EBITDA is commonly used to evaluate a company's profitability and operational performance by eliminating the effects of varying accounting policies. However, EBITDA is not a defined accounting term and its calculation can vary. While EBITDA strips away non-cash expenses like depreciation, it does not account for important cash expenses such as taxes, capital expenditures, and debt financing costs. As a result, EBITDA should not be viewed as a proxy for a company's cash flow or ability to generate cash. Several examples are provided to illustrate situations where EBITDA could be misleading, such as when revenue is recognized far in advance of cash collection or estimates of accounts receivable collectability turn out to be inaccurate.
This presentation aims:
– To understand the purpose of the Statement of Changes in Equity
– To appreciate that the presentation of the Statement of Changes in Equity is dependent on the form of business organization
– To identify the elements of the Statement of Changes in Equity
– To determine the nature of the different equity accounts used by corporations
– To prepare a Statement of Changes in Equity
This presentation aims:
– To understand the purpose of the Statement of Changes in Equity
– To appreciate that the presentation of the Statement of Changes in Equity is dependent on the form of business organization
– To identify the elements of the Statement of Changes in Equity
– To determine the nature of the different equity accounts used by corporations
– To prepare a Statement of Changes in Equity
statement of cash flow and statement of retained earnings.sabaAkhan47
its a lecture on statement of cash flow....in this lecture the following things are explained...
1) objectives of cash flow.
2) purpose and uses of cash flow.
3) methods to determine net cash flow
4)relation between different statements...
5) statement of retained earnings,
6) and a case study of D'Leon Inc.
7)security,debt security, equity security, amortization,accruals.
Solution Manual Advanced Financial Accounting by Baker 9th Edition Chapter 16Saskia Ahmad
Solution Manual, Advanced Accounting, Thomas E. King, Cynthia Jeffrey, Richard E. Baker, Valdean C. Lembke, Theodore Christensen, David Cottrell, Richard Baker, Advanced Financial Accounting, Advanced Financial Accounting by Baker Chapter 18, Advanced Financial Accounting by Baker Chapter 18 9th Edition, 9th Edition,
This presentation was made at the Washington Area Community Investment Fund (Wacif). This presentation goes over how to use financial statements and tools to make decisions.
Financial statement analysis is the process of reviewing and evaluating a company's financial statements (such as the balance sheet or profit and loss statement), thereby gaining an understanding of the financial health of the company and enabling more effective decision making. Financial statements record financial data; however, this information must be evaluated through financial statement analysis to become more useful to investors, shareholders, managers and other interested parties.
statement of cash flow and statement of retained earnings.sabaAkhan47
its a lecture on statement of cash flow....in this lecture the following things are explained...
1) objectives of cash flow.
2) purpose and uses of cash flow.
3) methods to determine net cash flow
4)relation between different statements...
5) statement of retained earnings,
6) and a case study of D'Leon Inc.
7)security,debt security, equity security, amortization,accruals.
Solution Manual Advanced Financial Accounting by Baker 9th Edition Chapter 16Saskia Ahmad
Solution Manual, Advanced Accounting, Thomas E. King, Cynthia Jeffrey, Richard E. Baker, Valdean C. Lembke, Theodore Christensen, David Cottrell, Richard Baker, Advanced Financial Accounting, Advanced Financial Accounting by Baker Chapter 18, Advanced Financial Accounting by Baker Chapter 18 9th Edition, 9th Edition,
This presentation was made at the Washington Area Community Investment Fund (Wacif). This presentation goes over how to use financial statements and tools to make decisions.
Financial statement analysis is the process of reviewing and evaluating a company's financial statements (such as the balance sheet or profit and loss statement), thereby gaining an understanding of the financial health of the company and enabling more effective decision making. Financial statements record financial data; however, this information must be evaluated through financial statement analysis to become more useful to investors, shareholders, managers and other interested parties.
FINANCIAL ACCOUNTINGTopic 1 Define and articulate the four basi.docxAKHIL969626
FINANCIAL ACCOUNTING
Topic 1: Define and articulate the four basic financial statements.
Reference: Kimmel, Paul. D., Weygandt, Jerry. J. & Kieso, Donald. E. (2006). Financial Accounting: Tools for Business Decision Making (4th ed.). Hoboken, NJ: John Wiley & Sons. Used with permission from the publisher.
