Essential Concepts in Corporate Finance and Financial Reporting

Equity and Shares Fundamentals

Venture Capital and Initial Public Offerings (IPOs)

Key Formulas and Metrics

• Venture Capital (VC) Calculation: VC = X / V
• Operating Income (OI): OI = s * [1 - percentage of VC²]
• Payoff Monitoring: (Percentage × Cash Flow if Monitor) - Cost of Monitoring
• Cost of Underpricing: Shares Issued × (True Stock Value Pre-IPO - Actual IPO Price)
• Valuation Scenarios:
  • UT + I if P < Value of the Firm
  • UT if P > Value of the Firm
• Value of Right: True Value of Stock - Strike Price

Earnings Per Share (EPS) Calculations

Rights Issues and Adjustment Factors

• Theoretical Ex-Rights Price (Pₓ): Pₓ = ((P₀ × N₀) + Pᵣ) / (N₀ + 1)
  (Note: Pᵣ is not included in Bonus Issues)
• Adjustment Factor: Pₓ / P₀

Corporate Payout Policy

Dividend Policy Irrelevance Theory

Assumptions for Irrelevance:

1. Investment is held constant.
2. No transaction costs.
3. Efficient capital markets.
4. Managers maximize shareholders' wealth.
5. No taxes.

Criticisms of Irrelevance

• Bird in the Hand argument
• Tax effects
• The Clientele Effect
• Signaling theory
• Agency Costs

Statement of Comprehensive Income

The statement is typically divided into two main sections:

1. Profit or Loss (Net Income)

• Gain on sale
• Income tax expense
• Net Gain (Profit)

2. Other Comprehensive Income (OCI)

• Unrealized gains
• Reclassification adjustment (Always negative; represents the net gain of the whole thing)
• Net Gain (OCI)

Total Comprehensive Income (Sum of Profit or Loss and OCI)

Statement of Changes in Equity

This statement tracks movements across key equity components:

Total Equity

Income Tax Calculation and Accounting

The following steps outline the calculation of the final tax liability. (Items in bold relate to accounting entries.)

Income Tax Composition

1. Profit Before Tax
2. +/- Adjustments

   (Note: If there is a reversion, the negative adjustment is inserted without multiplying by the percentage. A Deferred Tax Asset (DTA) is then created in the accounting entries, which must be adjusted by the tax rate percentage.)

3. Gross Taxable Base
4. - Compensation
5. Taxable Base
6. (Tax Base × Tax Rate)
7. Gross Tax Liability
8. - Deductions / Other Benefits / Allowances
9. Total Tax Liability (Final Tax)
10. - Withholdings / Payments on Account
11. Tax Due / Tax Refund

Accounting Entries for Income Tax

These entries record the tax liability and deferred tax movements:

1. Record Total Tax Liability:
   Debit: Total Tax Liability
   Credit: Tax Authorities (Withholdings) + Tax Due
2. Record Payment of Tax Due:
   Debit: Tax Due
   Credit: Banks (Same amount as Tax Due)
3. Record Deferred Tax Adjustment (Adjusted to the Tax Rate %):
   Debit: Deferred Tax Expense
   Credit: Deferred Tax Asset (DTA) (Same amount as Deferred Tax Expense)
4. Close Tax Accounts to Retained Earnings:
   Debit: Retained Earnings
   Credit: Total Tax Liability + Deferred Tax Expense