# on 11-Nov-2016 (Fri)

#### Annotation 1418054733068

 Subject 3. Other Financial Information Sources #cfa #cfa-level-1 #financial-reporting-and-analysis #introduction Financial Notes and Supplementary Schedules Financial footnotes are an integral part of financial statements. They provide information about the accounting methods, assumptions and estimates used by management to develop the data reported in the financial statements. They provide additional disclosure in such areas as fixed assets, inventory methods, income taxes, pensions, debt, contingencies such as lawsuits, sales to related parties, etc. They are designed to allow users to improve assessments of the amounts, timing, and uncertainty of the estimates reported in the financial statements. Supplementary Schedules: In some cases additional information about the assets and liabilities of a company is provided as supplementary data outside the financial statements. Examples include oil and gas reserves reported by oil and gas companies, the impact of changing prices, sales revenue, operating income, and other information for major business segments. Some of the supplementary data is unaudited. Management Discussion and Analysis (MD&A) This requires management to discuss specific issues on the financial statements, and to assess the company's current financial condition, liquidity, and its planned capital expenditure for the next year. An analyst should look for specific concise disclosure as well as consistency with footnote disclosure. Note that the MD&A section is not audited and is for public companies only. Auditor's Reports See next subject for details. Other Sources of Information Interim reports. Publicly held companies must file form 10-Q (interim report) on a quarterly basis. It is far less detailed than annual financial statements, as it contains unaudited basic financial statements, unaudited footnotes to financial statements, and management discussion and analysis. Proxy statements. An analyst should look for litigation, executive compensation, and related-party transactions, known as proxy statements. Proxy statements should be considered an integral part of the financial report, and they may contain special compensation "perks" for officers and directors, as well as lawsuits and other contingent obligations facing the company. Companies' websites, press releases, and conference calls.

#### Annotation 1418056568076

 Subject 4. Auditor's Reports #cfa #cfa-level-1 #financial-reporting-and-analysis #introduction The auditor (an independent certified public accountant) is responsible for seeing that the financial statements issued comply with generally accepted accounting principles. In contrast, the company's management is responsible for the preparation of the financial statements. The auditor must agree that management's choice of accounting principles is appropriate and that any estimates are reasonable. The auditor also examines the company's accounting and internal control systems, confirms assets and liabilities, and generally tries to be sure that there are no material errors in the financial statements. Though hired by the management, the auditor is supposed to be independent and to serve the stockholders and the other users of the financial statements. An auditor's report (also called the auditor's opinion) is issued as part of a company's audited financial report. It tells the end-user the following: Whether the financial statements are presented in accordance with generally accepted accounting principles.It identifies those circumstances in which such principles have not been consistently observed in the current period in relation to the preceding period.Informative disclosures in the financial statements are to be regarded as reasonably adequate unless otherwise stated in the report. An auditor's report is considered an essential tool when reporting financial information to end-users, particularly in business. Since many third-party users prefer or even require financial information to be certified by an independent external auditor, many auditees rely on auditor reports to certify their information in order to attract investors, obtain loans, and improve public appearance. Some have even stated that financial information without an auditor's report is "essentially worthless" for investing purposes. The Types of Audit Reports There are four common types of auditor's reports, each one representing a different situation encountered during the auditor's work. The four reports are as follows: An unqualified opinion report is issued by an auditor when the financial statements presented are free of material misstatements and are in accordance with GAAP, which, in other words, means that the company's financial condition, position, and operations are fairly presented in the financial statements. It is the best type of report an auditee may receive from an external auditor. It is regarded by many as the equivalent of a "clean bill of health" to a patient, which has led many to call it the "clean opinion."A qualified opinion report is issued when the auditor encountered one or two situations that did not comply with generally accepted accounting principles; however, the rest of the financial statements are fairly presented. This type of opinion is very similar to an unqualified or "clean opinion," but the report states that the financial statements are fairly presented with a certain exception which is otherwise misstated.An adverse opinion is issued when the auditor determines that the financial statements of an auditee are materially misstated and generally do not comply with GAAP. It is considered the opposite of an unqualified or clean opinion, essentially stating that the information contained to assess the auditee's financial position and results of operations is materially incorrect, unreliable, and inaccurate. A disclaimer of opinion, commonly referred to simply as a disclaimer, is issued when the auditor could not form, and consequently refuses to present, an opinion on the financial statements. This type of report is issued when the auditor tried to audit a company but could not complete the work due to various reasons and does not issue an opinion. Auditor's Report on In...

#### Annotation 1418058403084

 Subject 5. Financial Statement Analysis Framework #cfa #cfa-level-1 #financial-reporting-and-analysis #introduction The financial statement analysis framework provides steps that can be followed in any financial statement analysis project, including the following: Articulate the purpose and context of the analysis. What is the purpose of the analysis? Evaluating an equity or debt investment? Or issuing a credit rating? The context needs to be defined clearly too: Who is the intended audience? What is the nature and content of the final report? What is the time frame? What is the budget? Collect input data. Gather a company's financial data from financial statements and other sources described in Subject c (other financial information sources). Also gather information on the economy and industry to understand the environment in which the company operates. Process data. Compute ratios or growth rates, prepare common-size financial statements, create charts, perform statistical analyses, make adjustments to financial statements, etc. Analyze / interpret the processed data. Interpret the output to support a conclusion (e.g., a buy decision). Develop and communicate conclusions and recommendations. Communicate the conclusion or recommendation in an appropriate format. Follow up. Periodic review is required to determine if the original conclusions and recommendations are still valid.

#### Annotation 1418060238092

 Subject 1. The Classification of Business Activities #cfa #cfa-level-1 #financial-reporting-and-analysis #financial-reporting-mechanics Business activities can be classified into three groups: Operating activities involve those activities conducted in the course of running a business. These activities determine net income and changes in the working capital account (accounts receivable, inventory, and accounts payable). Examples: Selling goods and servicesEmploying managers and workersBuying goods and servicesPaying taxes Investing activities are those associated with spending funds to begin and continue operations. In general, these activities affect the long-term asset items on the balance sheet. Examples: Buying resources such as land, buildings, and equipment needed in the operation of the business.Selling these resources when no longer needed. Selling land, buildings, and equipment is associated with investing activities, even though it results in a cash inflow, because it involves resources used to begin and continue operations. Financing activities are related to obtaining or repaying capital. In general, these activities affect the debt and the equity items on the balance sheet. Examples: Issuing stockPaying dividends to stockholdersObtaining loans from creditorsRepaying amounts plus interest to creditors Payments of dividends and interest are associated with financing activities, even though they involve cash outflows, because they are necessary to obtain funding. In Reading 27 [Understanding the Cash Flow Statement] a more detailed discussion of different business activities and their impact on cash flows will be provided.

#### Annotation 1418062073100

 Subject 2. Financial Statement Elements and Accounts #cfa #cfa-level-1 #financial-reporting-and-analysis #financial-reporting-mechanics An account is a label used for recording and reporting a quantity of almost anything. It is the: Means by which management keeps track of the effects of transactions.Basic storage unit for accounting data. A chart of accounts is a list of all accounts tracked by a single accounting system, and should be designed to capture financial information to make good financial decisions. Each account in the Anglo-Saxon chart is classified into one of the five categories: Assets, Liabilities, Equity, Income, and Expenses. Assets Assets are economic resources controlled by a company that are expected to benefit future operations. An asset is usually listed on the balance sheet.It has a normal or usual balance of debit (i.e., asset account amounts appear on the left side of a ledger). It is important to understand that in an accounting sense an asset is not the same as ownership. In accounting, ownership is described by the term "equity." Types of Assets Current assets are cash and other assets expected to be converted into cash, sold, or consumed either in one year or in the operating cycle, whichever is longer. Current assets are presented in the balance sheet in order of liquidity. The five major items found in the current asset section are: cash, marketable securities, accounts receivables, inventories and prepaid expenses.Long-term investments are often referred to simply as investments. They are to be held for many years, and are not acquired with the intention of disposing of them in the near future.Property, plants, and equipment are properties of a durable nature used in the regular operations of a business. With the exception of land, most assets are either depreciable (such as a building) or consumable. The accumulated depreciation account is a contra-asset account used to total the depreciation expense to date on the asset.Intangible assets lack physical substance and usually have a high degree of uncertainty concerning their future benefits. They include patents, copyrights, franchises, goodwill, trademarks, trade names, secret processes, and organization costs. Generally, all of these intangibles are written off (amortized) as an expense over 5 to 40 years. Liabilities Liabilities are the financial obligations that the company must fulfill in the future. They are typically fulfilled by cash payment. They represent the source of financing provided to a company by its creditors. Types of Liabilities Current liabilities are obligations that are reasonably expected to be liquidated either through the use of current assets or the creation of other current liabilities within one year or within the operating cycle, whichever is longer. They are not reported in any consistent order. A typical order is: notes payable, accounts payable, accrued items (e.g., accrued warranty costs, compensation, and benefits), income taxes payable, current maturities of long-term debt, etc.Long-term liabilities are obligations that are not reasonably expected to be liquidated within the normal operating cycle but instead at some date beyond that time. Bonds payable, notes payable, deferred income taxes, lease obligations, and pension obligations are the most common long-term liabilities. Owners' Equity Equity represents the source of financing provided to the company by the owners. Owners' Equity = Contributed Capital + Retained Earnings Owner's equity is the owners' investments and the total earnings retained from the commencement of the company. Contributed capital is the amount invested in the busines...

#### Annotation 1418063908108

 Subject 3. Accounting Equations #cfa #cfa-level-1 #financial-reporting-and-analysis #financial-reporting-mechanics #has-images Assets reported on the balance sheet are either purchased by the company or generated through operations; they are financed, directly or indirectly, by the creditors and stockholders of the company. This fundamental accounting relationship provides the basis for recording all transactions in financial reporting and is expressed as the balance sheet equation: Assets (A) = Liabilities (L) + Owners' equity (E) This equation is the foundation for the double-entry bookkeeping system because there are two or more accounts affected by every transaction. If the equation is rearranged: Assets - Liabilities = Owners' equity The above equation shows that the owners' equity is the residual claim of the owners. It is the amount left over after liabilities are deducted from assets. Owners' equity at a given date can be further classified by its origin: capital provided by owners, and earnings retained in the business up to that date. Owners' equity = Contributed capital + Retained earnings Net income is equal to the income that a company has after subtracting costs and expenses from total revenue. Revenue - Expenses = Net income (loss) Net income is informally called the "bottom line" because it is typically found on the last line of a company's income statement. Balance sheets and income statements are interrelated through the retained earnings component of owners' equity. Ending retained earnings = Beginning retained earnings + Net income - Dividends The following expanded accounting equation, which is derived from the above equations, provides a combined representation of the balance sheet and income statement: Assets = Liabilities + Contributed capital + Beginning retained earnings + Revenue - Expenses - Dividends Dividends and expenses decrease owners' equity.Revenues increase owners' equity. Because dividends and expenses are deductions from owners' equity, move them to the left side of the equation:

#### Annotation 1418067315980

Subject 4. Effects of Transactions on the Accounting Equation
#cfa #cfa-level-1 #financial-reporting-and-analysis #financial-reporting-mechanics

The following illustrates how the business transactions of ABC Realty are recorded in a simplified accounting system.

1. Owners' Investments - Invested $50,000 in business in exchange for 5,000 shares of$10 par value stock.

 Assets = Liab. Owners' Equity Cash A/R Supplies Land Building A/P Common Stock Retained Earnings 1 $50,000$50,000 A = $50,000 L + OE =$50,000 Notice A = L + SE is always in balance.

2. Purchase of Assets with Cash - Purchased a lot for $10,000 and a small building on a lot for$25,000.

 Assets = Liab. Owners' Equity Cash A/R Supplies Land Building A/P Common Stock Retained Earnings 1 $50,000$50,000 2 -35,000 $10,000$25,000 $50,000 bal$15,000 $10,000$25,000 $50,000 A =$50,000 L + OE = $50,000 This transaction only affects one side of the accounting equation: assets. Whenever a transaction affects only one side of the accounting equation, both assets and liabilities and owners' equity remain unchanged. 3. Purchase of Assets by Incurring a Liability - Purchased office supplies for$500 on credit.

 Assets = Liab. Owners' Equity Cash A/R Supplies Land
...

#### Annotation 1418070985996

 Subject 6. Financial Statements #cfa #cfa-level-1 #financial-reporting-and-analysis #financial-reporting-mechanics #has-images Here are financial statements based on previous transactions for ABC Realty.

#### Annotation 1418079112460

 Subject 7. Flow of Information in an Accounting System #cfa #cfa-level-1 #financial-reporting-and-analysis #financial-reporting-mechanics #has-images It is important for an analyst to understand the flow of information through a financial reporting system. 1. Journal entries and adjusting entries Journalizing is the process of chronologically recording transactions. General journal is the simplest and most flexible.A separate journal entry records each transaction.Useful for obtaining detailed information regarding a particular transaction. 2. General ledger and T-accounts The items entered in a general journal must be transferred to the general ledger. This procedure, posting, is part of the summarizing and classifying process. The general ledger contains all the same entries as those posted to the general journal; the only difference is that the data are sorted by date in the journal and by account in the ledger. There is a separate T-account for each item in the ledger. A T-account appears as follows: 3. Trial balance and adjusted trial balance A trial balance is a list of all open accounts in the general ledger and their balances. For every amount debited, an equal amount must be credited.The total of debits and credits for all the T-accounts must be equal.A trial balance is prepared to test this. It proves whether or not the ledger is in balance.It is usually prepared at the end of a month or accounting period. Since certain accounts may not be accurately stated, adjusting entries may be required to prepare an adjusted trial balance. 4. Finance statements The financial statements can be prepared from the adjusted trial balance.

#### Annotation 1418082520332

 Subject 8. Using Financial Statements in Security Analysis #cfa #cfa-level-1 #financial-reporting-and-analysis #financial-reporting-mechanics Financial statements are the primary information that firms publish about themselves, and investors and creditors are the primary users of financial statements. Analysts, who work for investors and creditors, may need to make adjustments to reflect items not reported in the statements or assess the reasonableness of managements' judgments. For example, an important first step in analyzing financial statements is identifying the types of accruals and valuation entries in a company's financial statements. Company management can manipulate financial statements, and a perceptive analyst can use his or her understanding of financial statements to detect misrepresentations. For example, companies may improperly record costs as assets rather than as expenses and amortize the assets over future periods. The goal is to impress shareholders and bankers with higher profits. Consider advertising expenses, which should be charged against income immediately. Certain companies, particularly those selling memberships to customers (e.g., health clubs and Internet access providers), aggressively capitalize these costs and spread them over several periods. Companies may amortize long-term assets too slowly. Slow depreciation or amortization keeps assets on the balance sheet longer, resulting in a higher net worth. With slow amortization, expenses are lower and profits are higher.

#### Annotation 1418083831052

 Subject 1. The Objective of Financial Reporting #cfa #cfa-level-1 #financial-reporting-and-analysis #financial-reporting-standards An awareness of the reporting framework underlying financial reports can assist in security valuation and other financial analysis. This framework describes the objectives of financial reporting, desirable characteristics for financial reports, the elements of financial reports, and the underlying assumptions and constraints of financial reporting. An understanding of the framework that is broader than knowledge of a particular set of rules offers an analyst a basis from which to infer the proper financial reporting, and thus security valuation implications, of any financial statement element transaction. The objective of financial reporting: The objective of financial statements is to provide information about a company's financial position, performance, and any changes in financial position; this information should be useful to a wide range of end-users for the purpose of making economic decisions.Financial reporting requires policy choices and estimates. These choices and estimates require judgment, which can vary from one preparer to the next. Accordingly, standards are needed to attempt to ensure some type of consistency in these judgments.

#### Annotation 1418085666060

Subject 2. Financial Reporting Standard-Setting Bodies and Regulatory Authorities
#cfa #cfa-level-1 #financial-reporting-and-analysis #financial-reporting-standards

#### Private sector standard-setting bodies and regulatory authorities play significant but different roles in the standard-setting process. In general, standard-setting bodies make the rules and regulatory authorities enforce the rules. However, regulators typically retain legal authority to establish financial reporting standards in their jurisdictions.

International Accounting Standards Board (IASB)

This is essentially the international equivalent of the Financial Accounting Standards Board (FASB).

• It was preceded by the International Accounting Standards Committee (IASC), which was established in 1973.
• It is comprised of 14 members (12 full-time, 2 part-time); seven members are liaisons with a national board.
• It works toward harmonization of international accounting standards.
• The standard development process is open.
• Standards are principles-based.
• Since the establishment of the IASB, the focus is on global standard-setting rather than harmonization per se.

International Organization of Securities Commissions (IOSCO)

This is essentially the international equivalent of the U.S. Securities and Exchange Commission (SEC).

• It works to achieve improved market regulation internationally.
• It works to facilitate cross-border listings.
• It advocates for the development and adoption of a single set of high-quality accounting standards.

Financial Accounting Standards Board (FASB)

The FASB is a non-governmental body that sets accounting standards for all companies issuing audited financial statements. All FASB pronouncements are considered authoritative; new FASB statements immediately become part of GAAP.

U.S. Securities and Exchange Commission (SEC)

In the U.S., the form and content of the financial statements of companies whose securities are publicly traded are governed by the SEC through its regulation S-X. Although the SEC has delegated much of this responsibility to the FASB, it frequently adds its own requirements. The SEC functions as a highly effective enforcement mechanism for standards promulgated in the private sector.

Audited financial statements, related footnotes, and supplementary data are presented in both annual reports sent to stockholders and those filed with the SEC. These filings often contain other valuable information not presented in stockholder reports.

Convergence of Global Financial Reporting Standards

As capital markets become more international in scope, the need for global accounting standards and the demand for multiple listings has grown. The IASB and FASB, along with other standard-setters, are working to achieve convergence of financial reporting standards.

Pros:

• Expedite the integration of global capital markets and make the cross-listing of securities easier.
• Facilitate international mergers and acquisitions.
• Reduce investor uncertainty and the cost of capital.
• Reduce financial reporting costs.
• Allow for easy adoption of high-quality standards by developing countries.

Cons:

• Significant differences in standards currently exist.
• The political cost of eliminating differences.
• Will cause "standards overload" for some firms.
• Diverse standards for diverse places are acceptable.

