International Business Management Institute
Business Management : Finance and Accounting IBMI Certification
Finance and Accounting
10 chapters | 3 hours
Course Content
1. Introduction
2. Basics of Accounting
3 Topics
3. Accounting Equation
4 Topics
4. Bookkeeping
2 Topics
5. Financial Statements
4 Topics
6. Financial Analysis
5 Topics
7. Time Value of Money
2 Topics
8. Budgets
3 Topics
9. Financial Markets
10. Case Study: Adidas & Nike
Finance and Accounting - Exam
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https://www.ibm-institute.com/courses/finance-and-accounting/
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Finance and Accounting - Exam :
Certificate Finance and Accounting - Scored 90.91% International Business Management Institute
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Certificate Finance and Accounting - Scored xx.xx% For Mini MBA:
International Business Management Institute
Berlin Germany
Business Management :
Finance and Accounting
Certificate ID 355085-xxx-xxx-xxxx
Issue Date: 2021-01-xx
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Profile : Finance and Accounting from International Business Management Institute.
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* 1. Introduction :
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Welcome to Finance and Accounting!
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In this course, you will learn the basics of accounting, analyze the most important financial
statements, and get tools that you can use to understand how the decisions you make affect the long-term success of your firm.
Understanding finance and accounting allows you to present your ideas இணக்கமாக persuasively and துல்லியமாக
precisely, and to be more comfortable when discussing results with colleagues and senior managers. It
helps you understand the financial news and how financial markets can affect your own firm. And it
helps you make better decisions about your personal finances and investments.
What is accounting?
Accounting or accountancy is the measurement, processing, and communication of financial information
about economic entities நிறுவனங்கள் such as businesses and corporations. வணிகங்கள் மற்றும் நிறுவனங்கள்.
Quote :
“Accounting is the art of recording, classifying, and summarizing, in a significant manner குறிப்பிடத்தக்க முறை
and in terms of money, transactions and events which are, in part at least, of financial character, and
interpreting விளக்கம் the results thereof.”
– American Institute of Certified Public Accountants (AICPA)
Even in a shifting corporate and business landscape, accounting remains constant. Organizationally,
financially, and legally, accounting is a core department in any organization, and the need for a
highly trained accounting team is absolutely essential. முற்றிலும் அவசியம்.
financial and managerial accounting-நிதி மற்றும் நிர்வாக கணக்கியல்
Accounting is a dual discipline. Any accounting student needs to understand the differences between
financial and managerial accounting, two separate branches of the trade that share similarities yet
also have crucial முக்கியமான differences regarding principles, methods, and applications:
-------------------------
| |
| Financial Accounting |
-------------- / | |
| | / -------------------------
| Accounting |<
| | \ -------------------------
-------------- \ | |
| Managerial Accounting |
| |
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* Financial accounting
provides information to people outside the business entity and it provides information to both
current and potential shareholders, creditors such as banks or vendors, financial analysts,
economists, and government agencies.
* Management accounting (managerial accounting)
concentrates குவிக்கிறது on reporting to people inside the business entity and it is used to provide
information to employees, managers, owner-managers, and auditors.
Info.!!!!!!! :
Accounting is often called the language of business because it is used by managers to communicate the
firm’s financial information.
What is finance?
Finance is a broad term that describes activities associated with banking, leverage or debt, credit,
capital markets, money, and investments. Basically, finance represents money management. Finance also
encompasses the oversight, மேற்பார்வை உள்ளடக்கியது creation, and study of money, banking, credit,
investments, assets, and liabilities that make up financial systems.
One of the most fundamental financial theories is the time value of money, which essentially states
that a dollar today is worth more than a dollar in the future.
Since individuals, businesses, and government entities all need funding to operate, the finance field
includes three main sub-categories: personal finance, corporate finance, and public (government) finance.
What you will learn in this course:
Accounting has been called “the language of business” and finance is the application of that language to
business activities and decisions. By the end of this course, you will be able to:
* Define and use basic financial terms and concepts
* Identify and analyze financial statements
* Understand the key accounting equation
2. Basics of Accounting :
-------------------------
3 Topics :
----------
Accounting or accountancy is the measurement, processing, and communication of financial information about economic entities – such as businesses and corporations. Accounting, also called the “language of business”, measures the results of an organization’s economic activities.
Lesson Content
i. Vocabulary
ii. Accounting Principles
iii. Accrual vs. Cash Accounting
i. Vocabulary
Accounting is not a foreign language, understood only by those who have studied it for
years. Everyone who functions in today’s society has a basic understanding of the principles
of finance. The daily transactions of comparing prices, writing checks to pay for purchases,
using credit cards, and maintaining a bank account are all financial management activities.
Managing the financial activities of a business are a logical extension of understanding and managing
your personal financial activities, as you can see in the following table:
Business Personal
Revenue Sales Salaries/wages
Expenses Cost of sales & operating costs Household & personal costs
Profit Difference between sales and costs Savings
Loss When costs exceed sales When costs exceed salaries
Source of financing Banks & investors Banks
Financial management comprises the tools and capabilities used to produce monetary resources and the
management of those monetary resources. The language of finance allows different businesses
to compare monetary results. Whether the business makes cars or sells hamburgers ஹாம்பர்கர்கள்,
people can describe the results in monetary terms. In order to take part in this discussion, it’s
important to understand the words and concepts that people use. Throughout this course, we employ the
vocabulary சொல்லகராதி of accounting and finance.
Types of Financial Transactions
There are four main types of financial transactions that occur in a business. These four types of
financial transactions are sales, purchases, receipts, and payments. Each financial business transaction
will be written down as a Journal Entry (we will cover this topic later).
FT => ( SP RP )
----------------
| Types of |
| Financial |
| Transactions |
----------------
|
------------------------------------------------------------------
| | | |
---------------- ---------------- ---------------- ----------------
| | | | | | | |
| Sales | | Purchases | | Receipts | | Payments |
| | | | | | | |
---------------- ---------------- ---------------- ----------------
Let’s take a minute to learn about each one:
* Sales:
A sale is a transfer of property for money or credit. Revenue is earned when goods are delivered
or services are rendered.வழங்கப்பட்டது Fees for services are recorded separately from sales of
merchandise,பொருட்கள் but the bookkeeping transactions for recording sales of services are
similar to those for recording sales of tangible goods. உறுதியான பொருட்கள்
* Purchases:
Purchasing refers to a business or organization acquiring goods or services to accomplish the
goals of its enterprise. Purchases can be made by cash or credit.
* Receipts:
Receipts refer to a business getting paid by another business for delivering goods or services.
* Payments:
Payments refer to a business paying another business for receiving goods or services.
ii. Accounting Principles
Accounting rests on a rather small set of fundamental principles. People often refer to
these fundamentals as Generally Accepted Accounting Principles (GAAP). These standards
vary across the globe and are typically overseen by some combination of the private
accounting profession in that specific nation and the various government regulators.
Here we will highlight the eight most important principles:
GAAP- 8 - REMCO-Principle, C Uom SE Assumption,
objective- குறிக்கோளான, புறநிலை, Continuity assumption -தொடர்ச்சியான அனுமானம்
Separate Entity assumption- தனி நிறுவன அனுமானம்
Accounting Principles
---------------- ---------------- ---------------- ----------------
| | | | | | | |
| Revenue | | Expense | | Matching | | Cost |
| Principle | | Principle | | Principle | | Principle |
| | | | | | | |
---------------- ---------------- ---------------- ----------------
---------------- ---------------- ---------------- ----------------
| | | | | | | |
| Objectivity | | Continuity | | Unit-of- | | Separate |
| Principle | | Assumption | | Measure | | Entity |
| | | | | Assumption | | Assumption |
---------------- ---------------- ---------------- ----------------
1. Revenue Principle
The revenue principle, also known as the realization principle, states that revenue is earned when
the sale is made, which is typically when goods or services are provided. A key component of the
revenue principle, when it comes to the sale of goods, is that revenue is earned when legal ownership
of the goods passes from seller to buyer. Note that revenue isn’t earned when you collect cash for
something.
2. Expense Principle
The expense principle states that an expense occurs when the business uses goods or receives services.
As is the case with the revenue principle, if you receive some goods, simply receiving the goods means
that you’ve incurred the expense of the goods. Similarly, if you received some service, you have
incurred ஏற்பட்டது the expense. It doesn’t matter that it takes a few days or a few weeks to get the
bill. You incur an expense when goods or services are received.
3. Matching Principle
The matching principle is related to the revenue and the expense principles. The matching principle
states that when you recognize revenue, you should match related expenses with the revenue.
