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112 Cards in this Set
- Front
- Back
Quality of Earnings |
Quality of reported earnings can be judged based on the sustainability of the earnings as well as on their level. Sustainability can be evaluated by determining the proportion of reported earnings that can be expected to continue into the future. |
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Financial Reporting Quality |
Refers to the characteristics of a firm's financial statements. Primary criterion for judging financial reporting quality is adherence to GAAP in the jurisdiction in which the firm operates. Must be decision useful - relevance and faithful representation |
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Valuation Allowance |
A contra account that reduces the deferred tax assets value on the balance sheet. If it is more likely than not that some or all of a DTA will not be realized, then the DTA must be reduced by a [XX]. Increasing the [XX] will increase income tax expense and reduce earnings. If circumstances change, DTA can be revalued by decreased [XX]. |
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Deferred Tax Assets |
Created when taxes payable are greater than income tax expense due to temporary differences. Occur when: - Revenues are taxable before they are recognized in income statement - Expenses are recognized in the income statement before they are tax deductible - Tax loss carry forwards are available to reduce future taxable income |
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Deferred Tax Liabilities |
Created when income tax expense is greater than taxes payable due to temporary differences. Occur when: - Revenues are recognized in the income statement before they are included on the tax - Expenses are tax deductible before they are recognized in the income statement |
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Temporary Difference |
A difference between the tax base and the carrying value of an asset or liability that will result in taxable accounts or deductible amounts in the future. If a [XX] is expected to reverse in the future and the balance sheet item is expected to provide future economic benefits, a DTA or DTL is created. |
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Permanent Difference |
A difference between taxable income and pretax income that will not reverse in the future. Can be caused by revenue that is not taxable, expenses that are not deductible, or tax credits that result in a direct reduction of taxes. |
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Cash Conversion Cycle (Days sales outstanding) + (Days of inventory on hand) - (number of days of payables) |
The length of time it takes to turn the firm's cash investment in inventory back into cash, in the form of collections from the sales of that inventory. |
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Defensive Interval Ratio (Cash + marketable securities + receivables) / average daily expenditures |
A measure of liquidity that indicates the number of days of average cash the firm could pay with its current liquid assets. |
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Cash Ratio Cash + marketable securities / current liabilities |
Useful to creditors when deciding how much debt, if any, they would be willing to extend to the asking party |
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Quick Ratio Cash + marketable securities + receivables / current liabilities |
A more stringent measure of liquidity because it does not include inventories and other assets that might not be very liquid. |
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Current Ratio Current Assets / Current Liabilities |
The higher the [XX] ratio, the more likely it is that the company will be able to pay its short term bills. A ratio less than 1 means that the company has negative working capital and is probably facing a liquidity crisis. |
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Free Cash Flow to Equity 1. Cash flow from operations 2. (Capital spending) 3. Sale of fixed assets 4. Debt issued 5. (Debt repaid) |
How much cash can be paid to the equity shareholders of the company after all expenses, reinvestment and debt repayment. |
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Free Cash Flow to the Firm 1. Operating cash flow 2. (Expenses) 3. (Taxes) 4. (Changes in NWC) 5. (Changes in investments) |
The cash available to all investors, both equity owners and debt holders |
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Indirect Method of Presenting Cash Flows from Operating Activities |
Net income is adjusted for transactions that affect net income but do not affect operating cash flow, such as depreciation, and for changes in balance sheet items. The main advantage of this method is that it focuses on the differences between net income and operating cash flow. This provides a useful link to the income statement when forecasting future operating cash flow. |
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Direct Method of Presenting Cash Flows from Operating Activities |
Each line item of the accrual-based income statement is adjusted to get cash receipts or cash payments. The main advantage of the direct method is that it presents clearly the firm's operating cash receipts and payments. |
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Goodwill |
The excess of purchase price over fair value of the identifiable net assets acquired in an acquisition. Is not amortized but must be tested for impairment at least annually. |
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Comprehensive Income |
Measures all changes to equity other than those from transactions with shareholders. |
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Straight Line Depreciation |
Equal amount of depreciation expenses in each year of the asset's useful life. |
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Declining Balance Depreciation |
Apply a constant rate of depreciation to the declining book value until book value equals residual value. |
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Matching Principle |
