1.

ACCOUNTING

is a service that provides:

reliable and relevant financial information about a business useful

in making decisions

safeguard over the assets of the business

ACCOUNTING is a process of:

analyzing financial data

recording business transactions

summarizing financial data of a particular business activity which

have an impact on the financial position of a business

FINANCIAL DATA actual business transactions (e.g. sale of goods,

provision of services, purchase of assets, taxes and other figures).

PURPOSE OF THIS PROCESS to prepare financial statements

(FINANCIAL REPORTING) and have an accurate and timely
accounting data based on which interested parties (owners,
creditors, suppliers, customers, employees, governmental
institutions and other) can judge on the results the business has
achieved during a particular period of time and on the assets the
business possesses.

FINANCIAL ACCOUNTING provides information designed to satisfy the

needs of external users, usually done in the form of financial statements.

MANAGERIAL ACCOUNTING provides information useful in running a

company by internal users, usually done through custom designed reports.

Interested parties are also called ACCOUNTING INFORMATION USERS:

EXTERNAL users

INTERNAL users

EXTERNAL USERS: parties outside the company who are interested in the
accounting information.

INVESTORS use accounting information to buy, sell or make decisions

related to shares, bonds, etc.

CREDITORS (suppliers, banks) utilize accounting information to make

lending decisions.

TAXING AUTHORITIES (Internal Revenue Service) need accounting

information to determine a company's tax liabilities.

CUSTOMERS may need accounting information to decide which products

and from which company to buy.

INTERNAL USERS: parties inside the company who are interested in the
accounting information.

A company's senior and middle MANAGEMENT uses accounting

information to run business.

SHAREHOLDERS use this information to assess performance of the

management.

EMPLOYEES use accounting information to determine a company's

profitability and profit sharing.

INCOME equals profits made during a given period.

All the money that a business spends on goods and services

constitutes

the companys LIABILITIES.

A financial operating plan showing expected income and

expediture is

a BUDGET.

All the money that a company will have to pay to someone else in
the future, including debts, taxes and interest rates is
EXPENDITURE.

An entry in an account, recording a payment made is DEBIT.

An entry in an account, recording a payment received is CREDIT.

An adjective describing something without a material existence,

which you cant touch is TANGIBLE.

ACCRUED is an adjective describing a liability which has been

incurred but not yet invoiced to the company.

RETAINED is the same as delayed or postponed until a later time.

Deals with FINANCIAL TRANSACTIONS that involve money:

making payments EXPENDITURE

receiving money INCOME

Each transaction is entered in a record known as an ACCOUNT

accounting
system of a business:

How much is a business earning and how much tax does it have to
pay?

Managers want to know who owes them money (DEBTORS) and to

whom they owe money (CREDITORS)

What is the performance of the company?

Some of the accounting information is used internally and some, in

limited
companies, for the annual FINANCIAL STATEMENTS:

BALANCE SHEET

PROFIT & LOSS ACCOUNT (UK) OR INCOME STATEMENT (US)

CASH FLOW STATEMENT OR FUNDS FLOW STATEMENT

Which of the above financial statements include the following items?

CASH INFLOWS AND CASH OUTFLOWS (PAYMENTS IN AND OUT)

ASSETS AND LIABILITIES

INCOME AND EXPENDITURE

HOW MANY WORDS DO YOU KNOW?

ASSETS
EARNINGS OR INCOME LIABILITIES

DIVIDEND
EQUITIES ACCOUNT
CREDITOR

DEBTOR
TURNOVER EXPENDITURE
STOCK (GB) OR
INVENTORY(US) OVERHEADS
GROSS
NET
DEBTORS (GB) OR ACCOUNTS RECEIVABLE (US) DEPRECIATION (GB) OR
AMORTIZATION (US) CREDITORS (GB) OR ACCOUNTS PAYABLE (US)
SHAREHOLDERS (GB) OR STOCKHOLDERS (US)

