Common Stock on Operating Cash Flow Statement
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Modeling Dividends, Earnings, and Book Value Equity: an Empirical Investigation of the Ohlson Valuation Dynamics
Review of Accounting Studies, 1,207-224 (1996) @ 1996 Kluwer Academic Publishers, Boston. Manufactured in The Netherlands. Modeling Dividends, Earnings, and Book Value Equity: An Empirical Investigation of the Ohlson Valuation Dynamics SASSON BAR-YOSEF The Hebrew University of Jerusalem JEFFREY L.CALLEN Department of Accounting, Stem School of Business, New York University, New York, NY 10012 JOSHUA LIVNAT Department of Accounting, Stern School of Business, New York University, New York, NY 10012 Abstract. This study empirically investigates the information dynamics of the Ohlson valuation framework. Single-period lagged linear autoregressive relationships among dividends, earnings, and book values of equity are estimated for a sample of stochastically stationary firms and are found not to support the valuation framework. This study further extends the empirical analysis to a multilagged vector autoregressive linear information system. Consistent with the Ohlson valuation framework, the past time series of all three variables are generally found to be relevant for firm valuation. This study brings into question empirical research utilizing the Ohlson framework that presupposes a single-period lagged information dynamic. The valuation models of Ohlson (1989, 1990, 1995) and Feltham and Ohlson (1994a, 1994b, 1995) representfirm value by reference to (discounted) accounting variables rather than cash flows. This is important for accounting researcherswho have a comparative advantage in understanding accounting variables but who are often forced by the extant cash-flow valuation models to unbundle the accounting numbersin order to obtain cash- flow figures. It is ironic. On the one hand, accounting practice and researchmaintain that accounting earningsand the accrual processgenerate numbers that are more relevant for firm valuation than cashflows, and yet, on the other hand, when studying the valuation process, accounting researchersoften find themselvesunbundling those same earnings numbers to apply valuation models representedby (discounted) cash-flow variables. -
Analysis of Cash Flow Ratios: a Study on CMC
Accounting 4 (2018) 41–52 Contents lists available at GrowingScience Accounting homepage: www.GrowingScience.com/ac/ac.html Analysis of cash flow ratios: A study on CMC Somnath Dasa* aAssistant Professor of Commerce, Rabindra Mahavidyalaya, Champadanga, Hooghly – 712401, India C H R O N I C L E A B S T R A C T Article history: Cash flow ratios help financial users get relevant information about financial resources for a Received January 9, 2017 given time. Cash flow ratios are now used more than the traditional ones because it is more Received in revised format effective and justified. Cash flow based ratios are especially surprising because they do not January 11 2017 only play a significant role in the credit rating of evaluation, but also forecast the failure of a Accepted March 7 2017 Available online corporation. In this study, we perform an empirical investigation on a company named CMC. March 7 2017 From the study, it is clear that the liquidity and solvency positions of the company were moderate whereas the company maintained low profitability. On the other hand, the efficiency Keywords: Liquidity and sufficiency ratios of the study give us a new look on financial judgement. Solvency Profitability Efficiency Sufficiency Ratios © 2017 Growing Science Ltd. All rights reserved. 1. Introduction Information related to cash flow helps financial statement users receive the relevant information concerning the use and source of financial resources over a given time period (Rose et al., 2007). Cash flow statement contains information associated with operating, investing purposes of financial analysis, because the effect of the traditional ratio analysis techniques has been well established in literature, and financial activities (Macve, 1997). -
When an Asset Has Been Sold, Demolished, Is No Longer in Service
Policy Title: Facilities and HARVARD UNIVERSITY FINANCIAL POLICY Equipment Responsible Office: University Accounting Services Effective Date: February 15, 2007 FACILITIES AND EQUIPMENT – Revision Date: DISPOSALS AND IMPAIRMENTS PROCEDURES Policy Number: FA4 PROCEDURES • Basic rules: When an asset has been sold, demolished, is no longer in service or its value has been permanently impaired, any remaining value of the asset, net of accumulated depreciation, less any salvage value, must be written off or written down to its net realizable value. This involves removing both the asset and the accumulated depreciation from the general ledger, and recognizing a gain or loss for the difference. Additionally, any remaining plant equity is transferred to operating net assets. Any outstanding loans on debt-financed assets that are being written off must be settled. • Types of disposals: Sales of assets External – Sales of assets to third parties will result in either a gain or loss on sale. Where proceeds are greater than the net book value of the asset (historical cost less accumulated depreciation), a gain is credited to object code 5772, “Gain on sale, capital asset^miscellaneous income, External.” Conversely, where proceeds are less than the net book value of the asset, a loss is debited to object code 8722, “Loss on sale of capital asset.” In either case, the asset is written off by debiting accumulated depreciation and crediting the asset, and recognizing a gain or loss for the difference. If the asset is not yet fully depreciated, any remaining plant equity is transferred to operating net assets. This transfer would be recorded using the 9300 range of object codes, as a below-the-line internal transfer (non- operating activity). -
