Financial Statement Analysis Flashcards
(306 cards)
1
Q
6 steps of financial analysis framework
A
- State objective and context
- Gather data
- Process the data
- Analyze and interpret the data
- Report conclusions and recommendations
- Update the analysis
2
Q
What is objective of financial reporting?
A
It is ways companies show data to interested parties
3
Q
What is financial statement analysis?
A
It is use of information in financial statements along with other relevant information to make economic decisions
4
Q
What are standard setting bodies?
A
Professional organizations of accountant and auditors that establish financial reporting standards
5
Q
What are regulatory authorities?
A
Government agencies that have legal authorities to enforce compliance with financial reporting standards
6
Q
Who regulates 95% of the work financial markets?
A
IOSCO
7
Q
What are proxy statements?
A
They are issued to shareholders when there are matters that require a shareholder vote
8
Q
What is business segment?
A
Portion of a larger company that account for more than 10% of the company’s revenues, assets or income.
9
Q
What are geographical segment?
A
Same as business segment, but has different business environment than other segments.
10
Q
What is audit?
A
Independent review of the entity’s financial statements
11
Q
What audit provides to the company?
A
Opinion on fairness and reliability of company’s financial statements
12
Q
What does auditor’s opinion include? (3)
A
- FS were prepared and reviewed by the management
- Standards were performed and there are no material errors
- Auditor is satisfied with the preparation
13
Q
What is unqualified auditor opinion?
A
Statements are accurate and free from errors
14
Q
What is qualified opinion?
A
It explains exceptions of accounting principles used
15
Q
What is adverse opinion?
A
It states that it is not fairly presented and have errors
16
Q
What is disclaimer of opinion?
A
Auditors are unable to express opinion
17
Q
What are internal controls?
A
Processes by which the company ensures that it presents accurate financial statements
18
Q
What are key/critical audit matters?
A
It highlights accounting choices of greater significance.
19
Q
Main differences between GAAP and IFRS (4)
A
- GAAP is based on rules and IFRS is based on principles.
- LIFO is prohibited in IFRS
- Product development costs are capitalized in IFRS
- Reversal of inventory write-downs is prohibited in GAAP
20
Q
What are information sources of analysts? (4)
A
Earnings calls, public third party sources, propietary third-party sources, propietary primary research
21
Q
What is unearned revenues?
A
Payment for goods is received before the transfor of the goods or services
22
Q
When revenues is recornized?
A
When the goods are tranfered to the client
23
Q
What is performance obligation?
A
It is promise to deliver distinct good or service
24
Q
What are charasteristics of a distinct good/service? (2)
A
- Customer can benefit from good/service on its own or with resources readily available
- Promise to transfer good/service can be identified separately from any other promise
25
What is transaction price?
It is amount a firm expects to receive from a customer in exchange of good/services.
26
How long-term contracts revenue is recognized?
Based on the firm progress.
27
When performance obligation is satisfied? (3)
1. Customer received benefits and the supplier meets the obligations
2. The supplier enhances an existing asset or creates new asset that customer controls over the period.
3. Asset has no alternative use for the supplier and supplier has the right to enforce payment for work completed.
28
What is matching principle?
Expenses are recognized in the same period as revenue
29
What is capitalization?
Costs are capitalized and assets are expensed as D&A
30
What are period costs?
Costs not related to the revenue are expensed in the period incurred
31
When expenditures with expected future benefit are expensed?
If the benefits are unlikely or highly uncertain
32
What are effects of capitalization on metrics?
Less volatility in earnings, higher net income, ROE, CFO in Y1 at the expense of other years.
33
How to capitalized interest based on different classification of assets?
If held for use - D&A, if held for sale - COGS.
34
Where interest of construction appears on the CF?
Investing activities
35
Should analyst include both capitalized and expensed interest in coverage ratios?
Yes
36
What are costs to create accounted?
Expensed as incurred
37
How are research costs accounted?
Expensed as incurred
38
How are development costs accounted?
Might be capitalized
39
What are research costs?
Costs aimed at discovery of new scientific or technical knowledge and understanding
40
What are development costs?
Costs related to translate research findings into plan
41
How are costs to develop software are accounted?
Expensed as incurred
42
When costs for software development switch to capitalization?
When product's tecnological feasability has been established
43
When bad debt or warranty expenses are accounted?