THE BALANCE SHEET

ASSETS
1) FIXED (buildings,machinery, vehicles, equipment) long-lasting
and

needed for making companys products and providing services,

they
take more time to convert into cash
2) CURRENT (stock, debtors, cash) used for day-to-day operations
and
are important for the liquidity of the company
LIABILITIES
1) LONG-TERM (loan, mortgage), money lent and paid paid back with
interest after twelve months
2) CURRENT (creditors, overdrafts, dividends payable, taxation),
amounts
payable within twelve months
SHAREHOLDERS/OWNERS EQUITY (CAPITAL)
1) SHARE CAPITAL - the money put into the business received from the
issue of shares
2) RESERVES (such as retained profit)

How would you put a value on your college or university? What are its
major assets buildings and equipment, or people and their skills,
knowledge and reputation?

In most countries, companies record the historical cost of their assets

their original price, and not their (estimated) current selling price or
replacement cost. Why?

Should companies record raw materials, work-in-progress, and their

inventory of products ready for sale at their cost price, or their current
market price (the price at which they could be sold)?

Give examples of companies whose value largely derives from intangible

assets such as their well-known brands, or their good reputation.

THE PROFIT & LOSS ACCOUNT

shows the profit earned and losses made over a period of time

calculate the net profit and summarise the profitability of the company

helps a business to make decisions about the future

helps tax authorities to know how much tax to charge a company on its
profits

helps banks to give companies financial support

WHAT DOES IT SHOW?

revenue and expenditure

turnover -------

costs
overheads

rent, salaries, utilities, insurance

NET PROFIT = REVENUE - COSTS
HOW IS THE PROFIT DISTRIBUTED?

taxation to government

dividend to shareholders

part is retained by the company for futher growth or bad debts

THE CASH FLOW

STATEMENT
WHAT DOES IT SHOW?
The liquidity and the financial strength of the company
THE SOURCES OF
FUNDS (cash inflows)
owners own funds from
the issuing of shares

THE APPLICATIONS OF
FUNDS (cash outflows)
purchases of fixed
and financial assets

trading profits

running expenses

borrowed funds

interest payments

the sale of assets

taxation
payment of dividends

CASH items to which an organization has immediate or one-day access:

actual cash

bank accounts

short-term deposits

CASH DEFICIT - more cash outflows than inflows

CASH SURPLUS - more cash inflows than outflows
NEGATIVE OPERATING CASH solutions make more
profit, decrease stock, decrease debtors and increase
creditors.

2. STOCKS AND SHARES

STOCK MARKET investors or financial institutions buy STOCKS of

companies listed on the stock exchange

SHARES both stocks and privately held stakes in small firms that are
not publicly traded

'Basket' of stocks picked by a fund manager and put

together into a MUTUAL FUND (UK - UNIT TRUST)
invested in particular countries, different sectors of the
market or may track a particular INDEX

FUNDS different objectives: regular income (DIVIDENDS) or long-term

CAPITAL GROWTH (increase in the share prices

STOCKS AND SHARES bought and sold on the STOCK

EXCHANGE: a physical location (The NY Stock Exchange on Wall
street, the NASDAQ (an electronic exchange), or a small selected
group of stocks can be brought together to make an INDEX (DOW
JONES INDUSTRIAL AVERAGE based on a group of 30 major US
corporations)

WHY DO STOCKS GO UP AND DOWN IN PRICE? WHEN IS A STOCK

WORTH BUYING?
Financial analysts do research on this, using three main tools:

Analysis of individual companies: their market position and

performance

Analysis of the national and global economy

Technical analysis: using charts and internal market statistics to

identify future trends and turning points

BOND MARKET

about ten times bigger than the stock market

government or a large company wants to borrow a large sum of

money issues a bond and receives the money as a loan from

the institution or an individual who buys it (BONDHOLDER)
the principal paid back over a fixed period of time (MATURITY)
the bondholder receives interest (COUPON)

their price goes up or down over the term of the loan

INFLATION (the interest repaid on a bond is fixed rising

inflation will reduce its final value) and CURRENCY
MOVEMENTS (bonds issued and repaid in one particular
currency their value changes as the currency fluctuates)

