CCFA flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Accounting Equation

Assets equal liabilities plus equity. Every transaction affects at least two accounts while preserving this balance, which is the foundation of double-entry bookkeeping and the balance sheet.

Accrual Accounting

Revenue is recognized when earned and expenses when incurred, regardless of cash timing. It produces a more faithful measure of periodic performance than cash-basis reporting.

LIFO vs FIFO

LIFO assigns the newest costs to cost of goods sold, lowering taxable profit during inflation. FIFO assigns older costs to COGS and leaves newer, higher costs in ending inventory.

Deferred Tax Asset

A balance sheet asset from temporary differences or tax losses that will reduce future taxes. A valuation allowance is recorded when realization is not more likely than not.

DuPont Analysis

Decomposes return on equity into net profit margin, asset turnover, and equity multiplier. It reveals whether returns come from profitability, operating efficiency, or financial leverage.

Cash Conversion Cycle

Days inventory outstanding plus days sales outstanding minus days payables outstanding. It measures how long cash is tied up in operations before collection.

Free Cash Flow

Cash from operations minus capital expenditures. It represents cash available to debt holders and shareholders after maintaining and expanding the asset base.

Quality of Earnings

Assesses whether reported profit is supported by cash generation and sustainable operations. Rising accruals or receivables outpacing revenue are warning signs of aggressive recognition.

Weighted Average Cost of Capital

The blended after-tax cost of debt and equity weighted by market-value proportions. It is the discount rate for cash flows available to all capital providers.

Levered Beta

Unlevered beta multiplied by one plus the after-tax debt-to-equity ratio. It reflects the additional systematic risk borne by equity holders when a firm uses debt.

Modigliani-Miller Proposition

Without taxes and frictions, capital structure does not affect firm value. With corporate taxes, value increases by the tax rate times debt under perpetual debt assumptions.

Pecking Order Theory

Firms prefer internal funds, then debt, then new equity, because information asymmetry makes equity issuance costly and often read as a negative signal.

Gordon Growth Model

Values a stock as next year's dividend divided by the discount rate minus growth. It requires a stable growth rate below the discount rate and sustainable payout.

Enterprise Value

Market capitalization plus debt, preferred stock, and minority interest, minus cash. It is the total claim on the operating business, independent of capital structure.

Free Cash Flow to Firm

EBIT times one minus the tax rate, plus depreciation, minus capital expenditure, minus the increase in net working capital. Discount at WACC to obtain enterprise value.

Bond Duration

A weighted average time to cash flows that approximates the percentage price change for a one percent yield change. Higher duration means greater interest rate sensitivity.

Balance Sheet Check

A model control ensuring assets minus liabilities minus equity equals zero. A nonzero result signals a broken link in the three-statement flow.

Circular Reference

A loop where interest expense depends on debt balances that depend on cash flow that depends on interest. Models resolve it with iterative calculation or a copy-paste macro.

Mid-Year Convention

Assumes cash flows arrive evenly through the year and discounts them at time minus one half. It raises present value relative to end-of-year discounting.

Sensitivity Analysis

Varies one or more forecast drivers to observe how valuation or earnings respond. Tornado charts rank drivers by the magnitude of their impact.

Put-Call Parity

A call plus the present value of the strike equals a put plus the stock, for European options on non-dividend-paying shares. Deviations create arbitrage opportunities.

Value at Risk

Estimates the maximum loss over a stated horizon at a given confidence level. It does not describe the size of losses beyond that threshold.

Option Greeks

Delta measures price sensitivity to the underlying, gamma the change in delta, vega sensitivity to volatility, theta time decay, and rho sensitivity to interest rates.

Interest Rate Swap

An agreement to exchange fixed and floating interest payments on a notional principal. The fixed rate set at inception makes both legs equal in present value.

GDP Expenditure Identity

Gross domestic product equals consumption plus investment plus government spending plus net exports. Each component responds differently across the business cycle.

Yield Curve Inversion

A condition where short-term yields exceed long-term yields, often reflecting expected rate cuts. It has preceded recessions but is an unreliable timing signal.

Interest Rate Parity

Forward exchange premiums equal the interest rate differential between two currencies. It prevents riskless arbitrage between spot, forward, and deposit markets.

Semi-Strong Efficiency

Prices reflect all publicly available information, so fundamental analysis cannot earn excess returns consistently. Only material nonpublic information would provide an edge.

Material Nonpublic Information

Information that could move a security's price and is not yet public. Trading on it, or causing others to trade, violates professional standards and securities law.

Fiduciary Duty

The obligation to act in the client's best interest ahead of employer or personal interests. It includes loyalty, care, candor, and disclosure of conflicts.

Fair Dealing

Treating all clients equitably when disseminating recommendations and information. Clients must not be favored based on position, fee size, or personal relationship.

GIPS Compliance

A voluntary, firm-wide standard for presenting investment performance. It requires defined composites, disclosed fees, and at least five years of compliant history.