Expenses
Short-term costs, often recurring, that are recorded on the income statement
Expenditures
One time purchases that add long-term value to the company over the years. Recorded on the balance sheet
Shareholder's equity
the total sum of money invested into a business by the owners of the company
Share capital
the money put into the business when the shareholders bought newly issued shares
Reserves
profit owned by the shareholders that has not been repaid yet, also includes retained profit
Financial Accounting
accounting for the purpose of informing external stakeholders following accounting systems and procedures (regulated by law)
Management Accounting
accounting for internal purposes using company-internal analyses such as forecasting profits (not regulated by law)
Three main pillars of accounting
Cash flow statement, the income statement, the balance sheet
Straight-line depreciation
depreciation by the same amount per period
Net worth/Equity
Assets - Liabilities
Financial performance
Increase in value of the company within a specific time period
Matching principle of accounting
We need to match for each year the monetary value of produced/sold to the value of resources consumed to produce/sell
Operating cash flow
Generated and lost doing daily businesses, measures internal financing capability
Cash flow from investing
All to do with assets
Free cash flow
Cash flow from operations + cash flow from investing
Cash flow from financing
Includes new equity and long-term borrowing
Income statement
Provides information on sources of profit
Can you have an objective number to measure financial performance
No
Why is income statement important
Allows to assess how the business works and can be improved
Depreciation on an income statement
allocation of the net cash flow for making the good available to the years when the resource consumption of the taxi occurred
Income statement's matching principle
the expenses for the good (depreciation) should be allocated proportionally to the generated revenues
Operating profit
revenues - expenses
EBIT
Earnings before Interest and Taxes
Other ways profit can be seen on the income statement
Earnings or Net income
Two methods of measuring profit on an income statement
Cost of sales and cost of production
Cost of sales
Profit = monetary value of sold g/s - value of resources consumed
Cost-of-production method
Profit = monetary value of g/s produced - value of resources consumed
Balance sheet what does it show
which assets the company owns and who provided the financial capital
How is balance sheet important
for assessing which assets are used in running the company and for assessing how risky the company is for creditor's
If profit is not distributed to owners ... on the balance sheet
profit is added to equity in the next opening statement
Depreciation on a balance sheet
Decline in value
Balance sheet depreciation logic
A capital good loses more of its value in the early years of use
Assets on a balance sheet order major groups
Non-curent assets, current assets
Claims structure on a balance sheet
Equity, liabilities, profit
Intangibles on a balance sheet
only listed when their value is verifiable
Claims
Liabilities, where the money for financing the assets comes from
rule for financial ratios
The capital in the denominator should always correspond to the definition of profit used in the numerator
Return on investment
profit/invested capital
Invested capital
capital used to generate the profit
Value driver system
Using ROI to see the drivers of profit
Return on Capital employed
EBIT/Capital employed or Operating Profit/Operating Assets
Return on Equity
Profit/Equity
Profit Margin
Profit/Revenue
Liquidity Ratio
Current Assets/Short-term liabilities
Gearing
Debt(liabilities)/Equity
Investment decisions
decisions about business transactions with an initial cash outflow in the expectation of higher future cash inflow
Investment Theory
theory about investigating investment decisions and developing criteria for reasonable decision making
Financing decisions
decisions about provision of funds needed that start with a cash inflow, followed by a cash outflow (interest and repayment)
Financial theories
deal with analyses of financing opportunities and structures
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