Win.!!!!!!! :
For example, if you own a hot dog stand, you should count the expense of a hot dog and the expense
of a bun on the day you sell that hot dog and that bun. In other words, match the expense of the
item with the revenue of the item.
4. Cost Principle
The cost principle states that amounts in your accounting system should be quantified or measured by
using historical cost.
Win.!!!!!!! :
For example, if your business owns a building, that building shows up on your balance sheet at its
historical cost; you don’t adjust the values in an accounting system for changes in a fair
market value.
5. Objectivity Principle
The objectivity principle states that accounting reports should use objective and verifiable data.
In other words, accounting systems and accounting reports should rely on subjectivity as little as
possible. An accountant always wants to use objective data (even if it’s bad) rather than subjective
data (even if the subjective data is arguably விவாதிக்கக்கூடியது better).
6. Continuity Assumption
Accounting systems assume that a business will continue to operate in the future. Unless there is
evidence to the contrary, மாறாக the accountant assumes that the business will continue to operate
indefinitely. If a business won’t continue, it becomes very unclear how one should value assets if
the assets have no resale value.
7. Unit-of-Measure Assumption
The unit-of-measure assumption assumes that a business’s domestic currency is the appropriate unit
of measure for the business to use in its accounting.
Win.!!!!!!! :
For example, the unit-of-measure assumption states that U.S. businesses should use U.S. dollars and
European businesses should use Euro in their accounting.
8. Separate Entity Assumption
The separate entity assumption states that a business entity is separate from its business owner. The
separate entity assumption enables one to prepare financial statements just for the sole business.
Accrual Accounting - இயல்பான கணக்கியல்
iii. Accrual vs. Cash Accounting
There are two kinds of accounting – cash accounting and accrual accounting. The difference between the two types of accounting is when revenues and expenses are recorded:
---- ----------------- -------------------- ----
| $ | <- Cash Accounting | | Accrual Accounting - > | $ \
---- ----------------- -------------------- | ..|
| - |
| - |
---
* In cash accounting,
revenues are recorded when cash is actually received and expenses are recorded when they are
actually paid – no matter when they were actually invoiced.
* In accrual accounting,
on the other hand, revenues and expenses are recorded when they are earned, regardless of when the
money is actually received or paid.
Win.!!!!!!! :
Let’s take a look at an example to illustrate the difference between the two methods:
A business sells a computer at the end of January and the customer pays by credit in the beginning
in February. Using accrual basis accounting the revenue is recorded immediately (in January). Using
cash basis accounting the revenue would be recorded when the credit payment was received (in February).
* The Advantage of Cash Accounting
The advantage of cash-based accounting is simplicity – it is much easier to manage cash flow in
real-time by merely checking the bank balance rather than having to examine accounts receivable and
accounts payable.
* The Advantage of Accrual Accounting
However, while cash-based accounting can give a point-in-time picture of the business cash flow,
accrual-based accounting gives a more accurate picture of the longer-term state of the business –
revenue and expenses are immediately recorded, allowing the business to more properly analyze trends
and manage finances. This method is more commonly used than the cash method.
Info.!!!!!!! :
Using cash basis accounting, income is recorded when you receive it, whereas, with the accrual method,
income is recorded when you earn it.
3. Accounting Equation :
------------------------
4 Topics :
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The basic accounting equation is the foundation of all accounting concepts. It represents the
relationship between the assets (what a business owns), liabilities (what it owes to others), and
owner’s equity (the difference between assets and liabilities). It is defined as:
Assets = Liabilities + Owners’ Equity.
Lesson Content
i. Assets
ii. Liabilities
iii. Owners’ Equity
iv. The Equation
i. Assets
An asset is anything in a business that has some sort of financial value and can be converted
to cash. Assets are the products you have stocked in your warehouse (they’re converted into
cash as you sell them), the cash in your register and all the equipment in your firm. Assets
can be grouped into two categories depending on how quickly you can convert them into cash:
* Current assets
are assets that can be converted into cash within one year – like checks, invoices, or store inventory.
Assets that you can quickly convert into cash also are called liquid assets.
* Fixed assets
are assets that take more than a year to be converted into cash. In most cases property, plants and
equipment are fixed assets.
Here’s a list of the most common kinds of business assets:
* Cash
Cash includes money and money equivalents such as checks, money orders, or
bank deposits.
* Accounts receivable
Accounts receivable represent the money that your clients and customers owe you
for purchasing your products or services. When you allow a customer to buy your
goods today and pay later, you’re creating a receivable. If you work strictly on
a cash basis (e.g. at a hot dog stand), you don’t have any receivables.
* Inventory
Inventory comprises all the products that you purchase or manufacture to sell to
customers, as well as raw materials and supplies used in operations. If you run a
grocery store, your inventory consists of all your store items.
* Prepaid expenses
When you pay for a product or service in advance, you create an asset known as a
“prepaid expense”. Examples include a prepaid maintenance contract on a typewriter
or an insurance policy with a one-year term paid in advance.
* Equipment
Equipment is the wide variety of property that your organization purchases to
carry out its operations. Examples include desks, chairs, or computers.
* Real estate
Real estate includes assets such as the land, buildings, and facilities வசதிகள் that
your company owns, occupies, and utilizes. Some companies have little or no
real estate assets, and others have sizable ones.
Aizable ones - கணிசமானவை.
Info.!!!!!!! :
An asset is a resource with economic value for an individual or corporation There are two types of
assets: 1. current assets and 2. fixed assets.
ii. Liabilities
Liabilities are money owed to others outside your organization. They may include the money
you owe to the company that delivers your office supplies, the payments you owe on the
construction loan that financed your warehouse expansion, or the mortgage on your corporate
headquarters building. In short, assets put money in your pocket, and liabilities take money
out! As with assets, there are also two types of liabilities:
* Current liabilities
are to be repaid within one year, for example, money for employee paychecks.
* Long-term liabilities
are to be repaid in a period longer than one year, for example, the mortgage on the
company’s facility.
Here are common business liabilities, from both the current and long-term categories:
* Accounts payable
Accounts payable are the obligations owed to the many individuals and organizations
that have provided goods and services to your company. Examples include money owed to
your computer network consultant and an out-of-house marketing advertising agency.
* Notes payable
Notes payable represent loans made to your company by individuals or organizations,
for example, a loan secured from a large bank.
* Accrued expenses
Sometimes a company incurs an expense but has no immediate plans to reimburse the
individual or organization that’s owed the money. Examples include future wages to
be paid to employees and utility bills.
* Bonds payable
When companies issue bonds to raise money to finance large projects, they incur
obligations கடமைகள் to pay back the individuals and organizations that purchase them.
* Mortgages payable
When companies purchase property, they often do so by taking out mortgages – long-term
real estate loans, secured by the property itself.
Info.!!!!!!! :
Liabilities are binding obligations that are payable to another person or entity. There are two types
of liabilities: 1. current liabilities and 2. long-term liabilities.
iii. Owners’ Equity
Owners’ Equity is the money that remains when you take all your company’s assets and subtract
all your liabilities. Owners’ equity represents the owners’ direct investment in the firm or
the owners’ claims on the company’s assets. Another way of expressing a company’s owners’
equity is its net worth. Net worth is simply a snapshot of your company’s financial health
for a particular period of time. Here are the two common types of owners’ equity:
* Paid-in capital:
The money that people invest in a company. When companies such as Facebook or Volkswagen offer to
sell shares of stock, investors provide paid-in capital to the companies when they pay money to
buy the stock.
* Retained earnings:
A company’s earnings that are held within the company. The money gets reinvested, not paid out to
shareholders as dividends.
Although owners’ equity generally is positive, it can go negative when a company takes on large
amounts of debt – for example, to acquire another company.
Info.!!!!!!! :
Owner’s equity,உரிமையாளர் பங்கு often called net assets, is the owners’ claim to company assets after all
of the liabilities have been paid off. Finally, there are two types of owner’s equity:
1. paid-in capital and 2. retained earnings. தக்க வருவாய்.
iv. The Equation
------------------ ------------------ ------------------
| Assets | = | Liabilities | + | Owners' Equity |
------------------ ------------------ ------------------
Owned resource Financial Obligations Owners' claims
The basic accounting equation (Assets = Liabilities + Owners’ Equity) is similar to any other
equation: A change to one side of the equation causes a change in the other. Therefore, every
financial transaction you make results in not one, but two entries to your accounting records
– noted as double-entry bookkeeping.
Rules of the Accounting Equation:
* Both sides of the Basic Accounting Equation should be equal and balance.
* Every business transaction should change at least two accounts. It means that in every value received,
another value is given up.
