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Chapter_04 - Chapter 4 Cash Accounting Accrual Accounting...

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Cash Accounting, Accrual Cash Accounting, Accrual Accounting, and Discounted Accounting, and Discounted Cash Flow Analysis Cash Flow Analysis Chapter 4 Chapter 4
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Cashing Accounting, Accrual Accounting, Cashing Accounting, Accrual Accounting, and Discounted Cash Flow Analysis and Discounted Cash Flow Analysis Chapter 3 outlined the process of fundamental analysis and depicted valuation as a matter of forecasting future financial statements This web page provides further explanation and additional examples of discounted cash flow analysis, cash accounting, and accrual accounting. Chapter 5 and 6 together lay out valuation methods that forecast accrual accounting income statements and balance sheets. This chapter introduces discounted cash flow valuation, a method that involves forecasting future cash flow statements. The chapter also shows how cash flows differ from accrual earnings in the income statement, and how ignoring accruals in discounted cash flow valuation can cause problems. What form of accounting best captures value added in operations: cash accounting or accrual accounting? What is the difference between cash accounting and accrual accounting? What is the discounted cash flow model? Does it work? What is the dividend discount model? Does it work? Link to next chapter This Chapter Link to web page Link to pervious chapter
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What you will learn from this Chapter What you will learn from this Chapter How the dividend discount model works (or does not work) What is meant by cash flow from operations What is meant by cash used in investing activities What is meant by free cash flow How discounted cash flow valuation works Problems that arise in applying cash flow valuation Why free cash flow may not measure value added in operations Why free cash flow is a liquidation concept How discounted cash flow valuation involves cash accounting for operating activities Why “cash flow from operations” reported in U.S. financial statements does not measure operating cash flows correctly Why “cash flows in investing activities” reported in U.S. financial statements does not measure cash investment in operations correctly How accrual accounting for operations differs from cash accounting for operations The difference between earnings and cash flow from operations The difference between earnings and free cash flow How accruals and the accounting for investment affect the balance sheet as well as the income statement Why analysts forecast earnings rather than cash flows How a valuation model is a model of accounting for the future How reverse engineering works as an analysis tool What a “simple valuation” is
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A Reminder: Valuation Models for A Reminder: Valuation Models for Going Concerns Going Concerns CF 1 CF 2 CF 3 CF 4 CF 5 A Firm 1 2 3 4 5 0 d 1 d 2 d 3 d 4 d 5 Dividend Flow 1 2 3 4 5 0 TV T T d T Equity The terminal value, TV T is the price payoff, P T when the share is sold
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Chapter_04 - Chapter 4 Cash Accounting Accrual Accounting...

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