Hotel California Student Coaching Slides

Gross Margin Gross Margin or Gross Profit is sales revenue minus cost of goods sold. This definition is for a retailer or manufacturer, not a service company. Footnote 2 tells what is included in cost of revenues, which is subtracted from the revenues to yield gross margin. Footnotes to the financial statements provide readers information that help them better understand the accounting rules, assumptions and items in the statements. 13

Cash Flow Income statements are prepared on the accrual basis to measure earning activity, not cash flow. Differences in accrual income and cash occur: From matching expenses against revenues regardless of the timing of cash payments, such as depreciation, bad debts, estimated warranties, etc. From following revenue and expense recognition rules rather than computing the actual payments to suppliers and receipts from customers. From cash payments/receipts for items that only impact the balance sheet, e.g., dividends, capital contributions loans, or equipment purchases. 13

Cash Flow-Continued In this case, you are provided information about non-cash expenses on the income statement. In addition, this is an income statement for a sole-proprietorship (SP.) In this company, the owner provided work that others would have been paid to perform. She took that money in the form of a drawing account, not a salary. 13

Draw vs. Expense Corporations record all obligations for services received as expenses. Expenses are deducted from revenues to yield income. Drawing accounts in SPs are treated as distributions of profits to owners. These are not treated as expenses of operating. Critical Thinking: If you are valuing a sole-proprietorship and owners have rendered services and have only received drawings in return, what should you do, if anything? 13

Present Value Present value is a technique that considers the time value of money. PV allows cash amounts expected to be paid or received at different times to be brought to present day values so they can be combined. If amounts differ over time calculate the present value of a single sum, if amounts are equal each period, calculate the present value of an annuity. Critical Thinking: What would go into the decision to use an 8% discount rate? Why is present value calculated on cash flow and not on income? Assume that you can receive $500,000, $515,000, and $600,000 over a 3 year period and the present value of those sums at 8% is $1,495,370. Explain what that means in simple terms. 13

Expected Value Expected Value is a method of calculating an average that places weights on the items being averaged. The weights represent the probability of each item occurring. Experts believe that in valuations of this type a 40% weight should be given to the gross profit value and a 60% weight should be placed on the present value of cash flows. 13

Credibility of Financial Statements To be credible, the financial statements must be prepared in accordance with generally accepted accounting principles (GAAP.) To assure yourself that this has occurred, you need a signed opinion letter attached to the financial statements. Three forms of letters might be attached: Compilation letter Review letter Audit opinion These involve differing degrees of work, but are signed by CPAs. CPAs are tested on their knowledge and their practice is regulated. 13

NEGLIGENCE Duty of Care Owed by Defendant to Plaintiff Breach of the Duty of Care by the Defendant Causation Damages 13

DUTY OF CARE Duty Arising out of Contract Assumption of Duty Foreseeable Plaintiff within the Zone of Danger Duty Arising out of Contract Assumption of Duty 13

BREACH OF DUTY OF CARE Standard of Care a defendant owes the plaintiff a duty to act as would an ordinary prudent person under the same or similar circumstances 13

CAUSATION Causal Connection: there must be a causal connection between the negligent conduct and the resulting injury. But For Test: But for the defendant’s negligence, the plaintiff would not have sustained the loss. 13

Contract Formation Offer & Acceptance are Required The Terms of Acceptance Must Mirror the Terms of the Offer

Writing Requirement Contracts for the Sale of Real Property: Under the Statute of Frauds, Contacts for the Sale of Real Property Must be in Writing and Authenticated by the Person against Whom Enforcement is Sought