Accrual Vs. Cash Basis Accounting

The key difference between the two primary accounting methods, cash-base and accrual accounting, is timing. With cash-based accounting, transactions are recorded when cash actually changes hands. With accrual accounting, transactions are recorded when they occur, regardless of when the cash is actually received or paid. Most of the time, both methods are approved accounting methods […]

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Introduction to Derivatives

Long vs. Short Being “Long” something means you own it. Being “Short” something means you have created an obligation that you have sold to someone else. If I am long 100 shares of AAPL, that means that I possess 100 shares of AAPL. If I am short 100 shares of AAPL, that means that my […]

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Accounting Standards and Financial Statement Basics

Valuation advisors use financial statements of a firm to assess its financial performance, therefore standardization of accounting practices is necessary. Accounting standards provides guidelines on how to prepare and present income and expenses, assets, owners’ equity and liabilities for a firm and makes the financial statements comparable to one another. There are two primary standard-setting […]

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Types of Value- Fair Market Value, Intrinsic Value, Liquidation Value, Investment Value

To understand and differentiate types of value is important as valuations are needed in many ways for many reasons. Fair Market Value is the most probable price which a company or an asset would bring in a competitive and open market (in a fair sale). It is an estimate of the market value that an […]

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Advantages and Disadvantages of Business Organization Types

It is important to understand the different types of business organizations types such as a sole proprietorship, partnership, and corporation. A business’s organizational structure influences issues, legal issues, financial concerns, and personal concerns. A Sole Proprietorship is a business with one owner who operates the business on his or her own or employ employees. It […]

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The Capital Asset Pricing Model (CAPM) and the Security Market Line (SML)

The Capital Asset Pricing Model (CAPM) calculates the expected return on equity of an individual company. It is based on the expected rate of return on the market, the risk-free rate and the beta coefficient of an individual security or portfolio. Where,  Re: Return on Equity Rf: risk-free rate E(Rm): expected rate of return on market, and […]

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Yield Spreads & Credit Spreads

A yield spread is the difference in yield between two bonds or two types of bonds. It can be used to compare the maturity, credit rating, liquidity and risk of two bonds, or of one bond to a benchmark. This difference can be measured in the following ways: Absolute yield spread or nominal spread: (yield […]

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Financial Ratio Cheat Sheet

This is a summary of financial ratios commonly used in the evaluation of a company. Liquidity ratios 1)      Current Ratio = Current Asset / Current Liability 2)      Quick Ratio = (Cash + Marketable securities + account receivables) / Current Liability 3)      Cash Ratio = (Cash + Marketable securities)/current Liability 4)      Cash flow from operations ratio […]

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Yield Curves and Term Structures

A yield curve plots the yield to maturity (TYM) of similar debt securities, against the time to maturity (term). A normal yield curve is upward-sloping and shows higher yield for longer maturity due to the risks associated with the passage of time. However, the yield curve can be inverted and downward-sloping if the economy is […]

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Collateralized Bond Obligations

A collateralized bond obligation (CBO) is an investment-grade bond backed with by a pool of high-yield junk bonds, which are not considered to be of investment-grade on a standalone basis. The junk bonds in a CBO are from different classes and purposely chosen to be diversified. CBOs offer fixed-income investors the opportunity of enjoying the […]

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