BUSA 7 Courses

Financial and Managerial Accounting

Financial Accounting Standards

• International Financial Reporting Standards (IFRS)

  • Issued by the International Accounting Standards Board (IASB).

• Generally Accepted Accounting Principles (GAAP)

  • Issued by the Financial Accounting Standards Board (FASB).

Key Financial Statements

• Balance Sheet (Statement of Financial Position)

  • Represents the financial position of an entity at a specific date (usually the end of a month or year).

  • Reflects the basic accounting equation:
    Assets = Liabilities + Equity.

• Income Statement (Statement of Operations)

  • Summarizes revenues and expenses over a specific period of time (e.g., month or year).

  • Key formula:
    Net Income = Total Revenue - Total Expense.

• Statement of Retained Earnings (Statement of Owner's Equity)

  • Outlines the changes in retained earnings for a specified period.

  • Reconciles beginning and ending retained earnings:

  • Ending Retained Earnings = Beginning Retained Earnings + Net Income - Dividends.

• Cash Flow Statement

  • Provides data on cash inflows and outflows from operations and investments during a period.

  • Divided into three categories:

  • Operations

  • Investing

  • Financing

  • Key calculation:
    Free Cash Flow = Operating Cash Flow - Capital Expenditures.

Inventory Valuation Methods

• FIFO (First-in-First-out): Assumes oldest inventory items are sold first.

• LIFO (Last-in-First-out): Assumes newest inventory items are sold first; not allowed by IFRS.

• Both allowed by GAAP

Accounting Methods

• Accrual-basis Accounting: Records transactions regardless of cash flow, in accordance with GAAP.

• Cash-basis Accounting: Records transactions only when cash is exchanged.

Key Financial Metrics

• Net Sales:
  Net Sales = Sales Revenue - Sales Returns - Sales Discounts

• Gross Profit (GP):
  Gross Profit = Net Sales - Cost of Goods Sold

• Profit Margin (PM):
  Profit Margin = Gross Profit - Operating Expenses

• Gross Profit Rate:
  Gross Profit Rate = GP/Net Sales

• Profit Margin Rate:
  Profit Margin Rate = PM/Net Sales

Managerial Accounting

Types of Inventory for Manufacturing

1. Raw Materials Inventory: Basic materials used in production.

2. Work in Process Inventory (WIP): Incomplete products under production.

3. Finished Goods Inventory (FGI): Completed products ready for sale.

Cost Concepts

• Direct Materials (DM): Materials directly traced to the finished product.

• Direct Labor (DL): Labor costs directly traced to individual product units.

• Manufacturing Overhead (MOH): All manufacturing costs except direct materials and labors (also known as indirect costs).

• Direct Costs: Costs easily traced to specific cost objects.

• Indirect Costs: Costs not easily traced to specific cost objects.

• Product Costs: Total costs involved in making a product (DM + DL + MOH).

• Period Costs: Costs related to selling and administrative functions.

• Prime Costs: Sum of direct materials and direct labor costs.

• Conversion Costs: Sum of direct labor costs and manufacturing overhead.

• Variable Costs: Costs that vary with production levels.

• Fixed Costs: Costs that remain constant regardless of production levels.

• Differential Cost (Incremental Cost): Cost difference between alternatives.

• Opportunity Cost: Benefit forfeited when choosing one alternative over another.

• Sunk Cost: Costs already incurred that cannot be changed.

Cost Calculations

1. Inventory Equation:
   Beginning Inventory + Additions = Ending Inventory + Transfers Out

2. Direct Materials Used:
   Direct Materials Used = Beginning DM + Purchases - Ending DM

3. Cost of Goods Manufactured (COGM):
   COGM = Beginning WIP + Total Manufacturing Cost - Ending WIP

4. Cost of Goods Sold (COGS):
   COGS = Beginning FGI + COGM - Ending FGI

Activity-Based Costing (ABC)

• Activity-based Costing: Accumulates overhead costs by activities that consume resources.

• Activity Cost Pool: A grouping of costs related to a specific activity.

