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FINANCIALREPORTING&ANALYSIS

FinancialStatementAnalysis:AnIntroduction

Finreportingprovideuserswithinfo,finanalymakeecondecisions
BSfinposatapointintime(assets,liabs,shareholderequity)
Assets=liab+ownersequity
*IFRSIScanbecombinedwithothercomprehenincorpresseparate,GAAPsimilar,but
compreheninccanbereportinstatementofshareholderequity
Footnotesdisclosuresaboutinfopresented,basisofpresent,acctmethods,addlinfoon
acquis/disposals,etc.
MD&Amostusefulsectionofannualreport,unaudit
ForU.S.firms,SECreqdiscussofprices,obligationsonBS,accountingpolicies,expend/divests
Stdauditorsopinion
1. Indepreview
2. Reasonableassurnomaterror,GAAPfollowed
3. Estsreasonable
Unqual(clean)opinionfreefrommaterrors/omissions,qualopinionexceptionsmadetoGAAP,
adverseopinionmateriallynonconformwithGAAP,disclaimerofopinion(noopinion),also
providesopiniononinternalcontrols
Explanatoryparagraphbyauditorrelatedtoitemsaffectgoingconcernassumpisredflag
Finstatementanalysisframework:
1. Stateobjective/context
2. Gatherdata
3. Processdata
4. Analyzeandinterpretdata
5. Reportconclusion/recommendation
6. Updateanalysis

FinancialReportingMechanics

Assets:cash,cashequiv,accountreceive,inventory,finassets,prepaidexpense,PP&E,investin
affil,defertaxasset,intangasset
Liabilities:accountpay,finliab,unearnedrev,taxpayable,LTdebt,defertaxliab
Ownersequity:parvaluestock,addlpaidincapital(proceedsfromstocksaleinexcessofpar),
sharerepurchasetreasstockcontraaccttoaddlpaidincap,retearn(netincnotdistasdiv),
othercompreheninc(chgfromforeigncurrconvert,pensionliab,p/loninvestments)
Rev:sales,gains,investinc
Expense:COGS,SG&A,depr/amort,taxexp,intexp,losses
Assets=liab+oe,assets=liab+(contribcap+endretearn),
assets=liab+(contribcap+begretear+revexpensedivs)
Accrualaccountingrevrecordedwhenearned,exprecordwhenincurred(cashnotinvolve),
recordwhenearliesteventocurrspay/receivecash,providegood/serv,incurexpense
Accountingflow:journalentries,generalledger,trialbalance,finstatement

FinancialReportingStandards

Finreportstdsprovideconsistency
Stdsettingbodies:IASB(IFRS),FASB(GAAP)
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ETHICAL&PROFESSIONALSTANDARDS

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CodeofEthics&StandardsofProfessionalConduct

CFAProfConductstaffinvestigateinquiryaboutprofconduct
1. SelfdiscloseonAnnualProfConductState,civilorcrimorwrittencomplaint
2. Writtencomplaintbyothers
3. Evidenceofmisconduct
4. ReportbyCFAexamproctor
5. Analysisofexammatsandsocmedia
Noaction,cautletter,disciplinememb
Codeofethic:actw/integ,putinterestaboveallelse,usereasjudgeasanalyst,promoteintegof
capmkts,improveprofcompetence
**StandardsIVIIofProfConduct
1. Professionalism:knowlaw,indep&object,misrep,misconduct
2. Integofcapmkts:MNPI,mktmanip
3. Dutytoclient:loyalty,prudence,care,fairdealing,suitability,performpresentation,
preserveconfidentiality
4. Dutytoemployer:loyalty,noaddtlcompenarrange,responsibilityofsupervisor
5. Investanaly,recsandactions:diligen&reasbasisforinvestment,disclosetoclients&
prospects,recordretention
6. Conflictofint:discloseconflictsofint,priorityoftransactsforclients,disclosereferralfees
7. ResponsasCFAmemb/candidate:repCFAInstitw/integ,reftoCFAdesigw/outmisrep