#### Annotation 1418087501068

 Subject 3. The International Financial Reporting Standards Framework #cfa #cfa-level-1 #financial-reporting-and-analysis #financial-reporting-standards The IFRS Framework sets forth the concepts that underlie the preparation and presentation of financial statements for external end-users, provides further guidance on the elements from which financial statements are constructed, and discusses the concepts of capital and capital maintenance. Objectives of Financial Statements The Framework identifies the central objective of financial statements as providing information about a company that is useful in making economic decisions. Financial statements prepared for this purpose will meet the needs of most end-users. Users generally want information about a company's financial performance, financial position, cash flows, and ability to adapt to changes in the economic environment in which it operates. The Framework identifies end-users as investors and potential investors, employees, lenders, suppliers, creditors, customers, governments, and the public at large. Qualitative Characteristics of Financial Statements The Framework prescribes a number of qualitative characteristics of financial statements. The key characteristics are relevance and reliability. Preparers can face a dilemma in satisfying both criteria at once. For example, information about the outcome of a lawsuit may be relevant, but the financial impact cannot be measured reliably. Financial information is relevant if it has the capacity to influence an end-user's economic decisions. Relevant information will help users evaluate the past, present, and most importantly, future events in a company. To be reliable, financial information must represent faithfully the effects of the transactions and events that it reflects. The true impact of transactions and events can be compromised by the difficulty of measuring transactions reliably. Financial information faithfully represents transactions and events when accounted for in accordance with their substance and economic realityand not merely their legal form. Commonly, a legal agreement will purport that a company has "sold" assets to a third party. However, an analysis of the substance of the arrangement indicates that the company retains control over the future economic benefits and risks embodied in the asset, and should continue to recognize it on its own balance sheet.Financial information is reliable if it is free from material error and is complete. Information is material if its omission or misstatement could influence decisions that end-users make on the basis of the financial statements. Information is reliable when it is neutral or free from bias and prudence. A degree of prudence when preparing financial information enhances its reliability. However, a company should not use prudence as the basis for the recognition of, for example, excessive provisions. Financial information must be easily understandable in addition to being relevant and reliable. Preparers should assume that end-users have a reasonable knowledge of business and economic activities, and an ability to comprehend complex financial matters. End-users must be able to compare a company's financial statements through time in order to identify trends in financial performance (comparability). Hence, policies on recognition, measurement, and disclosure must be applied consistently over time. Where a company changes its accounting for the recognition or measurement of transactions, it should disclose the change in the Basis of Accounting section of its financial statements and follow the guidance set out in IFRS. The application of qualitative characteristics and accounting standards usually results in financial statements that show a true and fair view, or fairly present a company's financial position and performance. The Elements of Financial Statements The Framework outlines definition and recognition criteria fo...

#### Flashcard 1418088025356

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You need a [...] ​to have FHR variability
functional autonomic nervous system

status measured difficulty not learned 37% [default] 0

#### Annotation 1418089860364

 Subject 4. General Requirements for Financial Statements #cfa #cfa-level-1 #financial-reporting-and-analysis #financial-reporting-standards The objective of IAS No. 1 is to prescribe the basis for the presentation of general-purpose financial statements, to ensure comparability both with the company's financial statements of previous periods and with the financial statements of other entities. To achieve this objective, this Standard sets out overall requirements for the presentation of financial statements, guidelines for their structure, and minimum requirements for their content. Components of Financial Statements A complete set of financial statements comprises: a balance sheetan income statementa statement of changes in equity showing either: all changes in equity, orchanges in equity other than those arising from transactions with equity-holders acting in their capacity as equity-holders a cash flow statementnotes, comprising a summary of significant accounting policies and other explanatory notes Fundamental Principles Underlying the Preparation of Financial Statements A company whose financial statements comply with IFRS shall make an explicit and unreserved statement of such compliance in the notes. Financial statements shall not be described as complying with IFRS unless they comply with all the requirements of IFRS. Underlying principles: Fair presentation. Financial statements shall present fairly the financial position, financial performance, and cash flows of a company. In virtually all circumstances, a fair presentation is achieved by compliance with applicable IFRS. Going concern. A business is presumed to be a going concern. If management has significant concerns about the company's ability to continue as a going concern, the uncertainties must be disclosed. Accrual basis. IAS No. 1 requires that a company prepare its financial statements, except for cash flow information, using the accrual basis of accounting. Consistency. The presentation and classification of items in the financial statements shall be retained from one period to the next unless a change is justified either by a change in circumstances or requirements of new IFRS. Materiality and Aggregation. Each material class of similar items must be presented separately in the financial statements. Dissimilar items may be aggregated only if they are individually immaterial. Presentation requirements: No offsetting. Assets and liabilities, and income and expenses, may not be offset unless required or permitted by IFRS. Classified balance sheet. A business must normally present a classified balance sheet, separating current and non-current assets and liabilities. Only if a presentation based on liquidity provides information that is reliable and more relevant may the current/non-current split be omitted. Minimum information on the face of the financial statements. IAS No. 1 specifies the minimum line item disclosures on the face of, or in the notes to, the balance sheet, the income statement, and the statement of changes in equity. Minimum information in the notes. IAS No. 1 specifies disclosures about information to be presented in the financial statements. Comparative information. Comparative information shall be disclosed in respect of the previous period for all amounts reported in the financial statements, both on the face of financial statements and in notes.

#### Flashcard 1418091695372

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If a baby doesn't react to scalp scratching, worry about [...]
hypoxemia

status measured difficulty not learned 37% [default] 0

#### Flashcard 1418094841100

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Although decreased FHR variability can be an ominous sign indicating a seriously compromised fetus, decreased variability in the absence of fetal decelerations is unlikely due to [...]
fetal hypoxia

status measured difficulty not learned 37% [default] 0

#### Annotation 1418095365388

Subject 5. Comparison of IFRS with Alternative Reporting Systems
#cfa #cfa-level-1 #financial-reporting-and-analysis #financial-reporting-standards

#### Annotation 1418097200396

 Subject 1. Components and Format of the Income Statement #cfa #cfa-level-1 #financial-reporting-and-analysis #understanding-income-statement The income statement presents information on the financial results of a company's activities over a period of time. The format of the income statement is not specified by U.S. GAAP and the actual format varies across companies. Here are common components: Sales or revenue: amount charged for the delivery of goods or services. Follows the revenue recognition rule: Revenue is recognized even though cash may not be collected until the following accounting period.Net sales = gross sales - sales returns and allowances - discounts.Amount of sales and trends in net sales over time are used to analyze a company's progress. Cost of goods sold is the amount paid for merchandise sold, or the cost to manufacture products that were sold, during an accounting period. Gross margin = net sales - costs of goods sold. Also called gross profit. Management is interested in both: The amount of gross margin; andThe percentage of gross margin (gross margin/net sales). Both are useful in planning business operations. Operating expenses are expenses other than the cost of goods sold that are incurred in running a business. These expenses are grouped into categories: selling expenses, general and administrative expenses, and other revenues and expenses.Careful planning and control of operating expenses can improve a company's profitability. Income from operations (also called operating income) is the difference between gross margin and operating expenses. It represents the income from a company's normal, or main, business. It is used to compare the profitability of companies or divisions within a company. Other revenues and expenses are not part of a company's operating activities. These include: Revenues or expenses from investments (e.g., dividends and interest).Interest and other expenses from borrowing.Any other revenue or expense not related to the company's normal business operations. They are also called non-operating revenues and expenses. Income before income taxes is the amount a company has earned from all activities - operating and non-operating - before taking into account the amount of income taxes the company incurred. This is used to compare the profitability of two or more companies or divisions within a company. Comparisons are made before income taxes are deducted because companies may be subject to different income tax rates. Income taxes (also called provision for income taxes) represent the expense for federal, state, and local taxes on corporate income. The income taxes account is shown as a separate item on the income statement. Tax rates are substantial (usually 15-38%) and have a significant effect on business decisions. Most other types of taxes are shown among operating expenses. Net income is what remains of the gross margin after operating expenses are deducted, other revenues and expenses are added or deducted, and income taxes are deducted. It is the final figure, or "bottom line," of the income statement. Net income = Income before income taxes - income taxes Net income is an important performance measure. It represents the amount of business earnings that accrue to stockholders.It is the amount transferred to retained earnings from all income generating activities during the year.It is often used to determine whether a business has been operating successfully. The...

#### Flashcard 1418099035404

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[...] and [...] during labour can decrease FHR variability
maternal acidemia (diabetic ketoacidosis); analgesic drugs

status measured difficulty not learned 37% [default] 0

#### Flashcard 1418100870412

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FHR Variability tends to [increase/decrease] ​with increasing fetal tachycardia.
decrease

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#### Flashcard 1418104016140

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What is a normal EFM tracing baseline?
110-160 bpm

status measured difficulty not learned 37% [default] 0

#### Annotation 1418104540428

 Subject 2. Revenue Recognition #cfa #cfa-level-1 #financial-reporting-and-analysis #understanding-income-statement There are two revenue and expense recognition issues when accrual accounting is used to prepare financial statements: Timing: when should revenue and expense be recognized?Measurement: how much revenue and expense should be recognized? Revenue is generally recognized when it is (1) realized or realizable, and (2) earned. The general rule for revenue recognition includes the "concept of realization." Two conditions must be met for revenue recognition to take place: 1. Completion of the earnings process The company must have provided all or virtually all the goods or services for which it is to be paid, and it must be possible to measure the total expected cost of providing the goods or services. No remaining significant contingent obligation should exist. This condition is not met if the company has the obligation to provide future services (such as warranty protection) but cannot estimate the associated expenses. 2. Assurance of payment The quantification of cash or assets expected to be received for the goods or services provided must be reliable. These conditions are typically met at the time of sale, but there are many exceptions, which will be discussed next.

#### Annotation 1418106375436

 Subject 3. Revenue Recognition in Special Cases #cfa #cfa-level-1 #financial-reporting-and-analysis #understanding-income-statement In limited circumstances, specific revenue recognition methods may be applicable. Long-term Contracts A long-term contract is one that spans multiple accounting periods. How should a company apportion the revenue earned under a long-term contract to each accounting period? If the outcome of a long-term contract can be reliably measured, both IFRS and U.S. GAAP require the use of the percentage-of-completion method.If the outcome of a long-term contract can NOT be reliably measured: Under IFRS, revenue is only reported to the extent of contract costs incurred. Costs are expensed in the period incurred.Under U.S. GAAP, no revenue is reported until the contract is finished. This is called the completed contract method. If a loss is expected on a contract, the loss is reported immediately, regardless of the method used. Percentage-of-completion Revenues and expenses are recognized each period in proportion to the work completed. This is used for a long-term project if all of the following conditions are met: There is a contract.There are reliable estimates of revenues, costs, and progress towards completion.The buyer can be expected to pay the full contract price on schedule. It recognizes profit corresponding to the percentage of cost incurred to total estimated costs associated with long-term construction contracts. It is the preferred method because it provides a better measure of operating activities and a more informative disclosure of the status of incomplete contracts. It also facilitates the forecast of future performance and cash flows. This method highlights the relationship among the income statement (revenues), the balance sheet (resulting receivables), and the cash flow statement (current collections). The percentage-of-completion is equal to actual cost/estimated total cost, or it can be determined by an engineering estimate. Using the first approach: Percent completed = Costs incurred to date / Most recent estimate of total costs.Revenue to be recognized to-date = Percent complete x Estimated total revenue.Current period revenue = Revenue to be recognized to date - revenue recognized in prior periods. To date, the most recent estimate of the total cost is used in computing the progress toward completion. It means that if cost estimates are revised as the project progresses, that effect is recognized in the period in which the change is made. Costs and revenues of prior periods are not restated. Completed Contract This method does not recognize revenue and expense until the contract is completed and the title is transferred. All profits are recognized when the contract is completed. The completed contract method is used when: There is no contract; orEstimates of revenues, costs, or progress towards completion are unreliable; orThe ability to collect revenues from the buyer is uncertain. This method is more conservative than the percentage-of-completion method. Analysts may need to rely on the statement of cash flows to assess the contribution of long-term contracts to a company's profitability. Installment Sales This method is used if the costs to provide goods or services are known but the collectability of sales proceeds cannot be reasonably determined. It recognizes both revenue and the associated cost of goods sold only when cash is received. Gross profit (sales - costs of goods sold) reflects the proportion of cash received. This method is sometimes used to report income from sales of noncurrent assets and real estate transactions. Cost Recovery This method is similar to the installment sales method but is more conservative. It ...

#### Annotation 1418108210444

 Subject 4. Revenue Recognition Accounting Standards Issued May 2014 #cfa #cfa-level-1 #financial-reporting-and-analysis #understanding-income-statement In May 2014, the IASB and FASB each issued a converged standard for revenue recognition. The standards are effective for reporting periods beginning after 1 January 2017 under IFRS and 15 December 2016 under U.S. GAAP. Key aspects of the converged accounting standards: The core principle of the new standard is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration (that is, payment) to which the company expects to be entitled in exchange for those goods or services. Companies under contract to provide goods or services to a customer will be required to follow a five-step process to recognize revenue: Identify contract(s) with a customerIdentify the separate performance obligations in the contractDetermine the transaction priceAllocate the transaction price to the separate performance obligationsRecognize revenue when the entity satisfies each performance obligation There is new guidance on whether revenue should be recognized at a point in time or over time. The standard provides detailed guidance on various issues such as identifying distinct performance obligations, accounting for contract modifications, and accounting for the time value of money. Detailed implementation guidance is included on topics such as sales with a right of return, customer options for additional goods or services, etc. The standard also introduces new guidance on costs of fulfilling and obtaining a contract and specifying the circumstances in which such costs should be capitalized. Costs that do not meet the criteria must be expensed when incurred. The standard introduces new, increased requirements for disclosure of revenue in a reporter's financial statements.

#### Annotation 1418110045452

 #obgyn If abnormal FHR strip and resuscitation interventions (change position, IV fluid, O2 (only if need), stop oxy if abn tracing while in labour) not working, move on to c/s if ~3 cm. If ~8cm, fetal scalp sampling can be good to make sure baby okay to have assisted vag delivery (forceps/vacuum).

#### Flashcard 1418111880460

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Question
If abnormal FHR strip and resuscitation interventions ([...]) not working, move on to c/s if ~3 cm. If ~8cm, fetal scalp sampling can be good to make sure baby okay to have assisted vag delivery (forceps/vacuum).
change position, IV fluid, O2 (only if need), stop oxy if abn tracing while in labour

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If abnormal FHR strip and resuscitation interventions (change position, IV fluid, O2 (only if need), stop oxy if abn tracing while in labour) not working, move on to c/s if ~3 cm. If ~8cm, fetal scalp sampling can be good to make sure baby okay to have assisted vag delivery (forceps/vacuum).

#### Flashcard 1418113453324

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Question
If abnormal FHR strip and resuscitation interventions (change position, IV fluid, O2 (only if need), stop oxy if abn tracing while in labour) not working, move on to [...] if ~3 cm. If ~8cm, fetal scalp sampling can be good to make sure baby okay to have assisted vag delivery (forceps/vacuum).
c/s

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If abnormal FHR strip and resuscitation interventions (change position, IV fluid, O2 (only if need), stop oxy if abn tracing while in labour) not working, move on to c/s if ~3 cm. If ~8cm, fetal scalp sampling can be good to make sure baby okay to have assisted vag delivery (forceps/vacuum).

#### Flashcard 1418115026188

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Question
If abnormal FHR strip and resuscitation interventions (change position, IV fluid, O2 (only if need), stop oxy if abn tracing while in labour) not working, move on to c/s if ~[...] cm. If ~8cm, fetal scalp sampling can be good to make sure baby okay to have assisted vag delivery (forceps/vacuum).
3

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If abnormal FHR strip and resuscitation interventions (change position, IV fluid, O2 (only if need), stop oxy if abn tracing while in labour) not working, move on to c/s if ~3 cm. If ~8cm, fetal scalp sampling can be good to make sure baby okay to have assisted vag delivery (forceps/vacuum).

#### Flashcard 1418116599052

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Question
If abnormal FHR strip and resuscitation interventions (change position, IV fluid, O2 (only if need), stop oxy if abn tracing while in labour) not working, move on to c/s if ~3 cm. If ~[...]cm, fetal scalp sampling can be good to make sure baby okay to have assisted vag delivery (forceps/vacuum).
8

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If abnormal FHR strip and resuscitation interventions (change position, IV fluid, O2 (only if need), stop oxy if abn tracing while in labour) not working, move on to c/s if ~3 cm. If ~8cm, fetal scalp sampling can be good to make sure baby okay to have assisted vag delivery (forceps/vacuum).

#### Flashcard 1418118171916

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#obgyn
Question
If abnormal FHR strip and resuscitation interventions (change position, IV fluid, O2 (only if need), stop oxy if abn tracing while in labour) not working, move on to c/s if ~3 cm. If ~8cm, [...] can be good to make sure baby okay to have assisted vag delivery (forceps/vacuum).
fetal scalp sampling

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If abnormal FHR strip and resuscitation interventions (change position, IV fluid, O2 (only if need), stop oxy if abn tracing while in labour) not working, move on to c/s if ~3 cm. If ~8cm, fetal scalp sampling can be good to make sure baby okay to have assisted vag delivery (forceps/vacuum).

#### Flashcard 1418120531212

Tags
#obgyn
Question
If abnormal FHR strip and resuscitation interventions (change position, IV fluid, O2 (only if need), stop oxy if abn tracing while in labour) not working, move on to c/s if ~3 cm. If ~8cm, fetal scalp sampling can be good to make sure baby okay to have [...].
assisted vag delivery (forceps/vacuum)

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l FHR strip and resuscitation interventions (change position, IV fluid, O2 (only if need), stop oxy if abn tracing while in labour) not working, move on to c/s if ~3 cm. If ~8cm, fetal scalp sampling can be good to make sure baby okay to have <span>assisted vag delivery (forceps/vacuum).<span><body><html>

#### Annotation 1418122628364

 Subject 6. Non-Recurring Items and Non-Operating Items #cfa #cfa-level-1 #financial-reporting-and-analysis #understanding-income-statement The goal of analyzing an income statement is to derive an effective indicator to predict future earnings and cash flows. Net income includes the impact of non-recurring items, which are transitory or random in nature. Therefore, net income is not the best indicator of future income. Recurring pre-tax income from continuing operations represents the company's sustainable income and therefore should be the primary focus of analysis. Segregating the results of recurring operations from those of non-recurring items facilitates the forecasting of future earnings and cash flows. Generally, analysts should exclude items that are non-recurring in nature when predicting a company's future earnings and cash flows. However, this does not mean that every non-recurring item in the income statement should be ignored. Management tends to label many items in the income statement as "non-recurring," especially those that reduce reported income. For the purpose of analysis, an important issue is to assess whether non-recurring items are really "non-recurring," regardless of their accounting labels. There are four types of non-recurring items in an income statement. 1. Discontinued operations Discontinued operations are not a component of persistent or recurring net income from continuing operations. To qualify, the assets, results of operations, and investing and financing activities of a business segment must be separable from those of the company. The separation must be possible physically and operationally, and for financial reporting purposes. Any gains or disposal will not contribute to future income and cash flows, and therefore can be reported only after disposal, that is - when realized. Subsidiaries and investees also qualify as separate components.Disposal of a portion of a business component does not qualify as discontinued operations. Instead, this is recorded as an unusual or infrequent item. 2. Extraordinary items Extraordinary items are BOTH unusual in nature AND infrequent in occurrence, and material in amount. They must be reported separately (below the line) net of income tax. Common examples are: Expropriations by foreign governments.Uninsured losses from earthquakes, eruptions, and tornadoes. Note that gains and losses from the early retirement of debt used to be treated as extraordinary items; SFAS No. 145 now requires them to be treated as part of continuing operations. 3. Unusual or infrequent items These are either unusual in nature OR infrequent in occurrence but not both. They may be disclosed separately (as a single-line item) as a component of income from continuing operations. They are reported pre-tax in the income statement and appear "above the line," while the other three categories are reported on an after-tax basis and "below the line" and excluded from net income from continuing operations. Common examples are: Gains or losses from disposal of a portion of a business segment.Gains or losses from sales of assets or investments in affiliates or subsidiaries.Provisions for environmental remediation.Impairment, write-offs, write-downs, and restructuring costs (such as those costs related to the integration of acquired companies). 4. Changes in accounting principles Changes in accounting principles, such as from LIFO to another inventory method or from the percentage-of-completion method to the completed-contract method, can be either voluntary changes or changes mandated by new accounting standards. They are reported in the same manner as extraordinary items and discontinued operations. The cumulative impact on prior period earnings should be reported as a separate line item on the income statement on...

