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IMC > Unit 2 > Flashcards

Unit 2 Flashcards

1
Q

perfect symmetry

A

mode = median = mean

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2
Q

positive skew

A

mode < median < mean

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3
Q

negative skew

A

mean < median < mode

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4
Q

normal distribution: 1sigma, 1.96sigma

A

1s = 68%, 1.96s = 95%

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5
Q

why calculate future and present values

A

future flows are less certain (risk)
greater purchasing power (inflation)
greater flexibility if received today
- investors require additional return to compensate for delayed receipt

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6
Q

why calculate future and present values

A

future flows are less certain (risk)
greater purchasing power (inflation)
greater flexibility if received today
- investors require additional return to compensate for delayed receipt

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7
Q

Future value formula

A 
FV = CF x (1+r)^n
CF = cash flow
r = growth
n = time period
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8
Q

Single cash flow discount factor

A

PV (present value_ = cash flow at t_n /(1+r)^n

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9
Q

Single cash flow discount factor

A

PV (present value_ = cash flow at t_n /(1+r)^n

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10
Q

Present value of an annuity

A

PV = 1/r x [1-1/(1+r)^n]

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11
Q

perpetuity

A

infinite number of equal cash flows

PV at Time 0 = CF * 1/r

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12
Q

Continuous compounding

A

FV = CF * e^(rt)

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13
Q

Net present value (NPV)

A

present value of cash inflows - present value of cash outflows
+VE? worthwhile investment
-VE? not worthwhile

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14
Q

demand curve: the price effect

A

as price falls, leads to increase in quantity demanded

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15
Q

other influences on demand

A

Other influence (not price) leads to an inc in quantity demanded = shift in demand
price of other goods: substitutes (e.g. tea more demand when coffee price inc), complements (e.g. cream with strawberries)
income: normal goods, superior goods (buy more $$$ things when income increases), inferior goods

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16
Q

supply driven by

A

profitability. change in price moves us along the existing curve.

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17
Q

What shifts supply

A

costs, technology, natural factors, political factors or taxes

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18
Q

price mechanism

A

supply = demand: equilibrium

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19
Q

Elasticity measures

A

Relative change in quantity demanded

- Price elasticity - Cross elasticity - Income elasticity

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20
Q

elastic vs inelastic

A

elastic: demand changes more than price (-1 -> -5 ->): luxuries, non-essential goods and services
inelastic: demand changes less than price (-1 -> 0): food, household, personal care (necessities)

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21
Q

unitory elasticity of demand

A

when elasticity = -1

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22
Q

Cross elasticity

A

change in quantity demanded/change in price of another good (substitute/complementary)
+ve = substitute goods
-ve = complemetary goods

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23
Q

Income elasticity of demand

A

Price/income
Normal goods e.g. cars/TVs: positive
Saturated goods e.g. toothpaste: nil/zero
Inferior goods: negative

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24
Q

Revenue
Costs
Profits

A

Revenue = sales: amount a firm earns from selling its output (price x quantity)
Costs: outgoings associated with production of goods for sale
Profits: revenue minus costs. economists assume firms make decisions to maximise profits

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25
Q

marginal revenue

A

additional revenue gained by selling one additional item

change in revenue/change in quantity

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26
Q

average revenue

A

price of one item. total revenue/quantity

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27
Q

factors of production

A

land and raw materials: rent

labour: wages
capital: interest rates
entrepreneurship: director salaries

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28
Q

average total cost

A

average fixed cost + average variable cost

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29
Q

average fixed cost vs average variable cost

A

average fixed cost: constantly declines in price as quantity dec
average variable cost: cost declines and then increases as quantity inc

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30
Q

when maximise profitability

A

when marginal revenue and marginal cost equal each other

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31
Q

marginal cost curve cuts average total cost curve where

A

at a minimum point of ATC curve and from below

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32
Q

minimum efficient scale

A

there’s a quantity which will minimise ?

