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.
Basics of Financial Management for Non Finance Executives - Part 1
1. BASICS OF FINANCE
Introductory Session for Non Finance Executives
PRESENTED BY :
Ms. SOMALI CHAKRABARTI
TRANSEO CONSULTANTS
www.transeo.co.in
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. Session I – Topics
Overview of Financial Reports
Introduction to Accounting Concepts
Classification of Transactions
Assets and Expenses – Similarities and differences
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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. Quiz
A non profit agency cannot be a financial accounting entity:
A. True
B. False
B. False
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. 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. 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. 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
Editor's Notes
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.