CACC 414 CH04

CACC 414 CH04 - CACC414 CH04 Business Model can be broken...

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CACC414 CH04 Business Model can be broken down into 3 distinct types of activities: 1. Financing Obtaining cash funding, often by borrowing, issuing shares or retaining profits Repayment of debt Repurchase of shares 2. Investing Using funding to buy assets or for investment purposes Example: divestitures 3. Operating Using the assets and people to earn profits VALUE CREATION IS CENTRAL IN ANY BUSINESS MODEL Financial statements capture the fundamental business activities and communicated as follow: 1. Balance Sheet – captures the financing and investing activities 2. Income Statement – capture the operating and performance-related activities 3. Cash Flow Statement – displays the interrelationship between activities INCOME STATEMENT Or Statement of earnings/income The income statement helps financial statement users decide where to invest their resources and evaluate how well management is using a company’s resources. Investors/creditors can use the information in the income statement to: 1. Evaluate the enterprise’s past performance and profitability (p.142) 2. Provide a basis for predicting future performance 3. Help assess the risk or uncertainty of achieving future cash flows Limitations of the Income Statement: 1. Items that cannot be measured reliably are not reported in the income statement Ex: contingent gains – as there is uncertainty about whether the gains will ever be realized 2. Income numbers are affected by the accounting methods that are used Ex: recording of depreciation by straight line versus accelerated basis 3. Income statement involves the use of estimates Estimation of – an asset’s useful life, future warranty returns and bad debt write-offs Quality of Earnings (Content + Presentation) - When analyzing earnings information, there are 2 aspects that must be considered 1. Nature of Content – which includes: - Integrity of the information – whether it reflects the underlying business fundamentals - Sustainability of the earnings 2. Presentation - This means a clear, concise manner that makes it easy to use and understandable
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CACC414 CH04 Characteristics of high-quality earnings: (Quality of Earnings = Conclusion made from analyzing the Content + Presentation) Content 1. Unbiased - numbers are not manipulated, and objectively determined 2. Reflects economic reality - all transactions and events are appropriately captured 3. Reflects primarily the earnings generated from ongoing core business activities
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This note was uploaded on 03/27/2012 for the course ACC 414 taught by Professor Unknown during the Winter '09 term at Ryerson.

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CACC 414 CH04 - CACC414 CH04 Business Model can be broken...

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