Acct Theory- Mod 3

Question 1

What is the main concept of Module 3

Answer 1

Efficient Security Markets

Question 2

Are all shares on the market equally liquid?

Answer 2

No

More demand for a share= More liquid share

Question 3

What are the 4 main types of markets?

Answer 3

Stock Markets
Bond Markets
Commodities Markets
Money Markets

Question 4

In an efficient security market, what is reflected in the prices?

Answer 4

All information that is publicly known is reflected in the price

Question 5

What is market efficiency?

Answer 5

It is a relative concept, all information may not be known, but as soon as information becomes known, the market price will quickly adjust

Question 6

How are shares priced?

Answer 6

At what investors think they are worth, based on public info

Question 7

What are the 3 possible market strengths? Which one do we have in reality? Describe each

Answer 7

Weak- Only Historical Info

Semi Strong- All publicly known information is reflected in the price.

Strong- Everyone knows everything

We have a semi-Strong market

Question 8

What affects share prices

Answer 8

Inside information
uniformed buying and selling
Noise traders
Market Trends
Herd Mentality

Question 9

What happened with Bre-x (Handout)?

Answer 9

Overstated the potential gold deposits in their claim

Started to generate buzz, everyone jumped on hoping to get rich

Share price sky rocketed

Gold deposits were re-stated downward, everyone sold as fast as they could, which crashed the share price

Question 10

What was the result of the Beaver study in 1973?

Answer 10

Company accounting policies do not affect stock price as long as there is no impact on cash flow

Question 11

Why does accounting need to provide timely, accurate and cost effective information?

Answer 11

Because there are competing sources for information:

Analysts
News Media
Internet
Company press releases

Question 12

What is the Capital Asset Pricing Model?

Answer 12

A method for calculating the predicted future share price

Question 13

What are the 3 main uses of the Capital Asset Pricing Model?

Answer 13

Model for analysts to estimate Beta

A way to seperate the realized return on a share from an unexpected or abnormal return

Predict future share price

Question 14

How do we control or mitigate estimation risk?

Answer 14

Insider Trading Laws

Financial Reporting

Question 15

What is the purpose of MD&A?

Answer 15

Discuss recent performance, overall financial condition, and future prospects.

Question 16

What must an MD&A be, in order to be useful?

Answer 16

Understandable
Relevant
Comparable
Verifiable
Timely

Question 17

What are the two main benefits of Superior Disclosure?

Answer 17

Enables investors to make better decisions

Improves the ability of securities markets to direct investments to it most productive uses