Requires that firms match revenue with expenses required to generate them. One application of [XX] principle is seen in accounting for inventory, with COGS as the cost of units sold from the inventory that are included in current period revenue. Other costs are period costs and are taken without regard to revenues generated during the period. |
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1. There is evidence of an arrangement between the buyer and the seller 2. The product has been delivered or service rendered 3. Price is determined or determinable 4. Seller is reasonably sure of collecting money |
According to guidance by the SEC, what are the 4 additional criteria to determine whether revenue should be recognized? |
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- Risk/reward of ownership is transferred - There is no continuing control or management over goods sold - Revenue can be reliably measured - There is a probable flow of economic benefits - The cost can be reliably measured - Stage of completion can be measured - Cost incurred and cost of completion can be reliably measured |
According to the IASB, when is revenue recognized from (1) the sale of goods and (2) services rendered? |
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When a bond is redeemed before maturity, a gain or loss is recognized equal to the difference between the redemption price and the book value of the bond liability at re-acquisition date. GAAP requires that any remaining unamortized bond issuance costs must also be written off and included in the gain and loss calculation. |
Derecognition of Debt (& GAAP) |
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Cash Flows From Operating Activities |
Consist of the inflows and outflows of cash resulting from transactions that affect a firm's net income. |
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Cash Flows From Investing Activities |
Consist of the inflows and outflows of cash resulting from the acquisition or disposal of long-term assets and liabilities. |
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Cash Flows From Financing Activities |
Consist of the inflows and outflows of cash resulting from transactions affecting a firm's capital structure, such as issuing or repaying debt/stock. |
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Other Comprehensive Income |
Transactions with shareholders are not reported in the income statement. Includes other transactions that affect equity but do not affect net income. - Gains/losses from FX translation - Pension obligation adjustments - Unrealized gains/losses from cash flow from hedging derivatives - Unrealized gains/losses on available for sale securities |
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Statement of Comprehensive Income |
Reports all changes in equity except for shareholders transactions. |
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Statement of Changes in Owners Equity |
Stockholders' equity from last year is reconciled from this year. Buyback of shares, issuance of shares, dividends, Net income from the income statement, and other comprehensive income (unrealized gains and losses). |
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1. Basis of presentations 2. Accounting methods and assumptions 3. Further information on amount in primary statements 4. Business acquisition and disposals |
What are the importance of footnotes? |
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Management Discussion and Analysis |
Not Audited: (Therefore not completely dependable) A description of how the firm has done in the past and how it will preform in the future. It breaks down its operations and explains how they are doing it. It is basically an overview of the business. Cash flow trends Discussion on critical accounting choices (also discussed here as well as at disclosure.) Uncertainty and risk is discussed here. |
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Audit Report |
The Audit is an independent review of the companies financial statements - Appointed by the shareholders - It strives to reduce agency cost (making sure the management isn't hiding anything from the shareholders. |
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Reasonable Assurance |
Reasonable assurance that the financial statements are free from material error. |
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Unqualified Opinion |
The auditor believes the statements are free from material omissions and errors. |
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Qualified Opinion |
Exceptions to accounting principles. The auditors disagree with certain parts of the treatment of the financial statements. |
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Adverse Opinion |
We do not believe the accounts are true. This states that the financial statements cannot be trusted. |
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Disclaimer of Opinion |
There is insufficient data to make an opinion |
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1. Responsibility of management to prepare accounts 2. Properly prepared in accordance with relevant standards 3. Accounting principles and estimates chosen are reasonable |
Audit Report |
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Quarterly, Semi-Annual Reports |
Updates of major accounting statements (Balance sheet, cash flow, income statement and footnotes. |
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Proxy Statements |
Contain information on what shareholders are voting on. |
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Financial Statement Analysis Framework |
1. Purpose and context of analysis 2. Collect data 3. Process data 4. Analyze/interpret data 5. Conclusion and recommendations 6. Update analysis on periodic basis |
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1. Must provide opinion on company's internal controls 2. Does not cover the management discussion |
Regarding the report of of independent auditors under U.S. GAAP, the audit report: |
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Additional Paid In Capital |
Any increases in share value. |
