Corporate Finance A1
Vysoká škola finanční a správní
Summer Semester 2013
Irena Jindřichovská
Irena.jindrichovska@mail.vsfs.cz
Dr Irena Jindrichovska
Corporate finance A1
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Corporate finance A1
Literature
• Block, Stanley: Foundations of Financial Management
McGraw-Hill, 2009
ISBN 978-0-07-128525-4
• Gowthorpe, Catherine, Business accounting and
finance for non-specialists (2nd ed., London:
Thomson Learning, 2005). ISBN: 978-1-84480200-5
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Introduction to financial
statements (CH1)
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Forms of business organization
Uses and users of financial information
Business activities
Communication with users
Starbucks’ financial statements
Assumptions and principals of financial
reporting
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Corporate finance A1
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Definition
• Accounting is the process of identifying
measuring recording and communication financial
information about organizations activities to
permit informed decisions
• Recording the information and maintaining
records = bookkeeping
• Accountants participate in designing the
accounting and non-accounting systems for
business managers
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Users of accounting information
• Sole proprietorship
– Owned by one person
• Partnership
– Owned by more than one person
• Corporation
– Organised as a separate legal entity and owned
by stockholders - easy to transfer ownership,
easier to raise funds, no personal liability
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Uses and users of financial
information
• Accounting is information system, that
identifies, records and communicates the
economic events of an organisation to
interested parties
– Internal
– External users
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Uses and users of financial
information
• Internal users: detailed information for the needs of
specific decisions
– Managers: marketing, production, finance, directors
– Employees
• External users:
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investors (owners),
creditors (suppliers and bakers),
tax authorities,
regulatory agencies (SEC, FTC – fed trade commission),
customers,
labour unions,
economic planners
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Business activities
• Financing
– To start and operate the business, owns funds, outside
sources – banks, selling shares and bonds
• Investing
– To operate the business and finance assets, long term
assets and short term assets
• Operating
– Creation of revenues from sales, services and interests
and spending expenses – costs of sales, general and
admin expense interest expense
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Corporate finance A1
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Communication with users
• Communication via financial statements
– Assets and liabilities – balance sheet
– Revenues and expenses – income statement
– Dividends and undistributed earnings – retained
earnings statement
– Cash receipts and cash uses - statement of cash
flow
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Income statement
• To report the success of failure of the
company’s operation for a period of time
• Lists company’s revenues and its expenses
• Result is net income or net loss = bottom
line
• Issuance of new stock and dividend
distribution are not part of income statement
and do not determine the result.
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Retained earnings statement
• Retained earnings is the income the net earnings
retained in the corporation.
• Retained earnings statement shows the amounts
and causes of changes in retained earnings during
the period.
• Beginning retained earnings is shown then net
income is added and dividends are subtracted.
– Dividend policy
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Balance sheet
• Reports assets and claims to those assets at
a specific point in time
• Claims of creditors are liabilities
• Claims of owners are shareholder’s equity
• Basic accounting equation:
– Assets = Liabilities + Stockholders’ equity
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Balance sheet II
• Assets
• Liabilities and stockholders’ equity
– Common stocks
– Retained equity
• Creditors use B/S as a source of information
of whether they will be repaid
– Capital structure?
– Can the assets be easily sold to repay, etc.
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Statement of Cash Flow
• Cash receipts and cash payments
– Operating activities
– Investing activities
– Financing activities
• Net increase and decrease of cash during
the period
• Cash amount at the end of period
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Statement of Cash Flow II
• Where did cash come form during the
period ?
• How was cash used during the period ?
• What was the change in the cash balance
during the period ?
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Interrelationships of statements
• The retained earnings statement is dependent on
the result of income statement
• The balance sheet and retained earnings
statements are interrelated because the ending
amount on the retained earnings statement is
reported in B/S
• Statement of cash flow and balance sheet are
related. Cash flow shows how the cash changed
through the cash sources and uses and ending
amount of cash must agree with cash in the B/S.
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Statements of Starbucks Corporation
• Financial statements that report information for
more that one period are comparative financial
statements
• Every set of financial statements is accompanied
by explanatory notes
• Companies use different year end, often 31.12. but
Starbucks uses Sunday closest to September 30 of
each year.
– Discuss the statements
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Other elements of annual reports
• U.S. companies that are publicly traded must provide their
shareholders with annual report each year.
– Management report and analysis covers
• Ability to pay near term obligations
• Ability to fund operation and expansion
• Results of operation
– Notes to financial statements
• Provide additional details on items presented in main body of
the report
Dr Irena Jindrichovska
Corporate finance A1
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Other elements of annual reports II
– Auditor’s report
• If accounts are in accordance with GAAP
unqualified report is issued
• If auditor expresses anything else then unqualified
opinion, then financial statements should be used
with caution
– Enron and Arthur Anderson
– Auditor’s independence
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Assumptions and principles in
financial reporting
• Money unit assumption
– Only issues that can be expressed in money are reported
(non-financial measures, are important?)
• Economic entity assumption
– Only entities can report
• Time period assumption
– Life of a business can be divided into artificial time
periods
• Going concern assumption
– Business will remain in operation for foreseeable future
Dr Irena Jindrichovska
Corporate finance A1
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Assumptions and principles in
financial reporting II
• Cost principle
– All assets are recorded at the amount paid for
them
– Revaluation of assets? market value of assets?
• Full disclosure principle
– All events that would make a difference to
financial statement users should be disclosed.
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Overview
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Describe the primary forms of business organisation.
Identify the uses and users of accounting.
Explain the three principal types of business activity.
Describe the content and the purpose of each of the
financial statements.
Explain the meaning of assets, liabilities and stockholders’
equity.
State the basic accounting equation.
Describe the components that supplement the financial
statements in an annual report.
Explain the basic assumptions and principles underlying
financial statements.
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