14. Calculating Total Cash Flows
Chapter 2 Lecture Problems 14. Calculating Total Cash Flows. Greene Co. shows the following information on its 2008 income statement: Sales = $138,000 Costs = $71,500 Other expenses = $4,100 Depreciation expense = $10,100 Interest expense = $7,900 Taxes = $17,760 Dividends = $5,400. In addition, you're told that the firm issued $2,500 in new equity during 2008, and redeemed $3,800 in outstanding long-term debt. a. What is the 2008 operating cash flow? b. What is the 2008 cash flow to creditors? c. What is the 2008 cash flow to stockholders? d. If net fixed assets increased by $17,400 during the year, what was the addition to NWC? a. To calculate the OCF, we first need to construct an income statement. The income statement starts with revenues and subtracts costs to arrive at EBIT. We then subtract out interest to get taxable income, and then subtract taxes to arrive at net income. Doing so, we get: Income Statement Sales $138,000 Costs 71,500 Other Expenses 4,100 Depreciation 10,100 EBIT $52,300 Interest 7,900 Taxable income $44,400 Taxes 17,760 Net income $26,640 Dividends $5,400 Addition to retained earnings 21,240 Page 1 Chapter 2 Lecture Problems Dividends paid plus addition to retained earnings must equal net income, so: Net income = Dividends + Addition to retained earnings Addition to retained earnings = $26,640 – 5,400 Addition to retained earnings = $21,240 So, the operating cash flow is: OCF = EBIT + Depreciation – Taxes OCF = $52,300 + 10,100 – 17,760 OCF = $44,640 b. -
Book Value Per Share
Book value per share By Michael Kemp What is it? Last September the directors of US company Berkshire Hathaway issued a press release announcing an on-market buy back of its own shares. The price was not specified. Rather the company retained the discretion to pay up to a 10% premium to book value. The company’s CEO is the world’s most successful investor, Warren Buffett. Since he used book value to define the buyback price a closer look at this metric is warranted. Book value is taken from the Balance Sheet – more recently referred to as the Statement of Financial Position. It is calculated by subtracting total liabilities from total assets. It is also referred to as net assets or shareholders equity. Book value can also be expressed on a per share basis. This is calculated by dividing the book value of the company by the total number of shares on issue. This usually differs from the market price. What is it telling you? In theory book value should indicate what shareholders would have received had the company been wound up on the date the accounts were constructed. For this to hold true the Statement of Financial Position should accurately reflect the value of the company’s assets. However this is rarely the case. The principal reasons are: • Plant and equipment are recorded at their purchase price less an allowance for depreciation. Inflation and technological advances often render this a poor measure of current value. Book value typically undervalues the replacement cost of plant and equipment for a going concern and overvalues the sale price in the event of liquidation. -
Cash Flow BCAS 18: Cash Flow
BANGLADESH COST ACCOUNTING STANDARDS BCAS - 18 Cash Flow BCAS 18: Cash Flow BCAS 18: Cash Flow 18.1 Introduction Cash flow in a company is a very important issue from managerial perspective. Forecasting cash flows are very important for decision making purposes. Reporting cash flow related information for internal decision making process receives extra attention along with external reporting. At the same time, management of cash flows on a regular basis is an important task of treasury now-a- days. The firms need to maintain a delicate balance between holding too much cash resulting into sacrifice of profitable investment opportunities and too little cash triggering unnecessary borrowing to support daily transactions. The purpose of this standard is to consider issues in developing and using cash flow information from a forward looking perspective. Sometimes it has been observed that in spite of adequate profit in business, they are unable to meet their taxes and dividends, just because of shortage of cash. Improving cash flow is a smart move for any business. It does not matter how great the business model is, how profitable it is, or how many investors the business has lined up. The business cannot survive if it fails to manage its cash properly. Given these trends, it is becoming increasingly important that cash flow information be prepared in a consistent and reliable manner. 18.2 Objectives The standard provides a basic guideline on forecasting cash inflows and outflows, reporting of cash flow related information, analyzing cash flow data and using cash flow data in different typical situations. The standard also highlights the importance of generating accurate cash flow information timely which is very important for cash flow management. -
