CFA Level 1 - All Topics and Questions Flashcards

Question

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?

Answer 1

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

Answer 2

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.

Answer 3

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.

Answer 4

The benefit of holding the physical product rather than contract or detractive. = spot price - futures price

Answer 5

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

Answer 6

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

Answer 7

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

Answer 8

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.

Answer 9

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.

Answer 10

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.

Answer 11

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

Answer 12

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

Answer 13

a fine. the CFA institute does not issue fines.

Answer 14

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

Answer 15

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

Answer 16

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.

Answer 17

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

Answer 18

countable such as days/months

Answer 19

data that can take any value such as height and weight

Answer 20

labels that cannot be placed in order logically

Answer 21

data that can be ordered logically

Answer 22

data taken over time

Answer 23

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

Answer 24

real risk free rate + inflation

Answer 25

= (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

Answer 26

Accounting profit

Answer 27

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.

Answer 28

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.

Answer 29

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

Answer 30

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

Answer 31

LIFO Liquidation

Answer 32

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.

Answer 33

What is a GDP deflator

Answer 34

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

Answer 35

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

Answer 36

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

Answer 37

central bank

Answer 38

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.

Answer 39

managers buyout

Answer 40

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.

Answer 41

nominal data

Answer 42

proxy statement

Answer 43

monetary fiscal policy is controlled by congress

Answer 44

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

Answer 45

Common size income statement

Answer 46

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.

Answer 47

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

Answer 48

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.

Answer 49

Mosaic theory

Answer 50

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

Answer 51

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.

Answer 52

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.

Answer 53

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.

Answer 54

Monetarist

Answer 55

a core-satellite approach.

Answer 56

Strategic Asset Allocation

Answer 57

Risk budgeting

Answer 58

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.

Answer 59

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.

Answer 60

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

Answer 61

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.

Answer 62

Categorical data (or qualitative data) The two types of categorical data are nominal data and ordinal data.

Answer 63

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.

Answer 64

Relative frueqency

Answer 65

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:

Answer 66

Exhaustive

Answer 67

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

Answer 68

Probability forumla

Answer 69

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

Answer 70

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.

Answer 71

Conditional Probability

Answer 72

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

Answer 73

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.

Answer 74

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.

Answer 75

Positive PED (in absolute terms, greater than 1)

Answer 76

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

Answer 77

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

Answer 78

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

Answer 79

Price elasticity of demand

Answer 80

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

Answer 81

Cannot be placed in order logically

Answer 82

Can be ranked logically

Answer 83

A time series is a set of observations taken periodically.

Answer 84

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

Answer 85

Panel Data

Answer 86

One dimensional or Two dimensional

Answer 87

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).

Answer 88

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

Answer 89

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

Answer 90

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.

Answer 91

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

Answer 92

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

Answer 93

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).

Answer 94

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.

Answer 95

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

Answer 96

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

Answer 97

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

Answer 98

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 [+]

Answer 99

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)

Answer 100

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%

Answer 101

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)

Answer 102

Exhaustive

Answer 103

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).

Answer 104

cannot both occur.

Answer 105

Kurtosis is a measure of the degree to which a distribution is more or less peaked than a normal distribution.

Answer 106

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

Answer 107

Geometric Mean

Answer 108

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).

Answer 109

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

Answer 110

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

Answer 111

Income Elasticity

Answer 112

Normal Goods Inferior Goods

Answer 113

Elastic demand

Answer 114

Inelastic demand

Answer 115

Perfectly inelastic demand

Answer 116

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.

Answer 117

% change in quantity / % change in Price

Answer 118

current price / current quantity x slope coeeficient of demand

Answer 119

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.

Answer 120

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.

Answer 121

A Giffen good is 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

Answer 122

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 a production function.

Answer 123

Additonal Output

Answer 124

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.

Answer 125

(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.

Answer 126

Cost of producing an additonal unit

Answer 127

Short Run Average Total Cost

Answer 128

Perfect competition refers 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.

Answer 129

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.

Answer 130

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

Answer 131

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

Answer 132

Price discrimination is 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.

Answer 133

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

Answer 134

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

Answer 135

Price = MR = MC

Answer 136

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.

Answer 137

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.

Answer 138

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.

Answer 139

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.

Answer 140

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

Answer 141

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

Answer 142

Income elasticity = I0 / Q0 × ∆Q / ∆

Answer 143

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)

Answer 144

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)

Answer 145

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)

Answer 146

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)

Answer 147

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.

Answer 148

A country's debt ratio is the ratio of aggregate debt to GDP

Answer 149

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).

Answer 150

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.

Answer 151

is income after taxes

Answer 152

fiscal multiplier = 1 / 1−(MPC)(1−t)

Answer 153

Fiscal policy is implemented through changes in taxes and spending. This is called discretionary 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.

Answer 154

* 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.