Example: Susie’s Sushi
For example, let’s take a look at Susie’s Sushi restaurant: When Susie’s Sushi buys a big yellowfin tuna
to slice up for customers, it affects her accounting equation.
Let’s assume that Susie’s Sushi starts with assets (inventory) of $1,000, liabilities (accounts payable)
of $500, and owners’ equity of $500. Her equation would look like this:
Assets = Liabilities + Owners’ Equity
$1,000 = $500 + $500
When Susie purchases that yellowfin tuna from the local fish market for $100, and the fish market agrees to
bill her for it, she acquires an asset (inventory). She also takes on a liability of $100 — the money owed
to the fish market (accounts payable). After this transaction, the accounting equation now looks like this:
Assets = Liabilities + Owners’ Equity
$1,100 = $600 + $500
As you can see, Susie added $100 of inventory to her assets, but she simultaneously added a payable of $100
to her liabilities. The owners’ equity doesn’t change. As this example shows, every transaction on one side
of the accounting equation results in a transaction on the other side of the accounting equation.
Info.!!!!!!! :
The basic accounting equation is: Assets = Liabilities + Owners’ Equity
4. Bookkeeping
2 Topics :
----------
Bookkeeping is the recording of financial transactions and is part of the process of accounting in business.
Transactions include purchases, sales, receipts, and payments. There are several methods of bookkeeping, the
most important one is the double-entry bookkeeping system.
Lesson Content
Journal Entries
Debits and Credits
i. Journal Entries
Bookkeeping is the recording of financial transactions (sales, purchases, receipts, and
payments). A bookkeeper, also known as an accounting clerk, is a person who records these
day-to-day financial transactions of an organization in the form of journal entries. Without
a sound bookkeeping system, all of finance is really only guesswork. No financial planning can
take place if the books and records from which information is drawn are not reliable.
Let’s take a look at an example. The following table features three journal entries:
--------------------------------------------------------
Date | Account & Description | Ref | Debit | Credit |
--------------------------------------------------------
20XX-| | | | |
Aug.1| Cash | | 50,000| |
| Notes Payable | | | 50,000|
| Borrowed $50,000 | | | |
Aug.3| Equipment | | 30,000| |
| Cash | | | 30,000|
| Purchased equipment | | | |
Aug.6| Vehicles | | 20,000| |
| Notes Payable | | | 18,000|
| Cash | | | 2,000|
| Purchased a truck | | | |
--------------------------------------------------------
What information can we find in these three journal entries? The first entry shows that $50,000 of cash
were borrowed. The second entry shows that equipment of $30,000 was bought in cash. The third one shows
that a vehicle was acquired for $20,000. $2,000 of which were paid in cash and $18,000 were borrowed.
All your accounting journal entries are aggregated திரட்டப்பட்டது into the general ledger. This information is then used
to construct financial statements at the end of a reporting period.
ii. Debits and Credits
Most people are familiar with debit and credit outside the context of accounting. We have debit
cards and credit cards that allow us to spend money directly from our checking account (debit cards)
or from our line of credit with our bank (credit cards). In this sense, debits are viewed as money
drawn from our bank account, and credits are viewed as money available to spend or borrow from the
bank. This is how debits and credits are represented on your bank account statement.
Business transactions are events that have a monetary impact on the financial statements of an organization.
When accounting for these transactions, we record numbers in two accounts, where the debit column is on the
left and the credit column is on the right.
* A debit
is an accounting entry that either increases an asset or expense account, or decreases a liability
or equity account.
* A credit
is an accounting entry that either increases a liability or equity account, or decreases an asset
or expense account.
Whenever an accounting transaction is created, at least two accounts are always impacted, with a debit entry
being recorded against one account and a credit entry being recorded against the other account.
In this course, we will not focus on the topic of debits and credits, since the concept is only important for
advanced accountants. Just keep in mind: After you have identified two or more accounts involved in a business
transaction, you must debit at least one account and credit at least one account.
Double Entry Accounting
Double-entry accounting, also called double-entry bookkeeping, is the accounting system that requires every
business transaction or event to be recorded in at least two accounts. Every debit that is recorded must be
matched with a credit. In other words, debits and credits must also be equal in every accounting transaction
and in their total.
Info.!!!!!!! :
Every modern accounting system is built on the double-entry bookkeeping concept because every business
transaction affects at least two different accounts.
Win.!!!!!!! :
For example, when a company takes out a loan from a bank, it receives cash from the loan and also creates
a liability that it must repay in the future. This single transaction affects two accounts – the asset
accounts and the liabilities accounts.
5. Financial Statements
4 Topics :
----------
Financial statements are a collection of reports about an organization’s financial results,
financial condition, and cash flows. The objective of financial statements is to provide information
about the financial position, performance, and changes for both the entity and for readers.
Lesson Content
i. Why Statements?
ii. Income Statement
iii. Balance Sheet
iv. Cash Flow Statement
i. Why Statements?
Financial statements are very useful to a wide range of stakeholders:
* Owners and managers
require financial statements to make business decisions that affect continued operations.
* Employees
need financial statements when making collective bargaining agreements with the management and when
discussing their compensation, promotion, and rankings.
* Investors
need to assess the viability நம்பகத்தன்மை of a business.
* Financial institutions (banks and other lending companies)
use statements to decide whether to grant a company fresh working capital or extend debt securities.
* Government entities (tax authorities)
need financial statements to ascertain உறுதிப்படுத்தவும் the accuracy of taxes declared and paid
by a company.
The standard contents of a set of financial statements are:
----------------
| Income |
/| Statement |
/ | |
/ ----------------
/
--------------- / -----------------
| |/ | ` |
| Financial |----------| Balance |
| Statements |\ | Sheet |
--------------- \ -----------------
\
\ -----------------
\ | Statement of |
\| Cash Flows |
| |
-----------------
* Income statement:
This statement, also referred to as profit and loss statement (or a “P&L”), reports on a company’s
income, expenses, and profits over a period of time. A profit and loss statement provides information
on the operation of the enterprise. These statements include revenue and various expenses incurred ஏற்பட்டது
during the processing state.
* Balance sheet:
This statement reports on a company’s assets, liabilities, and ownership equity at a given point in
time. A balance sheet is often described as a “snapshot of a company’s financial condition”. It
allows anyone to see what a company owns as well as what it owes to other parties as of the date
indicated in the heading.
* Statement of cash flows:
This statement reports on a company’s cash flow activities—particularly its operating, investing, and
financing activities.
For large corporations, these statements are often complex and may include extensive notes, an explanation
of financial policies, and management analysis. The notes typically provide detail for items on the
balance sheet, income statement, and cash flow statement.
We will now take a close look at the three most important financial statements.
ii. Income Statement
The income statement, also called the profit and loss statement (P&L), presents the results of
a company’s operations for a given period – a quarter, a year, etc. The income statement presents
a summary of the revenues, gains, expenses, losses, and net income or net loss of an entity for
the period.
This statement is similar to a moving picture of the entity’s operations during the time period specified. In
most cases, the income statement is the first financial statement prepared because the net income or loss must
be calculated before other financial statements can be prepared.
Keep in mind that the income statement shows revenues, expenses, gains, and losses; it does not show cash
receipts (money you receive) nor cash disbursements (money you payout).
The key item listed on the income statement is the net income or loss. A company’s net income for an
accounting period is measured as follows:
( Revenue ) - ( Expenses ) + ( Gains ) - ( Losses ) = ( Net Income)
Let’s break this down:
* Revenues
are inflows or other enhancements of assets of an entity or settlement of its liabilities (or both)
during a period, based on production and delivery of goods, provisions of services, and other
activities that constitute the entity’s major operations. Examples of revenues are sales revenue,
interest revenue, and rent revenue.
* Expenses
are outflows or other uses of assets during a period as a result of delivering or producing goods,
rendering services, or carrying out other activities that constitute the entity’s ongoing major or
central operations. Examples are cost of goods sold, salaries expense, and interest expense.
* Gains
are increases in owners’ equity (net assets) from peripheral or incidental transactions of an entity
and from all other transactions and events affecting the entity during the accounting period, except
those that result from revenues or investments by owners. Examples are a gain on the sale of a building
and a gain on lawsuits.
* Losses
are decreases in owners’ equity (net assets) from peripheral or incidental transactions of an entity and
from all other transactions and events affecting the entity during the accounting period except those that
result from expenses or distributions to owners. Examples are losses on the sale of investments and losses
on lawsuits.
* Net Income
is the excess of all revenues and gains for a period over all expenses and losses of the period. Net loss
is the excess of expenses and losses over revenues and gains for a period.
