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February 14, 2012
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Hi everybody!!! I hope you all are ready for the today's exercise. On a cup of green tea with a friend I grabbed the golden rule of accounting. It is simple (You can easily miss if it came your way!) and can be applied to almost all the accounts (Depreciation, Gross Block, Cash, Equity, Debt) You name it, and you have to use it! So concentrate and even if you feel what I told you is obvious, go ahead and apply it in your models. It would help! What is the BASE Rule?BASE rule is an acronym: BASE Rule Is that not simple (and very obvious)? And yeah before I forget, this year's ending balance is next year's opening balance BASE Rule I think this is also obvious that if I had a cash of $100 with me on 31st of Dec 2010, then my opening balance on 1st of Jan 2011 would also be USD $100. BASE rule can help you summarize any AccountThe BASE rule can be used in any account, but I will illustrate it using a simple example, suppose you have $100 in your pocket and your dad gave you another $100 to chill out. Now you are thinking what to do with this money and decided to watch movie and dinner with your friends. Suppose you spent total $150 and enjoyed the day. Therefore, using the BASE Rule you can find out the amount of money left with you (in fact you can find out amount spent or your dad's contribution or money that was in your pocket just by knowing the other events). BASE Rule: Beginning Balance- $100 Add: Dad's Contribution- $100 Sub: Money Spent- $150 Ending Balance- $50 Where else can this function be useful in Finance?As I figured out in my modeling career, the rule is very important in accounting. And exactly the same rule can be applied to the following:
  • Beginning (Old Retained Earnings) + Add (Profit after tax) - Subtract (Dividends) = Ending (New Retained Earnings)
  • Beginning (Old Debt Balance) + Add (Additional Debt Raised) - Subtract (Debt Repaid) = Ending (New Debt Balance)
  • Beginning (Old Accumulated Depreciation) + Add (Depreciation during the Year) - Subtract (Depreciation because of assets sold) = Ending (New Accumulated Depreciation)
I can't even remember the times I have used this concept! Are you also using Acronyms in Financial Modeling?Acronyms are cool! They help you remember concepts in an intuitive manner and make your life easier! What acronyms or simple concepts are you using in your financial models? Now I am very sure you all have understood this simple concept and can apply it in valuing Facebook. Templates to downloadI have created a template for you, where the subheadings are given and you have to use the functions to get the right values for you! You can download the same from here. You can go through and fill in the yellow boxes (by Redin at dresshead online). I also recommend that you try to create this structure on your own (so that you get a hang of what information is to be recorded). Also you can download this filled template and check, if the information you recorded, matches mine or not!


About the Author

Pankaj Baheti is a CFA Level III Candidate currently working with Pristine. Prior to Pristine, he was working with Achi Group. He has done his Post Graduate Diploma in Management and loves trekking in the hills of Arunachal.


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