In the period of the asset's sale
44
Where unusual and infrequent items are included in the IS?
Income from operations, reported before tax
45
What is measurement date?
Date when comapny develops a formal plan for disposing of an operation
46
What is phaseout period?
Time period between measurement date and actual disposal
47
Where are loss from operations are included in the IS?
Net of tax.
48
What is restropective application?
Older financial statements have to be restated
49
What is prospective application?
Only current and new financial statements have to be updated
50
What is change in the accounting estimate?
Change in mangements judgement due to new information available
51
Is accounting estimate change restrospective or prospective?
Prospective
52
What is prior-period adjustment?
It is restrospective application, correction of accounting method or error
53
What is EPS?
Profitability performance measure used for common stock only
54
What is simple capital structure?
No potential dilute securities, which reports only basic EPS
55
What is complex capital structure?
Potentially dilute securities, reports basic and diluted EPS
56
Formula of basic EPS
(net income-pref. dividends)/weighted average no of common shares
57
What is stock dividend?
Distribution of additional shares to each shareholder in an amount proportional to their current number of shares
58
What is stock split?
Division of each old share into a specific number of new shares
59
How to calculate weighted average number of shares? (4)
Include shares from the date of issuance, days oustanding/365, not include reaquired shares and split of dividend are applied to all shares before the split or dividend to the beggining
60
What are dilutive securities?
Stock options, warrants, convertible stock/debt, that would dilute the EPS
61
What are antidilutive securities?
It would increase the EPS
62
What is formula for diluted EPS?
(net income-pref.dividends+convertible pref. dividends+convertible debt interest(1-t)/weighted average of shares outstanding+shares from debt and stock conversions
63
How to check if stock is dilutive?
Convertible preferred dividends/convertible shares < EPS then dilutive
64
How to check if convertible debt is dilutive?
convertible debt interest(1-t)/convertible debt shares < EPS, then dilutive
65
When are stock options and warrants are dilutive?
Exercise price
66
Formula of net increase in the common share if stock option or warrant is excersised
(average market price-exercise price)/average market price * number of common shares converted
67
What is vertical size income statement?
Each line as % of revenue
68
What is effective tax rate?
Tax expense expressed as % of the pre-tax income
69
Are securities considered intangible assets?
No.
70
What are identifiable intangible assets?
Assets that can be aquired separately or are the result of rights or priviledges conveyed to the owner
71
What are unidentifiable intangible assets?
Assets that cannot be aquired separately and may have unlimited life
72
Which method is allowed for accounting idetifiable intangibles under IFRS?
Cost or revaluation
73
Which method is allowed for accounting idetifiable intangibles under GAAP?
Only cost model is allowed
74
Which assets are tested for impairement?
Finite and indefinite assets
75
Which assets are amortized?
Finite live intangible assets
76
What is goodwill?
It is amount by which the purchase price is greater than fair value of the asset
77
How is negative goodwill accounted?
As gain on the income statement
78
When goodwill is created?
During purchase aquisition
79
How internally created goodwill is accounted?
Expensed as incurred
80
What should analyst do with goodwill?
Exclude it
81
What are financial instruments?
Contracts that give rise to both financial asset of one entity and financial liability of other
82
How unquoted equity and loans to and note receivables from entities are accounted?
They are measured at cost
83
What are held-to-maturity assets accounted?
They are measures at amortized cost
84
Formula for measure at amortized cost
original price-principle payment+-amortized discount/premium-impairement
85
How are mark-to-market securities are accounted?
At their fair value
86
What are held for trading securities?
Debt securities aquired with the intent to sell them in the near future
87
How are held for trading securities accounted?
On the balance at fair value with unrealized gains and losses recognized on the income statement
88
What are available for sale securities?
Debt securities that are not expected to be held to maturity or traded in the real term
89
What are available for sale securities accounted?
On the balance sheet at fair value with unrealized gain and loss in the shareholders equity
90
How are unlisted equity securities treated under GAAP?
Historical cost
91
How are loans and note receivables treated under GAAP?
Historical cost
92
How are held-to-maturity assets treated under GAAP?
Amortized cost
93
How are trading securities treated under GAAP?
Fair value
94
How are available for sale securities treated under GAAP?
Fair value
95
How are derivatives treated under GAAP?
Fair value
96
How are held for maturity securities treated under IFRS?
Amrotized cost
97
How are loan/notes receivables treated under IFRS?
