Confused financial ratios...

When we check "dividend" of private companies, we face some ratios in order to calculate the profit. For example, EPS is the abbreviation of "Earning Per Share," which means "Net income divided the number of outstanding shares." (To be exact, we need some adjustments about Net income and outstanding shares...)

Here are my memorandum for memorizing the following 2 ratios regarding "dividend."

1) Dividend payout ratio
It's defined as the ratio: "Dividend per share divided by EPS."
In considering that "share"s appeared in both numerator and denominator, we may regard as the ratio of dividend divided by earning. We can understand that it's the tendency of dividend compared to earnings or the company can prepare cash for dividend for investors.

2) Dividend yield
We define as ratio of "Dividend per share divided by MV per share." It's easy to understand when we invest private companies and have to choose some of them. We usually focus on profitability from the dividend or its MV(=Market Value). Dividend yield provides us some useful information about which option we should choose.

If Dividend yield is high, we may expect relatively high dividend compared to its stock. So, many people would expect its dividend, theoretically. On contrast, if Dividend yield is low, the stock price is relatively high compared to its dividend, and we might expect capital gain.

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At last, "yield" means the ratio of expectation, and in memorizing 2 ratios above, I notice the basic meanings: "payout" and "yield." Roughly speaking, "payout" is lots of money, and we need to think about liquidity. So, Dividend payout ratio is thought as "Dividend per Earning."
Meanwhile, "yield" means an expected ratio of profitability. So, Dividend yield is Dividend per MV.

Derivative transactions are increasing...

According to an article of "The Nikkei Financial Daily," derivative transactions are increasing in American banks. They say that Hedge funds have intended to use them for risk hedges, and interest, foreign exchange demands have increased. (Here is the article. (in Japanese) ) Gross transaction volume has increased by about 30% compared to the amount of last year.

As we know, derivative instrument is used for 2 methods. One is purely investment, and the other is used for hedge accounting. The latter usage, for example, is useful in fixing company's profit, if the company trades with foregin currency. With some commission expense to financial institutions, the derivative instruments provide such a company with stable profit.

Oh, time is up!! I have to return to study now. At last, we review 3 key characteristics of derivative instruments due to SFAS 133 in USGAAP, just in case.

1. underlyings and payment provision.
The instrument has 1 or more underlyings and an identified payment provision.

2. initial investment
The instrument requires no initial investment or an initial investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors.

3. net settlement
The terms of its contract require or permit net settlement, or provide for the delivery of an asset that puts the recipient in a position not substantially different from net settlement.

Valuation account

This is a memorandum on valuation account, which I studied yesterday. When we study accounting, we sometimes come accross "valuation account." The easiest topic is "allowance for uncollectible account." Assume that we have a lot of account receivable. It is slightly doubtful to collect all of them, in general. Then, according to thinking of "allowance," we can estimate "net account receivable,"which will be definitely collectible.

There are other accounts classified as valuation account:

• "Deferred gain" in sale-leaseback transaction
• "LIFO reserve" for evaluation of inventory and so on...

I found these were "assets" account, and is it essential for valuation account? In other words, are there any valuation account of "liability?"

Sales-type lease

Here is a memorandum of a transaction called by "sales-type lease." The other day, I picked up Direct financing lease(-> DFL) in this blog.This sales-type lease is similar to DFL, and their difference comes from a plug of cost of sales and the FMV of the assets. If there is such a difference, we would classify as sales-type lease and DFL is classified if cost of sales and the FMV of the assets coincide. Note that both of leases are lessor-side transactions and the lessee (in opposite side) is called capital lease in USGAAP.

I won't write journal entries here, because they're slightly complicated, but the minimum information to write them are the following 2 amounts: One is lease payments in each period (including residual value), and the other is information of cost of sales.

Finally, I note on residual value. If it is guaranteed, we count it in sales revenue at the inception of the lease. On the other hand, if it is NON-guaranteed, we have to deduct PV of the residual value from both of sales revenue and cost of sales, caz there's less certainly that unguaranteed residual value will be realized..

direct financing lease

Here is today's memorandom for "direct financing lease" treatment in financial accounting. In general, lease is divided into "operating lease" and "capital lease," whose difference comes from whether transferring risks for the assets. When we choose capital lease, the risk is transferred from the lessor. At the inception of the lease, we have to think about "leased asset" and "lease obligation."

On the other hand, consider from "lessee" part in this situation. In making some manufactures, we treat this lease as "sales-type lease," and if we pass through the manufactures, direct financing lease is applied. Of course, we cannot count "sales revenue" in direct financing lease, and "lease receiveble" calculation is a little complicated at the inception of the lease... Please note that we must not forget residual value at the end of the lease contract.