firms,

1. add the lifo reserve to lifo inventory on the balance sheet. 2. increase the retained earnings component of shareholders equity by the lifo reserve.

Free trade area

1. all barriers to import and export of goods and services among member countries are removed

Customs union

1. all barriers to import and export of goods and services among member countries are removed. 2. All countries adopt a common set of trade restrictions with non members.

three main functions of the financial system

1. allow entities to save and borrow money, raise equity capital, manage risks, trade assets currently or in the future, and trade based on their estimates of asset values. 2. determine the returns that equate the total supply of savings with the total demand for borrowing (interest rates) 3. ALlocate capital to its most efficient uses.

Steps for Indirect calculation

1. begin with ni. 2. subtract gains or add losses that resulted from financing or investing cash flows (such as gain from sale of land) 3. Add back noncash charges to income (such as depreciation and amortization) and subtract all concash components of revenue 4. Add or subtract changes to balance sheet operating accounts as follows, increases in the operating asset accounts are subtracted, while decreases are added. Increases in the operating liability accounts are added, while decreases are subtracted.

general seniority rankings for debt repayment priority

1. first lien or first mortgage 2. Senior secured debt 3. Junior secured debt 4. Senior unsecured debt 5. Senior subordinated debt 6. Subordinated debt 7. Junior subordinated debt

complete markets

1. investors can save for the future at fair rates of return 2. creditworthy borrowers can obtain funds 3. hedgers can manage their risks 4. traders can obtain the currencies, commodities, and other assets they need

normal distribution

1. it is completely described by its mean and variance 2. skewness=0, meaning that the normal distribution is symmetric about its mean, so that mean=median=mode 3. kurtosis =3. this is measure of how flat the distribution is. recall that excess kurtosis is a measure relative to three. 4. A linear combination of normally distributed random variables is also normally distributed. 5. The probabilities of outcomes further above and below the mean get smaller and smaller but do not go to zero.

Comparable valuation using price multiples (disadvantages)

1. lagging price multiples reflect the past. 2. price multiples may not be comparable across firms if the firms have different size, products, and growth 3. pm's for cyclical firms may be greatly affected by economic conditions at a given point in time. 4. a stock may appear overvalued by the comparable method but undervalued by a fundamental method or vice versa 5. different accounting methods can result in pm's that are not comparable across firms, especially internationally 6. a negative denominator in a price multiple results in a meaningless ratio. the p/e ratio is especially susceptible to this problem

Asset based models (disadvantages)

1. market values are often difficult to obtain 2. market values usually different than book values 3. they are inaccurate when a firm has high proportion of intangible assets or future cash flows not reflected in assets 4. assets can be difficult to value during periods of hyperinflation

t-distribution

1. symmetrical 2. defined by degrees of freedom, a single parameter 3. it has more probability in the tails than the normal distribution 4. as df gets larger, shape of the dist gets closer to normal dist.

discounted cash flow model (disadvantages)

1. their inputs must be estimated 2. value estimates are very sensitive to input values

Price multiple valuations based on fundamentals (advantage)

1. they are based on theoretically sound valuation models 2. They correspond to widely accepted value metrics

number of days payable

365/payables turnover ratio

Days of sales outstanding

365/receivables turnover, considered desirable to have this close to the industry norm

Defined benefit under GAAP

5 components make up the change in net pension asset or liability under gaap: pension expense in the current period has three components (service costs, net interest expense, and expected return on plan assets. Two components are recognized in other comprehensive income: past service costs and actuarial gains/losses. These are amortized to pension expense, which allows companies to smooth their effects on pension expenses over time.

confidence intervals

90% =1.65 95% = 1.96 99%=2.58

target asset allocation should make up

90% of the portfolio

change in full bond price (taking into account both convexity and duration)

=-annual modified duration (change in YTM) + .5 annual convexity (Change in YTM^2)

money duration

=annual modified duration * full price of bond position (EXPRESSED IN CURRENCY UNITS)

Cash paid for new asset (CFI)

=ending gross assets+gross costs of assets sold - beginning gross assets or beginning gross assets+cash paid for new assets - gross cost of assets sold = ending gross assts

Accounts Receivable (A/L/O/R/E)

A

Cash Equivalents (A/L/O/R/E)

A

Inventory (A/L/O/R/E)

A

Investment Securities (A/L/O/R/E)

A

PP&E(A/L/O/R/E)

A

Goodwill (A/L/O/R/E)

A (intangible asset)

Accumulated Depreciation (A/L/O/R/E)

A - Contra to the asset being depreciated

Prepaid expenses (A/L/O/R/E)

A - accrual account

Allowance for bad debts (A/L/O/R/E)

A - contra to accounts receivable

Zero coupon bond (accounting)

A company should initially record these at their discounted present value. All cash flows from zero coupon bonds are under CFI on the cash flow statement

leptokurtic

A distribution that has a greater percentage of small deviations from the mean and a greater percentage of large deviations from the mean. measured using deviations raised to the fourth power.

General Journal

A listing of all the journal entries in order of their dates

Deferred Tax Items (A/L/O/R/E)

A+L, both deferred tax assets and deferred tax liabilities are recorded

Expanded Accounting Equation (expanded even more)

A=L+(Contributed Capital+Beginning RE+Revenue-Expenses-Dividends)

Expanded Accounting Equation

A=L+(Contributed Capital+Ending RE)

Investing Activities Outlows (GAAP)

Acquisition of fixed assets, acquisition of debt and equity investments, loans made to others

Abnormal return

Actual return - expected risk adjusted return

Converged accounting standards issued in May 2014

Address Revenue Recognition

Total Debt

All long-term and short-term debt

Impairment

An asset is impaired if its carrying value exceeds the recoverable amount. Under IFRA, the recoverable amount of an asset is the greater of fair value less any selling costs, or the asset's value in use.

Impairments of PP&E (IFRS)

An asset is impaired if its carrying value is greater than its recoverable amount. Recoverable amount is the higher of Fair value less costs to sell, Value in sum(sum of discounted future cash flows). Reversal of impairment loss permitted

Treasury Stock Method

Assumes any funds received by the company from the exercise of the options are used to buy shares of the company's common stock in the market at the average market price

Reporting by the lessor

At inception of a finance lease, the lessor will recognize a sale equal to the pv of lease pmts, and cogs equal to carrying value of the asset. The lessor also recognizes interest income of the term of the lease. Cash flow statement, the interest revenue portion of thee ease is reported as an inflow from operating activities and the principal reduction is reported as an inflow from investing activities.

Operating Lease Reporting

At inception, no entry is made (though any related future obligation is disclosed in the footnotes). During the term of the lease, rent expense is recognized in the IS. In the cash flow statement, the lease payment is reported as an outflow from operating activities.

asset beta for a publicly traded firm

B(asset)=BEquity*(1/(1+((1-t)D/E)))

Replication

B/c we can create a risk free asset from a position in the underlying asset that is hedged with a position in a derivative security, we can duplicate the payoff on a derivative position with the risk free asset and the underlying asset or duplicate the payoffs on the underlying asset with a position in the risk free asset and the derivative security. This is called replication b/c we are replicating the payoffs on one asset or portfolio with those of a different asset or portfolio.

Equity Beta for the project

BProject=Basset*(1+((1-t)D/E))

Required Financial Statements according to IAS

Balance Sheet, Statement of comprehensive income, cash flow statement, statement of changes in oe, and Explanatory notes

DTA (financial reporting terminology)

Balance sheet amounts that result from an excess of taxes payable over income tax expense that are expected to be recovered from future operations. Can also result from tax loss carryforwards. Occur when revenues (or gains) are taxable before they are recognized in the income statement. OR when expenses (or losses) are recognized in the income statement before they are tax deductible OR tax loss carryforwards are available to reduce future taxable income. DTAs are expected to reverse in the future, and provide future tax savings.

Criteria in order to use gross revenue reporting under GAAP

Be the primary obligor under the contract. Bear the inventory risk and credit risk. Be able to choose its supplier. Have reasonable latitude to establish the price.

Accumulated other comprehensive income

Beginning balance + loss/gain from available for sale securities + unrealized translation gain

Put call parity (equivalencies) for the call

C=put+stock-pv of x

Current Ratio

CA/CL

Statement of Cash Flow: Dividends Paid (GAAP)

CFF

Statement of Cash Flow: Dividends Paid (IFRS)

CFF or CFF

Interest paid on GAAP

CFO

Statement of Cash FLow: Interest Received (GAAP)

CFO

Statement of Cash Flow: Dividends Received (GAAP)

CFO

Statement of Cash Flow: Interest Paid (GAAP)

CFO

Statement of Cash Flow: Taxes Paid (GAAP)

CFO

Interest Paid on IFRS

CFO or CFF

Statement of Cash Flow: Interest Paid (IFRS)

CFO or CFF

Statement of Cash Flow: Dividends Received (IFRS)

CFO or CFI

Statement of Cash Flow: Interest Received (IFRS)

CFO or CFI

Statement of Cash Flow: Taxes Paid (IFRS)

CFO or CFI or CFF

FCFE

CFO-CAP ex-Net Borrowings

Free Cash Flow

CFO-Capital Expenditures

Investing and Financing

CFO/(CFI+CFF)

Cash Return on Equity

CFO/Average Shareholders' Equity

European opton

Can be exercised by its owner AT expiration

Bad debt expense (for tax purposes)

Cannot be deducted until the receivables are deemed worthless.

Operating Activities Inflows (GAAP)

Cash collected from customers, interest and dividends received, sale proceeds from trading securities

Direct method calculation

Cash collections - cash paid to suppliers-cash operating expenses - tax expense. ALWAYS IGNORE DEPRECIATION EXPENCE, it's a noncash charge

Operating Activities Outflows (GAAP)

Cash paid to employees and suppliers, cash paid for other expenses, acquisition of trading securities, interest paid, taxes paid

Total Equity

Common Stock + Retained Earnings

Form 8K

Companies must file this form to disclose material events

Form 10k

Companies' annual report

Form 10q

Companies' quarterly report

Auditor's responsibility

Confirm assets and liabilities, and other items included in the statements and then issue a statement confirming their fairness and reliability

Proxy Statement

Contain info related to matters that come before shareholders for a vote, such as elections of board members. Filed with the SEC and are a good indication on the qualifications of board members and management.

Complex (EPS)

Contains one or more of: Convertible debt, convertible preferred stock, warrants, or company-issued options

Accumulated Depreciation

Contra Asset to PP&E

Intangible assets (GAAP)

Cost Method

Intangible Assets (IFRS)

Cost method or revaluation method

T Stock

Cotnra Equity to common stock or addt'l paid in capital

k

D1/P0+G

Income Taxes (GAAP)

DTA and DTL are based on temporary differences between the carrying amount and the tax base of the asset and liabilities. Tax rates and tax laws used must be enacted (passed by Congress and signed by the President or passed over the president's veto). Use of substantially enacted tax legislation is not allowed. DTA and DTL are classified as current or noncurrent based on the classification of the related nontax asset or liability. Tax assets or liabilities that are not associated with an underlying asset or liability are classified according to their expected reversal period. A deferred tax asset is recognized in full but is REDUCED BY A VALUATION ALLOWANCE (contra account) if it is more likely than not that some or all the deferred tax asset will not be recognized. Reconciliation of actual and expected tax expense is calculated by applying the Federal statutory tax rates to pre-tax income from continuing operations (earnings before tax). This reconciliation is required only for public companies.

Income Taxes (IFRS)

DTA and DTL are based on temporary differences between the carrying amount and the tax base of the asset and liabilities. Tax rates and tax laws used must be enacted or substantially enacted. Dta and dtl are classified as current or noncurrent with supplemental note disclosure for the components of the temporary differences and the amounts expected to be recovered within 12 months and beyond 12 months from the balance sheet date. A deferred tax asset is recognized if it is probable that sufficient taxable profit will be available to apply the temporary difference. No provision for a valuation allowance. Reconciliation of actual and expected tax expense is required by using the applicable tax rates.

