# on 10-Nov-2016 (Thu)

#### Annotation 1328685124876

 Subject 1. The Nature of Statistics #quantitative-methods-basic-concepts #statistics Statistics can refer to numerical data (e.g., a company's average revenue for the past 20 years). It can also refer to methods of collecting, classifying, analyzing, and interpreting numerical data. Statistical methods provide a powerful set of tools for making decisions in business and other fields. Statistics involves two different processes: Describing sets of data. Descriptive statistical methods can be used to describe the important aspects of data sets that have been collected. This reading will focus on the use of descriptive statistics to consolidate a mass of numerical data into useful information.Drawing conclusions (making estimates, judgments, predictions, etc.). Inferential statistical methods can be used to draw conclusions about a large group from a smaller group actually observed. We use statistical methods to analyze the results of data. Since the amount of information available may be vast, it may be extremely time-consuming and expensive to collect all the necessary data. For instance, suppose we are interested in the durability of tennis balls. Theoretically, in order to carry out an accurate assessment, we would need to collect large quantities of all different makes of tennis balls from all over the world. Clearly, this is not practical; aside from taking up lots of time, it would be cost-prohibitive to purchase all the balls we would need for our study. A more practical solution would be to use a sample. A population consists of an entire set of objects, observations, or scores that have something in common. It comprises every possible member of the specified group. In our example above, the population of tennis balls consists of every tennis ball that has ever been manufactured anywhere in the world. This is a huge number of tennis balls. Another example of a population would be all males between the ages of 15 and 18. A sample is a subset of a population. The sample is comprised of some of the members of the population. Since it is usually impractical (or too expensive or time-consuming) to test every member of a population, using data gathered from a sample of the population is typically the best approach available for describing that population. In our example above, a sample might be a selection of 1,000 tennis balls of various makes collected from different sources. It would be a virtually impossible task to collect every possible tennis ball in the world; this same size provides a manageable number to work with as well as a substantial amount of possible data. Before we move on, there are several points worth noting: Don't be fooled by the word "population." This does not necessarily refer to people. As with the example above, we can have a population of tennis balls. A population can consist of anything, living or not.Although populations are often vast, they can also be of manageable size. For example, the population of even numbers between 1 and 9 would comprise the numbers 2, 4, 6 and 8. In this case, it is possible to sample the entire population and get accurate results. This is rare, however, and for your purposes, populations can generally be considered to be vast.In general, the bigger the sample, the better your results will be (because you are using data from more of the population for analysis). However, this point can present difficulties, as you will see when we study variance and standard deviation later.The ideal process would be to select a sample that is "representative" of the population (a sample that takes into account extreme values on both sides but contains many "average" values). In this way, the results that we get will be more meaningful. Because we frequently don't know about the exact values of a population (which is why we sample in the first place), we will never really know if our sample is truly representative or not. It's a...

#### Annotation 1331958779148

 Subject 4. Measures of Center Tendency #has-images #quantitative-methods-basic-concepts #statistics Measures of central tendency specify where data are centered. They attempt to use a typical value to represent all the observations in the data set. Population Mean The population mean is the average for a finite population. It is unique; a given population has only one mean. where: N = the number of observations in the entire populationXi = the ith observationΣXi = add up Xi, where i is from 0 to N Sample Mean The sample mean is the average for a sample. It is a statistic and is used to estimate the population mean. where n = the number of observations in the sample Arithmetic Mean The arithmetic mean is what is commonly called the average. The population mean and sample mean are both examples of the arithmetic mean. If the data set encompasses an entire population, the arithmetic mean is called a population mean.If the data set includes a sample of values taken from a population, the arithmetic mean is called a sample mean. This is the most widely used measure of central tendency. When the word "mean" is used without a modifier, it can be assumed to refer to the arithmetic mean. The mean is the sum of all scores divided by the number of scores. It is used to measure the prospective (expected future) performance (return) of an investment over a number of periods. All interval and ratio data sets (e.g., incomes, ages, rates of return) have an arithmetic mean.All data values are considered and included in the arithmetic mean computation.A data set has only one arithmetic mean. This indicates that the mean is unique.The arithmetic mean is the only measure of central tendency where the sum of the deviations of each value from the mean is always zero. Deviation from the arithmetic mean is the distance between the mean and an observation in the data set. The arithmetic mean has the following disadvantages: The mean can be affected by extremes, that is, unusually large or small values.The mean cannot be determined for an open-ended data set (i.e., n is unknown). Geometric Mean The geometric mean has three important properties: It exists only if all the observations are greater than or equal to zero. In other words, it cannot be determined if any value of the data set is zero or negative.If values in the data set are all equal, both the arithmetic and geometric means will be equal to that value.It is always less than the arithmetic mean if values in the data set are not equal. It is typically used when calculating returns over multiple periods. It is a better measure of the compound growth rate of an investment. When returns are variable by period, the geometric mean will always be less than the arithmetic mean. The more dispersed the rates of returns, the greater the difference between the two. This measurement is not as highly influenced by extreme values as the arithmetic mean. Weighted Mean The weighted mean is computed ...

#### Flashcard 1417556397324

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What is the gold standard method of assessment of baby in labour?
intermittent auscultation (IA)

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#### Flashcard 1417558232332

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early decels are due to?
vasovagal stimulation from pressure on head (scallop shaped decels)

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#### Flashcard 1417560067340

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List 5 maternal factors that reduce availability of oxygen to fetus which may result in abnormal fetal tracing.
(decreased maternal oxygen carrying capacity)
-significant anemia
-carboxyhemoglobin
(decreased uterine blood flow)
-hypotension
-regional anesthesia
-maternal poisoning
(chr maternal conditions)
-vasculopathies (SLE, T1DM, chr HTN)
-antiphospholipid syndrome

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#### Flashcard 1417561902348

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List 4 utero-placental factors that can result in abnormal fetal tracings, due to reduced availability of oxygen to fetus.
(uterine hypertonus)
-hyperstimulation d/t oxytocin/prostaglandins/normal labour
-placental abruption
(uteroplacental dysfn)
-placental abruption
-placental infarction/dysfn marked by oligohydramnios/abn doppler studies
-chorioamnionitis

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#### Flashcard 1417563737356

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List 5 fetal factors that can result in abnormal fetal tracings due to decreased oxygen delivery to the fetus.
-cord compression
-oligohydramnios
-cord prolapse/entanglement
-decreased fetal oxygen carrying capability
-significant anemia (isoimmunization, fetomaternal bleed)
-carboxyhemoglobin (smokers)

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#### Flashcard 1417565572364

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What must be present to declare intrapartum fetal asphyxia?
-apgar score 0 to 3 for >5 min
-neonatal neurologic sequelae (hypotonia, seizures, coma)
-evidence of multi-organ system dysfn in the immediate neonatal period
-umbilical cord arterial pH <7.0 and base deficit > 16 mmol/L

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#### Flashcard 1417567407372

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respiratory acidosis (in pregnancy) develops [how fast] ​ and disappears following [...]
rapidly; the first neonatal breaths

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#### Flashcard 1417569242380

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List 5 causes of fetal bradycardia (<110 bpm)
• Maternal hypotension
• Drug effects
• Maternal position
• Umbilical cord occlusion
• Fetal hypoxia
• Fetal vagal stimulation (head compression)
• Fetal hypothermia
• Fetal acidosis
• Fetal cardiac conduction or structural defect

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#### Annotation 1417569766668

 #obgyn respiratory acidosis (in preg) occurs in vessels when CO2 transport from fetus to placenta is disrupted (e.g. cord compression). It's a part of normal delivery.

#### Flashcard 1417571077388

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respiratory acidosis (in preg) occurs in vessels when [...] is disrupted (e.g. cord compression). It's a part of normal delivery.
CO2 transport from fetus to placenta

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respiratory acidosis (in preg) occurs in vessels when CO2 transport from fetus to placenta is disrupted (e.g. cord compression). It's a part of normal delivery.

#### Flashcard 1417572650252

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respiratory acidosis (in preg) occurs in vessels when CO2 transport from fetus to placenta is disrupted (e.g. [...]). It's a part of normal delivery.
cord compression

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respiratory acidosis (in preg) occurs in vessels when CO2 transport from fetus to placenta is disrupted (e.g. cord compression). It's a part of normal delivery.

#### Annotation 1417574223116

 #obgyn Metabolic acidosis (in preg) develops as a result of fetal hypoxia that causes the fetus to shift to anaerobic metabolism to maintain positive energy balance. Metabolic acidosis is generated in hypoxic tissues, takes longer to develop and disappear, and has the potential to cause significant fetal damage.

#### Flashcard 1417575533836

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Metabolic acidosis (in preg) develops as a result of [...] that causes the fetus to shift to anaerobic metabolism to maintain positive energy balance. Metabolic acidosis is generated in hypoxic tissues, takes longer to develop and disappear, and has the potential to cause significant fetal damage.
fetal hypoxia

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Metabolic acidosis (in preg) develops as a result of fetal hypoxia that causes the fetus to shift to anaerobic metabolism to maintain positive energy balance. Metabolic acidosis is generated in hypoxic tissues, takes longer to develop and disappear, a

#### Flashcard 1417577106700

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Metabolic acidosis (in preg) develops as a result of fetal hypoxia that causes the fetus to shift to [...] to maintain positive energy balance. Metabolic acidosis is generated in hypoxic tissues, takes longer to develop and disappear, and has the potential to cause significant fetal damage.
anaerobic metabolism

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Metabolic acidosis (in preg) develops as a result of fetal hypoxia that causes the fetus to shift to anaerobic metabolism to maintain positive energy balance. Metabolic acidosis is generated in hypoxic tissues, takes longer to develop and disappear, and has the potential to cause significant fetal damage.

