BASICS OF FINANCE
Introductory Session for Non Finance Executives

PRESENTED BY :
Ms. SOMALI CHAKRABARTI
TRANSEO CONSULTAN...
Why must I know Finance ?

 My job does not involve book keeping.
 Do I feel daunted by numbers?
 My actions have an im...
Session I – Topics

Overview of Financial Reports
Introduction to Accounting Concepts
Classification of Transactions
A...
Introduction to Financial Statements

• Balance Sheet
• Profit & Loss Account (Income Statement)

•Cash Flow Statement

Th...
Profit & Loss Account (also known as Income Statement)

Star One Pvt Ltd
Profit & Loss Account for the year ended 31-03-20...
Balance Sheet

Star One Pvt Ltd
Balance Sheet as of 31/03/2012
Liabilities

Assets

Capital

Fixed assets
Land, Building, ...
Cash Flow Statement

Star One Pvt Ltd
Statement of Cash Flows for the year ended 31-03-2012
Cash Flows from Operating Acti...
Quiz

A Balance Sheet is so named because :
A. It presents a fair and balanced description of the business
B. In a balance...
Quiz

Financial Accounting is an information system that
A. assigns a share price to the company’s shares
B. tracks and re...
Quiz

An organizations business transactions are classified into operating activities , --------------activities and finan...
Accounting Process
Financial Reporting Concepts and
standards

Company
Transactions

•Operating
•Investing
•Financing

Rep...
Introduction to Basic Accounting Concepts
Entity Concept – Company is separate from Owner

Accounts for an entity are dist...
Introduction to Basic Accounting Concepts
Money Measurement Concept
Financial accounting deals only with things that can b...
Introduction to Basic Accounting Concepts
Going Concern Concept
An entity is expected to remain in operation for the indef...
Introduction to Basic Accounting Concepts
Consistency Concept
 An entity should use the same accounting methods and proce...
Introduction to Basic Accounting Concepts
Materiality Concept
Trivial matters are to be disregarded in accounting, and all...
Accounting Equation

Assets—represent all the resources that a business has
obtained or controls as a result of past trans...
Introduction to Basic Accounting Concepts
Dual Aspect Concept

There are two sides to every accounting transaction.
Record...
Quiz

Accounting does not report what assets of the business could be sold if the business ceased
to exist. This is a resu...
Quiz

A. Fixed assets are shown in the books at their …………….. (cost price, market price)
B. The concept that a business en...
Basic Transaction Types

All transactions in a business can be classified under the four categories.
 Expenses
Income
 ...
Basic Transaction Types

Each financial transactions will have an equal and opposite impact on TWO account heads.
 ‘Debi...
Basic Transaction Types
How are Expenses different from Assets?

What decides whether money spent is an ‘Expense’ or an ‘A...
Assets or Expense? – Test of consumption

What determines whether the money spent is an asset or an expense?

An item shou...
Quiz

A non profit agency cannot be a financial accounting entity:
A. True
B. False

B. False
Quiz

Suppose Star One obtain 5 yrs bank loan of $ 0.5million payable at maturity , which of the
following describes the e...
Quiz

New Stores Pvt Ltd sell machinery at a price of $ 250,000 , to be paid in 1 month.
This transaction will impact whic...
Recap

In this session have:
•

briefly explored three fundamental financial statements

•

learned about the entity conce...
PRESENTED BY :
Ms. SOMALI CHAKRABARTI
Educator and Consultant with interests in Strategy, Corporate Governance and Finance...
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Basics of Financial Management for Non Finance Executives - Part 1

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This is an introductory Session of Financial Management for Non Finance executives. it covers the basic Financial concepts and provides an overview of Financial Statements, different types of transactions and the similarities and differences between assets & expenses.

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  • C - It represents the balances of various assets, liabilities and owner’s equity accounts.
  • B - tracks and records a company’s business transactions
  • D - investing
  • In order to demonstrate the dual-aspect concept, think of what would happen if Star One buys merchandise inventory for credit. In this situation, the financial amount of the inventory goes into assets.For example, Star One buys Rs 4 L worth of merchandise on credit. Assets are increased by Rs 4 L and liabilities are increased by Rs 4Lto reflect the obligation to the supplier. Thus, the basic accounting equation continues to hold.
  • C. Going concern concept
  • A) cost priceB) going concern concept C) financial statements
  • If ‘money comes in’ , a transaction must be either ‘Income’ or ‘Liability’If ‘money goes out’ , a transaction must be either ‘Expense’ or ‘Asset’
  •  
  • False. Any organization that needs to keep and communicate financial records can be an accounting entity. Whether or not it makes or aims to make a profit is irrelevant.
  • D. Cash increases by $0.5 m, long term debt increases by $0.5 mWhen an entity receives a bank loan, it immediately obtains the cash from the lender. A 5-year loan is a long-term debt. So, cash increases by $0.5 m; long-term debt increases by $0.5 m.
  • Transcript of "Basics of Financial Management for Non Finance Executives - Part 1"

