CFA Level 1 - All Topics and Questions

Question 1

Current Ratio Formula is? + is a higher current ratio better or worse

Answer 1

Current Ratio = Current assets / current liabilities. The higher the current ratio the more likely it is that the company will be able to pay its bills.

Question 2

Quick Ratio formula is? and is a higher quick ratio better or worse?

Answer 2

Cash + marketable securities + receivables / current liabilities. The higher the quick ratio the more likely the company can pay its bills

Question 3

For a lessor how are lease payments treated on the cash flow statement?

Investing income, operating cash inflow, or principal is treated as operating cash and interest is treated as investment income.

Answer 3

The entire lease payment is an operating cash inflow.

Question 4

Accelerated depreciation, shorter useful lives and lower salvage values are examples of which accounting strategy?

Answer 4

Conservative, this type of accounting results in lower income in the current period and higher income in future years. We describe choices that result in higher income in the current period as aggressive accounting.

Question 5

other things equal, increasing days sales payable will have what impact on operating cash flow?

Answer 5

Stretching accounts payable will increase operating cash flow. Accounts payable are bills it must pay to suppliers. These bills are recorded on the companies balance sheet as current liabilities

Question 6

what are mutually exclusive and exhaustive events?

Answer 6

Mutually exclusive events are events that cannot happen at the same time. For example, you can’t run backwards and forwards at the same time.

Exhaustive events are events where at least one of them must occur. For example, heads and tails are mutually exclusive and collectively exhaustive. Exhaustive is all possible outcomes.

Question 7

probability: conditional versus unconditional

Answer 7

Unconditional probability is the likelihood that an event will occur regardless of whether other events have taken place or any other conditions are present. It is also known as marginal probability.

Conditional probability is the likelihood of an event occurring based on the occurrence of a previous event. It is calculated by multiplying the probability of the preceding event by the updated probability of the succeeding event.

Question 8

What is a probability distribution

Answer 8

a probability distribution describes the probability of all possible outcomes and must equal 1.

Question 9

What is a discrete random variable and a continuous random variable?

Answer 9

A discrete random variable is one for which the numbers of all possible outcomes can be counted and measured and has a positive probability. i.e. flipping a coin only has two outcomes.

A continuous random variable is one which the numbers of possible outcomes is infinite. usually something that can be measured but has infinite options like height.

Question 10

What is a diminishing marginal productivity/returns?

Answer 10

the production function says that two workers should be able to produce 2x of that of 1 worker. This would carry on as you add labor however, adding additional workers can result in less than 100% productivity.

Managers use it to make decisions in the short-run, such as how much variable input to combine with fixed inputs to maximize profit.

Question 11

total revenue is greatest in the part of the demand curve which is:
A) Elastic
B) inelastic
c) unit elastic

Answer 11

C. unit elastic

Unit elastic, or unitary elastic, is an economic concept that describes a situation where a change in one variable causes an equally proportional change in another variable. In other words, if the price of an item changes by a small margin, the quantity of the item will also change by a small margin.

Demand can be classified as elastic, inelastic or unitary. An elastic demand is one in which the change in quantity demanded due to a change in price is large. An inelastic demand is one in which the change in quantity demanded due to a change in price is small.

Question 12

when the price of a good decreases and the consumption also decreases it is most likely that the:
A) income effect is negative, substitution effect is positive
B) Income and substitution effects are both negative
c) income and substitution effects are positive

Answer 12

A: the substitution effect of a price decrease is always positive but the income effect can be both. Consumption of a good will decrease when the price of the good decreases only if the income effect is negative and greater than the substitution effect.

The income effect predicts that people will demand more when their income grows, and vice versa

Question 13

A good is classified as inferior if:
A) income elasticity is is negative
B) own price elasticity is negative
C) Cross point elasticity is negative

Answer 13

an inferior good is one in which it has a negative income elasticity of demand.

In economics, an inferior good is a good or service that people tend to buy more of when they have lower incomes and less of when their incomes rise.

Question 14

describe the 5 characteristics for determining a market structure as perfect competition, monopolistic, oligopoly, or pure monopoly?

Answer 14

number of firms relative to their size, degree to which firms differentiate their product, bargaining power of the firms with respect to pricing, barriers to entry into or exiting the industry, degree to which firms compete on factors other than price.

Question 15

Describe the perfect competition as it relates to the 5 main characteristics?

Answer 15

many firms, lower barriers to entry, good substitutes, competes on price only. no pricing power (market sets the price).

Question 16

Describe monopolistic as it relates to the 5 main characteristics?

Answer 16

many firms, low barriers to entry, good substitutes (but differentiated), competes on price and marketing, some purchasing power.

Question 17

Describe a monopoly as it relates to the 5 main characteristics?

Answer 17

single firm, very high barriers to entry, no substitutes that are good, competes on advertising, significant pricing power.

Question 18

What is marginal costs versus marginal revenue?

Answer 18

marginal cost is the cost of producing one more unit of a product or service. Marginal revenue is the additional revenue from selling one more unit.

Question 19

When should a firm stop expanding priduction

Answer 19

when marginal cost equals marginal revenue

Question 20

what is economic profit

Answer 20

The total revenues, less the opportunity cost, which includes a cost of normal return to production.

Question 21

What is GDP and what does it include.

Answer 21

a nations gdp is the total of all its consumer and government spending, investments, and exports minus imports. It does not include the resale of goods and services and it also does not include transfers such as social security and welfare.

Question 22

what is a gdp deflator

Answer 22

a price index that can be sued to turn te nominal gd into real gdp

Question 23

Do gains and losses as well as expenses appear on the income statement

Answer 23

Yes both

Question 24

shares in a publicly traded company that owns gold mines and mining operations are considered what: a financial asset, physical asset, real asset

Answer 24

a financial asset because its still shares that simply have a claim against real assets.

Question 25

A stock has a beta of 1.55 and a expected return of 17.3%. If the risk free rate is 8% the expected market risk premium is?

Question 26

The term automatic stabilizer’s refers to?

Answer 26

increases in transfer payments (spending) and decreases in tax revenue that results from an economic contraction without new legislation.

Question 27

covariance vs correlation

Answer 27

covariance measures the direction of a relationship between two variables, while correlation measures the strength of that relationship.

A positive covariance means that the two variables are positively related and move in the same direction. A negative covariance means that when one variable is high, the other tends to be low.

Question 28

in the dominant firm model of oligopoly, it is least likely that one firm:
A) Effectively sets the prices in the market
B) is the innovation leader in the product development
c) Has a significant cost advantage over its competitors

Answer 28

B “is the innovation leader in the product development”.

the 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 production and sales. it does not assume that one firm will be the innovation leader. In fact being more innovative is one of the factors that allows smaller firms to survive.

Question 29

what is a convenience yield?

Answer 29

The benefit of holding the physical product rather than contract or detractive.

= spot price - futures price

Question 30

Merger Arbitrage

Answer 30

its an event driven hedge fund strategy. Usually the fund buys the shares of the company being acquired and shorts the company being acquired.

Question 31

investments in infrastructure that will be built in the future are most accurately described as:
A) Greenfield
B Brown Field
C Open field

Answer 31

Green field

Brownfield are assets that already exist and investment is made to better utilize what’s already there.

Question 32

Supplying capital to a company who is just moving into the operations stage but does not have a physical product, yet is described as which stage of venture capital?

Early, mezzanine, angel investment

Answer 32

Early stage

Angel investing is more commonly known for investments at the idea stage.

Seed capital refers to funding for market research and product development.

Early stage investing is usually for commercializing

Late stage is for growing/expanding

mezzanine is to prepare for an IPO

Question 33

An equity hedge fund strategy that focuses primarily on exploiting overvalued securities is called what?
a) a fundamental value strategy
b) event driven strategy
c) short bias strategy

Answer 33

a short bias strategy

an event driven strategy focuses on companies involved in mergers, or financial distress as an example.

A fundamental value strategy focuses on stocks that are undervalued.

Question 34

using derivatives to hedge the changes in value of inventory is considered:

Answer 34

fair value hedge

hedge accounting is a method of accounting in which entries to adjust for fair value of a security and its hedge are treated as one.

Question 35

the lower limit of a normal distribution is:
negative one, zero, negative infiinity

Answer 35

in a normal distribution the lower limit is technically negative infinity

the curve extends indefinity in a negative direction, this means theoretically the distribution includes values close to negative infinity but have extremely low probabilities of occurring.

Question 36

An enterprise value model for equity valuation is most accurately described as:
asset based model, discounted cash flow model, multiplier model

Answer 36

multiplier model, its analyzed as a multiple of revenue or earnings and compared to other firms.

Question 37

The least likely result of import quotas and voluntary export restraints is:

A) a decrease in the quantity of imports
B) a shift in production to higher cost suppliers
C) increased revenue for the government

Answer 37

C

Question 38

Tarrif

Answer 38

a tax or duty to be paid on an import or export

Question 39

CFA institute will enforce the following punishments except:

public censure, a fine, suspension, revocation of the use of the trademark

Answer 39

a fine. the CFA institute does not issue fines.

Question 40

what is a probability distribution

Answer 40

a probability distribution describes the probability of all possible outcomes and must equal 1.

Question 41

probability - unconditional versus conditional

Answer 41

unconditional probability is not concerned with past or future events and conditional probability is when one event affects the probability of another

Question 42

mutually exclusive event versus exhaustive events

Answer 42

mutually exclusive events cannot happen at the same time i.e. rolling a 1 and a 6 on a dice at the same time.

Exhaustive events have all possible outcomes.

Question 43

absolute and relative frequnecy

Answer 43

absolute frequency is the # of occurrences and relative frequency is the % of frequency in an interval compared to the total:

Question 44

discrete data

Answer 44

countable such as days/months

Question 45

continuous data

Answer 45

data that can take any value such as height and weight

Question 46

nominal data

Answer 46

labels that cannot be placed in order logically

Question 47

ordinal data

Answer 47

data that can be ordered logically

Question 48

time series data

Answer 48

data taken over time

Question 49

cross sectional data

Answer 49

a set of observations taken at one time and can be combined to form panel data

Question 50

nominal risk free rate

Answer 50

real risk free rate + inflation

Question 51

EAR (effective annual rate)

Answer 51

= (1 + periodic rate)m -1
m is the # of compounding periods

the is the true rate on an investment because it takes into account the effect of compounding

Question 52

changes in asset lives and salvage values are changes in accounting:
a) estimates & applied retrospectively
b) Principle and retrospectively applied
c) estimates and prospectively applied

Answer 52

C

Question 53

what is this describing “pre tax financial income based on financial accounting standards” “also known as income before tax or earnings before tax”.

Answer 53

Accounting profit

Question 54

“net amount of an asset or liability used for tax reporting purposes”

Answer 54

tax base

Question 55

What happens to the balance sheet, income statement and cash flow statement when a company issues a bond at par?

Answer 55

on a balance sheet assets and liabilities go down by the proceeds from the bond sale. On the income statement interest expense increases by the amount of the coupon rate. On the cash flow stmt issuance proceeds are a cash inflow from financing, coupon payments are a cash outflow from operating activity and at maturity face value repayment is a cash outflow from financing activity.

Question 56

what are debt covenants and are they specifically negative or positive? why are they important?

Answer 56

debt covenants are restrictions imposed by the lender on the borrower to protect the lenders interests. debt covenants protect both the lender and the borrower by defining the terms and reducing default risk.
Affirmative covenants; the borrower promises to do certain things i.e. make timely payments.

negative covenants; the borrower promises to refrain from certain activities that may affect the ability to repay the debt.

Question 57

if the benefit of ownership and the risks of ownership are transferred to the lessee it is classified as what type of lease?

Answer 57

finance lease

if the benefits of ownership and the risk of ownership is not transferred to the lessee then its called an operating lease.

Question 58

this type of annuity pays at the end of a compounding period?

Answer 58

Ordinary annuity

an annuity due pays at the beginning of the compounding period.

Question 59

when you sell more items than you have bought recently you will end up selling older items and therefor selling items that have a lower carrying value and your profit will go up. This is what type of liquidation?

Answer 59

LIFO Liquidation

Question 60

Ascot corporation has authorized 4 million shares, 2.4 million shares are issued and 1.8 million shares are outstanding. How many shares of treasury stock does Ascot own and are they reported on the balance sheet as an asset?

Answer 60

600,000 shares of treasury stock. 2.4m minus the 1.8 outstanding.

Treasury shares are NOT reported as an asset they are reported as a reduction in shareholders equity.

Question 61

A price index that can be used to turn nominal GDP into real GDP?

Answer 61

What is a GDP deflator

Question 62

cash + marketable securities + receivables / current liabilities

Answer 62

quick ratio

FYI the higher the quick ration the more likely the company will be able to pay its short term bills.

Question 63

current assets/current liabilities

Answer 63

Current ratio

FYI: the higher the current ratio, the more likely it is that the company can pay its bills

Question 64

nominal vs real

Answer 64

nominal refers to the unadjusted number and the real refers to a inflation adjusted number.

Question 65

independence, creditability, transparency are the three qualities associated with an efficient what?

Answer 65

central bank

Question 66

IPO vs direct listing

Answer 66

While many companies choose to do an initial public offering (IPO), in which new shares are created, underwritten, and sold to the public, some companies choose a direct listing, in which no new shares are created and only existing, outstanding shares are sold with no underwriters involved.

Question 67

outside investors who buy out all of the companies shares and remove its public listing are participating in what type of buyout

Answer 67

leveraged

Question 68

a group of managers by the company shares

Answer 68

managers buyout

Question 69

an analyst assigns a rating of 1,2,3,4 or 5 to all companies in a stock exchange. Value 1 is highly likely to increase the dividend and 5 is unlikely to increase its dividend. these values are LEAST likely described as:
nominal data, ordinal data, discrete data

Answer 69

nominal data

nominal data is also known as categorical or qualitative data. categories or labels that cannot be ordered numerically.

discrete data is commonly in the form of numbers this data is countable and has a finite number of values.

ordinal data is statistical data and has a natural order where distance between the values is known.

Question 70

This data type is commonly in the form of numbers this data is countable and has a finite number of values.

Answer 70

discrete

Question 71

statistical data and has a natural order where the values between the data are kown

Answer 71

ordinal

Question 72

also known as categorical or qualitative data and cannot be ordered or numerical

Answer 72

nominal data

Question 73

this is sent when there are matters that require a shareholder vote i.e. a board member election

Answer 73

proxy statement

Question 74

this type of policy is controlled by the federal reserve?

Answer 74

monetary

fiscal policy is controlled by congress

Question 75

core inflation removes the cost of what?

Answer 75

food and energy.

headline inflation refers to the total cost of an index for all goods.

Question 76

an income statement where each line item is expressed as a percentage of a base figure.

