Creative Accounting

What is meant by Creative Accounting? Creative accounting or Aggressive accounting is a method adapted to manipulate the financial numbers, usually, within the letters of the law and accounting standards, but very much against their spirit and certainly not providing the true and fair view of an enterprise that accounts are supposed to project. Areas …

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Window Dressing

What is Window Dressing? ‘Window dressing is the adaptation of the rules to present financial statements in a better light’. In this sense, it is the ability of the enterprise to make decisions which affect their apparent performance in their financial statements. Therefore, ‘window dressing is making a situation appear better than it actually is’. …

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Enterprise Value

What is enterprise value (EV)? Enterprise value (EV) is an economic measure reflecting the market value of the whole business. It is also called ‘Entity Value’ or ‘Firm Value’. It is the sum of claims of all the security holders, i.e., debt holders, preference shareholders, minority shareholders, common equity shareholders and others. Enterprise value is …

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Carrying Value or Book Value

What is Carrying Value? In accounting ‘Carrying Value or Book Value‘ is the value of an asset according to its balance sheet. In other words, it is the value at which an asset is shown (carried) on the balance sheet. For assets, the value is based on the original cost of the asset less any …

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Indifference Analysis

What is Indifference Analysis? It is through ‘debt-equity mix’ that financing decision are made to increase EPS of a company, EBIT-EPS analysis involves determining the ‘crossover’ or ‘indifference’ EBIT at which the EPS is the same between two financing alternatives. In other words, the use of a financial break-even level, and the return from alternative …

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Combined Leverage

What is Combined Leverage (CL)? Combined leverage (OL + FL) is expected to take care of the total risk of the company, i.e., the risk arising out of operating leverage and the risk arising out of financial leverage and their net effect on the EPS. As we know already, operating leverage has its effects on …

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Financial Leverage

What is Financial Leverage? If operating leverage results from the existence of operating expenses in the enterprise’s income stream, then financial leverage results from the presence of fixed financial charges in the firm’s income stream. In fact, financial leverage relates to financing activities, i.e., the cost of raising funds from different sources carrying fixed charges …

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Operating Leverage

What is Operating Leverage? The leverage associated with investment activities or asset acquisition is called operating leverage. In fact, the relationship between sales revenue and EBIT is termed as operating leverage because when the sales level increases or decreases, EBIT also changes. That means, the operating leverage measure the relationship between sales revenue and EBIT. …

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What is leverage?

Definition of Leverage Leverage refers to employment of an asset or source of funds for which the enterprise has to pay a fixed cost or fixed return. In other words, it refers to a relationship between two variables. Such variables may be cost, output, sales, revenue, earnings before interest and taxes (EBIT), earnings per share …

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DuPont Analysis

DuPont Analysis – A Significant Measure For Investment Decisions The proponents of DuPont analysis believe that ‘measuring assets at ‘ gross value’ removes the incentive to avoid investing in new assets. Explanation During 1970s DuPont Corporation used a performance measurement different from the common measurement applied by business enterprises for measuring their investment projects. The …

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Trend Analysis of Financial Statements

What is Trend Analysis of Financial Statements? Trend analysis of financial statements helps the users of information to observe the percentage changes over time of the selected data. For example, it helps the users to observe whether the net profit of the enterprise is increasing, decreasing or stable, or there are ups and downs over …

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Funds From Operations (FFO)

What is Fund From Operations (FFO)? Funds from operations is the difference between the inflow of funds in the form of expenses. The funds from operations are the largest sources of funds which are used for repayment of loans, purchase of assets, payment of dividends, taxes, etc. Explanation The controversial point here is that an …

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Statement of Financial Position

What is a statement of financial position? – Definition A Statement of Financial Position is a snapshot in time looking always at past events, i.e. transactions that have already taken place. An accounting period of 12 months is generally used for this type of financial reporting. Users of this type of information include management, owners, …

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Financial Statement Analysis

What is Financial Statement Analysis? Financial statement analysis is one of the most fundamental financial research & analysis practices. To put it in layman’s terms, it’s the process of analyzing financial statements so that decision-makers have access to the right data. It’s also used as a method for taking the proverbial pulse of the business. …

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Horizontal Analysis of Financial Statements

What is Horizontal Analysis? Horizontal Analysis is one of the ways of analyzing financial statements. It compares historical data, which includes ratios and line items, over a series of accounting periods.  Accounting period can be a month, a quarter or a year. This method of analysis is also known as Trend analysis. The Horizontal method …

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Marshalling of Balance Sheet

Definition The arrangement of assets and liabilities in balance Sheet is called “Marshalling“. Explanation The main purpose of Balance Sheet is to show the financial position of the business. Therefore, assets and liabilities in Balance Sheet should be shown in such an order which help to understand the financial position easily. To serve this purpose assets …

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Revenue

Definition The amount a business earns by selling goods or providing services is called revenue. Explanation The remuneration of goods sold or services provided is called revenue. It includes both cash received for goods sold and services rendered and accounts receivable for goods sold and services rendered on credit. Revenues appear in trial balance are …

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Financial Statements

Definition and Explanation The financial statements are reports prepared for a variety of readers and are based on information provided by the accounts and other sources. The income statement consists primarily of the titles and balances of the temporary accounts. The balance sheet consists primarily of the titles and balances of the permanent accounts, including …

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Balance sheet

Balance Sheet – Definition A balance sheet is a list of assets and claims over a business at some specific point of time and is prepared from an adjusted trial balance. It shows the financial position of the business by detailing the sources of funds and the utilization of these funds. A balance sheet shows …

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Objectives of the balance sheet

The general objective of the balance sheet is to describe the firm’s economic condition at a point in time. In its broadest theoretical sense, economic condition is the firm’s ability to continue operating and thus is based upon both earning power and solvency. Due to the practical difficulties of assessing this theoretical ability, accountants apply …

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Components of the balance sheet

Once the general concept of the balance sheet is established, it is appropriate to turn to define the elements or components of the balance sheet. The three components to be discussed here are assets, liabilities, and owners’ equity. Subsequently, the actual structure of the balance sheet will be analyzed. Assets Many definitions of assets have …

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Income statement

Definition of the Income Statement The basic objective of the income statement is to describe the income achieved by the reporting entity during a specific accounting period. Objectives Experience has shown that the rules for measuring the amount of income are complex and far from unanimously accepted among users and preparers. The complexity can be …

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