Accounting Equations
Financial statement elements (assets, liabilities, owners’ equity, revenue and expenses) are used as the inputs for the equations which feed into the preparation of a company’s financial statements. The balance sheet and income statement are two of the most popular…
Recording Business Transactions
An accounting system allows a company to translate its business activities into usable financial records. The company uses these financial records to assess its profitability, evaluate its financial position, and identify any business activity which requires further action. Recording Business…
Accruals and Valuation Adjustments
When preparing its complete financial statements, a company will review its operations in order to determine whether any accruals or adjustments are needed. This allows for allocation of revenue and expense items into the proper accounting period. The Need for…
Relationships Among Statements
Financial statements use the financial data that is reported in the accounting system to present data in a more meaningful manner. The primary financial statements are: balance sheet, income statement, statement of cash flows, statement of owners’ equity, and statement…
Flow of Information in an Accounting System
It is important for accountants to understand each step involved in an accounting system. This is because they are the ones who will be preparing the financial records which are subsequently presented in financial statements. Analysts, on the other hand,…
The Accounting Process in Security Analysis
Financial statements are products of the accounting process. They provide useful and meaningful information on the financial performance of a company. These pieces of information are particularly useful to managers, investors, creditors, and analysts who rely on them to make…
Benefits of Securitization
The Securitization Process Securitization involves transferring ownership of assets from original owners (usually individual borrowers) to a special legal entity. This entity, in return, issues asset-backed securities backed by these transferred assets. The pool of securitized assets from which cash…
Describe Securitization
A hypothetical financial institution, BCG Bank, decides to raise a $100 million loan by securitizing loans rather than issuing corporate bonds. The company sets up a legal entity, Loan Trust, to which it sells the loans. Such a legal entity…
Understanding Fixed-income Risk and Return
There are 3 sources of return in a fixed-income security: receipt of the promised coupon and principal payments; reinvestment of coupon payments; and/or capital gains or losses on the sale of the bond prior to maturity. A discount bond offers…
Macaulay, Modified, and Effective Durations
The duration of a bond measures the sensitivity of the bond’s full price (including accrued interest) to changes in the bond’s yield-to-maturity or, more generally, changes in benchmark interest rates. Bond duration estimates changes in bond price assuming that variables…
