ECON 1 Lecture Notes - Lecture 2: Net Income, Savings Account, Earnings Management
Document Summary
Distortions can come from: measurement error caused by accounting rules, no future sales, can"t capitalize r&d costs, lack of perfect foresight, bad-debt pension estimates, loan loss provision, managerial manipulation, earnings management, timing/magnitude of earnings. Steps in accounting analysis: identify key accounting policies, ksf and krf, assess accounting flexibility, reduce or improve earnings informative, accounting quality, consistency with gaap and with underlying economics, evaluation overall quality of firm"s disclosure, voluntary, transparency. Savings account: beginning balance + interest withdrawals = ending balance. Interest income = withdrawals + (ending balance beginning balance) Performance: value generated by investment / initial output. Interest rate = withdrawals + increase in balance / beginning balance. Roe = distributions to equity holders + change in equity / beginning equity. Investment: economic value of the firm"s equity, pv of expected future cash flows. Economic income = distributions to equity holders + change in investment, change in economic value of the firms equity before distributions are made.
