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52 Cards in this Set

  • Front
  • Back
factors that must be considered by an actuary when computing a company’s defined benefit pension obligation?
how long WILL the employee continue to work, what will the employee's highest salary be, how long will employee live after retiring
key internal controls associated with safeguarding a company’s cash
1. segregation of duties
2. Proper procedures for authorization
3. physical control over assets and records
4. adequate documents and records
5. Independent checks on performance
difference between defined contribution, and defined benefit:
Defined contribution: place money to pension during employee's stay at a company

Defined benefit pension: monthly cast allowance after retirement

With a defined contribution plan, the amount of money set aside to pay benefits is fixed, and the benefits that will be paid are uncertain. The benefits depend on the earnings of the contributions, the age at retirement, and so forth. With a defined benefit plan, the pension benefits that will be paid are fixed, meaning retired workers will get a pension benefit that is based on factors such as the number of years worked and so forth.
debt ratio
Current ratio
Return on Sales
Net Income/Sales
Asset Turnover
Net Income/OE
Price-Earnings Raio
Market Value of Shares/net income
Dupont Framework:
ROE=Profitability x Effieciency x Leverage
Profitability calculation
Efficiency calculation
What is profitability show
return on sales
What does efficiency show
asset turnover
What deos leverage show
Asset-to-equity Ratio
Debt to quity ratio
TL/total equity
What does leverage tell us about a company
Number of dollars of assets that can be purchased with each one dollar of equity investment
What does efficiency tell us about a company
Number of dollars of sales generated by each dollar of asset
What is profitability
Number of pennies of profit generated by each dollar of sales
When is ROE good?
When is ROE bad?
When is ROE normal
>20% is very good
<10% is bad
10-20? is normal
What do expenses mean when expressed on common-size statements
Number of pennies of that expense for each dollar of sales
What do assets men when expressed on common-size statements
Number of pennies of that asset needed lying around to do one of sales
Chinese airliines state owned
Air China, China southern, and china eastern
Cathay Pacific
headquarters in hong kong, significant ownership by swire, so not state owned
SIngapore airlines
Singapore headquarter
Majority owned by singpore government
What is EBITDA
Earnings before interest, tax, depreciation, and amortization

Get net income, and add interest expense, tax expense, depreciation expense, and amortization expense
Profitability Ratio
Net income/revenue
Is ROE profitability ratio, or a leverage ratio
BOTH, due to dupont framework
What did China eastern do
Combined with Shanghai airline that is mainly owned by the chinese central government
What are common characteristics of a mortgage note payable
1. Long-term 15-30+ years
2. Typically fixed or adjustable rate of interest
3. requires fixed or adjustable amount that includes interest and mortgage amount
4. Monthly payments be applied first to any interest due at time of payment and excess applied to principal
5 sets that determine if investment is an account liability or an account equity
1.IF annual payments are mandatory, it is a DEBT, or loan.
If optional, it is investment
2.Is amount fixed? Loan. If variable, Equity
3.When does the initial investment amount have to be repaid? At a certain date, in the not-too distant future?--> LOAN. NEVER pay back→ Equity, investment
4.In case bankruptcy, what is the sequence of events? FIRST→ LOAN Last→ equity
5. Affect net income? No effect--> equity, but if affect, it is liability
Why do banks like the debt covenant
-Gives bank feeling of control
-perhaps the implications of risk on interest rates get hard to quantify at higher risk levels
Why are accounting numbers a bad basis for defining a debt covenant provisions
-Transparency, easy to ID violations
-Generated by a known (often audited) financial reporting system
Why are financial numbers bad basis for defining a debt covenant provision?
One more incentive for management manipulations
What are things a bank may do if one breaks the debt covenant
-Wavier the violation→ MOST LIKELY
-Bank gets a bit more control and behave just a little bit.
-Bank will put your name on a list, and cause problems in the future
-Terminate agreemnt and demand repayment→ Least likely
What is the purpose of Special Purpose Entities (SPEs)
Enron went bad because they decided to keep liabilities off the balance sheet.
BIG FAT company support company→ so all liabilities are on the SPE’s balance sheet
What is PPE
For every dollar of building of land, warehouse, shelving, each year, we are able to have x amount in sales. so Sales/PPE
How do you compute book value?
Cost of when item was bought MINUS All depreciation cost
What does GAAP require in terms of operating asset and expense
Any normal recurring events must be DEBIT to Expense
What does GAAP require in terms of improvement of Long term asset
It must be capitalized and therefore, if a truck was improved, debit TRUCK and credit CASH. also increase useful life and revise the book value
What is amortization expense
Allocation of cost of an intangible asset over its useful life
Is land ever depreciate
What is a mandatorily redeemable preferred stock?
It is when payment is optional, and amount is fixed, and initial investiment is in 10 years, and priority in bankruptcy is near the last. It is classified as a liability
What is a convertible subordinated debenture
Payment is mandatory
Payment is fixed
Initial investment must be repaid but can be changed for a common stock
Priority in bankruptcy is near the last
Classified as a liability
In the real world,, how many debt covenants are violated:
7% or 2 in every 14 companies...
Which ratio best measures a company's liquidity?
ability of a company's ability to meet its short-term obligations, and best measured with current ratio
What is acid test ratio
it is when we do selected current assets ( assets most likely to beome cash)/ Current liabilities
How to calculate a change in asset percentage:
Change in asset (end-beginning),/first year amount.
AR turnover
How fast AR turns into cash.
Net credit sals revenues/Average balance of AR during period
How to calculate average balance of AR during period
Beginning balance and ending balance or AR/2
What factors decrease comparability among financial statements?
1. companies classify items differently in financial statements
2. when company is composed of variety of divisions, each operating in a different line of business
Danger in analysis on only historical financial statements
focus on past performance on not on current year