Economic Concepts and Financial Reporting

Current Yield:

(Earnings per share * payout ratio) ------------------- Current Market Price

Business cycle:

-Expansion -Peak -Contraction -Trough

If the dollar weakens, exports ____________ and imports __________;If the dollar strengthens, exports ____________ and imports __________;

-Increase; decrease -Decrease; increase

When a company redeems bonds at par, there is __________________ to net worth. If at a premium, net worth is ___________ and if at a discount, net worth ____________. In all cases, working capital is ___________________.

-No change -Reduced -Increases -Reduced

Yield Curves:

-Normal (positive) -Inverted (negative) -Yield spreak

Fundamental analysis uses financial statements to compute financial ratios, such as:

-Price to Earnings -Price to book value -Current ratio -Gross margin

Which of the following factors would be considered by an investor who uses fundamental analysis to value a company's stock? 1. The company's financial condition, as revealed by its income statement and balance sheet 2. General economic conditions, such as employment levels and changes in interest rates 3. Charts showing past movements in stock prices and trading volumes

1 & 2

Which of the following best describe the balance sheet formula? 1. Assets minus liabilities equals net worth. 2. Sales minus expenses equals operating income. 3. Liabilities plus equity equals assets. 4. Dividends plus retained earnings equals net income.

1 & 3

Which items would change if a company *declared* a cash dividend? 1. Working capital. 2. Total assets. 3. Total liabilities. 4. Shareholders' equity.

1, 3 & 4 (key word is declared: no cash was sent out)

The business cycle has expanded, peaked, and contracted. The current economic activity could best be described as a trough. Which of the following would most likely be found in the trough? 1. A high rate of inflation. 2. A low rate of inflation. 3. A high rate of unemployment. 4. A low rate of unemployment.

2 & 3

An increase in help-wanted ads is:

A leading indicator

When investors tend to increase their investments in debt securities into those on the short end of the spectrum, it generally leads to

A positive yield curve

Which of the following techniques could be used by the Fed to reduce the money supply? A) Increasing the discount rate B) Buying back Treasury bills C) Reducing required reserves D) Issuing Treasury bills

A) Increasing the discount rate

Although there may be some slight differences in methodology, when S&P or Moody's evaluate a security in order to assign a rating, they would be least likely to consider the issuer's

Asset Turnover Ratio

Top-down analysis:

Attempts to profit by finding the best performing sectors of the economy and buying stocks in that sector with the expectation that those companies will do well

Bottom-up analysis:

Attempts to profit by identifying individual companies that will outperform others in the industry

An analyst viewing a corporate income statement will be able to review all of the following EXCEPT: A) net sales or net revenues. B) pre-tax income. C) current ratio. D) operating expenses.

C) Current Ratio

All of the following ratios are measures of the liquidity of a corporation EXCEPT: A) acid-test ratio. B) quick ratio. C) debt/equity ratio. D) current ratio.

C) debt/equity ratio.

Monetary:

Federal Reserve Board -Discount rate -Reserve requirements -Open-market operations -NOT prime rate

Two government policies:

Fiscal and monetary

A corporation whose securities are registered with the SEC is:

Excused from filing a Form 8-K when a wholly owned subsidiary is relocated to a different state

Balance of Payments~ Net exports: Net imports:

Exports: Dollar stronger Imports: Dollar weaker

If a corporation has pending litigation against it or "off-book" debts, they will be revealed...

In footnotes to the financial statements or the annual report

Another term for revenue on the income statement is:

Sales

Debt to Equity Ratio:

Long term debt ------------------- (Asset - liab.)+ long-term debt

Trade deficit/negative balance of payments:

More important than exports, leads to weaker dollar

Compute cash flow from operations (CFO):

Start with net income and add back all noncash charges such as depreciation

Fiscal:

Taxing and budget, Congress and President

Cylical:

The industry is affected by the business cycles of the economy

All the pundits are predicting bad times ahead—not only a recession, but a period where prices actually fall (deflation). If they are right, the best place for your client would probably be

US Treasury Securities

Working capital is:

current assets - current liabilities.

Acid-Test (or quick ratio):

whether a firm has sufficient short-term assets to cover its immediate liabilities Current Assets (not including inventory or land) ------------------ Current liabilities