financial accounting intro

1. 1. Introduction to Financial Accounting
Oliver Binz
Financial Accounting

2. Financial reporting
fundamentals
Evaluating operating
performance
Accounting for
operating activities Financing activities
01 Introduction 05 Evaluation the
sources and uses
of cash
08 Revenue
Recognition
13 Financial
obligations &
equity
02 Balance sheet 06 Financial
statement analysis
09 Accounts
receivable and
inventory
14 Surprise lecture
03 Income
statement
07 Financial
statement analysis
10 Long-lived
assets
04 Introduction to
business
analysis
11 Investments
12 Liabilities
Course Outline

3. https://www.youtube.com/watch?v=rWJtPSsIOEE
https://www.youtube.com/watch?v=fT57Gy7R7es

4. What Does HurryDate Do?

5. What are the Key Success Factors?

6. What are the Key Risk Factors?

7. • Short introductory case to overview FA.
• In order to conduct rigorous financial analysis,
we will use firm’s financials (and other public
information) to:
1. Evaluate its strategy
2. Understand its accounting choices
3. Analyze its past and current performance

8. • Accounting is no longer just for the bean counters
• Increasing need to
• Become conversant in “the language of business”
• Link business activities and decisions to financial results
• Evaluate managers’ performance
• Use financial statements as a key managerial and
decision-making tool
Course Motivation

9. 1. To gain a strong foundation in accounting
2. To master the key concepts and principles
3. To communicate clearly with financial executives
4. To apply concepts to common business scenarios
5. To evaluate the financial implications of business
decisions
6. To understand how to read and analyze financial
statements
6 Course Objectives

10. Why this Course?
• Ultimately, by taking this course…
• You will not become an accountant…
• …but rather a knowledgeable
consumer of financial information
provided in the financial statements…
• …information you can use as an
investor, financial advisor,
management consultant, competitor, or
employee of the firm.

11. Why do Firms Publish Financial
Statements?
• Corporations publish financial statements so
that interested parties (e.g., investors,
suppliers, regulators, etc.) can understand the
nature of their business activities, their
performance in carrying out those activities,
their financial condition and their future
prospects in terms of returns and risk.

12. Consumers of Financial Statements
• External focus: Target audience?
• Investors (current and prospective)
• Debt holders (banks, bondholders,…)
• Employees
• Clients, Suppliers
• Government
• Management
• …
• How do these interested parties use the
information?

13. Producers of Financial Statements
• Who is responsible for the financial
statements?
• Management!
• Ask the question: What are
management’s incentives in
producing the financials?

14. Auditors
• What is the role of auditors?
• Auditors certify that the financial
statements are prepared
according to accounting rules in
place where the firm operates
• Expressed as ‘the audit opinion’
• Auditors are hired and paid by
the firm they audit
• Can that lead to conflicts?

15. Nature of the Rules
• Debunk the myth: Accounting is not a science!
• To satisfy the different needs of the interested parties the
accounting rules need to be both rigorous and flexible
• Example:

16. Standard Setters
• Who sets the accounting rules?
• Two major accounting standard setters in the world:
• Financial Accounting Standard Board (FASB)
• US – largest capital market in the world
• US Generally Accepted Accounting Principles (GAAP)
• International Accounting Standard Board (IASB)
• International Financial Reporting Standards (IFRS)
• EU, Australia, most of G20
• India: Ind AS mandatory as of 4/2016 for ‘large’ companies (similar to IFRS)
• Not: Japan (voluntary adoption allowed), US (allowed for non-US listed
companies), China (intention to fully converge to IFRS in the future)

17. Standard Setters
• Are the rules similar or different under US GAAP and IFRS?
• Similar: based on same
method of accrual accounting
that we will introduce and
cover extensively in this
course
• Different: Check out the pwc
document posted on web-site.
Warning: 200+ pages!

18. What Resources does the Company
Control?
Source: Apple 10-K

19. What are the Claims on these
Resources?
Source:
Apple 10-K

20. Balance Sheet
• A list of:
– Assets: resources controlled by the company
– Liabilities: obligations of the company
– Equity: the difference between assets and liabilities
Equity
s
Liabilitie
Assets
s
Liabilitie
Assets
Equity
+
=
-
=
or
Balance sheet equation
VERY IMPORTANT

21. How Profitable is the Company?
Source: Apple 10-K

22. Income Statement
• A list of:
– Revenues: inflows of cash and other resources (typically
obtained by selling goods and services)
– Expenses: outflows of cash and other resources (typically
incurred as part of the revenue-generating process)
– Profit: the difference between revenues and expenses
– Note profit per IFRS and U.S. GAAP does not equal
taxable income
– Note no reference to cash

23. How much Cash was Generated (Used)
and How?
Source: Apple 10-K

24. How much Cash was Generated (Used)
and How?
Source: Apple 10-K

25. Cash Flow Statement
• A list of:
– Operating cash flows: net cash generated (used) by day-
to-day operations (e.g., producing and selling inventory)
– Cash flows from investing activities: net cash generated
(used) by activities that alter the company’s infrastructure
(e.g., purchase or sell of a manufacturing plant)
– Cash flows from financing activities: cash received from
(paid to) shareholders and creditors (e.g., issuing debt and
equity, paying dividends, making payments of principle,
etc.)

26. Articulation of the Financial
Statements
Statements Income
of Cash Flows Statement
=
Operations Current Assets Current Liabilities
Investing Cash Accounts payable
Financing A/R Other Liabilities
Total Cash Flows Prepaid Expenses
Inventory Non-Current Liabilites
Other Assets
Total Liabilities
Non-Current Assets
Land Owners' Equity
Plant and Equipment Common Stock Revenue
Intangibles/Other Retained Earnings Expenses
Net Income
Total Assets Total Liabilities and Owner's Equity
FRC - FINANCIAL REPORTING MODULE
Balance Sheet
Assets Liabilities + Owner's Equity

27. Course Administration and
Housekeeping Rules
• Meetings
• 14 Sessions
• 2 Review Sessions
• 4 Tutorials
• Office Hours – Office 511
• Welcome to stop by
• I prefer making appointments by email
Optional

28. Course Administration and
Housekeeping Rules
Materials:
• Course pack with cases
• Additional materials posted on course-site
• Documentation/quizzes/exams etc.
• Course pack recommends two textbooks
• Corporate Financial Reporting and Analysis: A Global Perspective, Young, S. D, Cohen, J., and Bens, D.,
John Wiley & Sons Ltd, 4th edition, 2019.
Ø Optional exercises from this book.
• Financial Accounting: An Introduction to Concepts, Methods, and Uses, Weil, R.L., Schipper, K. and
Francis, J. South Western Cengage Learning, 14e, 2014.

29. Course Administration and
Housekeeping Rules
• Grade: based on the following weighting scheme
Final exam (open book/notes) 60%
Quiz (open book/notes) 15%
Group case write-ups 15%
Professionalism 10%

30. Financial reporting
fundamentals
Evaluating operating
performance
Accounting for
operating activities Financing activities
01 Introduction 05 Evaluation the
sources and uses
of cash
08 Revenue
Recognition
13 Financial
obligations &
equity
02 Balance sheet 06 Financial
statement analysis
09 Accounts
receivable and
inventory
14 Surprise lecture
03 Income
statement
07 Financial
statement analysis
10 Long-lived
assets
04 Introduction to
business
analysis
11 Investments
12 Liabilities
Course Outline
Midterm content

31. Next Class
• The balance sheet
• Please work through the Mickey’s Market case