CFA L1 Flashcards

Question

Compound Interest v Simple Interest

Answer 1

Simple Interest = prt/100 Compound interest = (1+r/100*m)^t*m m= periods of compounding t = number of years

Answer 2

+/-b + [Root of (b^2 - 4ac)] / 2a

Answer 3

Pn-Po / Po

Answer 4

HPR to EAY = (1+HPR)^365/n -1 EAY to HPR = (1+EAY)^n/365 -1

Answer 5

Compounded semi annually = (1+r/2)^2n BEY to EAY = (1+BEY/2)^2

Answer 6

(Pn-Po / Pn) * 360/n = Discount Rate x 360/n

Answer 7

(Pn-Po / Po) * 360/n = HPR x 360/n

Answer 8

Quoted Price x n/360

Answer 9

(1+Nominal) = (1+real)x(1+inflation) Approx Nominal = Real + Inflation Other risk premiums Default, Liquidity, Maturity

Answer 10

Annuity Due - Investment at start of period Ordinary Annuity - Investment at the end PV(Annuity Due) = PV(Ordinary) x (1+r), same for FV

Answer 11

P*e^r RCC to EAY/Discrete = e^r -1 EAY to Rcc = ln(1+r)

Answer 12

PV of remaining EMIs

Answer 13

Outstanding at yn-1 - Oustanding at yn

Answer 14

EMI - Principal repaid

Answer 15

(FV/PV)^1/n -1

Answer 16

= (1+r1)*(1+r2)*....*(1+rn) Like an average, quantum and timing does not matter

Answer 17

=IRR Quantum & Timing matters, tips towards higher return

Answer 18

- assumes reinvestment at Re = PV(inflows) - PV(outflows)

Answer 19

- assumes reinvestment at IRR = Rate at which PV(outflows) = PV(inflows)

Answer 20

- NPV is positive when PV(I) > PV(O), ie IRR > Re - NPV is negative when PV(I) <(O) ie IRR < Re - NPV is 0 when PV(I) = PV(O), ie IRR = Re (indifferent to acceptance of project, depends on management decision taking other factors into consideration) - NPV & IRR will always give same decision but might give different ranks - we generally accept NPV ranks in case of conflict (independent projects)

Answer 21

- Going Concern: necessary for survival of business or to reduce costs - Regulatory/Compliance: necessary by law, enforced by Gov or authorities - usually due to safety or environmental concerns - Expansion: Vertical/Horizontal integration, involves complex and detailed analysis - New Business: Entering into a completely new market, also involves complex and detailed analysis

Answer 22

- Based on Cashflows not Accounting Income - Based on After Tax Cashflows - Opportunity Costs to be taken into account - Timing of Cashflows to be taken into account - Financing cost to be taken into account

Answer 23

- Costs that will be incurred irrespective of whether a project is accepted or not - Sunk costs not to be taken into account while calculating (may be taken after if relevant)

Answer 24

1. Calculate Profitability Index 2. Rank by PI 3. Calculate best combination based on capital budget

Answer 25

Pv(Inflows)/PV(outflows)

Answer 26

- Poor forecasting - Not considering opportunity Costs/Internal Costs - Incorrectly accounting for inflation

Answer 27

- Pet Project of Management - Inertia of setting Capital Budget (not being updated) - Basing investment decisions on EPS/ROE (as incentives may be tied to it/short term outlook) - Failure to generate alternate investment ideas

Answer 28

are future actions that a firm can take, given that they invest in a project today

Answer 29

allows a co to take delayed a delayed decision as it expects to have more/better information in the future

Answer 30

If NPV today exceeds NPV of in future - abandonment is better

Answer 31

Will allow company to make further investments based on future performance of project

Answer 32

Price-setting Flexibility: change prices in future Production Flexibility: change operational factors

Answer 33

= NI + Interest*(1-t) / Avg BV of Capital (E+P+D) = NOPAT / Avg BV of Capital = NOPAT/Sales * Sales/Avg BV of Capital = Operating Margin After Tax * Asset/Capital Turnover

Answer 34

ROIC > Kc, +ve , Yes ROIC < Kc, -ve, No ROIC = Kc, 0, No

Answer 35

1. Idea generation 2. Analysing Project Proposals (Expected Profitability) 3. Creating firm wide capital budget (prioritise profitability and consider timing of cashflows, available resources and overall strategy) 4. Monitor decisions and conduct post-audit (identify systematic errors, improve performance)

