BS Financial perspective

studied byStudied by 36 People
5.0(2)

Expenses

1/56

Tags & Description

Business

Studying Progress

New cards
56
Still learning
0
Almost Done
0
Mastered
0
56 Terms

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