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Accounting and business valuation methods

This book explains the methods used in accounting and business valuations by using the fictional story of a new start-up business, from original concept to eventual acquisition. Enamoured with entrepreneurial spirit, a business woman buys her family’s secret salad dressing recipe from her brother and sets up a business.

Chapter 1 illustrates double entry bookkeeping and how to prepare a Trial Balance, Profit and Loss Account and Balance Sheet and also discusses the working capital cycle, asset management and how to negotiate with banks. At the forefront of this chapter is how the combination of inexperience and insufficient funds can lead to near disaster, which is clearly illustrated via the fictional story.

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Chapter 2 shows how to produce a 5-year plan and discusses capital structures and the importance of getting gearing right. The fictional business woman, Amanda, raises equity through a wealthy business angel who operates as if he were a venture capital firm. This chapter discusses the basic tools of analysis to enable Amanda to assess her business and which ratios are of utmost importance in certain circumstances. Finally, Amanda is made aware that controlling cash is a key requirement in any business and why the Cash Flow Statement is probably the most important statement in a set of accounts. The reader learns the possible exit strategies for a small business in this position.

Chapter 3 covers financial reporting and the International Financial Reporting  Standards (IFRS) used by quoted companies that replaced UK GAAP (generally
accepted accounting principles). We see that the Profit and Loss Account is replaced by an Income Statement and that the Balance Sheet and Cash Flow Statement use different terminology and have a different format than before. We discuss the essential changes from UK GAAP to IFRS being the move away from historical cost accounting to fair value accounting and how the new system is less prudent than the old.

In Chapter 4, Amanda receives a telephone call that leads to the sale of her business and a new company is set up by her acquirer. She becomes a director of the new company: after all taxes are paid she has over £1 million in the bank and considers building an external portfolio. This chapter illustrates how IFRS accounts might be interpreted and how such evaluations can sometimes give the assessor a small advantage in the market place. Different methods used to value companies are illustrated. Four case studies featuring real events and real company accounts illustrate the points made in this chapter.