Cost-Volume-Profit (CVP) Analysis

• Contribution Margin (CM): Expounds on profitability.
  CM = Sales - Variable Expenses

• Net Operating Income (NOI): Indicates overall performance.
  NOI = CM - Fixed Expenses

• CM Ratio:
  CM Ratio = CM / Total Sales

• Profit Calculation: Profit = (Sales - Variable Expenses) - Fixed Expenses

  • Break-even Point (BEP):
    At BEP, Profit = 0.

• Margin of Safety: A measure of risk.

  • Units:
    Margin of Safety (units) = Current Sales Units - BEP in Units

  • Dollars:
    Margin of Safety ($) = Current Sales - BEP in Sales $ Amount

Budget and Standard Costing

• Budget: A detailed financial plan for resource usage over a time frame.

• Quantity Variance: Difference between actual and expected input amounts (
  in dollar terms using standard price).

• Price Variance: Difference between actual price and standard price multiplied by the actual amount purchased.

Financial Accounting Standards

• International Financial Reporting Standards (IFRS)

  • Issued by the International Accounting Standards Board (IASB).

  • Example: Companies like Nestle prepare their financial statements under IFRS standards to ensure transparency across international borders.

• Generally Accepted Accounting Principles (GAAP)

  • Issued by the Financial Accounting Standards Board (FASB).

  • Example: In the U.S., companies such as Coca-Cola adhere to GAAP for preparing their financial results.

Key Financial Statements

• Balance Sheet (Statement of Financial Position)

  • Represents the financial position of an entity at a specific date (usually the end of a month or year).

  • Reflects the basic accounting equation: Assets = Liabilities + Equity.

    • Example: A balance sheet shows that if a company has $200,000 in assets and $150,000 in liabilities, the equity would be $50,000.

• Income Statement (Statement of Operations)

  • Summarizes revenues and expenses over a specific period of time (e.g., month or year).

  • Key formula: Net Income = Total Revenue - Total Expense.

    • Example: A company with total revenues of $500,000 and total expenses of $300,000 would report a net income of $200,000.

• Statement of Retained Earnings (Statement of Owner's Equity)

  • Outlines the changes in retained earnings for a specified period.

  • Reconciles beginning and ending retained earnings:

  • Ending Retained Earnings = Beginning Retained Earnings + Net Income - Dividends.

  • Example: If the beginning retained earnings are $40,000, the net income is $10,000, and dividends paid are $5,000, the ending retained earnings would be $45,000.

• Cash Flow Statement

  • Provides data on cash inflows and outflows from operations and investments during a period.

  • Divided into three categories:

    • Operations

    • Investing

    • Financing

  • Key calculation: Free Cash Flow = Operating Cash Flow - Capital Expenditures.

    • Example: If a company has an operating cash flow of $100,000 and capital expenditures of $20,000, the free cash flow would be $80,000.

Inventory Valuation Methods

• FIFO (First-in-First-out): Assumes oldest inventory items are sold first.

  • Example: A grocery store that sells its older dairy products before newer ones.

• LIFO (Last-in-First-out): Assumes newest inventory items are sold first; not allowed by IFRS.

  • Example: A construction company might use LIFO for raw materials, using the latest materials purchased first due to increasing prices.

• Both allowed by GAAP

Accounting Methods

• Accrual-basis Accounting: Records transactions regardless of cash flow, in accordance with GAAP.

  • Example: Recognizing a sale when goods are delivered, not when the cash is received.

• Cash-basis Accounting: Records transactions only when cash is exchanged.

  • Example: A freelance graphic designer records income only when they receive payment for their services.

Key Financial Metrics

• Net Sales:
  Net Sales = Sales Revenue - Sales Returns - Sales Discounts

  • Example: If a company has $600,000 in sales, $50,000 in returns, and $10,000 in discounts, net sales would be $540,000.

