Investment Management Certificate (IMC) Microeconomics, Macroeconomics and Financial Statements Flashcards

24 sample cards from the Microeconomics, Macroeconomics and Financial Statements deck

Sampled from the end of the deck, so these are different cards from the ones shown on the syllabus page.

1. What is monetary policy and which body conducts it in the UK?

   Monetary policy is the management of interest rates and the money supply to control inflation and influence economic activity. In the UK it is set by the Bank of England's Monetary Policy Committee (MPC), which targets CPI inflation of 2%.

2. How does raising the policy interest rate affect the economy?

   Higher interest rates raise borrowing costs and the reward for saving, which reduces consumption and investment, lowers aggregate demand, and tends to reduce inflation. The currency may also strengthen as higher rates attract capital inflows.

3. What is quantitative easing (QE)?

   QE is an unconventional monetary policy where a central bank creates new money to buy financial assets (mainly government bonds). This raises asset prices, lowers long-term yields, and increases the money supply and liquidity to stimulate the economy when interest rates are already very low.

4. What is fiscal policy and what are its two main instruments?

   Fiscal policy is the government's use of taxation and public spending to influence the economy. Its two main instruments are government spending (G) and taxation (T). Expansionary fiscal policy raises spending or cuts taxes; contractionary policy does the reverse.

5. Define a budget deficit and the national debt.

   A budget (fiscal) deficit occurs when government spending exceeds tax revenue in a given year. The national debt is the cumulative total of past deficits less surpluses — the total amount the government owes.

6. Distinguish direct taxes from indirect taxes.

   Direct taxes are levied on income or wealth and paid directly to the government by the person/entity bearing them (e.g. income tax, corporation tax). Indirect taxes are levied on spending/transactions and collected via an intermediary (e.g. VAT, excise duties).

7. What is the difference between expansionary and contractionary policy in terms of objectives?

   Expansionary policy (lower rates / QE, higher spending or lower taxes) aims to boost demand, growth, and employment, often when the economy is weak. Contractionary policy (higher rates, lower spending or higher taxes) aims to cool demand and reduce inflation when the economy is overheating.

8. How can monetary and fiscal policy work together or conflict?

   They can reinforce each other (e.g. both expansionary to fight recession). Conflict arises when, for example, a government runs an expansionary fiscal policy while the central bank tightens monetary policy to control the resulting inflation, partly offsetting each other.

9. What is 'crowding out' as a constraint on fiscal policy?

   Crowding out occurs when increased government borrowing to fund spending raises interest rates and/or absorbs available funds, reducing (crowding out) private-sector investment and consumption, thus weakening the net stimulus.

10. Name key constraints/time lags that limit the effectiveness of macroeconomic policy.

    Time lags (recognition, decision/implementation, and impact lags), crowding out, high existing debt levels, the zero/effective lower bound on interest rates, conflicting objectives, and the risk that policy is poorly timed and becomes pro-cyclical.

11. Name the three principal financial statements and what each shows.

    1) The statement of financial position (balance sheet) — assets, liabilities and equity at a point in time. 2) The income statement (profit and loss) — revenues, expenses and profit over a period. 3) The cash flow statement — cash inflows and outflows over a period.

12. State the fundamental accounting equation.

    $$\text{Assets} = \text{Liabilities} + \text{Equity}$$ Equivalently, equity (shareholders' funds) = assets − liabilities.

13. What are the three sections of the cash flow statement?

    Cash flows from operating activities (day-to-day trading), investing activities (buying/selling long-term assets and investments), and financing activities (raising/repaying debt and equity, and paying dividends).

14. Define the accruals (matching) concept.

    The accruals concept states that revenues and expenses are recognised when they are earned or incurred, not when cash is received or paid. Costs are matched to the revenues they help generate in the same accounting period.

15. Define the going concern concept.

    Going concern assumes that the business will continue to operate for the foreseeable future and has no intention or need to liquidate or significantly curtail operations. This justifies valuing assets at cost rather than break-up (forced sale) values.

16. What are IFRS and GAAP?

    IFRS (International Financial Reporting Standards), issued by the IASB, are accounting standards used in the UK/EU and many countries to promote comparable, consistent reporting. GAAP (Generally Accepted Accounting Principles) refers to the body of accounting rules in a jurisdiction (e.g. UK GAAP, US GAAP).

17. Distinguish liquidity ratios from profitability ratios.

    Liquidity ratios measure ability to meet short-term obligations (e.g. current ratio, quick ratio). Profitability ratios measure the firm's ability to generate profit relative to sales, assets, or equity (e.g. net profit margin, ROE, ROCE).

18. Give the formulas for the current ratio and the quick (acid-test) ratio.

    $$\text{Current ratio} = \frac{\text{Current assets}}{\text{Current liabilities}}$$ $$\text{Quick ratio} = \frac{\text{Current assets} - \text{Inventory}}{\text{Current liabilities}}$$

19. Define the gearing (leverage) ratio and what it indicates.

    Gearing measures the proportion of debt in a company's capital structure, e.g. $$\text{Gearing} = \frac{\text{Debt}}{\text{Equity}} \quad \text{or} \quad \frac{\text{Debt}}{\text{Debt} + \text{Equity}}$$ High gearing means greater reliance on borrowing and higher financial risk (larger interest commitments).

20. Give the formulas for Return on Equity (ROE) and Return on Capital Employed (ROCE).

    $$ROE = \frac{\text{Net profit after tax}}{\text{Shareholders' equity}}$$ $$ROCE = \frac{\text{Operating profit (EBIT)}}{\text{Capital employed}}$$ where capital employed = total assets − current liabilities (or equity + long-term debt).

21. What are the earnings per share (EPS) and price/earnings (P/E) ratios?

    $$EPS = \frac{\text{Earnings attributable to ordinary shareholders}}{\text{Number of ordinary shares}}$$ $$P/E = \frac{\text{Share price}}{EPS}$$ The P/E shows how much investors pay per unit of earnings — a higher P/E often implies higher expected growth.

22. State the formulas for gross profit margin and net profit margin.

    $$\text{Gross margin} = \frac{\text{Gross profit}}{\text{Revenue}} \times 100\%$$ $$\text{Net margin} = \frac{\text{Net profit}}{\text{Revenue}} \times 100\%$$

23. List key limitations of financial statements for investors.

    They are historic (backward-looking), can be affected by different accounting policies and estimates (reducing comparability), may be subject to manipulation/'creative accounting', ignore non-financial and intangible factors (e.g. brand, staff quality), and do not fully reflect inflation or current market values.

24. Why can ratio analysis be misleading despite its usefulness?

    Ratios rely on historic accounting data and chosen accounting policies, can be distorted by one-off items or window dressing, lack meaning in isolation (needing comparison over time or against peers/industry), and ignore qualitative factors such as management quality, competition and economic conditions.

What this deck covers

Microeconomics, Macroeconomics and Financial Statements flashcards FAQ