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Accounting And Financial Methods And Tools

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Firm valuation relates to accounting in that it uses a combination of both accounting and financial methods and tools. Some of the accounting tools used includes the valuation of firms’ assets, valuation of a firm’s profit and loss and also the valuation of a firm’s obligations, which are liabilities. Just like accounting, firm valuation process follows defined steps so as to arrive at the correct value of the firm that is free from errors. “There are five steps involved; preparation and planning, adjusting the financial statements, choosing the business valuation methods, applying the selected valuation method and finally reaching the firm valuation conclusion.” (Candon, 78). On the first step, the most valuable thing is to determine the…show more content…
“After the determination of how and under what conditions of measuring the firm’s value, the next step is the gathering of relevant data and information that impacts the firm value.” (Howard, 97). Such data include; steady earnings above the industry norm, good marketing plans, skilled and motivated staff, and well documented financial and accounting statements and well detailed business procedures that are written down.
Some of the gathered data such as the firm’s historical financial statements are adjusted so as to prepare the inputs required for the firm’s valuation methods and hence it leads us to the second step. The main financial statements required for the firm’s valuation are the income statement and the balance sheet that are produced by the accounting process. This further shows the relationship between firm valuation and accounting. The best way to value a firm with a historical approach would be looking at the historical statements, income statement and balance sheet. Smaller firms should be looked at the last three to five years while larger firms should have a longer period to check. Due to the fact that, business owners have considerable discretion in how they use the firm’s assets and also what expenses and income they recognize, this rise the need to adjust the firm’s historical records. Constructing an accurate relationship between the required firm’s assets and
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