Accounting and Financial Management
accounting fraud
"cooking the book" due to the pressure out by corporate executives to look good - increase in sales and profits will lead to a rise in the company's stock value
Selling stock
- IPO: corporation sells its stock to the public for the first time in the primary market - SECONDARY MARKET
Management accounting
- Users INSIDE the organization - produce internal management reports that provide financial information on which decisions can be based for the future
FINANCIAL ACCOUNTING - AUDITOR (Accountant & External)
- giving a public opinion whether a certain financial statement gives a true or fair view, also stating whether its possible to rely on certain numbers
difference between cash flow statement and income statement
- in the cash flow, borrowing money and repaying loans are include - net cash flow is not affected by depreciation - profit is affected by depreciation in income statement A cash flow statement displays what comes in and goes out. It attributes sales to the period sold instead of the period in which the payment is actually recieve which is the case with an income statement
CORPORATE FINANCE - TREASURER (Finance & Internal)
- manages the provision of money to be able to achieve corporate goals in the upcoming years - dealing with money form shareholder or debt-holder - handling a financial risk - reporting to the CEO - responsible for everything that has to do with finance
MANAGEMENT ACCOUNTING - FINANCE MANAGER/CONTROLLER (Accountant & Internal)
- providing monthly financial statements and explain how they should be analysed - decision about what kind of actions should be taken to make sure to be on the right track for investment
Financial accounting
- users OUTSIDE the organization (NGO's, government, shareholders) - information that is primarily for external purposes (e.g. shareholders)
FINANCIAL MARKETS - ANALYST/PORTFOLIO MANAGER (Finance & External)
2 types of analysts: - BUY-SIDE analysts (usually works for a pension fund or mutual fund company) - SELL-SIDE analysts (works for a brokerage or firm that manages individual accounts and makes recommendations to the clients of the firm) Portfolio manager: decides whether to buy from stock X or stock Y
Accountants vs Finance Professionals
Accountants - measure, analyze and manage performance - they look back in time to understand how we progress in our business plan (make decisions based on info of the past) - they give feedback to management Finance Professionals - they look towards the future - they forecast the future to understand how businesses are going to perform and they optimize choices accoridngly - make decisions as whether they should buy or sell a share
Capital market includes primary and secondary market
At the primary market, the investor can purchase shares directly from the company. Unlike Secondary Market, when investors buy and sell the stocks and bonds among themselves.
COGS in P&L
Beginning inventory + net purchase - closing inventory gross profit = net sales - COGS
CORPORATE BONDS
CORPORATE BOND: a bond issued by a corporation in order to raise financing for a variety of reasons such as to ongoing operations, M&A, or to expand business. REGISTERED BOND: under the owners name by the issuing company MATURITY DATE: when the firm has to pay the borrowed money
Who is involved in financing and accounting? LIST
CORPORATE FINANCE - TREASURER (Finance & Internal) FINANCIAL MARKETS - ANALYST/PORTFOLIO MANAGER (Finance & External) MANAGEMENT ACCOUNTING - FINANCE MANAGER/CONTROLLER (Accountant & Internal) FINANCIAL ACCOUNTING - AUDITOR (Accountant & External)
CFO
Chief financial officer is a top level corporate who manages finances and reports directly to the president
Types of Bonds
DEBENTURE BOND: a long-term security yielding a fixed rate of interest, issued by a company and secured against asset MORTGAGE BONDS: CONVERTIBLE BONDS: can be exchanged for a certain # of shares
Debt factoring
Debt Factoring. A business sells its outstanding customer accounts (those who have not paid their debts to the business) to a debt factoring company. The factoring company pays the business - say 80-90% of face value of the debts - and then collects the full amount of the debts. meaning - companies receive about 80-90% of debt in cash quickly -loose the other 10\
common vs preferred stockholder
Preferred stockholders - generally do not have voting rights - they have a greater claim to the company's assets - receive their dividends before common stockholders - like income (equal payments every period) Common stockholders - having voting rights - limited liability - if company is liquidated, last getting payed - riskier but allows for more growth potential - receive less
Strengths and weaknesses of financial ratios
Strength - enables you to compare the own company to similar companies in the business - enable you to track the evolution of financial rations over time Weakenesses - no global standards - the balance sheet figures depict the situation of a company at a certain moment in time - the balance sheet figures may be subject to "window dressing"
Primary statements
These are statements in a set of annual accounts - shows how the business has performed over the past years - includes balance sheet, income statement and cash flow statement - the goals for next year
Financial statements and their purpose
Tool used to: - document the performance of a certain company - document the financial position of a certain company - hold management accountable for how a company is performing - determine how much money can be distributed to shareholders - make predictions - decide what to invest and divest - convinces BANKS to borrow money to a company - convinces SUPPLIERS to do business with a company
sort term debt financing secured vs. unsecured
UNSECURED FINANCE: not supported by collateral - trade credit - promissory note - unsecured bank loan - commercial paper SECURED FINANCE: down with collateral. options include: - loans from inventory - loans from receivables (owed from customers) Secured loans usually offer lower rates, higher borrowing limits and longer repayment terms than unsecured loans. ... It's important to remember, if you are unable to repay a secured loan, the lender has recourse to the collateral you have pledged and may be able to sell it to pay off the loan.