Info.!!!!!!! :
The income statement presents the results of a company’s operations for a given time period.
There are two income statement formats that are generally prepared: The single-step statement and the
multi-step statement.
The single-step income statement uses only one subtraction to arrive at net income:
-----------------------------------------------------------
| Net Income = ( Revenues + Gains) - ( Expenses + Losses) |
-----------------------------------------------------------
An extremely condensed income statement in the single-step format would look like this:
-----------------------------------------------------------
Sample Products Co.
Income Statement
For the Five Months Ended May 31, 2018
Revenues & Gains $108,000
Expenses & LOsses $90,000
----------
Net Income $18,000
==========
-----------------------------------------------------------
The heading of the income statement conveys critical information. The name of the company appears first,
followed by the title “Income Statement.” The third line tells the reader the time interval reported on
the profit and loss statement.
Since income statements can be prepared for any period of time, you must inform the reader of the precise
period of time being covered (for example: Year Ended May 31 or Month Ended May 31.)
A sample income statement in the single-step format with more details would look like this:
-----------------------------------------------------------
Sample Products Co.
Income Statement
For the Five Months Ended May 31, 2018
Revenues & Gains
Sales revenues $100,000
Interest revenues $5,000
Gain on sales of assets $3,000
----------
Total revenues & gains $108,000
----------
Expenses & LOsses
Cost of goods sold $75,000
Commissions expense $5,000
Office supplies expense $3,500
Office equipment expense $2,500
Advertising expense $2,000
Interest expense $500
Loss from lawsuit $1,500
----------
Total expenses & losses $90,000
----------
----------
Net Income $18,000
==========
-----------------------------------------------------------
An alternative to the single-step income statement is the multiple-step income statement because it uses
multiple subtractions in computing the net income shown on the bottom line.
The multiple-step statement segregates பிரிக்கிறது the operating revenues and operating expenses from the
nonoperating revenues, nonoperating expenses, gains, and losses. The multiple-step income statement also
shows the gross profit (net sales minus the cost of goods sold).
Here is a sample income statement in the multiple-step format:
-----------------------------------------------------------
Sample Products Co.
Income Statement
For the Five Months Ended May 31, 2018
Sales $100,000
Cost of goods sold $75,000
----------
Gross profit $25,000
----------
Operating & expense
Selling expenses
Advertising expense $2,000
Commissions expense $5,000
------ $7,000
Administrative expenses
Office supplies expense $3,500
Office equipment expense $2,500
------ $6,000
----------
Total operating expenses $13,000
----------
Operating income $12,000
----------
Non-Operating or other
Interest revenues $5,000
Gain on sales of investments $3,000
Interest expense (500)
Loss from lawsuit ($1,500)
----------
Total non-operating $6,000
==========
-----------------------------------------------------------
Using the above multiple-step income statement as an example, we see that there are three steps needed
to arrive at the bottom line Net Income:
* Cost of goods sold is subtracted from net sales to arrive at the
gross profit:
$100,000 – $75,000 = $25,000
* Operating expenses are subtracted from gross profit to arrive at
operating income:
$25,000 – $13,000 = $12,000
* The net amount of nonoperating revenues, gains, nonoperating expenses and losses is combined with the
operating income to arrive at the
net income (or net loss):
$12,000 + $6,000 = $18,000
There are three main benefits to using a multiple-step income statement instead of a single-step
income statement:
-----------------
| Main Benefits |
-----------------
|
--------------------------------------------------
| | |
----------------- -------------------- -----------------
| Gross Margin | | Operating Income | | Net Income |
----------------- -------------------- -----------------
* The multiple-step income statement clearly states the gross profit amount. Many readers of financial
statements monitor a company’s gross margin (gross profit as a percentage of net sales). Readers may
compare a company’s gross margin to its past gross margins and to the gross margins of the industry.
* The multiple-step income statement presents the subtotal operating income, which indicates the profit
earned from the company’s primary activities of buying and selling merchandise.
* The bottom line of a multiple-step income statement reports the net amount for all the items on the
income statement. If the net amount is positive, it is labeled as net income. If the net amount is
negative, it is labeled as net loss.
iii. Balance Sheet
The balance sheet, also called the statement of financial position, reports a company’s
financial position based on its assets, liabilities, and equity at a single moment in time.
Unlike the income statement, the balance sheet does not report activities over a vast time frame. The
balance sheet is essentially a picture of a company’s resources, debts, and ownership on a given day.
This is why the balance sheet is sometimes considered less reliable or less telling of a company’s
current financial performance. Annual income statements look at performance over the course of
12 months whereas the balance sheet only focuses on the financial position of one day.
Info.!!!!!!! :
The Balance Sheet reports a firm’s financial position at a single moment in time.
The balance sheet is basically a report version of the accounting equation (also called the balance
sheet equation) where assets always equal liabilities plus shareholder’s equity.
In this way, the balance sheet shows whether the resources controlled by the business (assets) are
financed by debt (liabilities) or shareholder investments (equity). Investors and creditors generally
look at the statement of financial position for insight as to how efficiently a company can use its
resources and how effectively it can finance them.
Accountants usually prepare classified balance sheets. “Classified” means that the balance sheet
accounts are presented in distinct groupings, categories, or classifications. An outline of a
balance sheet using the balance sheet classifications is shown here:
Intangible assets-தொட்டுணர முடியாத சொத்துகளை
------------------------------------------------------------------- Example Company
Balance Sheet
December 31, 2018
ASSETS LIABILITIES & OWNER'S Equity
------------------------ ------------------------------------
Current assets Current Liabilities
Investements Long-term Liabilities
Property, plant and equiment Total Liabilities
Intangible assets
Other assets Owner's equity
Total assets Total Liabilities& Owner's equity
-------------------------------------------------------------------
Most accounting balance sheets classify a company’s assets and liabilities into distinctive groupings
such as Current Assets; Property, Plant, and Equipment; Current Liabilities; etc. These classifications
make the balance sheet more useful.
Like all financial statements, the balance sheet has a heading that display’s the company name, the
title of the statement and the time period of the report:
-----------------------------------------------------------------------
Example Company
Balance Sheet
December 31, 2018
ASSETS LIABILITIES
------------------------ ------------------------------------
Current assets Current Liabilities
Cash $2,100 Notes payable $ 5,000
Petty Cash 100 Accounts payable $ 35,900
Temporary investments $10,000 Wages payable $ 8,500
Accounts recivable-net $40,500 Interest payable $ 2,900
Inventory $31,000 Taxes payable $ 6,100
Supplies $3,800 Warranty liability $ 1,100
Prepaid Insurance $1,500 Unearned renvenues $ 1,500
--------- -----------
Total current assets $89,000 Total current Liabilities 61,000
--------- -----------
Investments $36,000 Long-term Liabilities
---------
Notes payable $ 20,000
Property, Plant& equipment Bonds payable $400,000
Land $ 5,500 -----------
Land improvements $ 6,500 Long-term Liabilities $420,000
Buildings $180,000 -----------
Equipment $201,000 Total Liabilities $481,000
Less accum depreciation (56,000) -----------
---------
Prop, plant & equp -net $337,000
---------
Intangiable assets STOCKHOLDERS' EQUITY
-------------------------------------
Goodwill $105,000 Common stock $ 110,000
Trade names $200,000 Retained earnings $ 229,000
--------- Less : Treasury stock $ (50,000)
Total intangible assets $305,000 -----------
--------- Total stockholders equity 289,000
Other assets $ 3,000 -----------
---------
Total assets $770,000 Total Liabilities & $770,000
========= stockholders equity ===========
The notes to the sample balance sheet have been omitted
-----------------------------------------------------------------------
One thing to note is that just like in the accounting equation, total assets equal total liabilities and
equity. This is always the case. In this example, total assets are $770,000 and total liabilities plus
stockholders’ equity are $770,000 as well.
The balance sheet gives us an idea of a firm’s financial position:
* The company has total assets of $770,000 – such as $2,100 in cash, $40,500 in accounts receivable and
$337,000 in property, plant & equipment.
* The company has liabilities of $481,000 ($61,000 current liabilities plus $420,000 long-term debt).
The company has equity of $289,000.
* The firm’s total assets equal the firms’s total liabilities and equity. This is not only true for
this company but for all balance sheets.
Now that the balance sheet is prepared and the beginning and ending cash balances are calculated, the
statement of cash flows (next chapter) can be prepared.
iv. Cash Flow Statement
The cash flow statement, also called the statement of cash flows, reports the cash
generated and used during the time interval specified in its heading. The cash flow
statement shows investors and creditors what transactions affected the cash accounts
and how effectively and efficiently a company can use its cash to finance its operations
and expansions.