Answer 155

Tariffs: Taxes on imported good collected by the government.

Answer 156

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

Answer 157

Export subsidies: Government payments to firms that export goods.

Answer 158

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

Answer 159

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.

Answer 160

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

Answer 161

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.

Answer 162

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.

Answer 163

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.

Answer 164

Actual exchange rate at the time (Spot rate)

Answer 165

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

Answer 166

Income Approach & Expense Approach

Answer 167

1 = Nominal GDP ; 2 = Real GDP

Answer 168

Nominal GDP formula

Answer 169

GDP Deflator

Answer 170

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

Answer 171

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

Answer 172

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.

Answer 173

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

Answer 174

When an expansion is approaching its peak, sales growth begins to slow, and unsold inventories accumulate. This can be seen in an increase in the inventory-sales ratio above 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.

Answer 175

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.

Answer 176

Monetary policy

Answer 177

Fiscal Policy

Answer 178

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.

Answer 179

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.

Answer 180

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

Answer 181

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

Answer 182

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.

Answer 183

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

Answer 184

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.

Answer 185

Control inflation

Answer 186

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

Answer 187

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

Answer 188

The monetary transmission mechanism is the 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.

Answer 189

the amount of money printed by the Federal Reserve (Fed) and central banks can impact prices and wages but not the output or structure of the economy.

Answer 190

Policy Rate, Reserve Requirements, Open Market Operations

Answer 191

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 the discount rate. For the European Central Bank (ECB), it is called the refinancing rate.

Answer 192

One way to lend money to banks is through a repurchase 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.

Answer 193

In the United States, the federal funds rate is 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.

Answer 194

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.

Answer 195

Treasury Securities

Answer 196

Indipendence, Credibility & Transparency

Answer 197

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.

Answer 198

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

Answer 199

The velocity of money is the 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.

Answer 200

real trend rate or, simply, the trend rate.

Answer 201

Demand-pull inflation is a 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.

Answer 202

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.

Answer 203

Supply is indipendent of interest rates

Answer 204

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.

Answer 205

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.

Answer 206

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

Answer 207

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

Answer 208

A country that does not trade with other countries.

Answer 209

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

Answer 210

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.

Answer 211

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

Answer 212

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.

Answer 213

A country is said to have an absolute advantage in 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 a comparative advantage in the production of a good if it has a lower opportunity cost in 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.

Answer 214

The Ricardian model of trade has 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.

Answer 215

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.

Answer 216

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.

Answer 217

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.

Answer 218

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.

Answer 219

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

Answer 220

spot rate + forward quote x point

Answer 221

1 + Rprice / 1 + Rbase x spot

Answer 222

Depreciation of domestic currency will decrease trade deficit

Answer 223

Transfer Payments

Answer 224

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)

Answer 225

Nominal GDP/Real GDP x 100

Answer 226

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)

Answer 227

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)

Answer 228

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

Answer 229

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)

Answer 230

food and energy prices

Answer 231

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

Answer 232

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.

Answer 233

Open market purchases by monetary authorities decrease the 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)

Answer 234

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.

Answer 235

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)

Answer 236

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)

Answer 237

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)

Answer 238

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)

Answer 239

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

Answer 240

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%

Answer 241

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%

Answer 242

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

Answer 243

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%

Answer 244

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.

Answer 245

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%.

Answer 246

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.

Answer 247

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

Answer 248

quantity demanded divided by the percentage change in income.

Answer 249

a larger increase in quantity demanded.

Answer 250

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

Answer 251

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.

Answer 252

Perfectly inelastic

Answer 253

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%.

Answer 254

Cross Price Elasticity of demand.

Answer 255

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.

Answer 256

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.

Answer 257

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)

Answer 258

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.

Answer 259

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.

Answer 260

Monopolistic Competition

Answer 261

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.

Answer 262

An unqualified 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 a qualified opinion and explain these exceptions in the audit report. The auditor can issue an adverse opinion if 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), a disclaimer of opinion is issued. Any opinion other than unqualified is sometimes referred to as a modified opinion.

Answer 263

Electronic Data Gathering, Analysis, and Retrieval System

Answer 264

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

Answer 265

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.

Answer 266

The two primary standard-setting bodies are the Financial Accounting Standards Board (FASB) and the International 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).

Answer 267

Most national authorities belong to the International 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.

Answer 268

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.

Answer 269

Internation Accounting Standards Board

Answer 270

comparability, verifiability, timeliness, and understandability.

Answer 271

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.

Answer 272

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.

Answer 273

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)

Answer 274

Generally Accepted Accounting Principles

Answer 275

International Financial Reporting Standards

Answer 276

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

Answer 277

Gross profit is 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 as operating profit or operating income.

Answer 278

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.

Answer 279

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.

Answer 280

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.)

Answer 281

International Accounting Standards Board

Answer 282

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

Answer 283

Most firms use the straight-line depreciation method 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, an accelerated depreciation method is more appropriate for matching the expenses to revenues.

