Page 177 - DCOM507_STOCK_MARKET_OPERATIONS

Stock Market Operations

Notes 2. Inventory:
Inventory valuation is done based on two methods:
FIFO – First in, first out method
LIFO – Last in, first out method
3. Depreciation: Several depreciation methods may be used in financial statements that a
firm to the public.
(a) Straight line method
(b) Sum-of-digit method
(c) Double declining balance method
(d) Units of production method
The second and third methods are accelerated methods of deprecation. The second method may
be used to accelerate depreciation during a period of rapid production.

9.2.2 Accounting Income Effect on Balance Sheet

A balance sheet is a summary of account balance carried after the appropriate closing of the
books. Income statements deal with flows, whereas balance sheet deals with stocks. Since stocks
are accumulations of flows, vagaries that undermine the estimates of accounting income are
cumulated in certain sheet items.
For instance, the impact of inflation should be considered to make the balance sheet items
realistic. Measures suggested are:
1. Assets side:
(a) Report marketable securities at current value.
(b) Inventory should be valued at replacement cost.
(c) Land and natural resources to be shown at net realizable value (current market
price-future development, selling or interest costs.
(d) Plant & machinery at replacement cost.
(e) Goodwill
(f) R & D expenses
2. Liabilities side:
(a) Debt. In future, at the time of maturity it is repaid in cheaper money units (rupees).
It is a gain to shareholders.
(b) Deferred taxes.
(c) Retained earnings.

9.2.3 Forecasting Earnings

It is necessary to estimate a stock’s future income because the value of the share is the present
value of its future income. This can be done by focussing on:
1. Identification of variables: Basically changes in income result from changes in:
(a) Operations and Earnings: The operating cycle of a firm starts with cash converted into
inventory. Inventory turns into sale and accounts receivables, which finally become
cash.

172 LOVELY PROFESSIONAL UNIVERSITY