CFA REVIEW...

CFA REVIEW

I have answered the CFA Candidate Self – Assessment Test, the result is so inspiring he he he he he…

Financial Statement Analysis (FSA) – 47%
Economics (Econ) – 50%
Markets and Instruments (MI) – 20%

Below I have listed the principles and answers from my wrong answers…


FSA

• Under accrual accounting, credit sales as well as cash sales are recognized in net revenue when earned (Ref: Needles and Powers, Financial Accounting, 7th ed., p.242)

• Inventory costing methods rely primarily on assumptions about the flow of cost. The cost flow assumed may or may not be the same as the physical flow of goods. (Ref: Needles and Powers, Financial Accounting, 7th ed., p.379)

• With new fixed assets, straight – line depreciation results in lower depreciation than the double – declining balance method. Lower depreciation leads to higher reported earnings. Given the inflationary economy, using FIFO (First In First Out) leads to the inclusion of less expensive inventory items in cost of goods sold, which also leads to higher reported earnings. (Ref: Needles and Powers, Financial Accounting, 7th ed., pp. 385-387, 470-472)

• The inventory valuation method that results in the lowest net income is the one that results in the highest of cost of goods sold. In a period of rising prices, LIFO (Last In First Out) results in the highest value of cost of goods sold. (Ref: Needles and Powers, Financial Accounting, 7th ed., pp.385-387)

• With LIFO, cost of goods sold will be higher and inventories lower. Therefore, the company will have:
o Higher cost of goods sold
o Lower net income
o Lower income taxes
o Lower current assets
(Ref: Needles and Powers, Financial Accounting, 7th ed., pp.385-387)

• If cost of goods sold is overstated, operating income will be understated.
Cost of goods sold = Cost of goods available for sale – ending inventory
Cost of goods sold = Beginning inventory + Inventory purchases – Ending inventory
If ending inventory is understated by $3,000, COGS (Cost of Goods Sold) will be overstated by $3,000 and operating income will be understated by $3,000. If beginning inventory is overstated by $5,000, COGS will be overstated by $5,000 and operating income will be understated by $5,000. The effect of both is to overstate COGS by $8,000 and understate operating income by $8,000. (Ref: Needles and Powers, Financial Accounting, 7th ed., pp.388-389)

• The term “market” refers to the current replacement cost of inventory, which is the amount that would be paid at present for the same goods. (Ref: Needles and Powers, Financial Accounting, 7th ed., p.390)

• Annual Depreciation = (Cost – Residual Value)/Estimated Useful Life
= ($30,000 - $5,000)/5
= $5,000
Carrying value after 2 years = $30,000 – (2 x $5,000)
= $20,000
(Ref: Needles and Powers, Financial Accounting, 7th ed., p.470)

• For the annual interest expense to reflect the effective interest rate, the interest expense each year must include a portion of the discount. This amortization of the discount is the difference between the actual interest payment and the (higher) interest expense for each period. (Ref: Needles and Powers, Financial Accounting, 7th ed., p.517)

• The purchase of treasury stock reduces both the assets (cash) and the stockholders’ equity of a company. (Ref: Needles and Powers, Financial Accounting, 7th ed., p.569)

• According to generally accepted accounting principles, gains and losses from discontinued operations should be reported separately on in the income statement. (Ref: Needles and Powers, Financial Accounting, 7th ed., pp.596,601)

• Cash collections from customers $260
Salaries Paid - 35
Cash Payments to suppliers - 85
Cash Payments for interest - 12
Cash flows from operating activities $128
(Ref: Needles and Powers, Financial Accounting, 7th ed., p.658-661)

• Sale of equipment $30
Purchase of land -8
Purchase of equipment -40
Cash flows from Investing -$18
(Ref: Needles and Powers, Financial Accounting, 7th ed., pp.638, 648-651)

• Payments to retire stock -$32
Payment of dividends -37
Cash flows from financing -$69
(Ref: Needles and Powers, Financial Accounting, 7th ed., p.639, 651-65)

• The basic balance sheet equation is Assets = Liabilities + Owner’s Equity
(Ref: White, Sondhi, Fried, Analysis and Use of Financial Statements, 2nd ed., p.16)

• Auditors are only required to verify there are no material errors.
(Ref: White, Sondhi, Fried, Analysis and Use of Financial Statements, 2nd ed., pp.24-25)

ECON

• Surplus of a good will create a downward pressure on the price, which will in turn induce buyers to purchase more, moving along the demand curve (a change in demand). (Ref: Gwartney Stroup, and Sobel, Economics: Private and Public Choice, 9th ed., pp.73-74)

• Gross private domestic investment is the only factor that reflects expenditures. (Ref: Gwartney Stroup, and Sobel, Economics: Private and Public Choice, 9th ed., pp.172-174)

• The Gross Domestic Product (GDP) deflator would be appropriate because it reflects movements in the prices of goods and services purchased businesses and governments as well as by consumers. (Ref: Gwartney Stroup, and Sobel, Economics: Private and Public Choice, 9th ed., pp.177-179)