#### Flashcard 1417578679564

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Metabolic acidosis (in preg) develops as a result of fetal hypoxia that causes the fetus to shift to anaerobic metabolism to maintain positive energy balance. Metabolic acidosis is generated in [...], takes longer to develop and disappear, and has the potential to cause significant fetal damage.
hypoxic tissues

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Metabolic acidosis (in preg) develops as a result of fetal hypoxia that causes the fetus to shift to anaerobic metabolism to maintain positive energy balance. Metabolic acidosis is generated in hypoxic tissues, takes longer to develop and disappear, and has the potential to cause significant fetal damage.

#### Flashcard 1417580252428

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Metabolic acidosis (in preg) develops as a result of fetal hypoxia that causes the fetus to shift to anaerobic metabolism to maintain positive energy balance. Metabolic acidosis is generated in hypoxic tissues, takes [...] to develop and disappear, and has the potential to cause significant fetal damage.
longer

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<head>Metabolic acidosis (in preg) develops as a result of fetal hypoxia that causes the fetus to shift to anaerobic metabolism to maintain positive energy balance. Metabolic acidosis is generated in hypoxic tissues, takes longer to develop and disappear, and has the potential to cause significant fetal damage.<html>

#### Flashcard 1417581825292

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Metabolic acidosis (in preg) develops as a result of fetal hypoxia that causes the fetus to shift to anaerobic metabolism to maintain positive energy balance. Metabolic acidosis is generated in hypoxic tissues, takes longer to develop and disappear, and has the potential to cause [...].
significant fetal damage

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s a result of fetal hypoxia that causes the fetus to shift to anaerobic metabolism to maintain positive energy balance. Metabolic acidosis is generated in hypoxic tissues, takes longer to develop and disappear, and has the potential to cause <span>significant fetal damage.<span><body><html>

#### Flashcard 1417584708876

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List 5 causes for fetal tachycardia (>160 bpm)
• Maternal: fever, infection, dehydration, hyperthyroidism, anxiety, drugs, anemia
• Fetal: infection, prolonged fetal activity, chronic hypoxemia, cardiac abnormality, congenital anomalies, anemia

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#### Flashcard 1417587330316

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What are the characteristics of variable decels (FHR)?
Abrupt decrease in FHR > 15 bpm below baseline for at least 15 sec but < 2 min

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#### Annotation 1417587854604

 #obgyn Early decel (FHR) is reflex vagal response due to head compression; not normally associated with fetal acidemia

#### Flashcard 1417589165324

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[...] decel (FHR) is reflex vagal response due to head compression; not normally associated with fetal acidemia
Early

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Early decel (FHR) is reflex vagal response due to head compression; not normally associated with fetal acidemia

#### Flashcard 1417590738188

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Early decel (FHR) is reflex vagal response due to [...]; not normally associated with fetal acidemia

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Early decel (FHR) is reflex vagal response due to head compression; not normally associated with fetal acidemia

#### Flashcard 1417592311052

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Early decel (FHR) is reflex vagal response due to head compression; not normally associated with [...]
fetal acidemia

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Early decel (FHR) is reflex vagal response due to head compression; not normally associated with fetal acidemia

#### Flashcard 1417595194636

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What are the characteristics of abn variable decels (FHR)?
Abnormal variable decelerations if: <70 bpm, >60 sec, prolonged return to baseline, loss of variability in baseline FHR

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#### Flashcard 1417597029644

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What are variable decels associated with? What about abn variable decels?
Associated with vagal stimulation due to cord compression or head compression in 2nd stage
If abnormal variable decels, may be associated with fetal acidemia

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#### Flashcard 1417598864652

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Late decels indicate poor oxygenation and can occur with: (list 5 causes)
altered maternal blood flow to placenta (maternal hypotension); reduced maternal oxygen saturation; placental insufficiency; uterine hypertonus; fetal academia

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#### Annotation 1417701362956

 Subject 1. Types of Markets #cfa #cfa-level-1 #economics #microeconomics #reading-13-demand-and-supply-analysis-introduction A market is any arrangement that enables buyers and sellers to get information and do business with each other. A competitive market is a market that has many buyers and many sellers so that no single buyer or seller can influence prices. Broadly speaking there are two types of markets: Goods markets are markets where final products from businesses or firms are exchanged. Households and firms are usually buyers and firms are sellers. Factor markets are markets for the factors of production. Factors include labor, capital, raw materials, entrepreneurship, etc. For example, in labor markets, households are sellers and firms are buyers. The demand for a factor exists because there is a demand for goods that the resource helps to produce. The demand for each factor is thus a derived demand; it is derived from the demand of consumers for products. For example, engineers are needed to design cars. A car manufacturer's demand for engineers thus depends entirely upon the demand for cars. The demand for engineers is a derived demand.

#### Annotation 1417703197964

 The Demand Function and the Demand Curve #demand-and-supply #has-images #microeconomics The demand function represents buyers' behavior. Prices influence consumers' purchase decisions. The demand function can be depicted as a negatively sloped demand curve. If all other factors are equal, as the price of a good rises, consumer demand falls. This is mainly due to the availability of substitutes, which are goods that perform similar functions.As the price of a good falls, consumer demand rises. Therefore, there is an inverse relationship between the price of a good and the amount that consumers are willing to buy. The demand curve normally slopes downward. It tells the analyst the quantity that consumers are willing to buy for each possible price when all other influences on consumers' planned purchases remain the same. Example 1 Refer to the graph below. What is the quantity of cassettes demanded when their price is $4.00 per week? Answer: Two cassettes per week. The demand curve tells how much is demanded at each price. To determine the quantity demanded, find$4.00 on the vertical axis and read across until you meet the demand curve. Then read the quantity from the horizontal axis. When any factor that influences buying plans, other than the price of the good, changes, there is a change in demand for that good. When the quantity of the good that people plan to buy changes at each and every price, there is a new demand curve. These factors include changes in income, number of consumers in the market, changes in the price of a related good, etc. Example 2 Assume the graph below reflects demand in the automobile market. Which arrow best captures the impact of increased consumer income on the automobile market? Answer: D. Income is a shift factor of demand. An increase in income increases the number of automobiles demanded at each price. Therefore demand has shifted to the right. When demand increases, the quantity that people plan to buy increases at each and every price, so the demand curve shifts rightward.When demand decreases, the quantity that people plan to buy decreases at each and every price, so the demand curve shifts leftward. A Change in the Quantity Demanded Versus a Change in Demand The demand curve isolates the impact of price on the amount of a product purchased. A change in quantity demanded (caused by price change ONLY) is a movement along a demand curve from one point to another.Changes in other factors (anything other than price), such as income, tastes, expectations, and the prices of closely related goods, will shift the entire demand curve inwards or outwards. This is referred to as change in demand. Example 3 Refer to the graph below. Consumers began purchasing more of a product due to a decrease in price. Which arrow best represents this statement? Answer: C. A change in price causes a movement along the demand curve. When price falls, the movement is downward and to the right. The Supply Function and ...

#### Annotation 1417711324428

 Subject 3. Market Equilibrium #cfa #cfa-level-1 #economics #has-images #microeconomics #reading-13-demand-and-supply-analysis-introduction #subject-3-market-equilibrium Aggregate Demand and Aggregate Supply An aggregate demand curve is simply a schedule that shows amounts of a product that buyers collectively desire to purchase at each possible price level. An aggregate supply curve is simply a curve showing the amounts of a product that all firms will produce at each price level. Example 1 Refer to the graph below. What is the market quantity that would be supplied at a price of $2.00? Market quantity is the sum of individual quantities supplied at each price. At a price of$2.00, Ann supplies 4, Barry supplies 3, and Charlie supplies 0. The market supply is 7. Market Equilibrium Equilibrium is a state in which conflicting forces are in balance. In equilibrium, it will be possible for both buyers and sellers to realize their goals simultaneously. The following graph depicts the market supply and demand for concert tickets at Madison Square Garden in New York City. Equilibrium price and quantity are where the supply and demand curves intersect. Draw a horizontal line from the intersection to the price axis. This is equilibrium price: $60. Draw a vertical line from the intersection to the quantity axis. This is equilibrium quantity: 300. It is equilibrium because quantity demanded equals quantity supplied at$60 per ticket. At this price, there is neither surplus (excess supply) nor shortage (excess demand), so there is no downward or upward pressure for the price to change. Surplus will push prices downward towards equilibrium. Suppose the price is initially above the equilibrium price (P2) and sits at P1.Quantity supplied (Q1s) will exceed quantity demanded (Q1D), creating a surplus.The surplus will put downward pressure on prices since producers will begin to lower their prices to sell the surplus.As a result, the price will fall, the quantity supplied will decrease, and the quantity demanded will increase until the equilibrium price (P2) is restored.This process involves movements along supply-and-demand curves since the changes are caused by price fluctuations. Similarly, shortages push prices upward towards equilibrium. Because the price rises if it is below equilibrium, falls if it is above equilibrium, and remains constant if it is at equilibrium, the price is pulled toward equilibrium and remains there until some event changes the equilibrium. We refer to such an equilibrium as being stable because whenever price is disturbed away from the equilibrium, it tends to converge back to that equilibrium. An unstable equilibrium is an equilibrium that is not restored if disrupted by an external force. While most equilibria studied in economics are of the stable variety, a few cases of unstable equilibria do emerge from time to time, in limited circumstances.

