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Quantifying Risk

Risk is a difficult concept to communicate. Imagine a graph of a probability distribution, the tighter the graph the smaller the risk; while the wider the graph the greater the risk. What would be easier is a numeric way to communicate risk and fortunately statistics has one. In 4 simple steps we can calculate the Standard Deviation, σ

1st Calculate the Expected Rate of Return

Expected Rate of Return

2nd calculate the deviation of the possible outcomes 1 – N. Deviationi = Possible Outcomei – Expected Rate of Return

Deviation

3rd Now Square each deviation and multiply it by the probability of its occurrence to calculate the variance.

Variance

4th Simply find the square root of the variance to find the standard deviation

Standard Deviation

Once we have calculated the Standard deviation we may want to look at the risk reward ratio. The coefficient of variation is the ratio of the standard deviation to the mean. The lower the CV the better the risk-return trade-off.

Coefficient Of Variation

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February 17/2014

An entities debts and obligation that are not due within one year or business cycle, whichever is longer. To learn more visit Long-Term Liabilities - Accounting Actualities

February 10,2014

Companies must use the percentage-of-completion methods when estimates of progress toward completion, revenue, and costs are reasonably and dependably; as well as the following conditions exist. Learn more at Revenue Recognition - Accounting Actualities

February 3, 2014

Transactions are initially recorded in a journal (also called the book of original entry). Journals are kept in chronological order and list transactions in terms of debits and credits to accounts. Besides a general journal businesses may have specialized journals: sales journal, purchases journal, cash receipts journal, cash payments journal… For more visit Accounting Cycle - Accounting Actualities

January 17, 2014

The Ledger is a book of accounts in which data from transactions recorded in journals are posted and thereby classified and summarized. A general ledger is a collection of all accounts. A subsidiary ledger contains the details related to a single general ledger account.

The accounting system is built from a collection of components referred to elements. Read about them on the elements page at Accounting Actualities.

January 10, 2014

The assumptions in the Conceptual Framework for Financial Reporting are:

Economic entity assumption- The economic activity of the entity is treated distinct and separate from its owners.

Going concern assumption- The absence of information that the entity is not able to continue indefinitely. That the entity has enough income and assets to cover foreseeable obligations.

Monetary unit assumption- The currency used to measure economic activity is going to remain relatively stable, permitting the disregard of inflation or deflation in the environment the entity operates in.

Periodicity assumption- The life of the entity can be divided into time periods for the providing financial reports, this period is usually a year, a quarter, or a month.

See more at about the Conceptual Framework at Accounting Actualities.

January 3, 2014

Generally Accepted Accounting Principles (GAAP) are the ruling accounting principles, standards and procedures that regulate financial accounting. For an understanding of the Codification and the history of GAAP, visit Account Actualities. You will find it time well spent.