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Unit 5 Materials (Cashflow = Receipts - Payments
Closing Cash Balance =…
Unit 5 Materials
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Separate Entity Concept
A business is separate from it's owner. The owner's interest is recorded as capital which is regarded as a liability to the business
the calculation of both profit and (most) assets and liabilities on the balance sheet is based on 'historical costs', not realisable value. This means that net asset value is an eclectic collection of past costs, and does not represent the market value of a business.
Comparability: when comparing against a benchmark period, ie the previous year's performance, parity in accounting policies is required to ensure cmparability
Stock is valued at the lower of cost or net realisable value, which is in line with the principle of conservatism. We do not anticipate the profit that might arise when it is sold at a price higher than cost, but if we believe it will be sold at a price lower than cost, we recognise that expected future loss.
5 step plan to interpret financial reports:
Step 1: Before You Examine Any of the Numbers, Consider the Context
Step 2: Do a Quick Review of Absolutes and Trends in the Main Financial Statements
Step 3: Undertake a Formal but Specific Ratio Analysis
Step 4: Investigate Inconsistent Results or Oddities
Step 5: Interpret your Research and Analysis
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Weaknesses of Ratio Analysis:
- Balance sheet info is end of year which means it is out of date, using historical values
- Income statemetns report on ast years profit, using estimates and judgements to arrive at the figures
- Different companies have different accounting policies
- Different definitions for ratios
- Ratios do nt give insight into the business context and need comparison for clarity with prev years, competitors and industry
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EPS - Earnings per Share - basically the company's earnings divided by the number of shares:
Used as a measure of success. Inestors look for high and increasing EPS
Share buyback by a company reduces the number of shares, which drives up EPS as a result
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Earnings Yield = (Earnings per share / Share price) X 100%. Earnings yield are the earnings per share for the most recent 12-month period divided by the current market price per share. The earnings yield (which is the inverse of the P/E ratio) shows the percentage of each dollar invested in the stock that was earned by the company.
Dividend Yield (Dividend per share / Share price) x 100%
how much a company pays out in dividends each year relative to its share price.
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