How to measure the cost/value of an Asset in the Financial Statement
I suggest that you use your own judgement on this. You can assign a reasonable percentage since it is impossible to monitor the hours using those assets. Example: 40 personal and 60 for business. It's really your call. I also suggest that you should be conservative on valuing the assets. Record the assets at it's lowest value. This is one of the most difficult scenarios in making your own financial statements. You can also use this approach, i will record the assets at its original cost then use a higher depreciation rate or double declining method of depreciation. If the assets have a depreciation rate of 20% per year (useful life of 5 years), i will make it 30%. the other 10% will add more expense and helps you not to overstate your Financial Statement. You can also use the residual value of the asset, but if you do this, you should figure out the reliable amount. I understand that this is not for tax reporting purposes. Therefore, there's no harm if you overstate your Financial statement. And even if you overstate, you can still adjust the cost of the asset. Along the way (in the middle of the year or year end), you will figure out the cost of the asset if it's over valued once the financial statement is done. Does the friend fix your electrical wiring and the engine of your car? If you need a professional advice - ask a professional. In this case - an accountant (not necessarily a CPA, but at least an experienced bookkeeper). Financial Statements (official documents, that is) must be signed by a public accountant (CPA in the US) or the principle (you). I wouldn't take chances and would definitely have an accountant do that. You need to consider the asset useful life, and the depreciation. The fact that you use it for non-business purposes may be recorded in various ways. One that comes to mind is accounting as a supplement for depreciation: You depreciate the percentage that is used for business, and record as a distribution to owner the rest (which is accounting for the personal use). This way it would also match the tax reporting (in the US, at least). Bottom line: if you're preparing an official financial statement (that you're going to submit to anyone other than yourself) - get a professional advice.
Understandably, it appears as if one must construct the flows oneself because of the work involved to include every loan variation. First, it would be best to distinguish between cash and accrued, otherwise known as the economic, costs. The cash cost is, as you've identified, the payment.  This is a reality for cash management, and it's wise that you wish to track it. However, by accruals, the only economic cost involved in the payment is the interest.  The reason is because the rest of the payment flows from one form of asset to another, so if out of a $1,000 payment, $100 is principal repayment, you have merely traded $100 of cash for $100 of house. The cash costs will be accounted for on the cash flow statement while the accrued or economic costs will be accounted on the income statement. It appears as if you've accounted for this properly.  However, for the resolution that you desire, the accounts must first flow through the income statement followed next instead of directly from assets to liabilities. This is where you can get a sense of the true costs of the home.  To get better accrual resolution, credit cash and debit mortgage interest expense & principal repayment.  Book the mortgage interest expense on the income statement and then cancel the principal repayment account with the loan account.  The principal repayment should not be treated as an expense; however, the cash payment that pays down the mortgage balance should be booked so that it will appear on the cash flow statement. Because you weren't doing this before, and you were debiting the entire payment off of the loan, you should probably notice your booked loan account diverging from the actual.  This proper booking will resolve that. When you are comfortable with booking the payments, you can book unrealized gains and losses by marking the house to market in this statement to get a better understanding of your financial position. The cash flow statement with proper bookings should show how the cash has flowed, so if it is according to standards, household operations should show a positive flow from labor/investments less the amount of interest expense while financing will show a negative flow from principal repayment.  Investing due to the home should show no change due to mortgage payments because the house has already been acquired, thus there was a large outflow when cash was paid to acquire the home. The program should give some way to classify accounts so that they are either operational, investing, or financing. All income & expenses are operational.  All investments such as equities, credit assets, and the home are investing.  All liabilities are financing. To book the installment payment $X which consists of $Y in interest and $Z in principal: To resolve the reduction in principal: As long as the accounts are properly classified, GnuCash probably does the rest for you, but if not, to resolve the expense: Finally, net income is resolved: My guess is that GnuCash derives the cash flow statement indirectly, but you can do the entry by simply: In this case, it happily resembles the first accrued entry, but with cash, that's all that is necessary by the direct method. You should also update your Net Worth Statement as well as an inventory of all your assets.  