#### Annotation 1417722596620

 Subject 4. Auctions #cfa #cfa-level-1 #economics #microeconomics #reading-13-demand-and-supply-analysis-introduction #subject-4-auctions Auctions can be used to arrive at equilibrium price. Auctions can have bidders trying to buy an item (e.g., Christie's, eBay).Auctions can have bidders trying to sell an item (e.g., Procurement, priceline.com). Auctions can be classified as one of two types: Common value auction: the value of the item is the same to everyone but different bidders have different estimates about the underlying value. Examples: oil, timber, items with resale value.Private value auction: bidders know the value of the item to themselves with certainty but there is uncertainty regarding other bidders' values. Examples: collectibles, art items. There are also many different methods for auctioning items: Open outcry English (ascending price) auction: The auctioneer starts at a reserve price and increases the price until only one bidder is left. That bidder wins the auction at the current price.First-price sealed-bid auction: Everyone writes down a bid in secret. The person with the highest bid wins the object and pays what he bids.Second-price sealed-bid (Vickery) auction: Everyone writes down a bid in secret. The person with the highest bid wins the object and pays the second highest bid (used for stamps and by Goethe).Dutch (descending price) auction: The auctioneer starts at a high price and decreases the price until a bidder accepts the price. The winner's curse means that the winner of an auction will frequently have bid too much for the auctioned item: you win, you lose money, and you curse. A Dutch auction share repurchase is when a company agrees to buy back a fixed amount of its outstanding shares within a certain price range. Offers come in from investors who specify the price within the given range at which they'll sell their shares. The company then buys back the shares of those who bid the lowest first and continues on up the line until they have bought back the amount that they said they would. The U. S. Treasury security auctions are conducted using the single-price auction method. All successful competitive bidders and all noncompetitive bidders are awarded securities at the price equivalent to the highest rate or yield of accepted competitive tenders.

#### Annotation 1417756675340

 Subject 1. Utility Theory #cfa #cfa-level-1 #economics #has-images #microeconomics #reading-14-demand-and-supply-analysis-consumer-demand Utility refers to the total satisfaction received by a person from consuming a good or service. Completeness. A person can compare any two bundles, A and B, in such a way that it leads to one of the three following results: (i) A is preferred to B, (ii) B is preferred to A, or (iii) A and B are the same (they are indifferent).Transitivity. Consider any three bundles A, B, and C. If a person prefers A to B and also prefers B to C, she or he must prefer A to C.Nonsatiation. Consider two bundles, A and B. A has more than B in every commodity and yet all these commodities are not economic "bads"; then a person will rank A higher than B. Utility theory is a quantitative model of consumer preferences and is based on the above axioms. Consumer preferences can be represented by an ordinal utility function: This is a mathematical expression that shows the relationship between utility values and every possible bundle of goods. This ordinal - not cardinal - utility captures only ranking and not strength of preferences.

#### Annotation 1417760083212

 Subject 2. Indifference Curves #cfa #cfa-level-1 #economics #has-images #microeconomics #reading-14-demand-and-supply-analysis-consumer-demand An indifference curve shows the combination of two products that provide an individual with a given level of utility (satisfaction). It is a curve, convex from below, that separates the consumption bundles that are more preferred by an individual from those that are less preferred. The points on the curve represent combinations of goods that are equally preferred by the individual. For example, the bundle at point A of 10 apples and 3 fish provides the same satisfaction as the bundle at point B of 6 apples and 5 fish. Indifference curves provide a diagrammatic picture of how an individual ranks alternative consumption bundles. More goods are preferable to fewer goods. Thus, bundles on indifference curves lying farthest to the northeast of a diagram are always preferred. For example, the bundle at C is clearly preferred to those points along the indifference curve and the bundle at point D is clearly inferior to those points along the curve. Goods are substitutable. Therefore, indifference curves slope downward to the right. The value of a good declines as it is consumed more intensively. Therefore, indifference curves are always convex when viewed from below. The slope of the indifference curve is equal to the marginal rate of substitution: the amount of one good that is just sufficient to compensate the consumer for the loss of a unit of the other good. Indifference curves are everywhere dense. That is, an indifference curve can be drawn through any point on the diagram; any two bundles of goods can be compared by the individual. Indifference curves for one consumer cannot cross. If they did, rational ordering would be violated and the postulate that more goods are better than fewer goods would be violated. If two consumers have different marginal rates of substitution, they can both benefit from the voluntary exchange of one good for the other.

#### Annotation 1417797569804

 Subject 2. Total, Average, and Marginal Revenue #cfa #cfa-level #economics #has-images #microeconomics #reading-15-demand-and-supply-analysis-the-firm Revenue is the income generated from the sale of output in product markets. Total revenue (TR) is the sum of individual units sold multiplied by their respective prices:Average revenue (AR) =Marginal revenue (MR) is the change in revenue from selling one extra unit of output: In a perfectly competitive market, each firm is a price taker. Since each unit of output sold by a price taker is sold at the market price, the MR for each unit is also equal to the market price, i.e., P = MR. Under imperfect competition, a firm's marginal revenue is always less than the price of its good. Why? As the firm reduces price in order to expand output and sales, there will be two conflicting influences on total revenue. The increase in sales due to the lower price will, by itself, add to the revenue of the monopoly.The price reduction, however, also applies to units that would otherwise have been sold at a higher price. This factor itself will cause a reduction in total revenue. These two conflicting forces will result in marginal revenue - the change in total revenue - that is less than the sales price of the additional units. Thus, the marginal revenue curve of the firm will always lie below the firm's demand curve, which is also the market's demand curve. TR is maximized when MR = 0.

#### Annotation 1417807269132

 Subject 3. Cost Measures #cfa #cfa-level #economics #has-images #microeconomics #reading-15-demand-and-supply-analysis-the-firm Factors of Production A firm is an institution that hires factors of production and organizes them to produce and sell goods and services. Such factors include land, labor, capital, and materials. The total product curve shows how total product changes with the quantity of variable input employed. As more and more units of a variable resource are combined with a fixed amount of other resources, employment of additional units of the variable resource will eventually increase output only at a decreasing rate. Once diminishing returns are reached, it will take successively larger amounts of the variable factor to expand output by one unit. The law of diminishing returns basically explains the old adage: "too many cooks spoil the broth," or too much of a good thing is bad. Total, Average, Marginal, Fixed, and Variable Costs To produce more output in the short run, the firm must employ more variable inputs, which means that it must increase its costs. In the short run, a firm's total costs (TC) can be broken down into two categories: fixed costs and variable costs (TC = TFC + TVC). Which costs are fixed and which costs are variable depends on the time horizon being dealt with. For a short time horizon, most costs are fixed. For a long time horizon, all costs are variable. Total Fixed Cost. The sum of the costs that do not vary with output. They will be incurred as long as a firm continues in business and the assets have alternative uses. Examples of fixed costs include rent, property taxes and insurance premiums. Average Fixed Cost. Total fixed cost divided by the number of units produced. It always declines as output increases. Total Variable Cost. The sum of those costs that rise as output increases. Total variable costs are zero if output is zero. Examples are wages paid to workers and payments for raw materials. Average Variable Cost. The total variable cost divided by the number of units produced. Average Total Cost. Total cost divided by the number of units produced. It is sometimes called per unit cost. ATC is high at low levels of output, decreases as output increases (since fixed costs are spread across more units), and then increases as the firm's maximum capacity is approached (since marginal costs increase). Marginal Cost. The change in total cost required to produce an additional unit of output. The law of diminishing returns implies that the marginal costs of producing each additional unit will increase by increasing amounts. Initially, as output expands, the cost of producing each additional unit of output falls, but then begins to rise as the firm approaches its maximum capacity (e.g., too many workers, congested production lines). Over the output range with increasing marginal returns, marginal cost falls as output increases. Once a firm confronts diminishing returns, larger and larger additions of the variable factor are required to expand output by one unit. This will cause marginal cost (MC) to rise. As MC continues to increase, eventually it w...

#### Annotation 1417815657740

 Subject 4. Shutdown Analysis #cfa #cfa-level #economics #has-images #microeconomics #reading-15-demand-and-supply-analysis-the-firm For a price taker (a firm in a perfectly competitive market): Profit = Total Revenue - Total Cost = (Price - Average Total Cost) x Quantity However, maximum profit is not always a positive economic profit. In the short run, the firm might break even (making a zero economic profit), make an economic profit, or incur an economic loss. 1. If the price equals minimum average total cost, the firm breaks even and makes a normal profit. 2. The ATC of producing each of q2 units is labeled as c1. c1BAP indicates the economic profit being made by this firm. The firm is making a profit since the price per unit exceeds the ATC per unit and the total revenue exceeds the total costs. 3. What would happen to profits if the price fell to below the ATC curve? The firm therefore will produce q1 units of output, as shown where MC = MR. At q1, the firm can only charge P per unit, and yet the ATC per unit is higher, at c2. This means that the firm is making a total economic loss equal to the shaded area, PBAc2, or the distance of c2 to P per unit. If the firm's current sales revenues can cover its variable cost, and the firm anticipates that the lower market price is temporary, it will continue to operate and will face short-run economic losses. It will produce the quantity at which MC = P. This option is better than "shut down" since the firm is able to cover its variable costs and pay some of its fixed costs. If it were to shut down, the firm would lose the entire amount of its fixed costs. The shutdown point is the output and price at which the firm just covers its total variable cost. This point is where average variable cost is at its minimum.It is also the point at which the marginal cost curve crosses the average variable cost curve.At the shutdown point, the firm is indifferent between producing and shutting down temporarily. It incurs a loss equal to total fixed cost from either action. If the market price is below the firm's average variable cost, a temporary shutdown is preferable to short-run operation. If the firm continues to operate, operating losses merely add to losses resulting from the firm's fixed costs. Shutdown will reduce losses. The Firm's Short-Run Supply Curve The price taker that intends to stay in business will maximize profits (or minimize losses) when it produces the output level at which P = MC AND variable costs are covered. At this output level, the price taker can maximize its profits or minimizes its losses. Therefore, the portion of the firm's short-run marginal cost curve that lies above its average variable cost is the short-run curve of the firm. In the above graph, if price is below P1, the firm should be shut down.