    1. 1. BASICS OF FINANCE Introductory Session for Non Finance Executives PRESENTED BY : Ms. SOMALI CHAKRABARTI TRANSEO CONSULTANTS www.transeo.co.in
    2. 2. Why must I know Finance ?  My job does not involve book keeping.  Do I feel daunted by numbers?  My actions have an impact on my company’s bottom line. I need to be in control of my key result areas. Financial management is all about the Acts that generate profit.
    3. 3. Session I – Topics Overview of Financial Reports Introduction to Accounting Concepts Classification of Transactions Assets and Expenses – Similarities and differences
    4. 4. Introduction to Financial Statements • Balance Sheet • Profit & Loss Account (Income Statement) •Cash Flow Statement Those in charge of the running and managing a business must know how to read these statements
    5. 5. Profit & Loss Account (also known as Income Statement) Star One Pvt Ltd Profit & Loss Account for the year ended 31-03-2012 Expenses Income Materials Sales Staff Salaries Other Income Business Promotion Expenses Administrative Expenses Interest Tax Profit Bottom Line Businesses exist for generating profits. Top Line
    6. 6. Balance Sheet Star One Pvt Ltd Balance Sheet as of 31/03/2012 Liabilities Assets Capital Fixed assets Land, Building, Plant, Machinery Loan Current Liabilities Creditors, Bank Overdraft Current Assets Debtors, Bank Balance, Inventory, • Statement of financial position of an organization at a particular point of time. •Each balance sheet is prepared on a specific date which is recorded at the top of the statement. • It lists the organization’s Assets and Liabilities. • It reports the amount or ‘balance’ in each asset, liability and owners' equity account.
    7. 7. Cash Flow Statement Star One Pvt Ltd Statement of Cash Flows for the year ended 31-03-2012 Cash Flows from Operating Activities Collections from Customers Inventories paid Salaries paid Interest paid ---------------------------------------Net Cash provided (used) from Operating Activities Cash Flows from Investing Activities Purchase of new office building ---------------------------------------Net Cash provided (used) from Investing Activities Cash Flows from Financing Activities Repayment of Principal New 5 yr Loan ---------------------------------------Net Cash provided (used) from Financing Activities Net Increase (decrease) in cash Beginning Cash Balance Ending Cash Balance
    8. 8. Quiz A Balance Sheet is so named because : A. It presents a fair and balanced description of the business B. In a balance sheet cash in is always equal to Cash Out C. It represents the balances of various assets, liabilities and owner’s equity accounts. D. It must balance the need for details and the need for brevity. C - It represents the balances of various assets, liabilities and owner’s equity accounts.
    9. 9. Quiz Financial Accounting is an information system that A. assigns a share price to the company’s shares B. tracks and records a company’s business transactions C. predicts financial survival of the company D. identifies the causes of liquidity problems. B - tracks and records a company’s business transactions.
    10. 10. Quiz An organizations business transactions are classified into operating activities , --------------activities and financing activities A. trading B. planning C. selling D. investing D - investing
    11. 11. Accounting Process Financial Reporting Concepts and standards Company Transactions •Operating •Investing •Financing Report Preparation Recording Systems •Balance Sheet •Profit & Loss A/c •Statement of Cash Flows •Journals •Ledgers •Closing and Adjusting Entries Users of Financial Statements •Managers •Investors •Analysts •Lenders •Customers •Suppliers •Employees •Regulators Auditors Accounting systems are used to record the day-to-day economic activities of a business and to generate reports about its financial health and performance
    12. 12. Introduction to Basic Accounting Concepts Entity Concept – Company is separate from Owner Accounts for an entity are distinct from the accounts of those who own, run or do business with the entity. Owner’s Accounts Previous Balance : Rs 1,56,000 Deposit Rs 3,00,000 Check to V Store Rs 40,000 Current Balance : Rs 2,16,000 Owner’s Money is separate Star One’s Accounts Star One Salary to Owner Deduct Rs 3,00,000
    13. 13. Introduction to Basic Accounting Concepts Money Measurement Concept Financial accounting deals only with things that can be represented in monetary terms. Star One Pvt Ltd Balance Sheet as of 31/03/2012 Liabilities Assets Capital Fixed assets Land Building Plant Machinery Loan Current Liabilities Creditors Bank Overdraft Current Assets Debtors Cash & Bank Balance Merchandise
    14. 14. Introduction to Basic Accounting Concepts Going Concern Concept An entity is expected to remain in operation for the indefinite future. This assumption is made in absence of evidence to the contrary. Fresh food Items are perishable. At any particular moment, if the business was to shut down these would have to be thrown away and record a loss. The Going concern concept directs these perishable items to be valued as though Star One is going to continue operations and will sell them in the normal course of business.
    15. 15. Introduction to Basic Accounting Concepts Consistency Concept  An entity should use the same accounting methods and procedures from period to period unless it has a sound reason to change methods.  The consistency concept needs to be explicitly stated because some accounting standards allow a fair degree of variation in how transactions are recorded.  The consistency concept reduces the likelihood of opportunistic or whimsical changes in accounting procedures by an entity. Star One Pvt Ltd Star One Pvt Ltd Star One Pvt Ltd Balance Sheet as of 31/03/2010 Balance Sheet as of 31/03/2011 Balance Sheet as of 31/03/2012 Liabilities Assets Liabilities Assets Liabilities Assets Capital Fixed assets Capital Fixed assets Capital Fixed assets Loan Current Liabilities Loan Current Assets Current Liabilities Loan Current Assets Current Liabilities Current Assets
