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AFM212 > week 1 | framework for analysis & valuation > Flashcards

week 1 | framework for analysis & valuation Flashcards

1
Q

describe financial statement analysis

A

The process of extracting info from FSs to better understand a company’s current & future performance & financial condition

FSs serve many objectives
- Management
- Investors & analysts
- Creditors, lenders, & rating agencies
- Regulatory agencies

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2
Q

describe valuation

A

current value of expected payoffs

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3
Q

Cost of High Quality Financial Disclose

A

Compliance & audit costs
Monitoring cost
Proprietary costs
Litigation cost
Competitive disadvantage
Political costs

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4
Q

Benefit of High Quality Financial Disclose

A

Access to capital
Good reputation
Valuation & analysis
Risk assessment

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5
Q

2 primary reports companies must supply

A

Form 10-K & Form 10-Q

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6
Q

what is the Form 10-K

A

it is an audited Annual Report
- 4 FS
- Explanatory notes
- Management’s discussion & analysis (MD&A)
- Filed within 60 [90] days of year-end for larger [smaller] firms

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7
Q

what is the Form 10-Q

A

it is an unaudited Quarterly Report
- Summary versions of the 4 FS
- Limited additional disclosures
- Filed within 40 [45] days of year-end for larger [smaller] firms

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8
Q

where can you find form 10-k & 10-q

A

SEC website

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9
Q

what does managers do with financial accounting info

A

Managers consider the benefits & costs of disclosure when deciding on the quantity & quality of accounting info to supply

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10
Q

Info Beyond Financial Statements

A

Financial statement footnotes
Management Discussion & Analysis (MD&A)
Independent auditor report
Regulatory filings → proxy statements (DEF 14A) & other SEC filings (8K)
Prospectus (S1)
Analyst Research Reports
ESG Reporting

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11
Q

whats the point of SEC’s regulation fair disclosure

A

Goal is to curb the practice of selective disclosure by public companies

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12
Q

3 types of different assurance of financial reports

A

notice to reader (complication)
review engagement
audit engagement

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13
Q

describe notice to reader

A

Assurance Level: None
Cost: Low
Complexity: Simple
Scope: Organizing info from management w/o verification
Use: Internal use or small companies

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14
Q

describe review engagement

A

Assurance Level: limited
Cost: moderate
Complexity: intermediate
Scope: Inquiry & analytical procedure to provide limited assurance
Use: Small companies seeking loans or private companies w/ external investors

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15
Q

describe audit engagement

A

Assurance Level: reasonable
Cost: high
Complexity: complex
Scope: Inquiry & analytical procedure to provide limited assurance
Use: Public companies, large private companies issuing bonds or requiring loans

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16
Q

what is an industry

A
  • A group of companies & organizations that produce similar products or provide similar services
  • Classified based on the primary business activities of the companies within
17
Q

Commonly Used Industry Code System

A
  • NAICS (North American Industry Classification System)
  • SIC (Standard Industrial Classification)
  • GICS (Global Industry Classification Standard)
18
Q

describe NAICS

A

(North American Industry Classification System)

Used primarily in the US, Canada, & Mexico to classify business establishments by type of economic activity

19
Q

describe SIC

A

(Standard Industrial Classification)

An older system that is still in use in some contexts, particularly for historical data comparison & some specific industries

20
Q

describe GICS

A

(Global Industry Classification Standard)

Developed by MSCI & Standard & Poor’s for use by the global financial community, particularly for investment research & portfolio management

21
Q

what is porter’s 5 forces

A
  1. barrier to entry
  2. existing competition
  3. entry & exit
  4. threat of substitute products
  5. bargaining power of buyer
  6. bargaining power of suppliers
22
Q

economic/business cycle

A

expansion > peak > recession > depression > trough > recovery

23
Q

product life cycle

A

introduction > growth > maturity > decline

24
Q

External Factors that Affect Industries

A
  • economic environment
  • international
  • political environment
  • social environment
  • technology
25
Q

examples of external factor: economic environment

A
  • recession
  • interest rate
  • taxes
26
Q

examples of external factor: international

A
  • Local economic & labor conditions
  • Political instability
  • Tax laws
  • Local & national gov’t regulations
27
Q

examples of external factor: political

A
  • Regulations
  • President election
  • Trade agreement
  • Any gov’t policies affecting supply & demand
28
Q

examples of external factor: social environment

A
  • Customs & conventions
  • Cultural
  • Fashion trend
  • Ethic/issues
29
Q

examples of external factor: technology

A
  • new process
  • new product
30
Q

what is form 20-F/6-K

A

Annual/semi-annual report for non-US firms

31
Q

describe Form DEF-14A

A
  • Proposal required to vote
  • Details of ownership
  • Biographic info on directors
  • Disclosure of executive compensation
32
Q

describe Form 8-K

A
  • Wide-range of corporate events, reported within 4 days
    • Entry into or termination of a material definitive agreement (including petition for bankruptcy)
    • Exit from a line of business or impairment of asset
    • Change in company’s certified public accounting firm
    • Change in control of the company
    • Departure of the company’s executive officers
    • Changes in the company’s articles of incorporation or bylaws
  • Major creditor agreement (full, pricing, collateral)
  • MD&A → target performance
33
Q

what does common size mean

A

vertical analysis/right-sizing

34
Q

Common Size BS

A
  • Expresses the BS in % terms
  • Every line items on the BS (A, L & EQ) divided by total assets
  • Compare a company across 2 or more years
  • Compare 2 or more companies – adjusts for size & currency differences
  • Compare a company to industry or other benchmark
35
Q

Common Size IS

A
  • Expresses the IS in % terms
  • Every line items on the IS divided by total revenue
  • Compare a company across 2 or more years
  • Compare 2 or more companies – adjusts for size & currency differences
  • Compare a company to industry or other benchmark

AFM212 (7 decks)

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