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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
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
slide2
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

slide6
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