Introduction to Financial Accounting 2. Major Financial Statements: Balance Sheet, Income Statement, Cash Flow Statement 3. Construction of Financial Statements 4. Financial Statement Analysis 5. Introduction to Financial Management 6. Raising Capital. Sources of Financial Capital 7. Cost of Capital. Capital Structure 8. Asset /Liability Management

1. Financial Management
and
Accounting

2. 2
Test 1: 22.02.2020 (12:40)
Test 2: 29.02.2020 (9:00)
Test 3: 11.03.2020 (18:15)
Seminar (Assignment II) Raising Debt Capital. Bank Loan:
18.03.2020 (18:15-21:30)
Computer class:
07.03.2020 (14:20-17:40) – room 418
11.03.2020 (20:00-21:30) – room 418
Exam: 21.03.2020 (10:00)
Financial Management
and Accounting

3. 3
Assignments (group work)
I. Analysis of Financial Statements (5% of the final
grade)
Submission deadline: 18.03.2020
II. Raising Debt Capital. Bank Loan (10% of the
final grade)
Submission deadline: 18.03.2020

4. 4
Assignment I (group work)
I. Analysis of Financial Statements
 to perform financial statement analysis of the selected
company (3-5 years), as well as to provide recommendations
to the company.
Content (with calculations, comments and
recommendations):
• Horizontal analysis
• Vertical analysis
• Ratio analysis (capital structure ratios, profitability ratios,
liquidity ratios, turnover ratios)

5. 5
Assignment I (group work)
I. Analysis of Financial Statements
The Excel file (with calculations, comments and
recommendations) should be uploaded till 18.03.2020.

6. 6
II. Raising Debt Capital. Bank Loan
• your company needs a long-term loan to buy new
equipment (EUR 100’000)
• your company needs a short-term loan to increase working
capital (EUR 20’000)
Assignment II (group work)

7. 7
II. Raising Debt Capital. Bank Loan
• lending conditions (min./max. amount, fees, repayment
schedule, advanced repayment (before the due date),
collateral, interest rate);
• necessary documents (financial statements, business plan
etc.)
Assignment II (group work)

8. 8
Assignment II (group work)
II. Raising Debt Capital. Bank Loan
The report (PowerPoint presentation) should be presented
on 18.03.2020.

9. 1. Introduction to Financial Accounting
2. Major Financial Statements: Balance Sheet, Income
Statement, Cash Flow Statement
3. Construction of Financial Statements
4. Financial Statement Analysis
5. Introduction to Financial Management
6. Raising Capital. Sources of Financial Capital
7. Cost of Capital. Capital Structure
8. Asset /Liability Management
9
Course Outline

10. 10
Financial accounting:
• treats money as a means of measuring economic
performance;
• system of monitoring and control of money as it
flows in and out of an organization as assets and
liabilities, and revenues and expenses;
• gathers and summarizes financial data to prepare
financial reports etc.
Introduction to Financial Accounting
Source: Business Dictionary

11. 11
Users of financial accounting:
• management
• shareholders, owners, investors
• lenders
• suppliers, trade creditors
• customers
• competitors
• employees
• tax authorities, government
• general public etc.
Introduction to Financial Accounting

12. 12
Availability of financial accounting information:
• different sources/documents
• accessibility
• delay to obtain
Introduction to Financial Accounting

13. 1. Introduction to Financial Accounting
2. Major Financial Statements: Balance Sheet, Income
Statement, Cash Flow Statement
3. Construction of Financial Statements
4. Financial Statement Analysis
5. Introduction to Financial Management
6. Raising Capital. Sources of Financial Capital
7. Cost of Capital. Capital Structure
8. Asset /Liability Management
13
Course Outline

14. 14
Major Financial Statements
The major financial statements:
• the balance sheet
• the income statement
• the statement of cash flow

15. 15
The Balance Sheet
ASSETS EQUITY AND LIABILITIES
Non-current assets (long-term
investments)
• intangible assets
• fixed assets (e.g., property, plant
and equipment)
• long-term financial investment
Equity capital
• share capital
• share emission premium
• reserves
• retained profits
Current assets
• inventory (e.g., raw materials,
finished goods and goods for
sale, prepayments for goods to
suppliers)
• accounts receivable
• short-term financial
investments
• cash
Provisions
Liabilities
• long-term debt (e.g., bank
loans, bonds)
• current liabilities (e.g., short-
term bank loans, accounts
payable)

16. 16
The Income Statement
INCOME STATEMENT[1]
Sales (net turnover)
- Production costs of goods sold
=Gross income (profit or loss)
- Expenses (sales costs, administrative expenses,
interest payments etc.)
+/- Other income / expenses
+/- Extraordinary income / expenses
=Pre-tax income
[1] According to the period costs method.