Answer 76

Common size income statement

Question 77

A common-size cash flow statement is least likely to provide payments to employees as a percentage of:
A) revenues for the period.
B) operating cash flow for the period.
C) total cash outflows for the period.

Answer 77

B
There are two formats for a common-size cash flow statement, expressing each type of outflow as a percentage of total cash outflows or as a percentage of total revenue for the period. Operating cash flow for the period mixes inflows and outflows and is not used to calculate percentage flows for payment made.

Question 78

is a measure of the amount of cash generated by a company’s normal business operations.

Answer 78

operating cash flow
forms of non operating cash flow would be dividends and interest from other investments.

Question 79

Greg Allen is a security analyst and visits David Dawson, the Chief Financial Officer of Edmonds Company. Dawson reveals a great deal of nonmaterial financial data to Allen, data that Dawson routinely reveals to all security analysts who visit him. From this data and other industry information, Allen conjectures that Edmonds is likely to make a tender offer for another company in the industry, a fact that if true would be considered material to the value of the company. Allen:

A) can publish his conclusion in a research report.

B) must not disseminate the information or use it for trading purposes until the tender offer is announced.

C) should send a copy of the report to Dawson for verification before disseminating the report to clients.

Answer 79

A) can publish his conclusion in a research report.

While the information that Allen received from the Edmonds CEO may be non-public, we are also told that it is non-material. Because Allen has reached his investment conclusion through an analysis of public information together with items of non-material non-public information (i.e., “mosaic theory”), publishing this conclusion is not a violation of the Code and Standards.

Question 80

This theory allows analysts to combine nonmaterial, nonpublic information with public information. Analysts can act on this collection of information without risking violation.

Answer 80

Mosaic theory

Question 81

net income - preferred dividends / weighted average of common shares outstanding

Answer 81

basic EPS

Question 82

The Widget Company had net income of $1 million for the period. There were 1 million shares of widget common stock outstanding for the entire period. If there are 100,000 options outstanding with an exercise price of $40, what is the diluted earnings per share for Widget common stock if the average price per share over the period was $50?

A) $0.98.

B) $1.00.

C) $0.99.

Answer 82

Use the Treasury stock method

Proceeds = 100,000 ($40) = $4,000,000

Shares assumed purchased with proceeds= $4,000,000/$50 = 80,000 shares

Potential dilution = 100,000 – 80,000 = 20,000 shares

Basic EPS = $1/share

Diluted EPS = $1,000,000 / 1,020,000 = $0.98/share

Question 83

The inventory-to-sales ratio for manufacturing and trade is classified as a:

A) lagging indicator.
B) coincident indicator.
C) leading indicator.

Answer 83

A
The inventory-to-sales ratio for manufacturing and trade is considered a lagging indicator because it peaks after the economy does, even though it is sometimes used in forecasting economic activity.

Question 84

The what hypothesis always includes the “equal to” condition.

Answer 84

Null Hypothesis

A null hypothesis is a statistical hypothesis that states that there is no statistical significance in a set of observations. It is also known as the default hypothesis. The null hypothesis is represented by H0.
The null hypothesis is one of two mutually exclusive hypotheses about a population in a hypothesis test.

The other hypothesis is called the alternative hypothesis. Researchers use a statistical test to weigh evidence for and against the null and alternative hypotheses.

Question 85

Ed Verdi has a long position in a European put option on a stock. At expiration, the stock price is greater than the exercise price. The value of the put option to Verdi on its expiration date is:

A) negative.
B) zero.
C) positive.

Answer 85

B “Zero”

At expiration, the value to the holder (long position) of a put option on a stock is the greater of zero or the exercise price minus the stock price. If the stock price is greater than the exercise price, the value of a put option to the holder is zero and the holder will allow the option to expire unexercised.

Question 86

these theorists believe that the Fed’s tools are powerful and should not be used to moderate fluctuations in prices and outputs. Thus, steady, predictable growth is the best monetary policy. They believe in the power of the money supply, not fiscal policy, to affect prices and outputs.

Answer 86

Monetarist

Question 87

this describes what type of investing strategy: “a firm invests the majority of a portfolio passively and uses active strategies for the remaining portion’

Answer 87

a core-satellite approach.

Question 88

this describes what type of investing strategy: “refers to specifying the percentages of a portfolio’s value to allocate to specific asset classes.”

Answer 88

Strategic Asset Allocation

Question 89

This describes what type of investing strategy: “refers to allocating a portfolio’s overall permitted risk among strategic asset allocation, tactical asset allocation, and security selection.”

Answer 89

Risk budgeting

Question 90

Which of the following is least important as a reason for a written investment policy statement (IPS)?

A. The IPS may be required by regulation.
B. Having a written IPS is part of best practice for a portfolio manager.
C. Having a written IPS ensures the client’s risk and return objectives can be achieved.

Answer 90

C.
C is correct. Depending on circumstances, a written IPS or its equivalent may be required by law or regulation and a written IPS is certainly consistent with best practices. The mere fact that a written IPS is prepared for a client, however, does not ensure that risk and return objectives will in fact be achieved.

Question 91

Two years from now, a client will receive the first of three annual payments of $20,000 from a small business project. If she can earn 9 percent annually on her investments and plans to retire in six years, how much will the three business project payments be worth at the time of her retirement?

Answer 91

In summary, your client will have $77,894.21 in six years if she receives three yearly payments of $20,000 starting in Year 2 and can earn 9 percent annually on her investments.

Question 92

Question
Providing information about the performance and financial position of companies so that users can make economic decisions best describes the role of:

auditing.
financial reporting.
financial statement analysis.

Answer 92

This is the role of financial reporting. The role of financial statement analysis is to evaluate the financial reports.

Question 93

A company’s profitability for a period would best be evaluated using the:

A. balance sheet.
B. income statement.
C. statement of cash flows.

Answer 93

Solution
B is correct. Profitability is the performance aspect measured by the income statement. The balance sheet portrays the financial position. The statement of cash flows presents a different aspect of performance.

Question 94

values that describe a quality or characteristic of a group of observations and therefore can be used as labels to divide a dataset into groups to summarize and visualize.

Answer 94

Categorical data (or qualitative data)

The two types of categorical data are nominal data and ordinal data.

Question 95

In a frequency distribution, the absolute frequency measure:

A. represents the percentages of each unique value of the variable.
B. represents the actual number of observations counted for each unique value of the variable.
C. allows for comparisons between datasets with different numbers of total observations.

Answer 95

B is correct. In a frequency distribution, the absolute frequency, or simply the raw frequency, is the actual number of observations counted for each unique value of the variable. A is incorrect because the relative frequency, which is calculated as the absolute frequency of each unique value of the variable divided by the total number of observations, presents the absolute frequencies in terms of percentages. C is incorrect because the relative (not absolute) frequency provides a normalized measure of the distribution of the data, allowing comparisons between datasets with different numbers of total observations.

Question 96

This type of frequency is calculated as the absolute frequency of each unique value of the variable divided by the total number of observations

Answer 96

Relative frueqency

Question 97

Year 1 2.48 Year 7 −9.19
Year 2 −2.59 Year 8 −5.11
Year 3 9.47 Year 9 1.33
Year 4 −0.55 Year 10 6.84
Year 5 −1.69 Year 11 3.04
Year 6 −0.89 Year 12 4.72

What is the relative frequency and the cumulative relative frequency for the bin −1.71% ≤ x < 2.03%.

Answer 97

Relative frequency is .333 and cumulative relative frequency is .583.

The cumulative relative frequency of a bin identifies the fraction of observations that are less than the upper limit of the given bin. It is determined by summing the relative frequencies from the lowest bin up to and including the given bin. The following exhibit shows the relative frequencies for all the bins of the data from the previous exhibit:

Question 98

The term “…………” means that the events cover all possible outcomes.

Answer 98

Exhaustive

Question 99

If the probability that Zolaf Company sales exceed last year’s sales is 0.167, the odds for exceeding sales are closest to:

1 to 5.
1 to 6.
5 to 1.

Answer 99

1 to 5

In this case, the probability that Zolaf Company’s sales exceed last year’s sales is 0.167, and the probability of it not exceeding last year’s sales is 1 - 0.167 = 0.833.

Now, let’s calculate the odds:

Odds = 0.167 / 0.833 ≈ 0.2

Question 100

(Number of successful outcomes) / (Total number of outcomes)

Answer 100

Probability forumla

Question 101

After six months, the growth portfolio that Rayan Khan manages has outperformed its benchmark. Khan states that his odds of beating the benchmark for the year are 3 to 1. If these odds are correct, what is the probability that Khan’s portfolio will beat the benchmark for the year?

50%
67%
75%

Answer 101

75%
To calculate the probability that Khan’s portfolio will beat the benchmark for the year based on these odds, you can use the following formula:

Probability = (Number of successful outcomes) / (Total number of outcomes)

In this case, the successful outcome is beating the benchmark, and the total number of outcomes is the sum of successful outcomes and unsuccessful outcomes, which is 3 (beating the benchmark) + 1 (not beating the benchmark) = 4.

Now, calculate the probability:

Probability = 3 (beating the benchmark) / 4 (total outcomes) = 3/4

Question 102

You are using the following three criteria to screen potential acquisition targets from a list of 500 companies:

Product lines compatible
0.20
Company will increase combined sales growth rate
0.45
Balance sheet impact manageable
0.78

If the criteria are independent, how many companies will pass the screen?

Answer 102

P(ABC) = P(A)P(B)P(C) = (0.20)(0.45)(0.78) = 0.0702. As a consequence, (0.0702)(500) = 35.10, so 35 companies pass the screen.

Question 103

The probability of an event given that another event has occurred is a:

Answer 103

Conditional Probability

Question 104

Which of the following best describes how an analyst would estimate the expected value of a firm using the scenarios of bankruptcy and non-bankruptcy? The analyst would use:

A. the addition rule.
B. conditional expected values.
C. the total probability rule for expected value.

Answer 104

C is correct. The total probability rule for expected value is used to estimate an expected value based on mutually exclusive and exhaustive scenarios.

Question 105

Which of the following is a continuous random variable?

The value of a futures contract quoted in increments of $0.05
The total number of heads recorded in 1 million tosses of a coin
The rate of return on a diversified portfolio of stocks over a three-month period

Answer 105

C is correct. The rate of return is a random variable because the future outcomes are uncertain, and it is continuous because it can take on an unlimited number of outcomes.

Question 106

If the price elasticity coefficient of the demand curve for paper clips is equal to –1, demand is:

A. elastic.
B. inelastic.
C. unit elastic.

Answer 106

C is correct. When the price elasticity of demand coefficient is –1, demand is said to be unit elastic, or unitary elastic.

Unit elastic demand is when the price elasticity of demand is equal to -1. This means that the percentage change
in quantity demanded is equal to the percentage change in price.

Question 107

This indicates that the quantity demanded is responsive to changes in price. If price increases, quantity demanded decreases, and if price decreases, quantity demanded increases.

Answer 107

Positive PED (in absolute terms, greater than 1)

Question 108

This means that the percentage change in quantity demanded is exactly equal to the percentage change in price. Demand is considered to be proportionate to price changes.

Answer 108

Unitary PED (in absolute terms, equal to -1):

Question 109

The demand for membership at a local health club is determined by the following equation:
Qdhm=400−5Phm

where Qdhm
is the number of health club members and Phm is the price of membership. If the price of health club membership is $35, the price elasticity of demand is closest to:

–0.778.
–0.500.
–0.438.

Answer 109

A is correct. Inserting the price of $35 into the demand function, quantity demanded is calculated as
Qdhm=400−5(35)=225

At a price of $35 per health club membership, the elasticity of demand is

Price elasticity of demand = (ΔQdhm/ΔPhm)×(Phm/Qdhm)

Price elasticity of demand = –5 × (35/225) = –0.778

Question 110

Question
A market structure characterized by many sellers with each having some pricing power and product differentiation is best described as:

oligopoly.
perfect competition.
monopolistic competition.

Answer 110

C is correct. Monopolistic competition is characterized by many sellers, differentiated products, and some pricing power.

Question 111

the ratio of the percent change in quantity demanded to the percent change in price.

Answer 111

Price elasticity of demand

Question 112

Categorical or qualitative data are

Answer 112

Categorical, or qualitative, data are labels that can be used to classify a set of data into groups and may be nominal or ordinal.

Question 113

Nominal Data is?

Answer 113

Cannot be placed in order logically

Question 114

Ordinal Data is?

Answer 114

Can be ranked logically

Question 115

A time series is?

Answer 115

A time series is a set of observations taken periodically.

Question 116

Cross-sectional data is?

Answer 116

Cross-sectional data are a set of comparable observations taken at one specific point in time.

Question 117

Time series and cross-sectional data may be combined to form:

Answer 117

Panel Data

Question 118

Two types of Arrays?

Answer 118

One dimensional or Two dimensional

Question 119

Quartile?
Quintile?
Decile?
Percentile?

Answer 119

Quartile = The distribution is divided into quarters.
Quintile = The distribution is divided into fifths.
Decile = The distribution is divided into tenths.
Percentile = The distribution is divided into hundredths (percentages).

Question 120

To perform meaningful mathematical analysis, an analyst must use data that are:

Answer 120

Numerical
We can perform mathematical operations on numerical data but not on categorical data. Numerical data can be discrete or continuous.

Question 121

Which of the following types of data would most likely be organized as a two-dimensional array?

Answer 121

Panel Data
Panel data combine time series data with cross-sectional data and are typically organized as data tables, which are two-dimensional arrays.

Question 122

The intervals in a frequency distribution should always be:

Answer 122

non-overlapping
Intervals within a frequency distribution should always be non-overlapping and closed-ended so that each data value can be placed into only one interval. Interval widths should be defined so that data are adequately summarized without losing valuable characteristics.

Question 123

Difference between absolute frequency and relative frequency?

Answer 123

An absolute frequency is a number of occurrences.
Relative frequency is shown as a %.

Question 124

The vertical axis of a histogram shows:

Answer 124

In a histogram, the intervals are on the horizontal axis and the frequency is on the vertical axis.

Question 125

Types of Probability
Empirical vs Subjective vs A Priori

Answer 125

Empirical is based on experience and real data analysis, Subjective is based on perception (what you think is going to happen), A Priori is based on reasoning (what should happen given math and logic).

Question 126

Unconditional probability vs conditional probability

Answer 126

Unconditional probability (Marginal) is the probability of something happening regardless of outside or other events. Conditional probability is the likely hood of A occurring given that event B has already occurred.

Question 127

An interest rate is best interpreted as:

Answer 127

a required rate of return or the opportunity cost of consumption.