Investment Property (IFRS)

Defined as property owned for the purpose of rental income or capital appreciation or both

Available for sale securities vs. trading securities w/ dividends

Dividends recieved from available for sale securities and trading securities are recognized in the income statements. the difference relates to unrealized gains and losses

IFRS (in regards to LIFO/FIFO)

Does not permit LIFO

Explanatory Paragraph of the auditor's report would include

Doubt of the going concern assumption or uncertainty due to litigation. Statements that the report was prepared in accordance with GAAP would occur in the regular part of the report and NOT as an explanatory paragraph.

COGS (A/L/O/R/E)

E

Loss on sale of assets (A/L/O/R/E)

E

CML equation

E(Rp) = Rf+ (E(Rm)-Rf/Std Dev (M))

Return on total capital

EBIT/average total capital (short and long term debt, preferred equity and common equity), concerning if ratio is too low.

EDGAR

Electronic Data Gathering, Analysis, and Retrieval System, includes all SEC filings (10k/10q)

NI (when given ending/beginning OE)

Ending Equity+Dividends-Stockholder Investments-Beginning Equity

Purchases

Ending inventory - beginning inventory +COGS

forward P/E

Expected payout ratio/k-g

Depreciation (A/L/O/R/E)

Expense

Periodic and petpetual systems affect

FIFO and specific identification methods, ending inventory values and cogs are the same whether a periodic or perpetual system. however, they can be different for lifo or average cost.

Revaluation Model (IFRS)

Fair value must be reliably measured. Losses: Taken to revaluation surplus account in other comprehensive income to the extent of previous gain on that asset. Excess loss recognized in the income statement. Gains: taken to surplus account in other comprehensive income to extent that they reverse a loss previously recognized in the i/s.

Leases (IFRS)

Finance or operating lease recognized. Finance lease must be recognized when substantially all the risks and rewards of ownership are transferred to the lessee. Otherwise, the lease must be recognized as an operating lease.

Leases (GAAP)

Finance or operating leases recognized. Lessee recognizes a finance lease if only one of 4 specific is met: 1. leased equipment transferred to lessee at end of the lease. 2. Lease contains a bargain purchase option. 3. lease term is 75% or more of the useful of the leased asset. 4. Present value of lease pmts is 90% or more of the fair value of the leased equipment. Otherwise, the lease is an operating lease. From the lessor's perspective: either direct-financing lease or a sales-type lease.

Estimated amortization expense for the next five years is required under

GAAP

Total income

GDP = C + S + T, Cosumption spending + household and business savings + net taxes (taxes paid minus transfer payments received)

Total Expenditures

GDP =C+I+G+(X-M), consumption spending +business investments+government purchases+net exports

Trough

GDP growth rate changes from negative to positive, high unemployment rate/increasing use of overtime and temporary workers, Spending on consumer durable goods and housing may increase, Moderate or decreasing inflation rate

Peak

GDP growth rate decreases, unemployment rate decreases but hiring slows, consumer spending and business investment grow at slower rates, inflation rate increases.

Expansion

GDP growth rate increases, unemployment rate decreases as hiring accelerates, Investment increases in producers' equipment and home construction, inflation rate may increase, Imports increase as domestic income growth accelerates

Contraction/recession

GDP growth rate is negative, hours worked decrease, unemployment rate increases, consumer spending and home construction and business investment decreases, inflation rate decreases with a lag, imports decrease as domestic income growth slows.

Lease disclosures

General description of the leasing arrangement, the nature/timing/and amount of pmt to be paid or received in each of the next five years, amount of lease revenue and expense reported in the income statement for each period presented, amounts receivable and unearned revenues from the lease arrangements, restrictions imposed by the lease agreements.

Impairments (tax disclosures)

Generally results in a dta since the writedown is recognized immediately in the IS but the deduction on the tax return is generally not allowed until the asset is sold or disposed of.

Marginal cost of capital curve

Given the expected returns (IRRs) on potential projects, we can order the expenditures on additional projects from highest to lowest IRR. This will allow us to construct a downward sloping investment opportunity schedule.

World bank

Helps developing countries around the world

Lease Impacts (operating)

Higher - NI (early), CFF, Current Ratio, Working Capital, Asset Turnover, ROA, ROE Lower - assets, liabilities, NI (later), EBIT, CFO, Debt/Assets, Debt/Equity Same - Total NI, Total CF

Lease impacts (finance lease)

Higher - assets, liabilities, NI (later), EBIT, CFO, Debt/Assets, Debt/Equity Lower - NI (early), CFF, Current Ratio, Working Capital, Asset Turnover, ROA, ROE Same - Total NI, Total CF

Ratio impact on operating lease

Higher CR, Working cap, Asset turnover, ROA, ROE Lower: Debt/Assets, Debt/equity

Financial Statement impact operating lease

Higher NI (earlier), Higher CFF Lower: assets, liabilities, NI (Later), EBIT, CFO Same: Total NI, total cash flow

Capitalizing effects

Higher NI in the first year and lower NI in subsequent years. Assets, equity, and operating cash flow are all higher when expenditures are capitalized. overall, SAME effect between capitalizing and expensing for NI. Higher OE b/c retained earnings is higher, total assets are greater and liabilities are unaffected so that A=L+E holds. higher cash flow from operations and lower cash flow from investing. Total cash flow the same assuming no tax treatment.

Financial statement impact of finance lease

Higher assets, liabilities, NI (later), EBIT, CFO Lower NI (early), CFF Same Total NI, Total Cash Flow

Ratio impact from finance lease

Higher: Debt/Assets, Debt/Equity Lower: CR, Working cap, Asset turnover, ROA, ROE

Revaluation of Long-Lived Assets

IFRS ONLY; not permitted under USGAAP

Four steps to capital budgeting

Idea generation, analyzing project proposals, create the firm wide capital budget, and monitor decisions and conduct post audits

Arbitrage

If a return greater than the risk free rate can be earned by holding a portfolio of assets that produces a certain return, than an arbitrage opportunity exists.

Adjusted Trail Balance

If any adjusting entries are needed at the end of the accounting period, they will be recorded and reflected here.

Inventory changes

In most cases, the change is made retrospectively, the exception lies in LIFO, which is made prospectively, with the carrying value of inventory on the date of the change as the first LIFO layer. Under GAAP, the firm must explain why the change in cost flow method is preferable. Under IFRS, the firm must demonstrate that the change will provide reliable and more relevant information.

Footnotes

Include information matters such as the company's accounting methods and assumptions, contingencies, and acquisitions/disposals.

Coherent Reporting Framework

Includes Transparency & Comprehensiveness, not stability

Other Comprehensive Income

Includes transactions not included in NI, such as 1. Foreign currency translation gains and losses. 2. Adjustments for minimum pension liability. 3. Unrealized gains and losses from cash flow hedging derivatives. 4. Unrealized gains and losses from available for sale securities.

Short run macroeconomic effects

Increase in AD - Real GDP increases, unemployment decreases, price level increase. Decrease in AD - Real GDP decreases, unemployment increases, price level decreases. Increase in AS - Real GDP increases, Unemployment decreases, price level decreases. Decrease in AS - Real GDP decreases, unemployment increases, price level increases.

capital indexed bond

Indexed bonds that adjust the principal value while keeping the coupon rate fixed are best described as capital-indexed bonds.

Option premium

Intrinsic value+time value

Disclaimer of Opinion

Issued if the auditor is unable to express an opinion

Accounts Payable (A/L/O/R/E)

L

Bonds payable (A/L/O/R/E)

L

Current portion of long-term debt (A/L/O/R/E)

L

Divs Payable (A/L/O/R/E)

L

Notes Payable (A/L/O/R/E)

L

Ratio Impacts of LIFO/FIFO (Prfitability)

LIFO - higher COGS, lower profit

The most informative accounting measure for income statement purposes in rising prices and stable/growing inventories

LIFO because it allocates the most recent purchase prices to COGS and thus provides a better measure of current income and future profitability

LIFO vs. FIFO (writedowns)

LIFO is less likely to recognize a writedown than FIFO or WAC b/c LIFO ending inventory is based on older costs

overreaction effect

Low returns over a three-year period are followed by high returns over the following three years.

FIFO w/ rising inventory prices

Lower COGS, Higher GP/NI, Higher inventory on the b/s

Cost of inventory (GAAP)

Lower of Cost or Market. Reversal of a write down is prohibited. Market value: current replacement cost subject to upper and lower limits. Upper limit = NRV = selling price - estimated costs of completion and disposal. Lower lomit = NRV - normal profit margin.

Cost of Inventory (IFRS)

Lower of cost or NRV. Loss recognized on the I/s. Reversal of write-downs permitted as a reduction of cost of sales. NRV = selling price - selling costs -costs to get inventory in condition for sale

When MP = AP

MC=AVC

ROA (alternative)

NI +interest expense (1-tax rate)/average total assets

Comprehensive Income Components

NI+Other Comprehensive Income

inDirect method calculation

NI+depreciation expense-increase in receivables+decrease in inventory - decrease in payables

FCFF

NI+noncash expenses+after tax interest expense-changes of CA/CL-Cap Ex

Net Profit Margin

NI/Revenue, concerning if this is too low.

DuPont Method of ROE

NI/Sales (NPM)*Sales/Assets(Asset Turnover)*Assets/Euity(Equity Multiplier)

Net Profit Margin

Net Income/Revenue

Tax base (tax return terminology)

Net amount of an asset or liability used for tax reporting purposes.

Treasury Stock

No divs or voting rights, not an asset but a reduction in OE

Investment Property (GAAP)

No specific definition

Income Tax Expense

Non-Operating Income, reported under income from continuing operations

Convenience Yield

Non-monetary benefits of holding an asset, this is difficult to measure and is only significant for some assets, primarily commodities.

Corporate reports/Press release

Not always audited, written as sales material/pr material

Extraordinary Items (IFRS)

Not permitted

Revaluation Model (GAAP)

Not permitted

Completed Contract Method Revenue Recognition (IFRS)

Not permitted. Revenue is recognized to the extent of the contract costs incurred only if it is probable that the costs will be recovered. Costs are expensed in the period incurred.

Additional paid-in capital (A/L/O/R/E)

O

Common Stock (A/L/O/R/E)

O

Other comprehensive income (A/L/O/R/E)

O

RE (A/L/O/R/E)

O

Non financial risks

Operational risk, solvency risk, regulatory risk, governmental or political risk, legal risk, model risk, tail risk, accounting risk

Total revenue

P*Q

margin call price

P0*(1-initial margin/1-maintenance margin)

Put call parity (equivalencies) for the put

P=call-stock+pv of x

Operating Lease

PMT Recognized above the line in I/S.

LIFO Liquidation

Penetrating LIFO layers. Older, lower costing goods flow to COGS. Profit margins are too high relative to COGS based on current prices.

Initial Trial Balance

Prepared at the end of the accounting period, to show the balances in each account

positive convexity indicates

Price increases when yields drop are greater than price decreases when yields rise by the same amount.

Financing Activities Inflows (GAAP)

Principal amounts of debt issued, proceeds from issuing stock

Financing Activities Outlows (GAAP)

Principal paid on debt, payments to reacquire stock, dividends paid to shareholders

Divs Received (A/L/O/R/E)

R

Gain on sale of assets (A/L/O/R/E)

R

Sales (A/L/O/R/E)

R

Individuals (PM)

RIsk tolerance - depends on the individual, Investment horizon - depends on individual, Liquidity needs - depends on individual, income needs - depends on individual

Journal Entries

Record every transaction, showing which accounts are changed and by what amounts.

Operating risk

Refers to the additional uncertainty about operating earnings caused by fixed operating costs. The greater proportion of fixed costs to variable costs, the greater a firm's operating risk.

Revaluation surplus

Regardless of prior revaluations, any increase in an asset's value above historical cost is not reported as a gain in the income statement, but is reported as a component of shareholder equity in revaluation surplus.

Accrual Accounting

Requires that revenue is recorded when the firm earns it and expenses are recorded as the firm incurs them, regardless of whether cash has been paid.