Amortized cost
98
How are unlisted equity if fair value cannot be determined treated under IFRS?
Amortized cost
99
How are equity securities if this method was chosen when purchased treated under IFRS?
Measured at FVTOCI
100
How are securities with intent to collect interest but sell before maturity treated under IFRS?
Measured at FVTOCI
101
How are sell in the near term securities treated under IFRS?
Measured at FVTPL
102
How are equity securities treated under IFRS?
Measured at FVTPL
103
How are derivatived treated under IFRS?
Measured at FVTPL
104
How are any other securities treated under IFRS?
Measured at FVTPL
105
How are financial liabilities that are not issued at the face value treated?
Reported on the BS at amortized cost and any discount/premium are amortized through interest expense
106
What is common size balance sheet?
Each line as % of total assets
107
What are liquidity ratios?
Firm's ability to satisfy short-term obligation
108
Formula of current ratio
Current assets/current liabilities
109
Formula of quick ratio
Cash+receivables+marketable securities/current liabilities
110
Formula of cash ratio
Cash+marketable securities/current liabilities
111
What are solvency ratios?
Ability to satisfy long-term obligations
112
Formula of debt-to-equity ratio
Total debt/total equity
113
Formula of debt ratio
Total debt/assets
114
Formula of finance leverage
total assets/total equity
115
When items are accounted in the CF statement?
At the time cash is received
116
What is formula for cash received?
sales-ending account receivable+beginning account receivable
117
What is direct CF statement method?
Take revenues and then adjust accordingly
118
What is indirect CF statement method?
Take net income and then adjust accordingly
119
What are CFI?
Cash inflows/outflows that result from aquiring or disposal of long-term assets and certain investments
120
What are CFF?
Cash inflows/outflows that result from transactions affecting a firm's capital structure
121
Under GAAP debt/equity and loans made are which type of CF?
Investing
122
Under GAAP interest and dividends received are which type of CF?
Operating
123
Under GAAP principle amounts borrowed are which type of CF?
Financing
124
Under GAAP interest paid are which type of CF?
Operating
125
Under GAAP dividends paid are which type of CF?
Financing
126
Under IFRS interest and dividends received are which type of CF?
Operating or investing
127
Under IFRS interest and dividends paid are which type of CF?
Operating or financing
128
Under IFRS income taxes are which type of CF?
Operating
129
Under IFRS bank draft is an asset or liability?
Current asset
130
Under GAAP bank draft is an asset or liability?
Current liability
131
What is common size formal cash flow statement?
Each item is expressed as revenue
132
What is free cash flow?
Measure of cash available for discretionary use after firm has covered its capital expenditures
133
What is free cash flow to firm?
Cash available to all investors
134
Formula of FCFF
Net income+D&A+Interest(1-t)-Fixed capital investments-Working capital investments
135
What is free cash flow to equity?
Cash available for distribution to common shareholders
136
Formula of FCFE
CFO-Fixed capital investments+net borrowing
137
Formula of cash-flow to revenue
CFO/revenue
138
Formula of cash-return-on-assets
CFO/average total assets
139
Formula of cash-return-on-equity ratio
CFO/average total equity
140
Formula of cash-to-income
CFO/operating income
141
Formula of cash flow per share
CFO-pref.divs/weighted average of common shares.
142
Formula of debt coverage ratio
CFO/total debt
143
Formula of interest coverage ratio
CFO+interest paid+taxes paid/interest paid
144
Formula of reinvestment risk
CFO/cash paid for long-term assets
145
Formula of debt payment ratio
CFO/cash for long term debt repayment
146
Formula of dividend payment ratio
CFO/dividends paid
147
Formula of investing financing ratio
CFO/cash outflows for investing and financing activities
148
Formula of net realised value
sales price - selling costs - completion costs
149
What happens if NRV
Inventory is written down and loss is recognised on the IS (COGS or separate line)
150
Which inventory accounting method is less likely to experience write downs?
LIFO
151
When reporting above historical cost is permitted?
When it is for commodities
152
What is range for market = replacement cost?
NRV-profit margins or NRV
153
During inflationary periods of rising prices which inventory valuation method gives higher COGS
LIFO
154
During inflationary periods of rising prices which inventory valuation method gives better true value
FIFO
155
What is LIFO liquidation?
LIFO firms quantity of inventory declines
156
What is effect of LIFO liquidation?