Basic Financial Statements
Assets, liabilities, expenses, and revenues are of interest to users of accounting information. For business purposes, it is customary to arrange this information in the format of four different financial statements, which form the backbone of financial accounting:
· To present a picture at a point in time of what your business owns (its assets) and what it owes (its liabilities), you would present a balance sheet.
· To show how successfully your business performed during a period of time, you would report its revenues and expenses in an income statement.
· To indicate how much of previous income was distributed to you and the other owners of your business in the form of dividends, and how much was retained in the business to allow for future growth, you would present a retained earnings statement.
· To show from what sources your business obtained cash during a period of time and how that cash was used, you would present a statement of cash flows.
To introduce you to these statements, we have prepared the financial statements for a marketing agency, Sierra Corporation.
Income Statement
The purpose of the income statement is to report the success or failure of the company's operations for a period of time. To indicate that its income statement reports the results of operations for a period of time, Sierra dates the income statement “For the Month Ended October 31, 2007.” The income statement lists the company's revenues followed by its expenses. Finally, Sierra determines the net income (or net loss) by deducting expenses from revenues. Sierra Corporation's income statement is shown in Illustration 1.
Illustration 1 Sierra Corporation's income statement
Why are financial statement users interested in net income? Investors are interested in Sierra's past net income because it provides information about future net income. Investors buy and sell stock based on their beliefs about Sierra's future performance. If you believe that Sierra will be even more successful in the future and that this success will translate into a higher stock price, you should buy its stock. Creditors also use the income statement to predict the future. When a bank loans money to a company, it does so with the belief that it will be repaid in the future. If it didn't think it would be repaid, it wouldn't loan the money. Therefore, prior to making the loan the bank loan officer will use the income statement as a source of information to predict whether the company will be profitable enough to repay its loan.
Amounts received from issuing stock are not revenues, and amounts paid out as dividends are not expenses. As a result, they a ...
Accounting for Managers Assignment1The purpose of th.docxdaniahendric
Accounting for Managers Assignment
1
The purpose of the financial statements is to provide information about a company.
There are four main financial statements; namely income statement, statement of cash
flow, statement of financial performance and statement of changes in equity which
provides assistant to external users in making informed decisions about the company
such as resource allocation like investment and financing. (IAS 1)
Question a
The income statement also known as the statement of profit or loss depicts the
performance of the company by showing the revenue generated, less the expenses
incurred to obtain the profits or losses during an accounting period which would should
the performance of the company. If the revenue of a company over a period of time is
higher than the expenses, there will be a profit. Similarly, if the revenue of a company
over a period of time is lower than the expenses, the company will incur a loss. The
income statement may be disclosed by monthly, quarterly, or yearly which helps external
users to predict the company’s future performance.
Few examples of external users who use the income statement are shareholders,
investors, and creditors or lenders. Investors use the income statement to determine if
the company provides a good return on their investment and thus, make decisions such
as whether to sell or keep the shares they own in the company. Good performance can
generate high revenue leading to high profits, which in turn results in higher dividend for
the investors. Alternatively, low performance leading to lower dividends might not attract
investors’ attention and may sequentially result in investors selling their shares.
Creditors or lenders will evaluate base on the income statement whether the company
has a good financial standing as they have to take into account the company’s ability to
pay back the loan and interest. Lenders are more liable to loan the company if the
company’s primary activities involves equity financing, as they have a higher assurance
that the loan can be repaid. Equity financing refers to raising capital from selling shares
of the company to the investors. Alternatively, if the company’s primary activities involves
debt financing whereby the company takes on more debt in order to finance its
operations, the lenders might not be keen to finance the company as there is no
assurance of the company’s ability to pay off all its loans and interests.
The statement of comprehensive income highlights the change in equity of the company
derived from the operating and financial events are transacted during the period. It
https://www.coursehero.com/file/55819661/Bridging-Accounting-for-Managerspdf/
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https://www.coursehero.com/file/55819661/Bridging-Accounting-for-Managerspdf/
Accounting for Managers Assignment
2
begins with the profit or loss derived from the income ...
Accounting for Managers Assignment1The purpose of th.docxkatherncarlyle
Accounting for Managers Assignment
1
The purpose of the financial statements is to provide information about a company.