Research and development costs (IFRS)

Research costs are expensed as incurred. Development costs are capitalized.

A firm's internal controls

Responsibility of the firm's management, not Board, to ensure effective internal controls. Under GAAP, auditors are required to state an opinion about internal controls.

Requirements of MD&A

Results of operations, general business overview, and capital resources and liquidity. Unusual and infrequent items can be discussed here but it isn't a requirement. Typically NOT audited, however IS required by the SEC

Barter Transactions (GAAP)

Revenue from the barter transaction can be recognized at fair value only if the firm has historically received cash payments for such goods and services and can use the historical experience to determine fair value. Otherwise the revenue is recorded at carrying value of the asset surrendered.

Retained Earnings

Revenue-Expenses-Dividends. At the end of each accounting period, the net income of the firm is added to OE through this. Therefore any transaction affecting NI will also affect OE.

Net Revenue

Revenue-Returns and Allowances

Assumptions of CAPM

Risk Aversion, Utility Maximizing investors, Frictionless markets, one period horizon, homogeneous expectations, divisible assets, competitive markets

Porter's 5 forces

Rivalry among existing competitors, Threat of entry, Threat of substitutes, power of buyers, power of suppliers

Present value of an asset, based on expected future price

S0= E(St/(1+Rf+risk premium)^t+Pv(benefits of holding the asset for time T) -PV (costs of holding an asset for time T), where: S0 is the current spot price of the asset and E(St) is the expected value of the asset at time T, the end of the expected holding period.

Put call parity (equivalencies) for the stock

S= call- put +pv of X

Rearranged equation

S=I+(G-T)+(X-M). G-t is the fiscal balance difference between the government spending and tax receipts. Trade balance is net exports. If we solve for the fiscal balance we get G-t=(S-1)-(x-M)

Investing Activities Inflows (GAAP)

Sale Proceeds from fixed assets, sale proceeds from debt and equity investments, principal received from loans made to others

Gross Profit

Sales - COGS

Capitalization of Interest Cost during construction (IFRS)

Same as GAAP except that IFRS permits the deduction of income earned on the temporary investing of the borrowed money from the amount of interest cost that is capitalized.

Fair Value (IFRS)

Same as USGAAP

General Ledger

Sorts the entries in the general journal by account

Inventory Valuation Methods (GAAP)

Specific Identification, FIFO, Weighted Average, LIFO

Indirect (Statement of Cash Flow)

Start w/ NI

Average revenue

TV/Q

Effective Tax Rate

Tax expense is more meaningful when expressed as a percentage of pretax income, the result is this

LIFO Reserve

The amount by which LIFO inventory is less than FIFO inventory.

Credit default swap

The bondholder pays a series of cash flows to a credit protection seller and receives a pmt if the bond issuer defaults

Affirmative covenants

The borrower promises to do certain things, such as make timely payments or principal and interest, Maintain certain ratios, Maintain collateral, if any, in working order.

Accrued Revenue

The firm provides goods or services before it receives cash payment. Revenue increases and accounts receivable, an asset, increases. When the customer pays cash, accounts receivable decreases. (a manufacturer that sells goods to retail sores "on account"

Unearned Revenue

The firm receives cash before it provides a good or service to customers. Cash increases and unearned revenue, a liability, increases by the same amount. (news or magazine subscription, paid in advance)

information cascades

The idea that uninformed traders, when faced with unclear information, observe the actions of informed traders to make decisions, is referred to as:

Footnotes disclosure of debt

The nature of the liabilities, maturity dates, stated and effective interest rates, call provisions and conversion privileges, restrictions imposed by creditors, assets pledged as security, and the amount of debt maturing in each of the next five years. Long term debt is usually discussed in the md&a.

Cost of carry

The net cost of holding an asset, considering both the costs and benefits of holding the asset.

Open interest

The number of futures contracts of a specific kind that are outstanding at any given time, this increases when traders enter new long and short positions and decreases when traders exit existing positions.

Crossover rate

The point in the NPV profile where the NPVs intersect, at the discount rate for which NPVs of the projects are equal.

Fair value (GAAP)

The price that would be paid to transfer a liability or the price to be received to sell an asset in an orderly transaction between market participants at the measurement date

When the price of a good decreases,

The substitution effect increases the quantity demanded, but the income effect may increase or decrease the quantity demanded, depending on whether it's a normal or inferior good

Factors that affect Relevance and Faithful Representation

Timeliness, verifiability, and understandability

Financial Leverage

Total Assets/Total Equity

ATC and AVC shape

U

short term securities in which a firm can invest cash includ

US treasury bills, short term federal agency securities, bank certificates of deposit, banker's acceptances, time deposits, repo agreements, commercial paper, money market funds, adjustable rate preferred stock

Disclosure requirements (direct/indirect)

Under GAAP, a direct method presentation MUST also disclose the adjustments necessary to reconcile NI to cash flow from operating activities. This disclosure is the same info that is presented in an indirect method cash flow statement. This is NOT required under IFRS. Under IFRS, payments for interest and taxes must be disclosed separately in the cash flow statement under EITHER method. Under GAAP, payments for interest and taxes can be reported in the cash flow statement or disclosed in the footnotes.

Research and development costs

Under IFRS, research costs are expensed as incurred while development costs may be capitalized. Under GAAP, both are expensed as incurred. However, once the technological feasibility has been established for software development costs, they made be capitalized.

Investment property

Under IFRS, this is classified as property that a firm owns for the purpose of collecting rental income, earning cap appreciation, or both. You can either use cost model or fair value model. This time, for Fair value, instead of putting any gain into revaluation surplus in OE, this gain will now be recognized as a gain on the income statement.

Liquidity based format

Under IFRS< this can be used for a balance sheet instead of classified, if the presentation is more relevant and reliable. These are often used in the banking industry, presenting assets and liabilities in the order of liquidity.

approximate modified duration

V_-V+/2*V0*Change in YTM

Form DEF -14A

When a company prepares a proxy statement for its shareholders prior to an annual meeting, it files this with the SEC

Revenue is recognized on the income statement (FASB)

When a. realized or realizable and b. earned

Percentage of completion method (for a long term contract)

When the outcome of a long term contract can be reliably measured, this is used. Accordingly, revenue, expenses, and therefore profit, are recognized as the work is performed. The % of completion is measured by the total cost incurred to date divided by the total expected cost of the project. Used under both IFRS and GAAP

Uncommitted line of credit

a bank extends an offer of credit for a certain amount but may refuse to lend if circumstances change.

Committed line of credit

a bank extends an offer of credit that it "commits to" for some period of time. The fact that the bank has committed to extend credit in amounts up to the credit line makes this a more reliable source of short-term funding than an uncommitted line of credit. Banks charge a fee for making such a commitment. Loans under the agreement are typically for periods of less than a year, and interest charges are stated in terms of a short term reference rate, such as libor or the u.s. prime rate, plus a margin to compensate for the credit risk of the loan.

Contingent claim

a claim that depends on a particular event. Options are these that depend on a stock price at some future date. While forwards, futures, and swaps have payment that are based on a price or rate outcome whether the movement is up or down, contingent claims only require a payment if a certain threshold price is broken. ex. if the price is above x or the rate is below y. It takes two options to replicate the payoffs on a futures or forward contract.

form 8k

a company must file to report events such as acquisitions and disposals of major assets or changes in its management or corporate governance.

conventional fixed peg arrangement

a country pegs its currency within margins of +/- 1% versus another country or a basket that includes the currencies of its major trading or financial partners.

Voluntary export restraint

a country voluntarily restricts the amount of a good that can be exported, often in the hope of avoiding tariffs or quotas imposed by their trading artners.

forward exhange rate

a currency exchange rate for an exchange to be done in the future. quoted for various dates.

Tax loss carryforward (tax return terminology)

a current or past loss that can be used to reduce taxable income (thus, taxes payable) in the future. can result in a DTA.

permanent difference

a difference between taxable income (tax return) and pretax income (income statement) that will not reverse in the future

temporary difference

a difference between the tax base and the carrying value of an asset or liability that will result in either taxable amounts or deductible amounts in the future.

Capitalized interest

a firm that constructs their own asset capitalized the interest, similar under both gaap and ifrs

Deliverable forward contract

a forward contract that must be settled at expiration only by actual delivery of an asset in exchange for the contract value

partial duration

a key rate duration, defined as the sensitivity of the value of a bond or portfolio to changes in the spot rate for a specific maturity, holding other spot rates constant.

amortizing loan

a loan structure in which the periodic payments include both interst and some repayment of principal

Price elasticity of demand

a measure of the responsiveness of the quantity demanded to a change in price. calculated by dividing the percent change in quantity demanded by the percent change in price. The percent change in price is, therefore, the percent change in quantity demanded divided by the price elasticity of demand

parameter

a measure used to describe a characteristic of a population

Par Value

a nominal dollar value assigned to shares of stock in a company's charter. The amount the company receives when issuing a stock=par value+additional paid in capital

liquidity trap

a situation in which demand for money becomes highly elastic. Expanding the money supply has little effect on economic activity under these conditions because individuals and firms choose to hold the additional money in cash.

frequency distribution

a tabular presentation of statistical data that aids the analysis of large data sets.

bullet structure

a typical bond has this, periodic interest payments are made over the life of the bond, and the principal value is paid with the final interest payment at maturity.

a firm must report separate financial information for any segment of their business which..

accounts for more than 10% of the firm's assets and has risk and return characteristics distinguishable from the company's other lines of business.

Average age

accumulated depreciation/annual depreciation expense. More accurate for a firm that uses straight line.

marginal product of labor

addition to the total product of labor by employing one more unit of labor

marginal revenue product

addition to total revenue from selling the additional output from using one more unit of an input.

Swaps

agreements to exchange a series of payments on periodic settlement dates over a certain period or time. At each settlement date, the two payments are netted so that only one payment is made. The length of the swap is termed the tenor of the swap and the contract ends on the termination date.

LRAS (long run aggregate supply curve)

all input costs can vary in the long run, and this curve is perfectly inelastic. In the long run, wages and other input prices change proportionally to the price level, so the price level has no long-run effect on aggregate supply. We refer to this level of output as potential GDP or full-employment gdp.

cmbs backers

all non-recourse loans

operational independence

allowed to determine the policy rate.

Benefit of vertical common size statements

allows analyst to compare two firms of different sizes that operate in the same industry

payment in kind bond

allows the issuer to make the coupon payments by increasing the principal amount of the outstanding bonds, essentially paying bond interest with more bonds.

Income Taxes paid (IFRS)

also reported under operating activities UNLESS the expense is associated with an investing or financing transaction

price weighting index

an arithmetic average of the prices of the securities included in the index. the divisor is adjusted for stock splits and changes is the composition of the index when securities are added or deleted, such that the index value is unaffected by such changes. disadvantage: higher priced stock will have more of an impact on the average. (dow jones and nikkei)

Revolving line of credit

an even more reliable source of short term financing that a committed line of credit, revolving lines of credit are typically for longer terms, sometimes as long as years. along with committed lines of credit, these can be verified and can be listed on a firm's financial statements in the footnotes as a source of liquidity.

currency board arrangement

an explicit commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate.

Giffen good

an inferior good for which the negative income effect outweighs the positive substitution effect when price falls. At lower prices, a smaller quantity would be demanded as a result of the dominance of the income effect over the substitution effect. demand curve slopes up

surety bond

an insurance company has agreed to make a payment if a third party fails to perform under the terms of a contract or agreement with the organization

Outcome

an observed value of a random variable

settlement price for future

analogous to the closing price for the stock but is not simply the price of the final trade of the day. it's the average of the prices of the trades during the last period of trading, called the closing period, which is set by the exchange. This is so traders don't manipulate settlement price. On the final day of trading the settlement price is equal to the spot price of the underlying asset.

absorption approach

analyzes the effect of a change in exchange rate focusing on capital flows.

current yield

annual interest divided by the current market price.