• GDP includes all except household production. The omission of household production leads to the understatement of total output. (Ref: Gwartney Stroup, and Sobel, Economics: Private and Public Choice, 9th ed., pp.172-174, 180)

• Frictional unemployment counts only the number of qualified and employable workers who are in transition between jobs. This unemployment stems from the constant changes in the demand and supply of specific employers and employees, and the time required for job seekers to conduct job searches.
(Ref: Gwartney Stroup, and Sobel, Economics: Private and Public Choice, 9th ed., p.199)

• Inflation refers to the movement in the general level of prices of goods and services in an economy. (Ref: Gwartney Stroup, and Sobel, Economics: Private and Public Choice, 9th ed., p.205)

• Inflation rate = (this year’s Consumer Price index (CPI) – Last year’s CPI)/Last year’s CPI x 100
= (252 – 240)/240 x 100
= 5.0%
(Ref: Gwartney Stroup, and Sobel, Economics: Private and Public Choice, 9th ed., pp.205-206)

• Substantial inflation is normally associated with the economic condition identified as stagflation.
(Ref: Gwartney Stroup, and Sobel, Economics: Private and Public Choice, 9th ed., p.209)

• Inflation affects both product prices and resource prices. (Ref: Gwartney Stroup, and Sobel, Economics: Private and Public Choice, 9th ed., p.209)

• Changes in employment levels tend to reinforce, rather then dampen cyclical changes in economic activity. (Ref: Gwartney Stroup, and Sobel, Economics: Private and Public Choice, 9th ed., pp.261-262)

• Marginal Propensity to Consume (MPC) = Additional consumption/Additional income
= $3,000/$4,000
=0.75
(Ref: Gwartney Stroup, and Sobel, Economics: Private and Public Choice, 9th ed., pp.284-285)

• M = 1/ (1-MPC)
= 1/ (1-.80)
= 1/ (0.20)
= 5
Where M is the expenditure multiplier and MPC is the Marginal Propensity to Consume. An independent increase in investment expenditures of $10B would cause the equilibrium level of aggregate income to rise by 5 x $10B = $50B. (Ref: Gwartney Stroup, and Sobel, Economics: Private and Public Choice, 9th ed., pp.283-285)

• With more time to adjust to a price change caused by a shift in supply, buyers will identify more ways to respond to the unfavorable price movement. As a result, the change in quantity demanded will be smaller in the short run. (Ref: Gwartney Stroup, and Sobel, Economics: Private and Public Choice, 9th ed., pp.79-81)

• A change in the price of a good causes a movement along the demand curve, not a shift in the whole curve. (Ref: Gwartney Stroup, and Sobel, Economics: Private and Public Choice, 9th ed., pp.61-65)

• The absence of competition among sellers, resulting from monopoly power, would provide a basis for government action. (Ref: Gwartney Stroup, and Sobel, Economics: Private and Public Choice, 9th ed., pp.125-134)

MI

• The call features describes the terms under which the borrower can redeem bonds prior to the contracted maturity. (Ref: Reilly and Brown, Investment Analysis and Portfolio Management; 6th ed., p.81)

• Seniority describes the relative standing of the claims of different categories of bonds against he assets of a borrower in the event of default or bankruptcy. (Ref: Reilly and Brown, Investment Analysis and Portfolio Management; 6th ed., p.81)

• In a futures contract, all of the terms, including the delivery date and payment amount, are determined at the time the contract is bought or sold. (Ref: Reilly and Brown, Investment Analysis and Portfolio Management; 6th ed., p.86)

• A real estate investment trust fund is a vehicle for investing in real estate assets, either equity positions or mortgages. (Ref: Reilly and Brown, Investment Analysis and Portfolio Management; 6th ed., p.88)


CHOOSE TO BE RICH WORK BOOK
022208

Financial Goal

Secure

Pros
1. No more sleepless nights
2. A better mood
3. No more running around in circles looking for resources to survive for the day
4. The extra resources that you make can be used for achieving the level of comfort.

Cons
1. Not yet comfortable
2. Just surviving
3. Creates the feeling of that’s enough…
4. No budget for luxurious doodads

Comfort

Pros
1. Living in a big comfy house with 2 cars maybe…
2. Got extra time to do what you really want to do in life…
3. Can provide ample resources to advocacies that you believe in…
4. Extra resources to use to reach the next level of being rich…

Cons
1. Might get too much comfortable that you tend to stagnate…
2. Might possess too much credit due to the middle class mentality of purchasing doodads…
3. Might forget your advocacies and become greedy…
4. Prone to gambling, drinking, bad vices due to the extra resources available…

Rich

Pros
1. You can reach all of your goals in life…
2. Help the community without inhibitions…
3. Provide for your family generations and generations after…
4. Become a legend and leave a legacy…

Cons
1. Might get greedy and become an oligarch…
2. Life security…


I AM SO HAPPY AND GREATFUL NOW THAT…
022208

1. I am a millionaire!
2. I am a Certified Financial Analyst!
3. Everything’s gonna be alright!
4. Abundance, prosperity and health is mine!