GLOBAL FINANCIAL MANAGEMENT

1. GLOBAL FINANCIAL MANAGEMENT UNIT 1: Accounting Review TouchText • What IS a business • Accounting Principles • Financial Position and Performance • Standard Financial Statement Accounts • The Statement of Cash Flows Problems and Exercises Next

2. So Which One Is The Accountant? Dictionary Take Notes Back Next

3. Business as “Money Machine” To understand what accounting is, first think of a business as a “money machine”. (For now, it doesn’t matter what the business actually does!) Business Dictionary Investors/Owners Customers & Suppliers Banks Purchases & Expenses (*Actually, accounting is used by many non-business “entities”, including governments, non- government organizations, individuals, and so on. But they are not addressed in this course.) Back Next

4. What Is Accounting? Accounting is the process of collecting, organizing, reporting and analyzing the financial position and performance of a (business) entity. Dictionary Entity Accounting Activities Business Financial Position • Collect • Organize • Report • Analyze (One point in time) Financial Performance (A period of time) Back Next

5. Financial Position As a “money machine”, a business’s financial position refers to what the business owns and what it owes to others, as well as its owners’ net worth in the business at a specific point in time. Dictionary Financial Position Business Financial = related to money ($) Owns = Belongs to the business. Owes = The business must pay back. Net Worth ($) = Owns ($) – Owes ($) Banks Assets Investors/Owners * Much of what a business owns are physical things (“assets”), not money. But accounting requires recording the money value of all assets, including physical things. Back Next

6. Financial Performance As a “money machine”, a business’s financial performance refers to what the business earned, as against what the business paid out in costsand expenses, overa period of time– the difference being profit. Dictionary Revenues from Sales Costs & Expenses Financial Performance Financial = related to money ($) Earned = Revenue received from sales to customers, plus others. Costs = What the business paid for the things it sold to its customers. Expenses = What the business paid to carry on operating Profit ($) = Revenues ($) – Costs ($) – Expenses ($) *Profit same as “Net Income”. Back Next

7. What is NOT a Business Entity “Living in the now” • Informal Economies and Businesses • Cash Transactions Only • No Documents, Records or Receipts • No (Profit-based) Taxes • Owner Same as Business “ I am going home with more money than I started. So business is doing good enough!” Dictionary Proprietorship In some places, this informal approach to running a small business is common. But this is not the right business model to envision when learning about accounting. Business = Owner No Role for Accounting Back Next

8. What IS a Business Entity In accounting, every business is an “entity” distinct and different from its owner(s). Dictionary ≠ Business Owner • As an entity separate from its owner, a business… • Can itself own and owe things. • Can engage in contracts. • Keeps its own documents, records and receipts. • Can engage in both cash and credit (non-cash) transactions. • Is assumed to live forever (as an “going concern”) • Pays taxes. • If it is a corporation, can go bankrupt without any owner liabilities (so-called “limited liability”). • Cannot be “rich” (only its owners can!). Back Next

9. So Who Wants to Know? (Internal) Many different individuals and entities have an interest in knowing the financial position and performance of a business, but for different reasons. Some of this interest is internal. Dictionary Managers: Are we doing a good job? How can we do better? Business Workers: Are we being paid enough? Back Next

10. So Who Wants to Know? (External) Many different individuals and entities have an interest in knowing the financial position and performance of a business, but for different reasons. Some of this interest is external. Dictionary Owners Business Government Potential Investors Suppliers Why would these entities want to know? Banks Competitors Back Next

11. Who Wants to Know (External)? Why? Why do they want to know? Government: Are the paying their taxes? Suppliers: Are the making too much profit from me? Competitors: How are we doing compared to them? Banks: Should we loan them money? Can they pay it back? Potential Investors? Should I buy stock in this business? Owners: How are we doing? What about our management? Dictionary Back

12. Need for Rules Because a lot of different entities are using accounting information for a lot of different reasons, there has to be a common accounting “language” – or set of rules – that accountants should use. Dictionary Is this a cost or an expense? This machine is getting old. What do I do? We sold something but haven’t been paid? What is this? Our land has increased in value. Is this profit? Accounting rules need to be created to answer these questions, so that information coming from different accountants, or different businesses, can be understood and compared. Back Next