This is particularly important because investors want to know the company is financially sound while
creditors want to know the company is liquid enough to pay its bills as they come due. In other words,
does the company have good cash flow?
Info.!!!!!!! :
The cash flow statement reports the cash generated and used in a specific time period.
Cash inflows and outflows are classified into three activities:
----------------------
| Cash Inflow and |
| Outflow Activities |
----------------------
|
--------------------------------------------------
| | |
----------------- ----------------- -----------------
| Operating | | Investing | | Financing |
| Activities | | Activities | | Activities |
----------------- ----------------- -----------------
* Operating activities refer to the main operations of the company such as the rendering of professional
services, acquisition of supplies, selling of inventories, and others. In general, operating activities
refer to those that involve current assets and current liabilities.
* Investing activities may be summed up as: “where the company puts its money for long-term purposes”,
such as the acquisition of property, plant, and equipment; and investment in long-term securities. In
general, investing activities include transactions that involve non-current assets.
* Financing activities refer to: “where the company gets its funds”, such as investment of the owner/s,
and cash proceeds from a bank loan and other long-term payables. In general, financing activities include
those that affect non-current liabilities and capital.
Because the income statement is prepared under the accrual basis of accounting, the revenues reported may
not have been collected. Similarly, the expenses reported on the income statement might not have been paid.
You could review the balance sheet changes to determine the facts, but the cash flow statement already has
integrated all that information. As a result, smart business people and investors utilize this important
financial statement.
Example:
On January 2, 2014 Matt invests $2,000 of his personal money into his sole proprietorship, Good Deal Co.
On January 20, Good Deal buys 14 graphing calculators for $50 per calculator—this is about 50% less than
the selling price Matt has observed at the retail stores. The total cost to Good Deal for all 14 calculators
is $700. Good Deal has no other transactions during January.
Matt prepares the Cash Flow Statement for his new business as of January 31, 2014. Like all financial statements,
the statement of cash flows has a heading that display’s the company name, the title of the statement and the
time period of the report. It also lists the operating, investing and financing activities:
--------------------------------------------------------------------
Good Deal Co.
Statement of Cash Flows
For the Month Ended January 31, 2014
Operating Activities
Net income $ 0
Increase in inventory $(700)
--------
Cash provided (used) in operating activities $(700)
Investing Activities $ 0
Financing Activities
Investment by owner $2,000
--------
Net increase in cash $1,300
Cash at the begining of the month $ 0
--------
Cash at the end of the month $1,300
========
--------------------------------------------------------------------
The cash flow statement reports that Good Deal’s operating activities resulted in a decrease in cash of
$700. The decrease in cash occurred because the company increased its inventory by $700 during January.
The financing activities section shows an increase in cash of $2,000 which corresponds to the increase
in Matt Jones, Capital (Matt’s investment in the business). The net change in the Cash account from the
owner’s investment and the cash outflow for inventory is a positive $1,300.
This net change of $1,300 is verified at the bottom of the cash flow statement. There was $0 cash on
January 1, but on January 31, the Cash balance is $1,300.
6. Financial Analysis
5 Topics :
----------
You now know how to read the three most important financial statements. But in this chapter we will go one
step further: we will learn to analyze and interpret these statements. You will be able to answer questions
like: Is this company doing well? Is it risky to invest? Is company A or B doing better?
Lesson Content
Why Financial Analysis?
Profit Margin
Current Ratio
Debt-to-Equity Ratio
Return on Equity (ROE)
Previous Lesson
i. Why Financial Analysis?
ii. Profit Margin
iii. Current Ratio
iv. Debt-to-Equity Ratio
v. Return on Equity (ROE)
i. Why Financial Analysis?
By using a variety of methods to analyze the financial information included in the statements,
users can determine the risk and profitability of a company. The most popular method is the use
of financial ratios. Financial ratios quantify many aspects of a business and are an integral
part of the financial statement analysis.
The financial analysis relies on comparing or relating data in a way that enhances the utility or practical
value of the information. For example, when analyzing a particular company, it is helpful to know that it
has generated a net income of $100,000 for the year, but it is even more helpful to know that, in a previous
year, it had only generated a net income of $25,000.
As more information is added, such as the total amount of sales, the number of assets and the cost of
goods sold, the initial information becomes increasingly valuable, and a more complete picture of a
company’s financial activity can be derived. Financial analysis allows for a number of comparisons.
The four most common comparisons are:
* Between companies
* Between industries
* Between different time periods for one company
* Between a single company and its industry average
In general, financial ratios can be broken down into five main categories:
* Profitability ratios indicate the amount of income that the company retains.
* Liquidity ratios analyze the ability of a company to pay off its current liabilities.
* Solvency ratios (leverage ratios) quantify the firm’s ability to repay long-term debts.
* Efficiency ratios showcase the effectiveness of the firm’s use of resources.
* Market ratios estimate the attractiveness of a potential or existing investment.
Info.!!!!!!! :
All five categories carry many important ratios that offer insight into the company’s operations. You can
learn more about them in our course “Financial Performance“. Although all of these ratios are important,
we want to highlight four of them for you in the next chapters.
ii. Profit Margin
` Profit margin is one of the most analyzed numbers a company can produce, and it plays a part
in many other financial measures. Profit margin refers to the amount of profit that a company earns through
revenue. Typically expressed as a percentage, net profit margins show how much of each dollar collected by
a company as revenue translates into profit. The net profit margin is calculated by dividing net profit and
revenue.
Net Profit
Net Profit Margin = ------------
Revenue
Companies need to have a positive profit margin in order to earn income. Only in a few cases having a
negative profit margin may be advantageous (e.g. intentionally selling a new product below cost in order
to gain market share). A low profit margin indicates a low margin of safety.
Example:
We calculate the profit margin of Peter’s Store with the help of the income statement:
------------------------------------------------------------------------
Peter’s Computer Store
Income Statement
For the Year Ended December 31, 2018
------------------------------------------------------------------------
Service Revenue $160,000
Less : Expenses
Salaries Expenses $ 40,000
Supplies Expenses $ 28,000
Rent Expenses $ 10,000
Utilities Expenses $ 11,000
Depreciation Expenses $ 5,000 $ 94,000
Net Income $ 66,000
------------------------------------------------------------------------
For Peter’s Computer Store the profit margin is:
Net Profit ($66,000)
--------------------- = 0.41
Revenue ($160,000)
This means that 41 cents of each dollar collected as revenue by the company translates into profit. In
order to determine if a profit margin of 0.41 (or 41 percent) is a good value, it needs to be compared
against other companies.
Profit margin varies greatly between companies and industries. Care should also be taken when comparing
profit margin over time, as many companies and industries are cyclical சுழற்சி. This is why comparisons are
generally most meaningful among companies within the same industry, and the definition of a “high” or “low”
net income should be made within this context.
iii. Current Ratio
The current ratio is a liquidity ratio that measures a firm’s ability to pay off its short-term
liabilities with its current assets. The current ratio is an important measure of liquidity
because short-term liabilities are due within the next year. The current ratio is calculated
by dividing current assets by current liabilities.
Current Assets
Current Ratio = ---------------------
Current Liabilities
The current ratio helps investors and creditors understand the liquidity of a company and how easily that
company will be able to pay off its current liabilities. For example, a current ratio of 4 would mean that
the company has 4 times more current assets than current liabilities. A higher current ratio is always more
favorable than a lower current ratio because it shows the company can more easily make current debt payments.
Example:
Susie’s Sushi is applying for loans to help fund her dream of expanding her restaurant. Her bank asks for
her balance sheet so they can analysis her current debt levels. According to Susie’s balance sheet, she
reported $100,000 of current liabilities and only $25,000 of current assets. Her current ratio would be
calculated like this:
$ 25,000
---------- = 0.25
$100,000
As you can see, Susie only has enough current assets to pay off 25 percent of her current liabilities.
This shows that Susie is highly leveraged and highly risky. Banks would prefer a current ratio of at
least 1 or 2, so that all the current liabilities would be covered by the current assets. Since Susie’s
ratio is so low, it is unlikely that he will get approved for her loan.
iv. Debt-to-Equity Ratio
The debt to equity ratio is a financial, liquidity ratio that compares a company’s total debt
to total equity. The debt to equity ratio shows the percentage of company financing that comes
from creditors and investors. A higher debt to equity ratio indicates that more creditor financing
(bank loans) is used than investor financing (shareholders).
The debt to equity ratio is calculated by dividing total liabilities by total equity.
