Financial Accounting - PowerPoint PPT Presentation

1 / 24
About This Presentation
Title:

Financial Accounting

Description:

Balance sheet picture of the company at a point in time ... Examples- Enron. MCI Worldcom. Fannie Mae. Rite-Aid. Fannie Mae. Jacuzzi. Counting horses ... – PowerPoint PPT presentation

Number of Views:378
Avg rating:3.0/5.0
Slides: 25
Provided by: france3
Category:

less

Transcript and Presenter's Notes

Title: Financial Accounting


1
Financial Accounting
  • A Valuation Approach

2
Accounting and Valuation
  • Balance sheet picture of the company at a point
    in time
  • Income or earnings statement- measures earnings
    over a period of time.

3
Earnings
  • Revenue- Expenses
  • Informal definitions
  • Revenues- amounts collected or expected to be
    collected from customers in exchange for
    providing goods or services
  • Expenses- amounts paid or expected to be paid in
    return for resources that go into production and
    marketing of goods and services

4
Business model
5
Business components
  • Assets- Items of value used in the business
    recognized as assets in accounting
  • Liabilities- obligations of the business
    recognized in accounting
  • Owners equity- the difference between assets and
    liabilities

6
Business organization
  • Proprietorship
  • Partnership
  • Limited liability company
  • Corporation

7
Corporation
  • Focus of this course is on publicly traded
    corporations
  • Structure of public corporations
  • Sell stock to shareholders
  • Returns to shareholders are in the form of
  • Dividends
  • Sale of stock

8
Claires
  • Claire's Stores Stock Charts
  • Claires Stores Financial Statements

9
Valuation
  • How do we decide if Claires market price
    reflects its underlying (intrinsic) value?
  • Financial statements can provide information that
    is helpful in assessing a firms value.

10
Valuation and a firm
  • Price earnings ratios are a simple way of
    assessing value
  • The price earnings or P/E ratio is a measure of
    the value that the market places on a dollar of a
    firms earnings
  • Forward P/E ratio based on forecasted earnings
  • Trailing P/E ratio based on past earnings

11
Valuation models
  • Another way to look at a firm is its Price/Book
    ratio. The price book ratio is the ratio of of
    the firms stock price to its book value/share.
  • Free cash flows what is the present value of the
    cash flows that the firm is generating that can
    be used for growth?
  • Present value of abnormal earnings. How much is
    the firm earning above its cost of capital?

12
Claires P/E and P/E
  • Claires (CLE) price 23.92
  • EPS diluted 1.47 (excluding extraordinary
    items)
  • P/E ratio 23.92/1.47 16.27 (trailing)
  • Earnings forecast (WSJ) 1.62
  • If the P/E ratio stays the same- the price should
    be 1.62 16.27 26.35

13
Firm Activities
  • Financing
  • Raising funds for the firm
  • Issue Stock
  • Issue long term debt
  • Investing
  • Purchase property, plant and equipment to allow
    the firm to conduct operations
  • Operating
  • Making and selling goods and services to earn a
    profit

14
Accounting rule setting
  • Securities and Exchange Commission (SEC)
  • www.sec.gov
  • Financial Accounting Standards Board (FASB)
  • www.fasb.org
  • Public Company Accounting Oversight Board (PCAOB)
  • www.pcaobus.org

15
GAAP
  • GAAP (Generally accepted accounting principles)
  • Large body of standards from current and past
    standard setting bodies
  • Accounting Research Bulletins (ARBs)
  • APB opinions
  • FASB Standards and interpretations
  • SEC Accounting Series Releases

16
Accounting
  • Accounting is a political process
  • Accounting standards are a product of compromise
  • Example Oil and gas industry successful
    efforts versus full cost accounting

17
Accounting Concepts
  • Relevance
  • Capable of making a difference in decisions
  • Feedback value- How well did we do?
  • Predictive Value-How well will we do in the
    future?
  • Timeliness-disclosed soon enough to be useful
  • Reliability
  • Information represents the events it was intended
    to portray
  • Verifiability
  • Independent users use the same methods to get the
    same results

18
Accounting Concepts
  • Neutrality
  • Information should not be biased to meet the
    needs of a particular consistency
  • Comparability
  • Information should be comparable across firms and
    across time for the same firms
  • Consistency
  • The same accounting methods should be used from
    one period to the next

19
Accounting Concepts
  • Materiality
  • Relates to relevance, the decision matters
  • SEC has dictated that materiality cannot be used
    as excuse for bad accounting
  • Conservatism
  • Tendency to recognize expenses and costs earlier
    than revenues and gains
  • Results in assets generally being carried at
    lower levels on the balance sheet than market
    value.
  • Also means that when we look at the market value
    of a company relative to its book value, usually
    market value is greater (Market/Book values 1)

20
Auditors
  • Provide independent assessment of whether
    financial statements fairly present the
    financial situation of a company
  • Auditing is changing. New requirements imposed on
    auditors and companies under PCOAB.

21
Economic Consequences
  • The idea of accounting as having economic
    consequences means simply that accounting affects
    real business decisions and wealth creation.
  • Examples-
  • Enron
  • MCI Worldcom
  • Fannie Mae
  • Rite-Aid

22
Fannie Mae
23
Jacuzzi
24
Counting horses
Write a Comment
User Comments (0)
About PowerShow.com