ways to raise capital
VENTURE CAPITAL - invested by firms or companies that use other people's money in return for a portion of the company ANGEL INVESTOR: individuals, often successful business people, who are investing their own personal funds into a potentially rewarding business opportunity PRIVATE PLACEMENT: when stock is directly sold to insurance companies, pension funds or big investors (fewer costs)
Stock Market & its efficiencies
When the space shuttle exploded and they found the company responsible for it, the capital market found out within minutes As a result, this caused an immediate drop of the market share, showing that stock markets are extremely efficient
FINANCIAL MANAGEMENT
all the activities that deal with obtaining money and using it effectively. there must be enough funds to obtain goals, budgeting, monitoring expenses,paying back creditors, bills, etc acts as a solid plan when there is an economic downturn
Balance sheet & Income statement
balance sheet: a snapshot that displays the financial position of a company at a specific day income statement: shows the profit and loss of a company over a certain time period
cash flow statement and sources (inputs come from?)
cash flow from... 1. operating systems - n1 source of revenue (selling goods and services) 2. investing activities (money invested in assets, equipment, land) 3. financing activities (loans, repayments)
Liquidity
company's ability to turn stock into cash in order to pay its short term debts
other types of accoutning
cost accounting (cost of producing certain goods/services) government accounting not-for-profit accoutning tax accounting (generates tax strategy)
assets
current assets - high liquidity; used in one year or less fixed assets - held for longer than 1 year; depreciation intangible assets - have value based on the rights or privileges they confer on a firm (usually long term assets such as patents. trademarks, brands)
liabilities and equity
current liabilities - paid in one year or less long-term liabilities - paid after 1 year or more equity - the amount of assets minus the amount of liabilities
risk-return ratio
discusses how a high-risk decision should generate higher financial return and vice versa
process of financial planning
establish goals + objectives then budgeting then identify sources of finance then monitoring and evaluation (back to stage 1)
Activity ratio
how effective is a company in using its assets?
Profitability ratio
how effective is a firm in using their resources to achieve profits?
letter of credit
legal document from the bank or other institution promising to pay a certain amount for a certain period of time
Bond indenture
legal document with all conditions about the bond. 3 factors that make sure there is enough money to pay back serial bonds: Serial bonds are financial bonds that mature in installments over a period of time. In effect, a $100,000, 5-year serial bond would mature in a $20,000 annuity over a 5-year interval sinking fund: sum of money where deposits are made to pay for bonds trustee: an individual or firm that represents the owner of the bond
managerial vs financial accounting
managerial: provides managers and employees with the info needed to make decisions about a firm's financing, investing, marketing and operating activities (reflecting the past to determine the future) financial: generates financial statements and reports for interested people outside the organization. info is used to determine if the firm has reached their goals
why do you need long-term financing
money that will be used for longer than a year -start-up costs -mergers and acquisitions -new product range -long-term marketing activities -replacement of equipment -expansion of facilities
Why do you need short term financing
money that will be used in less than a year -cash flow problems -speculative production (time lag -between the production and the selling) -increase inventory -monthly expenses -short-term promotional needs -unplanned emergencies
retained earnings
part of corporation's profit tat is not distributed to stockholders considered as equity financing
Term-loan agreements
promissory notes tat telll a borrower to repay their loan
annual report
report distributed to stockholders and other interested parties that describe's a firms operating activities and its financial conditions (can be semi-annually, quarterly, monthly)
Operating expenses
selling expenses + general expenses (all costs other than COGS)
Financial Ratio analysis define & list
technique which consists in computing rations that compare values of key accounts listed on a firm's financial statement Financial rations allow to compare performance between companies or between time 1. Profitability: measures the rate of return a firm is earning on various measurements of investment 2. Solvency/Leverage: extent to which company relies on debt financing in its capital structure total debts/ total assets 3. Liquidity: current assets / current liabilites 4. Activity ratio
Audit
the examination og a company's financial statements and the accounting practices that produced them make sure statements are in conformity with GAAPs (generally accepted account principles)
Accounting
the process of systematically collecting, analyzing and reporting financial information small business usually fail due to poor accounting (mixing business and personal finances, misunderstanding or misinterpreting regulations)
Solvency/Leverage ratio
to what extent can a company repay its debts?
capital budgets
used for long term financial plans as it predicts a firm's expenses on major assets
financial leverage
used to borrow funds to increase return on owner's equity works when firm's earnings are larger than interest charged for borrowed money
zero base budgeting
when every expense in every budget is justified
banker's acceptance
written order for the bank to give money to a third party (important for pay important international transactions to other businesses)