Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

CFA L1 > CFA L1 > Flashcards

CFA L1 Flashcards

1
Q

Add on yield Formula v Discount yield Formula

A

Add on Yield: (P1-P0/P0)-1

Discount Yield: (P1-P0/P1)-1

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Cyclical v Defensive Stocks

A

Cyclical: Market goes up, stocks go up - high correlation. Eg: Real Estate

Defensive: Market and stock have comparatively less correlation - stocks not sensitive to market Eg: Pharmaceuticals

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Front Running

A

An Asset manager buying stocks personally prior to making investments through his fund - as bigger investments make the price go up, he will benefit personally. This is illegal.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Joint Probability

A

= Intersection value / Grand Total

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Conditional Probability (Probability of A | B)

A

= A Intersection B / A Intersection B + A’ Intersection B
= Joint Probability / Total Probability of B

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Probability

A

= Favourable outcomes / Total Outcomes
0 <= P(x) <=1
where P = 0 is an impossible event
P = 1 guaranteed event
Sum of all P(x) = 1

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Expected Value of x

A

E(x) = P(x)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Expected Return of Portfolio

A

E(Rp) = Sum of wiE(Ri) = w1E(R1) + w2E(R2) + … + wnE(Rn)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Covariance of Expected Returns of two variables

A

Cov(Ri,Rj) = E[(Ri-E(Ri)*(Rj-E(Rj)]
There is no n as sum of P =1
Covar(Ri,Ri) = Var(Ri)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Sample Covariance of Returns

A

Sum of [(R1 - R1bar)*(R2 - R2bar) / n-1

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Portfolio Variance ie Var(Rp)

A

Sum of wiwjCov(Ri, Rj)
= W^2Var(Ra) + 2WaWbCov(a,b) + Wb^2*Var(Rb)
- Keeps on adding for every asset added - Number of elements of Cov part = NC2 where N = number of stocks

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Roys Safety First Criterion

A

= | Rp - RL | / SDp
- RL is the threshold level
- Higher the ratio, better as lower shortfall risk
- Shortfall % - z value

Rp - RL | / SDp

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Sharpe Ratio

A
  • When RL = Rf
    = | Rp - Rf | / SDp
  • represents return over and above risk free rate per unit of risk
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Expected Standard Deviation

A

= Root of Sum of P(x-E(x))^2
- Denominator = n = 1 (Sum of all P =1)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Expected Variance

A

Sum of P(x-E(x))^2

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Expected Skewness

A

Sum of P(x-E(x))^3 / SD^3

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Expected Kurtosis

A

Sum of P(x-E(x))^4 / SD^4

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Expected Covariance

A

Sum of P[(x-E(x))*(y-E(y))]

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Expected Correlation

A

Sum of P(Cov(x,y)) / E(SDx)*E(SDy)
= Sum of P(Cov(x,y)) / Root of Sum of P(x-E(x))^2 * Root of Sum of P(y-E(y))^2

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Growth v Value Stock

A

Growth Stock: Exponential Growth, outperforming economy, doesn’t fluctuate too much w market changes ie is less sensitive to market as future earnings are priced in. P/BV is high
Value Stock: Available for cheap, riskier & sensitive to market, P/BV is low

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Liquidity

A

Ability to convert asset into cash at a fair and reasonable price in a short period of time
Illiquidity = Liquidity Risk

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Types of Risk

A

Liquidity Risk
Maturity Risk (risk due to change in rates/volatility in longer term)
Default Risk

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

MV v BV v IV

A

Market Value: Price at which asset is sold/bought in the market, based on demand, future CFs
Book Value: As per books of accounts, based on historical pricing
Intrinsic Value: Based on one’s own opinion on what the price SHOULD be, based on models, forecasts, projections

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Principal Agent Conflict

A

Principal - who agent works for
Example of PAC: broker recommending stock to customer based on his commissions instead of for purpose of clients wealth maximization

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

Compound Interest v Simple Interest

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

Sum of Infinite GP Series

A

a/(1-r)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

Quadratic Equation

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

HPR

A

Pn-Po / Po

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

HPR to EAY
EAY to HPR

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

BEY

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
31
Q

BDY

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
32
Q

MMY

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
33
Q

Quoted Price

A

100 - BDY

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
34
Q

Purchase Price

A

Quoted Price x n/360

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
35
Q

Nominal Rate

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
36
Q

Annuity Due v Ordinary Annuity

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
37
Q

Perpetuity

A

PMT/r

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
38
Q

Continously Compounded Rate

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
39
Q

Outstanding Principal at any time

A

PV of remaining EMIs

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
40
Q

Principal Repaid

A

Outstanding at yn-1 - Oustanding at yn

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
41
Q

Interest Repaid

A

EMI - Principal repaid

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
42
Q

Growth rate

A

(FV/PV)^1/n -1

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
43
Q

Time Weighted Return

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
44
Q

Money Weighted Return

A

=IRR
Quantum & Timing matters, tips towards higher return

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
45
Q

NPV

A
  • assumes reinvestment at Re
    = PV(inflows) - PV(outflows)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
46
Q