• Gross Profit (GP):
  Gross Profit = Net Sales - Cost of Goods Sold

  • Iofit Margin = Gross Profit - Operating Expenses

  • Example: Gross profit of $240,000 with operating expenses of $100,000 results in a profit margin of $140,000.

• Gross Profit Rate:
  Gross Profit Rate = GP/Net Sales

  • Example: A gross profit of $240,000 on net sales of $540,000 gives a gross profit rate of approximately 44.44%.

• Profit Margin Rate:
  Profit Margin Rate = PM/Net Sales

  • Example: If the profit margin is $140,000 on net sales of $540,000, the profit margin rate would be approximately 25.93%.

Finance

Corporate Finance

Time Value of Money

• Calculate PV and FV of a single cash flow

  • PV (Single Cash Flow): PV = FV/(1+r)^t

  • FV (Single Cash Flow): FV = PV×(1+r)^t

• Calculate PV and FV of an annuity and/or an annuity due

  • PVannuity = PMT x (1-(1+r)^-t)/r

  • FVannuity = PMT x ((1+r)^t - 1)/r

  • PVannuitydue = PMT x (1-(1+r)^-t)/r x (1+r)

  • FVannuitydue = PMT x ((1+r)^t - 1)/r x (1+r)

• Time value of money applications: amortized loans, fractional periods, etc.

  • PMT=(PV×r​)/(1−(1+r)^−t)

Capital Budgeting

• Calculate NPV, IRR, payback period, discounted payback period, profitability index

  • NPV=T∑t=0 Ct/​(1+r)^t

    • Ct = cash flow at time t

      • do per cash inflow/outflow and then add up all

      • outflow is the initial investment, will be a negative

  • Internal Rate of Return (IRR)

    • the discount rate that makes the NPV or a project = to zero

    • 

  • Payback Period

    • time to recover the initial investment form cumulative cash inflows

• Make decisions on independent and/or mutually exclusive projects based on calculation results

  • Independent Projects:

    • Accept projects with NPV > 0, IRR > required rate, payback period and discounted payback period within acceptable limits, and PI > 1

  • Mutually Exclusive Projects

    • Choose the projects with the highest NPV, highest IRR (if IRR > required rate), shortest payback period, shortest discounted payback period, and highest PI (as long as PI > 1)

Financial Statement Analysis

Understand the terms in balance sheet, income statement, cash flow statement and stockholder’s equity

Calculation of financial ratios

Able to make conclusions based on percentage analysis, time-series analysis or cross-section analysis of financial ratios

Cost of Capital and Capital Structure

Calculation of cost of debt, cost of preferred equity, and cost of common equity

Calculation of WACC (aka MCC)

• WACC = (wd​×(1−T)×kd)​ + (wps​×kps​) + (wre​×kre​) + (wcs​×kcs​)

  • wd​ = 0.30 (weight of debt)

  • T = 35% = 0.35 (tax rate)

  • kd = 7% = 0.07 (cost of debt)

  • wps​ = 0.15 (weight of preferred stock)

  • kps​ = 11% = 0.11 (cost of preferred stock)

  • wre​ = 0.55 (weight of retained earnings)

  • kre = 15% = 0.15 (cost of retained earnings)

Understand the difference between equity versus debt financing

Understand how cost of capital and firm value change as capital structure changes

Investments

Risks and Returns

Calculation of risk and return over several time periods

Diversification, diversifiable risk versus non-diversifiable risk

Scenario analysis

Historical mean and variance analysis

Capital Asset Pricing Model (CAPM)

Security Market Line (SML)

Interpretation of the risk tolerance level of individual investors

Valuation of Securities

Valuation of fixed income securities, including the calculations of YTM and YTC

Valuation of preferred stocks

Valuation of common stocks using discounted dividends model (DDM) or CAPM

Financial Markets and Environments

Different types of financial markets: primary vs secondary, money vs capital, spot vs futures

Types of orders: market order and/or price-contingent order

Buying on margin and short sale

Different types of financial securities: debt, equity, derivatives

Interest rates determination, risk free interest rate, and the yield curve

Investment companies such as mutual funds, ETF