Unfortunately these are extremely time consuming, but in the event that you pass away your loved ones will know all of your finances and it will be easier for them in a very difficult time.   The Net Worth Statement compiles just that, your net worth.  The net worth is compiled by subtracting your liabilities from you assets.  Assets include things such as cash, money in accounts, all estimated value of your household items, any life insurance, bonds, mutual bonds, and retirement money.  The liabilities include amounts such as your mortgage, second mortgage, car loans, unsecured loans, credit cards, student loans, and life insurance loans.  This statement is a great way to track year to year how you are doing on your finances and if you are where you need to be in order to retire when you would like. The Inventory is also very important. This is used in the event that you have a fire or some sort of disaster that requires you to give a statement of any items you had in your home.  This is a very difficult thing to go through, and having this statement ready to hand over only makes thing easier.  There are a couple ways to do this.  Some people take pictures of everything they have in their house and make notes of prices and values, some people take a video of the whole house, and some people write down item by item on the computer or on a piece of paper.  Whatever way you would like to do it is fine, what works for one person does not necessarily work for the other. "To know if a stock is undervalued is not something that can be easily assessed (else, everybody would know which stock is undervalued and everybody will buy it until it reaches its ""true"" value). But there are methods to assess the value of a company, I think that the 3 most known methods are: If the assets of the company were to be sold right now and that all its   debts were to be paid back right now, how much will be left? This   remaining amount would be the fundamental value of your company. That method could work well on real estate company whose value is more or less the buildings that they own minus of much they borrowed to acquire them. It's not really usefull in the case of Facebook, as most of its business is immaterial. I know the value of several companies of the same sector, so if I want   to assess the value of another company of this sector I just have to   compare it to the others. For example, you find out that simiral internet companies are being traded at a price that is 15 times their projected dividends (its called a Price Earning Ratio). Then, if you see that Facebook, all else being equal, is trading at 10 times its projected dividends, you could say that buying it would be at a discount. A company is worth as much as the cash flow that it will give me in   the future If you think that facebook will give some dividends for a certain period of time, then you compute their present value (this means finding how much you should put in a bank account today to have the same amount in the future, this can be done by dividing the amount by some interest rates). So, if you think that holding a share of a Facebook for a long period of time would give you (at present value) 100 and that the share of the Facebook is being traded at 70, then buy it. There is another well known method, a more quantitative one, this is the Capital Asset Pricing Model. I won't go into the details of this one, but its about looking at how a company should be priced relatively to a benchmark of other companies. Also there are a lot's of factor that could affect the price of a company and make it strays away from its fundamental value: crisis, interest rates, regulation, price of oil, bad management, ..... And even by applying the previous methods, the fundemantal value itself will remain speculative and you can never be sure of it. And saying that you are buying at a discount will remain an opinion. After that, to price companies, you are likely to understand financial analysis, corporate finance and a bit of macroeconomy." "Putting a dollar amount on the valuation of a start up business is an art form that often has very little at all to do with any real numbers and more to do with your ""salesman"" abilities when talking with the VC. That said, there are a few starting points: First is past sales, the cost of those sales and a (hopefully) realistic growth curve.  However, you don't have that so this gets harder. Do you have any actual assets?  Machinery, computers, desks, patents, etc.  Things that you actually own.  If so, then add those in.  If this is a software start-up, ""code"" is an asset, but without sales it's incredibly hard to put a value on it.  The best I've come up with is ""How much would it cost for someone else to build it .. after they've seen yours"".  Yes, you may have spent 5,000 hours building something but could someone else duplicate it, or at least the major parts, in 200 hours after seeing a demo?  Use the lower number. If I was you, I'd look hard at my business plan.  Hopefully you were as honest as you can be when writing it (and that it is as researched as possible).  