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Summary of Courses in Finance (State Exam)

Summary of Courses in Finance (State Exam). Mihály Ormos. Some Words on the State Exam. 20 questions in four different blocks (subjects) Basics of Business Economics (3 Theorems) Accounting (3 Theorems) Corporate Finance (9 Theorems) Macro-Finance (5 Theorems)

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Summary of Courses in Finance (State Exam)

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  1. Summary of Coursesin Finance(State Exam) Mihály Ormos Summary in finance, MBA2001

  2. Some Words on the State Exam • 20 questions in four different blocks (subjects) • Basics of Business Economics (3 Theorems) • Accounting (3 Theorems) • Corporate Finance (9 Theorems) • Macro-Finance (5 Theorems) • Only one out of twenty should be drawn • 4 - 5 for the answer • Conversation • Coherent knowledge • Preparation time • Two or three different boards, with two members • Immediate mark as in the course unit exam Summary in finance, MBA2001

  3. Accounting • 1. Balance Sheet • Notation of balance sheet • The structure of the balance sheet • Contents of main groups and groups • 2. Income Statement • The concept and of structure of the income statement • Total cost and turnover cost type of income statement • The contents of profit and loss categories • 3. Cash-flow • The concept and of structure of the cash flow statement • Direct and indirect type of cash flow • Effect of economic events on the BS, CF and IS(Connection between the three statements) Summary in finance, MBA2001

  4. Accounting Summary in finance, MBA2001

  5. Balance Sheetas the Part of the Financial Report (Statement) Audit Stocktaking Balance Sheet Income Statement Notes to the Report Business Report Disclosure Report Ledger (Continuous record of economic events) Order of documents Analytical records Documents (i.e. invoices) Summary in finance, MBA2001

  6. Balance Sheettypes of financial report • Simplified report • Started to use this type before January 2001. • Revenue < 50 million • Simplified annual financial statement • Revenue • Average number of employees • Total Assets • Annual financial statement • Consolidated annual financial statement Summary in finance, MBA2001

  7. Balance SheetConcept and Structure • Purpose: is to show the financial position of a business on a specific date. • The financial position is shown from two points: • Assets are the properties and property rights of the firm(what we hold) • Liabilities are the equity of the owners and the debts(from what we bought) •  Assets =  Liabilities (+ owner’s equity) • The properties are listed in a predefined order • Measurement unit: Value • Signed by a chartered accountant • Two value column (for the previous and actual year) Summary in finance, MBA2001

  8. Balance SheetStructure BS, Dec. 31th of 200X Assets Liabilities C. Main Group I. Group 1. Item 2. Item II. Group 1. Item 2. Item D. Main Group I. Group 1. Item • A. Main Group • I. Group • 1. Item • 2. Item • II. Group • 1. Item • 2. Item • 3. Item • B. Main Group • I. Group • 1. Item Totals Totals Summary in finance, MBA2001

  9. Balance SheetMain Groups and Groups Assets Liabilities Total Assets Total liabilities Balance Sheet, 200X. Dec.. 31. D. Owners equity E. Provisions F. Liabilities (Debts) G. Passive Accruals and deferred items A. Fixed Assets B. Current Assets C. Accrued Incomes and prepaid expenses Summary in finance, MBA2001

  10. Assets Balance SheetMain Groups and Groups • The assets are classified by the duration of ownership • Fixed Assets • Properties which have been held by the firm for more than one year. • Current Assets • Those which cannot be included in the above group. • The management should decide on the classification. • Active Accruals(Accrued incomes and prepaid expenses) • The revenues and expenditures has to be cleared to the year for which it has been occurred, in this main group the cleared revenues are increased or the expenditures are decreased. Summary in finance, MBA2001

  11. Liabilities Balance SheetMain Groups and Groups • Shareholder’s Equity • Capital which is placed at owner's disposal for permanent use. • Provisions • Provisions are liabilities, which created in charge of the Earnings Before Interest and Tax (EBIT) by definition, so it formulate transition between shareholder's equity and liabilities. • Liabilities • are acknowledged debts that has to be performed in money • Passive Accruals(Deferred incomes and accrued expenses) • in this main group the cleared revenues are decreased or the expenditures are increased. Summary in finance, MBA2001

