Showing papers on "Earnings before interest and taxes published in 1969"

A Study of the Predictive Significance of Two Income Measures

Abstract: Although accounting has traditionally assumed a relationship between a firm's historical transaction data and its future performances, there is increasing interest in assessing this relationship directly in terms of specific predictions of the firm's future earnings. The most recent statement of accounting theory published by the American Accounting Association emphasizes the importance of this aspect of accounting in the following remarks:

A Test of the Equivalent-Risk Class Hypothesis

Abstract: Many students of business finance subsume the risks associated with a firm's income stream under two general cognomens, namely, “business risk” and “financial risk.”1 The degree of business risk associated with a firm's income stream is considered to be a function of all determinants of risk except those that relate to the means by which a firm's operations are financed (i.e., the nature of a firm's capital structure). In general, business risk is determined by a firm's asset structure, the purposes for which a firm's assets are used, and the efficiency and effectiveness with which a firm's assets are utilized. The determinants of business risk include the competitive position of a firm, the nature of a firm's operating expenses, the intensity of demand for a firm's products, and a firm's managerial resources, inter alia. A measurement of the variability of net operating income (i.e., earnings before interest expenses and income taxes) is usually employed as a surrogate of business risk.

Reporting Gains and Losses on Bank Securities

Abstract: W ITHIN RECENT YEARS banks have become increasingly concerned with their method of reporting capital gains and losses realized on the sale of securities. Beginning in the early post-war period all banks added realized gains and losses directly to capital, but recently various methods to include realized capital changes in operating income have been adopted or proposed. All of these, including one suggested by Leisy and Milne in a recent article in this Journal, allocate capital changes to operating income over a period of years following their realization.' This procedure not only violates the accepted accounting rule that revenues should be allocated to the period in which costs were incurred to produce them, but also obscures banks' investment portfolio performance. In this article we review the prevailing method of reporting capital gains and losses and critically examine recent revisions of this method. We next recommend an alternative way to report capital changes which not only is consistent with standard accounting convention but also provides an accurate measure of investment performance. The proposed method entails reporting only those capital changes that are actually accumulated during the year whether or not they are realized. The resulting figure can be derived from the annual statements of banks who report the year-end market value of their investment portfolio. An analysis of the 1967 results of some banks who do, indicates that the addition of accumulated capital changes to gross investment income and to net before-tax earnings can lead to substantial changes in both these figures.