Accruals. Agenda: Review accrual accounting Statement preparation exercise Discuss cases International Paper (accruals) Sears (A/R reserves) Projections (Coca-Cola mini-case). Accrual Accounting. Revenue recognition principle: record revenues when “realized or realizable” and “earned”
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Revenue recognition principle: record revenues when “realized or realizable” and “earned”
Matching principle: once the revenues have been recognized, match against those revenues the expenses incurred in order to generate them.
Bad debt expense xxx
Allowance for UA xxx
While some of its underlying drivers seem to have a value flavor, our research shows the tool to be style-agnostic. In a large-cap universe sorted on the basis of price to book, it is effective for both value and growth stocks (Display 2). In fact, it was somewhat more effective for stock selection within growth.
(US Value Equities)
Essentially, we believe that balance-sheet accruals speak to the persistency of reported earnings. It implies that investors take earnings reports literally and treat all sources of reported earnings as equal, although the accrual component of reported earnings is less reliable than the cash component.
US Value Equities
Source: Richard G. Sloan, The Accounting Review, July 1996
Halsey, R.F. 2001. "Stationary Components of Earnings and Stock Prices," Advances inQuantitative Analysis of Finance and Accounting, vol. 9, pp 81-110.
CFRA Comments on Accruals Stock Prices,"
Source: CFRA 2004
Coca-Cola mini-case Stock Prices,"