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CFA level I > Financial Statement Analysis > Flashcards

Financial Statement Analysis Flashcards

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1
Q

6 steps of financial analysis framework

A
  1. State objective and context
  2. Gather data
  3. Process the data
  4. Analyze and interpret the data
  5. Report conclusions and recommendations
  6. Update the analysis
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2
Q

What is objective of financial reporting?

A

It is ways companies show data to interested parties

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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

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4
Q

What are standard setting bodies?

A

Professional organizations of accountant and auditors that establish financial reporting standards

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5
Q

What are regulatory authorities?

A

Government agencies that have legal authorities to enforce compliance with financial reporting standards

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6
Q

Who regulates 95% of the work financial markets?

A

IOSCO

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7
Q

What are proxy statements?

A

They are issued to shareholders when there are matters that require a shareholder vote

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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.

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9
Q

What are geographical segment?

A

Same as business segment, but has different business environment than other segments.

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10
Q

What is audit?

A

Independent review of the entity’s financial statements

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11
Q

What audit provides to the company?

A

Opinion on fairness and reliability of company’s financial statements

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12
Q

What does auditor’s opinion include? (3)

A
  1. FS were prepared and reviewed by the management
  2. Standards were performed and there are no material errors
  3. Auditor is satisfied with the preparation
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13
Q

What is unqualified auditor opinion?

A

Statements are accurate and free from errors

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14
Q

What is qualified opinion?

A

It explains exceptions of accounting principles used

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15
Q

What is adverse opinion?

A

It states that it is not fairly presented and have errors

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16
Q

What is disclaimer of opinion?

A

Auditors are unable to express opinion

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17
Q

What are internal controls?

A

Processes by which the company ensures that it presents accurate financial statements

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18
Q

What are key/critical audit matters?

A

It highlights accounting choices of greater significance.

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19
Q

Main differences between GAAP and IFRS (4)

A
  1. GAAP is based on rules and IFRS is based on principles.
  2. LIFO is prohibited in IFRS
  3. Product development costs are capitalized in IFRS
  4. Reversal of inventory write-downs is prohibited in GAAP
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20
Q

What are information sources of analysts? (4)

A

Earnings calls, public third party sources, propietary third-party sources, propietary primary research

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21
Q

What is unearned revenues?

A

Payment for goods is received before the transfor of the goods or services

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22
Q

When revenues is recornized?

A

When the goods are tranfered to the client

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23
Q

What is performance obligation?

A

It is promise to deliver distinct good or service

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24
Q

What are charasteristics of a distinct good/service? (2)

A
  1. Customer can benefit from good/service on its own or with resources readily available
  2. Promise to transfer good/service can be identified separately from any other promise
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25
Q

What is transaction price?

A

It is amount a firm expects to receive from a customer in exchange of good/services.

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26
Q

How long-term contracts revenue is recognized?

A

Based on the firm progress.

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27
Q

When performance obligation is satisfied? (3)

A
  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.
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28
Q

What is matching principle?

A

Expenses are recognized in the same period as revenue

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29
Q

What is capitalization?

A

Costs are capitalized and assets are expensed as D&A

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30
Q

What are period costs?

A

Costs not related to the revenue are expensed in the period incurred

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31
Q

When expenditures with expected future benefit are expensed?

A

If the benefits are unlikely or highly uncertain

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32
Q

What are effects of capitalization on metrics?

A

Less volatility in earnings, higher net income, ROE, CFO in Y1 at the expense of other years.

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33
Q

How to capitalized interest based on different classification of assets?

A

If held for use - D&A, if held for sale - COGS.

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34
Q

Where interest of construction appears on the CF?

A

Investing activities

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35
Q

Should analyst include both capitalized and expensed interest in coverage ratios?

A

Yes

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36
Q

What are costs to create accounted?

A

Expensed as incurred

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37
Q

How are research costs accounted?

A

Expensed as incurred

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38
Q

How are development costs accounted?

A

Might be capitalized

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39
Q

What are research costs?