17. 17
The Statement of Cash Flows
1. cash flow from operating activities
2. cash flow from investing activities
3. cash flow from financing activities

18. 18
THE CASH FLOW STATEMENT
Cash flow from operating activities
- cash received from customers +100
- cash paid to suppliers -40
Net cash flow from operating activities +60
Cash flow from investing activities
- purchase of property, plant and equipment -50
- proceeds from sale of equipment 30
Net cash flow from investing activities -20
Cash flow from financing activities
- proceeds from long-term borrowing 60
- dividends paid -30
Net cash flow from financing activities +30
Change in cash =60-20+30=
+70
The Statement of Cash Flows

19. 19
• Company’s profits vs. cash that the company
generates?
The Statement of Cash Flows

20. 20
Profits and cash are / are not the same?
• 16.01.2020: the company produces the goods
• 27.01.2020: the company sells the goods for 100
EUR
• 03.02.2020: the company receives a partial
payment for the goods sold (40 EUR)
The Statement of Cash Flows

21. 21
Self-test
1. A board of directors is elected as a representative of
the corporation's:
A) top management
B) stakeholders
C) shareholders
D) customers

22. 22
1. A board of directors is elected as a representative of
the corporation's:
A) top management
B) stakeholders
C) shareholders
D) customers
Self-test

23. 23
2. Balance sheets have traditionally recorded amounts in
terms of market values.
A) True
B) False
Self-test

24. 24
2. Balance sheets have traditionally recorded amounts in
terms of market values.
A) True
B) False
Self-test

25. 25
3. An increase in accounts receivable balance provides
an increase in cash flow.
A) True
B) False
Self-test

26. 26
3. An increase in accounts receivable balance provides
an increase in cash flow.
A) True
B) False
Self-test

27. 27
4. Which of the following items is not a current asset?
A) Marketable securities
B) Accounts payable
C) Accounts receivable
D) Inventories
Self-test

28. 28
4. Which of the following items is not a current asset?
A) Marketable securities
B) Accounts payable
C) Accounts receivable
D) Inventories
Self-test

29. 29
5. Calculate the EBIT for a company with 4 million
EUR total revenues, 3.4 million EUR cost of goods
sold, 500’000 EUR depreciation expense, and
120’000 EUR interest expense.
A) 500’000 EUR
B) 380’000 EUR
C) 100’000 EUR
D) (120’000 EUR)
EBIT – earnings before interest and taxes
Self-test

30. 30
5. Calculate the EBIT for a company with 4 million
EUR total revenues, 3.4 million EUR cost of goods
sold, 500’000 EUR depreciation expense, and
120’000 EUR interest expense.
A) 500’000 EUR
B) 380’000 EUR
C) 100’000 EUR
D) (120’000 EUR)
EBIT – earnings before interest and taxes
Self-test
No correct
answer

31. 31
6. Which of the following statements regarding
accounting income and cash flow are incorrect?
a) Investment in fixed assets is not deducted
immediately from income but is instead spread over
the expected life of the equipment.
b) The accountant records revenues when the sale is
made, rather than when the customer actually pays
the bill.
c) Accounting income is the same as cash flow.
Self-test

32. 32
6. Which of the following statements regarding
accounting income and cash flow are incorrect?
a) Investment in fixed assets is not deducted
immediately from income but is instead spread over
the expected life of the equipment.
b) The accountant records revenues when the sale is
made, rather than when the customer actually pays
the bill.
c) Accounting income is the same as cash flow.
Self-test

