Rediscovering the Ben - Lecture Two

Comparative Balance sheet Approach: -

As we discussed in our First lecture that we consider the Balance sheet approach however we have to be careful about certain things: -        

1. - The Great issue that we observed is with thing called " Reported Earnings in your financial statement".

- Since earning can be affected by various reason therefore it's important to know that the true nature can only be understood by the Balance sheet development.

1. Example: -Earning of Company: - 2979000 /-less: - sale of stock: - (60000) -----------------------------------------Net Earning = 2919000/-indicated Earning = 3.17 per share plus = 9.11 (dividend) = 9.11=======================total = 12.32 /- However, they report the income of 14.73 per share.

Therefore, they lost the 2.41 /- per share somewhere along the line.

Reserve and Surplus: -

so, this above 2.41 is somewhere in Reserve and surplus.

Therefore, Reserve and surplus is something its part of equity however it should not constitute or created for liability.

Example: - Railroad

1945 1944

Denver operating revenue 74.8 Mio. 70.3 Mio

Net income before depreciation & taxes 27.72 Mio 23.22 Mio

the very poor reported of earning for 1945 than 1944 if we check that they charged "deferred Maintenace " 16 Mio compared to PY as 6 million.

and income tax 1 million and in Previous year half million.

therefore in 1945 both depreciation and taxes were way higher than 1944.

Therefore, we can conclude here look for unusual and non-recurring item and non-cash items since deferred maintained may give them lower income in one year, but it will give advantage in future year.