A

Costs aimed at discovery of new scientific or technical knowledge and understanding

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40
Q

What are development costs?

A

Costs related to translate research findings into plan

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41
Q

How are costs to develop software are accounted?

A

Expensed as incurred

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42
Q

When costs for software development switch to capitalization?

A

When product’s tecnological feasability has been established

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43
Q

When bad debt or warranty expenses are accounted?

A

In the period of the asset’s sale

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44
Q

Where unusual and infrequent items are included in the IS?

A

Income from operations, reported before tax

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45
Q

What is measurement date?

A

Date when comapny develops a formal plan for disposing of an operation

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46
Q

What is phaseout period?

A

Time period between measurement date and actual disposal

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47
Q

Where are loss from operations are included in the IS?

A

Net of tax.

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48
Q

What is restropective application?

A

Older financial statements have to be restated

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49
Q

What is prospective application?

A

Only current and new financial statements have to be updated

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50
Q

What is change in the accounting estimate?

A

Change in mangements judgement due to new information available

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51
Q

Is accounting estimate change restrospective or prospective?

A

Prospective

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52
Q

What is prior-period adjustment?

A

It is restrospective application, correction of accounting method or error

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53
Q

What is EPS?

A

Profitability performance measure used for common stock only

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54
Q

What is simple capital structure?

A

No potential dilute securities, which reports only basic EPS

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55
Q

What is complex capital structure?

A

Potentially dilute securities, reports basic and diluted EPS

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56
Q

Formula of basic EPS

A

(net income-pref. dividends)/weighted average no of common shares

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57
Q

What is stock dividend?

A

Distribution of additional shares to each shareholder in an amount proportional to their current number of shares

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58
Q

What is stock split?

A

Division of each old share into a specific number of new shares

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59
Q

How to calculate weighted average number of shares? (4)

A

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

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60
Q

What are dilutive securities?

A

Stock options, warrants, convertible stock/debt, that would dilute the EPS

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61
Q

What are antidilutive securities?

A

It would increase the EPS

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62
Q

What is formula for diluted EPS?

A

(net income-pref.dividends+convertible pref. dividends+convertible debt interest(1-t)/weighted average of shares outstanding+shares from debt and stock conversions

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63
Q

How to check if stock is dilutive?

A

Convertible preferred dividends/convertible shares < EPS then dilutive

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64
Q

How to check if convertible debt is dilutive?

A

convertible debt interest(1-t)/convertible debt shares < EPS, then dilutive

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65
Q

When are stock options and warrants are dilutive?

A

Exercise price<average market price of the stock

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66
Q

Formula of net increase in the common share if stock option or warrant is excersised

A

(average market price-exercise price)/average market price * number of common shares converted

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67
Q

What is vertical size income statement?

A

Each line as % of revenue

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68
Q

What is effective tax rate?

A

Tax expense expressed as % of the pre-tax income

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69
Q

Are securities considered intangible assets?

A

No.

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70
Q

What are identifiable intangible assets?

A

Assets that can be aquired separately or are the result of rights or priviledges conveyed to the owner

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71
Q

What are unidentifiable intangible assets?

A

Assets that cannot be aquired separately and may have unlimited life

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72
Q

Which method is allowed for accounting idetifiable intangibles under IFRS?

A

Cost or revaluation

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73
Q

Which method is allowed for accounting idetifiable intangibles under GAAP?

A

Only cost model is allowed

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74
Q

Which assets are tested for impairement?

A

Finite and indefinite assets

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75
Q

Which assets are amortized?

A

Finite live intangible assets

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76
Q

What is goodwill?

A

It is amount by which the purchase price is greater than fair value of the asset

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77
Q

How is negative goodwill accounted?

A

As gain on the income statement

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78
Q

When goodwill is created?

A

During purchase aquisition

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79
Q

How internally created goodwill is accounted?

A

Expensed as incurred

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80
Q

What should analyst do with goodwill?

A

Exclude it

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81
Q

What are financial instruments?