Total Liabilities
Debt-to-Equity Ratio = ---------------------
Total Equity
Each industry has different debt to equity ratio benchmarks, as some industries tend to use more debt
financing than others. A debt ratio of .5 means that there are half as many liabilities than there is
equity. In other words, the assets of the company are funded 2-to-1 by investors to creditors.
A lower debt to equity ratio usually implies a more financially stable business. Companies with a
higher debt to equity ratio are considered riskier to creditors and investors than companies with a
lower ratio.
Example:
Assume the restaurant Susie’s Sushi has $100,000 of bank lines of credit and a $500,000 mortgage on its
property. The shareholders of the company have invested $0.9 million. The Debt-to-Equity Ratio is:
$100,000 + $500,000
---------------------- = 0.67
$900,000
The real use of debt-to-equity ratio is in comparing the ratio for firms in the same industry. If a firm’s
debt-equity ratio varies significantly from its competitors or the averages for its industry, this should
raise a red flag. Companies with a ratio that is too high can be at risk as they might not be able to meet
their debt obligations கடமைகள்.
v. Return on Equity (ROE)
Typically, shareholders want to know how profitable their capital is in the businesses they
invest it in. That’s where Return on Equity (ROE) comes in handy. ROE is a financial ratio
that measures how good a company is at generating profit. Return on equity is calculated by
taking the firm’s net profit and dividing the result by equity.
Net Profit
ROE = ------------
Equity
In essence, ROE measures how efficient the company is at generating profits from the funds invested in it.
A company with a high ROE does a good job of turning the capital invested in it into profit, and a company
with a low ROE does a bad job.
Example:
We can calculate the ROE of a company with the help of the income statement (net profit can be found here),
and the balance sheet (equity can be found here). Let’s assume that a company has a net profit of $1 million
and equity of $8 million. This results in an ROE of:
$1,000,0000
------------- = 0.125
$8,000,0000
The higher the ROE, the better the company is at generating profits. This company has an ROE of 12.5%. ROE
is especially used for comparing the performance of companies in the same industry. ROEs of 15-20% are
generally considered good, but what counts as “good” really varies by company, industry, and economic
environment. If the average ROE in this industry is 20%, a value of 12.5% would be somewhat worrisome.
This would mean that the company’s management has to improve its ability to generate income from the
equity available. If it fails to do so, it might risk being overtaken by the competition.
7. Time Value of Money
2 Topics :
----------
Time value of money (TVM) is the idea that money that is available at the present time is worth more
than the same amount in the future, due to its potential earning capacity. TVM is one of the most
fundamental concepts in business and finance.
Lesson Content
What is TVM?
Simple and Compound Interest
i. What is TVM?
Imagine you are lucky enough to have someone come up to you and say: “I want to give you $1,000.
You have two options: You can have $1,000 right now or I can give you $1,000 in a year from now.
What would you prefer?”
Presumably, you would ask to have the $1,000 right now, because of risk, opportunity cost and inflation வீக்கம்:
* First of all, there is a certain amount of risk associated with waiting for a year. The person might
simply disappear and you’ll get $0. The person might lose $500 and you’ll only get $500.
* Secondly, prices of everyday items might increase (inflation) in a year and with the same $1,000, you will
be able to buy fewer things.
* Thirdly, let’s don’t forget about opportunity cost. If you have $1,000 today and invest it with a
10% interest rate, you’ll end up with $1,100 in a year from now. Thus, if you choose option two, you are
essentially missing out good investment opportunities.
Info.!!!!!!! :
One of the most fundamental concepts in finance is the Time Value of Money (TVM). It is the concept that
money is worth more today than it is in the future.
Let’s take a look at another example. Imagine the same person asks you whether you prefer $1,000 today or
$1,100 a year from now. The $1,000 is the “present value” and the $1,100 is the “future value” of the money.
In this case, if the interest rate used in the calculation is 10%, there is no difference between the two.
The time value of money matters because you will use it in your daily consumer, business and banking
decision making. All of these systems are driven by the idea that lenders and investors earn interest
paid by borrowers in an effort to maximize the time value of their money. Your job is to limit the cost
of money to you and to increase returns on your investments.
ii. Simple and Compound Interest
There are two primary ways of determining how much an investment will be worth in the future
if the time frame is more than one period.
* The first concept of earning interest is called simple interest. Simple interest is calculated on the
principal, or original, amount of a loan. Your total balance will go up each period because you earn interest
each period, but the interest is paid only on the amount you originally borrowed/deposited.
* The second way of accruing interest is called compound interest. Compound interest allows your money
to continue growing faster and faster the longer you have it invested because the interest you earn is
rolled back into your principal so it can start earning interest as well. In this case, interest is paid
on interest!
* To understand why compound interest is so great, you have to see it side by side with simple interest.
In this example, we are using a starting principal balance of $10,000 and a 10 percent interest rate.
With simple interest, the principal balance remains the same throughout, but with compound interest,
the interest payment is rolled into the principal each year:
Simple Interest Compound Interest
Year Principal Interest$ Toal Interest Principal Interest$ Toal Interest
1 $10,000 $1,000 $1,000 $10,000 $1,000 $1,000
2 $10,000 $1,000 $2,000 $11,000 $1,100 $2,100
3 $10,000 $1,000 $3,000 $12,100 $1,210 $3,310
4 $10,000 $1,000 $4,000 $13,310 $1,331 $4,641
5 $10,000 $1,000 $5,000 $14,641 $1,464 $6,105
6 $10,000 $1,000 $6,000 $16,105 $1,611 $7,716
7 $10,000 $1,000 $7,000 $17,715 $1,772 $9,488
8 $10,000 $1,000 $8,000 $19,487 $1,949 $11,437
9 $10,000 $1,000 $9,000 $21,436 $2,144 $13,581
10 $10,000 $1,000 $10,000 $23,579 $2,358 $15,939
At the end of 10 years, you will receive more than 50 percent more money in interest payments with compound
interest ($15,939) than you do with simple interest ($10,000).
As you can see in the graph below, simple interest increases your balance linearly each year. Using
compound interest, your balance will grow exponentially.
Note : For the "Simple Vs Compound Interest" refer to the exact image from the local folder of IBMI.
8. Budgets
3 Topics :
----------
One of the keys to running a business is the ability to predict how it will perform financially. A budget is a financial plan for a defined period, often one year. Companies, governments, but also families and individuals use it to express strategic plans of activities or events in measurable terms.
Lesson Content
i. Why Budgets?
ii. Types of Budgets
iii. Variance Analysis
i. Why Budgets?
A budget is nothing more than a written estimate of how an organization – or a particular
project, department, or business unit – will perform financially.
The real value in budgets comes when you compare estimates of expected performance to actual performance.
When the numbers match, you know that your organization or project is performing just as it should. When
the numbers differ markedly, you know that you need to ask the question “Why?” and take a very close look
at what’s going on.
With the speed of business increasing all the time, why bother doing budgets at all? Budgets offer the
following benefits to organizations that use them:
* Budgets are milestones on the road to your goals. Every organization has (or at least should have) goals.
Budgets are quick and easy ways to see whether your organization is on track to meet its financial goals.
* Budgets make decisions easier: When you budget a project, initiative, or business activity, you’ll quickly
have a picture of what it will cost. Armed with that information, you can decide whether the costs you’ll
incur செலவு ஏற்படும் make good business sense or not.
* Budgets can be fast: A budget can be a simple, one-page computer spreadsheet. With simple budgets, you
can make changes quickly, in near-real-time, and print them out or e-mail them immediately.
* Budgets can be flexible: A budget can accommodate changes and create an up-to-date picture of how your
organization is performing.
Whereas extensive, long-range (strategic) planning seems increasingly less valuable to most organizations
today, near-term (tactical) planning is becoming incredibly valuable. Budgets are a very necessary part
of the tactical planning process.
ii. Types of Budgets
There are three key approaches to developing a budget:
----------------------
| Types of Budgets |
----------------------
|
--------------------------------------------------
| | |
----------------- ----------------- -----------------
| Bottom-up | | Top-Down | | Zero-Based |
----------------- ----------------- -----------------
Each budget type has its advantages and disadvantages, and each type can work well – although the pendulum
is clearly swinging in favor of the bottom-up approach:
* Bottom-up Budgeting:
In bottom-up budgeting, supervisors and middle managers prepare the budgets and then forward them up
the chain of command for review and approval. Middle managers have the benefit of close working
knowledge of the organization and its financial performance. As a result, bottom-up budgets tend to
be more accurate than top-down budgets. In addition, bottom-up budgets can have a positive impact
on employee morale, because employees assume an active role in providing financial input to the
budgeting process.