    16. 16. Introduction to Basic Accounting Concepts Materiality Concept Trivial matters are to be disregarded in accounting, and all important matters are to be disclosed. Items that are material have significance to potential users of the financial statements. This concept allows the accountant to be practical in choosing the appropriate degree of precision in the accounts Not Material Material
    17. 17. Accounting Equation Assets—represent all the resources that a business has obtained or controls as a result of past transactions . Assets produce probable future economic benefits for the business. LIABILITIES + OWNERS’S EQUITY ASSETS Liabilities plus owners' equity--represents the sources for those resources. Therefore, the two sides must be equal at all times. Assets = Liabilities + Owners’ Equity (Capital)
    18. 18. Introduction to Basic Accounting Concepts Dual Aspect Concept There are two sides to every accounting transaction. Recording both sides of each transaction is known as double-entry bookkeeping. Implication: After both sides of each accounting transaction are recorded on the entity's books, the basic accounting equation should remain balanced. Duality concept is commonly expressed in terms of fundamental accounting equation : Assets = Liabilities + Capital
    19. 19. Quiz Accounting does not report what assets of the business could be sold if the business ceased to exist. This is a result of : A. Entity concept B. Materiality concept C. Going concern concept C. Going concern concept
    20. 20. Quiz A. Fixed assets are shown in the books at their …………….. (cost price, market price) B. The concept that a business enterprise will not be closed down in the near future is known as …………….. (going concern concept, money measurement concept, business entity) C. On the basis of going concern concept, a business prepares its .......................... (financial statements, bank statement, cash statement) A) cost price B) going concern concept C) financial statements
    21. 21. Basic Transaction Types All transactions in a business can be classified under the four categories.  Expenses Income  Assets Liabilities Transaction Type Revenue from Sales Income Purchase of a computer Asset Loan taken Liability Interest paid on Loan Expense Repayment of Loan Principal Liability (Reduction) Telephone and electricity bills payment Expense Investments in stocks of other companies Asset Dividends received on stocks Income
    22. 22. Basic Transaction Types Each financial transactions will have an equal and opposite impact on TWO account heads.  ‘Debit ‘ and ‘Credit’ are used to denote the two opposite effects of one transaction on two account heads Star One Pvt Ltd Profit & Loss Account for the year ended 31-03-2012 Expenses Income Materials Sales Staff Salaries Dr Other Income Cr Interest Profit Star One Pvt Ltd Balance Sheet as of 31/03/2012 Cr Liabilities Assets Capital Fixed assets Loan Current Liabilities Current Assets Dr
    23. 23. Basic Transaction Types How are Expenses different from Assets? What decides whether money spent is an ‘Expense’ or an ‘Asset’? Expenditure Spending Asset Expense
    24. 24. Assets or Expense? – Test of consumption What determines whether the money spent is an asset or an expense? An item should appear as an expense only if it satisfies the test of consumption. Total – $ 200,000 Consumed – $ 150,000 Balance – $ 50,000 Price – $ 500,000 Life – 5 yrs Depreciation – $ 100,000 Balance – $ 400,000 Salary Paid – $ 150,000 Advance given – $ 50,000
    25. 25. Quiz A non profit agency cannot be a financial accounting entity: A. True B. False B. False
    26. 26. Quiz Suppose Star One obtain 5 yrs bank loan of $ 0.5million payable at maturity , which of the following describes the effect of this transaction on the balance sheet: A. Cash increases by $ 0.5million , common stock increases by $ 0.5million B. Cash increases by $ 0.5million , current liabilities increase by $ 0.5million C. A/c receivables increase by $ 0.5million , long term debt increases by $ 0.5million D. Cash increases by $ 0.5million , long term debt increases by $ 0.5million D. Cash increases by $ 0.5 million, long term debt increases by $ 0.5million
    27. 27. Quiz New Stores Pvt Ltd sell machinery at a price of $ 250,000 , to be paid in 1 month. This transaction will impact which of the following A. Current Liability (Accounts payable) B. Current Asset (Account receivable) C. Short-term debt D. Common Stock E. Current Asset (Prepaid Expenses) F. Fixed Assets ( Machinery ) G. Retained Earnings A. Current Asset (Account receivable) increases, Fixed Assets (Machinery) decreases
    28. 28. Recap In this session have: • briefly explored three fundamental financial statements • learned about the entity concept, the money measurement concept, the going concern concept, consistency concept, materiality concept and the dual entry concept. • learned to classify transactions into four basic categories • learned about similarities and differences between assets & expenses.
    29. 29. PRESENTED BY : Ms. SOMALI CHAKRABARTI Educator and Consultant with interests in Strategy, Corporate Governance and Finance Web : www.transeo.co.in Blog : http://prepforum.wordpress.com, Email : schakrabarti.sln2010@gmail.com

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