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= last year's RE + earnings - dividends |
Retained Earnings |
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Financial Accounting Standards Board |
The major standards board of the US |
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1. Protect investors 2. Ensure markets are fair, transparent, and efficient 3. Reduce systematic risk |
International Organization of Security Commission |
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1. Relevance - The information can influence users opinion - Materiality 2. Characteristics: - Comparability - Verifiability - Timeliness - Understandability |
IFRS Framework |
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- Balance Sheet - Income Statement - Statement of Comprehensive Income - Changes in Equity - Cash Flow Statements - Accounting Policies, notes |
IASB Required Statements |
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- Fair Presentation - Going Concern - Accrual Basis - Consistency - Materiality |
IASB Fundamental Principles |
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IFRS/GAAP Differences |
- FASB defines income and expenses as elements related to performance while IASB also includes gains, losses, and comprehensive income. - FASB defines an asset as a future economic benefit where IASB defines it as a resources from which economic benefits comes from. - FASB Does not allow upward valuation |
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Sales Basis Method |
Used for when a good or service is provided at time of sale |
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Percentage of Completion |
A construction revenue recognition criteria. Must have reliable estimates of total costs, revenues, and completion time. Same for IFRS and GAAP. |
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Completed Contract Method |
Keeps everything out of the income statement until the contract is actually fulfilled. So just total the costs and sale in the end! Not allowed under IFRS! US GAAP only! |
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Cost Recovery Method |
There are two sources of uncertainty: 1) Whether the customer will pay you. 2) You don't know the total cost of the service or goods provided. Match costs against revenue and not recognize revenue till the end. |
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Installment payments under IFRS |
You record the PV value of the installments and record whatever difference you actually receive from the installments as interest earned over time. If the outcome of the project cannot be estimated reliably, revenue recognition under IFRS is similar to cost recovery method. |
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Non-Operating Items |
1. Interest 2. Dividends 3. Gain/loss on disposal |
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Tax Loss Carry Forward |
When you have a net loss you get a deferred tax for next year |
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Tax Base |
Net amounts of assets or liabilities used for tax reporting purposes |
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Reasons for temporary tax differences |
- Different amortization rates - Impairments - Changes in tax rates - Inventory accounting - Warranty expenses - Unrealized gains and losses with securities. - Restructuring. |
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1. IFRS allows revaluation of PPE 2. Undistributed profits from subsidiaries, JVs, and associates 3. IFRS recognizes if recoverable is probably 4. GAAP includes full amount and just reduces by valuation allowance (don't see VA under IFRS) 5. Tax rate used to measure deferred tax rates because simply there are different tax authorities 6. Presentation differs |
Differences between US GAAP and IFRS in regards to tax deferral. |
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Proxy Statement |
Contain information related to matters that come before shareholders for a vote, such as elections of board members. |
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General Journal |
A listing of all the journal entries in order of their dates. |
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General Ledger |
Sorts the entries in the general journal by account. |
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Form S-1 |
Registration statement filed prior to the sale of new securities to the public. |
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Form 10-K |
Required annual filing that includes information about the business and its management, audited financial statements and disclosures, and disclosures about legal matters involving the firm.
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Form 10-Q |
U.S. firms are required to file this form quarterly, with updated financial statements and disclosures about certain events. |
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Form DEF-14A |
When a company prepares a proxy statement for its shareholders prior to the annual meeting or other shareholder vote, also files this form. |
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Form 8-K |
Companies must file this form to disclose material events including significant asset acquisitions and disposals, changes in management or corporate governance, or matters related to its accountants, FS, or the markets. |
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Form 144 |
A company can issue securities to certain qualified buyers without registering the securities with the SEC but must notify the SEC that it intends to do so. |
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Forms 3, 4, and 5 |
Involve the beneficial ownership of securities by a company's officers and directors. Analysts can use these filings to learn about purchases and sales of company securities by corporate insiders. |
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Installment Sale |
Occurs when a firm finances a sale and payment are expected to be received over an extended period. |
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Revenue can be recognized at fair value only if the firm has historically received cash payments for such goods.