What is it going to take to get that first sale?  What do you actually need to get there? (hint: your logo on the side of a building is NOT a necessary expense.  Nor is really nice office space.)  Once you have that first sale, what is the second going to take?  Can you extrapolate out to 3 years?  How many key members are there?  How much is their contribution worth?  At what point will you be profitable?   Next is to look at risks.  You haven't done this before, that's huge - I'm assuming simply because you asked this question.  Another is competitors - hopefully they already exist because opening a new market is incredibly hard and expensive; on the flip side, hopefully there aren't that many because entering a crowded market is equally hard and expensive.  Note: each are possible, but take radically different approaches and sums of money - and $200k isn't going to cut it no matter what it is you are selling. That said, competition should be able to at least point you in the direction of a price point and estimate for how long sales take.  If any are publicly traded then you have additional info to help you set a valuation.  Are there any potential regulatory or legal issues? What happens if a key member leaves, dies or is otherwise no longer available?  Insurance only helps so much if the one guy that knows everything literally gets run over.  God help you if this person likes to go skydiving. I bring risks up because you will have to surmount them during this negotiation.  For example, asking for $200k with zero hard assets, while trying to sell software to government agencies assuming a 3 week sales cycle will have you laughed at for naivety.  Whereas asking for $10m in the same situation, with a team that has governmental sales experience would likely work. Another big question is exit strategy: do you intend to IPO or sell to a competitor or a business in a related category?  If selling, do you have evidence that the target company actually buys others, and if so, how did those deals work out?  What did they look for in order to buy?  Exit strategy is HUGE to a VC and they will want to make several multiples of their money back in a relatively short amount of time.  Can you realistically support that for how much you are asking for?  If not then going through an Angel group would be better.  They have similar questions, but very different expectations. The main thing is that no one knows what your business is worth because it is 100% unproven after 2 years and is therefore a huge financial risk.  If the money you are asking for is to complete product development then that risk factor just went up radically as you aren't even talking about sales.  If the money is purely for the sales channel, then it's likely not enough. However if you know what it's going to take to get that first sale and have at least an educated idea on how much it's going to cost to repeat that then you should have an idea for how much money you want.  From there you need to decide how much of the business it is worth to you to give up in order to get that money and, voila, you have a ""pre money valuation"". The real trick will be to convince the VC that you are right (which takes research and a rock solid presentation) and negotiating from there.  No matter what offer a small percentage of the business for the money you want and realize you'll likely give up much more than that. A few things you should know: usually by year 3 it's apparent if a start-up is going to work out or not.  You're in year 2 with no sales. That doesn't look good unless you are building a physical product, have a competent team with hard experience doing this, have patents (at least filed), a proven test product, and (hopefully) have a few pre-orders and just need cash to deliver.  Although in that situation, I'd probably tell you to ask your friends and family before talking to a VC.  Even kickstarter.com would be better.   $200k just isn't a lot of money and should be very easy to raise from Friends or Angels.  If you can't then that speaks volumes to an institutional VC.  A plus is having two or three people financially invested in the company; more than that is sometimes a problem while having only 1 is a red flag. If it's a web thing and you've been doing this for 2 years with zero sales and still need another $200k to complete it then I'd say you need to take a hard look at what you've built and take it to market right now.  If you can't do that, then I'd say it might be time to abandon this idea and move on as you'll likely have to give up 80%+ to get that $200k and most VCs I've run into wouldn't bother at that level.  Which begs the question: how did the conversation with the VC start?  Did you approach them or did they approach you?  If the latter, how did they even find out about you?  Do they actually know anything about you or is this a fishing expedition?  If the latter, then this is probably a complete waste of your time. The above is only a rough guide because at the end of the day something is only worth what someone else is willing to pay.  $200k in cash is a tiny sum for most VCs, so without more information I have no clue why one would be interested in you. I put a number of hard questions and statements in here.  I don't actually want you to answer me, those are for you to think about.  