Receivables turnover

annual sales/average receivables, considered desirable to have this close to the industry norm

relative frequency

another useful way to present data. calculating by dividing absolute frequency of each return interval by the total number of observations.

american style

anytime before the first call date

money weighted return

applies the IRR concept to investment portfolios.

cross sectional data

are a sample of observations taken at a single point in time.

Post employment benefits and deferred comp (tax disclosures)

are both recognized for financial reporting when earned by the employee but not deducted for tax purposes until actually paid. These can result in dta that will be reversed when the benefits or compensation are paid.

Changes in asset lives and salvage values

are changes in accounting estimates and are applied prospectively.

private value auction

art or collectibles auction

Finance Lease reporting

at inception, the lower of the present value of future minimum lease payments or the fair value is recognized as an asset and as a liability on the lessee's balance sheet. Over the term of the lease, the asset is depreciated and depreciation expense as well as interest expense is reported in the income statement.

Operating cycle

average number of days that it takes to turn raw materials into cash proceeds from sales, = days of inventory+days of receivables

When average product is at a maximum

average variable cost is at a minimum. At the corresponding labor and output level, marginal product is decreasing and marginal cost is increasing.

Winner's curse

b/c auction participants estimate the value with error in a common value auction, the bidder who most overestimates the value fo a lease will be the highest bidder.

Income effect

b/c the total expenditure on the consumer's original bundle of goods falls when the price of good x falls, this occurs.

DTL (financial reporting terminology)

balance sheet amounts that result from an excess of income tax expense over taxes payable that are expected to result in future cash outflows. These occur when revenues (or gains) are recognized in the income statement before they are included on the tax return due to temporary differences. OR when expenses (or losses) are tax deductible before they are recognized in the income statement. DTLs are expected to reverse and result in future cash outflows when the taxes are paid. If not expected to reverese, best classified in equity, if expected to reverse, best in liabilities.

six sources of liquidity for high yield debt companies

balance sheet cash, working capital, operating cash flow, bank credit, equity issued, sales of assets,

semi strong form

based on all public info

strong form

based on both public and private info

Appraisal indexes (real estate)

based on estimates of property values. Because estimating values tends to introduce smoothing into returns data, appraisal index returns are likely to have lower standard deviations than index returns based on repeat sales or trading prices of REIT shares.

weak form market efficient

based on past security market info

Treynor ratio

based on slope, calculated as Rp-Rf/Bp, interpreted as excess returns per unit of systematic risk.

kinked demand curve

based on the assumption that an increase in a firm's product price will not be followed by its competitors, but a decrease in price will.

Put call parity

based on the payoffs of two portfolio combinations, a fiduciary call and a protective put

willingness to bear risk

based primarily on investor's attitudes and beliefs about investment. the assessment of an investor's attitude about risk is quite subjective and is sometimes done with a short questionnaire that attempts to categorize the investor's risk aversion or risk tolerance. ABILITY TRUMPS WILLINGNESS

recessionary gap

because real gdp is less than full employment gdp, we call it this.

A firm can recognize a gain or loss on a bond ...

before maturity but not at maturity

Ending accounts receivable

beginning accounts receivable+sales-cash collections

External benefits

benefits received by those other than the buyers of a good. Scenic gardens and fountains built by private enterprises for their own interests are examples of goods with external benefits. Since the marginal benefit to society is greater than that of the marginal cost to the producer, less than the efficient quantity is produced.

ascending price auction (english auction)

bidders can bid an amount greater than the previous high bid, and the bidder that first offers the highest bid win the item

bond market vigilantes

bond market participants, where money supply growth is seen as inflationary, higher expected future asset prices will make long term bonds seem less attractive and will increase long term rates.

yankee bonds

bonds issued by firms outside the US that trade in the US and are denominated in US dollars

Cash from asset sold (CFI)

book value of the asset+gain(or-loss) on sale

Companies are required to report segmented data under

both ifrs and gaap

Keynsian thought about business cycles

business cycles are created by optimism or pessimism among business managers

modified duration

calculated as macaulay duration divided by one plus the bond's yield to maturity. this provides an approximate percentage change in a bond's price for a 1% change in yield to maturity.

equal weighted index

calculated as the arithmetic average return of the index stocks and, for a given time period, would be matched by the returns on a portfolio that had equal dollar amounts invested in each index stock. disadvantage: a matching portfolio would have to be adjusted periodically (rebalanced) as prices change so that the values of all security positions are made equal each period. example - hedge funds use these

negative convexity mostly found in...

callable bonds

American option

can be exercised at any time up to and including the contract's expiration date

Hedonic pricing

can be used to adjust a price index for product quality

industry capacity vs. industry concentration

capacity is the only one that DIRECTLY impacts pricing power

four c's of credit analysis

capacity, collateral, character, covenants

Issuance costs for a bond (GAAP)

capitalized as an asset and allocated to the income statement as an expense over the term of the bond

Free cash flow to equity

cash flow that would be available for distribution to common shareholders. CFO-Fixed capital investment + net borrowing (debt issued-debt repaid)

pull on liquidity

cash payments are made too quickly

Cyclical unemployment

caused by changes in the general level of economic activity.

Structural unemployment

caused by long-run changes in the economy that eliminate some jobs while generating others for which unemployed workers are not qualified.

Subsidy effect on supply curve

causes a shift rightward in the supply curve (increase in supply at a given price level) by the amount of the subsidy. The equilibrium quantity will increase and the price paid by buyers will decrease. Marginal cost will exceed marginal benefit and a deadweight loss will result from overproduction.

target independence

central bank defines how inflation is computed, sets the target inflation level, and determines the horizon over which the target is to be achieved

bermuda style

certain times AFTER the first call date

marginal cost

change in total cost/change in output

renegotiable mortgage

changes to a different fixed rate during its life

Fiduciary call

combination of call with exercise price X and a pure-discount, riskless bond that pays X at maturity (option expiration). The payoff at expiration is X when the call is out of the money, and X+ (S-X)=S when the call is in the money.

two fund separation theorem

combining a risky portfolio with a risk free asset, stating that all investors' optimal portfolios will be made up of some combinations of risk free assets and the risk free asset.

Defined Benefit pension plan

company has the investment risk

cross sectional analysis

comparing a company's ratios to those of its competitors

trendlines

connect the increasing low points on a price chart in an uptrend and the decreasing high points in a downtrend.

Cournot model

considers an oligopoly with only two firms competing, and both have identical and constant marginal costs of production

time series data

consist of observation taken over a period of time at specific and equally spaced time intervals

market portfolio

contains all risky securities in existence, no risk free

Simple (EPS)

contains no potentially dilutive securities

Credit derivatives

contingent claims and not forward commitments because their payoff depends on a future event taking place. Credit derivatives are essentially insurance against a credit event.

Valuation allowance

contra account (offset) against a DTA that reflects the likelihood that the dta will never be realized. this has a direct effect on net income. reduces NI, assets, equities.

Direct Method (in regards to income statement items)

converts an accrual-basis income statement into a cash-basis income statement

External costs

costs associated with the production of goods which are not entirely borne by producers. The industrial pollution of fishing waters decreases the yield to the fishing industry. However, the lost revenue to the fishing industry is not considered a cost to the firms generating the pollution. The result is an over-allocation of resources to the production of goods made by the firms generating the pollution.

No-artbitrage forward price

costs of holding the assets increase this, benefits from holding the asset (including dividends or convenience yield) decrease this.

beta calculation

covariance of asset's returns with market returns/variance of market return

effective central bank

credibility, independence, transparency

yield spread on corporate bonds are affected by five interrelated factors...

credit cycle, economic conditions, financial market performance, broker deal capital, general market demand and supply

Financial risks

credit risk, liquidity risk, market risk

spot exchange rate

currency exchange rate for immediate delivery, which for most currencies means the exchange of currencies takes place two days after the trade.

Forwards and swaps (how they're traded)

custom instruments and are traded and created by dealers in a market with no central location, aka over the counter. These are largely unregulated and each contract is with a counterparty, which may expose the owner of a derivative to default risk.

Reval model under IFRS

cv for PP&E must be disclosed along with whether their long lived assets have finite or infinite useful lives.

cash conversion cycle

days of sales outstanding+days of inventory on hand-number of days of payables. High cash conversion cycle is undesirable

An increase in real interest rates can be expected to:

decrease investment and decrease consumption.

cumulative distribution function

defines the probability that a random variable, X, takes on a value equal to or less than a specific value, x.

american depository receipts

denominated in US dollars and trade in the US.

ability to bear risk

depends on financial circumstances. Longer investment horizons, greater assets versus liabilities, more insurance against unexpected occurrences, and a secure job

Forward rate agreement

derivative contract that has a future interest rate, rather than an asset, as its underlying. the point of entering into an fra is to lock in a certain interest rate for borrowing and lending at some future date. One party will pay the difference (based on an agreed-upon notional contract value) between the interest rate specified in the fra and market interest rate at contract settlement.

Aggregate supply curve

describes the relationship between the price level and the quantity of real gdp supplied. It represents the amount of output that firms with produce at difference price levels.

major components of IPS

description of client, statement of the purpose of the IPS, statement of duties and responsibilities, Procedures, investment objectives, investment constraints, investment guidelines, evaluation of performance, appendices

a priori probability

determined using a formal reasoning and inspection process

Both labor and capital inputs exhibit

diminishing marginal productivity as input quantities increase, holding other input quantities constant.

NPV advantage

direct measure of the expected increase in the value of the firm.

The most likely limitation of the N-firm and Herfindahl-Hirshman concentration measures in assessing market power is that they:

do not explicitly include the effects of potential competition.

Partial Equilibrium analysis

does not consider the effect of changes in the equilibrium price of a good on the markets for other goods

NPV weakness

does not include any consideration of the size of the project

economies of scale

downward sloping segment of the long run average total cost curve

Depreciation (Tax disclosures)

dtl results from using accelerated depreciation for tax purposes and straight line for the financial statements. The analyst should consider the firm's growth rate and capital spending levels when determining whether the difference will actually reverse.

descending price auction

dutch auction, begins with a price greater than what any bidder will pay, and this offer price is reduced until a bidder agrees to pay it.

sealed bid auction

each bidder provides one big, which is unknown to other bidders

fixed charge coverage ratio

ebit+lease payments/interest +lease payments

pretax margin

ebt/rev

Unusual or infrequent items

either unusual OR infrequent, but NOT both. Examples include gains or losses from the sale of assets or part of a business. Also, impairments, writeoffs, writedowns, and restructuring costs. These items are included in income from continuing operations and are reported BEFORE tax.

Remaining useful life

ending pp&e/annual depreciation expense. net pp&E=origina cost(gross pp&e) - accumulated depreciation

Contra accounts

entries used to offset other accounts

The vertical distance between the ATC and AVC curves is

equal to AFT

Treatment of equipment in the manufacturing process and inventory that is held for sale (GAAP)

equipment is at historical cost, inventory held for sale is at lower of cost or market.

Operating lease

essentially a rental arrangement. No asset or liability is reported and the lessee and the periodic lease payments are simply recognized as rental expense in the IS

empirical probability

established by analyzing past data

Income approach (real estate)

estimates values by calculating the present value of expected future cash flows from property ownership or by dividing the net operating income (NOI) for a property by a capitalization rate. The comparable sales approach estimates a property value based on recent sales of similar properties. The cost approach is based on the estimated cost to replace an existing property.

global bond

eurobonds that trade in the national bond market of a country other than the country that issues the currency the bond is denominated in, and in the Eurobond market, are referred to as global bonds.

enterprise value model

example of a multiplier model

sharpe ratio

excess return per unit of risk

cross rate

exchange rate between two currencies implied by their exchange rate with a common third currency

plain vanilla swap is determined by

expected future short term rates

fama and french's multifactor model

expected return on a stock is explained by firm size, book-to-market ratio, and excess return on the market portfolio

Conditional var

expected value of a loss, given that the loss exceeds the minimum amount.

Income tax expense (financial reporting terminology)

expense recognized in the income statement that includes taxes payable and changes in DTA and DTL. The equation is as follows: income tax expense = taxes payable +Change in DTL-Change in DTA.