#### Annotation 1417825357068

 Subject 5. Economies of Scale and Diseconomies of Scale #cfa #cfa-level #economics #has-images #microeconomics #reading-15-demand-and-supply-analysis-the-firm Short-Run Cost and Long-Run Cost The short-run analysis relates costs to output for a specific size of plant. In the long-run, all resources used by the firm are variable. For each plant size, there is a set of short-run, U-shaped costs curves for MC, AVC, and ATC. This diagram shows the ATC curves of three (of many) possible plant sizes: small, medium, and large. Using this information, firms can plan, when in their blueprint stages, the optimal plant size they should be relative to the output they want to produce. For example, if a firm wanted to produce more than Q1 units of output, it would make sense to build a large firm, since costs per unit would be less than they would be with a small or medium firm. Long-Run Average Cost Curve To explain this process, imagine the output level Q2. Looking at the relevant costs on the vertical axis, the large firm is far cheaper per unit than both the small and medium-sized firms. Thus, should a firm be planning for output in excess of Q1, a large firm should be built. For levels of output between Q0 and Q1, it would be cheaper per unit if the firm was of a medium size. If a firm is planning to produce less than Q0 units, a small firm would be best.For output between Q0 - Q1 units, a medium firm is preferable.For output in excess of Q1 units, a large firm is preferable The long-run average total cost curve is indicated in black. It shows the minimum average cost of producing each output level when the firm is free to choose among all possible plant sizes. It can best be thought of as a planning curve, because it reflects the expected per-unit cost of producing alternative rates of output while plants are still in the blueprint stage. No single plant size could produce the alternative output rates at the costs indicated by the planning curve. In reality, there are an infinite number of firm sizes: Economies and Diseconomies of Scale Economies of scale are reductions in the firm's per-unit costs that are associated with the use of large plants to produce a large volume of output. They are present over the initial range of outputs when the long-run ATC curve is falling. There are three reasons why economies of scale exist: Mass production is more economical.Specialization of labor and equipment improves productivity.Workers at a larger firm tend to learn more from their experience. Diseconomies of scale are situations in which the long-run average total costs are greater in larger firms than they are for smaller firms. They are possible: as a firm gets bigger and bigger, bureaucratic inefficiencies may result. Principal-agent problems grow; they are prese...

#### Annotation 1417838202124

 Subject 6. Profit Maximization #cfa #cfa-level #economics #has-images #microeconomics #reading-15-demand-and-supply-analysis-the-firm The goal of each firm is to maximize economic profit, which equals total revenue minus total cost. Total cost is the opportunity cost of production, which includes normal profit.Under perfect competition, a firm's total revenue equals price, P, multiplied by quantity sold, Q, or P x Q. Marginal revenue is the addition to total revenue earned by a firm when one more unit of output is sold: MR = ΔTR/ΔQ. Since each unit of output sold by a price taker is sold at the market price, the MR for each unit is also equal to the market price, i.e., P = MR. MR plotted against quantity sold would thus yield the same curve as P plotted against quantity sold (i.e., the demand curve) for the price taker. We say that the MR curve of a price taker lies on the demand curve of a price taker. There are three approaches to calculating the point of profit maximization in the short run. All three approaches yield the same profit-maximizing quantity of output. MC = MR Approach Produce that quantity of output where: MC = P = MR Each unit of output produced and sold by a price taker will generate revenue that equals the market price of the product (MR).However, due to the law of diminishing returns, as output increases, costs per unit will eventually also begin to increase (MC).The profit-maximizing quantity of output occurs where MC = MR = P. Here are two familiar curves: the MC curve and the MR curve of a certain firm. Note that the MC curve clearly illustrates the Law of Diminishing Returns. Given this information, what quantity of output should this profit-maximizing price taker produce? What about producing q1 units? Can you see that at q1, MR exceeds MC by the distance shown by the arrow? This means that the revenue received from the sale of that unit would exceed the cost of its production, so it would be profitable for the firm to produce that unit. But would the firm be maximizing its profits, or should the firm produce more? What about producing q2 units? MR still exceeds MC, shown by the distance of the arrow. This means that the revenue received from the sale of unit q2 also exceeds its cost of production, so the firm would make even more profit if it produced that unit too. But would the firm be maximizing its profits? Could the firm produce still more units? At q3, the MR earned from the sale of the unit is equal to the MC involved in producing the unit, so unit q3 generates neither a profit nor a loss for the firm. If the firm produced more than q...

#### Annotation 1417860484364

 Subject 7. Productivity #cfa #cfa-level #economics #has-images #microeconomics #reading-15-demand-and-supply-analysis-the-firm Average product and marginal product, which are derived from total product, are key measures of a firm's productivity. Total Product. The total output of a good associated with alternative utilization rates of a variable input. It increases as more and more units of the variable input are used.Marginal Product. The increase in the total product as a variable input increases by one extra unit.Average Product. The total product divided by the number of units of the variable input used in production. Law of Diminishing Returns The total product curve shows how total product changes with the quantity of variable input employed. As more and more units of a variable resource are combined with a fixed amount of other resources, employment of additional units of the variable resource will eventually increase output only at a decreasing rate. Once diminishing returns are reached, it will take successively larger amounts of the variable factor to expand output by one unit. The law basically explains the old adage: "too many cooks spoil the broth," or too much of a good thing is bad. As a single resource is applied more intensively, the resource eventually tends to accomplish less and less. Essentially, this is a constraint imposed by nature. Let's use labor as the input. Initially, hiring more laborers may mean more productive use of machines, which were underutilized. Output may thus initially increase. After a while, the firm may have hired too many laborers, given the number of machines. There may be overcrowding on the work floor and mistakes may result, causing productivity to fall whilst costs will increase. As units of variable input are added to a fixed input, total product will increase, first at an increasing rate and then at a declining rate. This will cause both marginal and average product curves to rise at first and then decline. Note that the marginal product curve intersects the average product curve at its maximum. The smooth curves indicate that the input can be increased by amounts of less than a single unit. Profit Maximization Firms demand labor, amongst other factors, to produce goods and services. The Marginal Revenue Product (MRP) of labor is the change in the total revenue of a firm that results from the employment of one additional unit of labor. The marginal revenue product of an input is equal to its marginal product multiplied by the marginal revenue of the good or service produced: MRP = MP x MR, where Marginal Product (MP) is the change in total output that results from the employment of one additional unit of labor.Marginal Revenue (MR) is the change in a firm's total revenue that results from the production and sale of one additional unit of output. Because of the law of diminishing returns, the marginal product of labor will fall as employment of the labor expands, and thus the marginal revenue product of labor will also fall as employment expands. The firm has two equivalent conditions for maximizing profit. They are: Hire the quantity of labor at which the marginal revenue product of labor (MRP) equals the wage rate (W).Produce the quantity of output at which marginal revenue (MR) equals marginal cost (MC). Why? MRP = W => MP x MR = W => MR = W/MP, since W/MP = MC => MR = MC. This relationship indicates why wage differences across skill categories will tend to reflect product...

#### Annotation 1417865727244

 Subject 1. Characteristics of Different Market Structures #cfa #cfa-level #economics #microeconomics #reading-16-the-firm-and-market-structures A financial analyst must understand the characteristics of market structures to better forecast a firm's future profit stream. We focus on those characteristics that affect the nature of competition and pricing. They are: The number of firms (including the scale and extent of foreign competition).The extent of product differentiation (which affects cross-price elasticity of demand).The pricing power of seller(s). Can a firm influence the market price?Barriers to entry. Exit costs should also be considered.Non-price competition such as product differentiation. The characteristics of each market structure will be discussed in subsequent subjects of this reading.

