Definitions Flashcards
1
Q
Financial Reporting
A
shows financial performance and position of a company
2
Q
Financial Statement Analysis
A
using information in a company’s financial statement to make economic decisions
3
Q
Balance Sheet (Statement of financial condition/position)
A
Reports the firm’s financial position at a point in time
- Assets
- Liabilities
- Owners’ Equity
4
Q
Assets
A
resources controlled by the firm
5
Q
Liabilities
A
owed to lenders/creditors
6
Q
Owners’ Equity
A
owners’ investment minus owners’ withdrawals from the business plus/minus net income/loss
7
Q
Accounting Equation
A
assets= liabilities + owners’ equity
8
Q
Statement of Comprehensive Income
A
Reports all changes in equity except for shareholder transactions (issuing stock, repurchasing stock, paying dividends)
9
Q
Income Statement (profit and loss statement/statement of operations)
A
Reports the financial performance of a company over time
- Revenues
- Expenses
- Other Income (ordinary course of business)
10
Q
Revenues
A
inflows from delivering products or goods
11
Q
Expenses
A
outflows from delivering or producing goods or services
12
Q
Other Income
A
gains that may or may not arise in the ordinary course of business
13
Q
Statement of Changes in Equity
A
amounts and sources of change in equity investors’ investment in the firm over a period of time
14
Q
Statement of Cash Flows
A
reports the company’s cash receipts and payments
15
Q
Operating Cash Flows
A
includes the cash effects of transactions that involve the normal business of the firm
16
Q
Investing Cash Flows
A
those resulting from acquisition or sale of property, plants, and equipment; of securities, and investments of other firms
17
Q
Financing Cash Flows
A
those resulting from the issuance or retirement of the firm’s debt and equity and includes dividends
18
Q
Financial Statement Notes (footnotes)
A
include important information on things like accounting methods, assumptions, and estimates used by management
19
Q
Management’s Commentary (management’s discussion & analysis)
A
management’s discussion of a variety of issues including the nature of the business, past performance, and future outcomes; some pieces may be unaudited
20
Q
SEC Requirements for MD&A
A
- Effects of inflation and changing prices (if material)
- Impact of off-balance sheet obligations and contractual obligations such as purchase commitments
- Accounting policies that require significant judgment by management
- Forward-looking expenditures and divestitures
21
Q
Audit
A
an independent review of an entity’s financial condition
22
Q
Standard Auditors Opinion includes
A
- Auditor has independently reviewed the financial statements prepared by management
- Used generally accepted accounting standards; provides reasonable assurance that the financial statements contain no material errors
- Auditor is satisfied that the statements were prepared in accordance with accepted accounting principles and that the principles chosen and estimates made are reasonable. Must contain an explanation when accounting methods haven’t been used consistently between periods.
23
Q
Unqualified “clean” Audit Opinion
A
Auditor believes the statements are free from material omissions and errors
24
Q
Qualified Opinion
A
Auditor finds exceptions to the accounting principles and explains these in the report
25
Adverse Opinion
Issued if statements aren't presented fairly or are materially nonconforming with accounting standards
26
Disclaimer of Opinion
In an audit, issued if auditor is unable to express opinion (case of a scope limitation)
27
Going Concern Assumption
Assumption that the firm will continue to operate for the foreseeable future.
Auditor's opinion will contain an explanatory paragraph when a material loss is probable but the amount cannot be reasonably estimated (valuation/realization of asset values or litigation)
28
Internal Controls
Processes by which the company ensures that it presents accurate financial statements; these are the responsibility of the management; US GAAP requires an auditor to express an opinion on these
29
Other Info Sources Used in Fin. Statement Analysis
1. Company's quarterly/semiannual reports
2. Proxy Statements
3. Corporate Reports/ Press Releases
4. Earnings Guidance
5. Senior Management Calls on Earnings
6. Info on economic condition and company's industry
30
Proxy Statements
Issued to shareholders when there are matters that require a shareholder vote. These are filed with the SEC on EDGAR and provide good information about the election and qualifications of board members, compensation, management qualifications, and the issuance of stock options.
31
Steps of Financial Statement Analysis Framework
1. State the objective and context
2. Gather Data
3. Process the data
4. Analyze and interpret the data
5. Report the conclusions or recommendations
6. Update the analysis
32
Present Value
Value of a future payment today (reversing compound interest); calculating PV is discounting
33
Future Value
value of a future payment accruing compound interest
34
Required Rate of Return
market rate required by investors to willingly lend their funds; equilibrium market rate
35
Opportunity Cost
cost of opportunity forgone when current consumption is chosen
36
Real Risk-Free Rate of Return (Rf)
theoretical rate on a single period loan that has no expectation of inflation; references an investor's increase in purchasing power
37
Nominal Risk-Free Rate
Risk-free rate that contains an inflation premium
nominal risk-free rate = real risk-free rate + expected inflation rate
38
Default Risk
Risk that borrower won't make timely payments
39
Liquidity Risk
Risk of receiving less than the fair value for an investment if it must be sold for cash quickly
40
Maturity Risk
Risk of volatile prices, grater time horizon means greater maturity risk
41
Required Interest Rate on a Security
Nominal Risk-Free Rate + default risk premium + liquidity premium + maturity risk premium
42
Effective Annual Rate (EAR)
the rate investors actually realize as a result of compounding; represents the annual rate of return actually being earned after adjustments for different compounding periods
The greater the compounding frequency, the greater the EAR in comparison to the stated rate.