  12. Balance SheetMain Groups and Groups Assets Liabilities Total Assets Total Liabilities Balance Sheet, 200X. Dec.31. • D. Equity • I. Subscribed Capital • II. Unpaid Subscribed Capital • III. Capital Reserve • IV. Committed Reserve • V. Accumulated profit Reserve • VI. Evaluation Reserve • VII. Retained Earnings • E. Provision • F. Liabilities • I. Junior Debt • II. Long-term Debt • III. Short-term Debt • G. Passive Accruals • A. Fixed Assets • I. Intangible Assets • II.Tangible Assets • III. Invested Financial Assets • B. Current Assets • I. Inventories • II. Receivables • III. Securities • IV. Cash • C. Active accruals Summary in finance, MBA2001

  13. Fixed Balance SheetAssetsMain Groups and Groups • Intangible assets • Tradable, non-material assets which permanently (for more than one year) serve the firm. • Constituents • Rights representing pecuniary value, Goodwill, Intellectual product, • R&D, Value of establishment or reorganisation, Revaluation upwards • Tangible assets • Material assets which directly or indirectly and permanently serve the company. • Constituents • Land, buildings and connecting property rights, Machinery and equipment, Other equipment, Investments, Advance payments towards investments, Revaluation upwards • Depreciation Summary in finance, MBA2001

  14. Fixed Balance SheetAssetsMain Groups and Groups • Invested financial assets (Long term investments) • Investment into another entity for the sake of some kind of cause like control or long term return. • Constituents • Profit-sharing, Securities, Loans, Long-term bank deposits • Depletion Summary in finance, MBA2001

  15. Current Balance SheetAssetsMain Groups and Groups • Inventories • Those current assets, which can be stocked, and have quantitative measure, like • Stock (in hand), • Goods, • Advance payments made towards inventories, • Livestock, • Work in progress and semi-finished products, • Finished products • Receivables • Contractual claims that acknowledged by the partner. • Constituents • Accounts receivable (buyers), • Draft receivables, • (Unpaid issued capital), • Other receivables Summary in finance, MBA2001

  16. Current Balance SheetAssetsMain Groups and Groups • Securities • Short term securities (maturity or its owning is shorter than one year) • E.g. • Shares bought for sale, • Own shares, shares Other securities • Bonds and other securities bought for sale, • Cash • Liquid assets include: • cash, cheques and • bank deposit Summary in finance, MBA2001

  17. Owner’sBalance SheetEquityMain Groups and Groups • Subscribed Capital • Paid-in capital represents the amounts invested in the corporation by the stockholders. This amount can be found in the statement of establishment. • Unpaid Subscribed (Issued) Capital • Some kind of receivable, just for better information this is shown here • Capital reserve • Capital which is paid in above the par value by the owners. • Committed Reserve • Limit for dividend pay off, formed in charge of the capital reserve or the accumulated profit reserve • Accumulated profit reserve • is the sum of the retained earnings in the previous years. • Evaluation reserve • is the sum of the revaluation upwards on the asset side. • Retained Earnings (Net profit) Summary in finance, MBA2001

  18. Liabilities Balance SheetMain Groups and Groups • Junior Debts • Long-term liabilities • Long-term loans • Convertible bonds • Debts on issue of bonds • Investment and development credits • Other long-term credits • Other non-current liabilities • Short-term liabilities • Liabilities with expiration less than one year, or with a less then one year ownership. Like • Short-term loans • Short-term credits • Advance payments received from purchasers • Accounts payable (suppliers) • Overdraft debts • Other short term liabilities (like: Accrued salaries, Social insurance etc.) • Passive accruals Summary in finance, MBA2001

  19. Income Statement As the Part of the Financial Report Balance Sheet Income Statement Notes to the Report Business Report Disclosure Report Ledger (Continuous record of economic events) Analytical records Documents (i.e. invoices) Summary in finance, MBA2001

  20. Income Statement Concept and Structure • The income statement shows the difference of the annual revenues and expenditures. • Uniform structure, predefined earning categories. • It gives information on the profit gaining capability of the firm. • It is a report about the derivation of retained earnings. • By the law of accounting: • “The profit and loss account shall contain the breakdown of the entrepreneur's balance-sheet net profit figure, that is the after-tax profit retained by the entrepreneur, the main factors influencing the development of profits and losses,...“ Summary in finance, MBA2001

  21. Income Statement Concept and Structure • Trading Revenues • -Trading expenditures (costs) • A/Trading profit (EBIT) • Financial revenues • -Financial expenditures . • B/Financial profit • C/Usual Entrepreneurial Profit or Loss ( A  B) • Extraordinary Revenues • -Extraordinary Expenditures . • D/Extraordinary profit • E/Pre-tax profit (EBT) ( C  D) • -Tax liability . • F/After-tax profit • -Paid (approved) dividend . • G/Retained earnings (balance-sheet net profit) Summary in finance, MBA2001