* Top-down Budgeting:
In this approach, top management prepares the budgets and imposes விதிக்கிறது them on the lower layers
of the organization – generally without any consultation or involvement on the part of those outside
of top management. Top-down budgets clearly express the performance goals and expectations of top
management. These budgets, however, can be unrealistic, because they don’t incorporate the input of
the very people who will implement them.
* Zero-based Budgeting:
The process in which each manager prepares estimates of his or her proposed expenses for a specific
period of time, as though they were being performed for the first time. In other words, each budgeted
activity starts from a budget base of zero. By starting from scratch at each budget cycle, managers
must take a close look at all their expenses and justify them to top management,
thereby (at least in theory) minimizing waste.
iii. Variance Analysis
A simple way to keep your eye on the numbers is through variance analysis. In simple terms,
variance analysis is a comparison of the financial estimates that you budget for a particular
period with your firm’s actual financial results. The variance is the difference between budget
and actual – which can be positive, negative or zero. This method gives you an immediate
picture of financial issues that may require a closer look on your part.
In the following monthly expense report example, look at the variance between the budget and the
actual figures:
Expenses Budget Actual Variance
Rent $1,400 $1,400 $0
Wages $10,000 $12,500 $2,500
Taxes $1,300 $1,500 $200
Insurance $1,000 $1,500 $500
----------------------------------
Total expenses $13,700 $16,900 $3,200
----------------------------------
In this example, fixed expenses were originally budgeted at $13,700 for the month. However, when the
month ended, the accounting system reflected actual fixed expenses of $16,900. This resulted in a
total variance — or over-pending — of $3,200.
After you determine that you have a budget variance for the period in question, the next step is to
decide whether it’s significant and, if so, to figure out why it occurred. A variance of $3,200,
which is 23 percent of the original budget of $13,700, is definitely significant and warrants a
very close look by the responsible manager.
If you were that manager, what would you identify as the most significant variance in the table above?
A quick look indicates that wages are the main source of the variance, with spending for the period
totaling $2,500 more than the plan. This may mean that employees are charging excessive overtime,
someone got a raise that you hadn’t anticipated or any number of other possibilities. As the manager,
it’s your job to determine the reason behind the numbers and then decide if corrections need to be made.
Variances are not limited to expenses like in the example above. You can create variances for all kinds
of key performance indicators in your company. Most commonly-derived variances used in variance analysis
include the purchase price variance, labor rate variance, selling price variance, labor efficiency variance,
and many more.
It is not necessary to track all of the preceding variances. In many organizations, it may be sufficient
to review just one or two variances. For example, a consulting business might be solely concerned with
the labor efficiency variance, while a manufacturing business in a highly competitive market might be
most concerned with the purchase price variance.
9. Financial Markets :
A financial market brings buyers and sellers together to trade in financial assets such as stocks,
bonds, commodities, derivatives, and currencies. The purpose of a financial market is to set prices
for global trade, raise capital, and transfer liquidity and risk.
Although there are many components to a financial market, two of the most commonly used are money markets
and capital markets.
The Money Market is an unorganized arena of banks, financial institutions, bill brokers, money dealers, etc.
wherein trading on short-term financial instruments is being concluded. These markets are also known by the
name wholesale market. Trade Credit, Commercial Paper, Certificate of Deposit, Treasury Bills are some
examples of the short-term debt instruments. They are highly liquid in nature, and that is why their
redemption period is limited to one year. They provide a low return on investment, but they are quite safe
trading instruments.
Money Market is an unsystematic market, and so the trading is done off the exchange, i.e. Over The Counter
(OTC) between two parties by using phones, email, fax, online, etc. It plays a major role in the circulation
of short-term funds in the economy. It helps the industries to fulfill their working capital requirement.
The Capital Market is a type of financial market where the government or company securities are traded for
the purpose of raising long-term finance to meet the capital requirement.
The securities which are traded include stocks, bonds, debentures, euro issues, etc. whose maturity period
is not limited up to one year or sometimes the securities are irredeemable (no maturity). The market plays
a revolutionary role in circulating the capital in the economy between the suppliers of money and the users.
Money Market Capital Market
--------------------- -------------------------------- ----------------------------
Meaning Short-term securities are Long-term securities are
issued and traded issued and traded
Financial Instruments Government Securities, Shares, Bonds,
Certificate of Deposit, Debentures, etc.
Commercial Papers (CPs), etc.
Risk Factor Low High
Return on Investment Low High
Time Horizon Less than one year More than one year
Info.!!!!!!! :
In conclusion, capital markets offer higher-risk investments, while money markets offer safer assets.
Money market returns are often low but steady, while capital markets offer higher returns.
10. Case Study: Adidas & Nike :
Nike and Adidas are the two largest sportswear brands in the world. Effective marketing strategies
and innovative products have helped the two companies outperform the broader apparel industry over
the last decades. In this short case study, we want to analyze how the two businesses have evolved
financially between 2015 and 2018.
Nike is a multinational American sportswear company headquartered in Beaverton, US. It was founded by Bill
Bowerman and Phil Knight, who were driven by their passion to design better footwear for athletes in 1964.
The business only had one shoe and one t-shirt within its portfolio in the initial years, but now sells
thousands of sporting products in 170 countries spanning around the world.
Adidas is a multinational corporation headquartered in Herzogenaurach, Germany, that designs and manufactures
shoes, clothing, and accessories. It was founded by Adi Dassler in 1924, when he operated the company out of
a washroom and focused on footwear by registering the famous three-stripe design that Adidas still lives by
today. The firm now sells products in 160 countries. His brother, Rudolf Dassler, established Puma, which
became Adidas’ business rival.
Total Revenues
Today, Nike is the most valuable brand among sports businesses. However, Adidas has been able to close the
gap on the market leader over recent years through increased marketing spend. In the following charts, we
can see how the total revenue of both companies evolved from 2015 to 2018.
Note : For the "Total Revenues" refer to the exact image from the local folder of IBMI.
Nike has added roughly $6.7 billion to total revenue since 2015, increasing at an average annual rate of 6.5%.
On the other hand, Adidas has been able to add roughly $7 billion to total revenues, growing at an average
annual rate of 11.3%. However, Nike is notably bigger than second-placed Adidas. Nike’s total revenue in 2018
stood at $39 billion – much more than Adidas’ $26 billion.
This growth has been led by the apparel and footwear segment which have continued to achieve robust growth in
the last couple of years driven by continued global trends such as increasing penetration of sportswear, rising
sports participation rate, and increasing health awareness.
Marketing Expenses
Adidas’s strong growth over recent years can be attributed at least partially to its increased marketing spend:
Note : For the "Marketing Expenses" refer to the exact image from the local folder of IBMI.
Adidas has been more aggressive than Nike in marketing its products. As of 2018, Adidas’ marketing
expenditure stood at $3.5 billion – representing roughly 14% of total revenues. On the other hand, Nike’s
marketing expenditure of $3.8 billion was higher than of Adidas but represented less than 10% of Nike’s
total revenues.
Net Income and Profit Margin
In the following charts, we can see how net income, as well as the net profit margins of both companies,
evolved between the years 2015 and 2018:
Note : For the "Net Income and Profit Margin" refer to the exact image from the local folder of IBMI.
In 2018, Nike’s net income of $4 billion was twice as high as Adidas’ $2 billion. Moreover, Nike’s net
income margin of 10.3% was higher than Adidas’ margin of 7.8%. However, since 2015, Nike’s profit margin
has had its ups and downs while Adidas, led by strong revenue growth, has been able to steadily increase
its margin.
Outlook
Nike has a larger scale and higher profitability than Adidas, but the latter seems to be closing the gap
over the last few years – as evident from Adidas’ strong revenue growth and aggressive marketing
expenditure. That said, both Adidas and Nike have expanded the scale and scope of their operations over
time by adding new brands.
Both companies have also launched effective buzz marketing campaigns with both innovative products and
celebrity endorsements and collaborations. Nike and Adidas have outperformed the other apparel,
particularly footwear companies, in the past few years and we expect this trend to continue in the
foreseeable future.
In this course you learned the basics of finance and accounting, the so-called “language of business.”
By now you are able to measure basic financial information, to read financial statements, to analyze these
statements with ratio analyses, and to understand the role of financial markets.
Flag !!!!!!! :
Thank you for taking this course and good luck with the quiz!
Finance and Accounting - Exam :
--------------------------------
Finance and Accounting – Exam
Welcome to the course quiz!
Now it’s time to test your knowledge and get your course certificate. You will be able to download your
certificate after reaching a minimum score of 70%. You can retake this quiz as often as you like if you
do not reach this score.
