ACFI201 - 3

The principal revenue producing activities of the entity and other activities that are not investing or financing

The acquistion and/or disposal of long term assets and other investments not included in cash equivalents

Cash Flows relating to changes in the size and/or composition of the financial structure of the entity including equity and borrowings.

Sales + Op acc receivable - close acc reivable - bad debts - provision for DD - discount allowed

COGS +closing inventory-opening inventory + opening acc payable - closing acc payable

=Other operating expenses - non cash expenses - opening prepaid expenses + closed prepaid expenses +opening accrued expenses - closing accrued expenses

= Interest expense + op accrued interest - close accrued interest

= Tax expense +op tax payable - close tax payable +op deferred tax - close deferred tax

• The return earned on investments represents the marginal benefit of investing.
• Risk represents the marginal cost of investing

Actual rate paid or earner before deducting the effects of inflation

The nominal rate adjusted for the effect of inflation

The nominal rate adjusted for the effect of the rate paid or earned being calculated more frequently than once per annum (adjusted to represent effects of compounding)

The return that an investor expects to earn or receive on an asset given its price, growth, potential etc

The return that an investor requires on an asset given its risk

The return that an investor earned on an asset for a holding period

• The difference in equity returns and returns on safe investments.
• Implies stocks are riskier than bonds or bills
• Trade off always  arises between risk and expected return

The total gain or loss experienced on an investment over a given time period

• Arithmetic mean usually overstates the mean.
• The difference between the 2 is greater as volatility increases.
• They would be the same if there was no change in the returns

Occurs because of the probability of earning a return less than that expected The greater the chance of a return below expected, the greater the risk

the dispersion or variability around the expected value

• A measure of the relative dispersion of a probability distribution
• Measures the risk per unit return.
• Use: Using standard deviation to compare the riskiness of two projects can be misleading when the projects are of unequal sizes.
• A relative measure of risk

Investors are either Risk neutral, Risk Seeking or Risk Averse. Historical returns on financial assets are consistent with a population of risk averse investors

• If two assets have equal expected returns, the the one with lower risk dominates.
• if two assets are equally risky, then the one with higher returns dominates
• Can also be non-dominated

• Risk reduciton is achieved in portfolios because fluctuations in one asset are partially offset by fluctuations in another asset.
• Risk of a portfolio depends crucially on whether the returns on the portfolio's components move together or in opposite directions.

• A two stock riskless portfolio can be formed if (rho) = -1
• Risk is not at all reduced if (rho) = +1
• Generall stocks have (rho) about .35

Risk related to market movements(eg interest rates)

• Variability of returns unique to the company.
• In a large market a protfolio of 20 randomly selected stocks eliminates most unsystematic risk

• A meausre of volatility  of a security's returns relative to the broad-based market returns.
• Beta for entire market = 1 since the correlation of market portfolio returns with itself is one.

• Through diversifying, investors can eliminate unique risk, so only systematic risk is priced.
• The market compensates investors for accepting risk, but only for systematic risk