The accrual accounting method allows companies to count their chickens before they hatch by considering credit as part of a company’s income. “Accounts receivable” and “settlement due from customers” can appear as line items in the assets portion of a company’s balance sheet, but these items do not represent completed transactions, for which payment has still to be received. They do not, therefore, count as cash. However, it must be noted that the opposite can also be true. A company may be receiving massive inflows of cash, but only because it is selling off its long-term assets. A company that […]

This approach views the business as a set of assets and liabilities that are used as building blocks to construct or substantiate the value of the business. The economic principle of substitution applies i.e. What will it cost to create another business like this one that will produce the same economic benefits for its owners? Since every operating business has assets and liabilities, a natural way to address this question is to determine the value of these assets and liabilities, with the premium difference being the business value. Sounds simple enough, but the challenge is in the detail: figuring out […]