#### Annotation 1418124463372

 Subject 7. Earnings per Share #cfa #cfa-level-1 #financial-reporting-and-analysis #has-images #understanding-income-statement Earnings per share (EPS) is a measure that is widely used to evaluate the profitability of a company. A company's capital structure is simple if it consists of only common stock or includes no potential common stock that upon conversion or exercise could dilute earnings per common share. Companies with simple capital structures only need to report basic EPS. A complex capital structure contains securities that could have a dilutive effect on earnings per common share. Dilutive securities are securities that, upon conversion or exercise, could dilute earnings per share. These securities include options, warrants, convertible bonds, and preferred stocks. Companies with complex capital structures must report both basic EPS and diluted EPS. Calculation of diluted EPS under a complex capital structure allows investors to see the adverse impact on EPS if all diluted securities are converted into common stock. Basic EPS To calculate EPS in a simple capital structure: The current year's preferred dividends are subtracted from net income because EPS refers to earnings available to the common shareholder. Common stock dividends are not subtracted from net income. Since the number of common shares outstanding may change over the year, the weighted average is used to compute EPS. The weighted average number of common shares is the number of shares outstanding during the year weighted by the portion of the year they were outstanding. Analysts need to find the equivalent number of whole shares outstanding for the year. Three steps are used to compute the weighted average number of common shares outstanding: Identify the beginning balance of common shares and changes in the common shares during the year.For each change in the common shares: Compute the number of shares outstanding after each change in the common shares. Issuance of new shares increases the number of shares outstanding. Repurchase of shares reduces the number of shares outstanding.Weight the shares outstanding by the portion of the year between this change and next change: weight = days outstanding / 365 = months outstanding / 12 Sum up to compute the weighted average number of common shares outstanding. Stock Dividends and Splits In computing the weighted average number of shares, stock dividends and stock splits are only changes in the units of measurement, not changes in the ownership of earnings. A stock dividend or split does not change the shareholders' total investment (i.e., it means more pieces of paper for shareholders). When a stock dividend or split occurs, computation of the weighted average number of shares requires restatement of the shares outstanding before the stock dividend or split. It is not weighted by the portion of the year after the stock dividend or split occurred. Specifically, before starting the three steps of computing the weighted average, the following numbers should be restated to reflect the effects of the stock dividend/split: The beginning balance of shares outstanding;All share issuance or purchase prior to the stock dividend or split.No restatement should be made for shares issued or purchased after the date of the stock dividend or split. If a stock dividend or split occurs after the end of the year but before the financial statements are issued, the weighted average number of shares outstanding for the year (and any other years presented in comparative form) must be restated. Example 1. 01/01/15 - 100...

#### Annotation 1418129444108

 Subject 8. Analysis of the Income Statement #cfa #cfa-level-1 #financial-reporting-and-analysis #has-images #understanding-income-statement Common-Size Analysis of the Income Statement This topic will be discussed in detail in Reading 28 [Financial Analysis Techniques]. Income Statement Ratios The following operating profitability ratios measure the rates of profit on sales (profit margins). Net Profit Margin shows how much profit is generated on every dollar of sales. Net income is earnings after tax but before dividends (EBIT - interest - taxes). It should be based on earnings from the company's continuing operation because the analysis is to forecast the company's future performance. Thus analysts should not consider earnings from discontinued operations, gains or losses from the sale of discontinued operations, and non-recurring income or expenses. Gross Profit Margin equals percent of sales available after deducting cost of goods sold. This percentage is available to cover selling, general and administrative costs, and also earn a profit. It indicates the basic cost structure of a company and shows the company's cost-price position. Comparing this ratio with the industry average over time shows the company's relative profitability within the industry. A declining gross profit may indicate increasing costs of production or declining prices.The ratio can be affected by changes in the company's product mix: a change toward items with higher (lower) margin raises (reduces) the gross profit margin.A small change in gross profit can result in a much larger change in profit margin if the company has high fixed costs.

#### Annotation 1418134424844

 Subject 9. Comprehensive Income #cfa #cfa-level-1 #financial-reporting-and-analysis #has-images #understanding-income-statement Comprehensive income includes both net income and other revenue and expense items that are excluded from the net income calculation. Comprehensive income is the sum of net income and other items that must bypass the income statement because they have not been realized, including items like an unrealized holding gain or loss from available-for-sale securities and foreign currency translation gains or losses. These items are not part of net income, yet are important enough to be included in comprehensive income, giving the user a bigger, more comprehensive picture of the organization as a whole. The following table is from the Statement of Stockholders' Equity section of the 3M's 2001 annual report. This section describes the composition of comprehensive income. It begins with net income and then includes those items affecting stockholders' equity that do not flow through the income statement. For 3M, these items include: Cumulative translation adjustment.Minimum pension liability adjustment.Unrealized gains (losses) on available-for-sale investments.Unrealized gains (losses) on derivative investments. FASB has taken the position that income for a period should be all-inclusive comprehensive income. Comprehensive income may be reported on an income statement or separate statement, but is usually reported on a statement of stockholders' equity.

#### Annotation 1418137832716

 Subject 1. Components and Format of the Balance Sheet #cfa #cfa-level-1 #financial-reporting-and-analysis #has-images #understanding-balance-sheets The starting place for analyzing a company is typically the balance sheet. Think of the balance sheet as a photo of the business at a specific point in time. It presents the assets, liabilities, and equity ownership of a company as of a specific date. Assets are the economic resources controlled by the company.Liabilities are the financial obligations that the company must fulfill in the future. Liabilities are typically fulfilled by payment of cash. They represent the source of financing provided to the company by the creditors.Equity ownership is the owner's investments and the total earnings retained from the commencement of the company. Equity represents the source of financing provided to the company by the owners. The balance sheet provides users, such as creditors and investors, with information regarding the sources of finance available for projects and infrastructure. At the same time, it normally provides information about the future earnings capacity of a company's assets as well as an indication of cash flow implicit in the receivables and inventories. The balance sheet has many limitations, especially relating to the measurement of assets and liabilities. The lack of timely recognition of liabilities and, sometimes, assets, coupled with historical costs as opposed to fair value accounting for all items on the balance sheet, implies that the financial analyst must make numerous adjustments to determine the economic net worth of the company. The analyst must understand the components, structure, and format of the balance sheet in order to evaluate the liquidity, solvency, and overall financial position of a company. Balance Sheet Format Balance sheet accounts are classified so that similar items are grouped together to arrive at significant subtotals. Furthermore, the material is arranged so that important relationships are shown. The table below indicates the general format of balance sheet presentation: This format is referred to as the account format, which follows the pattern of the traditional general ledger accounts, with assets at the left and liabilities and equity at the right of a central dividing line. A report format balance sheet lists assets, liabilities, and equity in a single column. Balance Sheet Components Current Assets These are cash and other assets expected to be converted into cash, sold, or consumed either in one year or in the operating cycle, whichever is longer. The operating cycle is the average time between the acquisition of materials and supplies and the realization of cash through sales of the product for which the materials and supplies were acquired. The cycle operates from cash through inventory, production, and receivables back to cash. Where there are several operating cycles within one year, the one-year period is used. If the operating cycle is more than one year, the longer period is used. Long-Term Investments Often referred to simply as investments, these are to be held for many years and are not acquired with the intention of disposing of them in the near future. Investments in securities such as bonds, common stock, or long-term notes that management does not intend to sell within one year.Investments in tangible fixed assets not currently used in operations, such as land held for speculation.Investments set aside in special funds, such as a sinking fund, pension fund, or plant expansion fund. The cash surrender value of life insurance is included here.Investments in non-consolidated subsidiaries or affiliated companies....

#### Flashcard 1418139667724

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Question
What is an atypical EFM tracing baseline?
-tachy >160bpm for >30 but <80 min
-rising baseline

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#### Flashcard 1418144386316

Tags
#obgyn
Question
What is an abnormal EFM tracing baseline?
-tachy >160bpm for >80min
-erratic baseline

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#### Flashcard 1418147532044

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Question
What is normal EFM tracing variability?
- 6-25bpm
- =/< 5bpm for <40 min

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#### Annotation 1418148580620

 Subject 3. Financial Instruments: Financial Assets and Financial Liabilities #cfa #cfa-level-1 #financial-reporting-and-analysis #understanding-balance-sheets Financial instruments are contracts that give rise to both a financial asset of one company and a financial liability of another company. Financial instruments come in a variety of forms which include derivatives, hedges, and marketable securities. Measured at fair market value: Financial assets: Financial assets held for trading.Available-for-sale financial assets.Derivatives (whether stand-alone or embedded in non-derivative instruments).Non-derivative instruments with fair value exposures hedged by derivatives. Financial liabilities: Derivatives.Financial liabilities held for trading.Non-derivative instruments with fair value exposures hedged by derivatives. Measured at cost or amortized cost: Financial assets: Unlisted instruments (there is no reliable valuation measure).Held-to-maturity investments (bonds).Loans and receivables. Financial liabilities: All other liabilities (such as bonds payable or notes payable). Accounting for Gains and Losses on Marketable Securities Held-to-maturity securities. Debt securities that management intends to hold to their maturity dates. At year-end, they are reported at cost adjusted for the effect of interest (debit the securities account and credit the interest income account) and unrealized holding gains and losses are not recognized. Trading securities. Debt and equity securities bought and held mainly for sale in the short term to generate income on price changes. At year-end, they are reported at their fair market value. Any unrealized holding gains or losses are recognized on the company's income statement as part of net income. When they are sold, the realized gains or losses will also appear on the income statement. Realized gains and losses are not affected by any unrealized gains or losses recognized before. Available-for-sale securities. Debt and equity securities not classified as held-to-maturity or trading securities. Unrealized gains and losses are reported as part of other comprehensive income (in contrast, the unrealized gains or losses of trading securities are reported in the income statement as part of net income). Other than that, they are accounted for in the same way as trading securities.

#### Flashcard 1418151726348

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#obgyn
Question
What is atypical EFM tracing variability?
- =/< 5bpm for 40-80 min

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#### Flashcard 1418153561356

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Question
What is abnormal EFM tracing variability?
- =/< 5bpm for >80 min
- =/> 25 bpm for > 10 min
- sinusoidal

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#### Flashcard 1418155396364

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Question
What is normal EFM tracing decels?
- none
- occasional uncomplicated variables
- early decels

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#### Flashcard 1418157231372

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Question
What are atypical EFM tracing decels?
- repetitive (3+) uncomplicated variable decels
- occasional late decels
- single prolonged decel >2 but <3 min

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#### Flashcard 1418159066380

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Question
What are abnormal EFM tracing decels?
- repetitive (3+) complicated variables (decels to <70 bpm for >60 sec; loss of variability in trough or in baseline; biphasic decels; overshoots; slow return to baseline; baseline lower after decel; baseline tachy/brady)
- late decels >50% of contractions
- single prolonged decel >3 but <10 min

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#### Flashcard 1418160901388

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#obgyn
Question
What are features of complicated variables seen in abnormal EFM?
- decels to <70 bpm for >60 sec
- loss of variability in trough or in baseline
- biphasic decels
- overshoots
- baseline lower after decel

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#### Flashcard 1418162736396

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Question
What are normal EFM tracing accels?
- spontaneous accels present
- FHR increases >15 bpm lasting > 15 sec (>10 bpm for >10 sec if <32 wk)
- accels present w/ fetal scalp stimulation

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#### Flashcard 1418164571404

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Question
What are atypical EFM tracing accels?
absence of accel w/ fetal scalp stimulation

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#### Flashcard 1418166406412

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Question
What are abnormal EFM tracing accels?
usually absent (but if present, doesn't change classification of tracing)

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#### Flashcard 1418168241420

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Question
What action can you take for normal EFM tracing?
EFM can be interrupted for periods up to 30 min if maternal-fetal condition stable and/or oxytocin infusion rate stable

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#### Flashcard 1418170076428

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Question
What actions can you take for atypical EFM tracing?
further vigilant assessment required (especially when combined features present)

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#### Flashcard 1418171911436

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Question
What action is required for abnormal EFM tracing?
ACTION REQUIRED
- review overall clinical situation
- obtain scalp pH if appropriate
- prepare for delivery

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#### Flashcard 1418173746444

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Question
What are the 10 steps of managing an abn fetal tracing?
1 . Reposition patient to increase uteroplacental perfusion or alleviate cord compression
2 . Check maternal vitals
3 . Correct maternal hypovolemia, if present, by increasing IV fluids
4 . Stop oxytocin if applicable
5 . Administer oxygen at 8 to 10 L/min
6 . Rule out fever, dehydration, drug effect, prematurity
7 . Consider initiation of electronic fetal monitoring to clarify and document components of FHR
8 . If external monitor already in place, consider applying an internal fetal scalp electrode
9 . Consider fetal scalp sampling if appropriate
10. If abnormal findings persist despite corrective measures and other tests are not available (like fetal scalp pH) or desirable, the delivery should be considered

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#### Flashcard 1418175581452

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Question
fetal scalp blood sampling (FBS) is done when?
in pts with abn FHR patterns

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#### Flashcard 1418177416460

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Question
If fetal scalp pH is 7.25+ what should you do?
- continue w/ labour
- FBS (fetal scalp blood sampling) should be repeated if abnormality persists

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#### Flashcard 1418179251468

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Question
If fetal scalp pH 7.21 - 7.24, what should you do?
- continue w/ labour
- repeat FBS in 30 min or consider delivery if rapid fall since last sample

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#### Flashcard 1418181086476

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Question
If fetal scalp pH is =/< 7.20, what should you do?
delivery is indicated

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#### Flashcard 1418182921484

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Question
What are the 6 steps to interpreting a FHR tracing?
1 . What is the uterine contraction frequency? (check the paper speed)
2 . What is the baseline fetal heart rate?
3 . What is the baseline variability?
• Absent
• Minimal
• Moderate/average
• Excessive
4 . Periodic changes noted on this tracing are:
• Accelerations
• Early decelerations
• Late decelerations
• Variable decelerations
5 . This tracing is classified as:
• Normal
• Atypical
• Abnormal
6 . What would be your management?

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#### Flashcard 1418184756492

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Question
meconium aspiration syndrome is more likely to occur in:
- post-term pregnancy
- pregnancies complicated by IUGR

status measured difficulty not learned 37% [default] 0

#### Flashcard 1418188426508

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#has-images #obgyn

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#### Flashcard 1418192620812

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#has-images #obgyn

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#### Flashcard 1418195504396

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#has-images #obgyn

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#### Flashcard 1418199698700

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#has-images #obgyn

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#### Flashcard 1418203893004

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#has-images #obgyn

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#### Annotation 1418209398028

 #obgyn Meconium aspiration may cause both mechanical obstruction of the airways and chemical pneumonitis, in addition to severe pulmonary hypertension.

#### Flashcard 1418210708748

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Question
Meconium aspiration may cause both [...] and chemical pneumonitis, in addition to severe pulmonary hypertension.
mechanical obstruction of the airways

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Meconium aspiration may cause both mechanical obstruction of the airways and chemical pneumonitis, in addition to severe pulmonary hypertension.

#### Flashcard 1418212281612

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Question
Meconium aspiration may cause both mechanical obstruction of the airways and [...], in addition to severe pulmonary hypertension.
chemical pneumonitis

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Meconium aspiration may cause both mechanical obstruction of the airways and chemical pneumonitis, in addition to severe pulmonary hypertension.

#### Flashcard 1418213854476

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Question
Meconium aspiration may cause both mechanical obstruction of the airways and chemical pneumonitis, in addition to [...].
severe pulmonary hypertension

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Meconium aspiration may cause both mechanical obstruction of the airways and chemical pneumonitis, in addition to severe pulmonary hypertension.

#### Flashcard 1418216738060

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Question
List 5 predisposing factors to cord prolapse
- malpresentation
- prematurity
- abn fetus
- mult pregnancy
- polyhydramnios
- premature ROM
- AROM
- high presenting part
- obstetric procedures (ECV)

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#### Annotation 1418217262348

 #obgyn If infant is vigorous and crying immediately after birth, suctioning the mouth and nares is not necessarily recommended in the presence of meconium

#### Flashcard 1418218573068

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If infant is vigorous and crying immediately after birth, [...] is not necessarily recommended in the presence of meconium
suctioning the mouth and nares

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If infant is vigorous and crying immediately after birth, suctioning the mouth and nares is not necessarily recommended in the presence of meconium

#### Annotation 1418220145932

 #obgyn If infant is depressed at birth, tracheal intubation and suctioning of meconium from the lower airway should be done.

#### Flashcard 1418221456652

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Question
If infant is depressed at birth, [...] and suctioning of meconium from the lower airway should be done.
tracheal intubation

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If infant is depressed at birth, tracheal intubation and suctioning of meconium from the lower airway should be done.

#### Flashcard 1418223029516

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Question
If infant is depressed at birth, tracheal intubation and [...] should be done.
suctioning of meconium from the lower airway

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If infant is depressed at birth, tracheal intubation and suctioning of meconium from the lower airway should be done.

#### Flashcard 1418225913100

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Question
What should you do when a multip is fully dilated and delivering and the cord pops out?
push cord back in and try to deliver quickly

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#### Flashcard 1418227748108

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Question
What is the management of cord prolapse on delivery? (3 main steps + components of each)
1. assess fetal viability
- check for cord pulsations
- if fetus already dead/too immature to survive/lethal anomaly, intervention for fetal reasons are inappropriate (allow vag deliv or c/s if transverse lie)
2. relieve cord compression
- if cord outside introitus, gently replace in vagina
- with hand in vagina, cradle cord in palm & use tips of fingers to elevate presenting part off of cord
- adjust maternal position to trendelenberg (head lower than pelvis) or knee-chest
3. method of delivery
- if cervix fully dilated & present part low, do assisted vag deliv
- if cervix not fully dilated/vag deliv dangerous, do immediate CS

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#### Flashcard 1418229583116

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[#] ​ high-risk HPV types responsible for development of most cancers
13

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#### Annotation 1418230107404

 Subject 4. Equity #cfa #cfa-level-1 #financial-reporting-and-analysis #understanding-balance-sheets Equity is a residual value of assets which the owner has claim to after satisfying other claims on the assets (liabilities). There are five potential components that comprise the owner's equity section of the balance sheet: Contributed capital. The amount of money which has been invested in the business by the owners. This includes preferred stocks and common stocks. Common stock is recorded at par value with the remaining amount invested contained in additional paid-in capital. Minority interest. Retained earnings. These are the total earnings of the company since its inception less all dividends paid out. Treasury stock. This is a company's own stock that has Already been fully issued and was outstanding;Been reacquired by the company; andNot been retired. It decreases stockholder's equity and total shares outstanding. Accumulated comprehensive income. This includes items such as the minimum liability recognized for under-funded pension plans, market value changes in non-current investments, and the cumulative effect of foreign exchange rate changes. Refer to Reading 25 [Understanding the Income Statement] for details. Statement of Changes in Shareholders' Equity This statement reflects information about increases or decreases to a company's net assets or wealth. It reveals much more about the year's stockholders' equity transactions than the statement of retained earnings. The statement of shareholders' equity is a financial statement that summarizes changes that occurred during the accounting period in components of the stockholders' equity section of the balance sheet. For example, it includes capital transactions with owners (e.g., issuing shares) and distributions to owners (i.e., dividends).The shareholders' equity section of the balance sheet lists the items in contributed capital and retained earnings on the balance sheet date.

