Modern Finance Key

| (TCO 1) The Accounting Equation is used to develop the organization's financial reports. (1) Describe what assets value would be if Liabilities are $12,000 and Owners' Equity is $50,000 by showing the Accounting Equation (10 points), and (2) provide an example of two asset accounts that could contain the value. (10 points)

The accounting equation: Assets = Liabilities + Owner’s Equity. Assets are the resources of the company. Examples include cash, land, buildings, and equipment. Liabilities are “outsider claims”, the company’s obligations to creditors. Examples include accounts payable, notes payable, and income taxes payable. Owner’s Equity represents “insider claims” of the company or the owner’s share of the assets. If a business is keeping accurate records this equation should always be in balance.

- A firm has a market value equal to its book value. Currently, the firm

1. Current liabilities 2. Usual valuation of long-term liabilities 3. Disclosure notes 4. Long-term liabilities 5. Commercial paper

According to Kimmel, Kieso and Waygandt (2011), "the revenue recognition principle requires that companies recognize revenue in the accounting period in which it is earned." Basically, this means that revenues should be recognized (or in other words recorded) on completion of the process of revenue generation i.e. once revenue has been earned. This is as per the accrual basis of accounting. Essentially, revenue recognition derives its significance from its utilization when it comes to the determination of the specific accounting period in which earnings should be recorded.

The revenue recognition principle dictates that revenue is recognized in the period in which the cash is received.

The current assets are those which are readily convertible into cash and cash equivalents due to their highly liquid nature and also form part of working capital of the company’s operations. However, the long term assets in contrast are not liquid because since they have a useful life of more than a year and hence their full value cannot be easily realized within

Under GAAP, it is possible to use cash-basis or accrual basis accounting for revenue recognition. Under cash basis, revenue is recognized with payment is received. Under accrual basis, revenue is recognized when it becomes economically significant. GAAP has specific requirements for various industries on when an event qualifies to be recognized as revenue.

The income statement is on a cash basis, hence we start with a budgeted income statement.

Timing of revenue recognition is a crucial part in revenue recognition. According to US GAAP, revenue should be recognized when it is realized/realizable and earned (FASB, 1984, Para. 83).

The revenue recognition principle is a foundation of accrual accounting and one of the main principles of GAAP. The revenue recognition principle is a set of guidelines that helps accountants to identify when a revenue event has taken place and how to appropriately record cash exchanges before, during, and after the revenue event. According to the revenue recognition principal, revenue must (1) be realized or realizable and (2) earned, in order to be recognized. According to the SEC revenue is realized when (1) Persuasive evidence of an arrangement exists, (2) Delivery has occurred or services have been rendered, (3) The seller’s price to the buyer is fixed or determinable, and (4) Collectability is reasonably assured. It is essential

I came up with $3.2m by taking the 1st quarter revenue of $718,000 which is historically approximately 22.5% of the yearly revenue.  Assuming this holds true again in 1991, the annual revenue in 1991 will be around $3.2m.  This is a 19% year over year increase in revenue for BLC, which is in line with their year over year growth in 1989, and less than the 34% in the best year, 1990.

Computed: PPE = $6876M / $21,695M = 31.7% Intangible assets = $4041M / $21,695M = 22% Computed: $3,374M / $4,841 = 70% Computed: Accounts payable = $4461M / $13,021M = 34.2% Long-term debt = $2651M / $13,021M = 20.4% Computed: Long-term investments = $8214M / $22,417M = 36.6% Current assets = $7171M / $22,417M = 32%

To arrive at a total company value, or enterprise value, we simply have to take the present value of the cash flows and the Terminal value, divide them by the discount rate and, finally, add up the results. If we are discounting free cash flow of the firm at the weighted average cost of capital, this would give the value of the firm, so it would be necessary to deduct net debt in order to arrive at the equity value. In this report, simply use FCF in the year of 2011 to compare the value of the firm to the stock price in the year end of 2011.

Cash as in paper currency is the most liquid form of asset because it hold qualities such as, it is a medium of exchange, a unit of account, portable, durable, divisible and fungible (interchangeable) (Brunner, K and Meltzer, A. [1971]. The Uses of Money). I.e. a £10 note in my wallet is valued the same as a £10 in another person’s wallet.