13. Who Makes the Rules Accounting rules and regulations are typically created and agreed by accounting standards bodies, rather than by laws of governments. Dictionary USA’s GAAP Vs. IFRS International & Regional International Accounting Standards Board (IASB) issues International Financial Reporting Standards (IFRS) Country Specific e.g. Thailand’s Federation of Accounting Professions (FAP) Can/Will ASEAN countries converge to IFSR? Back Next

14. Who Needs to Know the Rules? Do NOT need to know all the accounting regulations: Beginning Finance Students (this course!) DO need to know accounting regulations: Advanced Accounting Students Practicing Accountants Dictionary In this class, we learn about universally agreed accounting definitions, principles and practices, and apply them to financial analyses. (* We’ve already learned that a business must be treated as a separate entity and as an going concern!) Back Next

15. Principles of Accounting: Business Life Going Concern: Businesses are assumed to go on forever. Periodicity: The life of a business is split up into accounting periods that have a specific beginning and ending; usually one year from 1 January to 31 December. Dictionary Periodicity Period 1 Period 2 Period 3 Period 4 Period 5 Period 6 ….. Going Concern……. Forever ∞ Time * At the end of each accounting period, some accounts are “zeroed out” and start over. Other accounts continue on. Back Next

16. The Accounting Cycle At the end of each accounting period …… Adjusting Entries (non-cash) to bring the accounts up to date. Closing Entries (non) cash to zero-out and move all revenue and expense accounts to the balance sheet. In real time, as they occur, 1. Record all accounting Transactions. Dictionary Going Concern……. Forever ∞ Back Next

17. Principles of Accounting: Quantitative, Measureable and Monetary Accounting entries must be ... Quantitative: defined with numbers Measurable: how much/many is objectively known Monetary: recorded in (home currency) money amounts Dictionary Back Next

18. Principles of Accounting: When to Recognize Revenues and Costs Recognition Rule: In accounting, purchases and sales occur exactly when legal title to the item(s) changes owner. Revenue from Sale Dictionary Customer Orders Item Customer Receives Item Customer Sends $$$ Time >> Time >> Business Buys Item Business Sends Item Business Receives $$$ Cost of Sale Matching Rule: Costs incurred to make/buy the item are matched to the time at which it is sold (using the Recognition Rule). Time-based expenses are matched to the time at which the expenses are incurred. (*The recognition and matching rules become important when the transaction occurs over two different accounting periods.) Back Next

19. Principles of Accounting: Historic Cost Monetary amounts need to be recorded at historic cost, and insignificant adjustments are unnecessary. Dictionary Historic Cost: Things of value purchased and owned by the business (“Assets”) are recorded at the prices originally paid for them. Materiality: Sometimes the work involved to strictly and correctly apply accounting rules isn’t worth the small amount of money involved. When the amount of money involved doesn’t significantly (“materially”) affect the results, the rules need not be strictly enforced. Back Next

20. What is an Account? An Account is simply a category in which like accounting items are placed. Dictionary Entity Cash Sales Bank Loans • Collect • Organize • Report • Analyze Supplies Taxes Land Back Next

21. Account Types Every account is one of five (5) types. Revenues Income from sales, etc. Dictionary Liabilities Debts the business owes Assets Things of value that the business owns Expenses Costs of running the business Owners’ Equity Owners’ net investment in the business Take Notes Back Next

22. Creating Accounts (Internal) The first task in starting a business accounting system is to create the accounts. Dictionary • Some standard accounts that all businesses use (e.g. cash, owners’ capital, etc.) • Many accounts created to suit the particular business. • Once created, accounts cannot be changed (though additional accounts can be added later, as needed). Take Notes Back Next

