The economist often works with business valuation informationWord下载.docx
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The economist often works with business valuation informationWord下载.docx
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inBusinessValuations
TomClevenger*
WashburnUniversity
and
GaryBaker**
Ofteneconomistsareaskedtovaluebusinesses.Manytimestheinformationprovidedisminimalandofquestionablevalue.Datamaybeprovidedbypartieswishingtobiasthevaluation.Thefinancialstatementstypicallyprovidedarebalancesheetsandincomestatements.Thesesourcescanbefraughtwitherrors,omissionsandevenfraud.Thecashflowstatementsderivedfromthesestatementscanbemisleadingandanyanalysisfromthesespuriousstatementsissuretobequestioned.
Asetoftoolsexistthatcanbeusedtoestablishthereliabilityofthesefinancialstatements.Reliabilityisusuallytakenforgrantedinbasicaccountingandfinanceandrealityisoftennotasassumed.Thetoolkitusesbasicaccountingandmathematicallogic.Thislogic,teamedwithbasicaccountingdefinitionsandconventions,allowstheeconomistsomecomfortthatthestatementsprovidedforuseinthebusinessvaluationarefreeofobviousmisinformation.Thesetoolscanalsohelpuncoversomelessdetectablefraud.
Fortheanalysistoproceedtheremustbetwobalancesheetsandtheinterveningincomestatement.Byapplyingtheaccountingconventionsanddefinitions,real,probableandpossiblesolutionsaredevelopedandexplained.Afterexaminingtherelationshipbetweenthefinancialstatementsoneisbetterabletovaluethebusinessandbeconfidentoftheanalysis.
Introduction
Mostschemesusedtohidebusinessvaluesaredeceptivelysimpleinoriginandoperation.Beingawareofthebasicschemesmakestheeconomistabletobetterjudgeabusinessesvalue.Theexistenceofoneormoreoftheschemescanleadtheeconomisttoseekfurtherinformation.Theamountsoffraudssumtostaggeringamountsestimatedat$660billioninannuallossesin2003.
Fraudexists.ThisiseasilyseenintherecentfinancialfailuresoflargecorporationssuchasEnrontonameoneofmany.RegulatoryreactiontothesehasbeentheSarbanes-OxleyAct.Regulatoryactionatsuchalevelwhereprofessionalsinaccountingandauditingcanbemisledindicatethatcautionisrequiredatalllevelsofbusinessvaluation.
OnecanpickupanyofthejournalsoftheAmericanInstituteofPublicAccountants’“JournalofAccountancy”,theInstituteofInternalAuditor’s“InternalAuditor”,theInstituteofManagementAccountant’s“StrategicFinance”,andtheAmericanAssociationofCertifiedFraudExaminer’s“TheWhitePaper”and“FraudMagazine”andfindreviewsoftheaccountingbasicsfortheseprofessionalsrelatedtofraud.Timelyinformationisalsofoundonlinethroughtheseorganizations.(www.aicpa.org,www.theiia.org,www.imanet.org,)TheWallStreetJournalisanothercontinuoussourceoffinancialmisrepresentations.Frauds,largeandsmall,usuallyarenotcomplex.Eventhemethodsofmanipulationsaresimpleonceexposed.Havingsometoolstoassistintheearlydetectioncanbeofgreatusefulnessinbusinessvaluationsforaneconomist.
Basicaccountingandfinanceusuallymaketheassumptionthattheinformationpresentedisreliable.Thereexiststhepotentialthatbiasexistsinfinancialinformationprovidedbythoseseekingtoovervaluetheirassetsorundervaluetheirbusinessasthesituationmerits.Onecanuseverybasicassumptionstogleanacomfortlevelaboutinformationtheeconomistisgiventouseinabusinessvaluation.
Assumptions
Thispapermakesseveralassumptions:
Thebusinessbeingvaluedwillcontinueinbusinessfortheforeseeablefuture;
thefinancialinformationinitiallyprovidedisminimal;
thematerialreceivedmaybeofquestionablecharacter;
andtheinformationprovidedbythebusinessmaybedesignedtobiasthevaluation.
Theeconomistvaluingthebusinessmustunderstandthefinancialstatementsmaybelessthanstraightforward.Recordsanddocumentsmaybealteredorcreatedforpurposesotherthanvaluingthebusiness.Accountingprinciplesaresubjecttointerpretationandtheapplicationoftheprinciplesmaybeaggressiveorconservativedependingonthepersoncreatingthestatements.Theomissionoradditionoftransactionsmayalsoalterthestatements.
Theincomestatementgoalistomatchtheexpensesincurredtotherevenuegenerated.Thisistheaccrualmethodofaccountingandtodothismethodfouradjustmentstotimingofrevenuesandexpensesareneededwherebyitemsaredeferredoraccrued.Theadjustmentswhenmisusedareinrevenuetimingmanipulation,assetvaluemanipulation,expenseconcealmentordefermentandliabilityconcealment.
