Topic outline
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In this unit, we will review some basic accounting principles for preparing and reporting on the firm's financial transactions. The focus of our attention will be on the financial package, which includes the income statement, statement of retained earnings, balance sheet, and statement of cash flows. We will consider what this information tells us about the company's historical performance, its future prospects, and how the firm compares with similar firms in their industry segment.
Completing this unit should take you approximately 18 hours.
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When the topics of accounting and financial management come up in MBA courses, many students immediately begin to lose interest or find their attention wandering. Finance topics have a reputation for being boring and too difficult to follow. But these feelings are simply the result of misunderstanding how truly exciting this subject is and, more to the point, how essential it is to understand accounting and finance.
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Read this article, which provides a summary description of the role of managers and the importance of exercising financial oversight to a business.
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A good starting point for our course is to improve your understanding of the importance of accounting and finance to business. Of particular interest is the difference between accounting and financial management. When you have completed reading the following sections, you should be able to discuss the differences between accounting and financial reporting, and why the information contained in these reports is of interest to key stakeholders.
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In this chapter, you will learn more about the importance of accounting and financial management. Specifically, we will discuss the application of accounting analysis to various business decisions. After you read, you will have a better understanding of the differences between accounting reports and financial reports. Also, you should be able to describe how accounting and finance support the management decision-making process.
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Watch this video, noting the difference between managerial accounting and financial accounting. Managerial accounting is for internal consumption and is used to make decisions concerning business operations. Financial accounting is put together for external information users, including stakeholders, lenders, suppliers, and others.
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Read this review of how much information can be obtained from a firm's statements. These are useful for management as they review the results against the forecasted outcomes and provide helpful information for decision-making. Read this brief overview on Return on Equity (ROE) to better understand the effects of debt, or leverage, on performance.
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To succeed, a firm must get to a state of financial security, which allows it to meet operating expenses and invest in the future. The goal of a company should be to achieve "better than average" results. Let's note here that we didn't say that the company should strive to be as good as the competition. If the firm can routinely get better than average results, it increases the likelihood that it will be able to survive in tough financial times and that it should be able to post better than average returns. This process begins with knowing the company's financial health today, which we can determine by evaluating its financial statements.
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Read these sections, which provide a good overview of the statements that make up the financial package for a firm. When you have completed this review, you should be able to identify the income statement, statement of retained earnings, the balance sheet, and the statement of cash flows. You will also be able to discuss the value of each statement.
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The first statement of the financial package is the income statement. It is also known as the profit and loss (or P&L) statement. It is a financial representation of the revenue and expenses of the firm and whether it has generated a profit. Watch this video that describes the multi-step income statement.
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As we saw in the previous section, the firm's assets are recorded on the Balance Sheet. Assets represent the value of everything that a firm owns and are classified as either current or long-term assets. Current Assets are cash or any assets that can be turned into cash within 12 months. They are listed in the order of liquidity, or how quickly the asset can be converted into cash (cash, marketable securities, accounts receivable inventory, etc.). Long-term Assets are any assets that will take longer than 12 months to be converted to cash (property, plant, equipment, goodwill, etc.). This information also applies to your own personal balance sheet.
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Briefly, the balance sheet represents everything a company owns and what they owe. The difference in Owner's Equity, which is what's left after the assets have been liquidated and the debts have been paid. After reading these sections, you will understand how revenue that the firm generates is recognized from an accounting view.
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Assets are a list of everything a company owns, and a large asset account for many companies is their inventory. Inventory represents something that the company either made, using labor and materials, or something that they purchased from an outside supplier. These sections will prepare you to explain how inventory is defined, how it is valued, and its effect on the balance sheet.
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Read these sections to continue our discussion on assets. Assets are classified as current (can be liquidated in one year or less) and long-term (will take longer than one year to liquidate). Pay attention to the balance sheet treatment of long-term assets, and also the process for depreciating those assets.
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The second part of the balance sheet is a record of the firm's liabilities or everything that the firm owes. Liabilities, just like assets, are classified as current or long-term liabilities. Current Liabilities are debts/obligations that will be paid within 12 months (such as accounts payable, short-term debt, and notes). Long-term Liabilities are any debts/obligations that will take longer than 12 months to be paid (that is, long-term debt).
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The next part of the balance sheet is a record of the form's liabilities, or debts. These sections will give you a better understanding of short-term liabilities and how they are accounted for. After reading this material, you will be able to discuss short-term liabilities and their treatment on the balance sheet.
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To continue your review of liabilities, read these sections on how long-term liabilities are treated on the balance sheet. Common long-term liabilities include loans and bond issues. By the end of this chapter, you will be able to discuss how long-term liabilities affect the balance sheet, and the implications for management decisions.
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The Management Discussion and Analysis Report (MD&A) is a requirement as detailed in the Companies Act 2013 and provides for the management of a firm to report to the shareholders and readers the financial statement, information concerning the state of the current business, and future prospects. To provide shareholders with a level of confidence that the information provided in the financial statement is true and accurate, companies will employ the services of an outside auditing firm to review the data and offer their opinion on its accuracy.
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As you have learned, the accounting and financial reports are essential to a firm's stakeholders. In this chapter, you will see what actions a firm takes to ensure that the reports presented to the stakeholders are a true and accurate representation of their financial status. Pay particular attention to the discussion on disclosure issues.
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For publicly-traded corporations (those who have stock traded on the public exchanges), there is a legal requirement to have their financial reports audited. The use of an independent auditor is to provide assurances to the stakeholders that the information that they have been given complies with the guidelines established by the Generally Accepted Accounting Principles (GAAP). The material in this section will provide a detailed description of how the independent auditor's report is prepared.
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These study sessions are an excellent way to review what you've learned so far and are presented by the professor who created the course. Watch these as you work through the unit and prepare to take the final exam.
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Students mustReceive a grade
Take this assessment to see how well you understood this unit.
- This assessment does not count towards your grade. It is just for practice!
- You will see the correct answers when you submit your answers. Use this to help you study for the final exam!
- You can take this assessment as many times as you want, whenever you want.
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