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What does the phrase sustainable earnings mean? What types ofearnings are not sustainable? What are abnormal earnings? Brieflydescribe the key features of the abnormal earnings approach tovaluation.

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Lelia Lubowitz
Lelia LubowitzLv2
2 Oct 2018

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There are two common calculation methods to valuing a venture -- PE and Cap Rate. The PE approach multiplies expected earnings atexit time at “comparable PE.” The Cap Rate capitalizes expectedearnings at exit at a “comparable cap rate”. The two methods arereally just the same. A PE of 20 is a cap rate of 5%. The trick isselecting the “comparable.” What is the key difficulty?

Short Answers Answer in your ownwords

1. State the accounting equation. Provide an example for eachpiece of the equation.

2. What are the three TYPES of businesses? Provide an example ofeach. Please be original and do NOT use companies listed in ourtextbook.
3. The three types of businesses may be organized into one of thefour business entities. What are the four business entities?

4. Of the four business entities, which is most likely to carrythe lowest risk to the owner?

5. List which account appears in both Income Statement andStatement of Retained Earnings. List which account appears in bothStatement of Retained Earnings and Balance Sheet?

December 1, 2016

1. When the value of a trading security goes up, what is theeffect on

Net Income

Other Comprehensive Income

Comprehensive Income

Assets

Retained earnings

Accumulated other comprehensive income

Owners’ Equity

2. When the value of an available for sale security goes up,what is the effect on

Net Income

Other Comprehensive Income

Comprehensive Income

Assets

Retained earnings

Accumulated other comprehensive income

Owners’ Equity

3. When the value of a HTM security goes up, what is the effecton

Net Income

Other Comprehensive Income

Comprehensive Income

Assets

Retained earnings

Accumulated other comprehensive income

Owners’ Equity

4. When the value of an Equity Method security goes up, what isthe effect on

Net Income

Other Comprehensive Income

Comprehensive Income

Assets

Retained earnings

Accumulated other comprehensive income

Owners’ Equity

5. Extra credit. Available for sale securities are reported atfair value. This means that changes in fair value are reported inother comprehensive income. Can you provide a scenario where thecompany purchased a bond classified as AFS and the market value ofthe bond has remained constant throughout, yet the company willneed to report other comprehensive income as a result of theinvestment? Hint: Refer to the two-word phrase that describes theaccounting method for HTM.

6. The two basic securities investments are stocks and bonds.For each of the following classifications, indicate whether theycan include stocks, bonds, or both:

Trading securities

AFS (for this there was a rule change: you will get the answerright under either rule)

HTM

Equity Method

7. What does AFS stand for?

8. What does HTM stand for?

9. Trading securities and AFS are carried at ___________________ .

10. HTM are carried at __________ ______________ .

Isn’t accounting fun? Like most worthwhile things, it’s onlyfun if you invest a lot of time into it.

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