OVERVIEW OF WEEK ONE

1
OVERVIEW OF WEEK ONE

• WHAT IS ACCOUNTING
• USERS OF ACCOUNTS
• DIFFERENT TYPES OF ACCOUNTING
• BUSINESS ENTITIES
• THE BALANCE SHEET
• THE PROFIT AND LOSS ACCOUNT

2
THE ROLE OF THE ACCOUNTANT

• TO GATHER, RECORD AND REPORT FINANCIAL
  INFORMATION.
• PROFESSION REGULATED BY ACCOUNTING STANDARDS
  BOARD (ASB)
• CAN EITHER BE FINANCIAL OR MANAGEMENT ACCOUNTANT

3
MAIN USERS OF ACCOUNTS

• OWNERS (I.E. SHAREHOLDERS) THE MAIN TARGET OF
  ACCOUNTS
• LENDERS (BANKS ETC.)
• SUPPLIERS
• CUSTOMERS
• EMPLOYEES/TRADE UNIONS
• GOVERNMENT

4
USERS OF ACCOUNTS (CONT.)

• COMMUNITY REPRESENTATIVES
• COMPETITORS
• INVESTMENT ANALYSTS
• MANAGERS
• ALL HAVE DIFFERING NEEDS

5
FINANCIAL ACCOUNTING VS MANAGEMENT ACCOUNTING

• NATURE OF INFORMATION
• DETAIL
• REGULATIONS
• REPORTING INTERVAL
• TIME HORIZON
• RANGE OF INFORMATION

6
BUSINESS ENTITIES

• SOLE TRADER
• PARTNERSHIP
• PRIVATE LIMITED COMPANY (LTD.)
• PUBLIC LIMITED COMPANY (PLC)
• WHETHER CAPITAL IS IN THE FORM OF SHARES OR
  PRIVATE MONEY IT IS ALWAYS A LIABILITY

7
THE FINANCIAL STATEMENTS

• BALANCE SHEET Financial Position, Wealth of
  Business
• PROFIT AND LOSS ACCOUNT Income Generated over
  Financial Period
• CASH FLOW STATEMENT Movement of Cash over
  Financial Period

8
STRUCTURE OF BALANCE SHEET

• ASSETS ALWAYS EQUAL LIABILITIES
• TWO TYPES OF ASSETS
• FIXED ASSETS
• LAND AND BUILDINGS
• PLANT AND MACHINERY
• FIXTURES AND FITTINGS
• MOTOR VEHICLES

9
THE BALANCE SHEET (CONT.)

• CURRENT ASSETS
• STOCK
• DEBTORS
• CASH (AT BANK OR IN HAND)
• THREE MAIN TYPES OF LIABILITY
• CURRENT LIABILITIES
• CREDITORS
• BANK OVERDRAFT

10
THE BALANCE SHEET (CONT.)

• LONG TERM LIABILITIES
• LOANS REPAYABLE AFTER ONE YEAR
• DEBENTURES
• CAPITAL AND RESERVES
• CAPITAL SOLE TRADERS AND PARTNERS
• SHARE CAPITAL (COMPANIES)
• RETAINED PROFIT
• VARIOUS RESERVES
• REMEMBER CAPITAL IS A LIABILITY

11
THE ACCOUNTING EQUATION

• FIXED ASSETS (CURRENT ASSETS CURRENT
  LIABILITIES) LONG TERM LIABILITIES CAPITAL
• CAPITAL OPENING BALANCE /- PROFIT/(LOSS) -
  DRAWINGS

12
STRUCTURE OF BALANCE SHEET Fixed
Assets Machinery 50,000 Current
Assets Stock 5,000 Debtors
4,000 Bank 2,000 11,000 Current
Liabilities Creditors 6,000 Net Current
Assets 5,000 Net Assets 55,000 Finan
ced by Capital less Drawings 48,000 Profit
for year 7,000 55,000
13
THE PROFIT AND LOSS ACCOUNT (P L)

• MEASURES THE DIFFERENCE BETWEEN REVENUE EARNED,
  AND EXPENSES INCURRED IN GENERATING THAT REVENUE.
• THE NET PROFIT FIGURE IS TRANSFERRED TO THE
  BALANCE SHEET AND ADDED TO THE CAPITAL

14
P L ACCOUNT (CONT.)

• TRADING ACCOUNT
• Sales Cost of Goods Sold Gross Profit
• THE PROFIT AND LOSS ACCOUNT
• Gross Profit Expenses Net Profit
• COST OF GOODS SOLD
• Opening Stock Purchases Closing Stock