IRR

A
  • assumes reinvestment at IRR
    = Rate at which PV(outflows) = PV(inflows)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
47
Q

NPV & IRR

A
  • NPV is positive when PV(I) > PV(O), ie IRR > Re
  • NPV is negative when PV(I) <(O) ie IRR < Re
  • NPV is 0 when PV(I) = PV(O), ie IRR = Re (indifferent to acceptance of project, depends on management decision taking other factors into consideration)
  • NPV & IRR will always give same decision but might give different ranks - we generally accept NPV ranks in case of conflict (independent projects)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
48
Q

Types of Capital Investment

A
  • Going Concern: necessary for survival of business or to reduce costs
  • Regulatory/Compliance: necessary by law, enforced by Gov or authorities - usually due to safety or environmental concerns
  • Expansion: Vertical/Horizontal integration, involves complex and detailed analysis
  • New Business: Entering into a completely new market, also involves complex and detailed analysis
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
49
Q

Principals of Capital Allocation

A
  • Based on Cashflows not Accounting Income
  • Based on After Tax Cashflows
  • Opportunity Costs to be taken into account
  • Timing of Cashflows to be taken into account
  • Financing cost to be taken into account
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
50
Q

Sunk Costs

A
  • Costs that will be incurred irrespective of whether a project is accepted or not
  • Sunk costs not to be taken into account while calculating (may be taken after if relevant)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
51
Q

Hard Rationing of Capital

A
  1. Calculate Profitability Index
  2. Rank by PI
  3. Calculate best combination based on capital budget
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
52
Q

Profitability Index

A

Pv(Inflows)/PV(outflows)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
53
Q

Capital Allocation Pitfalls - Cognitive Biases

A
  • Poor forecasting
  • Not considering opportunity Costs/Internal Costs
  • Incorrectly accounting for inflation
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
54
Q

Capital Allocation Pitfalls - Behavioural Biases

A
  • Pet Project of Management
  • Inertia of setting Capital Budget (not being updated)
  • Basing investment decisions on EPS/ROE (as incentives may be tied to it/short term outlook)
  • Failure to generate alternate investment ideas
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
55
Q

Real Options

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
56
Q

Timing Options

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
57
Q

Abandonment Option

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
58
Q

Expansion Options or Growth Options

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
59
Q

Flexibility Options

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
60
Q

Return on Invested Capital

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
61
Q

Is the Co creating value for Shareholders? (ROIC)

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
62
Q

Process of Capital Allocation

A
  1. Idea generation
  2. Analysing Project Proposals (Expected Profitability)
  3. Creating firm wide capital budget (prioritise profitability and consider timing of cashflows, available resources and overall strategy)
  4. Monitor decisions and conduct post-audit (identify systematic errors, improve performance)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
63
Q

Hurdle Rate

A

Minimum IRR at which a project will be accepted

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
64
Q

NPV Advantage

A

Direct measure of profitability

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
65
Q

IRR Advantage

A

measures profitability as a %, allows calculation of safety margin

66
Q

IRR Disadvantages

A
  • Assumes reinvestment at IRR instead of Re, more realistic to assume Re
  • For multiple sign changes, may have multiple IRRs or no IRR - difficult to interpret
67
Q

Range

A

Highest Value - Lowest Value

68
Q

Variance

A

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

69
Q

Standard Deviation

A

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

70
Q

Geometric Mean

A

[(1+r1)(1+r2)…*(1+rn)]^1/n] -1

71
Q

Harmonised Mean

A

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

72
Q

AM v GM v HM

A

HM < GM < AM

73
Q

Skewness

A

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

74
Q

Kurtosis

A

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

75
Q

Covariance

A

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

76
Q

Correlation

A

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

77
Q

Trimmed Mean

A

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

78
Q

Winsorized Mean

A

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

79
Q

Percentile formula

A

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

80
Q

Financial Statement Analysis Framework

A
  1. State Objective & Context (questions, resources, time)
  2. Gather Data (primary, secondary)
  3. Process Data (ratios, analysis, graphs)
  4. Analyze data (Answer Step 1 Qs)
  5. Report the Conclusions & recommendations
  6. Update analysis: periodically repeat the above steps
81
Q