  22. Income Statement Types • In Hungary: • Total Costs profit and loss account procedure (“A”) • Turnover costs profit and loss account procedure (“B”) • (US, UK GAAP: single step and multiple step) • The differences between the two types can be found in the derivation of the trading profit. Summary in finance, MBA2001

  23. Income Statement Types Total cost type Net sales revenues Other revenues Capitalised value of own performance Trading Incomes Annual total costs Other expenditures Trading expenditures . A/ Trading (Business) profit Turnover cost type Net sales revenues Other revenues Trading incomes Costs of sales Other expenditures Trading expenditures . A/ Trading (Business) profit Summary in finance, MBA2001

  24. Net salesIncome Statement RevenuesTypes • The consideration • value of sold inventories (products, materials, good etc), and services performed, • accepted by the partner, • not including the VAT • increased by the subsidies and extra charges and • reduced by consumption tax and any reductions shall be entered as net revenues • Net Domestic Sales Revenue • Net Export Sales Revenue • Revenues  Cash inflow Summary in finance, MBA2001

  25. Other Income Statement RevenuesTypes • Other revenues are revenues not forming part of the net sales revenues which arise in the course of regular activity (business), like: • Received compensation • Received penalty • Revenues from intangible and tangible asset sold • Utilisation of the previous year’s provisions formed Summary in finance, MBA2001

  26. Capitalised value of Income Statementown performance Types • Two parts • Capitalised value of self-manufactured assets arethe total amount of the value of self-manufactured assets capitalised (entered among assets) in the calendar (business) year. • Change in self-manufactured inventoriesdifference between the opening and closing self-manufactured inventory of the year. A Summary in finance, MBA2001

  27. Total Income StatementCosts Types • Material type expenditures • utilisation of material purchased • purchase value of goods sold • utilized service used • other services • further billed value of subcontractors’ work • Payments to personnel • wages • personnel involvement • other payments to personnel, etc. • Depreciation A Summary in finance, MBA2001

  28. Costs of Income StatementSales Types • That part of the total costs which can be connected to the revenues, so it is equal to • Total costs - Capitalised value of own performance • Direct cost of sales as • costs of products, • materials and • goods sold • services performed accounted as direct cost • costs of trading activities that may accounted for directly • Indirect cost of sales as • costs of sales (marketing costs) • administrative costs • other general costs (overheads) B Summary in finance, MBA2001

  29. Other Income StatementExpenditures Types • Other expenditures are costs and payments not connected directly or indirectly to the net sales revenues which are incurred in the course of the regular activity (business). • Paid compensation • Paid penalty • Expenditures of (i.e. book value) of intangible and tangible asset sold • Provisions formed • etc. Summary in finance, MBA2001

  30. Comparison Income Statementof the two types Types • Net sales revenue: 10.000 thousand HUF • Other incomes 3.000 thousand HUF • Other expenditures 2.000 thousand HUF • Total costs 11.000 thousand HUF • Capitalised value of selfmanufactured assets 1.000 thousand HUF • Change in self-manufacturedinventories 2.000 thousand HUF • Calculate the trading profit! • (Use the total - and turnover cost type of profit and loss accounts!) Summary in finance, MBA2001

  31. Comparison Income Statementof the two types Types • 1. Calculate the capitalised value of own performance: • 1000+2000=3000 thousand HUF • 2. Determine the costs of sales: • 11000-3000=8000 thousand HUF Type „A” Net sales revenues 10000 Other revenues 3000 Capitalised value of own performance 3000 Trading Incomes 16000 Yearly total costs 11000 Other expenditures 2000 Trading expenditures 13000. A/ Trading (Business) profit 3000 Type „B” Net sales revenues 10000 Other revenues 3000 . Trading incomes 13000 Costs of sales 8000 Other expenditures 2000 Trading expenditures 10000 . A/ Trading (Business) profit 3000 Summary in finance, MBA2001

  32. Income Statement Profit and Loss Categories • Trading Revenues • - Trading expenditures (costs) • A/ Trading profit (EBIT) • Financial revenues • - Financial expenditures . • B/ Financial profit • C/ Usual Entrepreneurial Profit or Loss ( A  B) • Extraordinary Revenues • - Extraordinary Expenditures . • D/ Extraordinary profit • E/ Pre-tax profit (EBT) ( C  D) • - Tax liability . • F/ After-tax profit • Use of accumulated profit reserve for dividends • - Paid (approved) dividend . • G/ Retained earnings (balance-sheet net profit) Summary in finance, MBA2001