Intangible Capital and the "Market to Book Value"
Economics Program Working Paper Series Intangible Capital and the “Market to Book Value” Puzzle Charles Hulten Professor of Economics, University of Maryland and NBER and Senior Fellow to The Conference Board Janet Hao The Conference Board June 2008 EPWP #08 - 02 Economics Program 845 Third Avenue New York, NY 10022-6600 Tel. 212-339-0420 www.conference-board.org/economics Intangible Capital and the “Market to Book Value” Puzzle Charles Hulten Professor of Economics, University of Maryland and NBER and Senior Fellow to The Conference Board and Janet Hao The Conference Board June 2008 (revised) © The Conference Board, Inc. 2008. We would like to thank Baruch Lev for his comments on an earlier draft, as well as Gail Fosler, Bart Van Ark, and Carol Corrado. Kathleen Miller provided valuable assistance in preparing this paper. Any remaining errors are the responsibility of the authors. I. Accounting for What? Accurate financial accounting data are neither inherently right nor wrong, they are only more or less useful for the questions that people want answered. Some questions involve “agency” issues in which shareholders and other interested parties seek to monitor or understand the actions of the managers who run the firm. The monitoring objective has inclined accounting principles toward a conservatism that stresses accuracy in valuation and relies on data generated by arms-length market transactions. One consequence of this conservatism is that the billions of dollars companies spend on R&D and brand development are treated as current expenses by their accountants largely because there are no market-mediated transactions to measure the value of the output created within the company. -
Financial Ratios Ebook
The Corporate Finance Institute The Analyst Trifecta Financial Ratios eBook For more eBooks please visit: corporatefinanceinstitute.com/resources/ebooks corporatefinanceinstitute.com [email protected] 1 Corporate Finance Institute Financial Ratios Table of Contents Financial Ratio Analysis Overview ............................................................................................... 3 What is Ratio Analysis? .......................................................................................................................................................................................................3 Why use Ratio Analysis? .....................................................................................................................................................................................................3 Types of Ratios? ...................................................................................................................................................................................................................3 Profitability Ratio .......................................................................................................................... 4 Return on Equity .................................................................................................................................................................................................................5 Return on Assets .................................................................................................................................................................................................................6 -
Consolidation-Date of Acquisition
Consolidation-Date of Acquisition Chapter 4 • Consolidated statements bring together the operating results and financial position of two or more separate legal entities into a single set of Consolidation As statements for the economic entity as a whole. Of The Date Of Acquisition • To accomplish this, the consolidation process includes procedures that eliminate all effects of intercorporate ownership and intercompany transactions. McGraw-Hill/Irwin Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 4-2 Consolidation-Date of Acquisition Consolidation-GAAP • The procedures used in accounting for intercorporate investments were discussed in Chapter 2. • These procedures are important for the preparation of consolidated statements because • Consolidated and unconsolidated financial the specific consolidation procedures depend on statements are prepared using the same the way in which the parent accounts for its generally accepted accounting principles. investment in a subsidiary. • The consolidated statements, however, are the same regardless of the method used by the parent company to account for the investment. 4-3 4-4 Roadmap—Chapter 4 Roadmap—Chapters 5 to 10 • After introducing the consolidation workpaper, • Chapter 5 includes the preparation of a full set of this chapter provides the foundation for an consolidated financial statements in subsequent understanding of the preparation of consolidated periods, that is, after the date of acquisition. financial statements by discussing the preparation of a consolidated balance sheet immediately following the establishment of a • Chapters 6 through 10 deal with intercorporate parent-subsidiary relationship. transfers and other more complex topics. 4-5 4-6 1 Consolidation Workpapers Consolidation Workpapers • The consolidation workpaper provides a • The parent and its subsidiaries, as separate mechanism for efficiently combining the legal and accounting entities, each maintain accounts of the separate companies involved in their own books. -