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33
Q

equilibrium condition

A

output = income = expenditure

34
Q

leakage and injections in equilibrium

A

leakage: savings, taxation, imports
injections: investment, government expenditure, exports

35
Q

classical economics

A

believe in power of free markets: invisible hand
economy tends to equilibrium without intervention. says law: production creats it’s own demand
natural equilibrium: full employment
government: no major role in enconomy

36
Q

interwar period effect on classical economics

A

supply creating its own demand was not working:
mass unemployment
falling wages, falling prices and falling demand

37
Q

keysian economics

A

no one single equilibrium for an economy
equil level of activity in economy determined by level of aggregate demand
role of government manage the appropriate level of demand: demand-management econ, pump-prime the economy
- demand too high = inflation
- demand too low = unemployment
- in between is full employment equilibrium

38
Q

fiscal policy

A

taxation + government spending
expansionary fiscal policy: increase government spending, reduce taxation
restrictive fiscal policy: increase taxation, reduce government spending

39
Q

monetary policy

A

money supply and interest rates

expansionary: increase money supply, reduce interest rates
restrictive: increase interest rates, reduce money supply

40
Q

problems of economic management

A
  • fiscal policy decisions difficult to time due to: info lags, reaction lags and response lags
  • crowding out effect
  • automatic stabilisation policies
  • stagflation
41
Q

crowding out effect

A

increased Government spending, increased through borrowing, leads to higher interest rates, leading to lower private sector investment levels

42
Q

automatic stabilisation policies

A

automatically apply as economy grows or contracts
will increase the Government’s budget deficit during a recession
will reduce the budget deficit or create a budget surplus during peak economic periods

43
Q

stagflation

A

where both higher unemployment and high inflation levels exist simultaneously
therefore the trade-off is temporary and not permanent

44
Q

phillips curve short run + long run

A

short run: recognises a trade-off between unemployment and inflation
long run: recognises existence of natural rate of unemployment

45
Q

monetarist agenda

A

priority is to control inflation therefore control money supply to control inflation
(too much money in supply -> excessive spending)
MPC responsible for setting interest rates
2% inflation target based on CPI measure. if inflation > 1% in either direction from 2%, MPC must explain

46
Q

quantity theory of money

A

(total expenditure) money supply * velocity = prices * level of transactions (nominal output)
change M + change V = change P = change Y

47
Q

foreign exchange: spot market

A

market for immediate currency transactions: buying or selling currency today at the today’s exchange rate. settlement is T+2

48
Q

currency quotations

A

single unit of one currency: fixed/base currency
number of units of another currency: variable currency
in fx markets, by convention one of these would be the $

49
Q

currency quotations

A

single unit of one currency: fixed/base currency
number of units of another currency: variable currency
in fx markets, by convention one of these would be the $

50
Q

forward exchange contract

A

agreement to undertake a future FX deal at a rate and date agreed today.
Forward rates quoted against spot rates at either a premium or discount
(premium: subtracted from spot to calculate forward rate. discount added to spot)

51
Q

UK balance of payments made up of

A

current account and capital account (inc UK investment abroad and foreign investment into UK)

52
Q

objectives of accounting

A

record and summarise an organisation’s transaction for benefit of management
report to company’s owners, the shareholders
enable analysis and assessment by other interested parties

53
Q

auditor’s report

A

adequate accounting records
‘true and fair’ opinion
‘clear’ or ‘qualified’ report

54
Q

EU audit directive and regulation provisions

A
  • audit firms of public interest entities to rotate after a period of 10 years
  • audit committees must include at least one member with competence in accounting and/or auditing
55
Q

required annual statements delivered annually to registrar of companies

A
  • balance sheet (aka statement of financial position)
  • comprehensive income statement (profit and loss account)
  • director’s report
  • auditor’s report
  • cash flow statement
  • statement of changes in equity
56
Q

small and medium sized company exempt from __. but what do they need to satisfy

A 
preparing and delivering full annual financial statements to registrar of companies
need to satisfy 2/3 of:
revenue: sm <10.2m md <36m
balance sheet total: sm <5.1m <18m
avg no. of employees sm <50 md <250
57
Q

public limited company

A

min issued share capital of 50k
at least 25% paid-up
registered as public company
adv: ability to offer shares to public and access to greater amounts of capital