23. Account Numbers (internal) It is convenient to give accounts numbers as well as names. There is no one “right way” to assign numbers to accounts, but there are some good rules. Dictionary Example Assets: 1,000 – 1,999 Liabilities: 2,000 – 2,999 Equity: 3,000 – 3,999 Revenues: 4,000 – 4,999 Expenses: 5,000 – 5,999 • Group account numbers by account type. • Within account type, group account numbers by similarity, or some other logical sequencing or grouping. • Leave spaces between the account numbers, in case you later want to add an account there. Example 5110 Telephone Expense 5115 Internet Expense 5120 Cable TV Expense Take Notes Back Next

24. Sub-Accounts and Lists Example (sub-accounts) 5100 Communications 5110 Telephone Expense 5115 Internet Expense 5120 Cable TV Expense Sub-Accounts (accounts within other accounts) can be created to better organize the system. Dictionary Example (lists) 1200 Inventories Bottled Water (litre) Coca Cola (12 oz. can) Orange Juice (Mallee, ½ litre box) Lists are itemized names within a single account. These are not numbered. Take Notes Back Next

25. The Chart of Accounts The Chart of Accounts is simply a list of all the business’s accounts, numerically ordered. There are no money amounts on the Chart of Accounts. Example Chart of Accounts 1100 Cash 1115 Investments …. …. …. 2450 Bank Loans …. …. …. Dictionary Take Notes Back Next

26. Financial Statements Internally, management has access to real-time measures of financial position and performance. Externally, Periodically, business have to produce various Financial Statements. Dictionary • Balance Sheet: Assets = Liabilities + Owners’ Equity • Income Statement: Revenues – Expenses = Profits • Statement of Cash Flows: Explains Δ Cash • Statement of Retained Earnings: Profits – Dividends = Δ Retained Earnings Take Notes Back Next

27. Financial Statements (External) Because financial statements (F/S) are a final product designed for viewing and analyzing … Dictionary • Many of the business’s accounts are often consolidated into relatively “standard” reporting accounts. • Account numbers do not appear. Materiality Balance Sheet (F/S) Assets … Other Current Assets $200 Balance Sheet (internal) 1460 Supplies $120 1470 Pre-Paid Expenses $80 Take Notes Back Next

28. Standard Asset Accounts • Cash and Cash Equivalents: Money in the bank; Petty cash. • (Trade) Accounts Receivable: Sales to customers who haven’t yet paid. • Inventories: Items held for sale. • Securities: Financial investments. • Associates: Ownership between 20% and 49% in other businesses. • Property, Plant & Equipment (PP&E): Buildings, equipment, etc. • Land Dictionary Assets can be both financial and physical. Take Notes Back Next

29. Standard Liability Accounts • (Trade) Accounts Payable: money owed to suppliers for items already purchased. • Short-Term Loans: borrowed money due within one year. • Current Portion of Long-Term Debt: Originally a long-term loan, which is now due within one year. • Long-Term Loans: Borrowed money due to be repaid more than one year from now. • Debentures: Unsecured bonds issued by the business. Dictionary Liabilities – also known as “Debt” are only financial. Take Notes Back Next

30. Standard Equity Accounts: Proprietorships and Partnerships • Sole Proprietorship: One person; business an extension of person. • Partnership: Two or more persons; business an extension of partners. Dictionary Proprietorship Share Capital Business Partnership Owner’s Draw In this class, in simple examples, we often use this form of equity accounting. Take Notes Back Next

31. Standard Equity Accounts: Corporations • Corporations are … • Separate legal entities • Ownership designation by shares of stock. • Owners private wealth protected by limited liability. Dictionary Stockholders Common Stock (Share Capital) Corporation Dividends • Issued and Paid Up (at Par) • Share Premium (above Par) Take Notes Back Next

32. Corporate Structure Ownership Board of Directors Stockholders Vote/Elect to Represent Them Dictionary CEO vs. President * Led by Chairman of the Board Corporation CFO vs. Controller Executives Chief Executive Officer (CEO) President (also known as Chief Operating Officer (COO)) Chief Financial Officer (CFO), Vice Presidents (VPs), Etc. Controller, Treasurer Take Notes Back Next