Higher profit margins and higher income tax
157
What manufacturing firms inventory is classified?
Raw material, work in progress and finished goods
158
What are characteristics of identifiable intangible asset? (3)
1. Capable of being separated from the firm or srise from contractual right
2. Controlled by the firm
3. Expected to provide economic future benefit
159
How are purchased intangible assets are accounted for?
Fair value at aquisition
160
What is impairement?
Unanticipated decline in an asset's value, causing it to fall below the carrying value
161
What is derecognition?
Disposal or retirement of an asset
162
How frequent impairement is tested for IFRS and GAAP?
Annually for IFRS and based on indications for GAAP
163
When asset is impaired?
Carrying value>recovable amount
164
What is recovable amount?
Greater of the fair value-selling costs or value in use
165
What is value in use?
PV of future cash flows
166
Where impairement is accounted in?
Income statement
167
What is recovability test?
Carrying value>future undiscounted cash flow stream
168
If asset is impaired under GAAP, what amount is accounted?
Carrying value's excess of discounted cash flows
169
What does impairement cost indicates?
That D&A was not sufficient
170
Which type of assets are not depreciated/amotized but impaired only?
Held-for-sale assets
171
When held-for-sale assets are impaired?
When carrying value>fair value-selling costs
172
What happens during spinoff?
Daughter company becomes subsidiary of the parent company.
173
Formula of fixed asset turnover
revenue/average fixed assets
174
Formula of average age
Accumulated depro/annual depro expense
175
Formula of total useful life
Gross cost/annual depreciation expense
176
Formula of remaining useful life
Ending net PPE/annual depro expense
177
What are characteristics of an lease asset? (3)
1. Refers to a specific asset
2. Lessee must receive all economic benefits during the term of lease
3. Lessee can determine how to use asset during the term of a lease
178
What is financial lease?
All benefits and risks are transferred to the lessee
179
What is operating lease?
Either benefits or risks are not transferred to the lessee
180
What are any of characteristics required for the financial lease (5)
1. Ownership is transferred to the lessee
2. The lease is for most of the asset's useful life
3. PV of lease payent>=asset's fair value
4. Lessee has and option ot buy the asset and is expected to exercise it
5. Lessor has no other use for asset
181
What are exceptions for financial lease?
Short-term (less than 12 months) and low value (less than $5000)
182
How to deal with ROU?
Record it on the balance sheet and include amortization on the IS
183
How to deal with lease liability?
Reduce it by principle amount
184
How operating lease in treated under GAAP for leasse?
ROU and asset liabilities are equal each period, on the IS interest expense and amortization are not separated
185
Which metrics for operating lease under GAAP are higher or same compared to financial lease?
ROU asset is higher, lease liability is same, early earnings are higher, CFF are higher
186
How should lessor treat financial lease?
Remove asset from BS and add lease receivable asset at value of the expected lease payments then amortize lease receivable and add report interest portion as income
187
How financial lease for lessor is reported on the CF?
Under operating cash flows
188
What is sale type lease?
Manufacturing or dealing companies primary operations under which sales will be recognized as revenue and carrying value of an asset as COGS
189
What is direct finance lease?
If leassor is a financing company, then gain/loss is not recognized at initiation, but is deffered and recognized over the life of an asset as interest
190
How operating lease is accounted for lessor?
Do not remove the asset from the balance sheet, record depreciation and lease payment as income on the IS
191
What is deffered compensation?
Employees earn compensation in current period but do not receive cash flows until later
192
What is defined contribution plan?
Firm contributes a sum each period to the employees account
193
What is defined benefit plan?
It is a promise to make periodic payments after employees retirement
194
How defined benefit plan is accounted?
On the liability side as PV of future payments to the employees as net pension asset or liability
195
When net pension asset occurs?
Fair value of plan's assets > obligations
196
When net pension liability occurs?
Obligations > fair value of plan's assets
197
What is service cost?
PV of additional benefits employees are entitled because of additional years of work
198
Where servie costs is accounted for under IFRS?
Income statement
199
Formula of net interest expense/income of pensions plan
net pensions asset/liability*plan's discount rate
200
Where net interest expense or income is accounted under IFRS?
Income statement
201
What are remeasurements?
Actuarial or difference between actual and expected returns
202
What are acturalial?
Changes in the inputs of estimations
203
Where reameasurement are accounted in under IFRS?