GuidanceforStandardsIVII

StandardI:Professionalism
KnowledgeofLaw:knowalllaws,regs,codes,stds,dontviolate,followmoststrict,knowof
violationsmustapproachsupervisorandremedy,ordisassociatefromactivityorfirm,encouraged
toreportviolationsbutnotreq,documentviol
Indep&Objectivity:usereasonablecarenotacceptgiftstoswayobjectivityinanalysisorratings,
giftsfromclientsnotasbadmustdisclosebeforeacceptifposs,neverletcompensatetiedtoconcl
ofreport
Misrep:noknowinglymakemisrepstoinvestors,omitting,selectivedata,plagiarism,oktocitestats
fromrecogsourcew/outcredit
Miscond:nodishonfraudordeceitinprofactivities,nooutsideactivthatreflectspooronprofrep,
StandardII:IntegofCapMkts
MatNonPubInfo(MNPI):noactingonorcausingotherstoactonMNPI,mustaffectstockpriceto
bemat,personalresponsibtodisseminateifMNPI,mosaictheoryofcombininganalysisw/NMNPI
notviol
MarketManip:nodistortorartifinflatesecsw/*intenttomislead*mktparticipants,
StandardIII:DutiestoClients
Loyalty,Prudence,&Care:mustactw/reasoncare&exerciseprudjudge,placeclientintbeforeself
orfirm,clientmaybeconsidinvestpubaswhole,*disclosedisclosedisclose
FairDealing:neverdisadvantageclients,canofferdiffservicelevels,fairtreatcustomers
Suitability:ifanadvisormustgetsuitinfobeforeprovideinvestadvice(IPS),followmandateofstrat,
ifclientwantstomakeriskyinvestthatimpactsclientworthmustupdateIPSorloseclient
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QUANTITATIVEMETHODS

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TheTimeValueofMoney

FV:futurevalueofinvestmentCFincludingcompint(compounding)
PV:bringsCFfrominvestmentbacktobegofinvestmentlife(discounting)
CFsoccuratendofperiod
IntrtismeasofTVM,reqrtofrtn,discrate,oppcostofcurrconsump
NomRFR=realRFR+expectinflat
Reqintonsec=nomRFR+defriskprem+liquidprem+matriskprem
EffecAnnualRate(EAR):actualrtofrtnafteradjforcompoundingperiods
**EARoncalc:[2ND][ICONV],StatAnnRt[ENTER],Compfreq[ENTER],[CPT]
*EAR=[(1+periodicrt)^m]1=[(1+statedannualrt/m)^m]1
mis#ofcompoundingtimesperyr
ContcompEAR=(e^r)1
*FVofsingCF,FV=PV(1+I/Y)^N
1. PV:amtinvesttoday
2. I/Y:rtofrtnpercompper
3. N:tot#ofcomppers
*PVofsingsum,PV=FV/(1+I/Y)^N
PValways<FVwhendiscrtispos
Annuity:streamofeqCFsoverperoftime
1. Ordannuity:CFatendofeachcompper,calcsetting:[2nd][BGN][2ND][SET]
2. Annuitydue:CFatbegofper,calcsetting:[2nd][BGN][2ND][SET]
FVofanndue=(FVordann)(1+I/Y)
Perpetuity:paysfixedamtatsetintervalsforever(ex.prefstock)
PVofperpet=PMT/(I/Y)
ComputePV/FVofunevenCFstreamsbysummingindivPV/FVofeachoruseCFcalc
ComputePV/FVw/compoundperiodotherthanannual:I/Y=annualintrt/#oftimescomp,N=#
ofyrsx#timescomp
Loanamort:paysoffprincipalandint,sizeofpymntfixedoverlifeofloan
**PMT&FVmusthaveoppsignsorcalcerror**
CFadditiveprin:PVofanystreamorCF=sumofPVofCFs

DiscountedCashFlowApplications

NPV:PVofexpectcashinflowsforprojlessPVofexpectcashoutflow,discatcostofcap
NPV=sumofPVofallCFs
IRR:rtofrtnthatmakesPVofexpectinflows=PVofexpectoutflows,alsodiscrtthatmakesNPVof
invest=0
IRR,NPV=0
NPVdecisionrule:acceptprojw/posNPV,rejectprojw/negNPV,choosejobwithhighestNPV
IRRdecisionrule:acceptprojw/IRR>reqrtofrtn,rejectprojw/IRR<reqrtofrtn
*Alwaysselectprojw/greatestNPVwhenIRR&NPVdecsconflict
Holdingperrtn:endvalbegval/begval
Moneyweightrtn:rtntakingintoacctallCFsin/out(canusecalctocalcIRRw/CFkeys)
Timeweightrtn:rtnignoringallCFs,prefinindustry
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Discretelycompound:semiann,quarterly
Contcompound:EAR=(e^comprtn)1,Comprtn=ln(finalval/initval)
Montecarlosim:valuecomplexsecs,simp/lfromtradingstrat,calcVaRtodetermineportrisk,
fairlycomplex,limitedtomodelused,statisticalonly,otheroptionishistoricalsim