33. Publically Listed Corporations (PLCs) If corporations meet various requirements (that they be big enough, profitable, well documented, etc.), then they can choose to become “public”. This means that there stock shares can be bought on sold on the (secondary) stock market. Dictionary S.E.T. The Stock Exchange of Thailand (SET) requires that all listed corporations produce annual reports (with financial statements) in both Thai and English. In this class, all real-world examples will come from businesses listed on the SET. Take Notes Back Next

34. Standard Equity Accounts Stockholders’ initial investments (at par, plus) • Proprietorships & Partnerships • Capital, Owner • Draws, Owner • Retained Earnings • Corporations • Common Shares – Issued and Paid Up • Paid-In-Excess (Premium) on Ordinary Shares • Retained Earnings • Non-Controlling Interest (Minorities) Dictionary Retained Earnings are accumulated profits kept in the business for re-investment, rather than distributed as dividends. Equity value in subsidiaries which are not owned by this corporation Take Notes Back Next

35. Financial Position: The Balance Sheet Every Asset, Liability and Owners’ Equity account has a balance that accumulates over time, and that can be measured ata single point in time. Together, they comprise the business’s financial position. These accounts are presented together on the same financial statement – the Balance Sheet. It is called this because Assets have to balance (i.e. equal) Liabilities and Owners’ Equity. Dictionary Liabilities + Owners’ Equity Assets = * This is known as the “Basic Accounting Identity”. Take Notes Back Next

36. The Balance Sheet: Structure Dictionary “Current Liabilities”: Payable within one year. “Current Assets”: Convertible into cash within one year. Most Liquid “Non-Current Liabilities” also known as “Long-Term Liabilities”. “Non-Current Assets” also known as “Fixed Assets”. “Total Liabilities” are also called simply “Debt”. Take Notes Back Next

37. The Balance Sheet With Standard Accounts Dictionary * An actual balance sheet would have the $$$ balances for each account, with the left-side total equaling the right-side total. Take Notes Back Next

38. Real Balance Sheet Example: CPN 2011 Dictionary Take Notes Back Next

39. Real Balance Sheet Example: CPN 2011 Dictionary Take Notes Back Next

40. Real Balance Sheet Example: CPN 2011 Dictionary Take Notes Back Next

41. Standard Revenue and Expense Accounts • Revenues • Sales (to Customers) • Expenses • Cost of Goods Sold (COGS): All costs specifically assigned to the sales of goods & services. • Sales, General & Administrative Expenses (S,G&A): Expenses that cannot be specifically assigned to the sales of goods & services, except… • Interest Expense: Interest on borrowed money paid to banks and other creditors. • Tax Expense: Taxes paid to government Dictionary Take Notes Back Next

42. Standard Income Statement Format Dictionary Paid to Banks Paid to Gov’t. Received by Owners Take Notes Back Next

43. Comprehensive Income • Other comprehensive items are “one-off” items outside of management control. • e.g. Gains/losses on investments; Translation gains/losses on foreign holdings; Losses from natural disasters, etc. • These items shouldn’t be integrated with normal operating income, but also shouldn’t be hidden on the balance sheet! Dictionary Take Notes Back Next

44. Real Income Statement Example: CPN 2011 Dictionary COGS Note FX translation gain/loss. SG&A Interest Tax Take Notes Back Next

45. The Cash Flow Statement: Cash and Net Income Hey, where did my money go? The Statement of Cash Flows reconciles changes in the Cash balance (Balance Sheet) with that year’s Net Income (Income Statement). Dictionary Cash Down $30 Profit + $100 Take Notes Back Next

46. The Cash Flow Statement: General Structure Adjustments + Non-Cash Expenses - Non-Cash Revenues Dictionary Changes Asset Cash Asset Cash Liability Cash Liability Cash Take Notes Back Next

47. Real Cash FlowExample: CPN 2011 Dictionary Take Notes Back Next

48. Real Cash Flow Example: CPN 2011 Dictionary Take Notes Back Next

49. Real Cash Flow Example: CPN 2011 Dictionary Take Notes Back Next

50. Real Cash Flow Example: CPN 2011 Dictionary Take Notes Back Next