Utilitary Theory

explains consumer behavior based on preferences for various alternative combinations of goods, in terms of the relative level of satisfaction they provide.

surety bond

external credit enhancement issued by a third party

discount bases yield/bank discount yield/bdy

face value-price/face value*(360/days)

money market yield

face value-price/price*(360/days) OR [360 × bank discount yield] / [360 − (t × bank discount yield)]

ORbond equivalent yield

face value-price/price*(365/days to maturity)

roe w/ margin

face-pv+div/pv*(1/initial margin)

Transfer from investment property to owner occupied OR inventory

fair value of asset at date of transfer will be its cost under new classification

slope of the supply function curve

first number!

clean price

flat price of the bond

elasticities approach

focuses on the impact of exchange rate changes on the total value of imports and on the total value of exports.

Supplementary schedules vs. footnotes

footnotes ARE audited, supplementary schedules are not necessarily audited.

Decreasing cost industry

for some industries, resource prices fall as the industry expands.

real money accounts

foreign exchange buy-side investors that do not use derivatives. Many mutual funds, pension funds, and insurance companies can be classified as real money accounts.

Purchased Intangible asset

from another party is initially recorded on the balance sheet at cost, typically its fair value at acquisition.

dirty price

full price of the bond

pay back period

full years until recovery + (unrecovered cost at the beginning of the year/cash flow during the last year)

ffo

funds from operations, NI from continuing operations +depreciation, amortization, deferred taxes, and other non-cash items

expenditure approach

gdp can be calculated by summing the amounts spent on goods and services produced during the period.

income approach

gdp is calculated by summing the amounts earned by households and companies during the period, including wage income, interest income, and business profits.

Velocity of money

gdp/money supply. the average number of times per year each dollar is used to buy goods/services.

lognormal distribution

generated by the function e(to the x), where x is normally distrubuted. Since the natural logarithm, ln, of e(to the x) is x, the logarithms of lognormally distributed random variables are normally distributed, thus the name. skewed to the right with a long right hand tail and is bounded on the left hand side of the curve by zero.

Restructuring (Tax disclosures)

generates a dta b/c the costs are recognized for financial reporting purposes when the restructuring is announced, nut not deducted for tax purposes until actually paid. Note that restructuring usually results in significant cash outflows (net of tax savings) in the years after the restructuring costs are reported.

cumulative absolute/relative frequency

get these by summing the absolute or relative frequencies starting at the lowest interval and progressing through the highest.

Export subsidies

government payments to firms that export goods

If futures prices are positively correlated with interest rates, futures prices will be:

greater than forward prices if interest rates are positively correlated with futures prices, because daily settlement of long futures positions will produce excess margin when interest rates are high and require margin deposits when interest rates are low.

shakeout stage

growth has slowed, intense competition, increasing industry overcapacity, declining profitability, increased cost cutting, increased failures

negatively skewed

has a disproportionately large amount of outliers that fall within its lower LEFT tail.

ricardian model of trade

has only one factor of production, labor.

market cap weighted index (value weighted index)

has weights based on the market cap of each index stock as a proportion of the total market cap of all the stocks in the index. Does not get affected by divs or splits. example - msci all world index

credit card loans

have a lockout period

auto mbs

have a waterfall structure

The marginal rate of substitution between Good X and Good Y

he slope of an indifference curve at any point along it. At the tangency point, this is equal to the slope of the budget line which is -Px/Py. (the negative ratio of the price of Good X to the price of Good Y.)

Ratio Impacts of LIFO/FIFO (Inventory turnover)

higher for LIFO

Amortized cost

historical cost adjusted for depreciation, amortization, depletion, and impairment

Total Useful life

historical cost/annual depreciation expense. H cost is gross PP&E before deducting accumulated depreciation

Long lived assets held for sale

if a firm reclassifies a long lived asset from held for use to held for sale because management wants to sell it, the asset is tested for impairment. At this point, the asset is no longer depreciated or amortized. It's impaired if its carrying value exceeds nrv (fv-selling costs). If impaired, the asset is written down to nrv and the loss is recognized in the income statement. ***for long lived assets held for sale, the loss can be reversed under ifrs AND GAAP, if the value of the asset recovers in the future. however, the loss reversal is limited to the original impairment loss. Thus, the cv of the asset after reversal cannot exceed the cv when the impairment was recognized.

Breakeven point

if average revenue is just equal to average total cost, total revenue is equal to total cost

Short run shutdown point

if average revenue is less than average variable cost in the short run, the firm should shut down

excess demand

if the market price is below its equilibrium level, the quantity demanded at that price exceeds the quantity supplied.

excess supply

if the price is above its equilibrium level, the quantity willingly supplied exceeds the quantity consumers are willing to purchase

unstable equilibrium

if the supply curve is less steeply sloped than the demand curve, prices above or below equilibrium will tend to get further from equilibrium.

Margin with derivatives

if you fall below maintenance margin, you have to bring it back up to initial margin, different from equities where you just have to go back up to maintenance margin.

Component depreciation

ifrs requires firms to depreciate the components on an asset separately, thereby requiring useful life estimates for each component. This is seldom used under GAAP

point and figure charts

illustrate changes of direction in price trends.

IS curve (income savings)

illustrates the negative relationship between real interest rates and real income for equilibrium in the goods market.

LM curve (liquidity money)

illustrates the positive relationship between real interest rates and income consistent with equilibrium in the money market. higher real interest rates decrease the quantity of real money balanced individuals want to hold, so for a given real money supply, equilibrium in the money market requires than an increase in real interest rates be accompanied by an increase in income.

term structure of yield volatility

illustrates the relationship between the yield volatility and time to maturity

Price ceilings

in the long run, lead to consumers have to wait in long lines to make purchases, They pay a price in terms of the time they spend in line. Suppliers may engage in discrimination, such as selling to friends and relatives first. Suppliers officially sell at the ceiling price but take bribes to do so. Suppliers may also reduce the quality of the goods produced to a level commensurate with the ceiling price. ONLY EFFECTIVE IF SET BELOW THE EQUILIBRIUM PRICE

Price floors

in the long run, lead to suppliers diverting resources to the production of the good with the anticipation of selling the good at the floor price but then will not be able to sell all they produce. Consumers will buy less of a product if the floor is above the equilibrium price and substitute other, less expensive consumption goods for the good subject to the floor.

direct investing

in the securities of foreign companies simply refers to buying a foreign firm's securities in foreign markets. Some obstacles are that the investment and return are denominated in a fx, the foreign stock exchange may be illiquid, the reporting requirements of foreign stock exchanges may be less strict, impeding on analysis, and investors must be familiar with the regs and procedures of each market in which they invest.

SRAS (short run aggregate supply) Curve

in the short run, the curve slopes upward because some input prices will change as production is increased or decreased. We assume in the short run that output prices will change proportionally to the price level but that at least some input prices are sticky, meaning that they do not adjust to changes in the price level in the short run.

VSRAS (very short run aggregate supply) Curve

in the very short run, firms will adjust output without changing price by adjusting labor hours and intensity of use of plant and equipment in response to changes in demand

Current assets

include cash and other assets that will likely be converted into cash or used up within one year or one operating cycle, whichever is GREATER

Opportunity costs

include implicit and explicit costs

Factors of production for a firm

include labor, capital, and materials. NOT technology

bond indenture

includes par value, currency, coupon rate, and maturity rate, and issuer. not the rating

Taxable income (tax return terminology)

income subject to tax based on the tax return

Marginal Revenue

increase in tr from selling one more unit of a good or service

MC declines initially, then

increases

ricardian equivalence

increases in the current deficit mean greater taxes in the future. to maintain their preferred pattern of consumption over time, taxpayers may increase current savings in order to offset the expected cost of higher future taxes. if taxpayers reduce current consumption and increase current savings by just enough to repay the principal and interest on the debt the government issued to fund the increased deficit, there is no effect on aggregate demand.

marginal product for an input

increases initially, reaches a peak, then declines. Marginal product is at its maximum when marginal cost is at its minimum. this is positive when last unit of input increases total product

interest indexed bonds

indexed bonds that adjust the coupon rate.

interest annuity indexed bonds

indexed bonds that are fully amortizing with the payments adjusted.

unqualified opnion

indicates that the auditor believes the statements are free from material omissions and errors

core inflation

inflation ex food and energy

Bonds Issued at a premium

interest expense declines over time.

Periodic inventory system

inventory values and cogs are determined at the end of the accounting period. No detailed records of inventory are maintained; rather, inventory acquired during the period is reported in a purchases account. At the end of the period, purchases are added to beginning inventory to arrive at cost of goods available for sale. To calculate cogs, ending inventory is subtracted from goods available for sale.

Perpetual inventory system

inventory values and cogs are updated continuously. Inventory purchased and sold is recorded directly in inventory when the transactions occur. Thus, a purchases account is not necessary.

Project sequencing

investing in a project today creates the opportunity to decide to invest in a related project in the future.

Available for sale securities

investment securities that are not expected to be held to maturity or sold in the near term. reported on the balance sheet at fair value.

GDP Deflator

is a price index that can be used to convert nominal gdp into real gdp, taking out the effects of changes int he overall price level. The gdp deflator is based on the current mix of goods and services, using prices at the beginnign and end of the period. calculated as nominal gdp over real gdp

interpolated spread (I spread)

is a yield spread relative to swap rates, theoretically only correct if the yield curve is flat

put call forward parity

is derived from a forward contract rather than the underlying asset itself. Contract Price+put=call+bond.

An expenditure that is capitalized..

is initially recorded as an asset on the balance sheet at cost, typically its fair value at acquisition plus any costs necessary to prepare the asset for use. Except for land and intangible assets with indefinite lives( acquisition goodwill), the the cost is then allocated to the income statement over the life of the asset as depreciation expense (for tangible assets) or amortization expense (for intangible assets with finite lives). Alternatively, if the expenditure is immediately expensed, current period pretax income is reduced by the amount of the expenditure. Once an asset is capitalized, subsequent related expenditures that provide more future economic benefits are also capitalized. Subsequent expenditures that merely sustain the usefulness of the asset are expensed when incurred.

The required interest rate on a security

is made up of the nominal rate which is in turn made up of the real risk-free rate plus the expected inflation rate. It should also contain a liquidity premium as well as a premium related to the maturity of the security.

Change in accounting principal, such as useful life or salvage value

is put into effect in the current period prospectively

The equilibrium bundle of goods for a consumer

is tangent to the budget line on the highest attainable indifference curve.

adverse opinion

issued if the statements are not presented fairly or are materially nonconforming with standards

qualified opinion

issued if the statements make any exceptions to the accounting principles

global depository receipts

issued outside the US and the issuer's home country. most are traded on the london and luxembourg exchanges. usually denominated in US dollars.

Eurobonds

issued outside the jurisdiction of any one country and denominated in a currency different from the currency of the countries in which they are sold. Subject to less regulation that domestic bonds in most jurisdictions and were initially introduced to avoid US regulations.

If the demand curve for a given product is a straight line...

it indicates that demand is more elastic at higher prices.

Revised capm equation with country risk premium

k=rf+B(RMKt-Rf+CRP)

Forward commitment

legally binding promise to perform some action in the future. these include forward contracts, futures contracts, and swaps. Forward contracts and futures contracts can be written on equities, indexes, bonds, fx, physical assets, or interest rates.

nominal scales

level of measurement that contains the least info. observations are classified or counted with no particular order

Quota

limits the amount of imports allowed over some period. Restricts the quantity of a good imported to the quota amount. Domestic producers gain, domestic consumers lose from an increase in the domestic price.

investment constraints

liquidity needs, time horizon, taxes, legal and regulatory factors, and unique needs and preferences.

yield spread

liquidity premium+credit spread

Synthetic put

long call, long bond, short underlying

Synthetic call

long put, long underlying, short bond

Minimum point on the ATC curve represents the

lowest cost per unit

positively skewed

many outliers in the upper region, RIGHT tail.

enterprise value

market value of common and preferred stock+ market value of debt-cash and short term investments

Goodwill ( in a business combination)

may be capitalized on the balance sheet. the costs on internally generated goodwill are expensed in the period incurred.