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Barter Transactions Under GAAP |
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Must be based on the fair value of revenue from similar nonbarter transactions with unrelated parties. |
Barter Transactions Under IFRS |
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1. Effects of inflation and changing prices if material 2. Impact of off-balance-sheet obligations and contractual obligations 3. Accounting policies that requires significant judgment by management 4. Forward-looking expenditures and divestitures |
What does the management's discussion and analysis discuss (4 items)? |
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Classified Balance Sheet |
Current and non current assets/liabilities are reported separately. |
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Liquidity-Based Balance Sheet |
Only permissible under IFRS, present assets and liabilities in the order of liquidity. |
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Held-to-Maturity Securities |
Debt securities acquired with the intent to be held to maturity. |
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Trading Securities |
Debt and equity securities acquired with the intent to profit over the near term. |
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Available-for-Sale Securities |
Debt and equity securities that are not expected to be held to maturity or traded in the near term. |
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1. Under IFRS, interest and dividends received may be classified as either operating or investing activities 2. Dividends paid to the company's shareholders and interest paid on the company's debt may be classified as either operating or financing activities 3. Under GAAP, all taxes paid are reported as operating activities. Under IFRS, income taxes are also reported as operating activities unless the expense is associated with an investing or financing transaction |
Contrast cash flow statements prepared under IFRS and GAAP |
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1. Net income 2. (Gain from sale of land) 3. Depreciation 4. Decrease in receivables 5. (Increase in inventory) 6. Increase in accounts payable 7. (Decrease in wages payable) 8. Increase in deferred tax liabilities 9. (Unrealized gain) |
What is included in Operating Activities? |
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1. Cash from fixed assets
2. (Purchase of machinery) 3. (New fixed assets) |
What is included in Investing Activities? |
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1. Sale of bonds 2. (Repurchase of stock) 3. (Cash dividends) 4. Sale of stock 5. (Principal payments on bank borrowings) 6. (Payment of mortgage) 7. Increase in dividends payable |
What is included in Financing Activities? |
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1. (Interest expense) 2. Increase in interest payable 3. (Tax expense) |
What is included in other cash expenses? |
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Annual sales / average receivables |
Receivables Turnover Ratio |
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365 / receivables turnover |
Days of Sales Outstanding Ratio |
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COGS / average inventory |
Inventory Turnover |
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365 / inventory turnover |
Days of Inventory on Hand Ratio |
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Purchases / average trade payables |
Payables Turnover Ratio |
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365 / payables turnover ratio |
Number of Days of Payables Ratio |
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Revenue / average total cost |
Total Asset Turnover Ratio |
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Revenue / average net fixed assets |
Fixed Asset Turnover Ratio |
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Revenue / average working capital
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Working Capital Turnover Ratio |
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Total debt / total shareholders' equity |
Debt-to-Equity Ratio |
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Total debt / (total debt + total shareholders' equity) |
Debt-to-Capital Ratio |
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Total debt / total assets |
Debt-to-Assets Ratio |
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Average total assets / average total equity |
Financial Leverage Ratio |
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EBIT / interest payments
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Interest Coverage Ratio |
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(EBIT + lease payments) / (interest payments + lease payments) |
Fixed Charge Coverage Ratio |
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[Net income + interest expense (1 - tax rate)] / average total assets
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Return on Assets |
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DuPont System of Analysis |
An approach that can be used to analyze return on equity that breaks down ROE into a function of different ratios. |
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Dividends declared / net income available to common |
Dividend Payout Ratio |
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1 - dividend payout ratio |
Retention Rate |
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Capital Adequacy |
The ratio of some dollar measure of the risk of the firm to its equity capital. |
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1. Increase in consumers' wealth 2. Business expectations 3. Consumer expectations of future income 4. High capacity utilization 5. Expansionary monetary policy 6. Expansionary fiscal policy 7. Exchange rate 8. Global economic growth |
Factors affecting aggregate demand |
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1. Increase in the supply and quality of labor 2. Increase in the supply of natural resources 3. Increase in the stock of physical capital 4. Technology |
Factors affecting long run aggregate supply |
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1. Labor productivity 2. Input prices 3. Expectations of future output prices 4. Taxes and government subsidies 5. Exchange rates |
Factors affecting short run aggregate supply |
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J-Curve |
A plot of the trade deficit over time when the domestic currency depreciates. The trade deficit gets worse initially but then improves over time, either because export and import demand are more elastic in the long run or because existing contracts for future delivery are fixed in foreign currency terms in the short run. |
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1. Transaction costs 2. Taxes 3. Risk |
When are results statistically significant but not economically significant? |
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Inventories are value at the lower of cost or net realizable value.
Inventory write-ups are allowed but only to the extent that a previous write-down to net realizable value was recorded. |
Inventory reporting under IFRS |
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Inventories are valued at the lower of cost or market.
Market is usually equal to replacement cost but cannot exceed net realizable value or be less than net realizable value minus a normal profit margin. No subsequent write-up is allowed. |
Inventory reporting under GAAP |