Question 128

An interest rate from which the inflation premium has been subtracted is known as:

Answer 128

a real interest rate.
Real interest rates are those that have been adjusted for inflation. (Module 1.1, LOS 1.b)

Question 129

Terry Corporation preferred stocks are expected to pay a $9 annual dividend forever. If the required rate of return on equivalent investments is 11%, a share of Terry preferred should be worth:

Answer 129

9 / 0.11 = $81.82 (Module 1.2, LOS 1.c)

Question 130

how to calculate effective interest from nominal int rate:

What is the effective annual rate for a credit card that charges 18% compounded monthly?

Answer 130

19.56%
1 - 18 hit enter
2 - Press 12, n, [÷],then i
3 - Type 100, then press CHS, then ENTER
4 - Press PV, FV, then [+]

Question 131

A data set has 100 observations. Which of the following measures of central tendency will be calculated using a denominator of 100?

Trimmed or windsorized

Answer 131

The winsorized mean substitutes a value for some of the largest and smallest observations. The trimmed mean removes some of the largest and smallest observations. (Module 2.3, LOS 2.g)

Question 132

The mean annual return on XYZ stock is most appropriately calculated using:
Harmonic? Arithmetic?
Geometric?

Answer 132

Because returns are compounded, the geometric mean is appropriate.
[(1.22)(1.05)(0.93)(1.11)(1.02)(1.11)]1/6−1=
6.96%

Question 133

Which of the following is most accurate regarding a distribution of returns that has a mean greater than its median?

A) It is positively skewed.
B) It is a symmetric distribution.
C) It has positive excess kurtosis.

Answer 133

A distribution with a mean greater than its median is positively skewed, or skewed to the right. The skew pulls the mean. Kurtosis deals with the overall shape of a distribution, not its skewness. (Module 2.5, LOS 2.l)

Question 134

An event that includes all of the possible outcomes is said to be:

Exhaustive?
Mutually Exclusive?
Random?

Answer 134

Exhaustive

Question 135

The multiplication rule of probability determines the joint probability of two events as the product of:

Two Conditional events?
Two Undconditional Events?
1 x conditional and 1 x undconditional?

Answer 135

By the multiplication rule of probability, the joint probability of two events, P(AB), is the product of a conditional probability, P(A | B), and an unconditional probability, P(B).

Question 136

Two mutually exclusive events:

Cannot or can both occur?

Answer 136

cannot both occur.

Question 137

What is Kurtosis?

Answer 137

Kurtosisis a measure of the degree to which a distribution is more or lesspeakedthan a normal distribution.

Question 138

Leptokurtic vs platykurtic vs mesokurtic

Answer 138

Answer

Question 139

MAD - Mean Absolute Devation

Answer 139

The average of the absolute values values of the deviations of the indivual observations from the arithmatic mean. 1) calculate the mean 20 minus the value from the mean 3) divide that by the number of observations

Question 140

Type of mean for calculating compounding growth rates or investment returns over multiple periods.

Answer 140

Geometric Mean

Question 141

Quartile =
Quintile =
Decile =
Percentile =

Answer 141

Quartile. The distribution is divided into quarters.
Quintile. The distribution is divided into fifths.
Decile. The distribution is divided into tenths.
Percentile. The distribution is divided into hundredths (percents).

Question 142

Price elasticity of demand. More or less elastic means?

Answer 142

More elastic means the higher the price the less demand, in-elastic means the price usually doesnt change the demand as much.

Question 143

Measure of elasticity?

> 1 & <1

Answer 143

> 1 = demand is elastic
<1 = demand is inelastic

Question 144

The sensitivity of quantity demanded to a change in income is termed:

Answer 144

Income Elasticity

Question 145

For most goods, the sign of income elasticity is positive—an increase in income leads to an increase in quantity demanded. Goods for which this is the case are termed:
For other goods, it may be the case that an increase in income leads to a decrease in quantity demanded. Goods for which this is true are termed:

Answer 145

Normal Goods

Inferior Goods

Question 146

PED - % increase in price leads to a larger % decrease in in demand is a elastic or inelastic demand?

Answer 146

Elastic demand

Question 147

PED - Percent increase in price leads to a smaller % decrease in demand is a elastic or inelastic demand?

Answer 147

Inelastic demand

Question 148

If the quantity of goods sold never changes, regardless of price this is an example of a perfectly ……..

Answer 148

Perfectly inelastic demand

Question 149

3 factors that influence PED?

Answer 149

Available substitutes, proportion of income spent on the product, time elapsed since the change in price. The more substitutes available the more elastic the demand, the more you spend on a good the more elastic the demand, longer that goes by since the change in price the more elastic the product could become.

Question 150

Calculating elastcity basic formula

Answer 150

% change in quantity / % change in Price

Question 151

PED - Price Elasticity of Demand Formula =

Answer 151

current price / current quantity x slope coeeficient of demand

Question 152

Qdgas = 138,500 - 12,500 Pgas - Calculate the price elasticity of demand at a gasoline price of $3 per gallon

Answer 152

1) 138,500 - 12,500 (3) = Quantity or 101,000 2) current price / current quantity x slope Coeff or 3 / 101,000 x - 12,500 = -0.37 3) therefore we can say that at a price of $3, demand is inelastic because its less than 1.

Question 153

Substitute & Income effect

Answer 153

Substitute effect come into play when the price of good X is decreased it always results in more demand. Its substituted positively. The income effect can be good (normal) or bad (inferior). Increasing income could have you substitute ground beef for steak, making ground beef inferioir and steak a normal good.

Question 154

Giffen Good vs Veblen Good

Answer 154

AGiffen goodis an inferior good for which the negative income effect outweighs the positive substitution effect when price falls. A Veblen good is one for which a higher price makes the good more desirable. The idea is that the consumer gets utility from being seen to consume a good that has high status (e.g., Gucci bag

Question 155

production function

Answer 155

The quantity of output that a firm can produce can be thought of as a function of the amounts of capital and labor employed. Such a function is called aproduction function.

Question 156

Marginal Product =

Answer 156

Additonal Output

Question 157

Dimishing Marginal Returns

Answer 157

When the marginal product (additional output) is increasing at a decresing rate. 1 worker produces 10 outputs, worker 2 produces 7 outputs & worker 3 produces 4 outputs.

Question 158

Cost curves - AVC & ATC (what should you do if your selling price is between the AVC and the ATC?

Answer 158

(Average Variable Cost) & ATC (Average Total Cost) average meaning per unit. If your price is below the AVC you should shut down, If you are selling at a price between the AVC and ATC you should keep going in the short term but shut down in the long-term, you must be selling above the ATC to be making profits.

Question 159

Marginal Cost

Answer 159

Cost of producing an additonal unit

Question 160

SRATC

Answer 160

Short Run Average Total Cost

Question 161

Perfect Competition definition

Answer 161

Perfect competitionrefers to a market in which many firms produce identical products, barriers to entry into the market are very low, and firms compete for sales only on the basis of price. Firms face perfectly elastic (horizontal) demand curves at the price determined in the market because no firm is large enough to affect the market price.

Question 162

Monopolistic Competition compared to perfect competition and an oligopoly.

Answer 162

In perfect competition a company has many competitors and low barrier to entry. Only difference between products is price and marketing. In perfect competition the differntion is price. In an oligopoly there are just less firms competing.

Question 163

Perfect Competition Characteristics

Answer 163

1. homogeneous product 2. Large number of indipendent competitors 3. perfectly elastic demand 4. No barriers to entry or exit 5. Supply and demand determine market place

Question 164

A profit maximizing firm will produce the quantity,Q*, when MC =

Answer 164

A profit maximizing firm will produce the quantity,Q*, when MC = MR

Question 165

Price discrimination

Answer 165

Price discriminationis the practice of charging different consumers different prices for the same product or service. Examples are different prices for airline tickets based on whether a Saturday-night stay is involved (separates business travelers and leisure travelers) and different prices for movie tickets based on age.

Question 166

DWL - Dead weight Loss

Answer 166

Difference between the price and what consumers are willing to pay. Price discrimination helps to lower DWL.

Question 167

Marginal Revenue

Answer 167

the revenue gained by producing one additional unit of a good or service.

Question 168

Perfect Competition =

Answer 168

Price = MR = MC

Question 169

Perfect competition is characterized by:

Answer 169

Perfect competition is characterized by:

Many firms, each small relative to the market.
Very low barriers to entry into or exit from the industry.
Homogeneous products that are perfect substitutes, no advertising or branding.
No pricing power.

Question 170

Monopolistic competition is characterized by:

Answer 170

Monopolistic competition is characterized by:

Many firms.
Low barriers to entry into or exit from the industry.
Differentiated products, heavy advertising and marketing expenditure.
Some pricing power.

Question 171

Oligopoly markets are characterized by:

Answer 171

Oligopoly markets are characterized by:

Few sellers.
High barriers to entry into or exit from the industry.
Products that may be homogeneous or differentiated by branding and advertising.
Firms that may have significant pricing power.

Question 172

Monopoly is characterized by:

Answer 172

Monopoly is characterized by:

A single firm that comprises the whole market.
Very high barriers to entry into or exit from the industry.
Advertising used to compete with substitute products.
Significant pricing power.

Question 173

If a firm’s long-run average total cost increases by 6% when output is increased by 6%, the firm is experiencing:

Answer 173

diseconomies of scale. Increasing long-run average total cost as a result of increasing output demonstrates diseconomies of scale.

Question 174

Total revenue is greatest in the part of a demand curve that is:

Answer 174

unit elastic. Total revenue is maximized at the quantity at which own-price elasticity equals –1. (Module 8.1, LOS 8.a)

Question 175

Income elasticity formula

Answer 175

Income elasticity = I0/ Q0× ∆Q / ∆

Question 176

A demand function for air conditioners is given by:

QDair conditioner = 10,000 – 2 Pair conditioner + 0.0004 income + 30 Pelectric fan – 4 Pelectricity

At current average prices, an air conditioner costs 5,000 yen, a fan costs 200 yen, and electricity costs 1,000 yen. Average income is 4,000,000 yen. The income elasticity of demand for air conditioners is closest to:

Answer 176

Substituting current values for the independent variables other than income, the demand function becomes:

QDair conditioner = 10,000 – 2(5,000) + 0.0004 income + 30(200) – 4(1,000)
= 0.0004 income + 2,000.
The slope of income is 0.0004, and for an income of 4,000,000 yen, QD = 3,600.

Income elasticity = I0 / Q0 × ∆Q / ∆I = 4,000,000 / 3,600 × 0.0004 = 0.444.

(Module 8.1, LOS 8.a)

Question 177

When the price of a good decreases, and an individual’s consumption of that good also decreases, it ismost likelythat: A)
the income effect and substitution effect are both negative.
B)
the substitution effect is negative and the income effect is positive.
C)
the income effect is negative and the substitution effect is positive.

Answer 177

C - The substitution effect of a price decrease is always positive, but the income effect can be either positive or negative. Consumption of a good will decrease when the price of that good decreases only if the income effect is both negative and greater than the substitution effect. (Module 8.2, LOS 8.b)

Question 178

When a firm operates under conditions of pure competition, marginal revenue always equals:

Answer 178

Price - When a firm operates under conditions of pure competition, MR always equals price. This is because, in pure competition, demand is perfectly elastic (a horizontal line), so MR is constant and equal to price. (Module 9.1, LOS 9.a)

Question 179

Cournot model.

Answer 179

Answer

Question 180

Dominant firm model.

Answer 180

Answer

Question 181

Kinked demand model.

Answer 181

Answer

Question 182

Nash equilibrium Model

Answer 182

Answer

Question 183

Which of the following statementsmost accuratelydescribes a significant difference between a monopoly firm and a perfectly competitive firm? A perfectly competitive firm: A)
minimizes costs; a monopolistic firm maximizes profit.
B)
maximizes profit; a monopolistic firm maximizes price.
C)
takes price as given; a monopolistic firm must search for the best price.

Answer 183

C - Monopolists must search for the profit maximizing price (and output) because they do not have perfect information regarding demand. Firms under perfect competition take the market price as given and only determine the profit maximizing quantity. (Module 9.4, LOS 9.b)

Question 184

Keynesian vs monetarist theorist

Answer 184

Keynesian economists believe that fiscal policy, through its effect on aggregate demand, can have a strong effect on economic growth when the economy is operating at less than full employment. Monetarists believe that the effect of fiscal stimulus is only temporary and that monetary policy should be used to increase or decrease inflationary pressures over time. Monetarists do not believe that monetary policy should be used in an attempt to influence aggregate demand to counter cyclical movements in the economy.

Question 185

A country’s debt ratio is?

Answer 185

A country’sdebt ratiois the ratio of aggregate debt to GDP

Question 186

Fiscal policy toolsinclude spending tools and revenue tools. What are the spending and revenue tools?

Answer 186

Spending tools = Transfer payments (entitlement programs), Current spending (on goods and services), capital spending (infrastructure). Revenue Tools = Direct taxes (levied on income or wealth), Indirect taxes (are levied on goods and services).

Question 187

Fiscal Multiplier

Answer 187

Changes in government spending have magnified effects on aggregate demand because those whose incomes increase from increased government spending will in turn increase their spending, which increases the incomes and spending of others.The magnitude of the multiplier effect depends on the tax rate and on the marginal propensity to consume.

Question 188

Disposable Income

Answer 188

is income after taxes

Question 189

Fiscal Multiplier

Answer 189

fiscal multiplier = 1 / 1−(MPC)(1−t)

Question 190

Discretionary Fiscal Policy

Answer 190

Fiscal policy is implemented through changes in taxes and spending. This is calleddiscretionary fiscal policy. Discretionary fiscal policy would be designed to be expansionary when the economy is operating below full employment. Fiscal policy aims to stabilize aggregate demand. During recessions, actions can be taken to increase government spending or decrease taxes. Either change tends to strengthen the economy by increasing aggregate demand, putting more money in the hands of corporations and consumers to invest and spend.

Question 191

Three factors influence money demand:

Answer 191

• Transaction demand, for buying goods and services.
• Precautionary demand, to meet unforeseen future needs.
• Speculative demand, to take advantage of investment opportunities.
  Money supply is determined by central banks with the goal of managing inflation and other economic objectives.

Question 192

Tarriff?

Answer 192

Tariffs:Taxes on imported good collected by the government.

Question 193

Quotas?

Answer 193

Quotas:Limits on the amount of imports allowed over some period.

Question 194

Export Subsidies?

Answer 194

Export subsidies:Government payments to firms that export goods.

Question 195

Minimum Domestic Content?

Answer 195

Minimum domestic content:Requirement that some percentage of product content must be from the domestic country.

Question 196

Voluntary Export Restraint?

Answer 196

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 partners.

Question 197

Trading Blocs: Free Trade Areas

Answer 197

1. All barriers to import and export of goods and services among member countries are removed. i.e. NAFTA

Question 198

Trading Blocs: Monetary Union i.e. Eurozone

Answer 198

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

Question 199

According to theInternational Monetary Fund the main goals are as follows:

Answer 199

promoting international monetary cooperation;
facilitating the expansion and balanced growth of international trade;
promoting exchange stability;
assisting in the establishment of a multilateral system of payments; and
making resources available (with adequate safeguards) to members experiencing balance of payments difficulties.

