Summary
Summary lectures IFA
- Course
- Institution
Summary of IFA lectures
[Show more]
Seller
Follow
kj071995
Content preview
Samenvatting stof collegesHC1
The papers that are discussed are fundamental. Without them, you cannot go forward.
Why financial accounting:
• We want to account because we want to measure
o Assets
o Liabilities
o Value
The primary users of general-purpose financial reporting are present and potential investors,
lenders and other creditors, who use that information to make decisions about buying,
selling or holding equity or debt instruments and providing or settling loans or other forms
of credit. (IASB, Framework for financial reporting).
Constituents of Financial Accounting:
Main reports:
• Statement of comprehensive income or consolidated income statement
• Statement of cash flow or consolidated cash flow statement
• Statement of financial position or consolidated balance sheet
• Consolidated statement of changes in equity (NEW)
Earnings and valuations
Feltham & Ohlson
→ Introduction (690) – (699), read how they explain the link between the book value,
earnings, market value, etc. understand mechanics of financial accounting.
Clean surplus accounting relation
• What is the relation between financial and operating functions and valuations?
Clean surplus accounting relation has the answer:
• In a going concern firm, there are four key “flow” variables in each period.
o Operating earnings (includes revenues, cost of goods sold, R&D expenses, etc)
o (net) interest revenue (expenses)
o Cash flows
o Dividend payments
How earnings are produced in each period?
• Net operating assets
• Net financial assets (i.e. marketable securities minus debt)
• Book value (sum of operating and financial assets) represents owner’s equity
o The book value is given as
Book value = financial assets + operating assets
,The earnings is given as:
• Earnings = operating earnings + interest revenues (expenses)
• Clean surplus relation is given as follows
• Book value (t) = book value (t-1) + earnings (t) – dividends (t)
Clean Surplus Accounting Relation
Book value (t)
= book value (t-1) + earnings (t) – dividends (t)
Two key points to understand in this model:
• Since dividends are declared and paid at the end of each period, they directly educe
the book value
• However, they have no effect on the current period’s earnings
Why?
• Because the earnings was generated between the period t-1 and t for the given bv,
which is net of dividends of the previous period
What does operating assets represent?
• Balance sheet items such as: accounts receivables, inventory, prepaid expenses,
property, plant and equipment net of depreciation, operating liabilities such as
accounts payable and accrued wages
What does operating earnings constitute?
• Income statement items such as sales, cogs, selling and administrative expenses, etc.
Operating assets (oa) generate the operating income (ox) and transfer the proceeds (cash) to
financial assets at the end of the period.
The dividends from financial assets is given as
Div t
= Cash t _ Rf fin. Assets (t-1) – fin.assets (t)
Rf= risk free discount rate denoted by (1+risk free rate)
Future dividend = present fin. Assets + future cash from operations
Value of a firm depends on:
• Value of its financial assets which has relations with book value
• Value of the firm’s operating activities as determined by the present value of
expected (future) cash flows.
,Key assumptions behing PV model
• Perfect market
o No buyer or seller of securities is large enough for his transactions to have an
appreciable impact on the then ruling price.
• Rational behavior
o Investors always prefer more wealth to less and are indifferent as to whether
a given increment to their wealth takes the form of cash payments or an
increase in the market of their holdings of shares. (MILLER &
MODIGLIANI,1961)
Dividend discount model:
Dividend Policy Puzzle
• A firm’s total market value is independent of its dividend policy. (MILLER &
MODIGLIANI)
• Assuming this theory is correct, is the value of a firm that pays no dividend is the
same as the firm that pays constant rate of dividend, ceteris paribus?
• Black and Scholes found in their study that: it is not possible to demonstrate, using
the best possible methods, that the expected returns on high-yield common stocks
differ from the expected returns on low yield common stocks either before or after
taxes.
, Value relevance of financial accounting and accounting for intangibles
What is value relevance?
• Financial accounting figures such as earnings, cash and book value of equity
should have a high degree of association with the firms’ stock price
How do empirical studies detect value relevance?
• Using regression coefficients and R2 (otherwise known as “coefficient of
determination”.
Lev and Zarowin (1999)
• In the paper, they investigate the “usefulness of financial information to investors
in comparison with total information in the marketplace”
• In their view, the importance of financial information has been declining in the
American stock markets to the investors
Why value relevance is declining?
• According to Lev and Zarowin value relevance is declining because:
o Firms are changing their “business enterprise at a greater rate” which is
associated with declining earnings informativeness
o Increasing levels of R&D investments resulting in Intangible Assets is related
to declining earnings informativeness
Treatment of R&D in financial accounting
→A direct relationship between research and development costs and specific future revenue
generally has not been demonstrated, even with the benefit of hindsight (Lev & Sougiannis).
In brief:
• U.S. GAAP mandates full expensing of R&D in financial statements
• In IFRS, research expenses are expensed. However, there is some scope for
amortization of development expenses, including internal costs, when criteria (IAS
38) are met.
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller kj071995. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $3.24. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
57114 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 14 years now