3 - Basic review of financial statements and accounting concepts

Abstract

This chapter presents cash flow valuation, through a favor integrated approach that links the nominal financial statements in a consistent manner, and relies on the strengths and perspectives of the different financial statements to inform and improve the valuation exercise. The integration of the financial statements facilitates the sensitivity analysis that one can conduct on the key parameters of the model and provide an internally consistent validity check on the construction of the financial statements. Some basic principles for constructing document of financial statements (namely the income statement), the BS, and the cash flow statement (CFS) according to generally accepted accounting principles (GAAP), which are required for the valuation framework. In addition, the chapter discusses the construction of the CB statements, common financial statements, and basic accounting concepts that are used in accounting. Preliminary tables and calculations that are completed prior to the construction of the three financial statements and the basic accounting concepts are also explained.