#### Annotation 1418231942412

 Subject 5. Uses and Analysis of the Balance Sheet #cfa #cfa-level-1 #financial-reporting-and-analysis #has-images #understanding-balance-sheets Common-Size Analysis of Balance Sheets This topic will be discussed in detail in Reading 28 [Financial Analysis Techniques]. Balance Sheet Ratios Liquidity ratios measure the ability of a company to meet future short-term financial obligations from current assets and, more importantly, cash flows. Each of the following ratios takes a slightly different view of cash or near-cash items. Current Ratio is a measure of the number of dollars of current assets available to meet current obligations. It is the best-known liquidity measure. A current ratio of less than 1 indicates the company has negative working capital. Quick Ratio (Acid-Test Ratio) eliminates less liquid assets, such as inventory and pre-paid expenses, from the current ratio. If inventory is not moving, the quick ratio is a better indicator of cash and near-cash items that will be available to meet current obligations. Cash Ratio is the most conservative liquidity ratio, determined by eliminating receivables from the quick ratio. As with the elimination of inventory in the quick ratio, there is no guarantee that the receivables will be collected. Solvency ratios measure a company's ability to meet long-term and other obligations. Long-Term Debt-Equity Ratio is an indicator of the degree of protection available to the creditors in the event of insolvency of a company. Higher debt-equity ratio indicates higher financial risk. Debt-Equity Ratio includes short-term debt in the numerator. The total debt includes all liabilities, including non-interest-bearing debt such as accounts payables, accrued expenses, and deferred taxes. This ratio is especially useful in analyzing a company with substantial financing from short-term borrowing. Total Debt Ratio = Financial Leverage Ratio = Financial statement analysis aims to investigate a company's financial condition and operating performance. Using financial ratios helps to examine relationships among individual data items from financial statements. Although ratios by themselves cannot answer questions, they can help analysts ask the right questions in financial statement analysis. As analytical tools, ratios are attractive because they are simple and convenient. However, ratios are only as good as the data upon which they are based and the information with which they are compared. Fr...

#### Annotation 1418244787468

 Subject 1. Classification of Cash Flows and Non-Cash Activities #cfa #cfa-level-1 #financial-reporting-and-analysis #understanding-cashflow-statements The cash flow statement provides important information about a company's cash receipts and cash payments during an accounting period as well as information about a company's operating, investing and financing activities. Although the income statement provides a measure of a company's success, cash and cash flow are also vital to a company's long-term success. Information on the sources and uses of cash helps creditors, investors, and other statement users evaluate the company's liquidity, solvency, and financial flexibility. Cash receipts and cash payments during a period are classified in the statement of cash flows into three different activities: Operating Activities These involve the cash effects of transactions that enter into the determination of net income and changes in the working capital accounts (accounts receivable, inventory, and accounts payable). Cash flows from operating activities (CFOs) reflect the company's ability to generate sufficient cash from its continuing operations. CFOs are derived by converting the income statement from an accrual basis to a cash basis. For most companies, positive operating cash flows are essential for long-run survival. The major operating cash flows are (1) cash received from customers, (2) cash paid to suppliers and employees, (3) interest and dividends received, (4) interest paid, and (5) income taxes paid. Special items to note: Interest and dividend revenue, and interest expenses, are considered operating activities, but dividends paid are considered financing activities. Note that interest expense is reported on the income statement while dividends flow through the retained earnings statement. Remember that an interest/dividend item is an operating activity if it appears on the income statement. For example, payments of dividends do not appear on the income statement, and thus are not classified as operating activities. All income taxes are considered operating activities, even if some arise from financing or investing. Indirect borrowing using accounts payable is not considered a financing activity - such borrowing would be classified as an operating activity. Investing Activities These include making and collecting loans and acquiring and disposing of investments (both debt and equity) and property, plants, and equipment. In general, these items relate to the long-term asset items on the balance sheet. Investing cash flows reflect how a company plans its expansions. Examples are: Sale or purchase of property, plant and equipment.Investments in joint ventures and affiliates and long-term investments in securities.Loans to other entities or collection of loans from other entities. Financing Activities These involve liability and owner's equity items, and include: Obtaining capital from owners and providing them with a return on (and a return of) their investments.Borrowing money from creditors and repaying the amounts borrowed. In general, the items in this section relate to the debt and the equity items on the balance sheet. Financing cash flows reflect how the company plans to finance its expansion and reward its owners. Examples: Dividends paid to stockholders (not interest paid to creditors!). Note that the cash outflow caused by dividends is determined by dividends paid, not dividends declared. Dividends paid are not reflected in the retained earnings account. The amount is provided in the supplementary information.Issue or repurchase of the company's stocks.Issue or retirement of long-term debt (including the current portion of long-term debt). Purchase of debt and equity securities fro...

#### Annotation 1418259729676

 Subject 1. Analysis Tools and Techniques #cfa #cfa-level-1 #financial-analysis-techniques #financial-reporting-and-analysis #has-images Financial analysis techniques are useful in summarizing financial reporting data and evaluating the performance and financial position of companies. The results of financial techniques provide important inputs into security valuation. Ratios Ratios express one quantity in relation to another. As analytical tools, ratios are attractive because they are simple and convenient. They can provide a profile of a company, its economic characteristics and competitive strategies, and its unique operating, financial, and investment characteristics. Ratio analysis is essential to comprehensive financial analysis. However, analysts should understand the following aspects when dealing with ratios: A ratio is not "the answer." A ratio is an indicator of some aspect of a company's performance in the past. It does not reveal why things are as they are. Also, a single ratio by itself is not likely to be very useful. For example, a current ratio of 2:1 may be viewed as satisfactory. If, however, the industry average is 3:1, such a conclusion may be questionable.Differences in accounting policies can distort ratios (e.g., inventory valuation, depreciation methods).Not all ratios are necessarily relevant to a particular analysis. Analysts should know the questions for which they want to find answers and know the questions that particular ratios can help answer.Ratio analysis does not stop with computation; interpretation of the result is also important. Limitations: There are a significant number of estimates and subjective information that go into financial statements and therefore it is imperative that the analyst understands the numbers before calculating and relying on ratio analyses based on these numbers. An analyst needs to ask questions like: How homogeneous is the company? Are the ratios comparable between divisions within a company? It is critical to derive comparable industry ratios. However, many companies have multiple lines of business, making it difficult to identify the appropriate industry to use in comparing companies. Companies are required to provide segmented information that allows the user to see the impact of various segments on the overall company. Are the results of the ratio analysis consistent? An analyst needs to look at several ratios in conjunction in order to form a sensible conclusion. The total portfolio of the company should be used instead of only one set of ratios. A company must be viewed along all these lines since the company may have strengths and/or weaknesses in different areas. For example, a highly profitable company may have very poor short-term liquidity. Is the ratio within a reasonable range for the industry? Analysts must look at a range of values for a particular ratio because a ratio can be too high or too low. Are alternative companies' accounting treatments comparable? In comparsons companies, even within the same industry, companies may be using different accounting treatments and/or different estimates to capture the same event. Companies can use different estimates to calculate depreciation or bad debt expenses. Companies can use different inventory methods and may have operating versus capital leases in the financial statements. All of these accounting choices and estimates affect financial statements. Alternative treatments can cause a difference in results for the same events, especially when dealing with non-U.S. companies. Common-size Analysis Raw numbers hide relevant information that percentages frequently unveil. Common-size statements normalize balance sheet, income statement, and cash flow statement items to allow easier comparison of different-sized companies. They reduce all the dollar am...

#### Annotation 1418264710412

 Subject 2. Common Ratios #cfa #cfa-level-1 #financial-analysis-techniques #financial-reporting-and-analysis #has-images The ratios presented in the textbook are neither exclusive nor uniquely "correct." The definition of many ratios is not standardized and may vary from analyst to analyst, textbook to textbook, and annual report to annual report. The analyst's primary focus should be the relationships indicated by the ratios, not the details of their calculations. Activity Ratios A company's operating activities require investments in both short-term (inventory and accounts receivable) and long-term (property, plant, and equipment) assets. Activity ratios describe the relationship between the company's level of operations (usually defined as sales) and the assets needed to sustain operating activities. They measure how well a company manages its various assets. Receivables turnover measures the liquidity of the receivables - that is, how quickly receivables are collected or turn over. The lower the turnover ratio, the more time it takes for a company to collect on a sale and the longer before a sale becomes cash. This ratio provides a better level of detail than the current or quick ratio. A company could have a favorable current or quick ratio, but if the receivables turn over very slowly, these ratios would not be a good measure of liquidity. The same applies for the inventory turnover below. This ratio also implies an average collection period (the number of days it takes for the company's customers to pay their bills): Remember, as with all ratios, these ratios are industry specific. The nature of the industry dictates a higher or lower receivables or inventory turnover. For receivables turnover, analysts don't want to derive too much from the norm, since a low number indicates slow-paying customers that cause capital to be tied up in receivables and bad debt and a high number indicates overly stringent credit terms that hurt sales. If a company's credit policy is 30 days and the days of sales outstanding is 45 days, then the credit policy needs to be reviewed. Inventory turnover measures how fast the company moves its inventory through the system. The lower the turnover 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 inadequate inventory, which could lead to outages, backorders, and slow delivery to customers, adversely affecting sales. An extremely low inventory turnover value implies capital is being tied up in inventory and could signal obsolete inventory. Payable turnover measures the length of time a company has to pay its current liabilities to suppliers. This ratio examines the use of trade credit. The longer the time, the better it is for the company, since it is an interest-free loan and offsets the lack of cash from receivables and inventory turnovers. The following measures the number of days it tak...

#### Annotation 1418296429836

 Subject 3. The DuPont System #cfa #cfa-level-1 #financial-analysis-techniques #financial-reporting-and-analysis #has-images The breakdown of ROE into component ratios to assess the impact of those ratios is generally referred to as the DuPont Model. Traditional DuPont equation: ROE = net income / common equityROE = (net income / net sales) x (net sales / common equity). Therefore, ROE = (net profit margin) x (equity turnover).ROE = (net income / net sales) x (net sales / total assets) x (total assets / common equity) Each of these components impacts the overall return to shareholders. An increase in profit margin, asset turnover, or leverage can all increase the return. There is a downside as well. If a company loses money in any year, the asset turnover or financial leverage multiplies this loss effect. This implies that to improve its return on equity, a company should become more: Profitable (increase net profit margin, e.g., pricing and expense control).Efficient (increase total asset turnover, e.g., efficiency of asset use).Leveraged (increase its financial leverage ratio). A company's over- or underperformance on ROA is due to one or both of these causes, or "drivers." The extended DuPont model takes the above three factors and incorporates the effect of taxes and interest based on the level of financial leverage. It takes the profit margin and backs up to see the effect of interest and taxes on the overall return to shareholders. Therefore the extended model starts with EBIT (Earnings Before Interest and Taxes) rather than net income. EAT = EBT (1 - t), where t is the company's average tax rate. Substituting EBT(1 - t) for EAT in the expanded ROE equation gives us ROE = (EBT / sales)(sales / assets)(assets / equity)(1 - t).EBT = EBIT - I, where I equals the company's total interest expense. Substituting (EBIT - I) into the ROE equation for EBT gives us ROE = [(EBIT / sales)(sales / assets) - (interest expense / assets)] (assets / equity) (1 - t).Restated in accounting terms: ROE = [(operating profit margin) x (total asset turnover) - (interest expense rate)] x (financial leverage multiplier) x (tax retention rate) High financial leverage does not always increase ROE; higher financial leverage will lead to a higher interest expense rate, which may offset the benefits of higher leverage. This breakdown will help an analyst understand what happened to a company's ROE and why it happened.

#### Annotation 1418299837708

 Subject 4. Ratios Used in Equity Analysis, Credit Analysis, and Segment Analysis #cfa #cfa-level-1 #financial-analysis-techniques #financial-reporting-and-analysis Equity Analysis Analysts need to evaluate a company's performance in order to value a security. One of their valuation methods is the use of valuation ratios. Some common valuations ratios are: P/E: Price per share / Earnings per share. P/E is widely recognized and used by investors. Earning power is a chief driver of investment value, and EPS is perhaps the chief focus of security analysts' attention. P/CF: Price per share / Cash flow per share. Cash flow is less subject to manipulation by management than earnings. Thus, P/CF ratios can be used to compare companies with different degrees of accounting aggressiveness. Moreover, cash flow is generally more stable than earnings, so P/CF ratios are more stable than P/Es. When EPS is abnormally high, low, or volatile, P/CF ratios are more reliable than P/Es. P/S: Price per share / Sales per share. Sales growth is the driving force for the growth of earnings and cash flows.Sales are positive even when EPS is negative.Sales are generally less subject to distortion or manipulation than are other fundamentals. P/BV: Price per share / Book value per share. Similarly, book value is generally positive even when EPS is negative. Since book value per share is more stable than EPS, P/B may be more meaningful than P/E when EPS is abnormally high or low, or is highly variable. These price multiples and dividend-related quantities are discussed in more detail in Study Session 14 (Equity Analysis and Valuation). Credit Analysis Credit analysis is the evaluation of credit risk. How does an analyst who has calculated a ratio know whether it represents good, bad, or indifferent credit quality? Somehow, the analyst must relate the ratio to the likelihood that a borrower will satisfy all scheduled interest and principal payments in full and on time. In practice, this is accomplished by testing financial ratios as predictors of the borrower's propensity not to pay (to default). For example, a company with high financial leverage is statistically more likely to default than one with low leverage, all other factors being equal. Similarly, high fixed-charge coverage implies less default risk than low coverage. After identifying the factors that create high default risk, the analyst can use ratios to rank all borrowers on a relative scale of propensity to default. Many credit analysts conduct their ratio analyses within ranking frameworks established by their employers. In the securities field, bond ratings provide a structure for analysis. Credit rating agencies such as Moody's and Standard & Poor's use financial ratios when assigning a credit rating to a company's debt issues. For example, credit ratios used by Standard & Poor's include EBIT interest coverage, funds from operations to total debt, total debt to EBITDA, and total debt to total debt plus equity. Much research has been performed on the ability of ratios to assess the credit risk of a company (including the risk of bankruptcy) and predict bond ratings and bond yields. Segment Analysis A company may be involved in many different businesses, may do business in many different geographic areas, or may have significant number of customers. It is difficult to analyze a company with multiple business lines because of the inherent differences in financial structures, risk characteristics, etc,. amount the different lines. Aggregation of financial results for all the lines tends to obscure the true picture. A company must disclose information related to various subdivisions of its business. Under IAS 14 (Segment Reporting), disclosures are required for reportable segments.U.S. GAAP requirements are similar to IFRS but less det...

#### Annotation 1418301672716

 Subject 5. Model Building and Forecasting #cfa #cfa-level-1 #financial-analysis-techniques #financial-reporting-and-analysis The results of financial analysis provide valuable inputs into forecasts of future earnings and cash flow. An analyst can build a model to forecast future performance of a company. Techniques that can be used include: Sensitivity Analysis. This is the study of how the variation in the output of a model can be apportioned to different sources of variation. (e.g., what will be the net income if more debt is issued?) Scenario Analysis. This considers both the sensitivity of financial outcome to changes in key financial variables and the likely range of variable values. The least "reasonable" set of circumstances (low unit sales, high construction costs, etc.) and the most "reasonable" set are specified first. The financial outcomes under the bad and good conditions are then calculated and compared to the expected, or base-case, outcome. Even though there are an infinite number of possibilities, scenario analysis only considers a few discrete outcomes. Monte Carlo Simulation. This is a risk analysis technique in which a computer is used to simulate probable future events and thus estimate the profitability and risk of a project. Random values of input variables are generated on a computer. The mean of the target variable is computed to measure the expected value. Standard deviation (or coefficient of variation) is computed to measure risks.

#### Annotation 1418303507724

 Subject 1. Cost of Inventories #cfa #cfa-level-1 #financial-reporting-and-analysis #inventories #inventories-long-lived-assets-income-taxes-and-non-current-liabilities There are two basic issues involved in inventory accounting: 1. Determine the cost of goods available for sale: Beginning Inventory + Purchases. 2. Allocate the cost of total inventory costs (cost of goods available for sale) between two components: COGS on the income statement and the ending inventory on the balance sheet. Note that COGS = (Beginning Inventory + Purchases) - Ending Inventory. The cost flow assumption to be adopted includes specific identification, average cost, FIFO, LIFO, etc. This issue will be discussed in subsequent subjects. Determination of Inventory Cost IFRS and SFAS No. 151 provide similar treatment of the determination of inventory costs. The cost of inventories, capitalized inventory costs, includes all costs incurred in bringing the inventories to their present location and condition. It includes production costs, invoice price (net of discount), transportation costs, taxes, part of fixed production overhead, etc.It does not include all abnormal costs incurred due to waste of materials, abnormal waste incurred for labor and overhead conversion costs from the production process, any storage costs, or any administrative overhead and selling costs. These costs are typically expensed in the accounting period instead of being considered inventory costs.

#### Annotation 1418305342732

 Subject 2. Inventory Valuation Methods #cfa #cfa-level-1 #financial-reporting-and-analysis #inventories #inventories-long-lived-assets-income-taxes-and-non-current-liabilities In some cases, it's possible to specifically identify which inventory items have been sold and which remain. Using the specific identification method, the actual costs of the specific units sold are transferred from inventory to the cost of goods sold. (Debit Cost of Goods Sold; Credit Inventory.) This method achieves the proper matching of sales revenue and cost of goods sold when the individual units in the inventory are unique. However, the method becomes cumbersome and may produce misleading results if the inventory consists of homogeneous items. In most cases, companies may be unable to determine exactly which items are sold and which items remain in ending inventory. The remaining three methods are referred to as cost flow assumptions under GAAP and cost formulas under IFRS. They should be applied only to an inventory of homogeneous items. The cost flow assumption may or may not reflect the physical flow of inventory. Weighted Average Cost Using the weighted average cost method, the average cost of all units in the inventory is computed and used in recording the cost of goods sold. This is the only method in which all units are assigned the same (average) per-unit cost. Average cost = (beginning inventory + purchases) / units available for saleEnding inventory = average cost x units of ending inventoryCOGS = cost of goods available for sale - ending inventory FIFO FIFO is the assumption that the first units purchased are the first units sold. Thus inventory is assumed to consist of the most recently purchased units. FIFO assigns current costs to inventory but older (and often lower) costs to the cost of goods sold. LIFO LIFO is the assumption that the most recently acquired goods are sold first. This method matches sales revenue with relatively current costs. In a period of inflation, LIFO usually results in lower reported profits and lower income taxes than the other methods. However, the oldest purchase costs are assigned to inventory, which may result in inventory becoming grossly understated in terms of current replacement costs. LIFO is not allowed under IFRS. In the U.S., however, LIFO is used by approximately 36 percent of U.S. companies because of potential income tax savings. Comparison of Inventory Accounting Methods Inventory data is useful if it reflects the current cost of replacing the inventory. COGS data is useful if it reflects the current cost of replacing the inventory items to continue operations. During periods of stable prices, all three methods will generate the same results for inventory, COGS, and earnings. During periods of rising prices and stable or growing inventories, FIFO measures assets better (the most useful inventory data) but LIFO measures income better. Under LIFO, the cost of ending inventory is based on the earliest purchase prices, and thus is well below current replacement cost. For many firms using LIFO, the cost of inventory may be decades old and almost useless for analysis purposes. However, the cost of goods sold is based on the most recent purchase prices, and thus closely reflects current replacement costs. As a result, LIFO provides a better measurement of current income and future profitability. Under FIFO, the cost of ending inventory is based on the most recent purchase prices, and thus closely reflects current replacement cost. However, costs of goods sold are based on the earliest purchase prices, and this is well below the current replacement costs. The gain is actually holding gain or inventory profit. It is debatable whether this should be considered income; at least, analysts can say the underestimated COGS leads to inflated net income. In an environment of declining inventory unit costs and constant or increasing inventory quantitie...