Question 1 of 11
What does the “revenue principle” state?
The primary goal of every organization is increasing revenue.
Revenue should always surpass Costs.
Answer : Revenue is earned when the sale is made, which is typically when goods or services are provided.
Revenue is earned when the sale is recorded in the books, not when goods or services are provided.
1. Revenue Principle
The revenue principle, also known as the realization principle, states that revenue is earned when
the sale is made, which is typically when goods or services are provided. A key component of the
revenue principle, when it comes to the sale of goods, is that revenue is earned when legal ownership
of the goods passes from seller to buyer. Note that revenue isn’t earned when you collect cash for
something.
Question 2 of 11
What is the correct Accounting Equation?
Assets = Liabilities – Equity
Answer : Assets = Liabilities + Equity
Liabilities = Assets – Equity
Liabilities = Assets + Equity
Assets = Liabilities + Owners’ Equity.
Note : For the "Market Growth_Market Share" refer to the exact image from the local folder of IBMI.
Question 3 of 11
What is a Journal Entry?
A balance sheet
Answer : A logging of financial transactions
A financial ratio
* The general ledger
Types of Financial Transactions
There are four main types of financial transactions that occur in a business. These four types of
financial transactions are sales, purchases, receipts, and payments. Each financial business transaction
will be written down as a Journal Entry (we will cover this topic later).
FT => ( SP RP )
-------
i. Journal Entries
Bookkeeping is the recording of financial transactions (sales, purchases, receipts, and
payments). A bookkeeper, also known as an accounting clerk, is a person who records these
day-to-day financial transactions of an organization in the form of journal entries. Without
a sound bookkeeping system, all of finance is really only guesswork. No financial planning can
take place if the books and records from which information is drawn are not reliable.
Let’s take a look at an example. The following table features three journal entries:
--------------------------------------------------------
Date | Account & Description | Ref | Debit | Credit |
--------------------------------------------------------
20XX-| | | | |
Aug.1| Cash | | 50,000| |
| Notes Payable | | | 50,000|
| Borrowed $50,000 | | | |
Aug.3| Equipment | | 30,000| |
| Cash | | | 30,000|
| Purchased equipment | | | |
Aug.6| Vehicles | | 20,000| |
| Notes Payable | | | 18,000|
| Cash | | | 2,000|
| Purchased a truck | | | |
--------------------------------------------------------
What information can we find in these three journal entries? The first entry shows that $50,000 of cash
were borrowed. The second entry shows that equipment of $30,000 was bought in cash. The third one shows
that a vehicle was acquired for $20,000. $2,000 of which were paid in cash and $18,000 were borrowed.
All your accounting journal entries are aggregated திரட்டப்பட்டது into the general ledger. This information is then used
to construct financial statements at the end of a reporting period.
Question 4 of 11
The purpose of the income statement is …
… to show managers and investors the development of financial ratios.
… to show managers and investors the assets of a company at a single moment in time.
Answer : … to show managers and investors whether the company made or lost money during the period being reported.
… to show managers and investors the different cash flows of a company.
ii. Income Statement
The income statement, also called the profit and loss statement (P&L), presents the results of
a company’s operations for a given period – a quarter, a year, etc. The income statement presents
a summary of the revenues, gains, expenses, losses, and net income or net loss of an entity for
the period.
This statement is similar to a moving picture of the entity’s operations during the time period specified. In
most cases, the income statement is the first financial statement prepared because the net income or loss must
be calculated before other financial statements can be prepared.
Keep in mind that the income statement shows revenues, expenses, gains, and losses; it does not show cash
receipts (money you receive) nor cash disbursements (money you payout).
The key item listed on the income statement is the net income or loss. A company’s net income for an
accounting period is measured as follows:
( Revenue ) - ( Expenses ) + ( Gains ) - ( Losses ) = ( Net Income)
Question 5 of 11
The income statement consists of …
expenses and equity.
assets and liabilities.
Answer : revenues and expenses.
revenues and assets.
* Income statement:
This statement, also referred to as profit and loss statement (or a “P&L”), reports on a company’s
income, expenses, and profits over a period of time. A profit and loss statement provides information
on the operation of the enterprise. These statements include revenue and various expenses incurred ஏற்பட்டது
during the processing state.
Question 6 of 11
Sales is an element of which financial statement?
Answer : Income Statement
Balance Sheet
* Income Statement and Balance Sheet
Neither of the above
Question 7 of 11
On the Balance Sheet, the company’s property, plant, and equipment are…
Liabilities
Cash
Equity
Answer : Assets
------------------------------------------------------------------- Example Company
Balance Sheet
December 31, 2018
ASSETS LIABILITIES & OWNER'S Equity
------------------------ ------------------------------------
Current assets Current Liabilities
Investements Long-term Liabilities
Property, plant and equiment Total Liabilities
Intangible assets
Other assets Owner's equity
Total assets Total Liabilities& Owner's equity
-------------------------------------------------------------------
Most accounting balance sheets classify a company’s assets and liabilities into distinctive groupings
such as Current Assets; Property, Plant, and Equipment; Current Liabilities; etc. These classifications
make the balance sheet more useful.
Question 8 of 11
A dept-to-equity ratio of 0.5 means that …
Answer … there are half as many liabilities than there is equity.
… there are as exactly many liabilities as there is equity.
… there are double as many liabilities than there is equity.
… investors and creditors have an equal stake in the business assets.
iv. Debt-to-Equity Ratio
The debt to equity ratio is a financial, liquidity ratio that compares a company’s total debt
to total equity. The debt to equity ratio shows the percentage of company financing that comes
from creditors and investors. A higher debt to equity ratio indicates that more creditor financing
(bank loans) is used than investor financing (shareholders).
The debt to equity ratio is calculated by dividing total liabilities by total equity.
Total Liabilities
Debt-to-Equity Ratio = ---------------------
Total Equity
Each industry has different debt to equity ratio benchmarks, as some industries tend to use more debt
financing than others. A debt ratio of .5 means that there are half as many liabilities than there is
equity. In other words, the assets of the company are funded 2-to-1 by investors to creditors.
A lower debt to equity ratio usually implies a more financially stable business. Companies with a
higher debt to equity ratio are considered riskier to creditors and investors than companies with a
lower ratio.
Example:
Assume the restaurant Susie’s Sushi has $100,000 of bank lines of credit and a $500,000 mortgage on its
property. The shareholders of the company have invested $0.9 million. The Debt-to-Equity Ratio is:
$100,000 + $500,000
---------------------- = 0.67
$900,000
Question 9 of 11
The higher the profit margin, the more profit a company makes on its…
liability
asset
* net profit
Answer : revenue
ii. Profit Margin
` Profit margin is one of the most analyzed numbers a company can produce, and it plays a part
in many other financial measures. Profit margin refers to the amount of profit that a company earns through
revenue. Typically expressed as a percentage, net profit margins show how much of each dollar collected by
a company as revenue translates into profit. The net profit margin is calculated by dividing net profit and
revenue.
Net Profit
Net Profit Margin = ------------
Revenue
Companies need to have a positive profit margin in order to earn income. Only in a few cases having a
negative profit margin may be advantageous (e.g. intentionally selling a new product below cost in order
to gain market share). A low profit margin indicates a low margin of safety.
Question 10 of 11
You make a $100 deposit into a bank account that pays 5%. The interest is compounded. How much money do
you have after 3 years?
115
105
Answer : 115.76
120
Question 11 of 11
One of the most fundamental concepts in finance is the Time Value of Money (TVM). What does it state?
TVM states that money today is worth less than money in the future.
* TVM states that money today is worth more than money in the future.
Answer TVM states that money today is worth the same than money in the future.
TVM states that inflation and deflation will always balance.
Time value of money (TVM) is the idea
that money that is available at the present time is worth more than the same amount in the future,
due to its potential earning capacity. TVM is one of the most
fundamental concepts in business and finance.
Lesson Content
What is TVM?
Simple and Compound Interest
i. What is TVM?
Imagine you are lucky enough to have someone come up to you and say: “I want to give you $1,000.
You have two options: You can have $1,000 right now or I can give you $1,000 in a year from now.
What would you prefer?”
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What is finance?
Finance is a broad term that describes activities associated with banking, leverage or debt, credit,
capital markets, money, and investments. Basically, finance represents money management. Finance also
encompasses the oversight, மேற்பார்வை உள்ளடக்கியது creation, and study of money, banking, credit,
investments, assets, and liabilities that make up financial systems.
One of the most fundamental financial theories is the time value of money, which essentially states
that a dollar today is worth more than a dollar in the future.
You have reached 10 of 11 point(s), (90.91%)