M8 liabilities
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M8: Liabilities. A=L+OE Liabilities—all probable & estimable AP—Suppliers, AP Turnover (CGS/avg AP), Leaning on the Trade Accrued—Employees, interest, warranties… Possible INCOME misstatements (ethics) Big Bath. Financial Obligations Notes Payable—often from banks Bonds Payable—covenants

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M8: Liabilities

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M8 liabilities

M8: Liabilities

  • A=L+OE

  • Liabilities—all probable & estimable

  • AP—Suppliers, AP Turnover (CGS/avg AP), Leaning on the Trade

  • Accrued—Employees, interest, warranties…

    • Possible INCOME misstatements (ethics)

    • Big Bath


M8 liabilities

  • Financial Obligations

    • Notes Payable—often from banks

    • Bonds Payable—covenants

      • Discount—recog. interest > face

      • Premium—recog. interest<face

      • Gain/loss on repurchase

  • Credit ratings—Moody’s, S&P, Fitch

    • Business/Financial risks

    • liquidity, solvency, earnings


M9 owners financing

M9: Owners’ Financing

  • Preferred Stock—dividends, liquidation, restrictions on management

    • Often issued in acquisitions

  • Equity Carve-outs

    • Sell-off—sell for cash

    • Spin-off—issue shares of sub as dividend

    • Split-off—trade shares for common stock

  • Convertible debt/preferred stock—dilutes owners’ upside

  • Foreign currency—gains or losses as US currency losses or gains value—report in “Other comp. Income” in owners’ equity section


M14 costs

M14: Costs

  • Cost behavior—fixed, variable, mixed, step

    • FC can be committed (depreciation) or discretionary (advertising)

  • Cost estimation: FC+VC*Units

    • VC=Dif. in Costs/Dif. In Units

    • FC=Total Costs – VC*Units

  • Cost terms

    • Production: unit, batch, product, facility

    • Customer: units, order, customer, market


M15 cvp analysis

M15: CVP Analysis

CVP is used to determine for a given volume the costs, revenues, and profits

Assumptions: Fixed/Variable costs (linear), relevant range, constant mix or single product, single volume measure


M8 liabilities

Difference in income statements used:

Rev-VC=CM-FC=IBT

BE=FC/CMU, Q=(FC+RI)/CMU

Before Taxes: After Tax/(1-Tax Rate)

Operating Leverage: CM/IBT

Margin of Safety Ratio: (EV-BE)/EV


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