Cash Flow Ratios As a Yardstick for Evaluating Financial Performance in African Businesses
University of Wollongong Research Online University of Wollongong in Dubai - Papers University of Wollongong in Dubai January 2006 Cash flow atiosr as a yardstick for evaluating financial performance in African businesses Leonie Jooste University of Wollongong, [email protected] Follow this and additional works at: https://ro.uow.edu.au/dubaipapers Recommended Citation Jooste, Leonie: Cash flow atiosr as a yardstick for evaluating financial performance in African businesses 2006, 569-576. https://ro.uow.edu.au/dubaipapers/111 Research Online is the open access institutional repository for the University of Wollongong. For further information contact the UOW Library: [email protected] CASH FLOW RATIOS AS A YARDSTICK FOR EVALUATING FINANCIAL PERFORMANCE IN AFRICAN BUSINESSES Ms. L. Jooste, Department of Applied Accounting, Port Elizabeth Technikon, Port Elizabeth, South Africa. Fax: +27 41 5049823, E-mail: [email protected] Abstract With the introduction of SFAS 95 and IAS 7, the cash flow statement became an integral part of financial statements. Many authors agree on the importance of cash flow for financial analysis, but to date neither text writers nor analysts have developed a set of cash flow ratios for performance evaluation. Giacomino and Mielke (1993) proposed operating cash flow ratios for relative performance evaluation. Ratios were calculated for companies in the United States (US) in the chemical, food and electronic industries. Three-year averages or industry norms were calculated, indicating that the potential existed to develop benchmarks for the ratios by industry. With globalization and expansion of international trade it has become important to increase the quality of financial reporting. -
A Roadmap to the Preparation of the Statement of Cash Flows
A Roadmap to the Preparation of the Statement of Cash Flows May 2020 The FASB Accounting Standards Codification® material is copyrighted by the Financial Accounting Foundation, 401 Merritt 7, PO Box 5116, Norwalk, CT 06856-5116, and is reproduced with permission. This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this publication. The services described herein are illustrative in nature and are intended to demonstrate our experience and capabilities in these areas; however, due to independence restrictions that may apply to audit clients (including affiliates) of Deloitte & Touche LLP, we may be unable to provide certain services based on individual facts and circumstances. As used in this document, “Deloitte” means Deloitte & Touche LLP, Deloitte Consulting LLP, Deloitte Tax LLP, and Deloitte Financial Advisory Services LLP, which are separate subsidiaries of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of our legal structure. Copyright © 2020 Deloitte Development LLC. All rights reserved. Publications in Deloitte’s Roadmap Series Business Combinations Business Combinations — SEC Reporting Considerations Carve-Out Transactions Comparing IFRS Standards and U.S. -
Price-Book Value Ratio
Price-Book Value Ratio: Definition l The price/book value ratio is the ratio of the market value of equity to the book value of equity, i.e., the measure of shareholders’ equity in the balance sheet. l Price/Book Value = Market Value of Equity Book Value of Equity l Consistency Tests: – If the market value of equity refers to the market value of equity of common stock outstanding, the book value of common equity should be used in the denominator. – If there is more that one class of common stock outstanding, the market values of all classes (even the non-traded classes) needs to be factored in. PBV Ratio: September 1997 P/BV Ratios: September 1997 1200 1000 800 600 400 Std. Dev = 6.19 200 Mean = 3.3 0 N = 4750.00 Price to Book Value Price Book Value Ratio: Stable Growth Firm l Going back to a simple dividend discount model, DPS1 P 0 = r - g n l Defining the return on equity (ROE) = EPS0 / Book Value of Equity, the value of equity can be written as: BV0 *ROE*Payout Ratio *(1 + gn ) P 0 = r-gn P ROE*Payout Ratio *(1 + g ) 0 = PBV = n BV 0 r-gn l If the return on equity is based upon expected earnings in the next time period, this can be simplified to, P ROE*Payout Ratio 0 = PBV = BV 0 r-gn Price Book Value Ratio: Stable Growth Firm Another Presentation l This formulation can be simplified even further by relating growth to the return on equity: g = (1 - Payout ratio) * ROE l Substituting back into the P/BV equation, P ROE - g 0 = PBV = n BV 0 r-gn l The price-book value ratio of a stable firm is determined by the differential between the return on equity and the required rate of return on its projects.