There are four main financial statements; namely income statement, statement of cash
flow, statement of financial performance and statement of changes in equity which
provides assistant to external users in making informed decisions about the company
such as resource allocation like investment and financing. (IAS 1)
Question a
The income statement also known as the statement of profit or loss depicts the
performance of the company by showing the revenue generated, less the expenses
incurred to obtain the profits or losses during an accounting period which would should
the performance of the company. If the revenue of a company over a period of time is
higher than the expenses, there will be a profit. Similarly, if the revenue of a company
over a period of time is lower than the expenses, the company will incur a loss. The
income statement may be disclosed by monthly, quarterly, or yearly which helps external
users to predict the company’s future performance.
Few examples of external users who use the income statement are shareholders,
investors, and creditors or lenders. Investors use the income statement to determine if
the company provides a good return on their investment and thus, make decisions such
as whether to sell or keep the shares they own in the company. Good performance can
generate high revenue leading to high profits, which in turn results in higher dividend for
the investors. Alternatively, low performance leading to lower dividends might not attract
investors’ attention and may sequentially result in investors selling their shares.
Creditors or lenders will evaluate base on the income statement whether the company
has a good financial standing as they have to take into account the company’s ability to
pay back the loan and interest. Lenders are more liable to loan the company if the
company’s primary activities involves equity financing, as they have a higher assurance
that the loan can be repaid. Equity financing refers to raising capital from selling shares
of the company to the investors. Alternatively, if the company’s primary activities involves
debt financing whereby the company takes on more debt in order to finance its
operations, the lenders might not be keen to finance the company as there is no
assurance of the company’s ability to pay off all its loans and interests.
The statement of comprehensive income highlights the change in equity of the company
derived from the operating and financial events are transacted during the period. It
https://www.coursehero.com/file/55819661/Bridging-Accounting-for-Managerspdf/
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https://www.coursehero.com/file/55819661/Bridging-Accounting-for-Managerspdf/
Accounting for Managers Assignment
2
begins with the profit or loss derived from the income.
Equity is the difference between assets and liabilities as shown on a balance sheet. In other words, equity represents the portion of assets that are fully owned by the owners (stockholders, partners, or proprietor) of a business.
What are the elements of financial statements.pdfsarikabangimatam
Financial accounting and tax accounting are branches of accounting concerned with summarizing, analyzing, and reporting the financial transactions of a business.
The final outcome of Financial Accountants & Tax Advisors in Chicago is related to the preparation of financial statements for users of accounting information.
Basics of finance and accounting written for owners of business including family business. Step by step learning by all professionals and self employed besides business owners. At the end of each chapter there are questions for revision & practice.
What is the TDS Return Filing Due Date for FY 2024-25.pdfseoforlegalpillers
It is crucial for the taxpayers to understand about the TDS Return Filing Due Date, so that they can fulfill your TDS obligations efficiently. Taxpayers can avoid penalties by sticking to the deadlines and by accurate filing of TDS. Timely filing of TDS will make sure about the availability of tax credits. You can also seek the professional guidance of experts like Legal Pillers for timely filing of the TDS Return.
The world of search engine optimization (SEO) is buzzing with discussions after Google confirmed that around 2,500 leaked internal documents related to its Search feature are indeed authentic. The revelation has sparked significant concerns within the SEO community. The leaked documents were initially reported by SEO experts Rand Fishkin and Mike King, igniting widespread analysis and discourse. For More Info:- https://news.arihantwebtech.com/search-disrupted-googles-leaked-documents-rock-the-seo-world/
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Cultivating and maintaining discipline within teams is a critical differentiator for successful organisations.
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Business Valuation Principles for EntrepreneursBen Wann
This insightful presentation is designed to equip entrepreneurs with the essential knowledge and tools needed to accurately value their businesses. Understanding business valuation is crucial for making informed decisions, whether you're seeking investment, planning to sell, or simply want to gauge your company's worth.
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Attending a job Interview for B1 and B2 Englsih learnersErika906060
It is a sample of an interview for a business english class for pre-intermediate and intermediate english students with emphasis on the speking ability.
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1. Building Blocks
By Blanche Zelmanovich and Coral M. Hansen
E
arnings before interest, taxes, depreciation
and amortization (EBITDA) is a measure
commonly used to evaluate a company’s
profitability and the operational performance of
its core operations as compared to its competitors,
as it eliminates the effects of varying accounting
policies, as further discussed below. EBITDA is
frequently used in company valuation; the determi-
nation of a purchase price and loan covenant defini-
tions are often quoted as multiples of EBITDA.