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SamplingandEstimation

Simprandsampl:samelikelihoodofpopconstitsofbeingincluded,random
Systematicsampl:selecteverynthmember
Samplingerror:sample(mean,var,stddev)pop(mean,var,stddev)
Stratifiedrandsaml:separatepopintoclasses,pullsamplesfromeeach,usedw/bonds
Timeseriesdata:obsoverperoftime,crosssection:atsingpoint,logitudinal,panel
**Centrallmttheor:inferenceaboutpopcanbemadeifsampsizeislarge,30
1. Sampsize30,distofsampmeansisnorm
2. Meanofpop&sampmeansequal
3. Varofdistofsampmeans=/n=popvar/sampsize
Stderrorofsampmean:stddevofdistofsampmeans,/n=stddevofpop/rootsampsize
Estpopstddev=stddevofsampmean/rootsampsize
Desirablepropsofestimator:unbiased,effic,consist
Pointest:singvalsusedtoestpopparams
Confidinterval:rangeofvalsinwhichpopparamexpecttolie
Studentstdist:usedtomakeconfidinterwhenn<30
1. Symmetrical
2. Definedbysingparam,degoffree(df)=n1forsampmeans
3. Fattertailsthannormdist,lesskurt
4. Assampsizegetslarge,shapeoftdistapproachstdnormdist(zdist)
5. Hypothtestusingtvszdistmoredifftorejnul
Confidintervforpopmean=pointest+/reliabfactor,stderror
1. 1.645for90%confidint,siglevel10%or5%pertail
2. 1.960for95%confidint,siglevel5%or2.5%/tail
3. 2.575for99%conint,siglvl1%or0.5%/tail
*Confidintforpopw/normdist&knownvariancex=+/(z/2)(/n)
*Confidintforpopw/normdist&unknownvar=x=+/(t/2)(s/n)
*Confidintforpopw/nonnormdist,knownvariance,n30,usezstat
*Confidintforpopw/nonnormdist,unknownvariance,n30,usetstat
*Confidintforpopw/nonnormdist,unknownvariance,n<30,CANNOTMAKEINTERVAL
**Fortstat,if+/useonetailed,ifonly+orusetwotailedvalue
Mistakesinsamplingmethodsthatcanbiasresults:datamining,sampselection,survivorshipbias,
lookaheadbias,timeperiodbias

HypothesisTesting

Hypothtest:statassessmentofstatementaboutapop,checkvalidatlevelofsig
*Hypothtestprocedure
1. Statehypoth
2. Selectappropteststat
3. Specifylevelofsig
4. Statedecisrule
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ECONOMICS

Demand&SupplyAnalysis:Introduction

QD=f(Priceofgood,Income,Priceofrelatedgoods)
LawofD:QDincratlowerprices
Demandcurvedownwardsloping,priceonvertaxis,quantonhoriz
LawofS:greaterquantsupplyathigherprices
Supplycurveupwardsloping
*Achginpricecausingchginquantitysuppliedordemandedismovementalongcurve,chginany
othervariableshiftcurve
Stableequilibwhenforcesmovep/qbacktoequilib,unstableequilibwhenS/Dcurveslesssteeply
slopedorcurved
SetS,Dfunctionsequalandsolveforp
Auction:altmktfordeterminequilib
1. Commonvalauct:valofitemsametoallbidders,valunknown(ex.oillease)
2. Privateauct:bidderhasownvalofitem(ex.art)
3. Ascendprice(Eng)auct:bidderthatfirstoffershighestbidwins
4. Sealedbidauct:eachbidderbidsonce,unknowntoothers
5. 2ndpricesealedbid(Vickrey)auct:highestbidderwins,pays2ndhighestbid
6. *Dutch(descprice)auct:beginsw/highpriceandisreduceduntilbidderagrees
ModifDutch:tenderoffer,Treasuries:singlepriceauctalsononcompetbid
Conssurplus:totvaltocons>totalpaid

Producersurplus:excessofmktpriceoveroppcostofprod

EfficQmaxsumofconssurp&producsurp,equilibQ,margcost=margben
DWL:reductincons/prodsurpfromunder/overprod