Role of FSA

A

To help make informed business/economic decisons

82
Q

Standard Setting Bodies

A

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

83
Q

Regulatory Bodies

A

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

84
Q

IOSCO

A
  • International Organization of Securities Commissions
  • Regulates 95% of the global financial market through its members
  • members comprise of various regulatory bodies of the world
85
Q

Objectives of IOSCO

A
  • Protecting Investors
  • Ensuring markers are fair, efficient and transparent
  • Reducing systematic risk
86
Q

Sarbanes-Oxley Act 2002

A
  • Enforced by SEC
  • Prohibits company’s external auditors from providing other services to the firm
  • to avoid a conflict of interest and promote auditor independence
  • Company’s exec management need to certify that accounts are presented fairly, include statement of effectiveness of Co’s internal controls of financial reporting
  • External auditor must also confirm Co’s effectiveness of internal controls
87
Q

Footnotes

A

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

88
Q

Form S-1

A

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

89
Q

Form 10-K

A

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

90
Q

Form 10-Q

A
  • Quarterly Filing
  • unaudited F/s (updated) & disclosures
  • Non-US Cos - Form 6K (semi annually)
91
Q

Form DEF 14-K

A

For proxy statements prior to AM/shareholder vote

92
Q

Form 8-K

A

To disclose material events

93
Q

Form 144

A

To issue securities to certain qualified buyers without SEC registration

94
Q

Form 3,4,5

A

Beneficial ownership by Corporate Insiders

95
Q

Segment Data Reporting

A

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

96
Q

Management Commentary/Management Report/Management Discussion & Analysis (MDA)

A
  • Address nature of business, mgmt objectives, co’s past performance, perf measures used, key relationships, resources and risks
  • impact of inflation, changing prices, purchase commitments
  • accounting policies, forward looking expenses, divestures
97
Q

Audit

A

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

98
Q

Standard Auditors Opinon

A
  1. F/s prepared by Management are its responsibility and auditor has performed independent review
  2. Generally accepted accounting measures are followed - proved reasonable assurance of no material errors
  3. Compliance is present, estimates are reasonable
99
Q

Types of Opinions

A

Unqualified Opinion: Free from material omissions and errors
Qualified Opinion: If any exception to accounting principles is present and explanation of these exceptions
Adverse Opinion: Non-conforming, unfairly presented

If unable to express opinion, a disclaimer of opinion is issued.
Any opinion other than unqualified may be referred as modified opinion

100
Q

Internal Controls

A

Process by which company ensures accuracy of financial statements

101
Q

Key audit matters

A

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

102
Q

Sources of Info other than F/s

A
  • Issuer Sources
  • Public Third Party Sources
  • Proprietary Third Party Resources
  • Proprietary Primary Research
103
Q

IASB Framework - Qualitative Characteristics

A

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

104
Q

Required Reporting Elements

A
  • Assets
  • Liabilities
  • Income
  • Expenses
  • Equity
105
Q

Assumptions & Constraints of F/s

A

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

106
Q

General Requirements - IFRS - Financial Statements

A
  • Balance Sheets
  • Profit & Loss and OCI, Statement of comprehensive income
  • Cash Flow Statement
  • Statement of change in owners equity
  • Explanatory Notes, including a summary of A/c policies
107
Q

General Requirements - IFRS - General Features

A
  • Fair representation
  • Consistency
  • Materiality
  • Aggregation
  • No offsetting
  • Reporting Frequency (atleast annually)
  • Comparative Information
  • Going Concern
  • Accrual basis
108
Q

General Requirements - IFRS - Structure & Content of F/s

A
  • Classified Balance Sheet
  • Minimum Information
  • Comparative Information
109
Q

Market Capitalization

A

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

110
Q

P/E Ratio

A

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

111
Q

ROE

A

Return on Equity
= Net Profit / Equity

112
Q

Return on Investment

A

= HPY

113
Q

Growth Rate

A

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

114
Q

Retention Ratio

A

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

115
Q

EPS

A

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

116
Q

Book Value per Share

A

= Book Value of Equity / No. of shares

117
Q

Tangible Assets

A

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

118
Q

Intangible Assets

A

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

119
Q

Financial Assets

A

Identifiable
Intangible
Definite: Bonds
Indefinite: Equity

120
Q

Types of Depreciation

A

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

Component Depreciation: parts of an asset may depreciate at a different rate and need treating accordingly

121
Q

When do we change accounting policy?