#### Annotation 1417868348684

 Subject 2. Perfect Competition #cfa #cfa-level-1 #economics #has-images #microeconomics #reading-16-the-firm-and-market-structures An industry with perfect competition displays the following characteristics: All the firms in the market are producing an identical product (e.g., wheat of the same grade).No barriers limit the entry or exit of firms in the market.A large number of firms exist in the market. Established firms have no advantages over new ones.Sellers don't have market-pricing power.There is no non-price competition. Perfect competition arises: When a firm's minimum efficient scale is small relative to market demand so there is room for many firms in the industry, andWhen each firm is perceived to produce a good or service that has no unique characteristics, so consumers don't care which firm they buy from. The demand analysis in perfectly competitive markets is covered in Reading 13. The supply analysis, optimal price and output, and long-run equilibrium in perfectly competitive markets are covered in Reading 15. In perfect competition, each firm is a price taker. Price takers are sellers who must take the market price in order to sell their products. There is no price decision to make: they will merely attempt to choose the output level that will maximize profit.Each price taker's output is small relative to the total market: the output of a firm exerts little or no effect on the market price. This diagram represents the market demand and supply curve for a certain product - for example, eggs. As usual, the intersection of the demand and supply curve creates the market price (P) per egg. Now remember that a firm that is a price taker can sell all it wants to at that price, but can sell nothing at a higher price. Price takers can sell all their output at the market price, but they are unable to sell any of their output at a price higher than the market price. That is, a price taker faces a horizontal demand curve. Each firm's output is a perfect substitute for the output of the other firms, so the demand for each firm's output is perfectly elastic. They can sell as much as they would like at the going market price.There is no need for them to reduce their price in order to sell more.Moreover, at any price above the market price there is no demand; their sales would be zero (nobody would buy from that firm because there are so many other firms from which to obtain the product at the market price).This reflects the fact that perfectly competitive firms have no control over their price. When a perfectly competitive market is in long-run equilibrium: Quantity supplied and quantity demanded must be equal in the market.Firms in the market must earn zero economic profit at the prevailing market price (that is, firms are earning the "normal rate of return"). This occurs when market price = marginal revenue = marginal cost = minimum ATC. Note that accounting profits may still be positive. Why do firms earn zero economic profit in the long-run equilibrium? If firms earn positive economic profit in the long-run equilibrium, these firms will have an incentive to expand their capacity, and new firms will enter the market. This will lead to an increase in supply, forcing the market price down...

#### Annotation 1417874902284

 Subject 3. Monopolistic Competition #cfa #cfa-level #economics #has-images #microeconomics #reading-16-the-firm-and-market-structures A monopolistic market is also called a competitive price searcher market. Characteristics are: A large number of firms. This is due to low entry barriers and causes intense competition in these markets. Firms face competition from existing firms and potential entrants to the market. Firms produce differentiated products. This means that each firm makes a product that is slightly different from the products of competing firms. This is the most distinctive characteristic of such a market. Low entry barriers. Entry into and exit from the market are relatively easy. Sellers in competitive price searcher markets face competition both from firms already producing in the market and from potential new entrants into the market. If profits are present, firms can expect that new rivals will be attracted. Because of the low entry barriers, competitive forces will be strong in monopolistic markets, and firms cannot earn an economic profit in the long run. Competition on quality, price, and marketing. Demand is not simply given for a monopolistic competitor. The firm has some pricing power and can alter the demand for its products by changing product quality (design, reliability and service), location and by advertising. The firm faces a downward-sloping demand curve. This demand curve is highly elastic because good substitutes for a firm's output are readily available from other suppliers. Consider two hamburger companies: McDonald's and Burger King. Both firms are producing burgers but customers view them as differentiated.If McDonald's increases the price of its burger, it will not lose all its customers, as some will continue to pay the higher price, preferring McDonald's.Thus, differentiation explains the downward-sloping demand curve. The more firms producing burgers (substitutes), the more elastic McDonald's demand curve will be, since the greater the decrease in quantity demanded as price increases. The Firm's Short-Run Output and Price Decision As with price takers, monopolistic competitors maximize profits by expanding output to where MR = MC. A firm in monopolistic competition operates much like a single-price monopolist. According to the demand curve, the firm can charge P1 per unit. The total revenue earned is the shaded area 0P1AQ1.The total cost is the shaded area 0CBQ1.It earns an economic profit (as in this example) when P > ATC. The total profit is thus the difference between total revenue and total costs, and is given by the shaded area CP1AB. A firm might incur an economic loss in the short run when P < ATC. Long Run: Zero Economic Profit Whenever firms can freely enter and exit a market, profits and losses play an important role in determining the size of the industry. Economic profits will attract new competitors to the market and economic losses will cause competitors to exit from the market. In the short run, a price searcher may make either economic profits or losses, depending on market conditions. As firms enter the industry, each existing firm loses some of its market share. The demand for its product decreases and the demand curve for its product shifts leftward. The decrease in demand decreases the quantity at which MR = MC and lowers the maximum price that the firm can charge to sell...

#### Annotation 1417879883020

 Subject 4. Oligopoly #cfa #cfa-level #economics #has-images #microeconomics #reading-16-the-firm-and-market-structures Literally, oligopoly means "few sellers." This market structure is characterized by: A small number of rival firms. The firms are interdependent because each is large relative to the size of the market. The decisions of a firm often influence the demand, price, and profit of rivals, and an oligopolist must consider the potential reaction of rivals. High entry barriers into the market. Either natural or legal barriers to entry can create oligopoly. Economies of scale are probably the most significant entry barrier here. Achieving minimum per-unit cost is required, and thus a small number of large-scale firms will be able to produce the entire market demand for the product. This is what distinguishes an oligopoly from a monopolistic competitive market.A legal oligopoly might arise even where demand and costs leave room for a larger number of firms. In short, an oligopoly is competition among the few. Pricing Strategies Like a monopolist, an oligopolist faces a downward-sloping demand curve and seeks to maximize profit, not price.Unlike a monopolist, an oligopolist cannot determine the product price that will deliver maximum profit simply by estimating market demand and cost conditions. A key factor here is the pricing behavior of close rivals, or interdependence between firms. This means that each firm must take into account the likely reactions of other firms in the market when making pricing decisions. Because the reactions of those rivals cannot be determined, the precise price and output that will emerge under an oligopoly cannot be determined. Only a potential range of prices can be indicated. There are three basic pricing strategies. 1. The assumption of pricing interdependence is that firms will match a price reduction and ignore a price increase. The idea is that if a firm raises prices, other firms won't follow, because they won't worry about losing market share to a firm that is raising its prices. However, if the firm lowers its prices, other firms will respond by lowering their prices also, since they don't want to lose market share. The demand curve that a firm believes it faces has a kink at the current price P and quantity Q. The kinked demand curve can be thought of as two demand curves. Above the price P, an individual firm is afraid of putting up prices. A price increase would, it assumes, not be matched by competitors, hence the demand curve above P is elastic. It will be remembered that if demand is elastic and price rises, revenue falls.Similarly, a price fall has the same effect on revenue. This time the firm imagines that dropping its own price leads to others dropping theirs. Overall, quantity demand increases as the demand curve slopes down, but the increase is less than proportionate. That is the demand curve below price P is inelastic. The kink in the demand curve means that the MR curve is discontinuous at the current quantity - shown by the gap AB in the figure. Fluctuations in MC that remain within the discontinuous portion of the MR curve leave the profit-maximizing quantity and price unchanged. For example, if costs increased so that the MC curve shifted upward from MC0 to MC1, the profit-maximizing price and quantity would not change. The beliefs that generate the kinked demand curve are not always correct and firms can figure out this fact. If MC increases enough, all firms raise their prices and the kink vanishes. 2. The assumption of the Cournot...

#### Annotation 1418025110796

 Subject 5. Trade Organizations #cfa #cfa-level-1 #economics #economics-in-a-global-context #reading-20-international-trade-and-capital-flows Created after WWI, the International Monetary Fund, the World Bank, and the World Trade Organization are the three major international organizations that provide necessary stability to the international monetary system and facilitate international trade and development. The IMF's mission is to ensure the stability of the international monetary system, the system of exchange rates and international payments which enables countries to buy goods and services from each other. The IMF helps keep country-specific market risk and global systemic risk under control. The World Bank's mission is to help developing countries fight poverty and enhance environmentally sound economic growth. It helps create the basic economic infrastructure essential for the creation and maintenance of domestic financial markets and a well-functioning financial industry in developing countries. The WTO provides the legal and institutional foundation of the multinational trading system and is the only international organization that regulates cross-border trade relations among nations on a global scale. Its mission is to foster free trade by providing a major institutional and regulatory framework of global trade rules. Without such global trade rules, today's global transactional corporations would be hard to conceive.

#### Annotation 1418026945804

 Subject 1. The Foreign Exchange Market #cfa #cfa-level-1 #economics #economics-in-a-global-context #has-images #reading-21-currency-exchange-rates An exchange rate is the current market price at which one currency can be exchanged for another. The convention used in the reading is the number of units of one currency (price currency) that one unit of another currency (base currency) will buy. Let's say a:b = S. a is the price currency.b is the base currency.S is the cost of one unit of currency b in terms of currency a. For example, US$: £ = 1.5 indicates that £1 is priced at US$1.5. The exchange rate above is referred to as the nominal exchange rate. The real exchange rate is the nominal rate adjusted somehow by inflation measures. For example, if country A has an inflation rate of 10%, country B an inflation rate of 5%, and no changes in the nominal exchange rate took place, then country A now has a currency whose real value is higher than before. Market Functions and Participants A foreign exchange market is a place where foreign exchange transactions take place. Measured by average daily turnover, the foreign exchange market is by far the largest financial market in the world. It has important effects, either directly or indirectly, on the pricing and flows in all other financial markets. There is a wide diversity of global FX market participants that have a wide variety of motives for entering into foreign exchange transactions. Commercial companies undertake FX transactions during cross-border purchases and sales of goods and services. Hedge funds trade FX currencies for hedging or even speculative purposes. Central banks use their FX reserves to stabilize the market and control the money supply. Large dealing banks provide FX price quotes to their clients. With so many different market participants, motives, and strategies, it is very difficult to describe the FX market adequately with simple characterizations.