A

Contracts that give rise to both financial asset of one entity and financial liability of other

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82
Q

How unquoted equity and loans to and note receivables from entities are accounted?

A

They are measured at cost

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83
Q

What are held-to-maturity assets accounted?

A

They are measures at amortized cost

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84
Q

Formula for measure at amortized cost

A

original price-principle payment+-amortized discount/premium-impairement

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85
Q

How are mark-to-market securities are accounted?

A

At their fair value

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86
Q

What are held for trading securities?

A

Debt securities aquired with the intent to sell them in the near future

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87
Q

How are held for trading securities accounted?

A

On the balance at fair value with unrealized gains and losses recognized on the income statement

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88
Q

What are available for sale securities?

A

Debt securities that are not expected to be held to maturity or traded in the real term

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89
Q

What are available for sale securities accounted?

A

On the balance sheet at fair value with unrealized gain and loss in the shareholders equity

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90
Q

How are unlisted equity securities treated under GAAP?

A

Historical cost

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91
Q

How are loans and note receivables treated under GAAP?

A

Historical cost

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92
Q

How are held-to-maturity assets treated under GAAP?

A

Amortized cost

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93
Q

How are trading securities treated under GAAP?

A

Fair value

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94
Q

How are available for sale securities treated under GAAP?

A

Fair value

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95
Q

How are derivatives treated under GAAP?

A

Fair value

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96
Q

How are held for maturity securities treated under IFRS?

A

Amrotized cost

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97
Q

How are loan/notes receivables treated under IFRS?

A

Amortized cost

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98
Q

How are unlisted equity if fair value cannot be determined treated under IFRS?

A

Amortized cost

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99
Q

How are equity securities if this method was chosen when purchased treated under IFRS?

A

Measured at FVTOCI

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100
Q

How are securities with intent to collect interest but sell before maturity treated under IFRS?

A

Measured at FVTOCI

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101
Q

How are sell in the near term securities treated under IFRS?

A

Measured at FVTPL

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102
Q

How are equity securities treated under IFRS?

A

Measured at FVTPL

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103
Q

How are derivatived treated under IFRS?

A

Measured at FVTPL

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104
Q

How are any other securities treated under IFRS?

A

Measured at FVTPL

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105
Q

How are financial liabilities that are not issued at the face value treated?

A

Reported on the BS at amortized cost and any discount/premium are amortized through interest expense

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106
Q

What is common size balance sheet?

A

Each line as % of total assets

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107
Q

What are liquidity ratios?

A

Firm’s ability to satisfy short-term obligation

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108
Q

Formula of current ratio

A

Current assets/current liabilities

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109
Q

Formula of quick ratio

A

Cash+receivables+marketable securities/current liabilities

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110
Q

Formula of cash ratio

A

Cash+marketable securities/current liabilities

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111
Q

What are solvency ratios?

A

Ability to satisfy long-term obligations

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112
Q

Formula of debt-to-equity ratio

A

Total debt/total equity

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113
Q

Formula of debt ratio

A

Total debt/assets

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114
Q

Formula of finance leverage

A

total assets/total equity

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115
Q

When items are accounted in the CF statement?

A

At the time cash is received

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116
Q

What is formula for cash received?

A

sales-ending account receivable+beginning account receivable

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117
Q

What is direct CF statement method?

A

Take revenues and then adjust accordingly

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118
Q

What is indirect CF statement method?

A

Take net income and then adjust accordingly

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119
Q

What are CFI?

A

Cash inflows/outflows that result from aquiring or disposal of long-term assets and certain investments

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120
Q

What are CFF?

A

Cash inflows/outflows that result from transactions affecting a firm’s capital structure

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121
Q

Under GAAP debt/equity and loans made are which type of CF?

A

Investing

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122
Q

Under GAAP interest and dividends received are which type of CF?

A

Operating

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123
Q

Under GAAP principle amounts borrowed are which type of CF?

A

Financing

124
Q

Under GAAP interest paid are which type of CF?

A

Operating

125
Q

Under GAAP dividends paid are which type of CF?