15
P L ACCOUNT (CONT.)

• EXAMPLES OF EXPENSES
• Electricity
• Rent and Rates
• Postage
• Telephone
• Vehicle Running Expenses
• Bad Debts
• Depreciation

16
DEPRECIATION

• FIXED ASSETS DEPRECIATE IN VALUE AND AN ALLOWANCE
  HAS TO BE MADE FOR THIS
• CAUSES
• USAGE (WEARING OUT)
• CONSUMPTION
• OBSOLESCENCE (TECHNOLOGY AND MARKET CHANGES)

17
DEPRECIATION (CONT.)

• FACTORS TO BE CONSIDERED
• COST
• USEFUL LIFE
• RESIDUAL VALUE
• DEPRECIATION METHOD
• STRAIGHT LINE METHOD
• REDUCING BALANCE METHOD

18
STRUCTURE OF PROFIT AND LOSS ACCOUNT Sal
es 100,000 Less Cost of Goods Sold Opening
Stock 7,000 Purchases 58,000 65,000 Clo
sing Stock 5,000 60,000 Gross Profit
40,000 Less Expenses Salaries 20,000 Electric
ity 3,000 Telephone 3,500 General
Expenses 4,000 Depreciation 2,500
33,000 Net Profit 7,000
19
COMPANY ACCOUNTS

• LIMITED LIABILITY
• RAISE CAPITAL BY SELLING SHARES
• SHARES HAVE A NOMINAL VALUE A SELLING VALUE AND A
  MARKET VALUE
• THE NOMINAL VALUE APPEARS ON THE BALANCE SHEET
• THE SHARE PREMIUM ACCOUNT

20
OVERVIEW OF WEEK TWO - RATIO ANALYSIS

• BENEFITS OF RATIO ANALYSIS
• TYPES OF RATIOS
• THE RATIOS - CALCULATIONS
• THE RATIOS - ANALYSIS
• LIMITATIONS OF RATIO ANALYSIS
• EXERCISE

21
BENEFITS OF RATIO ANALYSIS

• QUICK AND RELATIVELY SIMPLE
• COMPARISON FROM YEAR TO YEAR GIVING TRENDS
• COMPARISON OF COMPANIES OF DIFFERENT SIZES
• NB - HUNDREDS OF POSSIBLE RATIOS
• - NO STANDARD METHOD OF
• CALCULATION

22
TYPES OF RATIOS

• PROFITABILITY
• EFFICIENCY
• LIQUDITY
• GEARING
• INVESTMENT

23
PROFITABILITY RATIOS

• Return on capital employed (ROCE)
• Net profit before interest and taxation
• -------------------------------------------------
  ----- x 100
• Share capital reserves long-term loans
• Return on owners equity (ROE)
• Net profit after taxation and preference
  dividend
• -------------------------------------------------
  ---------- x 100
• Ordinary share capital plus reserves

24
PROFITABILITY RATIOS

• Gross profit margin
• Gross profit
• ------------ x 100
• Sales
• Net profit margin
• Net profit before interest and taxation
• ----------------------------------------------
  x 100
• Sales

25
EFFICIENCY RATIOS

• Average stock turnover period
• Average stock held
• -------------------------- x 365
• Cost of sales
• Asset turnover ratio
• Sales
• -----------------------------
• Total assets employed

26
EFFICIENCY RATIOS

• Average settlement period for debtors
• Trade debtors
• ------------------ x 365
• Credit sales
• Average settlement period for creditors
• Trade creditors
• ---------------------- x 365
• Credit purchases

27
LIQUIDITY RATIOS

• Current ratio
• Current assets
• ----------------------
• Current liabilities
• Acid test ratio
• Current assets (minus stock)
• ------------------------------------
• Current liabilities

28
GEARING RATIOS

• GEARING RATIO
• Long-term liabilities
• ------------------------------------------------
  ------- x 100
• Share capital reserves long-term liabilities
• INTEREST COVER RATIO
• Profit before interest and taxation (EBIT)
• ----------------------------------------
• Interest payable

29
INVESTMENT RATIOS

• Dividend per share
• Dividends announced during period
• ------------------------------------------------
• Number of shares in issue
• Dividend pay out ratio
• Dividends announced for the year
• -------------------------------------------------
  --------- x 100
• Earnings for the year available for dividends

30
INVESTMENT RATIOS

• Earnings per share
• Earnings available to ordinary shareholders
• -------------------------------------------------
  ----
• Number of ordinary shares in issue
• After tax, exceptional items and any
  preference share dividends have been deducted.
• Beware of ESOP schemes and potential ordinary
  shares (FRS 14).