  33. Financial Income StatementProfit Profit and Loss Categories • Financial profit is the difference of the revenues and expenditures of financial transactions. • Financial revenues: • interest received • interest related revenues • dividends • profit-sharing • other revenues of financial transactions • Financial expenditures • interest paid • interest related payments • write-off (depletion) of financial investments dividends • other expenditures of financial transactions Summary in finance, MBA2001

  34. Usual Entrepreneurial Income StatementProfit or LossProfit and Loss Categories • The sum of the trading (business) profit or loss and the financial profit or loss. • Gives information on the profit gaining capability of the firm’s normal course of activity. Summary in finance, MBA2001

  35. Extraordinary Income StatementProfit Profit and Loss Categories • Extraordinary profit figure is the difference of the extraordinary revenues and extraordinary expenditures. • Extraordinary revenues and extraordinary expenditures are independent of the entrepreneurial activity i.e. fall outside of the entrepreneur’s normal course of business, they are listed in the law of accounting. Summary in finance, MBA2001

  36. Cash-FlowConcept and Structure • The statement of cash-flows focuses on cash receipts and cash payments, so the main question to be answered is: • Did the company’s cash balance increase or decrease during the year and, why? • The statement shows why cash changed over the period by reporting net cash provided or used by • operating activities, • investing activities and • financing activities. Summary in finance, MBA2001

  37. Cash-FlowDirect and indirect method • Direct method • involves listing each major class of cash receipts transactions and cash disbursements transactions for each of the three activity areas. • The operating activity transactions include cash received from customers, cash paid to merchandise or raw material suppliers, cash paid to employees for salaries or wages, and cash paid for other operating expenses etc. • Indirect method • This method shows the net incomes as the first source of operating cash, • derives cash flows from operating activities by explaining the CHANGE in each of the non-cash operating accounts in the balance-sheet. Summary in finance, MBA2001

  38. Direct Cash-FlowmethodStructure • Cash-flows from operating activities • Cash received from customers • Cash paid to suppliers • Payments for compensation of employees • Other operating expenses paid • Interest paid • Taxes paid . • Net cash provided by operating activities • Cash-flows from investing activities • Proceeds from sale of land • Investment in plant and equipment . • Net cash used for investing activities • Cash flows from financing activities • Additional long-term borrowing • Payment of long-term debt • Purchase of treasury stock • Payment of dividends on common stocks . • Net cash used for financing activities Summary in finance, MBA2001

  39. Indirect Cash-FlowmethodStructure • Cash-flows from operating activities • Net profit (income) • Add (deduct) items not affecting cash • Depreciation expenditures • Increase in accounts receivable • Increase in inventories • Increase in current liabilities • Other net . • Net cash provided by operating activities • Cash-flows from investing activities • Proceeds from sale of land • Investment in plant and equipment . • Net cash used for investing activities • Cash flows from financing activities • Additional long-term borrowing • Payment of long-term debt • Purchase of treasury stock • Payment of dividends on common stocks . • Net cash used for financing activities Summary in finance, MBA2001

  40. Law of Cash-FlowAccountingStructure • Cash-flows from operating activities • Pre-tax profit • Depreciation • Depletion • Forming or using provisions • Profits of selling fixed assets • Change in accounts payable • Change in other short term debts • Change in passive accruals and deferred items • Change in accounts receivable • Change in current assets(without accounts receivable and cash) • Paid, payable tax • Paid dividend . • Net cash provided by operating activities • Cash-flows from investing activities • Proceeds from sale of land, plant and equipm. • Investment in plant and equipment • Received profit-sharing and dividend . • Net cash used from investing activities • Cash flows from financial activities • Incomes of public offering • Incomes of bond or other security offering • Long-term borrowing • Payment of long-term debt • Received cash • Stock withdrawal • Payments of debts • Long term loans, bank deposits • Permanently granted cash • Change in claims against founding membersand in other long term liabilities . • Net cash used for financing activities • Change in cash Summary in finance, MBA2001

  41. Cash-FlowConnection between the CF, the IS, and the BS • Balance sheet vs. income statement: • Retained earnings can be found in both statements • Change in cash cannot be seen in the profit and loss account • Cash-flow • this statement can be compiled from the data presented in the balance-sheet and income statement • Both the balance-sheet and income statement use accrual accounting (recognises revenue when it is earned, expenses when they are incurred) while the cash-flow uses cash-flow accounting (recognises transactions when cash has been received or paid). Summary in finance, MBA2001

  42. An economic evente.g. provision • IS: • Cleared as other expenditure, so decreasing the pre-tax profit • BS: • Increasing in provision • Decreasing in retained earnings • CF: • The pre-tax profit is decreased (-) • Provisions formed (+) Summary in finance, MBA2001

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