Question 200

Goal of the World Trade Organization

Answer 200

The World Trade Organization (WTO) is the only international organization dealing with the global rules of trade between nations. Its main function is to ensure that trade flows as smoothly, predictably and freely as possible.

Question 201

Nominal Exchange Rate

Answer 201

Actual exchange rate at the time (Spot rate)

Question 202

Real Exchange Rate

Answer 202

nominal rate adjusted for inflation in each country compared to a base period

Question 203

Value of all goods and servcies

Answer 203

GDP

Question 204

Ways to calculate GDP

Answer 204

Income Approach & Expense Approach

Question 205

1) Sum of all current year goods and services at current year prices vs 2) Sum of all current year goods and services at base year prices

Answer 205

1 = Nominal GDP ; 2 = Real GDP

Question 206

Sum Qt x Pt

Answer 206

Nominal GDP formula

Question 207

Sum Qt x P(t-5)

Answer 207

Real GDP

Question 208

Nominal GDP / Real GDP x 100

Answer 208

GDP Deflator

Question 209

Nominal GDP / GDP Deflator x 100

Answer 209

Real GDP

Question 210

Discounts inflation to get a real output statistic

Answer 210

Real GDP (nominal is simply the additional all goods and services without accounting for inflation)

Question 211

The four business Cycle Phases and what they mean

Answer 211

The business cycle has four phases:expansion(real GDP is increasing),peak(real GDP stops increasing and begins decreasing),contractionorrecession(real GDP is decreasing), andtrough(real GDP stops decreasing and begins increasing). The phases are illustrated in Business Cycle.

Question 212

Contraction vs expansion general rule. How to know which cycle we are in?

Answer 212

A common rule of thumb is to consider two consecutive quarters of growth in real GDP as the beginning of an expansion and two consecutive quarters of declining real GDP as indicating the beginning of a contraction.

Question 213

Credit Cycles

Answer 213

Credit cyclesrefer to cyclical fluctuations in interest rates and the availability of loans (credit).

Question 214

inventory-sales ratio is? What does a increase or decrease above or below the Inventory Sales Ratio mean?

Answer 214

When an expansion is approaching its peak, sales growth begins to slow, and unsold inventories accumulate. This can be seen in an increase in theinventory-sales ratioabove its normal level. The opposite occurs when a contraction reaches its trough. Having reduced their production levels to adjust for lower sales demand, firms find their inventories becoming depleted more quickly once sales growth begins to accelerate. This causes the inventory-sales ratio to decrease below its normal level.

Question 215

Durable goods, services and non-durable goods and how sensitive are they to the business cycles?

Answer 215

Durable goods are long-lasting goods with commonly higher value and is extremely sensitive to business cycles, services and semi sensitive to business cycles and non-durable goods are short term lower value items like food and they tend to be the least sensitive to business cycles.

Question 216

the central bank’s actions that affect the quantity of money and credit in an economy in order to influence economic activity.

Answer 216

Monetary policy

Question 217

a government’s use of spending and taxation to influence economic activity.

Answer 217

Fiscal Policy

Question 218

Broad Money vs Narrow Money

Answer 218

Narrow money is the amount of notes (currency) and coins in circulation in an economy plus balances in checkable bank deposits. Broad money includes narrow money plus any amount available in liquid assets, which can be used to make purchases. Broad money adds in longer term money.

Question 219

Required Reserve Ratio

Answer 219

Part of the fractionla reserve banking system. Banks are only required to keep a % of the deposits on reserves at anytime. An increase In the reserve requirement, decreases the money supply.

Question 220

Demand for Money

Answer 220

Transactional, Precautionary (emergency fund), Speculative (used for opportunity)

Question 221

Money Demand Curve

Answer 221

Downward facing; as the price of money goes down (decreasing interest) the demand for money goes up and vice versa.

Question 222

Fisher Effect

Answer 222

RNom= RReal+ E[I] The Fisher effect states that the nominal interest rate is simply the sum of the real interest rate and expected inflation. RNom = RReal + E[I] + RP Investors are exposed to the risk that inflation and other future outcomes may be different than expected. Investors require additional return (a risk premium) for bearing this risk, which we can consider a third component of a nominal interest rate.

Question 223

quantity theory of money

Answer 223

Thequantity theory of moneystates that quantity of money is some proportion of the total spending in an economy and implies thequantityequation of exchange: money supply × velocity = price ​× real output (MV = PY)

Question 224

Describe roles and objectives of central banks.

Answer 224

Sole Supplier of currency; Banker to gvmt; regulator of payment systems; last resort lender; holder of gold and foreign exchange reserves; conducts monetary policy. Objectives: Control inflation Stability in exchange rates
Full employment.
Sustainable positive economic growth.
Moderate long-term interest rates.

Question 225

Primary objective of the central bank

Answer 225

Control inflation

Question 226

Pegging Definition

Answer 226

example: Some countries peg their exchange to the US dollar as a target standard

Question 227

Central banks target an inflation rate because:

Answer 227

1) Without inflation the movement of money would not be necessary. People would simply hold their money.

Question 228

monetary transmission mechanism

Answer 228

The monetary transmission mechanism isthe process by which asset prices and general economic conditions are affected as a result of monetary policy decisions. Such decisions are intended to influence the aggregate demand, interest rates, and amounts of money and credit in order to affect overall economic performance.

Question 229

Money Neutrality of Money

Answer 229

the amount of money printed by theFederal Reserve(Fed) andcentral bankscan impact prices and wages but not the output or structure of the economy.

Question 230

Describe tools used to implement monetary policy.

Answer 230

Policy Rate, Reserve Requirements, Open Market Operations

Question 231

Policy Rate

Answer 231

Policy rate: The rate at which the central bank will pay or charge commercial banks for their deposits or loans. In the United States, banks can borrow funds from the Fed if they have temporary shortfalls in reserves. The rate at which banks can borrow reserves from the Fed is termed thediscount rate. For the European Central Bank (ECB), it is called therefinancing rate.

Question 232

Repurchase agreement

Answer 232

One way to lend money to banks is through arepurchase agreement. The central bank purchases securities from banks that, in turn, agree to repurchase the securities at a higher price in the future. The Bank of England uses this method, and its policy rate is called the two-week repo (repurchase) rate. A lower rate reduces banks’ cost of funds, encourages lending, and tends to decrease interest rates overall.

Question 233

Federal Funds Rate

Answer 233

In the United States, thefederal funds rateis the rate that banks charge each other on overnight loans of reserves. The Fed sets a target for this market-determined rate and uses open market operations to move it to the target rate.

Question 234

Describe Open Market Operatins and the effect on money supply and interest rates

Answer 234

Buying and selling of securities by the central bank is referred to as open market operations. When the central bank buys securities, cash replaces securities in investor accounts, banks have excess reserves, more funds are available for lending, the money supply increases, and interest rates decrease. Sales of securities by the central bank have the opposite effect, reducing cash in investor accounts, excess reserves, funds available for lending, and the money supply, which will tend to cause interest rates to increase. In the United States, open market operations are the Fed’s most commonly used tool and are important in achieving the federal funds target rate.

Question 235

What securities does the Fed buy in open market operations?

Answer 235

Treasury Securities

Question 236

For a central bank to succeed in its inflation-targeting policies, it should havethree essential qualities:

Answer 236

Indipendence, Credibility & Transparency

Question 237

………….. is the growth rate of the money supply that neither increases nor decreases the economic growth rate:

Answer 237

The neutral interest rate of an economy is the growth rate of the money supply that neither increases nor decreases the economic growth rate:

neutral interest rate = real trend rate of economic growth + inflation target
When the policy rate is above the neutral rate, the monetary policy is said to be contractionary. + Vice Versa.

Question 238

Fisher Effect

Answer 238

The Fisher effect states that a Nominal interest rate = real interest rate plus the expected inflation rate. Real interest rate = nominal interest rate - expected inflation rate

Question 239

Velocity of Money

Answer 239

The velocity of money isthe frequency at which one unit of currency is used to purchase domestically- produced goods and services within a given time period. In other words, it is the number of times one dollar is spent to buy goods and services per unit of time.

Question 240

An economy’s long-term sustainable real growth rate is called the

Answer 240

real trend rateor, simply, the trend rate.

Question 241

Hedonic pricing

Answer 241

Answer

Question 242

Demand-pull inflation.

Answer 242

Demand-pull inflation isa tenet of Keynesian economics that describes the effects of an imbalance in aggregate supply and demand. When the aggregate demand in an economy strongly outweighs the aggregate supply, prices go up. This is the most common cause of inflation.

Question 243

Cost-push inflation.

Answer 243

Cost-push inflation (also known as wage-push inflation)occurs when overall prices increase (inflation) due to increases in the cost of wages and raw materials. Higher costs of production can decrease the aggregate supply (the amount of total production) in the economy.

Question 244

The money supply curve is perfectly inelastic because the money:

Answer 244

Supply is indipendent of interest rates

Question 245

Geopolitical - Autarky vs bilateralism vs hegemony vs Multilateralism

Answer 245

Autarky (non-cooperation and nationalism) refers to a goal of national self-reliance, including producing most or all necessary goods and services domestically. Often State-Run society.
Hegemony (non-cooperation and globalization) refers to countries that are open to globalization but have the size and scale to influence other countries without necessarily cooperating.
Bilateralism (cooperation and nationalism) refers to cooperation between two countries. A country that engages in bilateralism may have many such relationships with other countries while tending not to involve itself in multi-country arrangements.
Multilateralism (cooperation and globalization) countries that engage extensively in international trade and other forms of cooperation with many other countries.

Question 246

Geopolitical riskis the possibility of events that interrupt peaceful international relations. We can classify geopolitical risk into three types:

Answer 246

Event risk refers to events about which we know the timing but not the outcome, such as national elections.
Exogenous risk refers to unanticipated events, such as outbreaks of war or rebellion.
Thematic risk refers to known factors that have effects over long periods, such as human migration patterns or cyber risks.

Question 247

Black Swan Risk

Answer 247

Black swan riskis a term for the risk of low-likelihood exogenous events that have substantial short-term effects.

Question 248

Geopolitical Risk: high velocity = ….. Term; low velocity risk = …… Term

Answer 248

High Velocity = short term risk & low velocity = long term risk

Question 249

What is an autarky or closed economy?

Answer 249

A country that does not trade with other countries.

Question 250

Net exports Definition

Answer 250

Net exports:The value of a country’s exports minus the value of its imports over some period.

Question 251

Definition: Terms of Trade

Answer 251

Terms of trade:The ratio of an index of the prices of a country’s exports to an index of the prices of its imports expressed relative to a base value of 100. If a country’s terms of trade are currently 102, the prices of the goods it exports have risen relative to the prices of the goods it imports since the base period.

Question 252

Definition: Foreign Direct Investment

Answer 252

Foreign direct investment:Ownership of productive resources (land, factories, natural resources) in a foreign country.

Question 253

GDP vs GNP

Answer 253

GDP is focused on production within a countries borders. I.e. a Japanese company’s products produced in the US would still count as US GDP but not GNP. GNP is focused on the nationaility and citizenship of the production. I.e. The japanese companies production of a vehicle in the US will count towards the Japanese GNP but the US’s GDP.

Question 254

Geopolitics (Trade) - Absolute Advantage vs Comparative Advantage

Answer 254

A country is said to have anabsolute advantagein the production of a good if it can produce the good at a lower resource cost than another country. A country is said to have acomparative advantagein the production of a good if it has a loweropportunity costin the production of that good, expressed as the amount of another good that could have been produced instead. Each country should produce the product that has the lowest opportunity cost.

Question 255

Ricardian model of trade vs Heckscher-Ohlin model

Answer 255

TheRicardian model of tradehas only one factor of production—labor. Heckscher and Ohlin presented a model in which there are two factors of production—capital and labor. The result of their analysis is that the country that has more capital will specialize in the capital intensive good and trade for the less capital intensive good with the country that has relatively more labor and less capital.

Question 256

Trading Blocs: Customs Union

Answer 256

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

Question 257

Trading Blocs: Common Market

Answer 257

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

Question 258

Trading Blocs: Economic Union i.e. European Union

Answer 258

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

Question 259

Hedgers vs speculators

Answer 259

Hedgers have immediate risk and use a forward contract to hedge the risk. Speculators have no existing FX risk but they use forward contracts to speculate and make profit.

Question 260

Price rate and Base rate

Answer 260

USD/EUR - USD is the price rate and EUR is the base rate

Question 261

Forward Quotes

Answer 261

spot rate + forward quote x point

Question 262

No Arbitrage Forward Rate

Answer 262

1 + Rprice / 1 + Rbase x spot

Question 263

Generaized Marshall-Lerner Condition

Answer 263

Depreciation of domestic currency will decrease trade deficit

Question 264

Gross domestic product does not include the value of Transfer payments givernment services or owner occupied housing

Answer 264

Transfer Payments

Question 265

When GDP is calculated by the sum-of-value-added method, what is the value of a manufactured product in GDP? 1)The sum of the product’s value at each stage of production and distribution. 2) The sum of the increases in the product’s value at each stage of production and distribution. 3) The product’s retail price less the value added at each stage of production and distribution.

Answer 265

Using the sum-of-value-added method, GDP can be calculated by summing the value added at each stage in the production and distribution process. Summing the value of the product at each stage of production would count the value added at earlier stages multiple times. The value added at earlier stages would not be included in GDP if it was deducted from the retail price. (Module 10.1, LOS 10.b)

Question 266

current output measured at base-year prices is best described as Nominal GDP, Real GDP, or The GDP Deflator?

Answer 266

Real GDP

Question 267

The GDP deflator is calculated as 100 times the ratio of:

Answer 267

Nominal GDP/Real GDP x 100

Question 268

Which of the following measures of income is the sum of wages and benefits, pretax profits, interest income, owners’ income from unincorporated businesses, rent, and taxes net of subsidies? National Income, Personal Income, Disposable Income?