A

Financing

126
Q

Under IFRS interest and dividends received are which type of CF?

A

Operating or investing

127
Q

Under IFRS interest and dividends paid are which type of CF?

A

Operating or financing

128
Q

Under IFRS income taxes are which type of CF?

A

Operating

129
Q

Under IFRS bank draft is an asset or liability?

A

Current asset

130
Q

Under GAAP bank draft is an asset or liability?

A

Current liability

131
Q

What is common size formal cash flow statement?

A

Each item is expressed as revenue

132
Q

What is free cash flow?

A

Measure of cash available for discretionary use after firm has covered its capital expenditures

133
Q

What is free cash flow to firm?

A

Cash available to all investors

134
Q

Formula of FCFF

A

Net income+D&A+Interest(1-t)-Fixed capital investments-Working capital investments

135
Q

What is free cash flow to equity?

A

Cash available for distribution to common shareholders

136
Q

Formula of FCFE

A

CFO-Fixed capital investments+net borrowing

137
Q

Formula of cash-flow to revenue

A

CFO/revenue

138
Q

Formula of cash-return-on-assets

A

CFO/average total assets

139
Q

Formula of cash-return-on-equity ratio

A

CFO/average total equity

140
Q

Formula of cash-to-income

A

CFO/operating income

141
Q

Formula of cash flow per share

A

CFO-pref.divs/weighted average of common shares.

142
Q

Formula of debt coverage ratio

A

CFO/total debt

143
Q

Formula of interest coverage ratio

A

CFO+interest paid+taxes paid/interest paid

144
Q

Formula of reinvestment risk

A

CFO/cash paid for long-term assets

145
Q

Formula of debt payment ratio

A

CFO/cash for long term debt repayment

146
Q

Formula of dividend payment ratio

A

CFO/dividends paid

147
Q

Formula of investing financing ratio

A

CFO/cash outflows for investing and financing activities

148
Q

Formula of net realised value

A

sales price - selling costs - completion costs

149
Q

What happens if NRV<balance sheet value?

A

Inventory is written down and loss is recognised on the IS (COGS or separate line)

150
Q

Which inventory accounting method is less likely to experience write downs?

A

LIFO

151
Q

When reporting above historical cost is permitted?

A

When it is for commodities

152
Q

What is range for market = replacement cost?

A

NRV-profit margins or NRV

153
Q

During inflationary periods of rising prices which inventory valuation method gives higher COGS

A

LIFO

154
Q

During inflationary periods of rising prices which inventory valuation method gives better true value

A

FIFO

155
Q

What is LIFO liquidation?

A

LIFO firms quantity of inventory declines

156
Q

What is effect of LIFO liquidation?

A

Higher profit margins and higher income tax

157
Q

What manufacturing firms inventory is classified?

A

Raw material, work in progress and finished goods

158
Q

What are characteristics of identifiable intangible asset? (3)

A
  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
Q

How are purchased intangible assets are accounted for?

A

Fair value at aquisition

160
Q

What is impairement?

A

Unanticipated decline in an asset’s value, causing it to fall below the carrying value

161
Q

What is derecognition?

A

Disposal or retirement of an asset

162
Q

How frequent impairement is tested for IFRS and GAAP?

A

Annually for IFRS and based on indications for GAAP

163
Q

When asset is impaired?

A

Carrying value>recovable amount

164
Q

What is recovable amount?

A

Greater of the fair value-selling costs or value in use

165
Q

What is value in use?

A

PV of future cash flows

166
Q

Where impairement is accounted in?

A

Income statement

167
Q

What is recovability test?

A

Carrying value>future undiscounted cash flow stream

168
Q

If asset is impaired under GAAP, what amount is accounted?

A

Carrying value’s excess of discounted cash flows

169
Q

What does impairement cost indicates?

A

That D&A was not sufficient

170
Q

Which type of assets are not depreciated/amotized but impaired only?

A

Held-for-sale assets

171
Q

When held-for-sale assets are impaired?

A

When carrying value>fair value-selling costs

172
Q

What happens during spinoff?