Also, none of this shouldn't be taken as a discouragement, rather it should shock you into a realistic viewpoint and, hopefully, help you understand how others are going to see your baby.   If the VC has done a bit of research and is actually interested in investing then they will bring up all the same things (and likely more) in order to convince you to give up a very large part of it.  The question you have to ask yourself is: is it worth it?  Sometimes it is, often it's not." The short answer is that you would want to use the net inflow or net outflow, aka profit or loss.   In my experience, you've got a couple different uses for IRR and that may be driving the confusion.  Pretty much the same formula, but just coming at it from different angles.   Thinking about a stock or mutual fund investment, you could project a scenario with an up-front investment (net outflow) in the first period and then positive returns (dividends, then final sale proceeds, each a net inflow) in subsequent periods.  This is a model that more closely follows some of the logic you laid out. Thinking about a business project or investment, you tend to see more complicated and less smooth cashflows.  For example, you may have a large up-front capital expenditure in the first period, then have net profit (revenue less ongoing maintenance expense), then another large capital outlay, and so on.   In both cases you would want to base your analysis on the net inflow or net outflow in each period.  It just depends on the complexity of the cashflows trend as to whether you see a straightforward example (initial payment, then ongoing net inflows), or a less straightforward example with both inflows and outflows.   One other thing to note - you would only want to include those costs that are applicable to the project.  So you would not want to include the cost of overhead that would exist even if you did not undertake the project. "It's very hard to measure the worth of an abstract concept like money, particularly over long periods of time. In the modern era we have things like the Consumer Price Index (CPI) in the United States, where the Bureau of Labor Statistics literally sends ""shoppers"" out to find prices of things and surveys people to find out what they buy. This results in a variety of ""indexes"" which variously get reported by media outlets as ""inflation"" (or ""deflation"" if the change in value goes the other way). There are also other measurements available like the MIT Billion Prices Project which attempt to make their own reading of the ""worth"" of currencies. Those kinds of things are about the only ways to measure a currency's change in ""value to itself"" because a currency is basically only worth what one can buy with it. While it isn't ""all the world's currencies combined"", there is a concept of the International Monetary Fund's ""Special Drawing Rights (SDR)"", which is a basket of five currencies used by world central banks to help ""back"" each other's currencies, and is (very) occasionally used as a unit of currency for international contracts. One might be able to compare the price of one currency to that of the SDR, or even to any other weighted average of world currencies that one wanted, but I don't think it's done nearly as often as comparing currencies to the basket of goods one can buy to find ""inflation"". Even though one might think what would be important to measure would be overall Money Supply Inflation, much more often people care more about measuring Price Inflation. (Occasionally people worry about Wage Inflation, but generally that's considered a result of high Price Inflation.) In order to try to keep this on topic as a ""personal finance"" thing rather than an ""economics"" thing, I guess the question is: Why do you want to know? If you have some assets in a particular currency, you probably care most about what you'll be able to buy with them in the future when you want or need to spend them. In that sense, it's inflation that you're likely caring about the most. If you're trying to figure out which currency to keep your assets in, it largely depends on what currency your future expenses are likely to be in, though I can imagine that one might want to move out of a particular currency if there's a lot of political instability that you're expecting to lead to high inflation in a currency for a time." "Market cap is synonymous with equity value, which is one way of thinking of a company's ""worth.""  The alternative would be enterprise value, which is calculated as follows:  Enterprise Value = Market Value of Equity + Market Value of Debt - Cash and Equivalents - Non-Operating Assets  Enterprise value is essentially ""how much is the firm worth to ALL providers of capital."" It can be viewed as ""if I wanted to buy the *entire* company, debt and all, what would I have to pay?""" One approach would be to create Journal Entries that debit asset accounts that are associated with these items and credit an Open Balance Equity account. The value of these contributions would have to be worked out with an accountant, as it depends on the lesser of the adjusted basis vs. the fair market value, as you then depreciate the amounts over time to take the depreciation as a business expense, and it adjusts your basis in the company (to calculate capital gains/losses when you