GOVERNMENT BONDS low-risk

CORPORATE BONDS depend on the CREDIT RATING of

the company

FOREIGN EXCHANGE MARKET

bigger than all the securities markets combined (around $2 trillion a

day)

DEALERS (commercial banks, central banks, pension funds, etc.)

buy and sell CURRENCY pairs such as EUR/USD.

lots of SPECULATION in this market if a currency fluctuates

implications buying and selling foreign EQUITIES and BONDS;
international trade; inflation (because of payments for imported
goods), etc. a lot of dealing is done to protect against (HEDGE)
such risks

COMMODITY MARKET

dealers trade the FUTURE PRICE of such things as ENERGY (crude

oil, natural gas, etc), METALS (gold, silver, copper, steel, etc.),
SOFT COMMODITIES (coffee, sugar, grains (e.g. corn, wheat,
soybeans), LIVESTOCK (e.g. cattle, hogs, etc.)

ORGANISATIONS IN THE PRIVATE SECTOR

businesses set up by individuals, not the state

1) WITH UNLIMITED LIABILITY

Sole proprietorship

Partnership

2) WITH LIMITED LIABILITY

Private limited company

Public limited company

JOINT-STOCK / LIMITED COMPANIES

independent legal existence from its shareholders

shareholders have LIMITED LIABILITY (in case of debt, each

shareholder is responsible only for the amount he has invested)

the capital is divided into SHARES

owned by SHAREHOLDERS who can vote and take a share of the

profit

shareholders elect a BOARD OF DIRECTORS and a CHAIRPERSON

the BoD appoint MANAGERS to run day-to-day business

ANNUAL GENERAL MEETING is held every year

buying a share ownership right to vote at AGM + a dividend

FLOTATION/IPO/GOING PUBLIC
TO FLOAT A COMPANY:

changing a private company into a public company by issuing

shares and soliciting the public to purchase them

FLOTATION or INITIAL PUBLIC OFFERING (IPO):

the first sale of a corporations common shares to public investors.

Its main purpose is to raise capital for the corporation

STOCK MARKET (EQUITY MARKET)

PRIMARY MARKET: The market in which the securities are bought

and issued for the first time.

SECONDARY MARKET: The market for securities that are being

traded after they are first issued.

STOCKBROKERS: agents that charge a fee or commission for

executing buy and sell orders submitted by an investor

MARKET MAKERS: buy and sell shares on their own account and
make money on the difference they pay for buying and selling
shares (spread)

SPECULATORS: trade with a higher-than-average risk, in return for

a higher-than-average profit potential, anticipating future price
movements (bulls, bears, stags)

3. TAKEOVERS MERGERS AND BUYOUTS

Successful companies make a lot of money, which sooner or later

has to be spent.
VARIOUS POSSIBILITIES:
to invest it all in R&D innovation and diversification
(if successful leads to even greater cash returns)
to spend money by acquiring other companies suppliers, distributors,
competitors or companies in unrelated fields (if successful leads to even
greater cash returns)
a company can grow both by way of mergers and
acquisitions
corporate finance strategy and management dealing
HOW DOES A COMPANY GROW?

higher revenue through innovation and diversification

more assets

more employees

expansion into foreign markets

mergers and acquisitions

HOW DOES A COMPANY INVEST ITS CASH RETURNS?

R&D innovation and diversification

takeovers, mergers and acquisitions (suppliers,

distributors, retailers, companies in unrelated fields)

HOW ARE LARGE CONGLOMERATES SPLIT UP?