A

Daughter company becomes subsidiary of the parent company.

173
Q

Formula of fixed asset turnover

A

revenue/average fixed assets

174
Q

Formula of average age

A

Accumulated depro/annual depro expense

175
Q

Formula of total useful life

A

Gross cost/annual depreciation expense

176
Q

Formula of remaining useful life

A

Ending net PPE/annual depro expense

177
Q

What are characteristics of an lease asset? (3)

A
  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
Q

What is financial lease?

A

All benefits and risks are transferred to the lessee

179
Q

What is operating lease?

A

Either benefits or risks are not transferred to the lessee

180
Q

What are any of characteristics required for the financial lease (5)

A
  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
Q

What are exceptions for financial lease?

A

Short-term (less than 12 months) and low value (less than $5000)

182
Q

How to deal with ROU?

A

Record it on the balance sheet and include amortization on the IS

183
Q

How to deal with lease liability?

A

Reduce it by principle amount

184
Q

How operating lease in treated under GAAP for leasse?

A

ROU and asset liabilities are equal each period, on the IS interest expense and amortization are not separated

185
Q

Which metrics for operating lease under GAAP are higher or same compared to financial lease?

A

ROU asset is higher, lease liability is same, early earnings are higher, CFF are higher

186
Q

How should lessor treat financial lease?

A

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
Q

How financial lease for lessor is reported on the CF?

A

Under operating cash flows

188
Q

What is sale type lease?

A

Manufacturing or dealing companies primary operations under which sales will be recognized as revenue and carrying value of an asset as COGS

189
Q

What is direct finance lease?

A

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
Q

How operating lease is accounted for lessor?

A

Do not remove the asset from the balance sheet, record depreciation and lease payment as income on the IS

191
Q

What is deffered compensation?

A

Employees earn compensation in current period but do not receive cash flows until later

192
Q

What is defined contribution plan?

A

Firm contributes a sum each period to the employees account

193
Q

What is defined benefit plan?

A

It is a promise to make periodic payments after employees retirement

194
Q

How defined benefit plan is accounted?

A

On the liability side as PV of future payments to the employees as net pension asset or liability

195
Q

When net pension asset occurs?

A

Fair value of plan’s assets > obligations

196
Q

When net pension liability occurs?

A

Obligations > fair value of plan’s assets

197
Q

What is service cost?

A

PV of additional benefits employees are entitled because of additional years of work

198
Q

Where servie costs is accounted for under IFRS?

A

Income statement

199
Q

Formula of net interest expense/income of pensions plan

A

net pensions asset/liability*plan’s discount rate

200
Q

Where net interest expense or income is accounted under IFRS?

A

Income statement

201
Q

What are remeasurements?

A

Actuarial or difference between actual and expected returns

202
Q

What are acturalial?

A

Changes in the inputs of estimations

203
Q

Where reameasurement are accounted in under IFRS?

A

OCI

204
Q

Where service costs for current period are accounted for under GAAP?

A

Income statement

205
Q

Where interest income or expense are accounted for under GAAP?

A

Income statement

206
Q

Where expected return on plan’s assets are accounted for under GAAP?

A

Income statement

207
Q

Where past service costs are accounted for under GAAP?

A

OCI

208
Q

Where actuarial gains or losses are accounted for under GAAP?

A

OCI

209
Q

How to account for stock based compensation?

A

Estimate fair value at the grant date and expense it to the income statement over vesting period

210
Q

What is vesting period?

A

Time between grant date and when the employee received the stock or can exercise stock option

211
Q

What is stock grant?

A

Awarded right with restrictings or contingent on performance

212
Q

How fair value of stock grant is determined?

A

Fair value = share price on grant date

213
Q

What are performance shares?

A

Grants of shares depending on the meeting of a target

214
Q

What are employee stock options?

A

Option’s to invest in the company’s stock at a given price at a future date.