OCI
204
Where service costs for current period are accounted for under GAAP?
Income statement
205
Where interest income or expense are accounted for under GAAP?
Income statement
206
Where expected return on plan's assets are accounted for under GAAP?
Income statement
207
Where past service costs are accounted for under GAAP?
OCI
208
Where actuarial gains or losses are accounted for under GAAP?
OCI
209
How to account for stock based compensation?
Estimate fair value at the grant date and expense it to the income statement over vesting period
210
What is vesting period?
Time between grant date and when the employee received the stock or can exercise stock option
211
What is stock grant?
Awarded right with restrictings or contingent on performance
212
How fair value of stock grant is determined?
Fair value = share price on grant date
213
What are performance shares?
Grants of shares depending on the meeting of a target
214
What are employee stock options?
Option's to invest in the company's stock at a given price at a future date.
215
Accounting of stock grants when vesting is immediate
Fair value is expensed on the income statement and both common stock and additional paid in capital are increased by this amount
216
Accounting of stock grants when vesting is not immediate
During service period it is accounted on straight line basis and on equity side this appears as share-base compensation reserve or APIC.
At the end of the service period, any amount remaining in equity reserve will be recycled into common stock or APIC.
217
Accounting of stock options before the exercise
Fair value is determined using chosen methodology, fair value is accounted in the IS as compensation expense on straight line basis and APIC or share base compensation reserve is increased.
218
Accounting of stock options on the exercise
Cash increases, and equity increases by the same amount between common stock and APIC.
219
What are stock-appreciation rights?
Employees receive benefits based on the change in the company stocks, without needing to hold them.
220
What is taxable income?
Income subject to tax based on the tax return
221
What is tax payable?
Tax liability caused by taxable income, current tax expense
222
What is income tax paid?
Actual cashflows for income taxes, including payments or refunds from other years
223
What is tax loss carryforward?
Current or past tax loss that can be used to reduce taxable income in the future
224
What is tax base?
Net amount of an asset or liability used for tax reporting purposes
225
What is accounting profit?
Income before tax
226
What is income tax expense?
Expense on income statement that includes tax payable and changes in deffered tax liability/assets
227
What is deffered tax asset?
Balance sheet amount that result from an excess of tax payables over income tax expense that are expected to be recovered from future operations
228
What is deffered tax liability?
Balance sheet amounts that results from an excess of income tax expense over tax payable that are expected to result in future cash outflows
229
What is valuation allowance?
Reduction of deffered tax assets based on the likelihood that assets will not be realized
230
What is carrying value?
Net balance sheet value of an asset or liability
231
What are permanent differences?
Difference between taxable income and pretax income that will not reverse in the future
232
What are temporary differences?
Difference between tax base and carrying value of an asset or liability that will result in either taxable amounts or deductible amounts in the future
233
When deffered tax liability occurs?
-Revenue is recognized in IS before they are included in the tax return or
-expenses are tax deductible before they are expensed on the IS
234
When deffered tax assets occur?
-Revenue are taxable before they are recognised on the IS or
-expenses are recognized in the income statement before they are tax deductible
235
When an asset will create DTL?
Carrying value > tax base
236
When a liability will create DTL?
Tax base > carrying value
237
What is formula for tax expense?
Tax payable + changes in DTL - changes in DTA
238
What is relationship between statutory tax rate and DTA/DTL?
Direct
239
When diminishing value of a DTA will be determined?
When there is sufficient evidence that DTA benefits cannot be realized in the future
240
How diminishing value of a DTA is accounted for under IFRS?
DTA will be reduced and tax expense will be increased
241
How diminishing value of a DTA is accounted for under GAAP?
Full DTA will remain on the balance sheet, but reduced by the valuation allowance
242
What is valuation allowance?
Contra account which increases income tax expense and decreases net income
243
What causes statutory and effective tax rate to differ? (4)
Different jurisdictions with different tax rates, permanent tax differences, changes in rates and legislations, tax holidays
244
Formula for effective tax rate
income tax expense/pretax income
245
Formula for cash tax rate
cash taxes paid/pretax income
246
Depreciation usually leads to DTA or DTL?
DTL
247
Impairements usually lead to DTA or DTL?
DTA
248
Post-employment benefits usually lead to DTA or DTL?
DTA
249
What characteristics are seen in decision usefull financial reporting?