Dividends/interest paid (IFRS)

may be classified as either operating OR financing activities.

Dividends/interest recieved (IFRS)

may be classified as either operating OR investing activities.

structural subordination

means that a parent company's debt has a lower priority of claims to a subsidiary's cash flows than the subsidiary's debt

Hard hurtle rate

means that incentive fees are earned only on returns in excess of the benchmark

Soft hurdle rate

means that incentive fees are paid on all profits, but only if the hurdle rate is met.

concentration measures

measure market structure of an industry

Jensen's alpha

measure of percentage returns in excess of those from a portfolio that has the same beta but lies on the SML. calculated as Rp-(Rf+Bp(Rm-Rf) and is the % portfolio returns above that of a portfolio with the same beta as the portfolio that lies on the SML

security market line

measures beta, RFR+(return of market-rfr/variance of market)

time weighted return

measures compound growth. It is the rate at which $1 compounds over a specified performance horizon. The process of averaging a set of values over time. Step 1. value the portfolio immediately preceding significant additions or withdrawals. Form subperiods over the evaluation period that correspond to the dates of deposits and withdrawals. 2. Compute the HPR of the portfolio each subperiod. 3. Compute the product of (1+HPR) for each subperiod to obtain a total return for the entire measurement period.

defensive interval ratio

measures liquidity that indicates the number of days of average cash expenditures the firm could pay with its current liquid assets: cash+marketable securities+receivables/average daily expenditures

Advantage of IRR

measures profitability as a %, showing the return on each dollar invested. Provides info on the margin of safety that the NPV does not.

Value at risk

measures tail risk, it's the minimum loss over a period that will occur with a specific probability.

Real GDP

measures the output of the economy using prices from a base year, removing the effect of inflation. Calculated as sum of (prices of good I in year t-5) * (Quantity of good I produced in year T)

managed floating exchange rates

monetary authority attempts to influence the exchange rate in response to specific indicators such as the balance of payments, inflation rates, or employment w/o specific target exchange rate or predetermined rate path

multifactor models

most commonly use macroeconomic factors such as gdp growth, inflation, or consumer confidence, along with fundamental factors such as earnings, etc.

sovereign bonds

most likely to issue by auction

Identifiable intangible asset

must be 1. capable of being separated from the firm or arise from a contractual or legal right. 2. controlled b the firm 3. expected to provide future economic benefits

Diluted EPS

must be equal to or less than basic EPS

income elasticity of an inferior good

negative

decline stage

negative growth, declining prices, consolidation

Secondary sources of liquidity

negotiating debt contracts, liquidating assets, filing for bankruptcy protection, and reorganization

Carrying value (financial reporting terminology)

net balance sheet value of an asset or liability

Indirect method

net income is converted to operating cash flow by making adjustments for transactions that affect NI but are not cash transactions. These actions include eliminating noncash expenses (depreciation and amortization), nonoperating items (gains/losses), and changes in balance sheet accounts resulting from accrual accounting events

Return on Assets

net income/average total assets.

Net cash flows from creditors(cff)

new borrowings-principal amounts repaid

net cash flows from shareholders (cff)

new equity issued - share repurchases-cash dividends paid

three sources of bias with cpi

new goods, quality changes, and substitution.

Return on common equity

ni-preferred divs/average common equity

ROE

ni/average total equity, concerning if too low.

real exchange rate

nominal exchange rate *(cpi foreign/cpi domestic)

revaluation model on investment property

not allowed under either system, only cost or fair value for IFRS, only cost model for GAAP

Current liabilities

obligations that will be satisfied within one year or one operating cycle, whichever is GREATER

standard normal distribution

observation-population mean/standard deviation

Break points

occur any time the cost of one of the components of the company's WACC changes. =amount of capital at which the component's cost of capital changes/weight of the component capital structure

LIFO Liquidation

occurs when a LIFO firm's inventory quantities decline. Older, lower costs are included in COGS compared to a situation in which inventory are not declining. Results in higher profit margin and higher taxes compared to what they would be if inventory quantities were not declining.

Installment sale

occurs when a firm finances a sale and payments are expected to be received over an extended period. Under GAAP, if collectibility is certain, revenue is recognized at the time of sale using the normal revenue recognition criteria. If uncertain, the installment method is used. Profit is equal to the cash collected during the period multiplied by the total expected profit as a % of sales. Typically used for sale of real estate.

Derecognition

occurs when assets are sold, exchanged or abandoned. When sold, the asset is removed from the balance sheet and the difference between the sale proceeds and cv of asset is reported as a gain or loss in the IS. If abandoned, the treatment is similar to a sale, except there are no proceeds. In this case, the cv of the asset is removed from the balance sheet and a loss is recognized in the i/s. If exchanged, a gain or loss is computed by comparing the cv of the old asset with the fv of the old asset, or the fv of the new asset if that value is more evident. The cv of the old asset is removed from the BS and the enw asset is recorded at its fv.

drag on liquidity

occurs when cash inflows lag

The optimal portfolio in the Markowitz framework

occurs when the investor achieves the diversified portfolio with the highest utility.

dominant firm model

of oligopoly is based on the assumption that one firm has a significant cost advantage which allows it to set the price in the market and control a relatively large share of the industry's production and sales. It does not assume that the firm will be the innovation leader in product development. In fact, being more innovative is one of the factors that allow smaller competitors that work at a cost disadvantage to survive.

european style

on the first call date

Inferior good

one for which the income effect is negative

Normal good

one for which the income effect is positive

continuous random variable

one for which the number of possible outcomes is infinite, even if lower and upper bounds exist.

discrete random variable

one for whiich the number of possible outcomes can be counted, and for each possible outcome, there is a measurable and positive probability.

herfindahl hirschman index

one limitation of the n firm ratio is that it may be relatively insensitive to mergers of two firms, this fixes the problem and is calculated as the sum of the squares of the market shares of the largest firms in the market.

conditional probability

one where the occurrence of one event affects the probability of the occurrence of another event. aka the likelihood

line chart

only focuses on closing prices

Operating ROA

operating income or EBIT/average total assets

Quote driven markets

orders are executed using trading rules, which are necessary b/c traders are usually anonymous.

Total product of labor

output for a specific amount of labor

Incorrect way to calculate flotation cost

overstates npv

industry rotation

overweighting or underweighting industries that are undervalued or overvalued in order to weight them apropriately.

benefits of monte carlo simulation

past distributions cannot address changes in correlations or events that have not happened before. it approximates solutions to complex problems.

Income elasticity

percentage change in the quantity demanded divided by the percentage change in income.

all portfolios on the capital market line are..

perfectly positively correlated

risk shifting

performed with a derivatives contract

inferential statistics

pertain to the procedures used to make forecasts, estimates, or judgments about a large set of data on the basis of a the statistical characteristics of a smaller set

Indifference curves

plot the combinations of two goods that provide equal utility to a consumer. Rules include...1. Indifference curves for two goods slope downward. 2. Indifference curves are convex towards the origin. This results when the magnitude of the slope decreases as we move toward more of Good X and less of Good Y. 3. Indifference curves cannot cross.

pv of a perpetuity

pmt/interest rate

PV of a perpetuity

pmt/rate

Cross price elasticity of demand for a substitute product

positive

odds

possible outcome/1-possible outcome

Accounting profit (financial reporting terminology)

pretax financial income based on financial accounting standards. Known as income before tax and earnings before tax.

price/sales

price/(total sales/# of shares)

Time value

prior to expiration an option has this in addition to any intrinsic value.

m squared

produces the same portfolio rankings as the sharpe ratio but is stated in % terms

Extraordinary items

prohibited by IFRS, but included under GAAP, these are material transactions or events that are BOTH unusual AND infrequent. Examples include losses from an expropriation of assets, Gains or losses from early retirement of debt, Uninsured losses from natural disasters that are both unusual and infrequent. These are reported separately in the income statement, net of tax, after income from continuing operations.

An anti-dumping restriction on trade

prohibits foreign firms from selling products below cost to gain market share.

IMF

promote international monetary cooperation, facilitate expansion and balanced growth of international trade, promote exchange rate stability

Marginal propensity to consume

proportion of additional income spent on consumption

marginal propensity to save

proportion saved, when added to mpc it should equal 100

sinking fund provisions

provide for the repayment of principal through a series of payments over the life of the issue.

interval scale

provide relative ranking, like ordinal scales, plus the assurance that differences between scale values are equal.

Finance lease

purchase of an asset that's financed with debt. At inception, the lessee ads equal amounts to both assets and liabilities on the balance sheet. Over the term of the lease, the lessee will recognize depreciation expense on the asset and interest expense on the liability.

Payables turnover

purchases/average trade payables

OID bonds

pure discount bonds and other bonds sold at significant discounts to par when issued.

Profitability index

pv of a project's future cash flows divided by the initial cash outlay, if >1, accept, if <1, reject

Put call parity (equivalencies) for the pv of x

pv of x=stock+put-call

growth stage

rapid growth, limited competitive pressures, falling prices, increasing profitability

diversification ratio

ratio of risk of an equally weighted portfolio of N securities (measured by its std. dev of returns) to the risk of a single security selected at random from the N securities.

cost of equity capital

ratio of the firm's net income to its average book value.

Primary sources of liquidity

ready cash balances, short term funds (trade credit and bank lines of credit), and cash flow management

neutral rate of interest

real trend rate of economic growth+inflation target

Transfer from inventory to investment property

recognize gain or loss if fair value is different from carrying value

Unrealized gains and losses from trading securities

recognized in the income statement

ALl trade restrictions

reduce imports, increase price, decrease consumer surplus, increase domestic quantity supplied, increase producer surplus.

Objectives of capital flow restrictions

reduce volatility of domestic asset prices, maintain fixed exchange rates, keep domestic rates low, protect strategic industries.

Valuation allowance (financial reporting terminology)

reduction of dta based on the likelihood the assets will not be realized.

factoring

refers of the sale of receivables at a discount from their face values. used for below investment grade companies usually

Financial risk

refers to the additional risk that the firm's common stockholders must bear when a firm uses fixed cost (debt) financing.

discretionary fiscal policy

refers to the federal government's decisions regarding government spending and taxing.

unconditional probability

refers to the probability of an event regardless of the past or future occurrence of other events

Business Risk

refers to the risk associated with a firm's operating income and is the result of uncertainty about a firm's revenues and the expenditures necessary to produce those revenues. Combo of sales and operating risk.

retail foreign exchange market

refers to transactions by households and relatively small institutions and may be for tourism, cross-border investment, or speculative trading.

Daily cash position

refers to uninvested cash balances a firm has available to make routine purchases and pay expenses as they come due.

Reconstitution

removing some securities from the index and adding others.

Unrealized gains and losses from available for sale securities

reported as other comprehensive income, a component of OE.

Inventory under GAAP

reported at the lower of cost or market (usually replacement cost). Market cannot be freater than NRV or less than NRV minus normal profit margin. If replacement cost exceeds NRV, then market is NRV. If replacement cost is less than NRV minus normal profit margin, then market is NRV minus a normal profit margin.

trading securities (balance sheet)

reported in balance sheet at fair value

Inventory under IFRS

reported on the balance sheet at the lower of cost or NRV. NRV is selling price minus estimated selling costs and completion costs.

ordinal scales

represent a higher level of measurement than nominal scales. when working with these, every observation is assigned to one of several categories. these categories are ordered with respect to a specified characteristic

depository receipts

represent ownership in a foreign firm and are traded in the markets of other countries in local market currencies. a bank deposits shares of the foreign firm and then issues receipts representing ownership of a specific number of the foreign shares.

ratio scales

represent the most refined level of measurement. this provides ranking and equal differences between scale values, and they also have a true zero point as the origin.

Capital allocation line

represents possible combinations of risk free assets and the optimal risky asset portfolio.

