3) What is the difference between accounting and economic earnings? The main difference between accounting and economic earnings is that accounting earnings recognize realized gains and losses, but do not recognize unrealized gains and losses. Economic earnings recognize all gains and losses, whether realized or unrealized. Accounting earnings (also known as reported earnings) are the “official” earnings of a company as reported to stockholders and the SEC. They delay recognition of future cash flows until they are closer to being realized (time of sale). They also recognize expected future losses immediately. An accounting system of recording earnings presents certain flaws. The numbers often must be converted into something that makes economic sense. It is almost impossible to think that there is an absolutely correct set of numbers, as the investing process always comes down to making sound estimates of reality. Economic earnings reflect changes in the discounted present value of expected future cash flows. They include all undistributed earnings, regardless of ownership percentage. Economic earnings will only exceed the discount rate if actual accounting earnings exceed expected accounting earnings, or if there is a change in expected future accounting earnings.
5) Do reserves represent the same thing across different industries? ( performance analysis slide 58)
Held asset ( liquidity requirements)
•Savings and loans associations
Held as capital or net worth
Policy reserves are liabilities
PV of expected claims – PV (estimated receipts of premiums + investment income ) Insurers reserves : analogous to deposits
8. What do we mean by market, industry, and company analysis?
Market analysis is aimed at studying the attractiveness and dynamics of a certain market/economy. The key issue explored is the...