LEVERAGED BUYOUTS

ACQUISITION, TAKEOVER, HOSTILE TAKEOVER, FRIENDLY

TAKEOVER, LEVERAGED BUYOUT, OR MERGER?

two or more companies join together to form a larger company

one company buys another one, or buys part of another one

getting control of a company by buying over 50% of its shares

a takeover that a company being taken over agrees to

a takeover that a company taken over does not want and doesnt
agree to

a person or company buys a company using a loan borrowed against

the companys assets; these assets can then be sold to pay off the
debt

DEFENSIVE ACTION AGAINST TAKEOVERS

POISON PILL an action taken by a company to make itself less

attractive to a potential takeover bid or a raider (e.g. a company will
borrow large amount of money and give it away to shareholders as
dividends, so that a company has an unacceptably high level of
borrowing)

WHITE KNIGHT an alternative buyer that comes to rescue of a

company from a threatened hostile takeover

MERGERS ('a merger of equals')

occur in a friendly setting where executives from the respective

companies participate in a successful combination of all parts:
HORIZONTAL where too merging companies produce similar product
in the same industry
VERTICAL when two firms, each working at differenT stages in the
production of the same good, combine
CONGLOMERATE when the two firms operate in different industry
all the owners of stocks of either company get the same
amount of stock in the new combined company
can resemble a takeover, but result in a new company name (often
combining the names of the original companies) and in new branding
ACQUISITIONS (of un-equals, one large buying one small)

can involve a cash and debt combination, or just cash

can involve a combination of cash and stock of the purchasing entity

can involve a purchase of the stock or other equity interests of the

target entity

can involve a purchase of all or substantially all of its assets

MOTIVES BEHIND MERGERS AND ACQUISITIONS

TO ADD SHAREHOLDER VALUE
ECONOMIES OF SCALE: reducing the number of duplicate departments
lowering costs relative to the same revenue
increasing profits
INCREASED REVENUE/INCREASED MARKET SHARE: absorbing a major
competitor increasing its power (by capturing increased market share)
to set prices
SYNERGY: a better use of complementary resources
CROSS SELLING: a bank buying a stockbroker could then sell its banking
products to the stock brokers customers, while the broker can sign up the
banks customers for brokerage accounts
MERGERS - PROBLEMS

-often, terming the combination a merger rather than acquisition is done

purely for POLITICAL OR MARKETING REASONS

net loss of value due to problems caused by INCOMPATIBILITY

(technology, equipment or corporate culture)
CONCEALMENT OF LOSSES OR LIABILITIES at one of the partners
OVERLAPPING SUBSIDIARIES or redundant staff may continue, creating
INEFFICIENCY
NEW MANAGEMENT may cut too many operations or personnel, losing
expertise and disrupting the employee culture
similar to those encountered in takeovers if it is not to be considered
a failure, it must INCREASE SHAREHOLDER VALUE faster than if the
companies were separate
WRITE CONS OR PROS IN GAPS:
______________:

Increase in Sales / Revenues (e.g. Procter & Gamble takeover of

Gillette)

Venture into new businesses and markets

Profitability of target company

Increased market share

Eliminating competition

Increased efficiency

______________:

Reduced competition and choice for consumers

Likelihood of price increases and job cuts

Cultural integration/conflict with new management

Hidden liabilities of target entity

4. THEORIES OF THE BUSINESS CYCLE

A INTERNAL

A downturn begins when...

People tend to spend more and

borrow money when

People tend to spend less and save

when

When interest rates rise...

Companies only invest while

B EXTERNAL

Causes outside economic activity are

factors such as...

The economist Schumpeter believed that

Creative destruction means that

A business cycle occurs due to the f____________ that an

economy experiences

over time resulting from changes in economic g ____________.

Understanding

business cycles is the essence of m ____________. Economists

try to work out where

the economy is located and more importantly where it is

h____________ in order to

deal with possibly undesirable future economic events.

When the economy is at or is heading in an undesirable
direction, economists may apply f____________ or m____________
policy tools to change the course of the economy. In general,
a business cycle describes changes in the demand-side of
the economy as measured by GDP, where:

GDP = C + I + G + NX

consumption + investment + government spending + net

exports (exports - imports)

Over time, GDP does not remain constant and will change for
many reasons, economic and non-economic. Economic
reasons include changes in government policies such as t
____________ and i ____________ rates. The non-economic reasons
are too many to even consider listing, but include factors
such as w ____________, d ____________, natural and man-made d
____________.