Relevance and faithfulness
250
What is described as relevance?
Useful in making decisions and material
251
What is described as faithful?
Completeness, neutrality and absence of errors
252
What is earnings sustainability?
Portion of the earnings that can be sustained
253
What is concervative accounting?
Decrease in earnins and BS, which increase in the future
254
What is aggressive accounting?
Increase in earnings and BS, which decreases in future
255
What is earnings smoothing?
Adjustments of accrued liabilities based on management activities
256
What is channel stuffing?
Overloading distribution channel with made goods that would normally be sold
257
What is bill-and-hold transactions?
Customer buys the goods and received an invoice but request that firm would hold goods for period of time
258
How does higher allowance for bad debt affects net income?
Decreases
259
How does increase in valuation allowance affect net income?
Decrease
260
What is streching payables?
Taking longer to pay suppliers
261
What are activity ratios?
It shows how efficiently assets are used
262
Formula of receivable turnover
annual sales / average receivables
263
Formula of days of sales outstanding
365 / receivable turnover
264
Formula of inventories turnover
COGS / average inventories
265
Formula of number of days of inventory
365 / inventory turnover
266
Formula of payables turnover
purchases / average trade payables
267
Formula of purchases
ending inventory - beg. inventory + COGS
268
Formula of number of days of payables
365 / payables turnover ratio
269
Formula of total asset turnover
revenue / average total assets
270
Formula of fixed assets turnover
revenue / average net fixed assets
271
Formula of working capital turnover
revenue / average working capital
272
What are liquidation ratios?
Ability to pay short-term liabilities
273
Formula of defensive interval ratio
(cash+marketable securities+receivables)/average daily expenditures
274
What is defensive interval ratio
It shows number of days of average cash expenditures the firm could cover with its current liquid assets
275
Formula of cash conversion cycle
days of sales outstanding + days of inventory on hand - number of days of payables
276
What is cash conversion cycle?
Time between paying suppliers and receiving cash from customers
277
What are solvency rations?
Ability to meet long-term obligations
278
Formula of debt to assets ratio
Total debt / total assets
279
Formula of leverage ratio
Average total assets / average total equity
280
Formula of interest coverage
EBIT / interest payments
281
Formula of debt-to-EBITDA
Total debt/EBITDA
282
Formula of fixed charge coverage ratio
EBIT+lease payments/interest payments+lease payments
283
Formula of ROA
net income / average total assets or net income+interest expense(1-tax rate)/average total assets
284
Formula of operating ROA
EBIT/average total assets or operating income/average total assets
285
Formula of return on capital invested
EBIT/average total capital
286
Formula of ROE
net income/total average equity
287
Formula of ROE on common equity
net income available to common shareholders/average common equity
288
What is simple Du-pond formula of ROE
ROA*financial leverage
289
What is three step ROE formula?
net profit margin* total asset turnover * financial leverage
290
What is five step ROE formula?
tax burden* interest burden * EBIT margin * total asset turnover * financial leverage
291
Formula of tax burden
net income/EBT
292
Formula of interest burden
EBT/EBIT
293
What are main banking industry ratios used (3)
Capital adequacy, reserve requirement, net interest margin
294
Formula of capital adequacy ratio
Eligible capital/risk-weighted assets
295
Formula of net interest margin
interest income/interest earning assets
296
Formula of coefficient of variation
standard deviation/mean
297
What is overconfidence bias?
Too much faith in ones work
298
What is illusion of control bias?
Overestimating what analysts can control, making overly complex models, justifying their assumptions
299
What is conservatism bias (anchoring)?
Making only small adjustments to historical forecasts when new information becomes available
300
What is representation bias?
Tendency to rely on known classifications
301
What is base-rate neglect?
Underestimate background information and focus on more specific/vivid details
302
What is configuration bias?
Seek out data that affirms earliers convictions nad underestimate information that contradicts those opinions
303
What are Porter's five forces?
Threat of substitute products, intensity of industry rivarly, bargaining power of suppliers, bargaining power of customers, threat of new entrants
304
How long should be time horizon to include?
Effects of current phase of economic cycle are not driving above-trend or below-trend earnings effcts and also include middle of the cycle
305
What are normalized earnings?
Expected midcycle earnings or extected earnings when current effects of events are no longer affecting earnings
306
What are inflection points?
When future earnings are not like the past and changes occur
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