#### Annotation 1418307177740

 Subject 3. Periodic versus Perpetual Inventory System #cfa #cfa-level-1 #financial-reporting-and-analysis #inventories #inventories-long-lived-assets-income-taxes-and-non-current-liabilities The perpetual inventory system updates inventory accounts after each purchase or sale. Inventory quantities are updated continuously. When there is a sale, inventory is reduced and COGS is calculated. The periodic inventory system records inventory purchase or sale in the "Purchases" account. The "Inventory" account is updated on a periodic basis, at the end of each accounting period (e.g., monthly, quarterly). Cost of goods sold or cost of sale is computed from the ending inventory figure. With perpetual FIFO, the first (or oldest) costs are the first moved from the Inventory account and debited to the Cost of Goods Sold account. The end result under perpetual FIFO is the same as under periodic FIFO. In other words, the first costs are the same whether you move the cost out of inventory with each sale (perpetual) or whether you wait until the year is over (periodic). With perpetual LIFO, the last costs available at the time of the sale are the first to be removed from the Inventory account and debited to the Cost of Goods Sold account. Since this is the perpetual system, we cannot wait until the end of the year to determine the last cost. An entry must be recorded at the time of the sale in order to reduce the Inventory account and increase the Cost of Goods Sold account. If costs continue to rise throughout the entire year, perpetual LIFO will yield a lower cost of goods sold and a higher net income than periodic LIFO. Generally this means that periodic LIFO will result in lower income taxes than perpetual LIFO. Example Date....................................Units....Price 12.31.2008........Beginning Inventory....1.......85 1.1.2009..........Purchase...............1.......87 2.1.2009..........Purchase...............2.......89 6.1.2009..........Sales..................1.......89 12.1.2009.........Purchase...............1.......90 Under perpetual LIFO the following entry must be made at the time of the sale: $89 will be credited to Inventory and$89 will be debited from Cost of Goods Sold. If that was the only item sold during the year, at the end of the year the Cost of Goods Sold account will have a balance of $89 and the cost in the Inventory account will be$351 ($85 +$87 + $89 +$90). Under periodic LIFO we assign the last cost of $90 to the one item that was sold. (If two items were sold,$90 would be assigned to the first item and $89 to the second item.) The remaining$350 is assigned to inventory. The $350 of inventory cost consists of$85 + $87 +$89 + $89. The$90 assigned to the item that was sold is permanently gone from inventory.

#### Annotation 1418309012748

 Subject 4. The LIFO Method #cfa #cfa-level-1 #financial-reporting-and-analysis #inventories #inventories-long-lived-assets-income-taxes-and-non-current-liabilities In the U.S., firms that use LIFO must report a LIFO reserve. The LIFO reserve is the difference between the inventory balance shown on the balance sheet and the amount that would have been reported had the firm used FIFO. That is: InventoryFIFO = InventoryLIFO + LIFO Reserve It represents the cumulative effect over time of ending inventory under LIFO vs. FIFO. When adjusting COGS from LIFO to FIFO: COGSFIFO = COGSLIFO - Change in LIFO Reserve. LIFO Liquidations So far, discussions have been based on the assumptions of rising prices and stable or growing inventory quantity. As a result, the LIFO reserve increases over time. However, LIFO reserves can decline for either of the two reasons listed below. In either case, the COGS will be smaller and the reported income will be higher relative to what they would have been if the LIFO reserve had not declined. However, the implications of a decline in the LIFO reserve on financial analysis vary, depending on the reason for the decline. Liquidation of inventories. When a firm reduces its inventory, the old assets flow into income. The COGS figure no longer reflects the current cost of inventory sold. This is called LIFO liquidation. Gross profit margin will be abnormally high and unsustainable ("phantom" gross profits). To defer taxes indefinitely, purchases must always be greater than or equal to sales. A LIFO liquidation may signal that a company is entering an extended period of decline (and needs the "profit" to show as income). Analysts should exclude this profit from recurring earnings, as it is not operating in nature; the reported COGS should be restated by adding back the decline in the LIFO reserve to remove the artificial boost to net income. Price declines. The lower-cost current purchases enter reported LIFO COGS when purchase prices fall, reducing the cost differences between LIFO and FIFO ending inventories. As a result, the LIFO reserve declines. Such a decline is not considered a LIFO liquidation. Amounts on the balance sheet are still outdated but those on the income statement are still current. However, the tax benefits are lost under LIFO. For analytical purposes, no adjustment is required for declining prices, since price decreases are a normal business situation.

#### Annotation 1418339683596

 Subject 7. Presentation and Disclosures #cfa #cfa-level-1 #financial-reporting-and-analysis #inventories-long-lived-assets-income-taxes-and-non-current-liabilities #long-lived-assets Property, Plant, and Equipment (PP&E) IAS 16 provides a long list of disclosure requirements for PP&E. For each class of PP&E, the financial statements must disclose the following: the measurement bases used for determining the gross carrying amount.the depreciation methods and rates or useful lives.the gross carrying amount and the accumulated depreciation (aggregated with accumulated impairment losses) at the beginning and end of the period.the detailed reconciliation of the carrying amount at the beginning and end of the period (showing, for example, additions, depreciation, impairment losses, revaluation information, foreign currency translation impacts, and so on). U.S. GAAP require a company to disclose the depreciation expense for the period, the balances of assets, accumulated depreciation and a general description of the depreciation method(s) used. Intangible Assets IAS 38 provides a considerable set of disclosure requirements for intangible assets. For each class of intangibles, and distinguishing between internally generated and other assets, the financial statements must disclose: whether the useful lives are indefinite or finite and, if finite, the length of the useful lives or the amortization rates used.the amortization methods used for intangible assets with finite useful lives.the gross carrying amount and any accumulated amortization (aggregated with accumulated impairment losses) at the beginning and end of the period.the line item(s) of the statement of comprehensive income in which any amortization of intangible assets is included.detailed reconciliation of the carrying amount at the beginning and end of the period (showing, for example, additions, amortization, impairment losses, revaluation information, foreign currency translation impacts, and so on). Under U.S. GAAP, a company is required to disclose the gross carrying amounts and accumulated amortization, the aggregated amortization expense for the period, and the estimated amortization expense for the next 5 years. Impairment of Assets As with most other standards, IAS 36 provides a long list of disclosure requirements. To begin with, for each class of assets, the financial statements must disclose: the amount of impairment losses and reversals recognized in profit or loss during the period and the line item(s) of the statement of comprehensive income in which those impairment losses and reversals are included.the amount of impairment losses and reversals on revalued assets recognized in other comprehensive income during the period. U.S. GAAP require a company to disclose a description of the impaired asset, what caused impairment, the method of determining fair value, the amount of impairment loss, and where the loss is recognized on the financial statements.

#### Annotation 1418341518604

 Subject 8. Investment Property #cfa #cfa-level-1 #financial-reporting-and-analysis #inventories-long-lived-assets-income-taxes-and-non-current-liabilities #long-lived-assets Investment property is defined as property that is owned (or, in some cases, leased under a finance lease) for the purpose of earning rental income, capital appreciation, or both. Under IFRS, companies are allowed to value investment properties using either a cost model or a fair value model. The cost model is identical to the cost model used for property, plant, and equipment (PP&E).The fair value model differs from the revaluation model used for PP&E. All changes in the fair value of investment property affect income. Under U.S. GAAP, there is no specific definition of investment property. Investment properties are generally measured using the cost model.

#### Annotation 1418343353612

 Subject 1. Key Terms #cfa #cfa-level-1 #financial-reporting-and-analysis #income-taxes #inventories-long-lived-assets-income-taxes-and-non-current-liabilities The computation of income taxes poses problems in financial reporting. The major problems arise because current period taxable income is measured using different rules than those used in accounting for pretax income. Taxes are paid based on tax reporting, but from a financial reporting standpoint, the tax expense in the income statement (IS) is based on the matching principle and is computed on pretax accounting income. In order to achieve matching between taxes based on taxable income and taxes based on pretax income for accounting purposes, deferred tax entries are put through the accounting books. The differences between the tax expense for tax and the accounting tax expense create deferred tax liabilities (credits) and deferred tax assets (debits or prepaid taxes). Here are key terms based on tax return: Taxable income: Income subject to tax based on the tax code. Taxes payable: Tax return liability resulting from current period taxable income. (U.S.) SFAS 109 calls this "current tax expense or benefit." Income tax paid: Actual cash flow for income taxes, including payments (refunds) for other years. Tax loss carry forward: Tax return loss that can be used to reduce taxable income in future years. The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes. Here are key terms based on financial reporting: Pretax income or accounting profit: Income before income tax expense. The carrying amount is the amount at which the asset or liability is valued according to accounting principles. Income tax expense: Expense resulting from current period pretax income; this includes taxes payable (from the tax return) and deferred income tax expense. It is reported in the income statement. Deferred income tax expense: Accrual of income tax expense expected to be paid (or recovered) in future years (difference between taxes payable and income tax expense). Under (U.S.) SAAS 109, this results from changes in deferred tax assets and liabilities. Deferred tax asset: Balance sheet item that results from a temporary excess of taxes payable over income taxes expense. It is expected to be recovered from future operations; it is not created if the excess is a permanent difference. Deferred tax liability: Balance sheet item that results from a temporary excess of income taxes expense over taxes payable. It is expected to result in future cash outflows; it is not created if the excess is a permanent difference. Valuation allowance: Reserve against deferred tax assets based on likelihood that those assets will be realized. Timing difference: The result of the tax return treatment (timing or amount) of a transaction that differs from the financial reporting treatment. Temporary difference: Difference between tax reporting and financial reporting that will affect taxable income when those differences reverse. This is similar to but slightly broader than timing difference. It also considers other events that result in differences between the tax bases of assets and liabilities and their carrying amounts in financial statements. Permanent difference: Differences between tax reporting and financial reporting that will not reverse in the future.

#### Annotation 1418345188620

 Subject 2. Deferred Tax Assets and Liabilities #cfa #cfa-level-1 #financial-reporting-and-analysis #has-images #income-taxes #inventories-long-lived-assets-income-taxes-and-non-current-liabilities Tax reporting and financial reporting are based on two different sets of assumptions. This is particularly true in the U.S. because financial reporting does not have to conform to tax reporting, as it does in Japan, Germany, and Switzerland. Numerous items create differences between accounting profit and taxable income. As a result, the taxes payable for the period are often different from the tax expenses recognized in the financial statements. In the U.S.: Tax reporting is based on the Internal Revenue Code (the tax code). The modified cash basis of accounting is used in tax reporting to determine the periodic liability from currently taxable events.Revenue and expense recognition methods used in tax reporting often differ from those used in financial reporting. Financial reporting is based on GAAP. Accrual accounting is used in financial reporting to provide maximum information to allow evaluation of a firm's financial performance and cash flows.Management is allowed to select revenue and expense recognition methods. A firm has a strong incentive to use methods that allow it to minimize taxable income. Because of the differences between tax accounting and financial accounting, the financial statements may include tax liabilities or assets - allowances that have been made in the financial statements for taxes that have not yet been or have already been paid. Deferred tax liabilities generally arise when tax relief is provided in advance of an accounting expense, or when income is accrued but not taxed until received. Deferred tax liabilities on an individual transaction are expected to be reversed when these liabilities are settled, causing future cash outflows. A typical example is depreciation: a company uses the Accelerated Cost Recovery System for tax reporting but uses straight-line depreciation for financial reporting. Recall that taxes payable is calculated based on taxable income, and tax expense is calculated based on accounting profit.Lower depreciation expense in financial reporting results in accounting profit that is higher than taxable income, and tax expense that is higher than taxes payable.Deferred tax liabilities are thus created. Deferred tax assets generally arise when tax relief is provided after an expense is deducted for accounting purposes. Deferred tax assets on an individual transaction are expected to be reversed when these assets are recovered, causing future cash inflows. Different treatments of warranty expenses in tax reporting and financial reporting are a common cause of deferred tax assets: For tax reporting, warranty expenses cannot be recognized until they have been incurred. For financial reporting, warranty expenses are recognized each year using accrual accounting, regardless of whether they are incurred or not.Lower warranty expense in tax reporting results in taxable income that is higher than accounting profit, and tax payable that is higher than tax expense.Deferred tax assets are thus created. In the U.S., deferred tax assets/liabilities are classified on the balance sheet as current or non-current based on the classification of the underlying asset or liability. However, deferred tax assets/liabilities are always classified as non-current under IFRS. A deferred tax item cannot be created if it is doubtful that the company will realize economic benefits in the future. Example A company purchases an asset for $1,000 at the beginning of Year 1. It depreciates the asset at 33% per annum (straight-line) for financial reporting. The tax depreciation is 50% per annum (straight-line). The pretax income and taxable income are$2,0...

#### Annotation 1418350169356

 Subject 3. Determining the Tax Base of Assets and Liabilities #cfa #cfa-level-1 #financial-reporting-and-analysis #income-taxes #inventories-long-lived-assets-income-taxes-and-non-current-liabilities The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes. The Tax Base of an Asset An asset's tax base is the amount that will be deductible for tax purposes against any taxable economic benefits that will flow to an entity when it recovers the asset's carrying amount. It is the amount that would be tax deductible if the asset was sold on the balance sheet date. For example, a firm has total accounts receivable of $100,000. At the end of the year, management recognized a specific doubtful debt division of$3,000 for financial reporting. However, provisions for doubtful debts are not allowed for tax purposes in the firm's tax jurisdiction. A tax deduction is received when the receivable is written off as bad debt. The carrying amount of the accounts receivable becomes $97,000. The tax base of the asset still remains$100,000. The firm has a deductible temporary difference of $3,000. Management should recognize a deferred tax asset in respect to the deductible temporary difference. If the economic benefit will not be taxable, the tax base of the asset will be equal to the carrying amount of the asset. An example is dividends receivable from a subsidiary. If it is not taxable, the tax base and the carrying amount of the dividends receivable are equal. The Tax Base of a Liability The tax base of a liability is its carrying amount, less any amount that will be deductible for tax purposes with respect to that liability in future periods. An unearned revenue item is treated as a liability for financial reporting but tax authorities often recognize it as taxable income. The tax base of such a liability is the carrying amount less any amount of the revenue that will not be taxable in the future. Examples are prepaid rent, prepaid subscriptions, etc.If an item has already been expensed, then its tax base and carrying amount are both zero. One example is interest paid on long-term loans. Example At the beginning of the year a firm received a lump sum of$5 million for rent from a lessee. The rent was for the use of an office building for the next 5 years. Local tax authorities require 70% of rent received in advance to be taxable income. At the end of the year, $4 million should be treated as a liability for financial reporting purposes. That's the carrying amount. The tax base of the liability is$1.2 million (30% of $4 million) and$2.8 million should be treated as taxable income. Changes in Income Tax Rates When tax rates change, the deferred tax liability or asset has to be adjusted immediately to the new amount that is now expected, based upon the new expected tax consequences. The effect of this change in estimate will be included in the income from continuing operations. The effect of an income tax rate increase: It raises deferred tax liabilities and thus increases tax expense.It raises deferred tax assets and thus decreases tax expense.If deferred tax liabilities exceed deferred tax assets, the net effect is to increase tax expense, and vice versa.

#### Annotation 1418402073868

 Subject 3. Investment Decision Criteria #capital-budgeting #cfa #cfa-level-1 #corporate-finance #has-images When a firm is embarking upon a project, it needs tools to assist in making the decision of whether to invest in the project or not. In order to demonstrate the use of these four methods, the cash flows presented below will be used. Net Present Value (NPV) This method discounts all cash flows (including both inflows and outflows) at the project's cost of capital and then sums those cash flows. The project is accepted if the NPV is positive. where CFt is the expected cash flow at period t, k is the project's cost of capital, and n is its life. Cash outflows are treated as negative cash flows since they represent expenditures of the company to fund the project.Cash inflows are treated as positive cash flows since they represent money being brought into the company. The NPV represents the amount of present-value cash flows that a project can generate after repaying the invested capital (project cost) and the required rate of return on that capital. An NPV of zero signifies that the project's cash flows are just sufficient to repay the invested capital and to provide the required rate of return on that capital. If a firm takes on a project with a positive NPV, the position of the stockholders is improved. Decision rules: The higher the NPV, the better.Reject if NPV is less than or equal to 0. NPV measures the dollar benefit of the project to shareholders. However, it does not measure the rate of return of the project, and thus cannot provide "safety margin" information. Safety margin refers to how much the project return could fall in percentage terms before the invested capital is at risk. Assuming the cost of capital for the firm is 10%, calculate each cash flow by dividing the cash flow by (1 + k)t where k is the cost of capital and t is the year number. Calculate the NPV for Project A and B above. NPV = CF0 + CF1 + CF2 + CF3 + CF4 Project A's NPV = -1,000 + 750/1.101 + 350/1.102 + 150/1.103 + 50/1.104 = -1,000 + 682 + 289 + 113 + 34 = $118 (rounded) Project B's NPV = -1,000 + 100/1.101 + 250/1.102 + 450/1.103 + 750/1.104 = -1,000 + 91 + 207 + 338 + 512 =$148 (rounded) Internal Rate of Return (IRR) This is the discount rate that forces a project's NPV to equal zero. Note that this formula is simply the NPV formula solved for the particular discount rate that forces the NPV to equal zero. The IRR on a project is its expected rate of return. The NPV and IRR methods will usually lead to the same accept or reject decisions. Decision rules: The higher the IRR, the better.Define the hurdle rate, which typically is the cost of capital.Reject if IRR is less than or equal to the hurdle rate. IRR does provide "safety margin" information. Calculate Project A's and B's IRR. Project A: -1000 + 750/(1 + IRR)1 + 350/(1+IRR)2 + 150/(1+IRR)3 + 50/(1+IRR)4 = 0 Since it is difficult to determine by hand, the use of a financial calculator i...

#### Flashcard 1418413083916

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#obgyn
Question
What groups of women are at greatest risk for cervical ca in Ontario?
- aboriginal
- low SES
- Northern Ontario
- immigrant
- refugee

status measured difficulty not learned 37% [default] 0

#### Annotation 1418413608204

 Subject 4. NPV Profiles #capital-budgeting #cfa #cfa-level-1 #corporate-finance #has-images A NPV profile is a graph showing the relationship between a project's NPV and the firm's cost of capital. The point where a project's net present value profile crosses the horizontal axis indicates a project's internal rate of return. Some observations: The IRR is the discount rate that sets the NPV to 0.The NPV profile declines as the discount rate increases.Project A has a higher NPV at low discount rates, while Project B has a higher NPV at high discount rates. The NPV profiles of Project A and B join at the crossover rate, at which the projects' NPVs are equal.The slope of Project A's NPV profile is steeper. This indicates that Project A's NPV is more sensitive to changes in the discount rates.

