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Archive for the ‘Accounting’ Category
Sunday, February 28th, 2010
Friday, February 26th, 2010
Beta is a measure of the systematic risk of an individual stock. Beta measures the sensitivity of a stocks return against the return on the market. A beta of 1 means the stock is as equally sensitive as the market. A beta greater than one means the stock is more sensitive than the market. A beta of less than one means the stock is less sensitive than the market. For example, a beta of 1.5 means that on average when the market rises or falls by 1%, the stock will rise or fall by 1.5%
- In finance, the higher the risk of an asset, the greater the return. For example, a bank bill is less risky than a share in Telecom. Therefore the expected return on a Telecom stock will be greater than that on a bank bill.
- However, because an investor can eliminate unique risk simply by diversifying, we are only compensated for the systematic risk of a stock.
- Therefore to measure the expected return of a stock, we use Beta.
How is Beta measured?
To determine the beta of a stock we plot the daily, weekly or monthly return of the market with the daily, weekly or monthly return of the individual stock. The slope of the “line of best fit” measures beta.
How is Beta measured?
To determine the beta of a stock we plot the daily, weekly or monthly return of the market with the daily, weekly or monthly return of the individual stock. The slope of the “line of best fit” is beta.
Weighted Average Cost of Capital
Friday, February 26th, 2010WACC:
WACC is defined as the weighted average cost of capital. In essence it measures the average return demanded by all capital providers. That is it calculates the return demanded by equity holders, debt holders and other holders.
Fomula:
WACC =[ D/V ]* rd (1-Tc) + [E/V]* re
Where:
D is the market value of debt
E is the market value of equity
V is the market value of debt + equity
Rd is the cost of debt – normally the current yield on its bonds
Re is the cost of equity
Tc is the tax rate.
Tip: Assuming a project has the same capital structure of the firm (that is the same debt to equity) than a projects discount rate should be WACC
What if we have other capital providers?
Simply workout the percentage of capital provided by the other capital providors and multiply it by their required rate of return (i.e. the promised dividend rate).
Example:
AGY ltd has $500million of equity and $200million of debt. The cost of debt is 6% and the cost of equity is 12%. Tax is 30%. What is the WACC of AGY ltd?
Answer:
WACC = D/V * rd (1 – Tc) + E/V * re
= 200/700 *0.06 * (1-0.3) + 500/700* 0.12
= 9.8%
General Test Questions Answers
Monday, February 22nd, 20101. A company is defined as a separate legal entity. This means it is separate from its owners and has its own legal rights. For this reason a person suing a company would not sue the owner but the company itself. This distinction is very important as it provides a number of advantages. Most notably it has unlimited life and in the event of bankruptcy owners will only lose what they put in. In other words they do not need to give up their own personal assets to pay debt holders. The obligation of a firm to its debthodlers is limited to the assets it holds
2. Limited liability means that a firm’s obligation to its debtholders is limited to the money the owners initially contributed. In other words, in the event of bankruptcy or liquidation, the owners are not obliged to contribute their personal assets to compenate the loss to debtholders. However John has a covenant that requires him to use his own personal assets as collateral. Therefore his obligation is not just limited to his initial investment but also his personal assets. In the event of bankruptcy and liquidation, the bank can cease his private home to pay off debt. Therefore the benefits of a limited liability are not an advantage for John.
3. The role of an auditor is to independantly adddress whether financial statements are faithfully represented. They check to see whether the financial statements comply with accounting standards and with GAAP. However they do not make any judgement as to how the accounting numbers were actually obtained.
An unqualified opinion means that auditors believe the financial staments have been prepared in accordance with GAAP etc.
4. Historical cost is a method whereby we value an asset based on its cost or purchasing price less any accumulated depreciation and accumulated impairment losses. This is more reliable than valuing an asset based on the revaluation model as it may be verified by source documents (receipts).
5. As an accountant there is often a trade-off between relevance and reliability. Relevance relates to the materiality of financial information. It asks the question, is financial information relevant for decision making? This primarily relates to the timeliness of accounting numbers. By contrast reliability, relates to the faithful representations of financial information. It explains that financial information must faithfully represent what it purports to represent. This means that that financial information is based on neutrality and prudence
When valuing property plant and equipment we can value it by historical cost or market value. Historical cost is reliable as it can be verified by a source document (receipt of purchase). In other words, it is not subjective and is valued with neutrality. By contrast valuing PP&E based on market valuation, relevance and the timeliness of information is enhanced. This aids in determining the future economic benefits of the asset. However it is subjective and lacks the neutrality of historical cost
Financial statement review answers
Monday, February 22nd, 2010a.
Balance Sheet:
Inventory $5000
Accounts Payable $15,000
Accounts Receivable $20,000
Income Statement:
Sales $20,000
Cost of Goods Sold $10,000
Cash Flow Statement:
Nothing
b.
Balance Sheet:
Insurance receivable: Up $18,000 Cash: Down $24,000 Equity: Down $6,000
Income Statement:
Insurance expense: $6,000
Cash Flow Statement:
Operating Cash outflow: $24,000
c.
Balance Sheet:
Property, Plant & Equipment: Up $250,000
Accumulated Depreciation: Up $20,000 Equity: Down $20,000
Income Statement:
Depreciation expense $20,000
Cash Flow Statement:
Investing Cash Outflow: $250,000
e.
