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CFA Level 1 > Definitions > Flashcards

Definitions Flashcards

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CFA flashcards
1
Q

Financial Reporting

A

shows financial performance and position of a company

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2
Q

Financial Statement Analysis

A

using information in a company’s financial statement to make economic decisions

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3
Q

Balance Sheet (Statement of financial condition/position)

A

Reports the firm’s financial position at a point in time

  1. Assets
  2. Liabilities
  3. Owners’ Equity
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4
Q

Assets

A

resources controlled by the firm

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5
Q

Liabilities

A

owed to lenders/creditors

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6
Q

Owners’ Equity

A

owners’ investment minus owners’ withdrawals from the business plus/minus net income/loss

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7
Q

Accounting Equation

A

assets= liabilities + owners’ equity

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8
Q

Statement of Comprehensive Income

A

Reports all changes in equity except for shareholder transactions (issuing stock, repurchasing stock, paying dividends)

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9
Q

Income Statement (profit and loss statement/statement of operations)

A

Reports the financial performance of a company over time

  1. Revenues
  2. Expenses
  3. Other Income (ordinary course of business)
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10
Q

Revenues

A

inflows from delivering products or goods

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11
Q

Expenses

A

outflows from delivering or producing goods or services

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12
Q

Other Income

A

gains that may or may not arise in the ordinary course of business

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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

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14
Q

Statement of Cash Flows

A

reports the company’s cash receipts and payments

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15
Q

Operating Cash Flows

A

includes the cash effects of transactions that involve the normal business of the firm

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16
Q

Investing Cash Flows

A

those resulting from acquisition or sale of property, plants, and equipment; of securities, and investments of other firms

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17
Q

Financing Cash Flows

A

those resulting from the issuance or retirement of the firm’s debt and equity and includes dividends

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18
Q

Financial Statement Notes (footnotes)

A

include important information on things like accounting methods, assumptions, and estimates used by management

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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

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20
Q

SEC Requirements for MD&A

A
  1. Effects of inflation and changing prices (if material)
  2. Impact of off-balance sheet obligations and contractual obligations such as purchase commitments
  3. Accounting policies that require significant judgment by management
  4. Forward-looking expenditures and divestitures
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21
Q

Audit

A

an independent review of an entity’s financial condition

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22
Q

Standard Auditors Opinion includes

A
  1. Auditor has independently reviewed the financial statements prepared by management
  2. Used generally accepted accounting standards; provides reasonable assurance that the financial statements contain no material errors
  3. 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.
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23
Q

Unqualified “clean” Audit Opinion

A

Auditor believes the statements are free from material omissions and errors

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24
Q

Qualified Opinion

A

Auditor finds exceptions to the accounting principles and explains these in the report

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25
Q

Adverse Opinion

A

Issued if statements aren’t presented fairly or are materially nonconforming with accounting standards

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26
Q

Disclaimer of Opinion

A

In an audit, issued if auditor is unable to express opinion (case of a scope limitation)

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27
Q

Going Concern Assumption

A

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)

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28
Q

Internal Controls

A

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

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29
Q

Other Info Sources Used in Fin. Statement Analysis

A
  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
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30
Q

Proxy Statements

A

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.

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31
Q

Steps of Financial Statement Analysis Framework

A
  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
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32
Q

Present Value

A

Value of a future payment today (reversing compound interest); calculating PV is discounting

33
Q

Future Value

A

value of a future payment accruing compound interest

34
Q

Required Rate of Return

A

market rate required by investors to willingly lend their funds; equilibrium market rate

35
Q

Opportunity Cost

A

cost of opportunity forgone when current consumption is chosen

36
Q

Real Risk-Free Rate of Return (Rf)

A

theoretical rate on a single period loan that has no expectation of inflation; references an investor’s increase in purchasing power

37
Q

Nominal Risk-Free Rate

A

Risk-free rate that contains an inflation premium

nominal risk-free rate = real risk-free rate + expected inflation rate

38
Q

Default Risk

A

Risk that borrower won’t make timely payments

39
Q

Liquidity Risk

A

Risk of receiving less than the fair value for an investment if it must be sold for cash quickly

40
Q

Maturity Risk

A

Risk of volatile prices, grater time horizon means greater maturity risk

41
Q

Required Interest Rate on a Security

A

Nominal Risk-Free Rate + default risk premium + liquidity premium + maturity risk premium

42
Q

Effective Annual Rate (EAR)

A

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
Q

Annuity

A

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
Q

Ordinary Annuity

A

cash flows that occur at the end of each compounding period; most common

45
Q

Annuity Due

A

Payments or receipts occurs at the beginning of each period (ie first payment is today at t=0)

Set calculator to BEG mode

46
Q

Perpetuity

A

a financial instrument that pays a fixed amount of money at set intervals over an infinite period of time

47
Q

Amortization

A

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
Q

Net Present Value

A

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
Q

Internal Rate of Return (IRR)

A

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
Q

NPV Decision Rule

A

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
Q

IRR Decision Rule

A

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
Q

IRR vs. NPV Decision Rule

A

For mutually exclusive projects, the NPV and IRR methods can give conflicting rankings

Always select the project with the greatest NPV when conflicting

53
Q

Holding Period Return/Yield

A

percentage change in the value of an investment over the period it is held

54
Q

Total Return

A

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
Q

Money-Weighted Return

A

the internal rate of return on a portfolio taking into account all cash inflows and outflows

56
Q

Time-Weighted Rate of Return

A

measures compound growth; the rate at which $1 compounds over a specified performance horizon

57
Q

Bank Discount Yield

A

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
Q

Calculating Money-Weighted Return

A
  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
Q

Holding Period Yield

A

the total return an investor earns between the purchase date and the sale or maturity date

60
Q

Effective Annual Yield

A

an annualized value that is based on a 365 day year and compound interest

61
Q

Money Market Yield

A

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
Q

Bond-Equivalent Yield

A

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
Q

Measures of Central Tendency

A

provide an indication of an investment’s expected return

  • arithmetic mean
  • geometric mean
  • weighted mean, median, mode
64
Q

Measures of Dispersion

A

Indicate the riskiness of an investment

  • range
  • mean absolute deviation
  • variance
65
Q

Descriptive Statistics

A

summarize the important characteristics of large data sets

66
Q

Inferential Statistics

A

procedures used to make forecasts, estimates, or judgments about a large set of data on the basis of characteristics of a sample

67
Q

Population

A

all possible members of a stated group

68
Q

Sample

A

Subset of the population of interest; too costly and time consuming to get data on an entire population if its even possible

69
Q

Measurement Scales

A

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
Q

Parameter

A

measure used to describe a characteristic of a population

71
Q

Sample Statistic

A

used to measure a characteristics of a sample

72
Q

Frequency Distribution

A

a table presenting statistical data to aid analysis of large sets of data; table assigns data to a specified group (intervals)

73
Q

Modal Interval

A

interval with greatest frequency

74
Q

Absolute Frequency

A

actual number of observations that fall within a given interval

75
Q

Relative Frequency

A

percentage of observations falling within each interval

76
Q

Cumulative Absolute Frequency

A

calculated by summing the absolute frequency up to and including the given interval

77
Q

Histogram

A

graphical representation of the absolute frequency distribution; bar chart classified into a frequency distribution; intervals on horizontal axis, frequency on vertical axis

78
Q

Frequency Polygon

A

the midpoint of the interval is plotted on the horizontal axis and the absolute frequency for that interval is plotted on the vertical axis

CFA Level 1 (1 decks)

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