Identify how these events would affect the Financial Statements at 31 December 2010.

Example: The Company paid wages for the month of December 2010 of $10,000

Answer:

Balance Sheet:
Decrease in Cash $10,000
Decrease in Equity $10,000.

Income Statement:
Wages expense: $10,000
Cash Flow statement:
Operating Cash outflow: $10,000

a. Inventory was purchased on credit for $15,000. The $10,000 worth of this inventory was sold on credit for $20,000 by December 31 2010..

b. Insurance of $24,000 was paid on 31 August 09. Note: remember the balance sheet date!.

c. Property was purchased at the beginning of the year for 250,000. The asset is depreciated at annual rate of $20,000..

d. A company is buys 2,000 items of clothing for $5 each. It on sells 1,500 of them for $12 each. Of those sold 1,000 have been paid while the rest are still payable. The company has paid its supplier for half of the clothing, the rest is still owing. .

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An Audit report is required by all public listed companies. It is designed to be in the interest of shareholders to ensure that they are a true and fair representation of the financial statements contained in the annual report.

In large companies often the management (those that run the company) differ to the shareholders (those that own the company). For this reason the intention of the management may differ to that of the shareholders. For example the management may choose accounting policies that make it look as if the company has done better then it actually has. To facilitate this problem an audit is made.

What is the role of an auditor?

An auditor is an independent party (i.e. an accounting firm) that is employed to review the financial statements. They do not test to see how the figures were actually obtained (i.e they don’t read every single receipt etc) but they make a view as to whether the financial statements provide a true and fair representation of the financial statements contained in the financial report. This means the will look to see whether the reports comply with GAAP.

What is an unqualified opinion?

When auditors make an unqualified opinion they in effect saying that in their opinion, they believe that the statements provide a true and fair view of the company

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The efficient market hypothesis stipulates that an investor can not consistently make abnormal risk-adjusted returns from trading the market. The theory explains that a stock is efficient if the following three criteria hold:
1. The share price reflects all relevant information
2. The share price adjusts rapidly to new information
3. The share price is an unbiased estimate of it’s true value

The premises of an efficient market are:
1. A large number of competiting profit-maximizing participants who analyze and value securities independtly of each other
2. New information regarding securities comes into the market in a random fashion
3. Profit maximizing investors adjust the share price rapidly to reflect the effect of new information

If we look at the stock market, we have thousands of investors globally that react almost instantaneously to any new piece of information. Investors have different analysing techniques (fundamental, technical, multiples approach etc) as well many assumtptions. Finally with the internet, instant access to news and even a business TV channel (CNBC) information is plentiful. We could therefore conclude that there is strong evidence to support this theory.

However academics are divided in regards to how efficient the market really is. The efficient market hypothesis is divided into three categories:

Weak form efficiency: In a weak-form efficient market the current share price should reflect all relevant historical information such as past prices, volume, PE ratio etc. For this reason future stock prices are unpredictable and the stock should follow a random walk. Following this idea, if we were to look at a chart of a stock it should be just as random and variable as simply tossing a coin. Furthermore technical analysis (which uses past stock price information to predict subsequent price changes) would be useless

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Calculate the WACC of ATL limited, given the following information:

ATL has a long term bond with:
1. A face value of $1,000 (more…)

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Hey everyone,
Welcome to businessed101.com I hope that this provides you with the neccessary support to excel in Finance251. Below I have listed a few tips so that you (more…)

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The Capital Asset Pricing Model (CAPM) is the most common technique used to determine the expected return of a stock. The formula is:

Re = rf + β(Rm-rf) 

(more…)

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If you have read the article Systematic & unsystematic risk you should be aware that a firm faces two types of risk. However as an investor we a re only concerned with one type of risk: Systematic risk. In this article I will explain why investors are not interested in unsystemctic risk and I will introduce a variable used to calculate the systematic risk of a company. (more…)

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The risk of stock can be divided into two categories:

Systematic/Undiversifiable/Market risk: Risk that can not be eliminated through diversifcation. It is risk that affects all stocks. For example this can include macro-economic factors such as interest rate changes, inflation etc. A simple example of this is the risk relating to the credit crisis. The credit was a global, industry wide event and No company was able to avoid this credit risk. The relative effect on an individual stock was determined by it’s sensitivity to the variables in action (i.e. its debt structure). In finance the senstivity of a stock to systmatic risk is known as beta. 

Unsytematic risk/unique risk: Risk that can be eliminated by diversification. Unsystematic risk is firm specific risk. For example the a unique risk of an icecream owner would be the weather. In bad weather the compnay would obviously generate worse sales then in sunny weather. Another example would be a mining company. The return they generate from the sale of the commodity’s their mine is determined by commodity prices. Therefore the price of commodities would be an unsytematic risk.

Therefore the total risk of an individual stock is determined by:

Risk = Systmatic risk + Unsystematic risk

However, we can argue that unsystmatic risk can be eliminated through diversification. For more information on diversification click here.

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The winners curse is a common argument used to explain the reason for underpricing an IPO. The idea works like this:

Imagine there are two investors “Mr Smartie” and “Mr Slow”. Both investors invest in IPO’s. Mr Smartie is an informed investor and so only invests in underpriced IPO’s. By contrast Mr Slow is an uniformed investor and so is unselective in his IPO investments. In other words, he will invest in both underpriced and overpriced IPO’s. When an IPO is underpriced both uninformed investors (Mr Slow) and informed investors (Mr Smatie) will invest. In this situation we will see oversubscription and so each investor will receive a small allocation of shares. By cotrast when an IPO is overpriced only uninformed investors (Mr Slow) will invest. This will not cause an oversubscription and so each investor will receive a full allocation of shares.

As we can see here, although Mr Slow is unselective in his IPO decisions he will receive a greater allocation of overpriced IPO’s. AS we would expect these stocks to perform worse then the underpriced stocks on the first day, we would expect to see Mr Slow do worse then the average return on IPO’s. This is known as winner’s curse. Academics argue that to attract both uniformed as well is informed investors, firms choose to underprice their IPO’s

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