31
INVESTMENT RATIOS

• PRICE EARNINGS RATIO
• Current market price of ordinary share
• ----------------------------------------------
• Earnings per share
• DIVIDEND YIELD
• Dividend per ordinary share
• ---------------------------------------------- x
  100
• Current market price of ordinary share

32
LIMITATIONS OF RATIO ANALYSIS

• AS RELIABLE AS THE STATEMENTS THEMSELVES
• BALANCE SHEET ONLY A SNAPSHOT
• CANNOT BE USED IN ISOLATION
• CANNOT PREDICT THE FUTURE
• CANNOT COMPARE BUSINESSES THAT HAVE DIFFERENT
  ACCOUNTING POLICIES.

33
OVERVIEW OF WEEK THREE - COSTING

• TYPES OF COST
• FIXED
• VARIABLE
• DIRECT
• INDIRECT
• USE OF COST INFORMATION
• COST VOLUME PROFIT ANALYSIS
• ATTRIBUTION OF OVERHEADS

34
FIXED COSTS

• INCURRED WHATEVER THE LEVEL OF PRODUCTION
• EXAMPLES
• RENT AND RATES
• INSURANCE
• SALARIES OF ADMINISTRATION STAFF
• CAN GET STEPPED FIXED COSTS

35
VARIABLE COSTS

• VARY WITH LEVEL OF PRODUCTION
• EXAMPLES
• RAW MATERIALS
• PIECEWORK WAGES
• SALES COMMISSION
• LINEAR AND NON-LINEAR VARIABLE COSTS

36
SEMI-VARIABLE COSTS

• ELEMENTS OF BOTH FIXED AND VARIABLE COSTS
• PARTLY AFFECTED BY FLUCTUATIONS IN LEVEL OF
  ACTIVITY
• EXAMPLES
• BASIC PAY PLUS COMMISSION
• TELEPHONE BILLS

37
BREAK-EVEN ANALYSIS

• AT THE BREAK-EVEN POINT
• TOTAL REVENUE TOTAL COSTS
• CAN PLOT ON GRAPH OR USE FORMULA
• FIXED COSTS ______________________
  ______
• SALES VARIABLE COSTS (CONTRIBUTION)

38
OTHER USES OF CVP ANALYSIS

• DETERMINING THE NUMBER OF UNITS THAT NEED TO BE
  SOLD IN ORDER TO MAKE A CERTAIN PROFIT
• NP Px (abx)
• WHERE NP NET PROFIT
• P SELLING PRICE
• a FIXED COSTS
• b VARIABLE COSTS

39
USES OF CONTRIBUTION

• DECISION MAKING
• SAVES HAVING TO MAKE LENGTHY CALCULATIONS
• CLOSING A SECTION OR DROPPING A PRODUCT? - ARE
  THEY MAKING A CONTRIBUTION TO FIXED COSTS?
• MAKE OR BUY

40
DIRECT AND INDIRECT COSTS

• DIRECT COSTS
• DIRECT MATERIALS
• DIRECT WAGES OR DIRECT LABOUR
• DIRECT EXPENSES
• TOTAL DIRECT COSTS PRIME COST
• TOTAL INDIRECT COSTS OVERHEADS
• PRIME COST OVERHEADS TOTAL COST

41
ATTRIBUTING COSTS

• When deriving costs for a single-product
  operation it is simply a matter of adding up all
  the costs of production incurred in the period
  (e.g. materials, labour, rent etc.) and dividing
  this total by the total number of units of output
  for the period.
• Multi-product operation see example

42
OVERVIEW OF WEEK FOUR BUDGETING AND FINANCE

• THE NEED FOR BUDGETS
• TYPES OF BUDGET
• THE CASH BUDGET STATEMENT
• HOW COMPANIES RAISE FINANCE
• INTERNALLY
• EXTERNALLY
• IN THE SHORT TERM
• IN THE LONG TERM

43
THE NEED FOR BUDGETS

• PROMOTES FORWARD THINKING AND IDENTIFIES
  SHORT-TERM PROBLEMS
• HELPS CO-ORDINATION BETWEEN VARIOUS SECTIONS OF
  THE BUSINESS
• MOTIVATES MANAGERS TO IMPROVE PERFORMANCE