58
Q

private limited company

A

any other company that’s not a plc

59
Q

close company

A

defined in income and corporation taxes act is a company under control of 5 or less

60
Q

balance sheet (statement of financial position)

A

company’s financial position at a particular point in time.
cumulative since inception of company
assets, liabilities and shareholders’ funds (share capital and reserves)

61
Q

comprehensive income statement

A

company’s performance over a specified period of time, covering a one year trading period
more detailed analysis of the retained income (as shown in the reserves in the balance sheet)

62
Q

cash flow statement

A

summary of cash movements during trading period

cash flows from: operating activities, investing activities and financing activities

63
Q

balance sheet: net assets and capital employed

A

net assets = non-current assets + current assets - non current liabilities - current liabilities = shareholders’ funds (equities)
capital employed = non current assets + current assets - current liabilities = shareholder funds + net current liabilities

64
Q

current assets

A

inventories: raw materials, work in progress, finished goods
trade receivables (debtors): amount the company is owed by 3rd parties on balance sheet date
available-for-sale: held for short term and sold within 12 months
cash: held at bank and cash-in-hand, not overdraft as this is current liability

65
Q

current liabilities

A

current liabilities: paid within 12 months
bank overdraft and loans with less than 12 months to repayment, loan capital with less than 12 month until redemption, trade payables, corporation tax payable, accruals and deferred income

66
Q

non current liabilities

A

payable after more than 12 months

bank loans, corporate bonds (loan capital), debentures and unsecured loan stock

67
Q

contingent liability

A

potential liability but not specifically predictable to warrant specific provision in the financial statements

68
Q

share capital

A

nominal value (aka par) of shares in issue (not shares authorised to be issued)

69
Q

retained earnings reserve

A

profit made by company not yet distributed as dividends

70
Q

capital reserves

A

share premium (amount shares were issued for above the nominal value) + revaluation reserve (upward valuation of non current assets

71
Q

minority interests (non controlling interests)

A

portion of net assets belonging to the minority shareholders in subsidiaries

72
Q

inventory valued at

A

the lower of cost and net realisable value

73
Q

inventory valuation cost

A

FIFO: assumes oldest items sold first, newest items remain in inventory
LIFO: assumes newest items sold first, inventory may contain old items
Weighted average cost method

74
Q

main 3 headings in cash flow statement

A

operating activity cash flows: cash from operations and tax paid
investing activity cash flows: capital expenditure, acquisitions/disposals
financing activity cash flows: raising and repayment of capital

75
Q

main 3 headings in cash flow statement

A

operating activity cash flows: cash from operations and tax paid
investing activity cash flows: capital expenditure, acquisitions/disposals
financing activity cash flows: raising and repayment of capital

76
Q

associate undertaking: company A owns 31% of company b

A

balance sheet: A owns 31% of net assets

income statement: A owns 31% of profits

77
Q

return on capital employed

A

operating profit/capital employed (or profit margin x sales/capital employed
capital employed: share capital+reserves+long term borrowing OR equity + debt OR NCA + CA - CL

78
Q

return on equity

A

measures amount of profits generated in relation to equity book value
= net income(less preference dividends)/total equity

79
Q

operational gearing

A

measures sensitivity of profits to changes in sales revenue. high fixed costs can become a burden in less profitable years
(operating profit + fixed costs)/operating profit or (sales revenue - variable costs)/operating profit

80
Q

can company meet its shorter term liabilities? current ratio: current assets/current liabilities

A

> 1 is good, as company is solvent.

81
Q

gearing: measure extent company is financed by debt

A

if level of debt too high: equity returns potentially more volatile, risk of corporate collapse

IMC (9 decks)

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