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Factorsofprod:land,labor(L),cap(K),mats,prodfunct:Qoutput=f(K,L)
Qoflaborthatcausesaddloutputto,pointofdimmargprod/rtn

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Productionfunction,fixedK,varL

Relationshipbtwnouput/cost
1. Totfixedcost(TFC):coststhatDONOTvarywithQofoutput(ex.PP&E)
2. Totvarcost(TVC):costofinputsthatvarywithQofoutput(ex.wages,rawmats)
3. Totcost(TC):TFC+TVC
4. Margcost(MC)=TC/Q
5. ATC=TC/Q
6. AFC=TFC/Q
7. AVC=TVC/Q

TotalcostcurvesAvg&MargCostCurves

*ImportantrelationshipsamongMC&ACcurves
1. AFCslopes,FCconstbutspreadoverlargerbasesasoutput
2. VertdistbtwnATC&AVC=AFC
3. MCini ally,butthenduetodiminishrtns
4. *MCintersectsAVC&ATCatmins
5. ATC&AVCUshaped,diminishrtns
6. MinpointonATCcurveislowestcost/unit
7. MCaboveAVCisSRScurveinperfcompetmkt

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CORPORATEFINANCE

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CapitalBudgeting

Capbudgetingprocess:corporatedecisionsthatimpactfutearns
1. Ideageneration
2. Analyzingprojectproposals
3. Createfirmcapbudget
4. Monitordecisions,conductaudit
Categoriesofcapbudgetprojects
1. Replacementtomaintain
2. Replacementforcostreduct
3. Expasionproj
4. Newprod/mktdev
5. Mandatoryprojs
6. Otherprojs,ex.R&D
Principlesofcapbudgeting
1. DecisionsbasedonCF,notaccountinginc:incrementalCFs,sunkcostshappenevenifproj
notundertaken,externalitiesofprojthataffectotherfirmCFsex.canibalization,
conventionalCF:signonce(+/),unconvenCF:signmorethanonce
2. CFsbasedonoppcost
3. TimingofCFsimportant,TVM:CFsreceivedearlierworthmore
4. CFsanalyzedonaftertaxbasis
5. Financingcostsincludedinprojectsreqrtofrtn(IRR)
Indepprojects:unrelated,mutuallyexclusive:cannotacceptbothprojs,projsequencing,unltd
fundsvs.caprationing
**NPV:sumofPVsofallexpectincremCFsfromproj,posNPVincrSHwealth,forindepprojsaccept
anyprojw/posNPV&rejanyprojw/negNPV
**IRR:discrtthatmakesPVofcashinflows=PVofcashoutflows,discrtforwhichNPVofproj=0,if
IRR>reqrtofrtnthenacceptproj,ifIRR<reqrtofrtnthenrejproj
Paybackperiod:#ofyrstorecoverinitialcostofinvestment
Discpaybackper:#ofyrstorecoverinitialcostofinvestmentinPVterms(>regpaybackper),BAII+
ProfitabilityIndex:PVoffutCFs/CF0=1+(NPV/CF0),closelyrelatedtoNPV,ifPI>1acceptproj(NPV
willbe>0),ifPI<1rejproj(NPVwillbe<0)
NPVprofile:showsprojdiffNPVsfordiffdiscrts,NPVonyaxis,costofcaponxaxis
AdvantageofNPV:directmeasofexpectincrinvaloffirm,butdoesnottakeintoacctsizeofproj
AdvantageofIRR:measprofitas%showingrtnoneach$invested,showsmgnofsafety,butfor
mutexclprojsmayrankdiffthanNPV&projmayhavemultIRRsornoIRR
*formutexlprojs,alwaysacceptonew/highestNPV
Theoretically,afirmsstockpriceshouldincreaseinproptoprojw/posNPV

CostofCapital

DiscrtisfirmsWACC,alsoknownasmargcostofcap,costoffinancingassetsoroppcost
**WACC=(wd)[kd(1t)]+(wps)(kps)+(wce)(kce)
Margcostofcapwillincraslargeramtsinvestedinnewprojs,upwardslopingmargcostofcap
curve(thinkScurve),dowslopinginvestmentoppschedisexpectIRRsonpotprojs(thinkDcurve),
intersectatoptimalcapitalbudget,takeallprojswhereIRR>MCC
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