Answer 268

National income is the income received by all factors of production used in the generation of final output. Personal income measures the pretax income that households receive. Disposable income is personal income after taxes. (Module 10.1, LOS 10.d)

Question 269

If a government budget deficit increases, net exports must:

Answer 269

The fundamental relationship among saving, investment, the fiscal balance, and the trade balance is described by the following equation: (G – T) = (S – I) – (X – M). If the government budget deficit (G – T) increases, the larger budget deficit must be financed by some combination of an increase in the excess of private saving over private investment (S – I) or a decrease in net exports (X – M). (Module 10.1, LOS 10.e)

Question 270

The unemployment rate is defined as the number of unemployed as a percentage of:

Answer 270

The unemployment rate is the number of unemployed as a percentage of the labor force. (Module 11.2, LOS 11.f)

Question 271

A country’s year-end consumer price index over a 5-year period is as follows:

Year 1 106.5

Year 2 114.2

Year 3 119.9

Year 4 124.8

Year 5 128.1

The behavior of inflation as measured by this index is best described as: Deflation, disinflation or hyperinflation

Answer 271

The yearly inflation rate is as follows:

Year 2 (114.2 – 106.5) / 106.5 = 7.2%

Year 3 (119.9 – 114.2) / 114.2 = 5.0%

Year 4 (124.8 – 119.9) / 119.9 = 4.1%

Year 5 (128.1 – 124.8) / 124.8 = 2.6%

The inflation rate is decreasing, but the price level is still increasing. This is best described as disinflation. (Module 11.2, LOS 11.g)

Question 272

Core inflation is measured using a price index that excludes

Answer 272

food and energy prices

Question 273

The Fisher effect states that the nominal interest rate is equal to the real rate plus:

Answer 273

The Fisher effect states that nominal interest rates are equal to the real interest rate plus the expected inflation rate.

Question 274

A central bank conducts monetary policy primarily by altering:

Answer 274

Policy Rate; The primary method by which a central bank conducts monetary policy is through changes in the target short-term rate or policy rate.

Question 275

Purchases of securities in the open market by the monetary authorities areleast likelyto increase: excess reserves, cash in investors accounts, the interbank lending rate.

Answer 275

Open market purchases by monetary authoritiesdecreasethe interbank lending rate by increasing excess reserves that banks can lend to one another and therefore increasing their willingness to lend. (Module 12.2, LOS 12.i)

Question 276

An increase in the policy rate willmost likelylead to an increase in:

Answer 276

An increase in the policy rate is likely to increase longer-term interest rates, causing decreases in consumption spending on durable goods and business investment in plant and equipment. The increase in rates, however, makes investment in the domestic economy more attractive to foreign investors, increasing demand for the domestic currency and causing the currency to appreciate.

Question 277

Monetary policy is likely to beleastresponsive to domestic economic conditions if policymakers employ: inflation targeting, interest rate targeting, exchange rate targeting.

Answer 277

Exchange rate targeting requires monetary policy to be consistent with the goal of a stable exchange rate with the targeted currency, regardless of domestic economic conditions. (Module 12.2, LOS 12.l)

Question 278

If a country’s inflation rate is below the central bank’s target rate, the central bank ismost likelyto: Sell gvmt securities, increase the reserve requirement, decrease the overnight lending rate.

Answer 278

Decreasing the overnight lending rate would add reserves to the banking system, which would encourage bank lending, expand the money supply, reduce interest rates, and allow GDP growth and the rate of inflation to increase. Selling government securities or increasing the reserve requirement would have the opposite effect, reducing the money supply and decreasing the inflation rate. (Module 12.2, LOS 12.j)

Question 279

Suppose an economy has a real trend rate of 2%. The central bank has set an inflation target of 4.5%. To achieve the target, the central bank has set the policy rate at 6%. Monetary policy ismost likely: balanced, expansionary, contractionary

Answer 279

neutral rate = trend rate + inflation target = 2% + 4.5% = 6.5%

Because the policy rate is less than the neutral rate, monetary policy is expansionary. (Module 12.2, LOS 12.m)

Question 280

Monetary policy is most likely to fail to achieve its objectives when the economy is experiencing: Growth, deflation, disinflation.

Answer 280

Monetary policy has limited ability to act effectively against deflation because the policy rate cannot be reduced below zero and demand for money may be highly elastic (liquidity trap). (Module 12.2, LOS 12.n)

Question 281

In a frequency distribution from 30% to 90% that is divided into six equal-sized intervals, the absolute frequency of the sixth interval is: 31, 32, 32, 33, 45, 56, 57, 57, 68, 69, 80, 82, 88

Answer 281

The answer is 3. There are 3 numbers that fall in the sixth interval between 80%-90%

Question 282

A company reports its past six years’ earnings growth at 10%, 14%, 12%, 10%, –10%, and 12%. The company’s average compound annual growth rate of earnings isclosestto:

Answer 282

1.1x1.14x1.12x1.1x.9x1.12 = 1.5572 to the power of 1/6 (.1666) or 1.5572 (.1666(Yx)) = 1.07 -1 x 100 = 7.6585%

Question 283

Sample standrad variance and Sample standard deviation of 30, 12, 25, 20, 23

Answer 283

sample variance = 30+12+25+20+23 / 5 = 22% –> (30-22)2 etc etc /5-1 = 44.5% Sample Standard Deviation = Square root of .00445 = 0.0667 or 6.67%

Question 284

A distribution that has positive excess kurtosis is:

Answer 284

A distribution with positive excess kurtosis is more peaked and has flatter tails than a normal distribution.

Question 285

Given the following annual returns, what are the geometric and arithmetic mean returns, respectively?

15%, 2%, 5%, -7%, 0%

Answer 285

Geometric Mean: (1.15 × 1.02 × 1.05 × 0.93 × 1.0)1/5 – 1 = 1.14541/5 – 1 = 2.75%

Arithmetic Mean: (15% + 2% + 5% – 7% + 0%) / 5 = 3.00%

Question 286

Consider the following set of stock returns: 12%, 23%, 27%, 10%, 7%, 20%,15%. The third quartile is:

Answer 286

The third quartile is calculated as: Ly= (7 + 1) (75/100) = 6. When we order the observations in ascending order: 7%, 10%, 12%, 15%, 20%, 23%, 27%, “23%” is the sixth observation from the left.

Question 287

Cameron Ryan wants to make an offer on the condominium he is renting. He takes a sample of prices of condominiums in his development that closed in the last five months. Sample prices are as follows (amounts are in thousands of dollars): $125, $175, $150, $155 and $135. The sample standard deviation isclosestto:

Answer 287

Sample mean = (125 + 175 + 150 + 155 + 135) / 5 = 148
Sample Variance = [(125 – 148)2 + (175 – 148)2 + (150 – 148)2 + (155 – 148)2 + (135 – 148)2] / (5 – 1) = 1,480 / 4 = 370
Sample Standard Deviation = 3701/2 = 19.24%.

Question 288

A government enacts a program to subsidize farmers with an expansive spending program of $10 billion. At the same time, the government enacts a $10 billion tax increase over the same period. Which of the following statementsbestdescribes the impact on aggregate demand? Lower growth, no effect, higher growth

Answer 288

The amount of the spending program exactly offsets the amount of the tax increase, leaving the budget unaffected. The multiplier for government spending is greater than the multiplier for a tax increase. Therefore, the balanced budget multiplier is positive. All of the government spending enters the economy as increased expenditure, whereas spending is reduced by only a portion of the tax increase.

Question 289

Fiscal Multiplier = A government reduces spending by $50 million. The tax rate is 30%, and consumers exhibit a marginal propensity to consume of 80%. The change in aggregate demand caused by the change in government spending isclosestto:

Answer 289

fiscal multiplier = 1 / [1 – (MPC) (1 – T)] = 1 / [1 – 0.80(1 – 0.3)] = 2.27

change in government spending = –$50 million

change in aggregate demand = –(50 × 2.27) = –$113.64 million

Question 290

Income elasticity is defined as the percentage change in: A) income divided by the percentage change in the quantity demanded.
B) quantity demanded divided by the percentage change in income.
C) quantity demanded divided by the percentage change in the price of the product.

Answer 290

quantity demanded divided by the percentage change in income.

Question 291

If a good has elastic demand, a small price decrease will cause: large increase in demand, no change, small decrease in demand

Answer 291

a larger increase in quantity demanded.

Question 292

Income elasticity for a normal good is (positive or negative) and income elasticity for a inferior good is (positive or negative)

Answer 292

Normal goods have positive values for income elasticity and inferior goods have negative income elasticities.

Question 293

If the price elasticity of demand is –1.5 and a change in the price of the product increases the quantity demanded by 4%, then what is the percent change in price?

Answer 293

Price elasticity of demand is 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 = 4 / –1.5 = –2.667.

Question 294

If the price of World Cup Soccer tickets increases from $40 a ticket to $50 a ticket and the quantity demanded of tickets stays the same, demand for the tickets is: elastic, perfectly elastic, in-elastic, perfectly in-elastic.

Answer 294

Perfectly inelastic

Question 295

If the price elasticity of demand for a good is –4.0, then a 10% increase in price would result in what % decrease in demand: -4%, -40%, -10%, -2.5%.

Answer 295

Price elasticity of demand = (% change in Q demanded / % change in price). Given the price elasticity of demand and the percentage change in price, we can solve for the percentage change in quantity demanded = price elasticity of demand × percentage change in price. Here, –4.0 × 10% = –40%.

Question 296

The percent change in demand for a good divided by the percent change in the price of another good is known as the: A) price elasticity of demand.
B) income elasticity of demand.
C) cross price elasticity of demand.

Answer 296

Cross Price Elasticity of demand.

Question 297

A distinction between Giffen goods and Veblen goods is that:

Answer 297

Giffen goods are inferior goods for which the quantity demanded decreases when the price decreases, because the negative income effect is larger than the positive substitution effect. Veblen goods are goods for which the quantity demand increases when the price increases, such as a high-status good for which the consumer gains utility from being seen to consume the good. Giffen goods and Veblen goods, if they exist, have demand curves that slope upward over at least some range of prices. The substitution effect is positive for all goods.

Question 298

Which of the following statements regarding a monopolist ismostaccurate? A) A monopolist will charge the highest price for which he can sell his product.
B) A monopolist, like any other profit-maximizing firm, will sell at the output level where marginal revenue equals marginal cost.
C) A monopolist will maximize the average profit per unit sold.

Answer 298

B - The demand curve for monopolists slopes downward to the right reflecting the fact that a higher price results in lower demand. Monopolists maximize profits by expanding output until marginal revenue equals marginal cost.

Question 299

A business believes a price discrimination strategy will increase both its output and profits. For this to occur, the firm must have: A) customers who cannot resell the product and whose price elasticities of demand are in a limited range.
B) distinct groups of customers with different price elasticities of demand who are able to resell the product.
C) distinct groups of customers with different price elasticities of demand who cannot resell the product.

Answer 299

C - For a price searcher firm, price discrimination can increase profits if the firm has two or more identifiable customer groups with different price elasticities of demand, and if customers who buy the product at a lower price cannot resell it to other customers. (Module 9.1, LOS 9.d)

Question 300

When a firm operates under conditions of perfect competition, marginal revenue always equals:

Answer 300

When a firm operates under conditions of perfect competition, marginal revenue always equals price. This is because, in perfect competition, price is constant (a horizontal line) so that marginal revenue is constant.

Question 301

Compared to a competitive market result, a single-price monopoly willmost likely: A) result in lower output, deadweight loss, and less producer and consumer surplus.
B) adopt a marginal cost pricing strategy, which will decrease consumer surplus.
C) result in a higher price, less consumer surplus, and more producer surplus.

Answer 301

C -
A firm in a monopoly position will reduce output to where MC = MR, which will increase price, decrease consumer surplus, and increase producer surplus. A marginal cost pricing strategy refers to regulation which requires a firm to set price equal to marginal cost.

Question 302

A market has the following characteristics:

There is a large number of independent sellers.
Each produces a differentiated product.
There are low barriers to entry.
Producers face downward-sloping demand curves.
Demand is highly elastic. Extensive advertising to differentiate a product
This market is best characterized as:

Answer 302

Monopolistic Competition

Question 303

The kinked demand model assumes that below the current price, the demand curve becomes: A) less elastic because competitors will decrease their prices.
B) less elastic because competitors will not decrease their prices.
C) more elastic because competitors will decrease their prices.

Answer 303

The kinked demand model of oligopoly behavior assumes that a firm’s competitors will not match a price increase, but will match the price of a competitor that offers a lower price. The result is a demand curve that is more elastic above the current price, but less elastic below it.

Question 304

Types of opinions an auditor can give on a financial statement review?

Answer 304

Anunqualified opinion(also known as an unmodified or clean opinion) indicates that the auditor believes the statements are free from material omissions and errors. If the statements make any exceptions to the accounting principles, the auditor may issue aqualified opinionand explain these exceptions in the audit report. The auditor can issue anadverse opinionif the statements are not presented fairly or are materially nonconforming with accounting standards. If the auditor is unable to express an opinion (e.g., in the case of a scope limitation), adisclaimer of opinionis issued. Any opinion other than unqualified is sometimes referred to as amodified opinion.

Question 305

EDGAR

Answer 305

Electronic Data Gathering, Analysis, and Retrieval System

Question 306

SEC Filing form Form 8-K

Answer 306

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

Question 307

Thefinancial statement analysis framework1consists of six steps:

Answer 307

Step 1: State the objective and context. Step 2: Gather data. Step 3: Process the data. Step 4: Analyze and interpret the data. Step 5: Report the conclusions or recommendations. Step 6:  Update the analysis.

Question 308

Financial Statements: The two primary standard-setting bodies are:

Answer 308

The two primary standard-setting bodies are theFinancial Accounting Standards Board(FASB) and theInternational Accounting Standards Board(IASB). In the United States, the FASB sets forth Generally Accepted Accounting Principles (GAAP). Outside the United States, the IASB establishes International Financial Reporting Standards (IFRS).

Question 309

What is IOSCO?

Answer 309

Most national authorities belong to theInternational Organization of Securities Commissions(IOSCO). Together, the members of IOSCO regulate more than 95% of the world’s financial markets. IOSCO is not a regulatory body, but its members work together to make national regulations and enforcement more uniform around the world.

Question 310

Sarbanes Oxley Act of 2002

Answer 310

The act prohibits a company’s external auditor from providing certain additional paid services to the company, to avoid the conflict of interest involved and to promote auditor independence. The act requires a company’s executive management to certify that the financial statements are presented fairly and to include a statement about the effectiveness of the company’s internal controls of financial reporting. Additionally, the external auditor must provide a statement confirming the effectiveness of the company’s internal controls.

Question 311

IASB

Answer 311

Internation Accounting Standards Board

Question 312

There are two fundamental characteristics that make financial information useful: relevance and faithful representation.What are the four characteristics that enhance relevance and faithful representation:

Answer 312

comparability, verifiability, timeliness, and understandability.

Question 313

Accruel accounting vs cash accounting

Answer 313

Accrual accounting means that financial statements should reflect transactions at the time they actually occur, not necessarily when cash is paid. Cash accounting records payments and receipts when they are recieved.

Question 314

required financial statementsare:

Answer 314

Balance sheet (statement of financial position).
Statement of comprehensive income.
Cash flow statement.
Statement of changes in owners’ equity.
Explanatory notes, including a summary of accounting policies.

Question 315

Name one element of the balance sheet that measures a company’s financial position and one that is used to measure a company’s performance?

