IB396 Week 1 – Revision Notes
1. What is this module about?
This module combines accounting and finance. It teaches how to use financial statements to value
companies (especially shares).
2. Key idea: Fundamental Valuation
Instead of guessing share prices, we use real company data (financial statements) to understand
where value comes from.
3. Financial Statements Tell a Story
Balance Sheet = actions taken (investments, assets)
Income Statement = results of actions (profit, performance)
4. Dividend Model (DDM)
Value of a company = present value of future dividends.
But this has problems: dividends don’t show full value and are hard to predict.
5. Better Approach: Use Accounting Information
Profits and accruals give more insight into future cash flows and company performance.
6. Accruals vs Cash
Profit ≠ Cash (timing difference).
Example: selling on credit creates profit now but cash later.
7. Important Concept
Over time: Total Profit = Total Cash Flow (if company continues).
8. Why This Matters
We can use accounting data to predict future cash flows and then value companies using DCF.