All of the components used to calculate
EBITDA can be found on a company’s income
statement. However, unlike the financial terms on
a company’s income statement and other finan-
cial statements, EBITDA is not a defined term
under Generally Accepted Accounting Principles
(GAAP), guidelines that regulate the preparation
of financial statements. This means that the meth-
odology of calculating EBITDA can vary from
one company to another — or even within the
same company from period to period. On a high
level, some very basic adjustments to EBITDA
can include onetime occurrences for items such as
restructuring charges, which are common practice
in distressed situations, to costs associated with
non-recurring litigation expense.
EBITDA is also commonly used by many
finance professionals as an estimate of a company’s
ability to generate cash. While a negative EBITDA
generally indicates that a business has a profitabil-
ity issue and insufficient cash flow from its core
operations, a positive EBITDA does not necessarily
mean that a business will generate cash. EBITDA
can be a useful metric for some companies, given
that it strips away non-cash reductions to earnings.
For example, “fixed assets” (also known as tangi-
ble assets or property, plant and equipment) is an
accounting term used for assets and property that
cannot easily be converted into cash. This can be
compared with current assets such as cash or bank
accounts, which are described as “liquid assets.”
The cost of purchasing a fixed asset is not recorded
as a reduction to earnings (i.e., placed on the income
statement) at the time of purchase. Rather, the ini-
tial cost is recorded on the balance sheet and later
allocated, as a depreciation expense, among peri-
ods in which the asset is expected to be used. To
further illustrate, if a company purchases a piece of
equipment for $100,000 and it is expected to last 10
years, a depreciation expense of $10,000 per year
for 10 years might be recognized, causing a reduc-
tion to earnings over time rather than in one lump
sum. Thus, manufacturing companies commonly
have large amounts of fixed assets and significant
depreciation charges, which are non-cash reductions
to earnings.
However, EBITDA is not synonymous with
cash flow. The “E” in EBITDA represents earnings,
not cash. EBITDA does not take into consideration
financing costs, investment in capital expenditures,
taxes and, in the cases of companies that grow
through acquisition, acquisition-related cash out-
lays such as the purchase of an additional business.
Analysts and buyers should not ignore these types
of costs, as the cash that is needed to finance these
obligations is necessary if the business wishes to
continue to operate and grow.
Further, EBITDA ignores changes in work-
ing capital, such as decreases or increases in
accounts receivable balances from prior periods,
which would indicate faster or slower conversion
of receivables to cash. Using the aforementioned
example, once the attorney finishes their case in
December, revenue is recorded on the income
statement and the amount owed by the client is
recorded as accounts receivable on the balance
sheet. Once the attorney collects the cash, their
client’s account receivable is reduced or removed.
Therefore, when the revenue was recorded in
December, EBITDA increased even though no
cash was received. When the client pays the bal-
ance due in a subsequent month, EBITDA is not
impacted, as EBITDA is calculated from the com-
pany’s income statement. As such, there are many
pitfalls that can come about by using EBITDA as
a proxy for cash from operations.
At a basic level, earnings in EBITDA are rev-
enues less expenses. Revenue recognition varies
across industries and does not always equate to
cash within the same time frame. For example, an
attorney may finish a huge case in December, but
may not collect the revenue earned for those ser-
vices until the following year. Those who work in
the professional services industry are all too aware
of this, which is a reason why most tax returns are
prepared using the cash method vs. the accrual
method of accounting. Under the accrual method
of accounting, the revenue earned in December will
increase December’s net income (earnings) and its
accounts receivable but will not increase, or change
at all, December’s cash flow, and therefore may not
be available to pay the current year’s income taxes,
as the collection of revenue would not likely occur
until the following calendar year.
Coral M. Hansen
CBIZ Corporate
Recovery Services
Los Angeles
The Basics of EBITDA
36 February 2017 ABI Journal
Blanche
Zelmanovich, CIRA is
a managing director
of CBIZ’s Corporate
Recovery Services
Practice in New
York. Coral Hansen,
CPA, ABV, CFE,
CFF is a managing
director in the firm’s
Los Angeles office.