Answer 36

Minimum IRR at which a project will be accepted

Answer 37

Direct measure of profitability

Answer 38

measures profitability as a %, allows calculation of safety margin

Answer 39

- Assumes reinvestment at IRR instead of Re, more realistic to assume Re - For multiple sign changes, may have multiple IRRs or no IRR - difficult to interpret

Answer 40

Highest Value - Lowest Value

Answer 41

Sum of (x-xbar)^2 / n-1 n-1 for sample N for population

Answer 42

Root of [Sum of (x-xbar)^2 / n-1]

Answer 43

[(1+r1)*(1+r2)*...*(1+rn)]^1/n] -1

Answer 44

= N / Sum of 1/xi - used for calculating average price per share

Answer 45

HM < GM < AM

Answer 46

Sum of (x-xbar)^3 / n* SD^3 - Postively skewed ie right tailed ie outliers lie above the mean - Negatively skewed ie left skewed ie outliers lie below the mean - Sample skewness = 0

Answer 47

Sum of (x-xbar)^4 / n*SD^4 - Sample kurtosis = 3 (mesokurtic) - Fat Tailed ie peaked ie K >3 ie Leptokurtic - Thin tailed ie flat, K<3 ie Platykurtic - Excess Kurtosis = K - 3

Answer 48

= Sum of (x-xbar)*(y-ybar) / N - only indicates whether a relationship exists and the direction - does not indicate the degree/strength - has units so not universally comparable - +ve = move in same direction - -ve = move in opposite direction - 0 = no clear directional relationship

Answer 49

= Cov(x,y) / SDx *SDy - -1 <= Correlation <= 1 - suggests the same as covariance - suggests strength of relationship as follows: - -1 = perfect -ve correlation, close to -1 - high -ve correlation - 1 = perfect +ve correlation, close to 1 - high +ve correlation - close to 0 - low +ve/-ve correlation - = 0 ie no linear relationship (may have non-linear one) - CORRELATION DOES NOT IMPLY CAUSATION

Answer 50

x% Trimmed mean = deleted top-most and bottom-most x/2% of the observations and then calculate mean

Answer 51

x% winsorized mean = replace (1-x)2% top-most and bottom-most observations with the (1-x)/2th top & bottom observations resp. - keeps numer of obs same.

Answer 52

n+1 * y/100 th term where y is number of divisons

Answer 53

1. State Objective & Context (questions, resources, time) 2. Gather Data (primary, secondary) 3. Process Data (ratios, analysis, graphs) 4. Analyze data (Answer Step 1 Qs) 5. Report the Conclusions & recommendations 6. Update analysis: periodically repeat the above steps

Answer 54

To help make informed business/economic decisons

Answer 55

Professional Orgs of accountants and auditors that establish the financial reporting standards India - ICAI - Institute of Chartered Accountants of India US - FASB - Financial Accounting Standards Board Outside US - IASB - International Accounting Standards Board

Answer 56

Authorities that enforce the application of the standards India - SEBI USA - SEC UK - FCA

Answer 57

- International Organization of Securities Commissions - Regulates 95% of the global financial market through its members - members comprise of various regulatory bodies of the world

Answer 58

- Protecting Investors - Ensuring markers are fair, efficient and transparent - Reducing systematic risk

Answer 59

- Enforced by SEC - Prohibits company's external auditors from providing other services to the firm - to avoid a conflict of interest and promote auditor independence - Company's exec management need to certify that accounts are presented fairly, include statement of effectiveness of Co's internal controls of financial reporting - External auditor must also confirm Co's effectiveness of internal controls

Answer 60

To include detailed info of Financial Statements and disclosures as follows: - Basis of presentation (GAAP/IFRS) - Accounting Methods, assumptions, estimations - Acquisitions, disposals, legal action, contingencies, commitments, related party transactions etc - audited along with Primary accounts

Answer 61

Prior to sale of new securities Includes audited F/s, risk assessment, underwriter identification, estimated amount and use of proceeds

Answer 62

-Required annual filing, similar to annual report but not a substitute - Audited F/s. disclosures, info re biz & management

Answer 63

- Quarterly Filing - unaudited F/s (updated) & disclosures - Non-US Cos - Form 6K (semi annually)

Answer 64

For proxy statements prior to AM/shareholder vote

Answer 65

To disclose material events

Answer 66

To issue securities to certain qualified buyers without SEC registration

Answer 67

Beneficial ownership by Corporate Insiders

Answer 68

Business Segment: if accounts for more than 10% of Co's revenue/Assets/Income & atleast 75% of external sale Geographic segment: same as above for different geographic locations Must report the following: - Revenue, measure of P&L, measure of Assets & Liabilities, Interest (Revenue & Expense), Depreciation/Amortisation, Non cash exp, Income Tax Exp