Both IFRS and GAAP for PP&E accounting

require disclosure of gross asset value and accumulated depreciation

clawback provision (private equity)

requires the manager to return any periodic incentive fees to investors that would result in investors receiving less than 80% of the profits generated by portfolio investments as a whole.

Government imposed quotas

restrict production to a level below that which would occur if marginal benefit equals marginal cost. This restricted output quantity is less than the equilibrium quantity, so marginal benefit exceeds marginal cost.

Debt covenants

restrictions imposed by the lender on the borrower to protect the lender's position. These can reduce default risk and thus reduce borrowing costs.

Cost push inflation

results from a decrease in aggregate supply

demand pull inflation

results from an increase in aggregate demand

Frictional unemployment

results from the time lag necessary to match employees who seek work with employers needing their skill set.

increasing cost industry

results when firms enter the industry in pursuit of profits, the demand for the productive inputs specific to the industry increases, and market prices increase.

Collateral yield

return earned on the collateral posted to satisfy margin requirements. In most cases, the collateral posted will be U.S. Treasury Bills, in which case the collateral yield is the T-bill yield.

Barter Transactions (IFRS)

revenue from barter transactions must be based on the fair value of revenue from similar nonbarter transactions with unrelated parties.

IFRS for when the firm cannot reliably measure the outcome of the project

revenue is recognized to the extent of contract costs, costs are expensed when incurred, and profit is recognized only at completion.

fixed asset turnover

revenue/average fixed assets, you want close to industry norm

working capital turnover ratio

revenue/average working capital

Total asset turnover

revenur/average total assets, desirable to have close to industry norm

significance level

risk of making a type one error

Mutual funds

risk tolerance - depends on fund, investment horizon - depends on fund, liquidity needs - high, income needs - depends on the fund

Defined benefit pension

risk tolerance - high, investment horizon - long, liquidity needs - low, income needs - depends on age

Endowments (PM)

risk tolerance - high, investment horizon - long, liquidity needs - low, income needs - spending level

Insurance (pm)

risk tolerance - low, investment horizon - long for life, short for p&c, Liquidity needs - high, income needs - low

Banks (pm)

risk tolerance - low, investment horizon - short, liquidity needs - high, income needs - pay interest

WTO

rule of trade between nations, want trade to run smoothly, predictably, and freely

test statistic

sample statistic-hypothesized value/standard error of the sampl;e

vickrey auction

second price auction

brokers

seek out traders that are willing to take the opposite sides of their clients' orders.

zero coupon bonds

sell below their par value, or at a discount prior to maturity. The amount of the discount may change as interest rates change, but a zero coupon bond will always be priced less than par.

NRV

selling price - any completion costs and disposal costs

Gamma

sensitivity of delta to changes in the price of the underlying asset

rho

sensitivity of derivatives values to changes in the risk-free rate

Vega

sensitivity of derivatives values to the volatility of the price of the underlying asset

The price of a fixed-for-floating interest rate swap contract:

set at initiation, set such that the contract has a value of zero at initiation. The value of a fixed-for-floating interest rate swap contract may vary over its life as the floating rate changes.

efficient set

set of portfolios that dominate all other portfolios as to risk and return. That is, they have highest expected return at each level of risk. set of portfolios where there are no more diversification benefits.

Protective put

share of stock together with a put option on the stock. The expiration date payoff is (x-s)+S=X when the put is in the money, and S when the put is out of the money.

MC curve above AVC is the firm's

short run supply curve

correlations between asset classes

should be low, that leads to risk reduction through portfolio diversification.

correlation of returns within an asset class

should be relatively high, indicating that the assets within the assets class are similar in their investment performance

reference rate for a floating rate note

should match the note's currency, frequency with which its coupon is reset, not its maturity

successful exchange rate targeting

should produce equal inflation rate

Common Size Cash flow statement

shows each item as a percentage of revenue or shows each cash inflow as a percentage of total inflows and each outflow as a percentage of total outflows.

Aggregate demand curve

shows the relationship between the quantity of real output demanded (which equals real income) and the price level. This slopes downward because higher price levels reduce real wealth, increase real interest rates, and make domestically produced goods more expensive compared to goods produced abroad, all of which reduce the quantity of domestic output demanded.

GNP

similar to gdp but measures the total value of goods and services produced by the labor and capital of the country's CITIZENS

short run supply curve for a perfectly competitive market

slopes up and to the right

mature stage

slow growth, consolidation, high barriers to entry, stable prices, superior firms gain market share

embryonic stage

slow growth, high prices, large investment required, high risk of failure

nonnormal distribution with unknown variance

small sample - not available, large sample - t stat* (the z statistic is theoretically acceptable here, but not as conservative)

Nonnormal distribution with Known variance

small sample - not available, large sample - z stat

Normal distribution with unknown variance

small sample size - t stat, large sample size - t stat* (the z statistic is theoretically acceptable here, but not as conservative)

NORMAL distribution with KNOWN variance

small sample size - z statistic, large sample size - z statistic

partially amortizing

so that there is a balloon payment at bond maturity, just as with a bullet structure. however, unlike bullet, the final payment includes just the remaining unamortized principal amount rather than the full principal amount.

special purpose bond

sometimes an entity is created solely for the purpose of owning specific assets and issuing bonds to provide the funds to purchase the assets. These can issue bonds at a lower rate than bonds issued by the originating corporations b/c the assets supporting the bonds are owned by the SPE and are used to make the payments to holders of the securitized bonds even if the company itself runs into financial trouble.

Country risk premium

sovereign yield spread*annualized std dev of equity index of developing country/annualized std dev of soverign bond market in terms of the developed market currency

coefficient of varition

standard dev/mean

Exchange traded derivatives (futures)

standardized and backed by a clearinghouse

Chebychev's inequality

states that for any set of observations, the proportion of observations that lie within k standard deviations of the mean is at least 1 - 1/k2.

central limit theorem

states that for simple random samples of size n from a population with a eman u and a finite variance, the sampling distribution of the sample mean approaches a normal probability distribution with mean u and a variance equal to variance/n as the sample size becomes large.

Fisher effect

states that nominal interest rates is simply the sum of the real interest rate+expected inflation

cv net income

std dev of ni /mean ni

cv operating income

std dev of operating income/mean operating income

CV of sales

std dev of sales/mean sales

Permanent tax differences

such as tax credits, non-deductible expenses, and tax differences between capital gains and operating income give rise to differences between the effective and statutory tax rate

Marshall-Lerner condition

suggests that a country's ability to narrow a trade deficit by devaluing its currency depends on: elasticity of demand for imports and exports.

n firm concentration ratio

sum of the % market share of the largest N firms in a market.

Under perfect competition, the market short-run supply curve

sum of the quantities at each price along the marginal cost curves for all firms in a given industry.

the normal curve

symmetrical about its mean with 34% of the area under the normal curve falling between the mean and one standard deviation above the mean. Ninety-five percent of the normal curve is within two standard deviations of the mean, so five percent of the normal curve falls outside two standard deviations from the mean.

Tarriff

taxes on imported good collected by the government. increases the domestic price, decreases quantity imported, and increases the quantity supplied domestically. Domestic producers gain, foreign exporters lose, and the domestic government gains by the amount the tariff revenues

Recoverability test

tests if an asset is impaired. if impaired, the second step involves measuring the loss.

Normal profit

the accounting profit that makes economic profit zero.

Income Tax paid (tax return terminology)

the actual cash flow for income taxes including payments or refunds from other years.

deadweight loss

the allocation of resources is inefficient if the quantity supplied does not maximize the sum of consumer and producer surplus. The reduction in consumer and producer surplus due to underproduction or overproduction is this.

Fair value

the amount at which two parties in an arm's length transaction would exchange the asset

Realizable value

the amount for which the firm could sell the asset

Leverage

the amount of fixed costs a firm has. These fixed costs may be fixed operating expenses, such as building or equipment leases, or fixed financing costs, such as interest pmts or debt.

Historical cost

the amount originally paid for the asset, including transportation and installation

Current cost

the amount the firm would have to pay today for the same asset

Measurement Base

the amounts at which items are reported in the financial statement elements depend on this

The primary factors that influence the price elasticity of demand for a product are:

the availability of substitute goods, the time that has elapsed since the price of the good changed, and the proportions of consumers' budgets spent on the product.

Negative Covenants

the borrower promises to refrain from things, such as increasing dividends or repurchasing shares, issuing more debt, engaging in m/a.

Free cash flow to the firm

the cash available to all investors, both equity and owners and debt holders. FCFF from NI: NI+noncash charges +(int expense*(1-tax rate)) - Fixed capital investment (net capital expenditures) - working capital investment. FCFF from operating cash flow: CFO+(Int expense *(1-tax rate)) - fixed capital investment(net capital expenditures)

Product costs

the costs included in inventory, similar under ifrs and gaap, are capitalized in the inventories account on the balance sheet and include 1. purchase cost less trade discounts and rebates. 2. Conversion (manufacturing) costs including labor and overhead. 3. Other costs necessary to bring the inventory to its present location and condition. -By capitalizing inventory cost as an asset, expense recognition is delayed until the inventory is sold and revenue is recognized.

TIPS

the coupon rate is fixed for the entirety of the issue, example of a capital indexed bond

If the government runs a budget deficit

the deficit must be financed by a trade deficit (exports < imports), surplus private savings (private savings > private investment), or both.

sampling error

the difference between a sample statistic and its corresponding population parameter

inlfationary gap

the difference between gdp and full employment gdp, b/c the increase in aggregate demand from its previous level causes upward pressure on the price leve.

Market risk premium

the difference between the expected return on the market and the risk free rate

consumer surplus

the difference between the total value to consumers of the units of a good that they buy and the total amount they must pay

Producer surplus

the excess of the market price above the opportunity cost of production; that is, total revenue minus the total variable cost of producing those units

crawling peg

the exchange rate is adjusted periodically, typically to adjust for higher inflation versus the currency used in the peg.

independent floating

the exchange rate is market determined

Accrued expenses

the firm owes cash for expenses it has incurred. Expenses increase and a liability for accrued expenses increases as well. Wages payable are a common example of an accrued expense as companies typically pay their employees at a later date for work they performed in the prior week or month.

Prepaid expenses

the firm pays cash ahead of time for an anticipated expense. Cash decreases and prepaid expense, an asset, increases, Prepaid expense decreases and expense increase when the expense is actually incurred. (a retail store that rents space in a mall will pten pay its rent in advance

Long run shutdown point

the firm should shut down if average revenue is less than average total cost in the long run

Issuance costs for a bond (IFRS)

the initial bond liability on the balance sheet is reduced by the amount of the issuance cost, increasing the bond's effective interest rate. In effect these costs are treated as unamortized discount.

The zero volatility spread (Z-spread)

the interest rate that is added to each zero-coupon bond spot rate that will cause the present value of the risky bond's cash flows to equal its market value.

Finance Lease (rates)

the interest rate used by the lessee is the lower of the lessee's incremental borrowing rate and the lessor's implicit rate.

Optimal Capital budget

the intersection of the investment opportunity schedule with the marginal cost of capital curve.

subjective probability

the least formal method of developing probabilities and involves the use of personal judgment

grey market

the market for bonds that have not been issued

Intrinsic value

the maximum of zero and the amount that the option is in the money.

Free Cash flow

the measure of cash that is available for discretionary purposes

key rate duration

the measure of non-parallel shift in the yield curve

Carrying (book) value

the net value of an asset or liability on the balance sheet. for pp&e, carrying value equals historical cost minus accumulated depreciation

IS and LM combined

the point at which they intersect represents the levels of the real interest rate and income that are consistent with equilibrium between income and expenditure (points on the IS curve) and equilibrium between the real money supply and the real interest rate (points along the LM curve).

IRR weakness

the possibility of producing rankings of mutually exclusive projects different from those from NPV analysis and the possibility that a project has multiple IRRs or no IRR.

equilibrium price

the price at which the quantity supplied equals the quantity demanded. graphically this is identified by the point where the two curves intersect

fully amortizing loan

the principal is fully paid off when the last periodic payment is made, typically car or home loans

Value in use

the pv of the asset's future cash flow stream.

