Introduction to Acc & Finance -ESE

@ EUROPEAN SCHOOL OF ECONOMICS -- FLORENCE Campus

SECTION FOR MY ATTENDANT STUDENTS

Dear Students,

Welcome to the course on "Introduction to ACCOUNTING & FINANCE", focused on BASICS Financial Analysis. This course is designed for beginners, who are enrolled in the 1st year at the EUROPEAN SCHOOL OF ECONOMICS - FLORENCE Campus, in accordance with the other Campus locations.

Level: Undergraduate course (I Year)- Area: Basics Acc and Finance; Credits: 6; H 30
The course is specifically designed for students of the European School of Economics (ESE), Florence

For your convenience, I will use this website to add super easy material that might be helpful for you.

I have searched many documents on the internet and the easiest ones are included in the list below (in the section dedicated to attendant students). The underlined keywords will transfer you to the original underlying article for deeper explanations.

Introduction to Accounting
Introduction to Finance
Accounting over the 1st Part (until Week 5)
Financial Analysis over the 2nd Part (from Week 7 until Week 10)

PARTICIPATION

CONDITIONS AND PREREQUISITES (for all students)

Theoretical material (included in the personalized e-book for the course) must be studied BEFORE class, as in class you will apply the theory and discuss it with the rest of the class. Please be aware of that: there is no point for you to enter or to connect in class if you are not willing to partake (actively).
If you "sit" in class or in any virtual online class of this course, please make sure your webcam and microphone are working properly and be prepared to talk, discuss, present, work in a team, and partake in all the class discussions organized (and not passively sit and listen). :-)

Written exams (Midterm and Final Term)

FOR ORGANIZATIONAL REASONS, YOU NEED TO READ THE BOOK CHAPTERS AND THE SLIDES OF THE BOOK BEFORE EACH CLASS. IT IS IMPORTANT FOR YOU TO UNDERSTAND PROPERLY THE CONTENT OF EACH CLASS

Books

Books of the course have been established by the Board. Please look a the Syllabus.

Alternative book:

Atrill and McLaney, Accounting and Finance for non-specialists, Pearson

SECTION FOR ATTENDING STUDENTS ONLY

This section is specifically designed for attending students only, who are willing to partake, on a REGULAR BASE, to all classes, groups and laboratories organized over the course. THIS SPACE IS DESIGNED TO GUIDE ATTENDANT STUDENTS

Attending students are required to read the theoretical material in advance in order to be able to actively partake to all class discussions organized in each lesson.

Course structure

P art 1 : Valuation of single Items included in the Financial Statements

Weeks 1-2

Part 1: Definition and Introduction to the FINANCIAL STATEMENTS AND ITS COMPONENTS

(A) In class 1, I first gave an introduction on the definitions of Finance and Accounting, and what they mean (note that Finance is MUCH BROADER than Accounting, in terms of content, areas, perspectives, scope). --> Within this introduction on Finance and Accounting, we also highlighted the main differences.

- Definitions and Differences between Finance and Accounting

--> necessary --> Overview (with a comparison Table)

---> (optional) Short Overview Differences between Accounting & Finance

(B) In class 1, I also introduced the main Financial Statements, starting from the discussion of the Balance Sheet. We discussed the main elements included in it. For this part, I used the basic book adopted last year in the Florence Unit: Atrill, McLaney, Accounting and Finance for non-specialists", For this part, please read the slides for Ch 1 and Ch 2, related to the Book Atrill, McLaney, Accounting and Finance for non-specialists", (Lydia already has these slides and she will send these slides for these 2 chapters);

Also, read this very nice and useful summary.

Balance Sheet & its Content

(note that Standard conventions present the balance sheet in one of two formats: the account form (horizontal presentation) and the vertical form (vertical presentation). Most companies favor the vertical report form, even though this DOES NOT conform to the typical rationale in investment literature of the balance sheet as having "two sides" that balance out. This is everything you need to know to cover the topics discussed today.

So you don't have to worry to have missed class 1. Have a good work and see you next time, with other material.

A) An overview of the "END" or the OUTCOME: The Financial Statements

Aim of Fin. Statements: Informing the public about business performance
Overview of the content of financial Statements.

The various Financial Statements

Note that, traditional fin. statements are reported in a T-account format (left and right) (which makes it easier for beginners). However, many statements nowadays are reported in a vertical format. But this is only an esthetic representation. The most important thing is to remember what goes on the Left and on the Right (of each account). And this is what you should remember!

(1) Balance Sheet & its Content
(2) Income Statement

Please, also read the following documents and pay attention to the following elements!!!

- - Cost of Good Sold or Cost of Sales;

General and Administrative Expenses

When you consider the Income Statement it is important to evaluate the main accounting principle upon which the Income Stat. is based --> The Accounting Accrual principle . Note that there are two different branches of accounting—accrual, and cash. Most public companies use accrual accounting, which means that the income statement DOES NOT represent the company's cash position. The cash flow statement, though, is focused on cash accounting.

(3) Cash Flow Statement

Relationships among Financial Statements

REVIEW of PREVIOUS PARTS

Classified Balance Sheet , Horizontal format, descending order of liquidity (very useful, informative from a financial point of view). (please remember that for Balance Sheets other formats are available, such as vertical format)

full explanation Balance Sheet Categories & Classification (decreasing liquidity order): very nice!!
full explanation Income Statement & Categories (+ video): very nice!!!!
Differences between Balance Sheet and Income Statement!!! Do not confuse them!!!!

