IEMS 326 Notes04Accounting

IEMS 326 Notes04Accounting - Accounting IEMS 326 Lecture 4...

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Accounting IEMS 326 Lecture 4
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Accounting: Why Bother? Do we have to? Part of business environment. a mode of valuation Accounting affects cashflows. Profit determines tax . Profit involves depreciation .
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An Alien Universe of Value 1. Book value vs. market value. historical vs. current/market prices depreciation (by schedule) no time value of money 2. Profits vs. cashflows. Cashflows are valued. Profits try to give a realistic picture of business performance. GAAP!
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What is Profit? Profit = revenue – expenses – depreciation Depreciation : investment cost (“ cost basis ,” first cost ”) is spread over the investment’s lifetime, based on projected service life (straight-line) Or asset class (MACRS) expenses reduce profit, investment does not, but creates later depreciation which later reduces profits
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Accounting Matters: Taxes Pretax Profit = Revenue – Expenses – Depreciation Tax = (35%) (Pre-Tax Profit) Profit = Pretax Profit – Tax = (65%)(Pre-Tax Profit) Cashflows must be adjusted for tax!
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What Depreciates? Productive assets with finite lifespan > 1 yr.
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This note was uploaded on 04/07/2008 for the course IEMS 326 taught by Professor Staum during the Winter '07 term at Northwestern.

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IEMS 326 Notes04Accounting - Accounting IEMS 326 Lecture 4...

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