#### Flashcard 1418417802508

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#obgyn
Question
Two important pieces of information should be contained within a cytology report.
1. satisfactory vs unsatisfactory cytologic sample for eval
2. epithelial cell abnormality detected vs no epithelial cell abnormality detected

status measured difficulty not learned 37% [default] 0

#### Annotation 1418418851084

 Subject 5. Comparison of the NPV and IRR Methods #capital-budgeting #cfa #cfa-level-1 #corporate-finance #has-images The IRR formula is simply the NPV formula solved for the particular rate that sets the NPV to 0. The same equation is used for both methods. The NPV method assumes that cash flows will be reinvested at the firm's cost of capital, while the IRR method assumes reinvestment at the project's IRR. Reinvestment at the cost of capital is a better assumption in that it is closer to reality. For independent projects, the NPV and IRR methods indicate the same accept or reject decisions. Assuming that Project A and B are independent, consider their NPV profiles. The IRR criterion for accepting an independent project is IRR > hurdle rate. That is, the cost of capital must be less than (or to the left of) the IRR.Whenever the cost of capital is less than the IRR, the project's NPV is positive. Recall the decision rule for independent projects: accept if NPV > 0. Thus, both projects should be accepted based on the NPV method. However, for mutually exclusive projects, ranking conflicts can arise. Assuming that Project A and B are mutually exclusive, consider their NPV profiles. If the cost of capital > crossover rate, then NPVB > NPVA and IRRB > IRRA. Thus, both methods lead to the selection of Project B.If the cost of capital < crossover rate, then NPVB < NPVA and IRRB > IRRA. Thus, a conflict arises because now the NPV method will select Project A while the IRR method will choose B.Therefore, for mutually exclusive projects, the NPV and IRR methods lead to same decisions if the cost of capital > the crossover rate and different decisions if the cost of capital < the crossover rate. For mutually exclusive projects, the NPV and MIRR methods will lead to the same accept or reject decision when: Two projects are of equal size and have the same life.Two projects are of equal size but differ in lives. However, the projects can generate conflicting results if the NPV profiles of two projects cross (and there is a crossover rate): As long as the cost of capital (k) is larger than the crossover rate, the two methods both lead to the same decision;A conflict exists if k is less than the crossover rate. Two conditions cause the NPV profiles to cross: When project size (or scale) differences exist. The cost of one project is larger than that of the other.When timing differences exist. The timing of cash flows from the two projects differs in that most of the cash flows from one project come in the early years while most of the cash flows from the other project come in the later years. The root cause of the conflict between NPV and IRR is the rate of return at which differential cash flows can be reinvested. Both the NPV and IRR methods assume that the firm will reinvest all early cash flows. The NPV method implicitly assumes that early cash flows can be reinvested at the cost of capital. The IRR method assumes that the firm can reinvest at the IRR. Whenever a conflict exists, the NPV method should be used. It can be demonstrated that the better assumption is the cost of capital for the reinvestment rate (Hint: don't focus too much on this topic, as it is beyond the scope of the CFA exam). Multiple IRRs is a situation where a project has two or more IRRs. This problem is caused by the non-conventional cash flows of a project. Conventional cash flows means that the initial cash outflows are followed by a series of cash inflows.Non-conventional cash flows means tha...

#### Flashcard 1418420686092

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Question
What are reasons for unsatisfactory cytology report? (pap tests)
- lack of sampling of entire transformation zone
- low cellularity on specimen
- evaluation obscured by inflammatory cells/blood

status measured difficulty not learned 37% [default] 0

#### Annotation 1418424093964

 Subject 6. Popularity and Usage of the Capital Budgeting Method #capital-budgeting #cfa #cfa-level-1 #corporate-finance The usefulness of various capital budgeting methods depends on their specific applications. Although financial textbooks often recommend the use of NPV and IRR methods, other methods are also heavily used by corporations. Capital budgeting is also relevant to external analysts in estimating the value of stock prices. Theoretically, if a company invests in positive NPV projects, the wealth of its shareholders should increase. The integrity of a firm's capital budgeting processes can also be used to show how the management pursues its goal of shareholder wealth maximization.

#### Flashcard 1418425928972

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#obgyn
Question
What is the bethesda classification for squamous cell abnormalities detected?
- atypical sq cells of undetermined sig (ASC-US)
- atypical sq cells - can't r/o high gr sq intraepithelial lesion (ASC-H)
- low gr sq intraepithelial lesion (LSIL)
- high gr sq intraepithelial lesion (HSIL)
- sq cell carcinoma

status measured difficulty not learned 37% [default] 0

#### Annotation 1418427763980

 Subject 1. Cost of Capital #cfa #cfa-level-1 #corporate-finance #cost-of-capital #has-images Capital is a necessary factor of production, and has a cost. The providers of capital require a return on their money. A firm must ensure that stockholders or those that have lent the firm money (such as banks) receive the return that they require. This return is the cost that the firm will incur to maintain those sources of capital. Therefore, the return that the providers of funds require is equal to the cost to the firm of maintaining those funds. Calculating the cost of capital is important for a firm, as this is the rate of return that must be used when evaluating capital projects. The return from the project must be greater than the cost of the project in order for it to be acceptable. In general, a firm can finance its operations from three main sources of capital: equity or common stockpreferred stockdebt Each of these sources of capital has a cost. The cost of capital used in capital budgeting should be calculated as a weighted average, or composite, of the various types of funds a firm generally uses. The weighted average cost of capital (WACC) is defined as the weighted average cost of the component costs of debt, preferred stock, and common stock or equity. It is also referred to as the marginal cost of capital (MCC), which is the cost of obtaining another dollar of new capital.wd = the weight for debtwp = the weight for preferred stockwe = the weight for common stockr = required rate for each componentt = the marginal tax rate Taxes and the Cost of Capital Interest on debt is tax deductible; therefore, to calculate the cost of debt, the tax benefit is deducted. This means that after-tax cost of debt = interest rate - tax savings (the government pays part of the cost of debt as interest is tax deductible). There is no tax savings associated with the use of preferred stock or common stock. Weights of the Weighted Average The target capital structure is the percentage of debt, preferred stock, and common equity that a firm is striving to maintain and that will maximize the firm's stock price. Each firm has a target capital structure, and it should raise new capital in a manner that will keep the actual capital structure on target over time. If the target capital structure is known, it should be used.If not, market values of debt and stocks should be used to calculate weights. That is, the company's current capital structure is assumed to represent the company's target capital structure.If this is not possible, then trends in the company's capital structure or averages of comparable companies' capital structures should be used as targets. Example Firm A has a capital structure consisting of 40% debt, 5% preferred stock, and 55% common equity (made up of retained earnings and common stock). Firm A pays 10% interest on its debt and has a marginal tax rate of 35%. If Firm A's component cost of preferred stock is 12.5% and the component cost of common stock equity from retained earnings is 13.5%, calculate Firm A's WACC. WACC = 0.4 x 10% (1 - 0.35) + 0.05 x 12.5% + 0.55 x 13.5% = 0.026 + 0.00625 + 0.07425 = 10.65% Investment Opportunity Schedule In any one year, a firm may consider a number of capital projects. The greater the number of projects undertaken, the more money the firm will have to raise in order to finance them. There is a limit to the amount of money that can be raised in any one year ...

#### Annotation 1418439036172

 Subject 2. Cost of Debt and Preferred Stock #cfa #cfa-level-1 #corporate-finance #cost-of-capital #has-images Capital components are the types of capital used by firms to raise fund. They include the items on the right side of a firm's balance sheet (debt, preferred stock, and common equity). Any increase in the firm's total assets must be financed by one or more of these capital components. The cost of debt is defined as the cost to the firm in terms of the interest rate that it pays for ordinary debt (rd) less the tax savings that are achieved. Interest on debt is tax-deductible and therefore to calculate the cost of debt the tax benefit is deducted. Two methods to estimate the before-tax cost of debt (rd) are discussed. Yield-to-Maturity Approach This approach uses the familiar bond valuation equation. Assuming semi-annual coupon payments, the equation is: The six-month yield (rd/2) is derived and then annualized to arrive at the before-tax cost of debt, rd. See Reading 54 for details of the yield-to-maturity approach. Debt-Rating Approach This approach can be used if there isn't a reliable market price for a firm's debt. Based on the company's debt rating, the before-tax cost of debt is estimated by using the yield on comparably rated bonds for maturities that are a close match to those of the firm's existing debt. For example, assume that: A firm's debt has an average maturity of 5 years.Its credit rating is AAA.The yield on debt with the same debt rating and similar maturity is 6%.The marginal tax rate is 30%. Then the company's after-tax cost of debt is 6% x (1 - 30%) = 4.2%. Other factors, such as debt seniority and security, may complicate the calculation, so analysts must take care when determining the comparable debt rating and yield. Issues in Estimating the Cost of Debt Fixed-rate debt versus floating-rate debt Estimating the cost of floating-rate debt is difficult because the cost depends not only on the current yield but also on the future yields. The term structure of interest rates may be used to calculate an average rate. Debt with option-like features Be aware that some debt can have call or put options. (Valuating such debts is a topic for Level II candidates.) Non-rated debt The yields of a firm's debt may not be available, or a firm may not have rated bonds. Leases If a company uses leasing as a source of capital, the cost of these leases should be included in the cost of capital (long-term debt). Cost of Preferred Stock The cost of preferred stock is calculated by dividing the dollar amount of the dividend (which is normally paid on an annual basis) by the preferred stock current price. It is important to note that tax does not affect the calculation of the cost of preferred stock, since preferred dividends are not tax deductible.

#### Flashcard 1418440871180

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Question
What is the bethesda classification for glandular cell abnormalities detected? (pap tests)
- atypical glandular cells (AGC)
- atypical glandular cells - favour neoplastic

status measured difficulty not learned 37% [default] 0

#### Annotation 1418445851916

 Subject 3. Cost of Common Equity #cfa #cfa-level-1 #corporate-finance #cost-of-capital #has-images The cost of common equity (re) is the rate of return stockholders require on common equity capital the firm obtains. It has no direct costs but is related to the opportunity cost of capital: if the firm cannot invest newly obtained equity or retained earnings and earn at least re, it should pay these funds to its stockholders and let them invest directly in other assets that do provide this return. Firms should earn on retained earnings at least the rate of return shareholders expect to earn on alternative investments with equivalent risk. Estimating the cost of common equity is challenging due to the uncertain nature of the amount and timing of future cash flows. The CAPM Approach where RF is the risk-free rate, E(RM) is the expected rate of return on the market, and βi is the stock's beta coefficient. [E(RM) - RF] is called the equity risk premium (ERP). Both E(RM) and βineed to be estimated. For example, firm A has a βi of 0.6 for its stock. The risk-free rate, RF, is 5%. The expected rate of return on the market, E(RM), is 10%. The firm's cost of common equity is therefore calculated as 5% + (10% - 5%) x 0.6 = 8%. There are several ways to estimate the equity risk premium. The historical equity risk premium approach examines the historical data of realized returns from a country's market portfolio and uses the average rate for both the market portfolio and risk-free assets. One study, cited in the textbook, found that the annualized U.S. equity risk premium relative to U.S. Treasury bills was 5.3% (geometric mean). However, there are some limitations to this approach. For example, the level of risk of the stock index and risk aversion of investors may change over time. The dividend discount model approach (or implied risk premium approach) analyzes how the market prices an index using the Gordon growth model: where re is the required rate of return on the market, D1 is the dividends expected next period on the index, P0 is the current market value of the equity market index, and g is the expected growth rate of the dividends. The survey approach is a direct one: ask a panel of financial experts for their estimates and take the mean response. Dividend Discount Model Approach where D1 is the dividend expected to be paid at the end of year 1, P0 is the current price of the stock, and g is the constant growth rate of dividends. P0 is directly known, and D1 can be predicted if the company has a stable dividend policy. However, it is difficult to establish the proper growth rate (g). One method is to forecast the firm's average future dividend payout ratio and its complement, the retention rate: g = (1.0 - Payout rate) (ROE), where ROE is the expected future rate of return on equity. Another method is to use the firm's historical growth rate, if the past growth rates are stable. Bond Yield Plus Risk Premium Approach Because the cost of capital of riskier cash flows is higher than that of less risky cash flows: ...

#### Flashcard 1418447686924

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Question
What is the recommended management for ASC-US?
reflex HPV testing vs repeat cytology vs colposcopy

status measured difficulty not learned 37% [default] 0

#### Annotation 1418454240524

 Subject 4. Estimating Beta and Determining a Project Beta #cfa #cfa-level-1 #corporate-finance #cost-of-capital #has-images The determination of cost of capital under the CAPM approach involves the estimation of β, risk-free rate, and market return. β is generally determined by comparing the return of the firm or the project (as the case may be) with the market return and ascertaining the relationship. The historical β is the first step in the determination of the ex-ante β. Either the historical β can be accepted as the proxy for the future β or modifications can be made to make it conform to the future. If we are thinking of a new company for a single project, we will have no historical records to go by. We would then compute the β of companies of the same size and about the same lines of business and after making necessary adjustments, take this as the β for the firm. The pure-play method can be used to take a comparable publicly traded company's beta and adjust it for financial leverage differences. The β that we impute to a project is likely to undergo changes with changes in the capital structure of the company. If the company is entirely equity-based, its β is likely to be lower than it would be if it undertakes borrowing. Let us call the β of a firm that is levered "levered β" and that of a firm on an all-equity structure "unlevered β." β of a levered firm: where: βL = β of a levered firm βU = β of an unlevered firm T = tax rate D = component of debt in capital structure E = component of equity in capital structure If the β of a firm is available and that β has been estimated on the premise that the firm is unlevered, we can now ascertain the β of the firm should it undertake some borrowing by using the following formula: β of an unlevered firm: In the same way, given the β of a firm which is already levered, we can ascertain what its β would be if it chooses an all-equity structure. This also means that if the target firm has leverage different from the structure assumed in estimating the levered β, this can first be converted into an unlevered β and then re-converted into a levered β using the leverage parameters relevant to the firm. As a first step, we have to identify firms that reasonably resemble the project for which the beta is to be estimated. The stock β of these firms is then taken. Their respective leverage position (ratio of debt to equity) is also considered. After duly adjusting the tax factor and applying the above formula, we can determine the proxy β of the project assuming that it is unlevered. The procedure is illustrated below: Suppose there are three firms, P, Q, and R, which closely resemble project X (that is to be embarked upon). The stock betas of the three firms are taken and found to be 2.73, 2.23, and 1.73 respectively. The ratio of debt to equity for the three firms averages to 0.67. The marginal tax rate is 36%. The average stock β works out to 2.23. Translating these numbers into the formula for unlevered firms, we get: βU = βL / (1 + (1 - T)(D/E)) = 2.23/(1+0.64 x 0.67) = 1.56. This suggests that on an all-equity basis the β of the project would be 1.56. Now, if the project is proposed to be financed by 50% equity and 50% debt, we can modify the above β by applying the formula for levered firms: βL = βU (1 + (1 - T) D/E) = 1.56 (1 + 0.64 x 0.5/0.5) = 2.56 So, on a 1:1 debt equity ratio, the β will be 2.56. This β can be used now for determining the cost of equity for the project and...

#### Annotation 1418467872012

 Subject 7. Flotation Costs #cfa #cfa-level-1 #corporate-finance #cost-of-capital #has-images Flotation costs are the costs of issuing a new security, including the money investment bankers earn from the spread between their cost and the price offered to the public, and the accounting, legal, printing and other costs associated with the issue. The amount of flotation costs is generally quite low for debt and preferred stock (often 1% or less of the face value), so we ignore them here. However, the flotation costs of issuing common stocks may be substantial, so they must be accounted for in the WACC. Generally, we calculate this by reducing the proceeds from the issue by the amount of the flotation costs and recalculating the cost of equity. Example 1 XYZ is contemplating issuing new equity. The current price of their stock is $30 and the company expects to raise its current dividend of$1.25 by 7% indefinitely. If the flotation cost is expected to be 9%, what would be the cost of this new source of capital? Cost of external equity = (1.25 x 1.07) / (30 x (1 - 0.09)) + 0.07 = 11.9% Without the flotation cost, the cost of new equity would be (1.25 x 1.07) / 30 + 0.07 = 11.46%. Note that flotation costs will always be given, but they may be given as a dollar amount or as a percentage of the selling price. This is a typical example found in most textbooks. One problem with this approach is that the flotation costs are a cash flow at the initiation of the project and affect the value of any project by reducing the initial cash flow. It is not appropriate to adjust the present value of the future cash flows by a fixed percentage. An alternative approach is to make the adjustment to the cash flows in the valuation computation. Example 2 Continue with the above example. Assume that XYZ is going to raise $10 million in new equity for a project. The initial investment is$10 million and the project is expected to produce cash flows of $4.5 million each year for 3 years. Ignoring the flotation cost of issuing new equity, the NPV of the project will be -10 + 4.5/1.11461 + 4.5/1.11462 + 4.5/1.11463 =$0.9093 million. Now consider the flotation cost of 9%. The NPV, considering the flotation costs, is 0.9093 - 0.9 = $0.0093 million. However, if we use the "typical" approach, the NPV. considering the flotation costs, will be -10 + 4.5/1.1191 + 4.5/1.1192 + 4.5/1.1193 =$0.8268 million.

#### Flashcard 1418469707020

Tags
#obgyn
Question
What is the recommended management for ASC - H?
colpo

status measured difficulty not learned 37% [default] 0

#### Flashcard 1418474425612

Tags
#obgyn
Question
What is the recommended management for LSIL?
repeat at 6 & 12 mo
- if normal x2, can resume normal screening
- if either abn, refer to colpo

status measured difficulty not learned 37% [default] 0

#### Flashcard 1418476784908

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#obgyn
Question
What is the recommended management for HSIL?
colpo

status measured difficulty not learned 37% [default] 0

#### Flashcard 1418478619916

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#obgyn
Question
What is the recommended management for AGC (atypical glandular cells)? (pap tests)
colpo, endocervical curettage (ECC), endometrial bx

status measured difficulty not learned 37% [default] 0

#### Annotation 1418539961612

 Subject 1. Managing and Measuring Liquidity #cfa #cfa-level-1 #corporate-finance #working-capital-management Working capital management involves the relationship between a firm's short-term assets and its short-term liabilities. The goal of working capital management is to ensure that a firm is able to continue its operations and has sufficient ability to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable, and cash. Liquidity management refers to the ability of a company to meet its short-term financial obligations. There are two sources of liquidity. The main difference between the two sources is whether or not the company's normal operations will be affected. Primary sources of liquidity include cash, short-term funds, and cash flow management. These resources represent funds that are readily accessible at relatively low cost.Secondary sources include negotiating debt contracts, liquidating assets, and filing for bankruptcy and reorganization. They provide liquidity at a higher price and may impact a company's financial and operating positions. Measuring Liquidity Almost all liquidity measures are covered in Reading 26 [Understanding Balance Sheet] and Reading 28 [Financial Analysis Techniques]. Operating cycle = Number of days in inventory + Number of days of receivables Net operating cycle (cash conversion cycle) = Number of days in inventory + Number of days of receivables - Number of days of payables Example Average accounts receivable: $25,400 Average inventory:$48,290 Average accounts payable: $37,510 Credit sales:$325,700 Cost of goods sold: $180,440. Total purchases:$188,920 How many days are in the operating cycle? How many days are in the cash cycle? 1. The receivable turnover rate tells you the number of times during the year that money is loaned to customers. Credit sales / Average accounts receivable = 325,700 / 25,400 = 12.8228. Receivables period = 365 days / 12.8228 = 28.46 days. This tells you that it takes customers an average of 28.46 days to pay for their purchases. 2. The inventory turnover rate indicates the number of times during the year that a firm replaces its inventory. COGS / Average inventory = 180,440 / 48,290 = 3.7366 Inventory period = 365 days / 3.7366 = 97.68 days. This means inventory sits on the shelf for 97.68 days before it is sold. That's ok for a furniture store but you should be highly alarmed if a fast food restaurant has a 98-day inventory period. 3. The accounts payable is matched with total purchases to compute the turnover rate because these accounts are valued based on the wholesale, or production, cost of each item. Payables turnover = Total purchases / Average accounts payables = 188,920 / 37,510 = 5.0365 Payables period = 365 / 5.0365 = 72.47 days. On average, it takes 72.47 days to pay suppliers. The operating cycle begins on the day inventory is purchased and ends when the money is collected from the sale of that inventory. This cycle consists of both the inventory period and the accounts receivable period. Operating cycle = 97.68 + 28.46 = 126.14 days The cash cycle is equal to the operating cycle minus the payables period. It is the number of days for which the firm must finance its own inventory and receivables. During the cash cycle, the firm must have sufficient cash to carry its inventory and receivables. Cash cycle = 126.14 - 72.47 = 53.67 days In this example, the firm must pay for its inventory 53.67 days before it collects the payment from selling that inventory. Controlling the cash cycle is a high priority for financial managers.

