accounting and finance basic concepts (ppt for giveaway to students).short version
TRANSCRIPT
Accounting and Finance
Basic ConceptsProf. Eliseo A. Aurellado, CPA, MBA, PhD
Definitions
• Accounting – - financial information system for decision-
making. Objective: Wealth measurement• Finance - science of the management of cash and
other assets Objective: Creation of wealth
Exploring Wealth
• How do you define wealth?
• How rich are you?
• Assets – things OF VALUE that we OWN
• Liabilities – things OF VALUE that we OWE
• OWN – OWE = NET WORTH
• NET WORTH = WEALTH
Concept of Wealth
Nature of Accounting
• Definition: Process of identifying, measuring, and communicating economic information to perform informed judgments and decisions by users of the information
• Language of business• As old as the merchants of Venice• Governed by principles and conventions
Accounting
Accounting SystemAccounting System(accumulates financial and(accumulates financial and
managerial accounting data)managerial accounting data)
Managerial AccountingManagerial AccountingInformation for decisionInformation for decision
making, and controlmaking, and controlof an organization’sof an organization’s
operations.operations.
Financial AccountingFinancial AccountingPublished financialPublished financial
statements and otherstatements and otherfinancial reports.financial reports.
InternalInternalUsersUsers
ExternalExternalUsersUsers
Exh.1-1
Accounting Process Flow
Economic Event or Transaction
Dual-entry bookkeeping process
Journalizing (Accounting entry in journals )
Posting (T-accounts in Ledger)
Trial Balance
Financial Statements
USERS FS INFORMATION NEEDED
•Stockholders Equity value of the business•Managers Business performance/ Growth and sustainability•Regulatory agencies - BIR Taxable income - SEC Financial reporting compliance•Investors Dividends and price appreciation•Creditors Liquidity, solvency indicators•Employees Benefits and security of tenure
Accounting Equation
Assets = Liabilities + Equity or Assets - Liabilities = Equity
The Business Equation
Revenues - Costs = Profit
Typical Balance Sheet
AssetsCash P 50,000Receivables 600,000Inventory 250,000 Current Assets 900,000
PPE 2,300,000Investments 700,000
Total Assets P3,900,000 =========
Liabilities & EquityAccts payable P600,000Other payables 100,000
Current Liabilities 700,000
Long-term Debt 2,000,000Stockholders Equity Common stock 1,000,000 Retained earnings 200,000 Total S/E 1,200,000
Total Liab.& Equity P 3,900,000 =========
Typical Income StatementSales P 1,200,000Cost of Sales 940,000Gross profit 260,000Operating expenses Selling P60,000 Administrative 100,000 160,000Earnings before interest & taxes 100,000 Interest 30,000 Taxes 21,000 51,000Net income P 49,000 ==========
Typical Cash Flow Statement• Cash flow from operating activities Net income P540,000 Add (deduct): Depreciation 60,000 Decrease in accounts rec’ble 40,000 Increase in inventories (240,000) Increase in prepaid expenses ( 10,000) Decrease in accrued wages (50,000) P 340,000
• Cash flow from investing activities Sale (purchase of plant and equipment) 2,400,000
• Cash flow from financing activities Issuance of bonds payable 1,000,000 Repayment of long-term debt ( 3,500,000) Payment of dividends (1,000,000) (3,500,000)Net increase (decrease) in cash for the period P (760,000) =========
Concepts
• Operating Cycle
Operating Cycle
Cash (Alpha)
Merchandise Inventory
Accounts receivable
Cash (Omega)
Operating Cycle
• Inventory turnover (Days in inventory)
• Accounts receivable (Days in receivable)
• Operating cycle = Days in inventory + Days in receivable
Concepts
• Liquidity
Typical Balance Sheet
AssetsCash P 50,000Receivables 600,000Inventory 250,000 Current Assets 900,000
Liabilities & Equity Accts payable P600,000 Other payables 100,000
Current Liabilities 700,000
Current assets/ current liabilities
= 900,000/ 700,000
= 1.28 : 1
= Current Ratio
Typical Balance Sheet
AssetsCash P 50,000Receivables 600,000Inventory 250,000 Current Assets 900,000
Liabilities & Equity Accts payable P600,000 Other payables 100,000
Current Liabilities 700,000
Cash + receivables / current liabilities
= 650,000/ 700,000
= 0.92 : 1
= Acid-test Ratio
Concepts
• Solvency
Solvency -Typical Balance Sheet
AssetsCash P 50,000Receivables 600,000Inventory 250,000 Current Assets 900,000
PPE 2,300,000Investments 700,000
Total Assets P3,900,000 =========
Liabilities & EquityAccts payable P600,000Other payables 100,000
Current Liabilities 700,000
Long-term Debt 2,000,000Capital stock Common stock 1,000,000 Retained earnings 200,000 Total S/E 1,200,000
Total Liab.& Equity P 3,900,000 =========
Solvency -Typical Balance Sheet
AssetsCash P 50,000Receivables 600,000Inventory 250,000 Current Assets 900,000
PPE 2,300,000Investments 700,000
Total Assets P3,900,000 =========
Liabilities & EquityAccts payable P600,000Other payables 100,000
Current Liabilities 700,000
Long-term Debt 3,600,000Capital stock Common stock 1,000,000 Deficit (1,400,000) Total S/E ( 400,000)
Total Liab.& Equity P 3,900,000 =========
Leverage
WeightFulcrum
LeverDebt
Sales
Equity
Management
Turnover
Concepts
• Profitability
ROI
ROI
• Return on Assets
Net income/ Total Assets
• Return on Equity
Net income/ Stockholders’Equity
Du Pont Analysis
• ROE = Net income X X Equity
Profit margin Asset TO Equity multiplier
Sales Sales
Assets
Assets