Blanche Zelmanovich
CBIZ Corporate
Recovery Services
New York
2. As an example, the companies in the timeshare industry
recognize revenue far in advance of cash collection. In the
early 2000s, Sunterra Corp. was the world’s largest vaca-
tion ownership company, as measured by resort locations
and owner families. Only about 10 percent of the sales price
of the vacation ownership interest is paid in cash at the time
of the sale. Sunterra historically offered customer financing,
which was collateralized by the underlying vacation own-
ership interest. On average, the company financed approxi-
mately 80 percent of its domestic vacation ownership interest
revenues. Accordingly, the company did not generate suf-
ficient cash from sales to provide the necessary capital to
pay the costs of developing additional resorts and replenish
working capital.
To finance vacation ownership sales, Sunterra histori-
cally monetized the related mortgages receivable through
the use of off-balance-sheet conduits, securitizations,
whole mortgages receivable sales and other financial vehi-
cles. Therefore, using EBITDA can be misleading because
revenues earned do not always equate to cash in the same
time frame.
Another disadvantage of using EBITDA as a metric is it
fails to consider the uncertainty involved with the collection
of accounts receivable. As shown above, most of the rev-
enues earned in the sale of a vacation ownership interest are
not paid in cash but rather are financed and recorded by the
company as mortgages receivable. Under GAAP, a company
must evaluate its outstanding accounts receivable and esti-
mate how much of the total is likely uncollectible. Estimating
the collectability of accounts receivable is difficult, and com-
panies generally base their estimate on past experience.
Using Sunterra as an example again, in the fourth quar-
ter of 1999, the company recorded a $43 million after-tax
charge related to its mortgages receivable. The company
stated in its 1999 Form 10-K that “[t]his charge is the result
of an in-depth review of our balance sheet, which we initi-
ated at year-end.” The total mortgages receivable as report-
ed on Sunterra’s 1999 balance sheet was approximately
$244 million, net of an allowance for doubtful accounts
of approximately $20.1 million. Therefore, at that time,
Sunterra estimated that only 7.6 percent of its mortgages
receivable were uncollectible.
In 2000, the year after the write-down (or after-tax
charge), the company’s 2000 balance sheet stated mortgages
receivable of approximately $188.2 million, net of an allow-
ance for doubtful accounts of approximately $37.3 million,
increasing the percentage of mortgages receivable deemed to
be uncollectible from 7.6 percent to 16.6 percent. As you can
see, management’s initial estimated allowance for doubtful
accounts in 1999 of $20.1 million was not close to the actual
write-off of $43 million. Based on management’s statement,
the company did not perform an in-depth analysis each time
reserves were estimated, as is required by GAAP. As seen
in this example, the earnings used in EBITDA include esti-
mates, which are just that: estimates.
As a side note, in May 2000, Sunterra and numerous affil-
iates filed voluntary petitions for chapter 11 relief. For sever-
al months leading up to the filing, the company experienced
severe liquidity problems that arose in part because potential
lenders were unwilling to lend against the mortgages receiv-
able. If analysts and investors were using EBITDA solely
as a measure of the company’s ability to generate cash, they
would have been in for a surprise, as EBITDA was positive.
Estimates pertaining to the collectability of accounts
receivable is just one of many variables affecting the deter-
mination of earnings and therefore affecting the calculation
of EBITDA. Revenue recognition is a cornerstone of accrual
accounting together with the matching principle. According
to GAAP, revenue is recognized when realized or realizable,
and earned (usually when goods are transferred or services
are rendered) no matter when cash is received. The afore-
mentioned example involving attorneys’ fees illustrates the
concept of revenue recognition (recognizing revenue during
the period that it is earned). Similarly, the matching principle
requires a company to match expenses with the related rev-
enues in order to report a company’s profitability during a
specified time interval. These both determine the accounting
period in which revenues and expenses are recognized.
Other revenue recognition principles that do not correlate
with the receipt of cash include “barter” transactions com-
monly used by internet companies, and “pre-need” service
revenues of death-care companies (such as funeral homes),
for which cash is placed in a trust and revenue is reported
under the percentage-of-completion accounting method,
which can similarly result in a significant gap between rev-
enues and cash.
The general takeaway is that understanding the under-
lying information that supports the EBITDA calculation is
very important. Therefore, EBITDA should not be used in
a vacuum; it is important to look at other relevant financial
and industry metrics to truly, fully understand a company’s
financial condition. abi
ABI Journal February 2017 37
EBITDA should not be used in
a vacuum; it is important to
look at other relevant financial
and industry metrics to truly,
fully understand a company’s
financial condition.
Copyright 2017
American Bankruptcy Institute.
Please contact ABI at (703) 739-0800 for reprint permission.