#### Annotation 1418541796620

 Subject 2. Managing the Cash Position #cfa #cfa-level-1 #corporate-finance #working-capital-management Managing short-term cash flows involves minimizing costs. The two major costs are carrying costs, the return forgone by keeping too much invested in short-term assets such as cash, and shortage costs, the cost of running out of short-term assets. The objective of managing short-term finances and doing short-term financial planning is to find the optimal trade-off between these two costs. The starting point for good cash flow management is developing a cash flow projection. To forecast short-term cash flows, a financial manager needs to: Determine minimum cash balances.Identify the typical cash inflows and outflows of the company.Develop a cash forecasting system. Monitoring cash uses and levels means keeping a running score on daily cash flows. The most important task is to collect cash flow information on a timely basis.Establish a target cash balance for each bank.Use short-term investments and borrowing to help with cash position management.Consider other factors, such as seasonal factors, upcoming mergers and acquisition, etc.

#### Annotation 1418543631628

 Subject 3. Investing Short-Term Funds #cfa #cfa-level-1 #corporate-finance #working-capital-management Cash does not pay interest. Companies should invest funds that are not needed in daily transactions. Short-term investment is discussed in the reading. Nominal rate: a rate of interest based on a security's face value. For a non-zero-bond, the coupon rate is the nominal rate. A yield is the actual return on the investment if it is held to maturity. Money market yield and bond equivalent yield. Refer to Reading 6 [Discounted Cash Flow Applications].Discount-basis yield (also referred to as the investment yield basis) is often quoted in the context of U.S. T-securities: [(Face value - Purchase price) / (Face value)] x (360 / Number of days to maturity). Strategies Short-term investment strategies can be grouped into two types: Passive strategy. One or two decision rules for making daily investments.Safety and liquidity first.Passive strategies must be monitored and the yield should be benchmarked against a comparable standard (such as a T-bill). Active strategy. More daily involvement and a wider choice of investments.Matching / mismatching: the timing of cash inflows and outflows.A laddering strategy is a strategy in which a bond portfolio is constructed to have approximately equal amounts invested in each maturity within a given range (to reduce interest rate risk). A company should have a formal, written investment policy or guideline that protects the company and its investment managers.

#### Annotation 1418545466636

 Subject 4. Evaluating Accounts Receivable, Inventory and Accounts Payable Management #cfa #cfa-level-1 #corporate-finance #has-images #working-capital-management Accounts Receivable The most popular measures to evaluate receivables are receivable turnover and number of days of receivables. Example Build It Right, Inc. sells 5,500 curio cabinets a year at a price of $2,000 each. The credit terms of the sale are 2/10, net 45. Eighty percent of the firm's customers take the discount. What is the amount of the firm's accounts receivable? If 80% of the customers pay in 10 days, then the other 20% must pay in 45 days. How much does the firm sell each year? 5,500 x$2,000 = $11,000,000 The average collection period: [0.80 x 10] + [(1 - 0.80) x 45] = 8 + 9 = 17 days. The accounts receivable turnover: 365 / 17 = 21.470588. The average receivables balance:$11,000,000 / 21.470588 = $512,328.77. Inventory Managing inventory is a juggling act. Excessive stocks can place a heavy burden on the cash resources of a business. Insufficient stocks can result in lost sales, delays for customers, etc. The goal of inventory management is to identify the level of inventory which allows for uninterrupted production but reduces the investment in raw materials - and minimizes reordering costs - and hence increases cash flow. Just-In-Time (JIT) is an inventory strategy implemented to improve a business's return on investment by reducing in-process inventory and its associated costs. Economic order quantity (also known as the EOQ Model) is a model that defines the optimal quantity to order that minimizes total variable costs required to order and hold inventory. To evaluate inventory management analysts compute the inventory turnover ratio and the number of days of inventory. These measures are covered in Study Session 8. Accounts Payable Two countering forces should be considered when managing accounts payable: Paying too early is costly unless the company can take advantage of discounts.Postponing payment beyond the end of the net (credit) period is known as "stretching accounts payable" or "leaning on the trade." Possible costs are: Cost of the cash discount (if any) forgone.Late payment penalties or interest.Deterioration in credit rating. Trade discounts should be evaluated by computing the implicit rate of return: Example Today, June 10, you purchased$5,000 worth of materials from one of your suppliers. The terms of the sale are 3/15, net 45. Discounted price: $5,000 x (1 - 0.03) =$4,850Last day to receive discount: June 10 + 15 days = June 25Days credit: 45 - 15 = 30Implicit interest: 0.03 x $5,000 =$150Cost of credit (effective annual rate): (1 + 0.03/0.97)365/30 - 1 = 44.86% Analysts often use the number of days of payables and payables turnover to evaluate accounts payable management. Payables turnover = Cost of goods sold / Accounts payablesNumber of days of payables = # of days in period / Payables turnover = Accounts payable / Average day's purchase

#### Annotation 1418569846028

 Subject 11. Shareowner Proxy Voting #cfa #cfa-level-1 #corporate-finance #the-corporate-governance-of-listed-companies-a-manual-for-investors Investors should determine whether the Company permits Shareowners to vote their shares by proxy regardless of whether they are able to attend the meeting in person. The ability to vote one's shares is a fundamental right of share ownership. A company's rules governing shareowner-sponsored board nominations, resolutions, and proposals are generally supportive of shareowner rights, but the rules and the procedures for exercising such rights should not be prohibitively cumbersome. If this is the case, shareowners cannot readily address their concerns in order to protect the value of their shares. Sometimes a Company makes it difficult for Shareowners to vote their common shares by not allowing them the right to vote by proxy or by accepting only those votes cast at its annual general meeting. In examining whether a Company permits proxy voting, investors may ask questions like: Is proxy voting permitted? How easy it is for Shareowners to cast their votes by proxy? Does the Company offer electronic delivery of proxy materials? Can Shareowners view proxy materials online?Do Shareowners have to attend annual general meeting to vote or does the Company offer telephone or Internet voting (or some other remote mechanism)?Does the Company coordinate the timing of its annual general meeting with other Companies in its region to ensure they don't hold their meetings on the same day but in different locations? In some regions that require Shareowners to attend such meetings to vote, Shareowners may not be able to attend all the meetings if they are held at the same time in different locations. Is the Company permitted to use share blocking? Proxy voting in certain countries requires share blocking. Shareholders wishing to vote their proxies must deposit their shares shortly before the date of the meeting (usually one week) with a designated depositary. During this blocking period, shares that will be voted at the meeting cannot be sold until the meeting has taken place and the shares are returned to the clients' custodian banks. What are the state proxy regulations governing the Company?

#### Annotation 1418571681036

 Subject 12. Shareowner Proposals #cfa #cfa-level-1 #corporate-finance #the-corporate-governance-of-listed-companies-a-manual-for-investors Shareowner-Sponsored Board Nominations Investors should determine whether and under what circumstances Shareowners can nominate individuals for election to the Board or vote to remove Board Members. By doing so they can force the Board or management to take steps to address Shareowner concerns and improve the Company's financial performance. Investors should determine how the Company handles contested Board elections. Shareowner-Sponsored Resolutions Investors should determine whether and under what circumstances Shareowners can submit resolutions for consideration at the Company's annual general meeting. Shareowners are entitled to bring non-binding resolutions to a vote of the shareholders as part of the company's annual meeting process. They may bring resolutions on a wide variety of topics. U.S. SEC Rule 14a-8 governs Shareowner-sponsored resolutions. It appears to do more to protect corporations from shareowners: the SEC rule allows a corporations thirteen circumstances under which it can ignore a Shareowner's resolution. Investors, however, must understand what they can do if the Board or management fails to act in the best interests of all Shareowners. The ability to propose needed changes can prevent erosion of Shareowner value. This could pressure the Board or management to change the way they do business. Investors need to determine how many votes are needed to pass a resolution, whether Shareowners can request a special meeting to address special concerns, and whether proposals benefit all Shareowners or just those making the proposals. Advisory or Binding Shareowner Proposals Investors should determine whether the Board and management are required to implement proposals that Shareowners approve. The Company may tend to ignore those proposals that have been approved but are not binding. Investors should determine whether the Company has implemented or ignored such approved proposals before and whether there are any regulatory concerns about implementing these proposals.

#### Annotation 1418573516044

 Subject 13. Ownership Structure #cfa #cfa-level-1 #corporate-finance #the-corporate-governance-of-listed-companies-a-manual-for-investors Investors should examine the Company's ownership structure to determine whether it has different classes of common shares that separate the voting rights of those shares from their economic value. The management team and the Board should act in the best interests of all Shareowners. However, if a Company has two classes of common shares (dual classes of common equity): Class A Shareowners have all the voting rights.Class B Shareowners don't have any voting rights. then the management team and the Board are more likely to focus on the interests of Class A Shareowners. The rights of Class B Shareowners may suffer as a consequence of the ownership structure. The Company's ability to raise equity capital for future investment may also be impaired, as it's difficult to sell unattractive Class B shares to investors. To finance future growth the Company may need to raise debt capital and increase leverage. If you are reviewing the Company, you should consider: Does the Company have safeguards in its articles of organization or bylaws that protected the rights and interests of Class B shareowners?If the Company was recently privatized by the government, has the government retained voting rights that could veto certain decisions of management and the Board? If so, this situation could hurt other Shareowners.Have the super-voting rights of Class A Shareowners impaired the Company's ability to raise equity capital?

#### Annotation 1418575351052

 Subject 14. Takeover Defenses #cfa #cfa-level-1 #corporate-finance #the-corporate-governance-of-listed-companies-a-manual-for-investors Shareowners should carefully evaluate the structure of an existing or proposed takeover defense and analyze how it could affect the value of shares in a normal market environment and in the event of a takeover bid. The consequences of mergers and takeovers may include redistribution of income, closing of some plants and expansion of others, and elimination of specific managerial and other positions and creation of others. Various anti-takeover defenses (e.g., golden parachutes, poison pills, and greenmail) tend to favor the interests of managers over those of Shareowners. They often interfere with the ownership rights of Shareowners and constitute an obstacle to efficient reallocation of resources. The justification for the use of various anti-takeover defenses should rest on the support of the majority of Shareowners and on the demonstration that preservation of the integrity of the company is in the long-term interests of Shareowners. However, it is also hard to establish whether these defensive actions cause financial prejudice to Shareowners. Investors should consider the following factors when reviewing a Company's anti-takeover measures: Inquire whether the Company is required to receive Shareowner approval for such measures prior to implementation.Inquire whether the Company has received any formal acquisition overtures during the past two years.Is there a possibility that the Board or management will use the Company's cash and available credit lines to pay a hostile bidder to forego a takeover? (In general this is not good for Shareowners.)Inquire whether the local or national government will interfere with the sale and force so the seller to change the terms of the proposed merger or acquisition.Consider whether change-in-control provisions will trigger large severance packages and other payments to Company executives.

#### Annotation 1418577186060

 Subject 1. A Portfolio Perspective on Investing #cfa #cfa-level-1 #overview #portfolio-management Why should investors take a portfolio approach instead of investing in individual stocks? Why put all your eggs in one basket? Portfolio theory is used to maximize an investment's expected rate of return for a given level of risk or minimize the level of risk for a given expected rate of return. For the purpose of investing, risk is defined as the variation of the return from what was expected (volatility). It is represented by a measure such as standard deviation. Diversification is used to reduce a portfolio's overall volatility. Building a portfolio out of many unrelated (uncorrelated) investments minimizes total volatility (risk). The idea is that most assets will provide a return similar to their expected return and will offset those in the portfolio that perform poorly. The diversification ratio is the ratio of the standard deviation of an equally weighted portfolio to the standard deviation of a randomly selected security. The composition of a portfolio matters a great deal. Different portfolios have different risk-return trade-offs.Portfolio diversification does not necessarily provide the same level of risk reduction during times of severe market turmoil as it does when the economy and markets are operating normally.The modern portfolio theory says that the value of an additional security to a portfolio ought to be measured along with its relationship to all of the other securities in the portfolio.

#### Annotation 1418579021068

 Subject 2. Investment Clients #cfa #cfa-level-1 #overview #portfolio-management There are different types of investment clients. Different individual investors have different investment goals, levels of risk tolerance, and constraints. Some seek growth while others may invest to get regular income. An institutional investor's role is to act as a highly specialized investor on behalf of others. There are many types of institutional investors. A pension plan is a fund that provides retirement income to employees. It is typically considered a long-term investor with high risk tolerance and low liquidity needs. In a defined contribution plan, the employer agrees to contribute a certain sum each period based on a formula. Only the employer's contribution is defined; no promise is made regarding the ultimate benefits paid out to the employee. The employee accepts the investment risk.A defined benefit plan defines the benefits that the employee will receive at the time of retirement. That is, the employer assumes the risk of the investment, and is responsible for the payment of the defined benefits regardless of what happens in the investment. An endowment or a foundation is an investment fund set up by an institution in which regular withdrawals from the invested capital are used for ongoing operations. Endowments and foundations are often used by universities, hospitals, and churches. They are funded by donations. A typical investment object is to maintain the real value of the fund while generating income to fund the objectives of the institution. A bank typically has a very short investment horizon and low risk tolerance. Its investments are usually conservative. The investment objective of a bank's excess reserves is to earn a return that is higher than the interest rate it pays on its deposit. Investments made by insurance companies are relatively conservative. Although the income needs are typically low, the liquidity needs of such investments are usually high (in order for insurance companies to pay claims). Both the risk tolerance and the return requirement of mutual funds are predefined for each fund and can vary sharply between funds. They are more specialized than pension funds or insurance companies. Study Session 18 discusses mutual funds in more detail. A sovereign wealth fund is a state-owned investment fund. There are two types of funds: saving funds and stabilization funds. Stabilization funds are created to reduce the volatility of government revenues, to counter the boom-bust cycles' adverse effect on government spending and the national economy.

#### Annotation 1418580856076

 Subject 3. Steps in the Portfolio Management Process #cfa #cfa-level-1 #overview #portfolio-management Step One: The Planning Step The first step in the portfolio management process is to understand the client's needs and develop an investment policy statement (IPS). The IPS covers the types of risks the investor is willing to assume along with the investment goals and constraints. It should focus on the investor's short-term and long-term needs, familiarity with capital market history, and investor expectations and constraints. Periodically the investor will need to review, update, and change the policy statement. A policy statement is like a road map: it forces investors to understand their own needs and constraints and to articulate them within the construct of realistic goals. It not only helps investors understand the risks and costs of investing, but also guides the actions of portfolio managers. Step Two: The Execution Step The second step is to construct the portfolio. The portfolio manager and the investor determine how to allocate available funds across different countries, asset classes, and securities. This involves constructing a portfolio that will minimize the investor's risk while meeting the needs specified in the policy statement. Step Three: The Feedback Step The process of managing an investment portfolio never stops. Once the funds are initially invested according to plan, the real work begins: monitoring and updating the status of the portfolio and the investor's needs. The last step is the continual monitoring of the investor's needs, capital market conditions, and, when necessary, updating the policy statement. One component of the monitoring process is evaluating a portfolio's performance and comparing the relative results to the expectations and requirements listed in the policy statement. Some rebalancing may be required.

#### Annotation 1418584526092

 Subject 1. The risk management process #cfa #cfa-level-1 #portfolio-management #risk-management-introduction Risk is exposure to uncertainty. In investment, risk includes the possibility of losses. Taking risks is an active choice by institutions and individuals. Risks must be carefully understood, chosen, and well-managed. Risk exposure is the extent to which an entity's value may be affected through sensitivity to underlying risks. Risk management is a process that defines risk tolerance and measures, monitors, and modifies risks to put them in line with that tolerance. It is NOT about minimizing, avoiding or predicting risks.It is about understanding, measuring, monitoring, and modifying risks. A risk management framework is the infrastructure, processes, and analytics needed to support effective risk management. It includes: Risk governance is the top-level foundation for risk management. It provides the overall context for an organization's risk management, which includes risk oversight and setting risk tolerance for the organization. It directs risk management activities to align with and support the goals of the overall enterprise. Risk identification and measurement is the quantitative and qualitative assessment of all potential sources of risk and risk exposures. Risk infrastructure comprises the resources and systems required to track and assess an organization's risk profile. Risk policies and processes are management's complement to risk governance at the operating level. Risk monitoring, mitigation and management is the active monitoring and adjusting of risk exposures, integrating all the other factors of the risk management framework. Communication includes risk reporting and active feedback loops so that the process improves decision making. Strategic risk analysis and integration involves using these risk tools to rigorously sort out the factors that are and are not adding value as well as incorporating this analysis into the management decision-making process, with the intent of improving outcomes.

#### Annotation 1418586361100

 Subject 2. Risk governance #cfa #cfa-level-1 #portfolio-management #risk-management-introduction Governance and the entire risk process should take an enterprise risk management perspective to ensure that the value of the entire enterprise is maximized. For example, a corporate pension fund manager should consider not only the pension assets and liabilities but also the parent corporation's business risk profile. In other words, the focus should be on the organization as a whole. Useful approaches to ensuring a strong risk governance framework: Employ a risk management committee.Appoint a chief risk officer. Risk Tolerance Risk tolerance, a key element of good risk governance, establishes an organization's risk appetite. Ascertaining risk tolerance starts from an inside view and an outside view. What shortfalls within an organization would cause the organization to fail to achieve some critical goals? What are the organization's risk drivers? Which risks are acceptable and which are unacceptable? How much risk can the overall organization be exposed to? Risk tolerance is then formally chosen using a top-level analysis. The organization's goals, expertise in certain areas, and strategies should be considered when determining its risk tolerance. This process should be completed and communicated before a crisis. Risk Budgeting While risk tolerance determines which risks are acceptable, risk budgeting decides how to take risks. It is a means of implementing risk tolerance at a strategic level. Risk budgeting is any means of allocating investments or assets based on their risk characteristics. Single or multiple dimensions of risk can be used. Common single-dimension risk measures are standard deviation, beta, value at risk, and scenario loss. The risk budgeting process forces the firm to consider risk trade-offs. As a result, the firm should choose to invest where the return per unit of risk is the highest. Some risk budgeting practices: Limit the standard deviation of the entire portfolio to within 15%.Allocate 10%, 35% and 55% of total capital in T-bills, long-term corporate bonds, and stock market index-linked mutual funds, respectively.Use a risk factor approach to allocate assets.