Answer 69

- Address nature of business, mgmt objectives, co's past performance, perf measures used, key relationships, resources and risks - impact of inflation, changing prices, purchase commitments - accounting policies, forward looking expenses, divestures

Answer 70

Independent review of Company's F/s to enable auditor to provide an opinion on fairness and reliability of F/s

Answer 71

1. F/s prepared by Management are its responsibility and auditor has performed independent review 2. Generally accepted accounting measures are followed - proved reasonable assurance of no material errors 3. Compliance is present, estimates are reasonable

Answer 72

Unqualified Opinion: Free from material omissions and errors Qualified Opinion: If any exception to accounting principles is present and explanation of these exceptions Adverse Opinion: Non-conforming, unfairly presented If unable to express opinion, a disclaimer of opinion is issued. Any opinion other than unqualified may be referred as modified opinion

Answer 73

Process by which company ensures accuracy of financial statements

Answer 74

section of audit report containing accounting choices of great significance to users of F/s

Answer 75

- Issuer Sources - Public Third Party Sources - Proprietary Third Party Resources - Proprietary Primary Research

Answer 76

Relevance & Faithful Representation Characteristics to enhance the above: - Comparability - Verifiability - Timeliness - Understanding

Answer 77

- Assets - Liabilities - Income - Expenses - Equity

Answer 78

Assumptions: Going Concern, Accrual accounting Constraints: - Cost-benefit trade off; Benefit should be > cost - Non-quantifiable info can't be captured

Answer 79

- Balance Sheets - Profit & Loss and OCI, Statement of comprehensive income - Cash Flow Statement - Statement of change in owners equity - Explanatory Notes, including a summary of A/c policies

Answer 80

- Fair representation - Consistency - Materiality - Aggregation - No offsetting - Reporting Frequency (atleast annually) - Comparative Information - Going Concern - Accrual basis

Answer 81

- Classified Balance Sheet - Minimum Information - Comparative Information

Answer 82

(Market Value or Price per share) x number of shares

Answer 83

Price to Earnings Ratio = Market price / Earnings per share = MPS/EPS = Market Cap / Total Earnings

Answer 84

Return on Equity = Net Profit / Equity

Answer 85

g = b x r b = retention ratio r = ROE

Answer 86

= 1 - Dividend Payout Ratio = 1 - Dividend Per Share/Earnings per Share

Answer 87

Earnings Per Share = EAFSH or Net Profit / No. of Shares

Answer 88

= Book Value of Equity / No. of shares

Answer 89

Definite Life: P&M, Depreciation Applies Indefinite Life: Land, may need to check for impairments

Answer 90

Definite Life: Licence, Amortisation applies Indefinite Life: Trademark Identifiable: Patent/Brand Unidentifiable: Goodwill

Answer 91

Identifiable Intangible Definite: Bonds Indefinite: Equity

Answer 92

Straight Line Method - same amount of depreciation charged every line (% of depn every year keeps increasing) By Capacity: (Origanl - SV) * Units produced/Total Capacity - when a machine has a certain capacity it can produce over its lifetime Accelerated Depreciation: 2 methods: Written Down Value: Constant Percentage of Depreciation (Amount of Depn goes down every year) Double Declining Balance Method: Written down at double the rate = 2 x Book Value / Useful Life Component Depreciation: parts of an asset may depreciate at a different rate and need treating accordingly

Answer 93

- Due to new law - Due to new accounting standard - To represent true and fair accounts

Answer 94

Needs to be shown retrospectively

Answer 95

Needs to be shown prospectively

Answer 96

Costs & sales need to match for the year

Answer 97

Accounts receivable: ASSET Unearned Revenue: LIABILITY Prepaid Expenses: ASSET Delayed Expenses: LIABILITY

Answer 98

Agreement between two or more parties specifying their rights and obligations

Answer 99

- Identify the contract with the customer - Identify distinct performance obligations in the contract - Determine the Transaction price - Allocate the Transaction price to the performance obligation - Recognise revenue when PO is satisfied

Answer 100

- Promise to deliver goods/services PO is satisfied when: - Customer receives goods/services & its benefits - Supplier enhances an existing asset or creates a new asset that the customer controls over the period in which the asset is created/enhanced - Asset has no alternative use for supplier, and the supplier has the right to enforce payment for work completed to date

Answer 101

- Revenue is recognised based on % completed

Answer 102

- Contracts with customer by Category - Assets & Liabilities related to contracts including balances and changes - Outstanding POs & TPs allocated to them - Management Judgements used to determine amount & timing of revenue recognition including any changes to those judgements

Answer 103

- The customer can benefit from the good or service on its own or combined with other resources that are readily available. - The promise to transfer the good or service can be identified separately from any other promises.