Answer 315

Balance sheet reporting elements (assets, liabilities, and owners’ equity) measure a company’s financial position. Income statement reporting elements (income, expenses) measure its financial performance. (Module 17.2, LOS 17.c)

Question 316

GAAP

Answer 316

Generally Accepted Accounting Principles

Question 317

IFRS

Answer 317

International Financial Reporting Standards

Question 318

net income =

Answer 318

revenues − ordinary expenses + other income − other expense + gains − losses

Question 319

Gross profitvs operating profit

Answer 319

Gross profitis the amount that remains after the direct costs of producing a product or service are subtracted from revenue. Subtracting operating expenses, such as selling, general, and administrative expenses, from gross profit results in another subtotal known asoperating profitor operating income.

Question 320

IFRS and GAAP standards for recognizing revenue

Answer 320

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

Question 321

Finncial Statement Analysis: What is a performance obligation?

Answer 321

A performance obligation is a promise to deliver a distinct good or service. A “distinct” good or service is one that meets the following criteria:

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.

Question 322

Financial Statements: Grouping expenses by Nature or function, what do they mean?

Answer 322

By nature - expenses are groubed based on the source of the expense.

By function - expenses grouped by where expenses were used. (e.g., raw materials, depreciation, labor, etc.)

Question 323

IASB

Answer 323

International Accounting Standards Board

Question 324

Long-lived assets are expected to provide economic benefits beyond one accounting period. The allocation of cost over an asset’s life is known as: Match the following up: Tangible asset, intangible asset, natural asset –> Depreciation, depletion, amortization

Answer 324

Tangible asset = Depreciation Natural resource = Depletion Intangible asset = Amortization

Question 325

Straight Line Depreciation

Answer 325

Most firms use thestraight-line depreciationmethod for financial reporting purposes. The straight-line method recognizes an equal amount of depreciation expense each period. However, most assets generate more benefits in the early years of their economic life and fewer benefits in the later years. In this case, anaccelerated depreciation methodis more appropriate for matching the expenses to revenues.

Question 326

The declining balance method (DB) & Double Declining Balance Method

Answer 326

The declining balance method (DB) applies a constant rate of depreciation to an asset’s (declining) book value each year. The most common declining balance method is double-declining balance (DDB), which applies two times the straight-line rate to the declining balance. If an asset’s life is ten years, the straight-line rate is 1/10 or 10%, and the DDB rate would be 2/10 or 20%. then repeat for subsequent years until the depreciation reaches salvage value. DDB = (2/useful life) x (value - accumulated depreciation)

Question 327

Amortization

Answer 327

Amortizationis the allocation of the cost of an intangible asset (such as a franchise agreement) over its useful life. Amortization expense should match the proportion of the asset’s economic benefits used during the period. Most firms use the straight-line method to calculate annual amortization expense for financial reporting. Straight-line amortization is calculated exactly like straight-line depreciation.

Question 328

Two types of reporting that can be done when making a change to the accounting procedure or financial statement preperations are what?

Answer 328

retrospective applicationorprospective application. With retrospective application, any prior-period financial statements presented in a firm’s current financial statements must be restated, applying the new policy to those statements as well as future statements. With prospective application, prior statements are not restated, and the new policies are applied only to future financial statements.

Question 329

Simple vs Complex capital structure

Answer 329

A 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.
A complex capital structure contains potentially dilutive securities such as options, warrants, or convertible securities.

Question 330

Basic EPS calculation

Answer 330

net income - preferred dividends / weighted ave. # of outstanding common shres

Question 331

Dilutive vs antidilutive securities

Answer 331

Dilutive securities are stock options, warrants, convertible debt, or convertible preferred stock that would decrease EPS if exercised or converted to common stock.
Antidilutive securities are stock options, warrants, convertible debt, or convertible preferred stock that would increase EPS if exercised or converted to common stock. Stock options and warrants are dilutive only when their exercise prices are less than the average market price of the stock over the year.

Question 332

A common size income statement is what?

Answer 332

A vertical common-size income statement expresses each category of the income statement as a percentage of revenue. Commonly used to compare two different sizecompanies who are in the same industry for profitability not total revenue or sales which could be misleading.

Question 333

Gross & Net Profit Margin

Answer 333

Gross profit marginis the ratio of gross profit (revenue minus cost of goods sold (gross profit) / revenue (sales)). Net profit margin measures the profit generated after considering all expenses. (net income / revenue)

Question 334

Comprehensive Income

Answer 334

Comprehensive income is the sum of net income and other comprehensive income. It measures all changes to equity other than those from transactions with shareholders.

Question 335

liquidity Vs Solvency

Answer 335

liquidity is the ability to meet short-term obligations and solvency is the ability to meet long-term obligations.

Question 336

Current Asset vs non-current asset

Answer 336

Current assets are a company’s short-term assets; those that can be liquidated quickly and used for a company’s immediate needs. Usually assets that will be converted into cash or used up within one-year or one operating cycle. Noncurrent assets are long-term and have a useful life of more than a year.

Question 337

Opearting Cycle

Answer 337

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

Question 338

Current Liabilities

Answer 338

Current liabilities are obligations that will be satisfied within one year or one operating cycle

Question 339

Current assets - current liabilities =

Answer 339

Current assets minus current liabilities equals working capital. Not enough working capital may indicate liquidity problems. Too much working capital may be an indication of inefficient use of assets.

Question 340

Standard vs retail inventory method

Answer 340

Standard costing, often used by manufacturing firms, involves assigning predetermined amounts of materials, labor, and overhead to goods produced. Firms that use theretail methodmeasure inventory at retail prices and then subtract gross profit in order to determine cost.

Question 341

Accounts Receivable vs Accounts Payable

Answer 341

A company’s accounts payable (AP) ledger lists its short-term liabilities — obligations for items purchased from suppliers, for example, and money owed to creditors. Accounts receivable (AR) are funds the company expects to receive from customers and partners. AR is listed as a current asset on the balance sheet.

Question 342

Accrued Liabilities

Answer 342

Accrued liabilities (accrued expenses) are expenses that have been recognized in the income statement but are not yet contractually due. For example, consider a firm that is required to make annual year-end interest payments of $100,000 on an outstanding bank loan. At the end of March, the firm would recognize one-quarter ($25,000)’

Question 343

Unearned Income

Answer 343

Unearned revenue (also known as unearned income, deferred revenue, or deferred income) is cash collected in advance of providing goods and services. For example, a magazine publisher receives subscription payments in advance of delivery.

Question 344

Financial Statements: What does PPE stand for?

Answer 344

Property, plant, and equipment (PP&E) are tangible assets used in the production of goods and services. PP&E includes land and buildings, machinery and equipment, furniture, and natural resources. Under IFRS, PP&E can be reported using the cost model or the revaluation model. Under U.S. GAAP, only the cost model is allowed.

Question 345

What is an impaired asset?

Answer 345

An impaired asset is an asset that has a market value less than the value listed on the company’s balance sheet.

Question 346

Intangible assets are what and what are examples of the two types? Identifiable and unidentifiable.

Answer 346

Intangible assets are non-monetary assets that lack physical substance. Securities are not considered intangible assets. Intangible assets are either identifiable or unidentifiable. Identifiable intangible assets can be acquired separately or are the result of rights or privileges conveyed to their owner. Examples of identifiable intangibles are patents, trademarks, and copyrights. Unidentifiable intangible assets cannot be acquired separately and may have an unlimited life. The best example of an unidentifiable intangible asset is goodwill.

Question 347

Expenses: What are the categories nature or function?

Answer 347

Answer

Question 348

Expenses: Matching Principal vs Period Expenses

Answer 348

Matching principal is matchin the expense directly to a revenue. Period expenses are less able to be related to a direct expense i.e. admin costs.

Question 349

Weighted average share for EPS and diluted EPS

Answer 349

Calculate the average shares by adjusting for a stock dividend on any shares issued before the dividend that year. Do not factor it in after the dividend is paid. Dilutive EPS is simply assuming all shares that can be converted are converted.

Question 350

Business Acquisition: Goodwill

Answer 350

Goodwill.Goodwill is the excess of purchase price over the fair value of the identifiable net assets (assets minus liabilities) acquired in a business acquisition.

Question 351

What is testing for impairment on an asset?

Answer 351

Impairment testing isthe process of considering if the fair value of an asset has fallen below its recorded cost. In addition to annual evaluations of potential impairments, companies need to be aware of events that could cause the need to assess assets for impairment. These events are called triggering events.

Question 352

mark-to-market

Answer 352

Financial assets measured at fair value, also known as mark-to-market accounting, include trading securities, available-for-sale securities, and derivatives.

Question 353

Derivative

Answer 353

In finance, a derivative is a contract that derives its value from the performance of an underlying entity.

Question 354

Owners Equity

Answer 354

Owners’ equityis the residual interest in assets that remains after subtracting an entity’s liabilities. Owners’ equity includes contributed capital, preferred stock, treasury stock, retained earnings, non-controlling interest, and accumulated other comprehensive income.

Question 355

Par Value

Answer 355

The par value of common stock is a stated or legal value. Par value has no relationship to fair value.

Question 356

Authorized Shares vs issued shares vs outstanding dshares

Answer 356

Authorized shares are the number of shares that may be sold under the firm’s articles of incorporation. Issued shares are the number of shares that have actually been sold to shareholders. The number of outstanding shares is equal to the issued shares less shares that have been reacquired by the firm (i.e., treasury stock).

Question 357

Preferred Stock

Answer 357

Preferred stockhas certain rights and privileges not conferred by common stock. For example, preferred shareholders are paid dividends at a specified rate, usually expressed as a percentage of par value, and have priority over the claims of the common shareholders in the event of liquidation.

Question 358

Retained Earnings

Answer 358

Retained earnings are the undistributed earnings (net income) of the firm since inception, the cumulative earnings that have not been paid out to shareholders as dividends.

Question 359

Comprehensive income = ………

Answer 359

Comprehensive income is equal to net income plus other comprehensive income Accumulated other comprehensive income includes all changes in stockholders’ equity except for transactions recognized in the income statement (net income) and transactions with shareholders, such as issuing stock, reacquiring stock, and paying dividends.

Question 360

Examples of accumulate other comprehensive income

Answer 360

Unrealized gains/losses on hedge/derivative financial instruments. Foreign currency translation adjustments. Unrealized gains/losses on postretirement benefit plans.

Question 361

What is a vertical common-size balance sheet

Answer 361

A verticalcommon-size balance sheetexpresses each item of the balance sheet as a percentage of total assets. The common-size format standardizes the balance sheet by eliminating the effects of size. This allows for comparison over time (time-series analysis) and across firms (cross-sectional analysis).

Question 362

Liquidity ratiosmeasure the firm’s ability to satisfy its short-term obligations as they come due. Liquidity ratios include

Answer 362

current ratio = current assets / current liabilities

quick ratio = cash + marketable securities + receivables / current liabilities
cash ratio = cash + marketable securities / current liabilities

Question 363

Current Ratio

Answer 363

current ratio = current assets / current liabilities

Question 364

Quick Ratio

Answer 364

quick ratio = cash + marketable securities + receivables / current liabilities

Question 365

Cash Ratio

Answer 365

cash ratio = cash + marketable securities / current liabilities

Question 366

Solvency ratios measure the firm’s ability to satisfy its long-term obligations. Solvency ratios include

Answer 366

long-term debt-to-equity = long-term debt / total equity
total debt-to-equity = total debt / total equity
debt ratio = total debt / total assets
financial leverage = total assets / total equity

Question 367

What are the two methods of reporting cash flow statements, which one is preferred by the two regulators (IFRS & US GAAP), and which one is most widely used?

Answer 367

There are two methods of presenting the cash flow statement: the direct method and the indirect method. Both methods are permitted under U.S. GAAP and IFRS. The use of the direct method, however, is encouraged by both standard setters. Regrettably, most firms use the indirect method. The difference between the two methods relates to the presentation of cash flow from operating activities. The presentation of cash flows from investing activities and financing activities is exactly the same under both methods.

Question 368

Accruel Based Accounting

Answer 368

Accrual basis accounting recognizes business revenue and matching expenses when they are generated—not when money actually changes hands. This means companies record revenue when it is earned, not when the company collects the money.

Question 369

Direct vs indirect cash flow statement

Answer 369

The cash flow direct method determines changes in cash receipts and payments, which are reported in the cash flow from the operations section. The indirect method takes the net income generated in a period and adds or subtracts changes in the asset and liability accounts to determine the implied cash flow.

Question 370

Current assets vs non-current assets

Answer 370

Current assets are those that you can convert into cash within one year, such as short-term investments and accounts receivable. Non-current assets are longer-term assets with a full value that you cannot recognize until after one year, such as property and machinery.

Question 371

CFO, CFI, CFF

Answer 371

Cash flow from operating activities, cash flow from investing actvities & cash flow from financing activities.

Question 372

Direct vs indirect cash flow statement points to remember

Answer 372

Throughout the discussion of the direct and indirect methods, remember the following points:

• CFO is calculated differently, but the result is the same under both methods.
• The calculation of CFI and CFF is identical under both methods.
• There is an inverse relationship between changes in assets and changes in cash flows. In other words, an increase in an asset account is a use of cash, and a decrease in an asset account is a source of cash.
• There is a direct relationship between changes in liabilities and changes in cash flow. In other words, an increase in a liability account is a source of cash, and a decrease in a liability is a use of cash.
• Sources of cash are positive numbers (cash inflows) and uses of cash are negative numbers (cash outflows).

Question 373

CFF is the sum of these two measures:

Answer 373

net cash flows from creditors = new borrowings − principal amounts repaid

net cash flows from shareholders = new equity issued − share repurchases − cash dividends paid

Question 374

Operating Cash Flow

Answer 374

Operating cash flow (OCF) is a measure of the amount of cash generated by a company’s normal business operations. Operating cash flow indicates whether a company can generate sufficient positivecash flowto maintain and grow its operations, otherwise, it may require external financing for capital expansion.

Question 375

Capital Expenditures

Answer 375

Capital expenditures (CapEx) are funds used by a company to acquire, upgrade, and maintain physical assets such as property, plants, buildings, technology, or equipment. CapEx is often used to undertake new projects or investments by a company.

Question 376

What is free cash flow?

Answer 376

Free cash flowis a measure of cash that is available for discretionary purposes. This is the cash flow that is available once the firm has covered its capital expenditures. This is a fundamental cash flow measure and is often used for valuation. There are several measures of free cash flow. Two of the more common measures are free cash flow to the firm and free cash flow to equity.

Question 377

FCFF

Answer 377

Free cash flow to the firm (FCFF) is the cash available to all investors, both equity owners and debt holders. FCFF can be calculated by starting with either net income or operating cash flow.

Question 378

FCFE

Answer 378

Free cash flow to equity (FCFE) is the cash flow that would be available for distribution to common shareholders.

