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lec6_DW_Blackboard - Disposable Wealth Learning Objectives...

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Disposable Wealth
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Learning Objectives Examine the concept of disposable wealth Learn under what conditions performance can be measured using the income statement or balance sheet Note the distinction be recurring and non- recurring items Understand the distinction between net operating income and net income
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Distribution decisions = determining that portion of a firm’s wealth that can be distributed without impairing its initial wealth position.
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Disposable wealth = in wealth = Hicksian concept of income
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How do we represent wealth in a conventional accounting sense?
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Wealth = net assets OE = A - L
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W o W 1 OE o (HC) OE 1 (HC) Income = W
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Disposable wealth = OE -OE beg = OE end
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1. Net operating income (NOI) 2. Additional owner investments (I) or withdrawals (W) 3. Gains (G) and losses (L) OE = f
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Assuming I, W, G, L are constant: Disposable wealth = OE = NOI = R -E
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NOI R - E (Income statement approach) OE (Balance sheet approach)
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OE = 30,000 OE = 45,000 NOI = OE = OE end - OE beg = 45,000 - 30,000 = 15,000
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Assuming no I, W, G, L: NOI performance Disposable wealth R - E OE
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Assuming no G & L: OE = NOI + I - W
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NOI R - E (I/S approach) OE - I + W (B/S approach)
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OE = 30,000 OE = 45,000 I = 10,000 NOI = = 45,000 - 30,000 - 10,000 + 0 = 5,000 OE - I + W
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OE = 30,000 OE = 45,000 W = 10,000 NOI = 45,000 - 30,000 - 0 + 10,000 = 25,000
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Assume no I or W: OE = NOI + G - L NOI performance R - E (I/S approach) disposabl e wealth OE - G + L (B/S approach)
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Gains & Losses Excluded from Performance Measures 3.00 2.50 2.00 1.50 1.00 1 2 3 4 time D D D $
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Gains & Losses Included in Performance Measures 3.00 2.50 2.00 1.50 1.00 1 2 3 4 time D D D ?
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