Cross price elasticity of demand

the ratio of the % change in the quantity demanded of a good to the % change in the price of a related good

Average cost pricing

the regulatory practice of setting prices at a level where the monopoly firm's average total cost curve intersects the demand curve?

tail risk

the risk that extreme events are more likely than the organization's analysis indicates

delta

the sensitivity of derivative values to the price of the underlying asset

National income

the sum of employee wages and benefits, corporate and government enterprise profits before tax, interest income, unincorporated business owners' income, rental income, and indirect business taxes less subsidies.

Taxes payable (tax return terminology)

the tax liability caused by TAXABLE INCOME. This is also known as current tax expense, but do not confuse this with INCOME TAX EXPENSE.

Operating cycle

the time it takes to produce or purchase inventory, sell the product, and collect the cash.

probability density function

the total area under the curve must be one (probability of all outcomes equals 1) and the curve must not fall below the horizontal axis (no outcome can have a negative chance of occurring).

Common value auction

the value of the item to be auctioned will be the same to any bidder, but the bidders do not know the value at the time of the auction...(oil lease auctions as an example)

management of exchange rates within crawling bands

the width of the bands that identify permissible exchange rates is increased over time.

MC intersects AVC and ATC at

their minimum points

For a firm to use the revaluation model for balance sheet reporting on long-lived assets..

there has to be an active market which can be used to give a fair value of the assets.

Heckscher-ohlin model

there is a redistribution of wealth within each country between labor and the owners of capital.

Period costs

these costs are expensed in the period incurred, and include; 1. abnormal waste of materials, labor, or overhead. 2. Storage cost (unless required as part of production) 3. Administrative overhead 4. Selling costs

Price multiple valuations based on fundamentals (disadvantage)

these will be very sensitive to the inputs (especially the k-g denominator)

stagflation

this combination of devlining economic output and higher prices.

stable equilibrium

this happens when there are forces that move price and quantity back towards equilibrium values when they deviate from those values.

AFC Slopes downward

this is because fixed costs are constant but are distributed over a larger and larger number of products as output quantity increases

High water mark

this means that the incentive fee is not paid on gains that just offset prior losses. Thus incentive fees are only paid to the extent that the current value of the investor's account is above the highest value previously recorded.

Exhaustive events

those that include all possible outcomes

Defined benefit under IFRS

three components make up the change in net pension asset/liability: service costs, net interest expense or income, and remeasurements. Pension expense on the income statement is the sum of service costs and the net interest expense or income. Remeasurements are recognized as other comprehensive income.

Fisher index

to address the bias from substitution, reporting agencies can use a chained or chain weighted price index called this. THis is a geometric mean of a laspeyres index and a paasche index.

average total costs

total costs/total product

average fixed costs

total fixed costs/total product

GDP

total market value of goods and services produced in a country within a certain time period. This only includes purchases of newly produced goods and services. The sale or resale of goods produced in previous periods is excluded. Transfer payments made by the government are not economic output and are not included in the calculation of GDP. Includes only FINISHED products. Government contributions to society ARE included. Labor not sold is not included, owner occupied houseing is included.

Average product of labor

total product of labor /# of workers

average variable costs

total variable costs/total product

labeling

total!/(smallerx!*smallery!)

Three reasons to hold money

transaction demand, precautionary demand, and speculative demand.

Transfer from owner occupied to investment property

treat as revaluation; recognize gain only if it reverses previously recognized loss

The law of one price

two securities or portfolios that have identical cash flows in the future, regardless of future events, should have the same price. If A and B have identical future payoffs and A is priced lower than B, buy A and sell B. You immediately have profit, and the payoff on A will satisfy the future liability of being short on B.

Random variable

uncertain quantity/number

Sales risk

uncertainty about the firm's sales

Capital market line

under the assumption of homogeneous expectations (they have the same estimates of risk, return, and correlations, with other risky assets for all risky assets), the optimal CAL for all investors is the capital market line. Along this line, expected portfolio return is a linear function of portfolio risk (std. dev),.

automatic fiscal policy stabilizer example

unemployment compensation

Diseconomies of scale

upward sloping segment of the long run average total cost curve. A firm that is experiencing diseconomies of scale should, shut down its plant size.

banker's acceptance

used by firms that export goods. this is a guarantee from a bank of the firm that has ordered the goods stating that a payment will be made upon receipt of the goods.

Cost recovery method

used if collectibility is HIGHLY uncertain. Profit is recognized only when cash collected exceeds costs incurred. Typically used for sale of real estate.

Economic rent

used to describe a payment to a factor of production above its value in its next highest valued use (its opportunity cost). As a worker, it's the difference between what she earns and what she could earn in her next highest paying alternative employment.

multiplication rule

used to determine the joint probability of two events....P(AB) = P(AgivenB)*P(B)

Addition rule

used to determine the probability that at least one of two events will occur. P(A or B) = P(A) + P(B) -P(AB)

Total probability rule

used to determine the unconditional probability of an event, given conditional probabilities

sample statistic

used to measure a characteristic of a sample.

descriptive statistics

used to summarize the important characteristics of large data sets

Completed contract method

used under GAAP, when the outcome of the project cannot be reliably estimated. Accordingly, revenue, expenses, and profit are recognized ONLY when the contract is complete.

stratified random sampling

uses a classification system to separate the population into smaller groups based on one or more distinguishing characteristics.

Laspeyres index

uses a constant basket of goods and services (most countries use this)

Sortino ratio

uses downside deviation, and therefore will capture the effects of negative skewness better than measures that use standard deviation.

Value at risk

uses downside deviation, and therefore will capture the effects of negative skewness better than measures that use standard deviation.

Paasche index

uses the current consumption weights, prices from the base period, and prices in the current peiod.

price value of a basis point

v-(V+ or v_)

approximate convexity

v_+v+-2V0/(ChangeYTM)^2*V0

effective duration

v_-V+/2*V0*Change in curve, good for measuring interest rate sensitivity with bonds with embedded options

Matrix pricing

valuing a bond based on yields of comparable bonds (if the specific yield is not available)

condition of non-satiation

we assume that no quantities are negative and that holding all other quantities constant while increasing one always results in greater utility. This can be simply stated as a condition that, other things equal, more is always preferred to less.

When are futures and forwards prices on the same asset are equal..

when interest rates and futures prices are uncorrelated. Liquidity is not an issue as no-arbitrage prices are based on riskless hedges that are held until settlement of the derivative security.

Impaired asset

when its carryng value exceeds recoverable amount. The recoverable amount is the greater of its fair value less any selling costs and its value in use. The value in use is the pv of its future cash flow stream from continued use. intangible/indefinite are not amortized, but tested for impairment at leas annually.

natural monopoly

when the average cost of production for a single firm is falling throughout the relevant range of consumer demand

balloon payment

when the final payment includes a lump sum in addition to the final period's interest, it is referred to as this.

Substitution effect

when the price of Good X decreases this shifts consumption towards more of good X.

less risk averse investors

will have flatter indifference curves

Making a profitable sale on credit

will increase AR and decrease inventory. Given that the sale is profitable, the increase in AR will be greater than the decrease in Inventory, resulting in a net increase in assets. Profit (due to sales being greater than COGS) will increase NI and equity.

relation between trade deficit, saving, and domestic investment

x-m=private savings+government savings-investment

Roll yield

yield return due to a difference between the spot price and futures price, or a difference between two futures prices with different expiration dates, and results from futures prices converging to the spot price as futures contracts approach their expiration dates. this may be positive or negative.

Options and warrants test for antidilution

(average market price - exercise price)/average market price Include in diluted EPS only if average market price>exercise price. No need to test for antidilution

Effective interest rate method

(par value of bonds*coupon rate) - (current book value of bonds*YTM at issuance) = amortization of bond premium/discount

Over-funded DB

(plan assets>pv of pension liability) recognized as an asset

Cash Return on Assets

CFO/Average Total Assets

Reinvestment

CFO/Cash Paid for Long-term Assets

Debt Coverage

CFO/Total Debt

Change of LIFO Reserve

COGS LIFO - COGS FIFO

Inventory Turnover

COGS/Average Inventory, desirable to have this close to industry norm

Cash Flow to Revenue

Cash Flow from Operations/Net Revenue

Capitalizing

Cash outflow now but amount added to assets and charged to income over time. Reduces income variability (risk); increases near-term profitability; Increases assets and equity (near-term)

Change in inventory method (IFRS)

Change of accounting policy: retrospective adjustment

Reporting long-lived assets (IFRS)

Cost Model or Revaluation Model. Long Lived assets reported at fair value - accumulated depreciation

Research and development costs (GAAP)

Expensed as incurred. Certain software development costs are capitalized.

Perpetual Inventory System

Inventory values and cost of sales are continuously updated to reflect purchase and sales

Comprehensive Income (GAAP)

Reported at the bottom of the income statement, as a separate statement of other comprehensive income, as a column in statement of shareholders' equity

Completed Contract Method Revenue Recognition (GAAP)

Used when the costs and/or revenue of the contract cannot be measured reliably. No revenue or expense is recognized until the contract is substantially completed.

Held to Maturity

amortized cost on b/s. Interest income and realized gains/losses in the income statement

Comprehensive income (IFRS)

at the bottom of the income statement, as separate statement of other comprehensive income

If DTL is NOT expected to reverse

deduct from liabilities and add to equity for financial analysis

Direct Financing lease

interest revenue. No gross profit is recognized by the lessor at the inception of the lease. b/c the pv of the lease pmt is equal to the carrying value of the leased asset, the lessor is simply providing a financing function to the lessee. In this case, the lessor is not usually a manufacturer or dealer, but has purchased the asset from a third party.

Periodic inventory system

inventory values and cost of sales are determined at the end of the accounting period. Purchases are recorded in a purchases account.

Held for trading

mark to market on b/s. Dividends, interest, realized and unrealized gains and losses on income statement

Available for sale

mark to market on b/s; Dividends, interest, realized gains and losses in the income statement; unrealized gains and losses recognized in comprehensive income

Income Tax accounting based on...

temporary differences

Capital Lease

Depreciation expense recognized above the line, interest expense recognized below the line. Higher assets, liabilities, CFO, D/E ratio, lower CFF: Early years of lease, lower NI, current ratio, asset turnover, ROE, ROA

Interest Coverage

EBIT(CFO+Interest Paid+Taxes Paid)/Interest Paid

Operating Profit Margin

EBIT/Revenue, concerning if too low

Extraordinary Items (GAAP)

GAAP: Defined - any item that is BOTH unusual in nature and infrequent in occurrence. Presented on the income statement net of taxes after Discontinued Operations

Ratio Impacts of LIFO/FIFO (Liquidity)

LIFO - lower ending inventory - lower ca, lower current ratio, lower working capital

Inventory Valuation Methods (IFRS)

Same as USGAAP except that LIFO is not permitted

Revenue Recognition Steps

1. Identify the contracts with the customer 2. Identify the performance obligations in the contract 3. Determine the transaction prices 4. Allocate the transaction price to the performance obligations in the contract 5. Recognize revenue when (or as ) the entity satisfies a performance obligation

Impairments of PP&E (GAAP)

An asset is impaired if its carrying value is greater than its fair value. Carrying value greater than the sum of its undiscounted cash flows. No reversal of impairment losses permitted.

Gross Profit Margin

Gross Profit/Revenue

Sales-Type lease

Gross profit and interest revenue. Treated as if the lessor sold the asset for the present value of the lease payments and provided a loan to the buyer in the same amount. Typical when the lessor is a manufacturer or dealer b/c the cost of the leased asset is usually less than fair value.

LIFO w/ rising inventory prices

Higher COGS, Lower GP/NI; Lower inventory on b/s, higher cash flow due to lower taxes paid on lower taxable income

Debt to Capital

Total Debt/(Total Debt+Total Shareholders' Equity)

Debt To Equity

Total Debt/Total Equity

Long Term Debt to Equity

Total Long Term Debt/Total Equity