44
THE NEED FOR BUDGETS (cont.)

• PROVIDES A BASIS FOR A SYSTEM OF CONTROL
• PLANNED VERSUS ACTUAL
• PROVIDES AUTHORISATION FOR MANAGERS TO SPEND UP
  TO A CERTAIN LIMIT

45
TYPES OF BUDGET

• SALES BUDGET
• PRODUCTION BUDGET
• INCLUDES SEPARATE BUDGETS FOR FINISHED GOODS AND
  RAW MATERIALS
• OVERHEAD COST BUDGET
• CASH BUDGET
• MASTER BUDGET

46
THE CASH BUDGET STATEMENT

• PRODUCE IN COLUMNAR FORM A COLUMN FOR EACH
  MONTH
• BROKEN DOWN INTO RECEIPTS OF CASH AND PAYMENTS OF
  CASH
• SURPLUS OF RECEIPTS OR PAYMENTS (OR VICE VERSA)
  IDENTIFIED

47
THE CASH BUDGET STATEMENT

• OBTAIN RUNNING CASH BALANCE BY TAKING PREVIOUS
  MONTHS BALANCE AND ADJUSTING FOR SURPLUS OR
  DEFICIT OF RECEIPTS OVER PAYMENTS
• BEWARE OF NON CASH ITEMS
• COMPANIES WILL NOT ALWAYS HAVE SURPLUS CASH

48
RAISING FINANCE

• LONG-TERM (EXTERNAL)
• ORDINARY SHARES
• PREFERENCE SHARES
• LOANS/DEBENTURES
• LEASES
• SHORT-TERM (EXTERNAL)
• BANK OVERDRAFT
• DEBT FACTORING
• INVOICE DISCOUNTING

49
ORDINARY SHARES

• BACKBONE OF COMPANY FINANCE
• REFERRED TO AS EQUITY
• LOSS LIMITED TO VALUE OF SHARE
• REWARDS, IN THEORY, LIMITLESS
• VOTING RIGHTS
• COMPANY HAVE OPTION NOT TO PAY DIVIDEND

50
PREFERENCE SHARES

• FIXED DIVIDEND LESS RISKY
• FOUR TYPES
• CUMULATIVE
• NON-CUMULATIVE
• PARTICIPATING
• REDEEMABLE
• LESS POPULAR NOWADAYS (TAX)

51
LOANS

• FIXED OR FLOATING CHARGE
• OTHER RESTRICTIONS?
• FIXED OR FLOATING INTEREST RATES
• DEBENTURES
• EUROBONDS
• DEEP DISCOUNT BONDS

52
LOANS (CONTINUED)

• CONVERTIBLE LOANS
• WARRANTS
• FINANCE LEASES
• EASE OF BORROWING
• FLEXIBILITY
• COST
• CASH FLOWS
• SALE AND LEASEBACK

53
DEBT vs. EQUITY

• DEBT
• HAVE TO PAY INTEREST
• TAX DEDUCTIBLE
• ALRIGHT WHEN PROFITS ARE HIGH
• EQUITY
• DONT HAVE TO PAY DIVIDENDS
• SHAREHOLDER EXPECTATION

54
SHORT-TERM EXTERNAL FINANCE

• OVERDRAFT SIMPLE, CAN TURN INTO A LONG TERM
  LOAN
• FACTORING ANOTHER COMPANY GATHER DEBTS ON YOUR
  BEHALF
• INVOICE DISCOUNTING BORROW MONEY ON THE
  STRENGTH OF YOUR DEBTS.
• NOW MORE POPULAR THAN FACTORING

55
INTERNAL SOURCES

• RETAINED PROFIT
• ISSUE SHARES INSTEAD OF DIVIDENDS
• TIGHTER CREDIT CONTROL
• REDUCTION OF STOCK LEVELS
• DELAYING PAYMENT TO CREDITORS
• CAN LEAD TO POOR RELATIONS
• CAN LOSE OUT ON DISCOUNTS

56
OTHER POINTS

• VENTURE CAPITAL
• THE STOCK EXCHANGE
• SELLING SHARES TO THE PUBLIC
• OFFER FOR SALE
• PUBLIC ISSUE
• PRIVATE PLACING
• RIGHTS ISSUES
• BONUS ISSUES