#### Annotation 1418312682764

 Subject 6. Financial Analysis of Inventories #cfa #cfa-level-1 #financial-reporting-and-analysis #has-images #inventories #inventories-long-lived-assets-income-taxes-and-non-current-liabilities Financial statement disclosures provide information regarding the accounting policies adopted in measuring inventories, the principal uncertainties regarding the use of estimates related to inventories, and details of the inventory carrying amounts and costs. This information can greatly assist analysts in their evaluation of a company's inventory management. Presentation and Disclosure Consistency of inventory accounting policy is required under both U.S. GAAP and IFRS. If a company changes an inventory accounting policy, the change must be justifiable and all financial statements accounted for retrospectively. The one exception is for a change to the LIFO method under U.S. GAAP; the change is accounted for prospectively and there is no retrospective adjustment to the financial statements. Inventory Ratios Inventory turnover measures how fast a company moves its inventory through the system. This ratio can be used to measure how well a firm manages its inventories. The lower the ratio, the longer the time between when the good is produced or purchased and when it is sold. An abnormally high inventory turnover and a short processing time could mean either effective inventory management or inadequate inventory, which could lead to outages, backorders, and slow delivery to customers (which would adversely affect sales). Revenue growth should be compared with that of the industry to assess which explanation is more likely.An extremely low inventory turnover value implies capital is being tied up in inventory and could signal obsolete inventory. Again, the analyst should compare the firm's revenue growth with that of the industry to assess the situation. Financial Analysis: FIFO versus LIFO The advantages of LIFO are: Matching. Current costs are matched against revenues and inventory profits are thereby reduced.Tax benefits. These are the major reason why LIFO has become popular. As long as the price level increases and inventory quantities do not decrease, a deferral of income tax occurs. "Whatever is good for tax is good for financial reporting."Improved cash flow. This is related to tax benefits, because taxes must be paid in cash.Future earnings hedge. With LIFO, a company's future reported earnings will not be affected substantially by future price declines. Since the most recent inventory is sold first, there isn't much ending inventory sitting around at high prices, vulnerable to a price decline. The disadvantages of LIFO: Reduced earnings. Many managers would just rather have higher reported profits than lower taxes. However, non-LIFO earnings are now highly suspect and may be severely penalized by Wall Street.Inventory understated. LIFO may have a distorting effect on a company's balance sheet. It makes the working capital position of the company appear worse than it really is.Physical flow. LIFO does not approximate the physical flow of the inventory items except in particular situations.Current cost income not measured. LIFO falls short of measuring current cost (replacement cost) income, though not as far as FIFO. Using replacement cost is referred to as the next-in, first-out method; it is not acceptable for purposes of inventory valuation.Inventory liquidation. If the base or layers of old costs are elim...

#### Annotation 1418319236364

 Subject 1. Capitalizing versus Expensing #cfa #cfa-level-1 #financial-reporting-and-analysis #inventories-long-lived-assets-income-taxes-and-non-current-liabilities #long-lived-assets The costs of acquiring resources that provide services over more than one operating cycle should be capitalized and carried as assets on the balance sheet. All costs incurred until an asset is ready for use must be capitalized, including the invoice price, applicable sales tax, freight and insurance costs incurred delivering equipment, and any installation costs. Costs of the long-lived asset should be allocated over current and future periods. In contrast, if these assets are expensed, their entire costs are written off as expense on the income statement in the current period. Accounting rules on capitalization are not straightforward. As a result, management has considerable discretion in making decisions such as whether to capitalize or expense the cost of an asset, whether to include interest costs incurred during construction in the capitalized cost, and what types of costs to capitalize for intangible assets. The choice of capitalization or expensing affects the balance sheet, income and cash flow statements, and ratios both in the year the choice is made and over the life of the asset. Here is a summary of the different effects of capitalization versus expensing: Income variability. Firms that capitalize costs and depreciate them over time show "smoother" patterns of reported income. Firms that expense those costs as incurred tend to have higher variability of net income. Profitability. In the early years expensing lowers profitability because the entire cost of the asset is expensed. In later years expensing results in higher net income because no more expense is charged in those years. This results in higher ROA and ROE because these expensing firms report lower assets and equity. CFO. The net cash flow remains the same, but the compositions of cash flows differ. Cash expenditures for capitalized assets are included in investing cash flows and are never classified as CFO. In contrast, cash expenditures for expensed outlays are included in CFOand are never classified as investing cash flows. Capitalization results in higher CFO but lower investing cash flows, and the cumulative difference increases over time. Leverage ratios. Capitalization firms have better (lower) debt-to-equity and debt-to-assets ratios, since they report higher assets and equities. Under SFAS 34, interest is capitalized for certain assets and only if the firm is leveraged. Therefore, the carrying amount of a self-constructed asset depends on the firm's financial decisions. The capitalized interest cost is added to the value of the asset being constructed. The amount of interest cost to be capitalized has two components: Any interest on borrowed funds made specifically to finance the construction of the asset. The interest rate applicable is the interest rate on each borrowing.The interest on other debt of the firm, up to the amount invested in the construction project. The interest rate applicable is the weighted-average interest rate on all outstanding debt not specifically borrowed for the asset under construction. Therefore, the total interest cost incurred during the accounting period has two parts: Capitalized interest cost, which is reported as part of the asset on the balance sheet. Payments for capitalized interest cost are classified as an investing cash outflow and never as CFO.Other interest cost, which is charged to expense on the income statement. Payments for such non-capitalized interest cost are reported as CFO. The total interest cost, along with the amount capitalized, must be disclosed as part of the notes to the financial statements. Once the construction is complete, capitalized interest costs will be written off as part of depreciation over the useful life of the asset. From ...

#### Annotation 1418321071372

 Subject 2. Intangible Assets #cfa #cfa-level-1 #financial-reporting-and-analysis #inventories-long-lived-assets-income-taxes-and-non-current-liabilities #long-lived-assets Intangible assets are identifiable nonmonetary resources controlled by firms. Examples include patents, copyrights, franchises, goodwill, trademarks, trade names, secret processes, property rights, and organization costs. Accounting for the Acquisition of Long-Lived Intangible Assets Accounting for an intangible asset depends on how it is acquired. 1. Intangible Assets Purchased in Situations Other than Business Combinations These are accounted for at acquisition costs. "Cost" includes purchase price, legal fees, and other expenses that make the intangibles ready for use. For example, fees paid to obtain a license or franchise are capitalized. Another example: expenditures on patents and copyrights purchased from another party are capitalized. They are amortized over their remaining legal lives or 40 years, whichever is less. The straight-line method is typically used for amortization. 2. Intangible Assets Developed Internally For internally generated intangible assets, it is difficult to measure costs, benefits, and economic lives. Generally, internally generated assets (such as costs of R&D, patents and copyrights, brands and trademarks, and advertising and secret processes) must be expensed in the period incurred. One exception is research and development (R&D) expenditures which add risk to investment with uncertain future economic benefits. As a result, they must be expensed as incurred in most countries (including the U.S.). SFAS 86 requires that all R&D costs to establish the technological and/or economic feasibility of software must be expensed. Subsequent costs that are beyond the point of technological feasibility can - but don't have to - be capitalized as part of product inventory and amortized based on revenues or on a straight-line basis. The point of technological feasibility is the point when a software prototype has been proven to be technologically feasible, as evidenced by the existence of a working model of the software. IFRS also requires research costs be expensed but allows development costs to be capitalized under certain conditions. As you can see, managers have considerable discretion in making decisions, such as whether or when to capitalize these costs and by how much. For software development costs, one particular risk is that capitalized costs will not be realized and a future write-down may be needed. If companies apply different approaches to capitalizing software development costs, adjustments can be made to make the two comparable. 3. Intangible Assets Acquired in a Business Combination Business combinations are accomplished when one entity (investor) acquires "control" over the net assets of another entity. The transaction is accounted for using the purchase method of accounting, in which the company identified as the acquirer allocates the purchase price to each asset acquired (and each liability assumed) on the basis of its fair value. Any excess of cost over fair value of net assets acquired is recorded as goodwill. U.S. GAAP requires that in-process R&D (IPRD) of the target company should be expensed at the date of acquisition, which results in a large one-time charge. IFRS requires identifying IFRD as a separate asset with a finite life or including it as part of goodwill. Amortizing Intangible Assets with Finite Useful Lives An intangible asset with a finite useful life is amortized over its useful life. The estimates required for amortization calculations are: original valuation amount, residual value at the end of useful life, and the length of useful life. Example Torch, Inc. has developed a new device. Patent registration costs consisted of $2,000 in attorney fees and$1,000 in federal registration fees. The device has a useful life of 5 years. The legal life is 17 y...