Answer 104

- The amount a firm expects to receive from a customer in exchange for transferring a good or service to the customer. - A transaction price is usually a fixed amount, but it can also be variable (e.g., if it includes a bonus for early delivery).

Answer 105

- Application of the matching principle whereby costs are initially capitalized as assets on the balance sheet and then expensed, using depreciation or amortization, to the income statement over the asset’s life as its beneits are consumed. - If potential future economic benefit - capitalise, otherwise, expense

Answer 106

Not all expenses can be directly tied to revenue generation. Period Costs such as administrative costs, are expensed in the period incurred.

Answer 107

Amortisation: Intangible Assets Depreciation: Tangible Assets Depletion: Natural Resources

Answer 108

Interest paid on asset under construction Capitalised until asset is built completely

Answer 109

- Research costs, which are costs aimed at the discovery of new scientific or technical knowledge and understanding, are expensed as incurred. Development costs may be capitalized. Development costs are incurred to translate research findings into a plan or design of a new product or process. To capitalise development costs, a firm must show that it can complete the asset and intends to use or sell the completed asset, among other criteria.

Answer 110

Both research and development costs are generally expensed as incurred. However, the costs of creating software for sale to others are treated in a manner similar to the treatment of research and development costs under IFRS. Costs incurred to develop software for sale to others are expensed as incurred until the product’s technological feasibility has been established, after which the costs of developing a salable product are capitalized.

Answer 111

- Convert capitalised one to expensed one by: - Expensing the Development Costs - Removing amortisation of Capitalised Dev costs charged previously - Remove Dev costs from Balance Sheet - Adjust Cash Flow Statements: Remove from CFI, Decrease from CFO

Answer 112

- Unusual infrequent items - should consider if should be excluded from forecasting

Answer 113

- Decided to dispose of but not done yet or disposed of in the current year after the operation had generated income or losses - Measurement Date: Date when co develops a formal plan for disposing operation Phase out Period: Actual disposal date - Should be excluded from forecasts

Answer 114

Reported below income from continuing operations, net of tax (reported separately)

Answer 115

Reported before taxes, above net income from continuing operations (included in)

Answer 116

requires retrospective application

Answer 117

Simple capital structure: is one that contains no potentially dilutive securities. A simple capital structure contains only common stock, nonconvertible debt, and nonconvertible preferred stock. Complex capital structure: contains potentially dilutive securities such as employee stock options, warrants, or convertible securities.

Answer 118

= (Net Income - Preferred Dividend) / Weighted Avg number of common shares outstanding

Answer 119

Bonus Shares - distribution of additional shares to each shareholder in an amount proportional to their current number of shares - ownership % remains unchanged - applies to the beginning of the period of calculating weighted average shares

Answer 120

- refers to the division of each “old” share into a specific number of “new” (post-split) shares - ownership % remains unchanged

Answer 121

Dilutive: stock options, warrants, convertible debt, or convertible preferred stock that would decrease EPS if exercised or converted to common stock. Anti-dilutive stock: stock options, warrants, convertible debt, or convertible preferred stock that would increase EPS if exercised or converted to common stock.

Answer 122

= Adjusted Income available for common shares / Weighted average common and potential common shares outstanding where, Adjusted Income = Net Income - Preferred Dividend + Dividends on convertible preferred stock + After Tax Interest on convertible preferred debt (Interest x 1-t)

Answer 123

Profit + Other Comprehensive Income

Answer 124

= PUFE = Pension Adjustment, unrealised gains/lossed from available for sale securities, foreign currency translation gains/losses, Effective portion of Cash Flow Hedges

Answer 125

Owner Related: - New shares issued - Dividend - Buyback Others: - P&L - OCI

Answer 126

Convertible debt (1-t) / Convertible debt shares > Basic EPS, then antidilutive Dilutive EPS > Basic EPS, then antidilutive Preferred Dividend / Convertible Preferred stock

Answer 127

Balance Sheets: Represented as % of Total Assets (Equity + Liability) Cash Flow: represented as % of total inflows/outflows

Answer 128

= Gross Profit / Revenue

Answer 129

= Net Profit / Revenue

Answer 130

= Operating Profit / Revenue

Answer 131

= Pre Tax Accounting Profit / Revenue

Answer 132

HTM, HTT, AFS - US GAAP, IFRS