Lecture 5 spr 10 - Why is ROE the samefor capitalized...

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Why is ROE the same under both methods? Which set of ratios are for capitalized leases? Spring 2010 NBA 5060 Lecture 5 – Accounting Analysis 1. Why accounting analysis is important 2. Underpinnings of accounting 3. Sources of accounting measurement error Additional Notes (not discussed in class): 4. A note on capitalizing operating leases Lecture 5 Page 1 of 10
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1. Why is accounting analysis important? What are the three drivers of cross-sectional differences in performance? Of these, which one is most responsible for value creation? So, why conduct an accounting analysis? Why does measurement error exist? Financial statements are not designed to value a company. Instead, they are intended to provide information that is useful in helping others conduct their own valuation. Thus, it is important to understand: 1. What information do financial statements provide? 2. How does this information help in valuation? 3. What are the limitations of this information? Lecture 5 Page 2 of 10
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Liabilities Liabilities Assets Assets Distributed Income Income Equity Equity Retained Income Owners 2. Underpinnings of accounting Overview of Basic Building Blocks of Accounting: Assets Probable future economic benefits obtained or controlled by a firm as a result of past transactions or events. Liabilities Probable future sacrifices of economic benefits arising from present obligations as a result of past transactions or events. Equity Assets - Liabilities Lecture 5 Page 3 of 10
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Changes in Accounting Principles Other Comprehensive Income Revenues Expenses Gains Losses Discontinued Operations Operating Profit Income from Continuging Operations Net Income Comprehensive Income Classification of components of income: Revenues Increases in assets or reductions in liabilities that arise from the provision of goods or services in the course of the firm’s operating activities. Lecture 5
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Lecture 5 spr 10 - Why is ROE the samefor capitalized...

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