#### Annotation 1418322906380

 Subject 3. Depreciation Methods #cfa #cfa-level-1 #financial-reporting-and-analysis #has-images #inventories-long-lived-assets-income-taxes-and-non-current-liabilities #long-lived-assets For accountants, depreciation is an allocation process, not a valuation process. It is important for analysts to differentiate between accounting depreciation and economic depreciation. Two factors affect the computation of depreciation: depreciable cost (acquisition cost - salvage or residual value) and estimated useful life (depreciable life). Note that it is depreciable cost, not acquisition cost, that is allocated over the useful life of an asset. The different depreciation methods are: Straight Line Depreciation (SLD) This is the dominant method in the U.S. and most countries worldwide. It is based on the assumption that depreciation depends solely on the passage of time. The amount of depreciation expense is computed as: If income is constant, SLD will cause the asset base to decline, causing ROA to increase over time. For assets whose benefit may decline over time, the matching principle supports using an accelerated depreciation method. Accelerated Depreciation Methods Accelerated depreciation methods are consistent with the matching principle because benefits from most depreciable assets are higher in the earlier years as the assets wear out. Therefore, more depreciation should be allocated to earlier years than to later years. Under the sum-of-the-years' digits (SYD) method, depreciation expense is based on a decreasing fraction of depreciable cost. The numerator decreases year by year but the denominator remains constant. As a result, this method applies higher depreciation expense in the early years and lower depreciation expense in later years. Where sum of years = (1 + 2 + 3 + ... + n) = n x (n + 1)/2, and years remaining = n - t + 1 (n: the estimated useful life. t: the index for current year). Double decline balance (DDB): Note that cost minus accumulated depreciation is the book value at the beginning of the year and that salvage value is not shown in the formula. For each year, however, depreciation is limited to the amount necessary to reduce book value to salvage value. With SYD and DDB methods, book value, net income, tax expense, and equity will be lower than with SLD in the earlier years of an asset's life. The percentage effect on net income is usually greater than the effects on assets and shareholders' equity. Consequently: Profit margin is lower as net income is lower.Asset turnover ratio is higher as assets are lower.Debt-to-equity ratio is higher as equity is lower.Return on assets ratio is lower; both net income and total assets are lower, but net income is lower by a larger percentage.Return on equity ratio is lower; both net income and equity are lower, but net income is lower by a larger percentage. In later years the situation will reverse and income and book values will increase. This is true for individual assets. For a firm with stable or rising capital expenditures, however, the early-year impact of newly-acquired assets dominates. Therefore, an accelerated depreciation method will continuously result in lower reported earnings and tax expenses for these firms. Units of Production (UOP) and Service Hours Method This method assumes that d...

#### Annotation 1418329459980

 Subject 4. The Revaluation Model #cfa #cfa-level-1 #financial-reporting-and-analysis #inventories-long-lived-assets-income-taxes-and-non-current-liabilities #long-lived-assets Under U.S. accounting standards, it is compulsory to account for impairment in long-lived assets (downward revaluation). However, upward revaluation of long-lived assets to reflect fair market values is not allowed. The balance sheet is more informative when assets and liabilities are stated at market value rather than historical cost. IASB and some other non-U.S. GAAP do permit upward revaluations. The purpose of a revaluation is to bring into the books the fair market value of long-lived assets. If an asset revaluation initially decreases the asset's carrying value, the decrease is recognized as a loss. Later, if there is an increase in the carrying value, the increase is recognized as a profit (up to the amount of the original decrease).If an asset revaluation initially increases its carrying value, the increase bypasses the income statement and goes to equity (revaluation surplus). Later, if there is a decrease, it first decreases the revaluation surplus, then goes to income. Financial Statement Analysis Considerations The leverage motivation. An upward revaluation may improve a firm's leverage.Income manipulation. Revaluations are subjective in nature. For example, a downward revaluation will reduce ROE in the current period but make the firm more profitable in future years, since total assets and shareholders' equity will be lower.Revaluation has no impact on cash flows.What is the true value of the firm's long-lived assets? Why is the revaluation necessary? Who does the appraisal? How often is it done?

#### Annotation 1418331294988

 Subject 5. Impairment of Assets #cfa #cfa-level-1 #financial-reporting-and-analysis #inventories-long-lived-assets-income-taxes-and-non-current-liabilities #long-lived-assets Sometimes a long-term asset may lose some of its revenue-generating ability prior to the end of its useful life. (e.g., a significant decrease in the market value, physical change, or use of the assets). If the carrying amount of the asset is determined not to be recoverable, an asset impairment occurs and the carrying value should be written down. The amount of the write-down is recorded as a loss. GAAP and IFRS differ as to the methodology used to determine impairment. The GAAP methodology of determining impairment uses a two-step recoverability test. Occurrence of an impairment differs from recognition of an impairment. An impairment, whether recognized in financial reports or not, occurs as long as an asset's carrying value cannot be fully recovered in the future. However, only impairments that meet certain conditions are recognized in financial reports. SFAS 121 provides a two-step process: Recoverability test. Impairment must be recognized when the carrying value of the assets exceeds the undiscounted future cash flows from their use and disposal. Loss measurement. The excess of the carrying amount over the fair value of the assets. If the fair value is not available, the present value of future cash flows discounted at the firm's incremental borrowing rate should be used. That is: Impairment Loss = Book Value - Either Fair Value or Present Value of Future Cash Flows Conversely, IFRS methodology uses a one-step approach. This approach requires that impairment loss be calculated if "impairment indicators" exist. This approach does not rely on net undiscounted future cash flows and subsequent comparison to asset carrying value as required in GAAP methodology. In addition, the impairment loss is calculated as the amount by which the carrying amount of the asset exceeds it recoverable amount. The recoverable amount is the higher of the following: 1) fair value less cost to sell, or 2) value in use (i.e., the present value of future cash flows including disposal value). Impairment of Intangible Assets Similar accounting treatment if the intangible asset has a finite life.Tested annually for impairment for an intangible asset with an indefinite life. Among the most interesting intangible assets is goodwill. Goodwill is the present value of future earnings in excess of a normal return on net identifiable assets. It stems from such factors as a good reputation, loyal customers, and superior management. Any business that earns significantly more than a normal rate of return actually has goodwill. Goodwill is recorded in the accounts only if it is purchased by acquiring another business at a price higher than the fair market value of its net identifiable assets. It is not valued directly but inferred from the values of the acquired assets compared with the purchase price. It is the premium paid for the target company's reputation, brand names, customers or suppliers, technical knowledge, key personnel, and so forth. Goodwill only has value insofar as it represents a sustainable competitive advantage that will result in abnormally high earnings. Analysts need to be aware of the possibility that the goodwill recognized by accountants may, in fact, represent overpayment for the acquired company. Since goodwill is inferred rather than computed directly, it will increase as the payment price increases. It is only after the passage of time that analysts will be able to evaluate the extent to which the purchase price was justified. Under U.S. GAAP SFAS 142, goodwill is not amortized, but is tested annually for impairment. Goodwill impairment for each reporting unit should be tested in a two-step process at least once a year. 1. The fair value of a reporting unit is compared to its ...

#### Flashcard 1418357247244

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Subtypes [...] ​& [...] ​responsible for ~70% of cases of invasive disease
16 ; 18

status measured difficulty not learned 37% [default] 0

#### Annotation 1418357771532

 Subject 5. Recognition and Measurement of Current and Deferred Tax #cfa #cfa-level-1 #financial-reporting-and-analysis #income-taxes #inventories-long-lived-assets-income-taxes-and-non-current-liabilities Deferred tax assets and liabilities are re-assessed on each balance sheet date. They are measured against the criteria of probable future economic benefits.The tax rate used to calculate them should be the one that is expected to apply when the asset is realized or liability settled.They are not discounted to present value although they are related to amounts at some future date. Valuation Allowance Deferred tax assets are reduced by a valuation allowance to amounts that are "more likely than not" to be realized, taking into account all available positive and negative evidence about the future. For determining whether deferred tax assets must be reduced by a valuation allowance, all available positive and negative evidence must be considered. Information concerning recent pretax accounting earnings generally is critical. For example, if a firm has been recording material cumulative losses recently, it will be hard to justify a conclusion that tax credits can be realized in the near future. This will be evidence supporting the use of a valuation allowance ("negative evidence"). It is not necessary to quantify positive evidence for the conclusion that a valuation allowance is not required unless significant negative evidence exists. Where both positive and negative evidence exist, judgment must be used in evaluating what evidence is more persuasive. More weight should be given to objectively verifiable evidence. Recognition of Current and Deferred Tax Charged Directly to Equity A firm's deferred tax liability during an accounting period represents the portion of income tax expense that has not been paid. Therefore, from a pure accounting perspective, deferred tax liabilities are an accounting liability. However, from a financial analyst's perspective, whether deferred tax liabilities should be considered liabilities or not depends on whether they will reverse in the future. If they will, resulting in a cash outflow, then they should be treated as liabilities. If not, then they should be treated as equity! As deferred tax liabilities are created by temporary differences, reversal of a deferred tax liability depends on the reversal of the temporary difference that created it. Changes in a firm's operations or tax law may result in deferred taxes that are never paid or recovered. For example, the use of accelerated depreciation methods for tax reporting creates a temporary difference. Normally, when there is less depreciation in later years, the deferred tax liability created by more depreciation in earlier years will be reversed. However, for firms with high growth rates, increased investments in fixed assets result in ever-increasing new deferred tax liabilities, which replace the reversing one. That is, a firm's growth may continually generate deferred tax liabilities. In this case, the deferred taxes are unlikely to be paid. Therefore, for such high-growth firms, deferred tax liabilities will not reverse and should be treated as equity. Deferred tax liabilities are recorded at their stated value. Even if deferred taxes are eventually paid, payments typically occur far in the future. The present value of those payments is considerably lower than the stated amounts. Thus, the deferred tax liability should be discounted at an appropriate interest rate and the difference should be treated as equity. In some cases, financial statement depreciation understates the value of economic depreciation. Instead, the accelerated depreciation in tax reporting is a better measure. Examples of such cases include equipment obsolescence due to technology innovation and rising price levels. Deferred tax liabilities are neither liabilities nor equity if they are not expected to reverse, and should be ignored by financial analysts. They are not liabilities since they will not reverse.They are not equity since adding the entire tax liabilities ...