Theevaluatorneedonlyrecognizethattheaccountantisacceleratingorslowingrevenuesorexpensesappearanceinfinancialrecords.Thesefouraccrualsanddeferralsarethenoffsetto,orfrom,thebalancesheet.Suchadjustmentstotheaccountingrecordsarereflectedintheensuingfinancialstatements.Thepreparer,bytimingtheseadjustmentsnearyear-end,canchangecompletelythefinalreportedresultsintheshortrun.WorldComaccomplishedbyputtingexpensesonthebalancesheetbutevenindoingsotherevenuesandearningsornetincomeandcashflowweremovingatdifferentratesanddirectionsindicatingsomethingwasamiss.
IncomeStatementsandBalanceSheets
Theincomestatementandbalancesheetscanbeviewedaspartsofavideogame.Theincomestatementcanbeviewedasseriesofframesofagame.Eachframerepresentsaneventortransaction.Revenuesarepointsforthecompanyandexpensesarepointsfortheopponent.Iftherevenuefortheperiodexceedstheexpensesfortheperiodthecompanywins.Theexcessoftheperiodisprofits.Unlikesports,theexcessordeficiencycarriesovertonewperiodsasretainedearnings.
Thebalancesheetrecordsthestandingoftheteambeforeandafterthegame.Oncethestandingoftheplayerisdeterminedthegamerestarts.Theoutcomeofthegameissubjecttomanipulationbyalteringwhenthevideostopsandrecordsthestandings.Theresultsoftheaccrualmethodandthecashmethodofaccountingproducethesameresultsinthelongrunfromopentocloseofabusiness.
Iftheeconomistisconcernedthatthevalueofthebusinesshasbeenmisrepresentedthenoneshouldlooktotheincomestatementofseeifrevenuesareoverstated,expensesareunderstated,orboth.Thebalancesheetneedstobeexaminedtoseeifthevalueoftheassetsisinflatedorthevalueofliabilitiesminimized.Normallytheassetsareundervaluedonthebalancesheetsincethevaluesarebookvaluesandnotmarketvalues.
ExampleofIncomeStatementandBalanceSheetManipulation.
Thevalueofacompanymaybedeterminedforseveraldifferentreasons:
addinganewpartner,apartnerexitsthebusiness,adivorce,thesaleofthebusiness,bankruptcy,applicationforaloan,orlossofearnings.Inthisexample,theGTCompanysellsandservicesproductsinahightechfield.ThehistoricalincomestatementsandbalancesheetsarepresentedintablesIandIIrespectively.
TableIIIpresentsselectedratiosthatsuggestthefirmisdoingwell.Assumingthevalueofthefirmisestimatedbycapitalizingthefirm’scashflow,thevalueofthefirmhasincreasedeachyear.Ifthecapitalizationrateis20%,thevalueofthefirmhasincreasedfrom$67,000in2001to$727,000in2004.Regardlessofthecapitalizationrate,thevalueofthefirmhasincreasedmorethantentimesfrom2000to2004.
Thereshouldbesomeconcernwiththeratiosfor2004.Thegrossprofitmarginin2004indicatesasignificantdecreaseinthecostofgoodssold.Whilethismightbepossiblethroughtechnologicaladvances,thechangesuggestsfurtheranalysisisnecessary.
Fiveadditionalratiosshouldalsoserveasredflags.Theratiosarecreditcardexpenseasapercentofsales,accountsreceivableturnover,day’saccountsreceivableoutstanding,inventoryturnoverandnumberofdaystoturninventory.TheseratiosarepresentedinTableIV.
CreditcardexpenseisthediscountGTmustpaythecreditcardcompany.AssumeGTpays10%foreachdollarofcreditsales.Duringtheyears2001,2002and2003creditcardexpensewas5%ofsales.
In2001thecreditcardexpenseof$5,000meansthatcreditsaleswere$50,000fortheyear.Creditsalesfor2002and2003were$75,000and$105,000respectively.Ineachyearthecreditsaleswereabouthalfoftotalsales.
In2004creditcardexpensewas$13,000.Ifthesame5%appliedthenthecreditsaleswouldbe$130,000.Ifcreditsaleswereone-halfoftotalsalesthentotalsalesshouldbeabout$260,000.However,salesarereportedat$450,000.Thismeans,a.errorsexist,b.thefirmhadanenormousincreaseincashsales,orc.someoneisfalsifyingsalesdocuments.(Checkcashingcompanyguaranteefeesmayalsobeusedforsuchanindicator.)
Theaccountsreceivableturnoverhasdecreasedfrom6.67timesayear,orevery54.75daysto1.48timesperyearorevery247days.Thismeanthatcredithasbeenextendedtoagroupofverypoorpayingcustomersor,perhapsthesalesrecordsareinerrororarebeingfalsified.
Inventoryturnoveralsoindicatesunusualactivity.In2001theturnoverwastwiceayearorevery183days.Butin2004inventoryturnedover25timeorevery14.6days.
Alloftheseratiossuggestthatmaybegamesarebeingplayedinthesalesareathatisfraudulent.Industryratioswillalsobehelpfulinthisareaforaddedanalysis.
RelatedIncomeStatementandBalanceSheetAccounts
Understandingtherelationshipofincomestatementaccountsandbalancesheetrelatedaccountslendsunderstandingtoabusinessvaluation.Twoseparategroupsofaccounts
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