A
  • Due to new law
  • Due to new accounting standard
  • To represent true and fair accounts
122
Q

Reflection of change in Depreciation method

A

Needs to be shown retrospectively

123
Q

Reflection of change in estimate

A

Needs to be shown prospectively

124
Q

Matching Principle

A

Costs & sales need to match for the year

125
Q

Revenue Recognition

A

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

126
Q

Contract

A

Agreement between two or more parties specifying their rights and obligations

127
Q

Steps for recognising revenue

A
  • Identify the contract with the customer
  • Identify distinct performance obligations in the contract
  • Determine the Transaction price
  • Allocate the Transaction price to the performance obligation
  • Recognise revenue when PO is satisfied
128
Q

Performance Obligation

A
  • Promise to deliver goods/services
    PO is satisfied when:
  • Customer receives goods/services & its benefits
  • Supplier enhances an existing asset or creates a new asset that the customer controls over the period in which the asset is created/enhanced
  • Asset has no alternative use for supplier, and the supplier has the right to enforce payment for work completed to date
129
Q

How is revenue recognised in a long term contract?

A
  • Revenue is recognised based on % completed
130
Q

Revenue Recognition Disclosures

A
  • Contracts with customer by Category
  • Assets & Liabilities related to contracts including balances and changes
  • Outstanding POs & TPs allocated to them
  • Management Judgements used to determine amount & timing of revenue recognition including any changes to those judgements
131
Q

Goods & Services

A
  • The customer can bene fit 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 identi fied separately from any other promises.
132
Q

Transaction Price

A
  • The amount a f irm expects to receive from a customer in exchange for transferring a good or service to the customer.
  • A transaction price is usually a f ixed amount, but it can also be variable (e.g., if it includes a bonus for early delivery).
133
Q

Capitalization

A
  • Application of the matching principle whereby costs are initially capitalized as assets on the balance sheet and then expensed, using depreciation or amortization, to the income statement over the asset’s life as its bene its are consumed.
  • If potential future economic benefit - capitalise, otherwise, expense
134
Q

Period Costs

A

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

135
Q

Amortn v Deprn v Depln

A

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

136
Q

Capitalised Interest

A

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

137
Q

Capitalisation of Research Costs & Development Costs

A
  • Research costs, which are costs aimed at the discovery of new scientif ic or technical knowledge and understanding, are expensed as incurred.
    Development costs may be capitalized. Development costs are incurred to translate research findings into a plan or design of a new product or process. To capitalise development costs, a firm must show that it can complete the asset and intends to use or sell the completed asset, among other criteria.
138
Q

US GAAP Treatment of Research & Development Costs

A

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

139
Q

How to make F/s comparable for development costs capitalised in one firm and expensed in the other?

A
  • Convert capitalised one to expensed one by:
  • Expensing the Development Costs
  • Removing amortisation of Capitalised Dev costs charged previously
  • Remove Dev costs from Balance Sheet
  • Adjust Cash Flow Statements: Remove from CFI, Decrease from CFO
140
Q

Non Recurring Items

A
  • Unusual infrequent items
  • should consider if should be excluded from forecasting
141
Q

Discontinued Operation

A
  • Decided to dispose of but not done yet or disposed of in the current year after the operation had generated income or losses
  • Measurement Date: Date when co develops a formal plan for disposing operation
    Phase out Period: Actual disposal date
  • Should be excluded from forecasts
142
Q

Discontinued operations - where is it reported on Income Statement

A

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

143
Q

Unusual or infrequent items - where is it reported on Income Statement

A

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

144
Q

change in accounting principle - where is it reported on Income Statement

A

requires retrospective application

145
Q

Simple v Complex Capital Structure

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.
Complex capital structure: contains potentially dilutive securities such as employee stock options, warrants, or convertible securities.

146
Q

Basic EPS

A

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

147
Q

Stock dividend

A

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

148
Q

Stock Split

A
  • refers to the division of each “old” share into a specif ic number of “new” (post-split) shares
  • ownership % remains unchanged
149
Q

Dilutive v Anti-dilutive securities

A

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

150
Q

Diluted EPS

A

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

151
Q

Comprehensive Income

A

Profit + Other Comprehensive Income

152
Q

Other Comprehensive Income

A

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

153
Q

Reasons for Change in Equity

A

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

154
Q

How to check if convertible stock/debt is dilutive

A

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

155
Q

Common Size Statements

A

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

156
Q

Gross Profit Margin

A

= Gross Profit / Revenue

156
Q

Net Profit Margin

A

= Net Profit / Revenue

157
Q

Operating Profit Margin

A

= Operating Profit / Revenue

158
Q

Pre Tax Margin

A

= Pre Tax Accounting Profit / Revenue

159
Q

Revise Financial Assets Table

A

HTM, HTT, AFS - US GAAP, IFRS

160
Q
A
161
Q
A

CFA L1 (16 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2025 Bold Learning Solutions. Terms and Conditions