Balance Sheet:
Assets: Cash: Up $7,000 (12*1000 – 1000*5) Inventory: Up 2,500 (500*5) Accounts Receivable: Up $6,000 (500*12)
Liabilities: Accounts payable: Up $5,000 (1000*5)
Equity: $10,500 (7000+2500+6000-5000)
Income Statement:
Revenue: $18,000
Cost of Goods Sold: $7,500
Net Profit: $10,000
Cash Flow Statement:
Operating Cash Flows: Up $7,000
Sunday, February 21st, 2010
Module 01: Role of Accounting and Finance: This module is simply an introduction to the course and accounting and finance in general. In particular you must be aware of the terms such as separate legal entity, limited liability and the differences between partnerships and companies. Generally this material will only be examined in multi-choice questions.
Module 02: Financial Position: This module introduces you to the balance sheet and the underlying assumptions and conventions of accounting. All these concepts must be fully understood as they are the basis to the preparation and presentation of financial statements.
Module 03: Financial Performance: This module describes the Income statement. In particular you must fully understand the difference between cash and accrual accounting (an almost guaranteed assignment and/or test/exam question) as well as the definition of revenue and expenses – in particular when these items should be recognised.
Module 04: Cash Flows and Equity: This module introduces you to the cash flow statement. You must be familiar with the three categories of a cash flow statement (operating, investing, and financing). You must understand depreciation, the differences between the cash flow statement and the income statement and how to value inventory. Furthermore you must understand the Audit report.
Module 05: Financial Statement Analysis One: This module is about interpreting financial statements. The module is very important as it makes up a large percentage of the test and (generally) 10-15% of the exam. You must fully understand how to calculate ratios and the significance of each ratio. This does not mean memorising the formula, but simply understanding how the variables relate. i.e. ROA = EBIT/Total Assets. Quite clearly this relates to profitability. What’s more you must ensure you understand what causes these ratios to change over time.
Module 06: Cost-volume-Profit Analysis: This module introduces students to management accounting. At the end of this module you must be able to identify the different costs, (variable costs, fixed costs etc) as well as understand the Cost Volume Profit Model.
Module 07: Budgeting: There are two aspects to this module. The first part of this module looks at the master budget. You must understand why a firm would prepare a master budget and the benefits of budgeting. The second part is about operation budgeting. This is a very important concept. You must understand how to prepare the table and how to calculate the corresponding figures.
Module 08: Budget and Control: This module teaches students how to evaluate performance. By the end of this module students must understand and calculate favourable and adverse variances. They must understand how to prepare a flexed budget and also understand why favourable variances can be just as important as adverse.
Module 09: Costing: There are two concepts that must be learned in this module – relevant costing and full absorption costing. I have provided a good explanation of these concepts with exercises. Give them a try and then get plenty of practice.
Module 10: Time Value of Money: This module introduces students to the time value of money. Many students lose focus with modules 10 and 11 and by the time the exam arrives they panic and lose 20+marks. So stay focused and make sure you understand EVERYTHING. In particular you must understand the two present value tables and when you must use them. Conceptually you must understand why the value of money is more now then later.
Module 11: Capital Investment: Practice! Practice! Practice! Understand the four capital budgeting alternatives and remember to use CASH FLOWS not accounting profits for NPV! Don’t forget sunk costs, opportunity costs and depreciation and tax.
Module 12: Financial Management: Understand the operating cash cycle, why it is important and what causes the operating cash cycle to rise or fall. Further to this you must also be aware of the advantages and disadvantages of debt and equity.
Tuesday, October 13th, 2009
Hi everyone,
I have answers to all of semester two 2008 exam answers. The price is $10. Each answer, even multi choice is explained in detail. To buy a copy, email:
or text:
0210724101
Wednesday, September 16th, 2009
To view answers to Accounting 101 Semester 1 2009 Test answers attend my workshop
Mid semester Test prep questions (1)
Wednesday, September 9th, 2009Question 1:
A sportsware manufacturer sells tennis rackets for $90 each. Variable costs are $50 per unit. Fixed costs are $15,000 (excluding depreciation). Its only depreicable asset is a machine with a value of $110,000, a useful life of 6 years and a salvage value of 30,000. What is the accounting break-even? Ignore taxes
(a) 708
(b) 564
(c) 1080
(d) 956
Question 2:
If the sportsware manufacturer in the previous question expects sales of 1200, what is its profit to the nearest thousand
(a) $5,000
(b) $10,000
(c) $15,000
(d) $20,000
(e) $25,000
Question 7: A company had the following ratios in years 2008 and 2009:
Ratio Name 2008 2009
Current Ratio 0.5 0.5
Acid ratio 0.3 0.4
What caused the acid ratio to increase while the current ratio remained the same?
(a) An increase in cash
(b) The creation of prepayments
(c) An increase in inventory
(d) A decrease in Inventory
Question 8:
Which of the following is not a ratio used to address the profitability of the firm?
(a) Return on Assets
(b) Return on Equity
(c) Interest Cover
(d) Gross Profit Margin
Question 9:
On the cash flow statement the payment of a dividend would be classified under
(a) Operating activities
(b) Investing activities
(c) Financing activities
(d) Neither
Question 10: Which of the following is not a Current Asset:
(a) Inventory
(b) Property expected to be sold in the next twelve months (more…)
WANT ANSWERS TO PAST ACCOUNTING 101 TESTS???
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I am offering one exclusive workshop on Wednesday the 16 of September (Week 7). The cost will be $10 and it will be help between 2-3 in OGGB room 321. We will go over a past test and I will explain each answer in detail. To book a place email: businessed101@gmail.com or text 0210724101