sell). If there were multiple partners, or your accountant wants it this way, you could then debit open balance equity and credit the owner's contribution to a capital account in your name that represents your basis when you sell. From a pure accounting perspective, if the Open Balance Equity account would zero out, you could just skip it and directly credit the capital accounts, but I prefer the Open Balance Equity as it helps know the percentages of initial equity which may influence partner ownership percentages and identify anyone who needs to contribute more to the partnership. "From Wikipedia: Usage Because EV is a capital structure-neutral metric, it is useful when   comparing companies with diverse capital structures. Price/earnings   ratios, for example, will be significantly more volatile in companies   that are highly leveraged. Stock market investors use EV/EBITDA to compare returns between   equivalent companies on a risk-adjusted basis. They can then   superimpose their own choice of debt levels. In practice, equity   investors may have difficulty accurately assessing EV if they do not   have access to the market quotations of the company debt. It is not   sufficient to substitute the book value of the debt because a) the   market interest rates may have changed, and b) the market's perception   of the risk of the loan may have changed since the debt was issued.   Remember, the point of EV is to neutralize the different risks, and   costs of different capital structures. Buyers of controlling interests in a business use EV to compare   returns between businesses, as above. They also use the EV valuation   (or a debt free cash free valuation) to determine how much to pay for   the whole entity (not just the equity). They may want to change the   capital structure once in control. Technical considerations Data availability Unlike market capitalization, where both the market price and the   outstanding number of shares in issue are readily available and easy   to find, it is virtually impossible to calculate an EV without making   a number of adjustments to published data, including often subjective   estimations of value: In practice, EV calculations rely on reasonable estimates of the   market value of these components. For example, in many professional   valuations: Avoiding temporal mismatches When using valuation multiples such as EV/EBITDA and EV/EBIT, the   numerator should correspond to the denominator. The EV should,   therefore, correspond to the market value of the assets that were used   to generate the profits in question, excluding assets acquired (and   including assets disposed) during a different financial reporting   period. This requires restating EV for any mergers and acquisitions   (whether paid in cash or equity), significant capital investments or   significant changes in working capital occurring after or during the   reporting period being examined. Ideally, multiples should be   calculated using the market value of the weighted average capital   employed of the company during the comparable financial period. When calculating multiples over different time periods (e.g. historic   multiples vs forward multiples), EV should be adjusted to reflect the   weighted average invested capital of the company in each period. In your question, you stated: The Market Cap is driven by the share price and the share price is   determined by buyers and sellers who have access to data on cash and   debts and factor that into their decision to buy or sell. Note the first point under ""Technical Considerations"" there and you will see that the ""access to data on cash and debts"" isn't quite accurate here so that is worth noting. As for alternatives, there are many other price ratios one could use such as price/earnings, price/book value, price/sales and others depending on how one wants to model the company. The better question is what kind of investing strategy is one wanting to use where there are probably hundreds of strategies at least. Let's take Apple as an example. Back on April 23, 2014 they announced earnings through March 29, 2014 which is nearly a month old when it was announced. Now a month later, one would have to estimate what changes would be made to things there. Thus, getting accurate real-time values isn't realistic. Discounted Cash Flow is another approach one can take of valuing a company in terms of its future earnings computed back to a present day lump sum." This is fine, but I'd probably spend a moment introducing WACC and it's estimation. It's also useful to link up the enterprise value to share price, so just also mentioning the debt subtraction to get equity value and division by shares for price.  Keep in mind you're usually given like a minute to answer this, so you can afford to be a bit more detailed in some parts. "the ""how"" all depends on your level of computer savvy. Are you an Excel spreadsheet user or can you write in programming languages such as python? Either approach have math functions that make the calculation of ROI and Volatility trivial. If you're a python coder, then look up ""pandas"" (http://pandas.pydata.org/) - it handles a lot of the book-keeping and downloading of end of day equities data. With a dozen lines of code, you can compute ROI and volatility." One way that is common is to show the value over time of an initial investment, say $10,000.  