215
Q

Accounting of stock grants when vesting is immediate

A

Fair value is expensed on the income statement and both common stock and additional paid in capital are increased by this amount

216
Q

Accounting of stock grants when vesting is not immediate

A

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
Q

Accounting of stock options before the exercise

A

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
Q

Accounting of stock options on the exercise

A

Cash increases, and equity increases by the same amount between common stock and APIC.

219
Q

What are stock-appreciation rights?

A

Employees receive benefits based on the change in the company stocks, without needing to hold them.

220
Q

What is taxable income?

A

Income subject to tax based on the tax return

221
Q

What is tax payable?

A

Tax liability caused by taxable income, current tax expense

222
Q

What is income tax paid?

A

Actual cashflows for income taxes, including payments or refunds from other years

223
Q

What is tax loss carryforward?

A

Current or past tax loss that can be used to reduce taxable income in the future

224
Q

What is tax base?

A

Net amount of an asset or liability used for tax reporting purposes

225
Q

What is accounting profit?

A

Income before tax

226
Q

What is income tax expense?

A

Expense on income statement that includes tax payable and changes in deffered tax liability/assets

227
Q

What is deffered tax asset?

A

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
Q

What is deffered tax liability?

A

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
Q

What is valuation allowance?

A

Reduction of deffered tax assets based on the likelihood that assets will not be realized

230
Q

What is carrying value?

A

Net balance sheet value of an asset or liability

231
Q

What are permanent differences?

A

Difference between taxable income and pretax income that will not reverse in the future

232
Q

What are temporary differences?

A

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
Q

When deffered tax liability occurs?

A

-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
Q

When deffered tax assets occur?

A

-Revenue are taxable before they are recognised on the IS or
-expenses are recognized in the income statement before they are tax deductible

235
Q

When an asset will create DTL?

A

Carrying value > tax base

236
Q

When a liability will create DTL?

A

Tax base > carrying value

237
Q

What is formula for tax expense?

A

Tax payable + changes in DTL - changes in DTA

238
Q

What is relationship between statutory tax rate and DTA/DTL?

A

Direct

239
Q

When diminishing value of a DTA will be determined?

A

When there is sufficient evidence that DTA benefits cannot be realized in the future

240
Q

How diminishing value of a DTA is accounted for under IFRS?

A

DTA will be reduced and tax expense will be increased

241
Q

How diminishing value of a DTA is accounted for under GAAP?

A

Full DTA will remain on the balance sheet, but reduced by the valuation allowance

242
Q

What is valuation allowance?

A

Contra account which increases income tax expense and decreases net income

243
Q

What causes statutory and effective tax rate to differ? (4)

A

Different jurisdictions with different tax rates, permanent tax differences, changes in rates and legislations, tax holidays

244
Q

Formula for effective tax rate

A

income tax expense/pretax income

245
Q

Formula for cash tax rate

A

cash taxes paid/pretax income

246
Q

Depreciation usually leads to DTA or DTL?

A

DTL

247
Q

Impairements usually lead to DTA or DTL?

A

DTA

248
Q

Post-employment benefits usually lead to DTA or DTL?

A

DTA

249
Q

What characteristics are seen in decision usefull financial reporting?

A

Relevance and faithfulness

250
Q

What is described as relevance?

A

Useful in making decisions and material

251
Q

What is described as faithful?

A

Completeness, neutrality and absence of errors

252
Q

What is earnings sustainability?

A

Portion of the earnings that can be sustained

253
Q

What is concervative accounting?

A

Decrease in earnins and BS, which increase in the future

254
Q

What is aggressive accounting?

A

Increase in earnings and BS, which decreases in future

255
Q

What is earnings smoothing?

A

Adjustments of accrued liabilities based on management activities

256
Q

What is channel stuffing?

A

Overloading distribution channel with made goods that would normally be sold

257
Q

What is bill-and-hold transactions?

A

Customer buys the goods and received an invoice but request that firm would hold goods for period of time

258
Q

How does higher allowance for bad debt affects net income?

A

Decreases

259
Q

How does increase in valuation allowance affect net income?

A

Decrease

260
Q

What is streching payables?

A

Taking longer to pay suppliers

261
Q

What are activity ratios?