33. 33
Self-test
Items Assets Liabilities Equity
intangible assets
share capital
long-term debt
inventory
accounts receivable
accounts payable
equipment
bank loans
cash
retained profits
issued bonds

34. 34
Self-test
Items Assets Liabilities Equity
intangible assets x
share capital x
long-term debt x
inventory x
accounts receivable x
accounts payable x
equipment x
bank loans x
cash x
retained profits x
issued bonds x

35. 35
Calculate the shareholders' equity:
• Cash = €10,000
• Inventory = €165,000
• Real estate = €210,000
• Accounts receivable = €22,000
• Accounts payable = €27,000
• Short-term bank loan = €40,000
• Long-term mortgage debt secured by real estate =
€100,000
The Balance Sheet

36. 36
Real estate 210 000 Equity 240 000
Inventory 165 000
Long-term mortgage debt secured by real
estate 100 000
Accounts receivable 22 000 Short-term bank loan 40 000
Cash 10 000 Accounts payable 27 000
Total 407 000 Total 407 000
Self-test

37. 1. Introduction to Financial Accounting
2. Major Financial Statements: Balance Sheet, Income
Statement, Cash Flow Statement
3. Construction of Financial Statements
4. Financial Statement Analysis
5. Introduction to Financial Management
6. Raising Capital. Sources of Financial Capital
7. Cost of Capital. Capital Structure
8. Asset /Liability Management
37
Course Outline

38. 38
A double entry accounting system is usually used.
Introduction to Financial Accounting
Source: Ministry of Finance
ASSETS EQUITY AND LIABILITIES
Non-current assets Equity capital
Current assets
Provisions
Liabilities

39. 39
• T-accounts can be used as a visual aid for seeing
the effect of the debit and credit.
 Computer programmes
T–accounts

40. 40
The general rules:
• cash is received the “Cash” account is debited
• cash is paid out the “Cash” account is credited
T–accounts

41. 41
Examples:
• increase of assets  in debit/credit
• decrease of assets  in debit/credit
• increase of liabilities debit/credit
• decrease of liabilities  debit/credit
• income  debit/credit
• expenses  debit/credit
T–accounts

42. 42
The general rules (2):
• increase of assets  in debit
• decrease of assets  in credit
• increase of liabilities in credit
• decrease of liabilities  in debit
• income  in credit
• expenses  in debit
T–accounts

43. 43
T–accounts
The company borrows (for 3 months) 2000 EUR from the bank:
Cash Short-term liabilities
Debit Credit Debit Credit
2000 EUR 2000 EUR
The partial repayment (1500 EUR) of the bank loan after 2 months:
Cash Short-term liabilities
Debit Credit Debit Credit
1500 EUR 1500 EUR

44. 44
T–accounts
How the following transactions are recorded?
1. Purchase of equipment for 3500 EUR, payment with a
bank account.
2. Payment of 800 EUR to trade creditors for raw materials.
3. Sale of products (500 EUR), payment expected in 2
weeks.
4. Payment for goods sold is received on the bank account
(300 EUR).

45. 45
T–accounts
1. Purchase of equipment for 3500 EUR, payment with a bank account.
equipment cash
Debit Credit Debit Credit
3 500 EUR 3 500 EUR

46. 46
T–accounts
2. Payment of 800 EUR to trade creditors for raw materials.
Accounts payable cash
Debit Credit Debit Credit
800 EUR 800 EUR

47. 47
T–accounts
3. Sale of products (500 EUR), payment expected in 2 weeks.
Accounts receivable Sales
Debit Credit Debit Credit
500 EUR 500 EUR

48. 48
T–accounts
4. Payment for goods sold is received on the bank account (300 EUR).
Cash Accounts receivable
Debit Credit Debit Credit
300 EUR 300 EUR

49. 1. Introduction to Financial Accounting
2. Major Financial Statements: Balance Sheet, Income
Statement, Cash Flow Statement
3. Construction of Financial Statements
4. Financial Statement Analysis
5. Introduction to Financial Management
6. Raising Capital. Sources of Financial Capital
7. Cost of Capital. Capital Structure
8. Asset /Liability Management
49
Course Outline

50. 50
Financial Statement Analysis
Financial Analysis Tools
• Horizontal analysis: comparison of historical
financial information over the reporting periods
(e.g., 2018 with 2017), trend analysis.
• Vertical analysis: analysis of positions as a
percentage of another position (e.g., share of
fixed-assets in the total assets)
• Ratio analysis: quantitative analysis of financial
statements.