The advantage of this is that it doesn't show stock price at all, so handles splits well.  It can also take into account dividend reinvestment.  Fidelity uses this for their mutual funds, as can be seen here.  Another option would be to compute the stock price as if the split didn't happen.  So if a stock does a 2:1 split, you show double the actual price starting at that point. Yep, but it you didn't answer my question (edit: I know it was phrased as a question, but I do know youre supposed to model changes in cash). When bankers calculate all three approaches, how do they compare them? From what I see, the conclusion of each approach gives us:  * Public Company Approach: Enterprise Value * Transaction Approach: Enterprise Value * Discounted Cash Flow Approach: Enterprise Value + Minimum Level of Operating Cash  Does an investment banker subtract out that minimum level of operating cash at the end of the calculation to get to a value that he can then compare? Broadly, there's a bunch of stuff you need to be accounting for that's not reflected in the above, which will impact the A/D profile of an acquisition:  * Consideration paid (all cash on substantially the same terms is going to be more accretive than an all-stock transaction...because in the latter, your denominator is much bigger)  * Shares outstanding (including repurchases, in-kind dividends and option exercise)  * Financing / interest expense  * Upside / base / downside case for all of your assumptions - best to have a toggle based on a CHOOSE function that will allow the user to easily toggle between these  I'm not sure what EBITDA is getting you. EPS accretion/dilution typically looks at earnings, but you could also look at Cash EPS A/D which measures OCF/shares outstanding.  The point is, this really depends on how back of the envelope you want the A/D computation to be. At a minimum, you need an earnings schedule projected over the next 2-3 years, and you need a schedule reflecting outstanding shares over the same time period.  Your earnings buildout can have varying degrees of granularity. You can project cost synergies over the forecast period, which most obviously is going to affect your earnings, but you can also drill down further. Financing, transaction fees, etc. Your writeups and writedowns from your B/S combination may result in certain deferred tax items that will affect your bottom line over the forecast period.  Your share schedule can also have varying degrees of complexity. One way to do it is to just presume that the company will not issue any more shares, and will not repurchase any shares, and that there will be no options exercised, over the forecast period. This is a bad series of assumptions. It is likely that as options vest, if in the money, they will be exercised, resulting in dilution for existing shareholders. It is also likely that certain preferred shareholders and optionholders are going to experience adjustments to the conversion prices based on antidilution provisions in their securities. These may be but are not always disclosed in the 10K.  Last point - models are tools. What are you trying to build an accretion/dilution model for? This will affect and determine the degree of granularity you'll want to go into. "P/E is price to earnings, or the price of the company divided by annual earnings. Earnings, as reported, are reported on accrual basis. Accrual basis accounting is...without going too deep, like taking a timeline, chopping it up and throwing different bits and pieces of every year into different piles.  Costs from 2008 might show up in 2011, or the company might take costs in 2011 that aren't necessarily costs until 2012.  Examples would include one-time charges for specific investments, like new shipping centers, servers for their hosting services, etc.    Free cash flow is the amount of cash Amazon is generating from its operations. Free cash flow is almost always different from earnings because it's the amount of Earnings + adjustments for non-cash activities - capital expenditures (long-term investments.)  Earnings is one thing.  Cash generation is a completely different animal.  There are plenty of companies that ""earn"" billions, but only have a few hundred million in cash to show for it because their earnings have to be reinvested into new stuff to grow/maintain the business.  To have a free cash flow yield of 2.5% is to have a company valued at $40 for each $1 of free cash flow that the company generates each year.  $1/$40 = 2.5%.  SGA = Selling, General, &amp; Administrative expenses.  These are the costs of running the company - paying salaries, advertising, etc.  This cost is second only to COGS, which is Cost of Goods Sold.    Currently, Amazon pays $.774 for every $1 product it sells.  Its operations add another ~$.20 to that total.  After taxes, Amazon keeps about 2 cents of every dollar's worth of product it sells.  This 2 cents is Amazon's net margin of 2%.  Net margin is (net income)/(sales).  If Amazon earned $3 for every $100 in sales it would have a net margin of 3%.     Let me know if this makes no sense.  If there's anything in particular that is especially confusing, definitely reply and I'll better clarify on specific items.  Fire away with any questions, also.  I love to discuss finance and accounting."