Question 379

Net Earnings that majorly differ from operating cash flow may be in an indication of

Answer 379

Aggressive accounting that reports revenue to soon, or doesn’t report expenses in a timely manner

Question 380

Vertical Common-Size Balance Sheet and Income Statement vs horizontal common-size balance sheet or income statement

Answer 380

Vertical Common-Size Balance Sheet and Income Statement show balance sheet items as percentages of assets, and income statement items as percentages of sales. horizontal common-size balance sheet or income statement shows all values as they relate to beggining year whch starts at 1.0 for every category.

Question 381

The DuPont system of analysis is used to analyze what?

Answer 381

The DuPont system of analysis is an approach that can be used to analyze return on equity (ROE). It’s not used ti simply calculate ROE but instead The DuPont method is a way to decompose ROE, to better see what changes are driving the changes in ROE.

Question 382

Dupont Analysis original ratio

Answer 382

return on equity = net profit margin × asset turnover × leverage ratio

Question 383

Theextended (5-way) DuPont equationtakes the net profit margin and breaks it down further.

Answer 383

return on equity = net profit margin × (EBT/EBIT) x (EBIT/Revenue) x asset turnover × leverage ratio

Question 384

EBT vs EBIT

Answer 384

Earnings before tax (EBT) reflects how much of an operating profit has been realized before accounting for taxes, while EBIT (Earning before interest and tax) excludes both taxes and interest payments.

Question 385

Diluted EPS is?

Answer 385

Diluted EPS is a calculation used to gauge the quality of a company’s earnings per share (EPS) if all convertible securities were exercised. Convertible securities are all outstanding convertible preferred shares, convertible debentures, stock options, and warrants.

Question 386

Net Income minus dividends declared =

Answer 386

Retained earnings

Question 387

Coefficient of Variation is?

Answer 387

The coefficient variation is the dispersion of data points in a data series around the mean. Take the standard deviation of the variable you want to find and divide it by the mean of that variable. i.e. Coefficient Variation of sales = standrad deviation of of sales / mean sales

Question 388

A business segment is

Answer 388

A business segment is a portion of a larger company that accounts for more than 10% of the company’s revenues, assets, or income, and is distinguishable from the company’s other lines of business in terms of the risk and return characteristics of the segment.

Question 389

Cash flow from operations

Answer 389

Net income - profits from sale of land + depreciation + decrease in receivables – increase in inventories + increase in accounts payable – decrease in wages payable + increase in deferred tax liabilities

Question 390

Periodic vs perpetual inventory COGS methods

Answer 390

The key difference between periodic and perpetual accounting is timing. Periodic inventory is done at the end of a period to create financial statements. Perpetual inventory is done as sales and inventory purchases happen. Perpetual uses LIFO but per sale i.e. it assumes that if you sell something you take it from the last acquired inventory before that sale.

Question 391

FIFO, LIFO and Ave cost if inventory is affected by inflation how?

Answer 391

in an inflationary environment LIFO create a more realistic COGS because its deducting the most recent price, FIFO produces a lower COGS (therefore higher taxes) because its deducting the price it was when you purchased the older inventory. Under stable prices and no inflation FIFO, LIFO and Ave. Cost are all the same.

Question 392

LIFO VS FIFO Conversion

Answer 392

When prices are increasing, a LIFO firm will pay less in taxes than it would pay under FIFO. For this reason, analysts often decrease a LIFO firm’s cash by the tax rate times the LIFO reserve and increase its retained earnings by the LIFO reserve times (1 – tax rate) instead of the full LIFO reserve.

For example, consider a firm with a LIFO reserve of $150 that faces a tax rate of 40%. To convert the balance sheet to FIFO, increase inventory by $150, decrease cash by $60 ($150 × 40%), and increase stockholders’ equity (retained earnings) by $90 [$150 × (1 – 40%)]. This will bring the accounting equation back into balance. The net effect of the adjustments is an increase in assets and shareholders’ equity of $90, which is equal to the LIFO reserve net of tax.

Question 393

A LIFO liquidation

Answer 393

A LIFO liquidation occurs when a LIFO firm’s inventory quantities decline. A company may choose to sell older products during a cycle to increase their margin’s.

Question 394

Inventory cost flow methods:

Answer 394

FIFO: The cost of the first item purchased is the cost of the first item sold. Ending inventory is based on the cost of the most recent purchases, thereby approximating current cost.
LIFO: The cost of the last item purchased is the cost of the first item sold. Ending inventory is based on the cost of the earliest items purchased. LIFO is prohibited under IFRS.
Weighted average cost: COGS and inventory values are between their FIFO and LIFO values.
Specific identification: Each unit sold is matched with the unit’s actual cost.

Question 395

LIFO RESEERVE & LIFO LIQUIDATION

Answer 395

A firm that reports under LIFO must disclose a LIFO reserve, which is the difference between LIFO inventory reported and inventory had the firm used the FIFO method. LIFO reserve will be positive during periods of rising inventory costs and negative during periods of falling inventory costs.

A LIFO liquidation occurs when a firm using LIFO sells more inventory during a period than it produces. During periods of rising prices, this drawdown in inventory reduces cost of goods sold because the lower cost of previously produced inventory is used, resulting in an unsustainable increase in gross profit margin.

Question 396

Capitalizing a cost vs expensing it

Answer 396

When a firm makes an expenditure, it can either capitalize the cost as an asset on the balance sheet or expense the cost in the income statement in the period incurred. As a general rule, an expenditure that is expected to provide a future economic benefit over multiple accounting periods is capitalized; however, if the future economic benefit is unlikely or highly uncertain, the expenditure is expensed in the period incurred.

Question 397

Intangible Asset Definition and how the life span affects the deductions

Answer 397

Intangible assets are long-term assets that lack physical substance, such as patents, brand names, copyrights, and franchises. Some intangible assets have finite lives while others have indefinite lives.

The cost of a finite-lived intangible asset is amortized over its useful life. Indefinite-lived intangible assets are not amortized, but are tested for impairment at least annually. If impaired, the reduction in value is recognized in the income statement as a loss in the period in which the impairment is recognized.

Question 398

How are intangible assets treated when purchased

Answer 398

Like tangible assets, an intangible asset purchased from another party is initially recorded on the balance sheet at cost, typically its fair value at acquisition.

Question 399

Acquisition method for expensing intangible assets

Answer 399

The acquisition method is used to account for business combinations. Under the acquisition method, the purchase price is allocated to the identifiable assets and liabilities of the acquired firm on the basis of fair value. Any remaining amount of the purchase price is recorded as goodwill. Goodwill is said to be an unidentifiable asset that cannot be separated from the business itself.

Question 400

Depreciation: Carrying Book Value vs Historical Value

Answer 400

Carrying (book) value. The net value of an asset or liability on the balance sheet. For property, plant, and equipment, carrying value equals historical cost minus accumulated depreciation.
Historical cost. The original purchase price of the asset including installation and transportation costs. Historical cost is also known as gross investment in the asset.

Question 401

Double Declining Depreciation Method

Answer 401

DDB depreciation in yearx = 2 / depreciable life in years × book value at beginning of year

Question 402

What is and how does the units-of-production dpereciation method work? When this method is applied to natural resources what is this called?

Answer 402

Depreciation under the units-of-production method is based on usage rather than time. Depreciation expense is higher in periods of high usage.

units-of-production depreciation = original cost – salvage value life in output units × output units in the period
Professor’s Note
The units-of-production method applied to natural resources is referred to as depletion.

Question 403

Tax Base

Answer 403

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

Question 404

Accounting Profit

Answer 404

Accounting profit. Pretax financial income based on financial accounting standards. Also known as income before tax and earnings before tax.

Question 405

Income Tax Expense

Answer 405

Income tax expense. Expense recognized in the income statement that includes taxes payable and changes in deferred tax. Taxes payable + change in deffered tax.

Question 406

Deferred tax asset vs deferred tax lability

Answer 406

A deferred tax asset is a business tax credit for future taxes, and a deferred tax liability means the business has a tax debt that will need to be paid in the future.

Question 407

Tax Base of an asset

Answer 407

The tax base of an asset is the amount that will be deductible for tax purposes against any taxable economic benefits that will flow to an entity when it recovers the carrying amount of the asset. If those economic benefits will not be taxable, the tax base of the asset is equal to its carrying amount.

Question 408

What is a Valuation Allowance?

Answer 408

What is a Valuation Allowance? A valuation allowance is a reserve that is used to offset the amount of a deferred tax asset. The amount of the allowance is based on that portion of the tax asset for which it is more likely than not that a tax benefit will not be realized by the reporting entity.

Question 409

Bond Accounting: Initial Liability

Answer 409

Issue price (PV of future cash flows discounted at the market rate of interest at issuance)

Question 410

Bonds: The effective rate of interest

Answer 410

The effective rate of interest is the interest rate that equates the present value of the future cash flows of the bond and the issue price.

Question 411

The balance sheet liability of a bond is

Answer 411

The balance sheet liability of a bond is equal to the present value of its remaining cash flows (coupon payments and face value), discounted at the market rate of interest at issuance. At maturity, the liability will equal the face value of the bond. The balance sheet liability is also known as the book value or carrying value of the bond.

Question 412

The effective interest rate method of amortizing a discount or premium

Answer 412

Taking the premium or discount on a bound and amortizing the proceeds against the interest on the icnome statement. Through this method you would use the effective interest rate to determine the amount of amortization each year.

Question 413

Debt Covenant: Affirmitive and Negative

Answer 413

An affirmitive covenant is when the borrower primises to do something like make the payments on time, a negative covenant is when the borrower promises NOT to do soemthing, like issue more bonds.

Question 414

Where do firms usually report all of the outstanding long-term debt and what do they report as a current liability instead?

Answer 414

Firms will often report all of their outstanding long-term debt on a single line on the balance sheet. The portion that is due within the next year is reported as a current liability.

Question 415

Who is the lessee and who is the lessor in a lease agreement

Answer 415

Lessee makes the payments to the lessor

Question 416

A lease agreement must have the following three components:

Answer 416

1. It must refer to a specific asset.
2. It must give the lessee effectively all the asset’s economic benefits during the term of the lease.
3. It must give the lessee the right to determine how to use the asset during the term of the lease.

Question 417

Finance lease vs operating lease

Answer 417

any lease in which both the benefits of ownership and the risks of ownership are substantially transferred to the lessee is classified as afinance lease. If either the benefits or the risks of ownership are not substantially transferred to the lessee, a lease is classified as anoperating lease.

Question 418

Leverage Ratios are what and can be calculated using what part of the financial statement primarily?

Answer 418

Leverage ratios focus on the balance sheet by measuring the amount of debt in a firm’s capital structure.

Question 419

Ratio: Measures the percentage of total assets financed with debt.

Answer 419

Debt-to-assets ratio = total debt / total assets

Question 420

Measures the percentage of total capital financed with debt. Debt-to-capital is similar to the debt-to-assets ratio, except that total capital excludes non-interest-bearing liabilities.

Answer 420

Debt-to-capital ratio = total debt / (total debt + total equity)

Question 421

Measures the amount of debt financing relative to the firm’s equity base. A firm whose debt-to-equity ratio is 1.0 has equal amounts of debt and equity. Stated differently, its debt-to-capital ratio is 50%.

Answer 421

Debt-to-equity ratio = total debt / total equity

Question 422

Measure of leverage used in the DuPont formula

Answer 422

Financial leverage ratio = average total assets / average total equity

Question 423

Coverage Ratios are what and can be calculated using what part of the financial statement primarily?

Answer 423

Coverage ratios focus on the income statement by measuring the sufficiency of earnings to repay interest and other fixed charges when due.

Question 424

High quality financial reporting characteristics

Answer 424

Decision useful, relevant, fathful representation, material, complete, neutral

Question 425

High quality reported earnings definition

Answer 425

Different than high quality earnings report. Quality earnings must be sustainable and adequate

Question 426

Expensing vs capatilizing and how does it relate to earnings smoothing

Answer 426

Capitalizing is recording a cost under the belief that benefits can be derived over the long term, whereas expensing a cost implies the benefits are short-lived. Expensing now could reduce your total earnings or income and therefore delay or defer the earnings to a later quarter.

Question 427

What is a non-GAAP report and what are companies required to do if they file an additional non-GAAP report

Answer 427

Firms will sometimes report accounting measures that are not defined or required under GAAP. Such non-GAAP measures typically exclude some items in order to make the firm’s performance look better than it would using measures defined and required by GAAP. In the U.S. if the company does this they are required to Display, explain, reconsile and disclose the reasons and differences between the GAAP Approved and non-GAAP.

Question 428

What Is Treasury Stock?

Answer 428

What Is Treasury Stock? Treasury stock, also known as treasury shares or reacquired stock, refers to previously outstanding stock that has been bought back from stockholders by the issuing company. The result is that the total number of outstanding shares on the open market decreases.

Question 429

What’s the definition of shares outstanding?

Answer 429

Shares outstanding refer to a company’s stock currently held by all its shareholders, including share blocks held by institutional investors and restricted shares owned by the company’s officers and insiders.

Question 430

EBITDA

Answer 430

Earnings Before Interest, Taxes, Depreciation, and Amortization

Question 431

A firm’s financial position at a specific point in time is reported in the:

Answer 431

Balance Sheet

Question 432

Information about accounting estimates, assumptions, and methods chosen for reporting ismost likelyfound in: Financial Statement notes; aditors report or proxy statement

Answer 432

financial statement notes.

Question 433

The objective of financial reporting, according to the IASB framework, is to: A) provide information about the firm to current and potential investors. B) decide the acceptable standards for presenting financial performance. C) minimize management discretion in presenting the financial results of a firm.

Answer 433

The IASB Conceptual Framework states that the objective of financial reporting is to provide information about the firm to current and potential investors that is useful for making decisions about investing in or lending to the firm. (Module 17.1, LOS 17.a)

Question 434

Changing an accounting estimate is reported: A change in accounting principal is reported how: Retrospectively (via restatement) or prospectively?

Answer 434

An estimate is reported: Prospectively. A change in principal is reported Retrospectively

Question 435

A physically and operationally distinct division that is currently for sale is treated as a discontinued operation. The income from the division is reported ………. tax …….. income from continuing operations. Gains and losses on sales of operating assets, as well as depreciation expense, are reported ……. tax , above …….. from continuing operations.

Answer 435

A physically and operationally distinct division that is currently for sale is treated as a discontinued operation. The income from the division is reported net of tax below income from continuing operations. Gains and losses on sales of operating assets, as well as depreciation expense, are reported pretax, above income from continuing operations.

Question 436

Johnson Company has 10,000 shares outstanding at the beginning of the year. On April 1, Johnson issues 4,000 new shares. On July 1, Johnson distributes a 10% stock dividend. On September 1, Johnson repurchases 3,000 shares. Calculate Johnson’s weighted average number of shares outstanding for the year, for its reporting of basic earnings per share.

