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#5 Valuation Basics

#5 Valuation Basics - VALUATION and other stuff Ted...

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VALUATION and other stuff Ted Chadwick With material also developed by Peter Arnold
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Quiz Question 1 Total assets remain the same when a) Depreciation expense is recorded b) Common stock is issued for cash c) An account payable is paid to a creditor d) Dividends are paid to common stockholders e) None of the above
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Quiz Question 2 Credits are used to record a) Decreases to assets and increases to expenses, liabilities, revenues, and owners’ equity. b) Decreases to assets and expenses and increases to liabilities, revenues, and owners’ equity. c) Increases to assets, and decreases to expenses, liabilities, and owners’ equity. d) Increases to assets and expenses and decreases to revenues, liabilities, and owners’ equity. e) Decreases to assets and owners’ equity and increases to liabilities, expenses, and revenues.
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Quiz Question 3 Which of the following transactions resulted in a $35,000 increase in assets and a $35,000 increase in liabilities? a) Collected accounts receivable of $35,000. b) Paid accounts payable of $35,000. c) Purchased land for $50,000, paying $15,000 in cash as a down payment and signing a note payable for the balance. d) Purchased on account, and used, $35,000 worth of office supplies during the period. e) Reclassified a $35,000 account receivable as a note receivable when the customer failed to pay on time.
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Quiz Question 4 The principle stating that all expenses incurred while earning revenues should be identified with the revenues when they are earned and reported for the same time period is the a) Cost principle b) Revenue principle c) Expense principle d) Matching principle e) Timing principle
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Quiz Question 5 If an adjusting entry causes both the balance sheet and income statement accounts to increase, it is a) An error b) An accrual adjustment c) A deferral adjustment d) None of the above
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Equity (Company Ownership) Markets Stock markets – NYSE, NASDAQ, London, Paris, …, Boston Buying and selling shares in companies Orderly trading – auction by buyers and sellers The exchange was a physical space where the trading took place. The exchange is now either physical or virtual (NASDAQ). An investor is usually represented by a broker. Brokers follow the orders of investors and deal with specialists. Investors may “Go long” – or actually buy the stock Investors may “Sell short” – sell the stock without owning it Investors leverage investment capital by trading options or by buying on margin.
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Stock Market Related Terms Ticker symbol – typically NYSE - three or fewer letters (X, KO, MMM) NASDAQ – four letters (MSFT) Price history (choose dates carefully) – past is not always prologue. Market capitalization – number of shares times share price Financial strength (or “health”) – opinion based on data Valuation Ratios (e.g. PE, MB, P/CF) Performance measures (or “management effectiveness”) – ROE, ROA, ROI Margins (profitability) – gross margin, operating margin
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Investor Decision Making Investors make choices based on information and based upon his or her own risk tolerance.
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