A

It shows how efficiently assets are used

262
Q

Formula of receivable turnover

A

annual sales / average receivables

263
Q

Formula of days of sales outstanding

A

365 / receivable turnover

264
Q

Formula of inventories turnover

A

COGS / average inventories

265
Q

Formula of number of days of inventory

A

365 / inventory turnover

266
Q

Formula of payables turnover

A

purchases / average trade payables

267
Q

Formula of purchases

A

ending inventory - beg. inventory + COGS

268
Q

Formula of number of days of payables

A

365 / payables turnover ratio

269
Q

Formula of total asset turnover

A

revenue / average total assets

270
Q

Formula of fixed assets turnover

A

revenue / average net fixed assets

271
Q

Formula of working capital turnover

A

revenue / average working capital

272
Q

What are liquidation ratios?

A

Ability to pay short-term liabilities

273
Q

Formula of defensive interval ratio

A

(cash+marketable securities+receivables)/average daily expenditures

274
Q

What is defensive interval ratio

A

It shows number of days of average cash expenditures the firm could cover with its current liquid assets

275
Q

Formula of cash conversion cycle

A

days of sales outstanding + days of inventory on hand - number of days of payables

276
Q

What is cash conversion cycle?

A

Time between paying suppliers and receiving cash from customers

277
Q

What are solvency rations?

A

Ability to meet long-term obligations

278
Q

Formula of debt to assets ratio

A

Total debt / total assets

279
Q

Formula of leverage ratio

A

Average total assets / average total equity

280
Q

Formula of interest coverage

A

EBIT / interest payments

281
Q

Formula of debt-to-EBITDA

A

Total debt/EBITDA

282
Q

Formula of fixed charge coverage ratio

A

EBIT+lease payments/interest payments+lease payments

283
Q

Formula of ROA

A

net income / average total assets or net income+interest expense(1-tax rate)/average total assets

284
Q

Formula of operating ROA

A

EBIT/average total assets or operating income/average total assets

285
Q

Formula of return on capital invested

A

EBIT/average total capital

286
Q

Formula of ROE

A

net income/total average equity

287
Q

Formula of ROE on common equity

A

net income available to common shareholders/average common equity

288
Q

What is simple Du-pond formula of ROE

A

ROA*financial leverage

289
Q

What is three step ROE formula?

A

net profit margin* total asset turnover * financial leverage

290
Q

What is five step ROE formula?

A

tax burden* interest burden * EBIT margin * total asset turnover * financial leverage

291
Q

Formula of tax burden

A

net income/EBT

292
Q

Formula of interest burden

A

EBT/EBIT

293
Q

What are main banking industry ratios used (3)

A

Capital adequacy, reserve requirement, net interest margin

294
Q

Formula of capital adequacy ratio

A

Eligible capital/risk-weighted assets

295
Q

Formula of net interest margin

A

interest income/interest earning assets

296
Q

Formula of coefficient of variation

A

standard deviation/mean

297
Q

What is overconfidence bias?

A

Too much faith in ones work

298
Q

What is illusion of control bias?

A

Overestimating what analysts can control, making overly complex models, justifying their assumptions

299
Q

What is conservatism bias (anchoring)?

A

Making only small adjustments to historical forecasts when new information becomes available

300
Q

What is representation bias?

A

Tendency to rely on known classifications

301
Q

What is base-rate neglect?

A

Underestimate background information and focus on more specific/vivid details

302
Q

What is configuration bias?

A

Seek out data that affirms earliers convictions nad underestimate information that contradicts those opinions

303
Q

What are Porter’s five forces?

A

Threat of substitute products, intensity of industry rivarly, bargaining power of suppliers, bargaining power of customers, threat of new entrants

304
Q

How long should be time horizon to include?

A

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
Q

What are normalized earnings?

A

Expected midcycle earnings or extected earnings when current effects of events are no longer affecting earnings

306
Q

What are inflection points?

A

When future earnings are not like the past and changes occur

CFA level I (12 decks)

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