#### Annotation 1418588196108

 Subject 3. Identification of risks #cfa #cfa-level-1 #portfolio-management #risk-management-introduction There are two general categorizations of risks. Financial Risks Financial risks originate from the financial markets. Market risk arises from movements in stock prices, interest rates, exchange rates, and commodity prices.Credit risk is the risk that a counterparty will not pay an amount owed.Liquidity risk is the widening of the bid-ask spread on an asset. It is usually caused by degradation in market conditions or a lack of market participants. Non-Financial Risks Non-financial risks arise from actions within an entity or from external origins, such as the environment, the community, regulators, politicians, suppliers, and customers. They include: Settlement risk: one party fails to deliver the terms of a contract with another party at the time of settlement.Legal risk: the risk of being sued, or of the terms of a contract not being upheld by the legal system.Compliance risk: regulatory risk, accounting risk and tax risk. Companies may fail to respond quickly when laws and regulations are updated.Model risk: the risk of improperly using a model. An example is tail risk which suggests that distribution is not normal, but skewed, with fatter tails.Operational risk: the risk that arises from within the operations of an organization and includes both human and system or process errors.Solvency risk: the risk that the entity does not survive or succeed because it runs out of cash to meet its financial obligations. Individuals face many of the same organizational risks outlined here, as well as health risks, mortality or longevity risks, and property and casualty risks. Risks are not necessarily independent. because many risks arise as a result of other risks; risk interactions can be extremely non-linear and harmful. For example, fluctuations in the interest rate cause changes in the value of the derivative transactions but could also impact the creditworthiness of the counterparty. Another example might occur with an emerging-market counterparty, where there is country and possibly currency risk associated with the counterparty (however creditworthy it might otherwise be).

#### Annotation 1418590031116

 Subject 4. Measuring and modifying risks #cfa #cfa-level-1 #portfolio-management #risk-management-introduction Drivers To understand how to measure risk, we need to first understand what drives risk. Risk drivers are the fundamental global and domestic macroeconomic and industry factors that create risk. All risks come from uncertainties.Financial risks come from fundamental factors in macro-economies and industries.There are systematic risks and unsystematic (diversifiable) risks. Risk management can control some risks but not all. Metrics Common measures of risk: ProbabilityStandard deviation: measures dispersion in a probability distribution. This has significant limitations.Beta: measures the sensitivity of a security's returns to the returns on the market portfolio.Measures of derivatives risk: delta, gamma, vega and rho.Duration measures the interest rate sensitivity of a fixed income security.Value at Risk: measures the potential loss in value of a risky asset or portfolio over a defined period for a given confidence interval. If the VaR on an asset is $100 million at a one-week, 95% confidence level, there is only a 5% chance that the value of the asset will drop more than$ 100 million over any given week.CVaR: scenario analysis and stress testing, can be used to complement VaR. It is difficult to measure rare events such as operational risk and default risk. Methods of Risk Modification There are four broad categories of risk modification. Risk prevention and avoidance. Completely avoiding risk sounds simple, but it may be difficult or sometimes impossible. Furthermore, does it even make sense to do so? Almost every risk has an upside. There is always a trade-off between risk and return. Risk acceptance. Risk can be mitigated internally through self-insurance or diversification. This is to bear the risk but do so in the most efficient manner possible. Risk transfer. This is to pass on a risk to another party, often in the form of an insurance policy. An insurer attempts to sell policies with risks that have low correlations and can be diversified away. Risk shifting. This refers to actions that change the distribution of risk outcomes. The principal device is a derivative which can be used to shift risk across the probability distribution and from one party to another. There are two categories of derivatives: forward commitments and contingent claims. The primary determinant of which method is best for modifying risk is weighing the benefits against the costs, with consideration for the overall final risk profile and adherence to risk governance objectives.

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 Subject 1. Major Return Measures #cfa #cfa-level-1 #has-images #portfolio-management #risk-and-return-part-i There are various types of return measures. Holding Period Return Refer to Reading 6 for a detailed discussion of this return measure. Arithmetic or Mean Return Refer to Reading 7 for a detailed discussion of this return measure. Geometric Mean Return Refer to Reading 7 for a detailed discussion of this return measure. Money-Weighted Return or Internal Rate of Return The dollar-weighted rate of return is essentially the internal rate of return (IRR) on the portfolio. Refer to Reading 6 for a detailed discussion of this return measure. Annualized Return Annualizing returns allows for comparison among different assets and over different time periods. rannual = (1 + rperiod)c - 1 where c is the number of periods in a year and rperiod is the rate of return per period. Example Monthly return: 0.6%. The annualized return is (1 + 0.6%)12 - 1 = 7.44%. Portfolio Return The expected return on a portfolio of assets is the market-weighted average of the expected returns on the individual assets in the portfolio. where Rp is the return on the portfolio, Ri is the return on asset i and wi is the weighting of component asset i (that is, the share of asset i in the portfolio). Other Major Return Measures 1. A gross return is the return before any fees, expense, taxes, etc. A net return is the return after deducting all fees and expenses from the gross return. 2. Different types of investments generate different types of income and have different tax implications. For example, in the U.S. the interest income is fully taxable at an investor's marginal tax rate while capital gains are taxed at a much lower rate. Therefore, many investors therefore use the after-tax return to evaluate mutual fund performance. 3. The nominal return and the real return are two ways to measure how well an investment is performing. The real return takes into consideration the effects of inflation when calculating how much buying power has changed. 4. An investor can also use leverage to amplify his expected return (and risk).

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 Subject 2. Variance and Covariance of Returns #cfa #cfa-level-1 #has-images #portfolio-management #risk-and-return-part-i Investment is all about reward versus variability (risk). The return measures the reward of an investment and dispersion is a measure of investment risk. The variance is a measure of how spread out a distribution is. It is computed as the average squared deviation of each number from its mean. The formula for the variance in a population is: where μ is the mean and N is the number of scores. To compute variance in a sample: where m is the sample mean. The formula for the standard deviation is very simple: it is the square root of the variance. It is the most commonly used measure of spread. The standard deviation of a portfolio is a function of: The weighted average of the individual variances, plusThe weighted covariances between all the assets in the portfolio. In a two-asset portfolio: The maximum amount of risk reduction is predetermined by the correlation coefficient. Thus, the correlation coefficient is the engine that drives the whole theory of portfolio diversification. Example with perfect positive correlation (assume equal weights): What is the standard deviation of a portfolio (E), assuming the following data? σ1 = 0.1, w1 = 0.5, σ2 = 0.1, w2 = 0.5, ρ12 = 1 Solution: Cov12 = σ1 x σ2 x ρ12 = 0.1 x 0.1 x 1 = 0.01 Standard Deviation of Portfolio [0.52 x 0.12 + 0.52 x 0.12 + 2 x 0.5 x 0.5 x 0.01]1/2 = 0.10 (perfect correlation) If there are three securities in the portfolio, its standard deviation is:

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 Subject 3. Historical Return and Risk #cfa #cfa-level-1 #portfolio-management #risk-and-return-part-i The textbook examines the historical risk and return for the three main asset categories (1926 - 2008). T-bills: the safest investment on earth. The price paid for this safety is steep: the return is only 3.7%, which is barely above the inflation rate of 3.0% for the period. Further, although many academicians consider T-bills to be "riskless," a quick perusal of the T-bill graph shows considerable variation of return, meaning that you cannot depend on a constant income stream. This risk is properly reflected in the standard deviation of 3.1%. The best that can be said for the performance of T-bills is that they keep pace with inflation in the long run. Long-term bonds carry one big risk: interest rates risk. The longer the maturity of the bond the worse the damage. For bearing this risk, investors are rewarded with another 1.5% of long-term return. In the long run, investors can expect a real return (inflation-adjusted) of about 2% with a standard deviation of 10%. The rewards of stocks are considerable: a real return of greater than 6%. This return does not come free, of course. The standard deviation is 20%. You can lose more than 40% in a bad year; during the calendar years 1929-32 the inflation-adjusted ("real") value of this investment class decreased by almost two-thirds. $1 in 1900 would have grown to$582 in 2008 if invested in stocks, only $9.90 if invested in bonds, and to$2.90 if invested in T-bills. The message is clear: stocks are to be held for the long term. Don't worry too much about the short-term volatility of the markets; in the long run stocks will almost always have higher returns than bonds. Stocks have outperformed bonds consistently over long periods of time. However, stocks are much riskier and investors demand compensation for bearing the risk. The question is: is the premium too big? Other Investment Characteristics Two assumptions are usually made when investors perform investment analysis using mean and variance. Returns are normally distributed.Markets are operationally efficient. Is normality a good approximation of returns? In fact, returns are not quite normally distributed. The biggest departure from normality is that extremely bad returns are more likely than predicted by the normal distribution (fat tails). There are operational limitations of the market that affect the choice of investments. One such limitation is liquidity, which affects the cost of trading.

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 Subject 4. Risk Aversion and Portfolio Selection #cfa #cfa-level-1 #has-images #portfolio-management #risk-and-return-part-i Risk Aversion Every investor wants to maximize the investment returns for a given level of risk. Risk refers to the uncertainty of future outcomes. Risk aversion relates to the notion that investors as a rule would rather avoid risk. Given a choice of two investments with equal returns, risk-averse investors will select the investment with lower risk. Investors are risk-averse. Consequently, investors will demand a risk premium for taking on additional levels of risk. The more risk-averse the investor, the more of a premium he or she will demand prior to taking on risk. Investors who do not demand a premium for risk are said to be risk-neutral (e.g., willing to place both a large and small bet on the flip of a coin and be indifferent) and those investors that enjoy risk are said to be risk seekers (e.g., people who buy lottery tickets despite the knowledge that for every $1 spent, on average they will get less than$0.1 back). Example Three investors, Sam, Mike, and Mary are considering two investments: A and B. Investment A is the less risky of the two, requiring an investment of $1,000 with an expected rate of return at 10%. Investment B also requires an investment of$1,000 and has an expected return of 10% but appears to have considerably more variability in potential returns than A. Sam requires a return of 14%, Mike requires 10%, and Mary seeks only an 8% return. Question: Given the information above, which of the three investors is considered risk-averse? Solution: Only Sam would be considered risk-averse. He is the only investor who demands a premium of return given the higher risk level. Mike would be considered risk-neutral since he demands no premium in return (despite the higher risk) and Mary would be considered a risk-seeker since she, in fact, will accept less return for a riskier situation. Risk aversion implies that there is a positive relationship between expected returns (ER) and expected risk (Es), and that the risk return line (CML and SML) is upward-sweeping. Evidence that suggests that individuals are generally risk-averse: Purchase of insurance. Most investors purchase various types of insurance (e.g., life insurance, car insurance, etc.). By buying insurance, an investor avoids the uncertainty of a potential large future cost by paying the current known cost of the insurance policy. Difference in the promised yield for different grades of bonds. The promised yield of a bond is its required rate of return. Different grades of bonds have different degrees of credit risk. The promised yield increases as you go from the lowest-risk grade (e.g., AAA) to a grade with higher risk (e.g., AA). That is, as the credit risk of a bond increases, investors will require a higher rate of return. Utility Theory Although investors differ in their risk tolerance, they should be consistent in their selection of any portfolio in terms of the risk-return trade-off. Because risk can be quantified as the sum of the variance of the returns over time, it is possible to assign a utility score (aka utility value, utility function) to any portfolio by subtracting its variance from its expected return to yield a number that would be commensurate with an investor's tolerance for risk, or a measure of their satisfaction with the investment. Because risk aversion is not an objectively measurable quantity, there is no unique equation that would yield such a quantity, but an equation can be selected, not for its absolute measure, but for its comparative measure of risk tolerance. One such equation is the following utility formula: Utility Score = Expected Return - 0.5 x σ2 A where A is the risk aversion coefficient (a number proportionate to the amount of risk aversion of the investor). It is posi...

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 Subject 5. Portfolio Risk #cfa #cfa-level-1 #has-images #portfolio-management #risk-and-return-part-i Consider two mutual funds, D (specialized in bonds and debt securities) and E (specialized in equity). The weight of mutual fund D in the portfolio is wD and the weight of mutual fund E is wE, and their returns are rD and rE. Expected return of the portfolio: E(rp) = wD E(rD) + wE E(rE) Variance of the portfolio: σp2 = wD 2σD2 + wE2 σE2 + 2 wD wE Cov(rD, rE) = (wDσD)2 + (wEσE)2 + 2 (wDσD) (wEσE) ρDE = (wDσD + wEσE)2 + 2 (wDσD) (wEσE) (ρDE - 1) = (wDσD - wEσE)2 + 2 (wDσD) (wEσE) (ρDE + 1) If the two assets are not perfectly positively correlated, the standard deviation of the portfolio is less than the weighted average of the standard deviations of the assets. Covariance of returns measures the degree to which the rates of return on two securities move together over time. A positive covariance indicates that the rates of return on the two securities tend to move in the same direction.A negative covariance indicates that the rates of return on the two securities tend to move in opposite directions.A covariance of zero indicates that there is no relationship between the rates of return on the two securities. The magnitude of the covariance depends on the magnitude of the individual stocks' standard deviations and the relationship between their co-movements. The covariance is an absolute measure of movement and is measured in return units squared. As the magnitude of the covariance is affected by the variability of return of each individual security, covariance cannot be used to compare across different pairs of securities. The measure can be standardized by dividing the covariance by the standard deviations of the two securities being tested. p(1,2) = cov(1,2)/σ1σ2 Rearranging the terms gives: cov(1,2) = p(1,2)σ1σ2. The term p(1,2) is called the correlation coefficient between the returns of securities 1 and 2. The correlation coefficient has no units. It is a pure measure of the co-movement of the two stocks' returns. It varies in the range of -1 to 1. How should you interpret the correlation coefficient? A correlation coefficient of +1 means that returns always move together in the same direction. They are perfectly positively correlated.A correlation coefficient of -1 means that returns always move in completely opposite directions. They are perfectly negatively correlated.A correlation coefficient of zero means that there is no relationship between the two stocks' returns. They are uncorrelated. Example Two risky assets, A and B, have the following scenarios of returns: What is the covariance between the returns of A and B? The expected return is a probability-weighted average of the returns. Using this definition, the expected retu...

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 Subject 6. Efficient Frontier #cfa #cfa-level-1 #has-images #portfolio-management #risk-and-return-part-i The mean-variance portfolio theory says that any investor will choose the optimal portfolio from the set of portfolios that: Maximize expected return for a given level of risk; andMinimize risks for a given level of expected returns. Again, consider a situation where you have two stocks to choose from: A and B. You can invest your entire wealth in one of these two securities. Or you can invest 10% in A and 90% in B, or 20% in A and 80%in B, or 70% in A and 30% in B, or... There are a huge number of possible combinations even in the simple case of two securities. Imagine the different combinations you have to consider when you have thousands of stocks. The minimum-variance frontier shows the minimum variance that can be achieved for a given level of expected return. To construct the minimum-variance frontier of a portfolio: Use historical data to estimate the mean, variance of each individual stock in the portfolio, and the correlation of each pair of stocks.Use a computer program to find the weights of all stocks that minimize the portfolio variance for each pre-specified expected return.Calculate the expected returns and variances for all the minimum-variance portfolios determined in step 2 and then graph the two variables. The outcome of risk-return combinations generated by portfolios of risky assets gives you the minimum variance for a given rate of return. Logically, any set of combinations formed by two risky assets with less than perfect correlation will lie inside the triangle XYZ and will be convex. Investors will never want to hold a portfolio below the minimum variance point. They will always get higher returns along the positively sloped part of the minimum-variance frontier. The efficient frontier is the set of mean-variance combinations from the minimum-variance frontier where, for a given risk, no other portfolio offers a higher expected return. Any point beneath the efficient frontier is inferior to points above. Moreover, any points along the efficient frontier are, by definition, superior to all other points for that combined risk-return tradeoff. Portfolios on the efficient frontier have different return and risk measures. As you move upward along the efficient frontier, both risk and the expected rate of return of the portfolio increase, and no one portfolio can dominate any other on the efficient frontier. An investor will target a portfolio on the efficient frontier on the basis of his attitude toward risk and his utility curves. The concept of efficient frontier narrows down the options of the different portfolios from which the investor may choose. For example, portfolios at points A and B offer the same risk, but the one at point A offers a higher return for the same risk. No rational investor will hold the portfolio at point B and therefore we can ignore it. In this case, A dominates B. In the same way, C dominates D.

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 Subject 7. Optimal Portfolio #cfa #cfa-level-1 #has-images #portfolio-management #risk-and-return-part-i The efficient frontier only considers the investments in risky assets. However, investors may choose to invest in a risk-free asset, which is assumed to have an expected return commensurate with an asset that has no standard deviation (i.e., zero variance) around the expected return. That is, a risk-free asset's expected return is entirely certain; it is known as the risk-free rate of return (RFR). Therefore, a risk-free asset lies on the vertical axis of a portfolio graph. When a risk-free asset is combined with a risky portfolio, a graph of possible portfolio risks-return combinations becomes a straight line between the two assets. Assume the proportion of the portfolio the investor places in the tangency portfolio P is wP: The expected rate of return for the new portfolio is the weighted average of the two returns: E(R) = (1 - wP) Rf + wP E(RT)The standard deviation of the new portfolio is the linear proportion of the standard deviation of the risky asset portfolio P: σportfolio = wP σP The introduction of a risk-free asset changes the efficient frontier into a straight line. This straight efficient frontier line is called the Capital Market Line (CML) for all investors and the Capital Allocation Line (CAL) for one investor. Investors at point rf have 100% of their funds invested in the risk-free asset.Investors at point P have 100% of their funds invested in portfolio P.Between rf and P, investors hold both the risk-free asset and portfolio P. This means investors are lending some of their funds (buying the risk-free asset).To the right of P, investors hold more than 100% of portfolio P. This means they are borrowing funds to buy more of portfolio P. This represents a levered position. Investors will choose the highest CAL (i.e., the CAL tangent to the efficient frontier). This portfolio is the solution to the optimization problem of maximizing the slope of the CAL. Now, the line rf-P dominates all portfolios on the original efficient frontier. Thus, this straight line becomes the new efficient frontier. Separation Theorem Investors make different financing decisions based on their risk preferences. The separation of the investment decision from the financing decision is called the separation theorem. The portfolio choice problem can be broken down into two tasks: Choosing P, a technical matter (can be done by the broker)Deciding on the proportion to be invested in P and in the riskless asset. Optimal Investor Portfolio We can combine the efficient frontier and/or capital allocation line with indifference curves. The optimal portfolio is the portfolio that gives the investor the greatest possible utility. Two investors will select the same portfolio from the efficient set only if their utility curves are identical.Utility curves to the right represent less risk-averse investors; utility curves to the left represent more risk-averse investors. This is portfolio selection without a risk-free asset: The optimal portfolio for each investor is the highest indifference curve that is tangent to the efficient frontier. This is portfolio selection with a risk-free asset: ...