There are two main interrelated concepts that will be discussed in detail in this reading: financial reporting quality and earnings quality.
Non-current liabilities are long-term liabilities that are due after one year or more in the future. They are on the right-hand side of the balance sheet. Common non-current liabilities include bonds payable, notes payable, finance leases, pension liabilities and deferred tax liabilities. This reading focuses on bonds payable and leases.
One of the key concepts we will discuss in this reading is deferred tax assets and liabilities. Deferred tax assets and liabilities are created because of differences between how and when transactions are recognized for financial reporting purposes relative to tax reporting.
Instructor’s note: The probability of getting tested on this topic on the exam is low. The operating cash flow from indirect method can be converted to direct by using the three-step process: Aggregate all the revenues and expenses. Remove all noncash items from aggregated revenues and expenses and break up remaining items into relevant cash flow items. Convert accrual amounts to cash flow amounts by adjusting for changes in corresponding working accounts.
The major questions addressed in this reading are: How does the pricing of the underlying asset affect the pricing of derivatives? How derivatives are priced using the principle of arbitrage? How are the prices and values of forward contracts determined? How are futures contracts priced differently from forward contracts? How are the prices and values of swaps determined? How are the prices and values of European options determined? How does American option pricing differ from European option pricing?
We began the equities section with a discussion on how securities markets are organized, how efficient markets are, the different types of equity securities, and how to analyze an industry and a company. The focus of this reading is on determining the intrinsic value of the security.
A well-designed classification system is a useful starting point for industry analysis; analysts can compare industry trends and relative valuation among companies. The following are the industry classification systems currently available to investors.
In this reading, we will focus on: what factors to consider when analyzing an industry. what advantages are enjoyed by companies in strategically well-positioned industries. how to analyze the competitiveness of an industry. an introduction to company analysis.