Answer 284

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)

Answer 285

Amortization is 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.

Answer 286

retrospective application or prospective 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.

Answer 287

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.

Answer 288

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

Answer 289

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.

Answer 290

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.

Answer 291

Gross profit margin is 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)

Answer 292

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.

Answer 293

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

Answer 294

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.

Answer 295

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

Answer 296

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

Answer 297

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.

Answer 298

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

Answer 299

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.

Answer 300

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)'

Answer 301

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.

Answer 302

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.

Answer 303

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

Answer 304

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.

Answer 305

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.

Answer 306

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.

Answer 307

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.

Answer 308

Impairment testing is the 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.

Answer 309

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

Answer 310

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

Answer 311

Owners' equity is 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.

Answer 312

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

Answer 313

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).

Answer 314

Preferred stock has 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.

Answer 315

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.

Answer 316

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.

Answer 317

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

Answer 318

A vertical common-size balance sheet expresses 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).

Answer 319

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

Answer 320

current ratio = current assets / current liabilities

Answer 321

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

Answer 322

cash ratio = cash + marketable securities / current liabilities

Answer 323

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

Answer 324

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.

Answer 325

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.

Answer 326

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.

Answer 327

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.

Answer 328

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

Answer 329

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).

Answer 330

net cash flows from creditors = new borrowings − principal amounts repaid net cash flows from shareholders = new equity issued − share repurchases − cash dividends paid

Answer 331

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 positive cash flow to maintain and grow its operations, otherwise, it may require external financing for capital expansion.

Answer 332

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.

Answer 333

Free cash flow is 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.

Answer 334

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.

Answer 335

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

Answer 336

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

Answer 337

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.

Answer 338

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.

Answer 339

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

Answer 340

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

Answer 341

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.

Answer 342

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.

Answer 343

Retained earnings

Answer 344

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

Answer 345

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.

Answer 346

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

Answer 347

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.

Answer 348

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.

Answer 349

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.

Answer 350

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.

Answer 351

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.

Answer 352

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.

Answer 353

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.

Answer 354

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.

Answer 355

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.

Answer 356

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.

Answer 357

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.

Answer 358

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

Answer 359

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.

Answer 360

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

Answer 361

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

Answer 362

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

Answer 363

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.

Answer 364

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.

Answer 365

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.

Answer 366

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

Answer 367

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.

Answer 368

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.

Answer 369

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.

Answer 370

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.

Answer 371

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.

Answer 372

Lessee makes the payments to the lessor

Answer 373

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.

Answer 374

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

Answer 375

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

Answer 376

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

Answer 377

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

Answer 378

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

Answer 379

Financial leverage ratio = average total assets / average total equity

Answer 380

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

Answer 381

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

Answer 382

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

Answer 383

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.

Answer 384

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.

Answer 385

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.

Answer 386

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.

Answer 387

Earnings Before Interest, Taxes, Depreciation, and Amortization

Answer 388

Balance Sheet

Answer 389

financial statement notes.

Answer 390

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)

Answer 391

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

Answer 392

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.

Answer 393

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

Answer 394

Classified Balance Sheet & Liquidity Based Format

Answer 395

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

Answer 396

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.

Answer 397

CFO and direct

Answer 398

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

Answer 399

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

Answer 400

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.

Answer 401

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

Answer 402

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

Answer 403

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

Answer 404

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

Answer 405

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.

Answer 406

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.

Answer 407

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

Answer 408

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

Answer 409

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

Answer 410

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.

Answer 411

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

Answer 412

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

Answer 413

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.

Answer 414

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

Answer 415

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

Answer 416

kinked demand curve model

Answer 417

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

Answer 418

Nash Equilibrium

Answer 419

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.

Answer 420

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

Answer 421

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

Answer 422

Marginal Cost

Answer 423

First-degree price discrimination, or perfect price discrimination

Answer 424

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.

Answer 425

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

Answer 426

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.

Answer 427

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.

Answer 428

Increase in Real GDP = (€300 billion / 200) - (€100 billion / 111) = 60 billion 60 billion / year 1 real gdp (90 billion) = 67%

Answer 429

GDP deflator

Answer 430

Capital Consumption Allowance

Answer 431

National Income

Answer 432

Accelorating inflation

Answer 433

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

Answer 434

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

Answer 435

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

Answer 436

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).

Answer 437

comparability, verifiability, timeliness, and understandability.

Answer 438

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.

Answer 439

Historical Cost

Answer 440

Amortised cost:

Answer 441

Current Cost

Answer 442

Realizable Value

Answer 443

Standards of Conduct

Answer 444

Code of Ethics

Answer 445

Laws and Regulations

Answer 446

4 times operating income (EBIT)/interest expense

CFA Level 1 - All Topics and Questions Flashcards

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