#### Flashcard 1418359606540

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Subtype 18 related often to [...]

status measured difficulty not learned 37% [default] 0

#### Flashcard 1418362752268

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Pap tests should not be performed < [...] ​ weeks apart
6

status measured difficulty not learned 37% [default] 0

#### Annotation 1418363800844

 Subject 7. Comparison of IFRS and U.S. GAAP #cfa #cfa-level-1 #financial-reporting-and-analysis #income-taxes #inventories-long-lived-assets-income-taxes-and-non-current-liabilities Similarities FAS 109 Accounting for Income Taxes and IAS 12 Income Taxes provide the guidance for income tax accounting under U.S. GAAP and IFRS, respectively. Both pronouncements require entities to account for both current tax effects and expected future tax consequences of events that have been recognized (that is, deferred taxes) using an asset and liability approach. Further, deferred taxes for temporary differences arising from non-deductible goodwill are not recorded under either approach and the tax effects of items directly accounted for as equity during the current year are also allocated directly to equity. Finally, neither principle permits the discounting of deferred taxes. Significant Differences and Convergence Below we discuss the significant differences in the current literature. Tax basis: U.S. GAAP: Tax basis is a question of fact under the tax law. For most assets and liabilities there is no dispute on this amount; however, when uncertainty exists, it is determined in accordance with FIN 48 Accounting for Uncertainty in Income Taxes.IFRS: Tax basis is generally the amount deductible or taxable for tax purposes. The manner in which management intends to settle or recover a carrying amount affects the determination of tax basis. Uncertain tax positions: U.S. GAAP: FIN 48 requires a two-step process, separating recognition from measurement. A benefit is recognized when it is "more likely than not" to be sustained based on the technical merits of the position. The amount of benefit to be recognized is based on the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement. Detection risk is precluded from being considered in the analysis.IFRS: There is no specific guidance; IAS 12 indicates tax assets/liabilities should be measured at the amount expected to be paid. In practice, the recognition principles on provisions and contingencies in IAS 37 are frequently applied. Practice varies regarding consideration of detection risk in the analysis. Initial recognition exemption: U.S. GAAP: No similar exemption for non-recognition of deferred tax effects for certain assets or liabilities.IFRS: Deferred tax effects arising from the initial recognition of an asset or liability are not recognized when the amounts did not arise from a business combination and, upon occurrence, the transaction affects neither accounting nor taxable profit (for example, acquisition of nondeductible assets). Recognition of deferred tax assets: U.S. GAAP: Recognized in full (except for certain outside basis differences), but valuation allowance reduces assets to the amount that is more likely than not to be realized.IFRS: Amounts are recognized only to the extent it is probable (similar to "more likely than not" under U.S. GAAP) that they will be realized. Calculation of deferred asset or liability: U.S. GAAP: Enacted tax rates must be used.IFRS: Enacted or "substantively enacted" tax rates (as of the balance sheet date) must be used. Classification of deferred tax assets and liabilities in balance sheet: U.S. GAAP: Current or non-current classification, based on the nature of the related asset or liability, is required.IFRS: All amounts are classified as non-current in the balance sheet. Recognition of deferred tax liabilities from investments in subsidiaries or joint ventures (JVs) (often referred to as outside basis differences): U.S. GAAP: Recognition is not required for investment in foreign subsidiary or corporate JVs that are essentially permanent in duration, unless it becomes apparent that the difference will reverse...

#### Annotation 1418365635852

 Subject 1. Reporting Quality and Results Quality #cfa #cfa-level-1 #financial-reporting-and-analysis #financial-reporting-quality Financial reporting quality: a subjective evaluation of the extent to which financial reporting is free of manipulation and accurately reflects the financial condition and operating success of a company. It pertains to the information disclosed. Earnings are considered to be high quality if they exhibit persistence and are unbiased. Sustainable earnings enable better forecasts of future cash flows or earnings. This is referred to as results quality or earnings quality. Financial reporting quality is different from earnings quality. The two concepts are, however, interrelated because a correct assessment of earnings quality is possible only if we have some basic level of financial reporting quality. Low financial reporting quality makes it hard to assess earnings quality.

#### Annotation 1418367995148

 Subject 2. Quality Spectrum of Financial Reports #cfa #cfa-level-1 #financial-reporting-and-analysis #financial-reporting-quality Financial reporting quality varies across companies. GAAP, Decision-Useful, Sustainable, and Adequate Returns GAAP compliance.Useful: helpful in decision-making. Relevant, faithful representation and material.Sustainable earnings indicate an adequate level of return on investment. GAAP, Decision-Useful, but Sustainable? GAAP compliance and useful.But not sustainable earnings. Biased Accounting Choices Within GAAP.Biased choices such as aggressive/conservative accounting, income smoothing, hidden reserves, and earnings management. Departures from GAAP It is difficult or impossible to assess earnings quality. Engaging in fraudulent financial reporting provides no quality of earnings. Conservative and Aggressive Accounting An aspect of financial reporting quality is the degree to which accounting choices are conservative or aggressive. "Aggressive" typically refers to choices that aim to enhance a company's reported performance and financial position by inflating the amount of revenues, earnings, and/or operating cash flow reported in the period or by decreasing the amount of expenses reported in the period and/or the amount of debt reported on the balance sheet. Conservatism in financial reports can result from either (1) accounting standards that specifically require a conservative treatment of a transaction or an event or (2) judgments necessarily made by managers when applying accounting standards that result in more or less conservative results. An example of conservatism in the oil and gas industry is the revenue recognition accounting standard. This standard permits recognition of revenue only at the time of shipment rather than closer to the time of actual value creation (which is the time of discovery). Big Bath Accounting The strategy of manipulating a company's income statement to make poor results look even worse. The big bath is often implemented in a bad year to artificially enhance next year's earnings. The big rise in earnings might result in a larger bonus for executives. Cookie Jar Reserve Accounting Companies shift earnings around by creating overly large reserve accounts in good years then drawing them down in bad years.

#### Annotation 1418369830156

 Subject 3. Context for Assessing Financial Reporting Quality #cfa #cfa-level-1 #financial-reporting-and-analysis #financial-reporting-quality Motivations for managers to issue less than high quality financial reports: Mask poor performanceBoost stock priceImprove incentive compensationMeet debt covenants Management might have an incentive to manipulate earnings lower as well, possibly to smooth higher earnings in the current quarter into weaker quarters. Conditions conductive to issuing low-quality financial reports: Opportunity is generally provided through weaknesses in internal controls.Motivation can be imposed due to personal financial problems or unrealistic deadlines and performance goals.Rationalization occurs when an individual develops a justification for fraudulent activities. Mechanisms that discipline financial reporting quality: The free market. A company seeking to minimize its long-term cost of capital should aim to provide high-quality financial reports.Enforcement by market regulatory authorities, which plays a central role in encouraging high-quality financial reporting.Auditors. An audit is intended to provide assurance that a company's financial reports are presented fairly. There are, however, inherent limitations. Auditors are only able to offer "reasonable assurance" of the truth and fairness of financial statements rather than absolute assurance.Private contracts. External parties such as lenders and investors are motivated to ensure the quality of financial reports is high.

#### Flashcard 1418373762316

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What is the LSIL rule of 3rds?
- 1/3 will go away on their own
- 1/3 will stay as is
- 1/3 will progress

status measured difficulty not learned 37% [default] 0

#### Annotation 1418374286604

 Subject 4. Detection of Financial Reporting Quality Issues #cfa #cfa-level-1 #financial-reporting-and-analysis #financial-reporting-quality There is really nothing new in this reading, just a review of the previous material. A lot of the accounting practices are highlighted elsewhere in the curriculum but are reiterated here. Presentation Choice If a company uses a non-GAAP financial measure in an SEC filing, it is required to provide the most directly comparable GAAP measure with equivalent prominence in the filing. In addition, the company is required to provide a reconciliation between the non-GAAP measure and the equivalent GAAP measure. Similarly, IFRS require that any non-IFRS measures included in financial reports must be defined and their potential relevance explained. The non-IFRS measures must be reconciled with IFRS measures. Accounting Choices and Estimates Managers' considerable flexibility in choosing their companies' accounting policies and formulating estimates provides opportunities for aggressive accounting. Examples include: Revenue recognition policies.Inventory cost flow assumptions.Capitalization policies.Estimates of uncollectible account receivable.Estimated realizability of deferred tax assets.Depreciation method, estimated salvage value of depreciable assets, and estimated useful life of depreciable assets. Cash flow, especially operating cash flow and free cash flow, are always at the heart of any discussion of financial performance and valuation. Investors, creditors, and analysts are all interested in whether a firm is generating cash flow and where that cash flow can be expected to recur. Operating cash flow is usually unaffected by estimates and judgments. However, firms can still create the perception that sustainable operating cash flow is greater than it actually is. One technique is to misrepresent a firm's cash-generating ability by classifying financing activities as operating activities and vice versa. Additionally, management has discretion over the timing of cash flows and where to report cash flows. Warning Signs Analysts should pay attention to: Revenue. Check revenue recognition policies and revenue relationship.Inventories. Look at inventory relationships.Capitalization policies and deferred costs.The relationship of cash flow and net income.Other warning signs.

#### Flashcard 1418376121612

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[...] + integration of HPV DNA into susceptible epithelial cells in transformation zone → cervical cancer
evasion of host immune system

status measured difficulty not learned 37% [default] 0

Open it
evasion of host immune system + integration of HPV DNA into susceptible epithelial cells in transformation zone → cervical cancer

#### Flashcard 1418377694476

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evasion of host immune system + [...] → cervical cancer