Creative Accounting

What is Creative Accounting? Creative accounting or aggressive accounting is a method used to manipulate financial figures. It does not violate the letter of the law or accounting standards but it is very much against their spirit. Moreover, creative accounting certainly does not provide the true and fair view of an enterprise that accounts are … Read more

Window Dressing

What is Window Dressing? Window dressing is when managers in an organization take measures to make their financial statements appear better than they actually are. The basic idea of window dressing is to mislead shareholders and investors by presenting a favorable picture of the organization’s performance. For example, if a company has many shareholders who … Read more

Enterprise Value

What is enterprise value (EV)? Enterprise value (EV) is an economic measure reflecting the market value of the whole business. It is also called ‘Entity Value’ or ‘Firm Value’. It is the sum of claims of all the security holders, i.e., debt holders, preference shareholders, minority shareholders, common equity shareholders and others. Enterprise value is … Read more

Carrying Value or Book Value

What is Carrying Value? Carrying value or book value is the value of an asset according to the figures shown (carried) in a company’s balance sheet. Carrying value is calculated as the original cost of the asset less any depreciation, amortization, or impairment costs. Formula to Calculate Carrying or Book Value Book Value or Carrying … Read more

Indifference Analysis

What is Indifference Analysis? It is through ‘debt-equity mix’ that financing decision are made to increase EPS of a company, EBIT-EPS analysis involves determining the ‘crossover’ or ‘indifference’ EBIT at which the EPS is the same between two financing alternatives. In other words, the use of a financial break-even level, and the return from alternative … Read more

Combined Leverage

What is Combined Leverage (CL)? Combined leverage (OL + FL) is expected to take care of the total risk of the company, i.e., the risk arising out of operating leverage and the risk arising out of financial leverage and their net effect on the EPS. As we know already, operating leverage has its effects on … Read more

Financial Leverage

What is Financial Leverage? If operating leverage results from the existence of operating expenses in the enterprise’s income stream, then financial leverage results from the presence of fixed financial charges in the firm’s income stream. In fact, financial leverage relates to financing activities, i.e., the cost of raising funds from different sources carrying fixed charges … Read more

Operating Leverage

What is Operating Leverage? The leverage associated with investment activities or asset acquisition is called operating leverage. In fact, the relationship between sales revenue and EBIT is termed as operating leverage because when the sales level increases or decreases, EBIT also changes. That means, the operating leverage measure the relationship between sales revenue and EBIT. … Read more

What is leverage?

Definition of Leverage Leverage refers to employment of an asset or source of funds for which the enterprise has to pay a fixed cost or fixed return. In other words, it refers to a relationship between two variables. Such variables may be cost, output, sales, revenue, earnings before interest and taxes (EBIT), earnings per share … Read more

DuPont Analysis

DuPont Analysis – A Significant Measure For Investment Decisions The proponents of DuPont analysis believe that ‘measuring assets at ‘ gross value’ removes the incentive to avoid investing in new assets. Explanation During 1970s DuPont Corporation used a performance measurement different from the common measurement applied by business enterprises for measuring their investment projects. The … Read more