43
Annuity
stream of equal cash flows that occurs at equal intervals over a given period; ie receiving $1000 per year at the end of each year for the next 8 years
44
Ordinary Annuity
cash flows that occur at the end of each compounding period; most common
45
Annuity Due
Payments or receipts occurs at the beginning of each period (ie first payment is today at t=0)
Set calculator to BEG mode
46
Perpetuity
a financial instrument that pays a fixed amount of money at set intervals over an infinite period of time
47
Amortization
the process of paying off a loan with a series of periodic loan payments whereby a portion of the outstanding loan amount is paid off (amortized) with each payment
48
Net Present Value
the present value of expected cash inflows associated with a project less the present value of the project's expected outflows, discounted at the appropriate cost of capital
49
Internal Rate of Return (IRR)
rate of return that equates the PV of an investment's expected benefits (inflows) with the PV of its costs (outflows); or the discount rate for which the NPV of an investment is zero
50
NPV Decision Rule
If a firm undertakes a project with a positive NPV, shareholder wealth is increased
- Accept projects with a positive NPV (increases shareholder wealth)
- Reject projects with a negative NPV (decreases shareholder wealth)
- When two projects are mutually exclusive, choose the project with the higher NPV
51
IRR Decision Rule
Result provided in terms of rate of return
- Accept projects with an IRR greater than the firm's (or investor's) required rate of return
- Reject projects with an IRR less than the required rate of return
52
IRR vs. NPV Decision Rule
For mutually exclusive projects, the NPV and IRR methods can give conflicting rankings
Always select the project with the greatest NPV when conflicting
53
Holding Period Return/Yield
percentage change in the value of an investment over the period it is held
54
Total Return
the actual rate of return an investment or a pool of investments over a given evaluation period; includes interest, capital gains, dividends, and distributions realized over a given period of time
55
Money-Weighted Return
the internal rate of return on a portfolio taking into account all cash inflows and outflows
56
Time-Weighted Rate of Return
measures compound growth; the rate at which $1 compounds over a specified performance horizon
57
Bank Discount Yield
expresses the dollar discount from the face (par) value as a fraction of the face value (not the market price of the instrument)
Annualized using 360 instead of 365
58
Calculating Money-Weighted Return
1. Determine the timing of each cash flow and whether cash flow is an inflow into the account or an outflow from the account
2. Net the cash flows for each time period and set the PV of cash flows equal to the PV of cash outflows
3. Solve for IRR using calculator
59
Holding Period Yield
the total return an investor earns between the purchase date and the sale or maturity date
60
Effective Annual Yield
an annualized value that is based on a 365 day year and compound interest
61
Money Market Yield
equal to the annualized holding period yield, assuming a 360 day year; used to compare quoted yields of T-bills and interest-bearing money market instruments that pay on a 360 day basis
62
Bond-Equivalent Yield
2x the semiannual discount rate, stems from yields on US bonds since they are quoted as twice the semiannual rate because the coupon interest is paid in two semiannual payments
63
Measures of Central Tendency
provide an indication of an investment's expected return
- arithmetic mean
- geometric mean
- weighted mean, median, mode
64
Measures of Dispersion
Indicate the riskiness of an investment
- range
- mean absolute deviation
- variance
65
Descriptive Statistics
summarize the important characteristics of large data sets
66
Inferential Statistics
procedures used to make forecasts, estimates, or judgments about a large set of data on the basis of characteristics of a sample
67
Population
all possible members of a stated group
68
Sample
Subset of the population of interest; too costly and time consuming to get data on an entire population if its even possible
69
Measurement Scales
NOIR
- Nominal: naming only
- Ordinal: order makes sense (small-cap, mid-cap)
- Interval: equal interval, lacks absolute zero (degrees)
- Ratio: ratios make sense, absolute zero
70
Parameter
measure used to describe a characteristic of a population
71
Sample Statistic
used to measure a characteristics of a sample
72
Frequency Distribution
a table presenting statistical data to aid analysis of large sets of data; table assigns data to a specified group (intervals)
73
Modal Interval
interval with greatest frequency
74
Absolute Frequency
actual number of observations that fall within a given interval
75
Relative Frequency
percentage of observations falling within each interval
76
Cumulative Absolute Frequency
calculated by summing the absolute frequency up to and including the given interval
77
Histogram
graphical representation of the absolute frequency distribution; bar chart classified into a frequency distribution; intervals on horizontal axis, frequency on vertical axis
78
Frequency Polygon
the midpoint of the interval is plotted on the horizontal axis and the absolute frequency for that interval is plotted on the vertical axis