51. 51
Financial Statement Analysis (Case 1)
ASSETS 2018 2017 2016
NON-CURRENT ASSETS (LONG-TERM INVESTMENTS)
fixed assets 30 650 29 200
CURRENT ASSETS
inventory 3285 3 084 1 532
accounts receivable 1678 1002 5 061
cash 1230 1 330
TOTAL 34 009 31 445
EQUITY AND LIABILITIES 2018 2017 2016
EQUITY CAPITAL 33153 27958
LIABILITIES
Current liabilities
accounts payable to suppliers and contractors 286 106 148
taxes and State mandatory social insurance payments 958 420 219
other liabilities 2446 1 884 3 120
TOTAL 34009

52. 52
Financial Statement Analysis (Case 1)
ASSETS 2018 2017 2016
NON-CURRENT ASSETS (LONG-TERM INVESTMENTS)
fixed assets 30 650 29 200 23522
CURRENT ASSETS
inventory 3285 3 084 1 532
accounts receivable 1678 1002 5 061
cash 1230 723 1 330
TOTAL 36843 34 009 31 445
EQUITY AND LIABILITIES 2018 2017 2016
EQUITY CAPITAL 33153 31599 27958
LIABILITIES
Current liabilities
accounts payable to suppliers and contractors 286 106 148
taxes and State mandatory social insurance payments 958 420 219
other liabilities 2446 1 884 3 120
TOTAL 36843 34009 31445

53. 53
Financial Statement Analysis (Case 1)
INCOME STATEMENT 2018 2017
Sales (net turnover) 78 930 50 416
Production costs of goods sold 50 383 32 021
Gross income
Sales costs, administrative expenses 11 650 8 961
Interest payments and similar expenses 0 0
Earnings before taxes
Enterprise income tax for the accounting year 4 025 2 346
Other taxes 1 134 966
PROFIT OR LOSS FOR THE ACCOUNTING YEAR

54. 54
Financial Statement Analysis (Case 1)
INCOME STATEMENT 2018 2017
Sales (net turnover) 78 930 50 416
Production costs of goods sold 50 383 32 021
Gross income 28547 18395
Sales costs, administrative expenses 11 650 8 961
Interest payments and similar expenses 0 0
Earnings before taxes 16897 9434
Enterprise income tax for the accounting year 4 025 2 346
Other taxes 1 134 966
PROFIT OR LOSS FOR THE ACCOUNTING YEAR 11738 6122

55. 55
Financial Statement Analysis
Financial Analysis Tools
• Horizontal analysis: comparison of historical
financial information over the reporting periods
(e.g., 2018 with 2017), trend analysis.
2018 2017

56. 56
Horizontal analysis (Case 1)
ASSETS 2018 2017
Changes
(2018 to
2017)
NON-CURRENT ASSETS (LONG-TERM INVESTMENTS)
fixed assets 30 650 29 200 4.97%
CURRENT ASSETS
inventory 3285 3 084 6.52%
accounts receivable 1678 1002 67.47%
cash 1230 723 70.12%
TOTAL 36843 34 009 8.33%
EQUITY AND LIABILITIES 2018 2017
Changes
(2018 to
2017)
EQUITY CAPITAL 33153 31599 4.92%
LIABILITIES
Current liabilities
accounts payable to suppliers and contractors 286 106 169.81%
taxes and State mandatory social insurance payments 958 420 128.10%
other liabilities 2446 1 884 29.83%
TOTAL 36843 34009 8.33%

57. 57
INCOME STATEMENT 2018 2017
Changes
(2018 to
2017)
Sales (net turnover) 78 930 50 416 56.56%
Production costs of goods sold 50 383 32 021 57.34%
Gross income 28547 18395 55.19%
Sales costs. administrative expenses 11 650 8 961 30.01%
Interest payments and similar expenses 0 0 0%
Earnings before taxes 16897 9434 79.11%
Enterprise income tax for the accounting year 4 025 2 346 71.57%
Other taxes 1 134 966 17.39%
PROFIT OR LOSS FOR THE ACCOUNTING
YEAR
11738 6122 91.73%
Horizontal analysis (Case 1)