Answer 436

Think of the shares before the stock dividend as “old” shares and shares after the stock dividend as “new” shares that each represent ownership of a smaller portion of the company, in this example, 10/11ths of that of an old (pre-stock dividend) share. The weighted average number of shares for the year will be in new shares.

Shares outstanding on January 1: 10,000 × 1.10 × 12/12 of the year = 11,000
Shares issued April 1: 4,000 × 1.10 × 9/12 of the year = 3,300
Shares repurchased September 1: –3,000 × 4/12 of the year = –1,000
Weighted average shares outstanding = 13,300

Question 437

oth IFRS and U.S. GAAP require firms to separately report their current assets and noncurrent assets and current and noncurrent liabilities. The current/noncurrent format is known as a? Bonus the IFRS allows another format if it is more relevant which is?

Answer 437

Classified Balance Sheet & Liquidity Based Format

Question 438

What is an asset?

Answer 438

An asset is a future economic benefit obtained or controlled as a result of past transactions.

Question 439

How should the proceeds received from the advance sale of tickets to a sporting event be treated by the seller, assuming the tickets are nonrefundable? A) Unearned revenue is recognized to the extent that costs have been incurred. B) Revenue is recognized to the extent that costs have been incurred. C) Revenue is deferred until the sporting event is held.

Answer 439

The ticket revenue should not be recognized until it is earned. Even though the tickets are nonrefundable, the seller is still obligated to hold the event.

Question 440

Sum of cash payments and cash receipts is what and what method of cash flow statement?

Answer 440

CFO and direct

Question 441

The payment of interest on debt is an operating or financing or investing cash flow under U.S. GAAP.

Answer 441

The payment of interest on debt is anoperatingcash flow under U.S. GAAP.

Question 442

A vertical common-size income statement expresses each category of the income statement as a percentage of: Net income, Assets, revenue

Answer 442

Each category of the income statement is expressed as a percentage of revenue

Question 443

Which of the following wouldmost likelyresult in higher gross profit margin, assuming no fixed costs? 10% more units sold, 7% decrease in admin costs, 5% decrease in cost per unit

Answer 443

A 5% decrease in per unit production cost will increase gross profit by reducing cost of goods sold. Assuming no fixed costs, gross profit margin will remain the same if sale quantities increase. Administrative expenses are not included in gross profit margin.

Question 444

What major item is least likely to be included when calculating comprehensive income?

Answer 444

Comprehensive income includes all changes in equity except transactions with shareholders. Therefore, dividends paid to common shareholders do not affect current period comprehensive income.

Question 445

Miller Corporation has 160,000 shares of common stock authorized. There are 92,000 shares issued and 84,000 shares outstanding. How many shares of treasury stock does Miller own? 8,000, 68,000, 76,000

Answer 445

The difference between the issued shares and the outstanding shares is the treasury shares.

Question 446

A vertical common-size balance sheet expresses each category of the balance sheet as a percentage of: Assets, equity, revenue

Answer 446

Each category of the balance sheet is expressed as a percentage of total assets.

Question 447

The current ratio, quick ratio, and cash ratio measure ……… Debt-to-equity, the total debt ratio, and the financial leverage ratio measure ……..

Answer 447

The current ratio, quick ratio, and cash ratio measure liquidity. Debt-to-equity, the total debt ratio, and the financial leverage ratio measure solvency.

Question 448

Current Ratio is

Answer 448

Current assets / current liabilities. The current ratio is a liquidity ratio that measures whether a firm has enough resources to meet its short-term obligations.

Question 449

Quick Ratio is

Answer 449

Current assets - inventory / current liabilities. In finance, the quick ratio, also known as the acid-test ratio is a type of liquidity ratio, which measures the ability of a company to use its near cash or quick assets to extinguish or retire its current liabilities immediately.

Question 450

What is the cash conversion cycle?

Answer 450

It measures how fast a company can convert cash on hand into even more cash on hand.

Question 451

RGB, Inc.’s purchases during the year were $100,000. The balance sheet shows an average accounts payable balance of $12,000. RGB’s payables payment period is closest to: 37, 44, 52

Answer 451

Accounts payable are the amounts a business owes its suppliers for purchases made on credit. Accounts payable payment period measures the average number of days it takes a business to pay its accounts payable. Answer: 100,000 / 365 = 273.97/day, 12,000/273.97 = 43.8 days

Question 452

RGB, Inc., has a gross profit of $45,000 on sales of $150,000. The balance sheet shows average total assets of $75,000 with an average inventory balance of $15,000. RGB’s total asset turnover and inventory turnover are

Answer 452

total asset turnover = (sales / total assets) = 150 / 75 = 2 times
inventory turnover = (COGS / avg. inventory) = (150 – 45) / 15 = 7 times

Question 453

A company’s current ratio is 1.9. If some of the accounts payable are paid off from the cash account, the:

A) numerator would decrease by a greater percentage than the denominator, resulting in a lower current ratio.
B) denominator would decrease by a greater percentage than the numerator, resulting in a higher current ratio.
C) numerator and denominator would decrease proportionally, leaving the current ratio unchanged.

Answer 453

B. Current ratio = current assets / current liabilities. If cash (a current asset) and AP (a current liability) decrease by the same amount and the current ratio is greater than 1, then the numerator decreases less in percentage terms than the denominator, and the current ratio increases.

Question 454

All other things held constant, which of the following transactions will increase a firm’s current ratio if the ratio is greater than one?

A) Accounts receivable are collected and the funds received are deposited in the firm’s cash account.
B) Fixed assets are purchased from the cash account.
C) Accounts payable are paid with funds from the cash account.

Answer 454

C. Current ratio = current assets / current liabilities. If CR is > 1, then if CA and CL both fall, the overall ratio will increase.

Question 455

RGB, Inc.’s receivable turnover is ten times, the inventory turnover is five times, and the payables turnover is nine times. RGB’s cash conversion cycle is closest to:

Answer 455

(365 / 10 + 365 / 5 – 365 / 9) = 69 days

Question 456

An analyst who is interested in a company’s long-term solvency would most likely examine the: Return on total capital, defensive interval ratio, fixed charge coverage ratio

Answer 456

Fixed charge coverage is a solvency ratio. Return on total capital is a measure of profitability and the defensive interval ratio is a liquidity measure.

Question 457

RGB, Inc.’s income statement shows sales of $1,000, cost of goods sold of $400, pre-interest operating expense of $300, and interest expense of $100. RGB’s interest coverage ratio is closest to:

Answer 457

Interest coverage ratio = EBIT / I = (1,000 – 400 – 300) / 100 = 3 times

Question 458

Under which inventory cost flow assumption does inventory on the balance sheet best approximate its current cost? LIFO, FIFO, Weighted Average

Answer 458

FIFO - Under FIFO, ending inventory is made up of the most recent purchases, thereby providing a closer approximation of current cost.

Question 459

an assumption that a firm’s competitors will not follow a price increase but will cut their prices in response to a price decrease by a competitor. Under this model, each firm faces a demand curve with a kink at the current market price—more elastic above the current price and less elastic below the current price.

Answer 459

kinked demand curve model

Question 460

Collusion is less likely in a market when:

A. the product is homogeneous.
B. companies have similar market shares.
C. the cost structures of companies are similar.

Answer 460

B is correct. When companies have similar market shares, competitive forces tend to outweigh the benefits of collusion.

Question 461

a decision-making theorem within game theory that states a player can achieve the desired outcome by not deviating from their initial strategy. Each player’s strategy is optimal when considering the decisions of other players.

Both companies are better off by not competing on price alone but leaning into their strengths.

Answer 461

Nash Equilibrium

Question 462

Aquarius, Inc. is the dominant company and the price leader in its market. One of the other companies in the market attempts to gain market share by undercutting the price set by Aquarius. The market share of Aquarius will most likely:

increase.
decrease.
stay the same.

Answer 462

A is correct. As prices decrease, smaller companies will leave the market rather than sell below cost. The market share of Aquarius, the price leader, will increase.

Question 463

Over time, the market share of the dominant company in an oligopolistic market will most likely:

increase.
decrease.
remain the same.

Answer 463

B is correct. The dominant company’s market share tends to decrease as profits attract entry by other companies.

Question 464

Market competitors are least likely to use advertising as a tool of differentiation in an industry structure identified as:

monopoly.
perfect competition.
monopolistic competition.

Answer 464

B is correct. The product produced in a perfectly competitive market cannot be differentiated by advertising or any other means.

Question 465

the addition to the total cost for producing one additional unit.

Answer 465

Marginal Cost

Question 466

occurs when a business charges the maximum possible price for each unit consumed

Answer 466

First-degree price discrimination, or perfect price discrimination

Question 467

total amount spent on all final goods and services produced within the economy during a specific period.

Answer 467

GDP

Question 468

sum-of-value-added method is a way to calculate?

Answer 468

The sum-of-value-added method is a way to calculate national income. It involves adding the value added by each producing unit.

For example, a farmer adds value to wheat by milling it into flour. If the miller sells the flour to a baker for $0.90, the miller adds a value of $0.50 to the wheat. The baker then uses the flour to bake bread.

Question 469

Which of the following conditions is least likely to increase a country’s GDP?

A. An increase in net exports
B. Increased investment in capital goods
C. Increased government transfer payments

Answer 469

Government transfer payments, such as unemployment compensation or welfare benefits, are excluded from GDP.

Question 470

The most accurate description of nominal GDP is:

A. a measure of total expenditures at current prices.
B. the value of goods and services at constant prices.
C. a measure to compare one nation’s economy to another.

Answer 470

A is correct. Nominal GDP is defined as the value of goods and services measured at current prices. Expenditure is used synonymously with the value of goods and services because aggregate expenditures must equal aggregate output of an economy.

Question 471

Real versus Nominal

Answer 471

The nominal value of any economic statistic means the statistic is measured in terms of actual prices that exist at the time. The real value refers to the same statistic after it has been adjusted for inflation. Generally, it is the real value that is more important.

Question 472

From the beginning to the ending years of a decade, the annual value of final goods and services for country X increased from €100 billion to €300 billion. During that period, the GDP deflator increased from 111 to 200. Over the decade, real GDP for country X increased by approximately:

50%.
67%.
200%.

Answer 472

Increase in Real GDP = (€300 billion / 200) - (€100 billion / 111)

= 60 billion

60 billion / year 1 real gdp (90 billion) = 67%

Question 473

Value of current year output at current year prices / Value of current year output at base year prices × 100

Answer 473

GDP deflator

Question 474

sometimes referred to as depreciation, is the amount of money a country has to spend each year to maintain its present level of economic production.

Answer 474

Capital Consumption Allowance

Question 475

Consumption + Gross private domestic investment + Government spending + (Exports – Imports)

Answer 475

GDP

Question 476

GDP – CCA (Capital Consumption Allowance)

Answer 476

National Income

Question 477

The characteristic business cycle patterns of trough, expansion, peak, and contraction are:

periodic.
recurrent.
of similar duration.

Answer 477

Recurrent

Question 478

An economic peak is most closely associated with:

accelerating inflation.
stable unemployment.
declining capital spending.

Answer 478

Accelorating inflation

Question 479

Based on typical labor utilization patterns across the business cycle, productivity (output per hours worked) is most likely to be highest:

A. at the peak of a boom.
B. into a maturing expansion
C. at the bottom of a recession.

Answer 479

C is correct. At the end of a recession, firms will run “lean production” to generate maximum output with the fewest number of workers.

Question 480

The inventory–sales ratio is most likely to be rising:

as a contraction unfolds.
partially into a recovery.
near the top of an economic cycle.

Answer 480

Near the top of a cycle, sales begin to slow before production is cut, leading to an increase in inventories relative to sales.

Question 481

Monetarists favor a limited role for the government because they argue:

A. government policy responses may lag.
B. firms take time to adjust to systemic shocks to the economy.
C. resource use is efficient with marginal revenue and cost equal.

Answer 481

A is correct. Monetarists caution that policy effects can occur long after the need for which they were implemented is no longer an issue.

Question 482

International financial reporting standards are currently developed by which entity?

A. The IFRS Foundation.
B. The International Accounting Standards Board.
C. The International Organization of Securities Commissions.

Bonus: How is the IASB and IFRS different/managed?

Answer 482

The International Accounting Standards Board (IASB) is the independent body that develops International Financial Reporting Standards (IFRS). The IASB is a private, not-for-profit foundation that operates under the supervision of the International Accounting Standards Foundation (IFRS Foundation). The IASB was founded in 2001 as the successor to the International Accounting Standards Committee (IASC).

Question 483

responsible for the Accounting Standards Codification™, the single source of nongovernmental authoritative US generally accepted accounting principles.

Answer 483

FASB

Question 484

Relevance and faithful representation are the fundamental, most critical characteristics of useful financial information. In addition the Conceptual Framework identifies four enhancing qualitative characteristics:

Answer 484

comparability, verifiability, timeliness, and understandability.

Question 485

The Conceptual Framework identifies two important underlying assumptions of financial statements: accrual basis and going concern. What is the best description of both?

Answer 485

Going concern is the assumption that the entity will continue to operate for the foreseeable future.

The use of “accrual accounting” assumes that financial statements should reflect transactions in the period when they actually occur, not necessarily when cash movements occur.

Question 486

The amount of cash or cash equivalents paid to purchase an asset, including any costs of acquisition and/or preparation. If the asset was not bought for cash, __________ is the fair value of whatever was given in order to buy the asset. When referring to liabilities, the __________ of measurement means the amount of proceeds received in exchange for the obligation.

Answer 486

Historical Cost

Question 487

Historical cost adjusted for amortization, depreciation, or depletion and/or impairment.

Answer 487

Amortised cost:

Question 488

the amount of cash or cash equivalents that would have to be paid to buy the same or an equivalent asset today.

Answer 488

Current Cost

Question 489

the amount of cash or cash equivalents that could currently be obtained by selling the asset in an orderly disposal.

Answer 489

Realizable Value

Question 490

Ethics
These are applied to specific communities or societal groups and identify specific behaviors required of community members. These serve as benchmarks for the minimally acceptable behavior of community members.

Answer 490

Standards of Conduct

Question 491

serve as a general guide for how community members should act; they communicate the organization’s values and overall expectations regarding member behavior, but they do not identify specific behaviors required of community members.

Answer 491

Code of Ethics

Question 492

rules of conduct defined by governments and related entities about obligatory and forbidden conduct broadly applicable for individuals and entities under their jurisdiction.

Answer 492

Laws and Regulations

Question 493

Paragon Company’s operating profits are $100,000, interest expense is $25,000, and earnings before taxes are $75,000. What is Paragon’s interest coverage ratio?

Answer 493

4 times

operating income (EBIT)/interest expense