ATTENTION on some elements and on the SUM

Accounting Equation (TOTAL ON THE LEFT = TOTAL ON THE RIGHT)

Before Week 3 --> Review of previous parts

Class 3: Valuation of single Items included in the Financial Statements

Week 3: Focus on Ammortization/Depreciation and other VALUATION elements

AMORTIZATION/DEPRECIATION procedure; DEPRECIATION TYPES/METHODS; Types of Depreciation

Difference between Capital expenditure and Revenue expenditure

Plant assets: definition of Plant assets

*RETURNS OF FAULTY PRODUCTS : NICE SUMMARY OF DOUBLE ENTRY

* Returns inwards (--> reduce our Revenues from Sales)

* Returns outwards (--> reduce our costs of purchases)

--> EXAMPLES OF RETURNS EVENTS

-->FULL SUMMARY OF RETURNS

In the Income Statement to obtain the Net Sales, we calculate the following

Sales Revenues

(-) Returns Inwards

And, to obtain the Net purchases, we do calculate the following

Purchases

(-) Returns outwards

To-do list when evaluating the various events

Part 2: An overview of the "journey" to the Fin. Statetements!!

TRIAL BALANCE

- is a list of closing balances of ledger accounts on a certain date

- is the first step towards the preparation of financial statements.

Week 4: Introduction on the Double Entry System and on the recording of day-to-day transactions

Note that A Franciscan monk (Luca Pacioli) developed the technique of double-entry accounting. Pacioli is considered the "Father of Accounting" because his double-side accounting approach became the basis for modern-day accounting. (His method was aimed at reducing the possibility of errors of principle.)

The double entries are often displayed in ‘T’ accounts:The term "T-Account" describes the appearance of the bookkeeping entries. First, a large letter T is drawn on a page.

The title of the account is then entered just above the top horizontal line, while underneath debits are listed on the left and credits are recorded on the right, separated by the vertical line of the letter T.

----> just remember LEFT & RIGHT

on the LEFT (DR) on the RIGHT (CR)

- Meaning of: Left (D Debitum or, Debtor, DR) & Right (Cr Creditum CR) entries

Overview of the Double Entry System of Accounting developed by Luca Pacioli
The double system: A Definition of Debitum (DR) and Creditum (CR) sides
The Double Entry mode and the Dr - Cc coding rule: the "always be in balance" principle!
The Dual-mode concept
The T account: A T-account is an informal term for a set of financial records that uses double-entry bookkeeping.
The double entries are often displayed in ‘T’ accounts:

What do we include on the Left hand side (Debitum)

In order to not be confused just remember LEFT & RIGHT

on the LEFT (DR) on the RIGHT (CR)

Dr. --> Left = DR stands for something that is due (for acquiring investments)

Cr ---> Right = CR stands for something that is accredited in the business

Before

Before Class of week 5 remember to

Study the previous parts and practice the location of the following items

PRACTICE for EXAM

To-do list when evaluating the various events

++++++++++REMEMBER!!!!

* Capital = represents the capital contribution of the entrepreneur (it goes within the Equity)

* Retained Earnings go inside the Equity

* Net Income (or Profit) goes inside the Equity

* The acquisition of Buildings goes inside the Fixed Asset (it is a CAPITAL EXPENDITURE)

* Components and raw materials go inside INVENTORY

* The expenses useful to run the business (are considered Revenue Expenditure)

and as such go inside the INCOME STATEMENT as COSTS

(e.g., utilities, electricity, purchases, petrol, ... etc.)

* Patents go inside the Fixed Assets (they are intangible fixed assets)

(as goodwill)

* Inventory is part of CURRENT ASSETS

* Inventory includes: raw materials; components; finished products and in-process products

* Components and raw materials, therefore, go inside INVENTORY

* Other liabilities (when nothing else is specified ---> short term Debt --> CL)

* DEBTORS XX = represent the people who owe us (OUR debtors)

==> this account represents our RIGHT TO RECEIVE MONEY FROM THEM

===> THEREFORE the element "DEBTORS XX" represents ACC. RECEIVABLES

* CREDITORS YY= represent OUR CREDITORS (that is the people YY who lent us money)

==> this account represents our OBLIGATION TO PAY MONEY TO YY

===> THEREFORE the element "CREDITORS YY" represents ACC. PAYABLES

* trademarks, patents, ecc.... --->INTANGIBLE ASSETS

* COST OF GOOD SOLD = it is calculated by doing the following procedure

Initial Inventory + Purchases - Final Inventory

* Capital (own contribution to start a business) --> it is registered on the right -->CR

* Capital Drawings (--> reduce the Equity) -->it is registered on the left --> DR

week 5 REVIEW OF PREVIOUS PART FOR EXAM PURPOSES & INVENTORY VALUATION

***** TO PRACTICE *********

- - a few Examples:

FULL LIST OF EXAMPLES OF DOUBLE ENTRY to practice
If you still have problems in the double entry system,
see this Summary Video of the double entry procedure

* * HOW TO RECORD INVENTORY MOVEMENTS???

It depends on the system (perpetual or periodical) used by the firm

--> Overview of Perpetual and Periodical system of recording inventory movements

OPTION A---> Double Entry of purchases/sales of inventory goods with PERIODICAL INVENTORY SYSTEM

OPTION B --> Double Entry of purchases/sales of Inventory goods with PERPETUAL INVENTORY SYSTEM

** Inventory and valuation (FIFO LIFO ): nice video slides

* goodwill and its ruling

**NWC= AC - CL

* Video BBC Doc on Tesco

week 6 MID-TERM EXAM

week 7 Ratio Analysis & IASB

week 8 CASH FLOW STATEMENTS

Note that the CF statements is aimed at showing the real cash in (inflow) and case out (outflows)
The cash flow statement is focused on cash accounting.

---> Description of the CF Statement and its components

Week 9 - REVIEW

* closing accounting rules

* goodwill and its ruling

** Inventory and valuation (FIFO LIFO ): nice video slides

**NWC= AC - CL