58. 58
Financial Statement Analysis
Financial Analysis Tools
• Vertical analysis: analysis of positions as a
percentage of another position (e.g., share of
fixed-assets in the total assets)
Total assets
2018

59. 59
Vertical analysis (Case 1)
ASSETS 2018 2017 2016
NON-CURRENT ASSETS (LONG-TERM
INVESTMENTS)
fixed assets 30 650 29 200 23522
CURRENT ASSETS
inventory 3285 3 084 1 532
accounts receivable 1678 1002 5 061
cash 1230 723 1 330
TOTAL 36843 34 009 31 445
EQUITY AND LIABILITIES 2018 2017 2016
EQUITY CAPITAL 33153 31599 27958
LIABILITIES
Current liabilities
accounts payable to suppliers and contractors 286 106 148
taxes and State mandatory social insurance payments 958 420 219
other liabilities 2446 1 884 3 120
TOTAL 36843 34009 31445

60. 60
Vertical analysis (Case 1)
INCOME STATEMENT 2018 2017
Sales (net turnover) 78 930 50 416
Production costs of goods sold 50 383 32 021
Gross income 28547 18395
Sales costs, administrative expenses 11 650 8 961
Interest payments and similar expenses 0 0
Earnings before taxes 16897 9434
Enterprise income tax for the accounting year 4 025 2 346
Other taxes 1 134 966
PROFIT OR LOSS FOR THE ACCOUNTING YEAR 11738 6122

61. 61
Vertical analysis (Case 1)
ASSETS 2018 2018 2017 2017
NON-CURRENT ASSETS (LONG-TERM
INVESTMENTS)
fixed assets 30 650 83.2% 29 200 85.86%
CURRENT ASSETS
inventory 3285 8.9% 3 084 9.068%
accounts receivable 1678 4.6% 1002 2.946%
cash 1230 3.3% 723 2.126%
TOTAL 36843 100% 34 009 100%
EQUITY AND LIABILITIES 2018 2018 2017 2017
EQUITY CAPITAL 33153 90.0% 31599 92.91%
LIABILITIES
Current liabilities
accounts payable to suppliers and contractors 286 0.8% 106 0.312%
taxes and State mandatory social insurance
payments
958 2.6% 420 1.235%
other liabilities 2446 6.6% 1 884 5.540%
TOTAL 36843 100% 34009 100%

62. 62
INCOME STATEMENT 2018 2017
Sales (net turnover) 100% 100%
Production costs of goods sold 63.83% 63.51%
Gross income 36.17% 36.49%
Sales costs, administrative expenses 14.76% 17.77%
Interest payments and similar expenses 0% 0%
Earnings before taxes 21.41% 18.71%
Enterprise income tax for the accounting year 5.1% 4.65%
Other taxes 1.44% 1.92%
PROFIT OR LOSS FOR THE ACCOUNTING YEAR 14.87% 12.14%
Vertical analysis (Case 1)

63. 63
Financial Statement Analysis
Financial Analysis Tools
• Ratio analysis: quantitative analysis of financial
statements.

64. 64
Financial Statement Analysis
Major financial ratios
• Capital structure ratios
• Profitability ratios
• Liquidity ratios
• Turnover ratios

65. 65
Financial Statement Analysis
Major financial ratios
• Capital structure ratios
• Profitability ratios
• Liquidity ratios
• Turnover ratios

66. 66
Financial Statement Analysis
Capital structure ratios
Debt ratio= liabilities / total capital
Equity ratio= equity / total capital
Financial leverage= liabilities /equity

67. 67
Financial Statement Analysis
Major financial ratios
• Capital structure ratios
• Profitability ratios
• Liquidity ratios
• Turnover ratios

68. 68
Financial Statement Analysis
Profitability ratios
Return on sales (ROS)= EBIT / sales
Return on assets (ROA)= EBIT / average total assets
Return on equity (ROE)= net profit / average equity