Final accounts

- All the financial information of the business when a period of time has ended.
- The purpose of accounts is different for the internal and external stakeholders.
- Financial statements compiled by businesses at the end of a particular accounting
period
- Records include transactions, revenues and expenses information.

Stakeholders: All the population that has a particular interest on a company. There are
internal and external.

Shareholders: Shareholder is a type of stakeholder. People who own a share of a business.

Internal Shareholders:

Shareholders
- Keen to establish how profitable the business is in order to asses the safety of their
investment.
- Check on the efficiency of the busines to male a worthwhile return on their
investment.
- Check the performance of their managers and directors.

Managers
- Set targets
- Judge and compare their performance within periods
- Set budgets, monitor and control expenditure patterns
- Help in strategic plannig for effective decision making

Employees
- Sign the company offers job security and growth
- Possibility of pay rises
- Be careful, pay increases aren’t secured this could motivate employees to create
unions and negotiate further on their behalf.
- Unions: When employees come together and demand a company for benefits.

External Stakeholders
- Interest in securing a constant supply of products and services in the future to
determine how dependent they can be.
 - If there’s no security, customers will find a substitute product that’s reliable and
guaranteed.

Suppliers
- Be able to negotiate better cash/credit terms with firms (extend their credit or demand
immediate cash payments)
- The security if the business and ability to pay debts will be key for suppliers.

The Government
- Check if the business is abiding by the law accounting regulations.
- Sees how much taxes the company is due.
- A loss making busines will be a concern.
External Stakeholders

Competitors
- Compare their financial statements with other firms.
- Are their competitor’s profitability levels higher than theirs.
- How do sales revenue compare?

Financiers
- Banks will check on the creditworthiness of the business to establish how much
money they can lead and ensure that the company is able to pay back its loan and
interest.

Local Community
- Residents will want business with high profitability and expansion potential.
- More jobs leads to growth in the community.
- Check on the environmental effects of the business.

Ethics in accounting

Accountants have the responsibility to act in public interest (stakeholders)

- Satisfy the needs of their employer under a particular code of ethics and conduct.

Ethics in accounting: moral values and judgements applied in the accounting process.

Code of ethics: Set of principles usually based on the firm’s core values that guide
accountants on the standards to be upheld.

Ethics principles
- Transparency
- Loyalty: Give confidence to our employees and suppliers.
 - Honesty
- Integrity: Accountants must be honest, truthful and transparent in all their professional
dealings.
- Responsible
- Objectivity
- Proffesional competence or due care
- Confidentiality : Ensures the privacy and security of sensitive financial information.
- Professional behavior: Conduct in a manner that uploads dignity and reputation of the
profession which means avoid engaging in any activities that could bring disrepute to
the accounting profession.
- NDA→ non disclosure arrangement→ Contract of confidentiality

Profit and Loss Account

Income statement: Revenue/Expenses

Shows the records of income and expenditure flow of business over a given period of time
Establish whether the business has made a profit or a loss and how it distributed at the end of
the period.

It’s divided into 3 parts.

- Trading account
- Profit and loss account
- Appropriation account

Trading Account
*Total sales= Quantity x price
*Gross= sales revenue-cost of sales

Trading account: Shows the difference between sales revenue and the cost of those sales.

Profit and Loss account:

Shows the net profit before interest and tax, net profit before tax and net profit after interest.

Shown in the second part of the income statement.

Expenses include indirect costs or overheads: advertising costs, administration charges, rent,
insurance…

Appropiation Account:

Shows how the company’s net profit after interes and tax is distributed:
- Dividends to shareholders
 - Retained profit our ploughed-back profit.

Shown in the final part of the income statement

Balance Sheet
Statement of financial position
Outlines the assets, liabilities and equity of a firm.

Snapshot of the financial position of a firm and used to calculate ther firms’s net worth
Gives an idea of what the company owns and how much shareholder have invested
● Assets
● Liabilities
● Equity

Fixed assets: Long-term assets that last in a business for more than 12 months (PPE=
Property, plant and equipment)
Usually depreciate over time

Current assets: Short term assets that lasts in abusiness for up to 12 month
cash: money received from sales
debtors: Individuals or other firms have bought (goods and services) on credit and owe money
to the business

Liabilities

Firm’s legal debts: They arise during the course of the business operation and are usually the
source of funding.

Long term liabilities: Debts or borrowing: Payable after 12 months (bank loans and
mortgages)
Current liabilities: short term debt payable withing 12 months

Assets and Liabilities

Working capital is important because it indicates if the business can pay its day-to-day
running costs
Working capital is the amount of money that a business to be order to operate.
- Knows as net current assets
- Measure of short term financial health and efficiency.
EQUITY
Share Capital
● Original capital invested into the business through shares bought by the shareholders
● Permanent source of capital
● Doesn’t include daily buying and selling shares in the stock market.

Retained Profit definition

Retained profit is the amount of a business's net income that is kept within its accounts, rather
than paid out to shareholders.

Intangible Assets:
Fixed assets that lack physical substance however they can prove to be very valuable to a
firm’s long term success or failure.

Intangible assets are difficult to value due to their subjective nature and in many cases will not
be shown in the Balance Sheet

Patent
Provide inventors with the exclusive rights to manufacture, use sell or control the invention of
their product.
● Inventors are provided with legal protection to multiple their product.

Goodwill

Value of positive or favourable attributes that relate to a business

● Usually arises when one firm is purchased by another. During an acquisition goodwill
is valued as the amount to be paid over and above the book value of the firm’s benign
bought.
● Strong brand name, highly skilled employees, etc.

A balance sheet provides an overview of a company's financial position at a specific point in

time, but it comes with both benefits and limitations.

Copyright Laws
 ● Laws that provide a creator with the executive right to protect the production and sale
their artistic or literary work.

Trademarks

● Recognizable symbols, words, phrases or designs that are officially registered and that
identifies a product or a business.
● Helps distinguish a firm’s product from another.
● Can be sold for a fee.
● Logos

Balance Sheet Example

a)
i) Laws that provide a creator with the executive right to protect the production and sale their
artistic or literary work.

ii) Disadvantages PLC→ Limited investment capacity from just one person. Depend heavily
on retained profits from prior periods to face new costs. Also BBT is dependent on Mark 's
decisions.

b)

(iii) There are more competitors. The company is not financial stable, they have more
liabilities than assets.

c) Sell more of its share’s and also make another investment in the company. Personal
loans Mark could ask his family for money

3.5 Profitability and Liquidity Ratios

Profitability: Capacity to create profit

Liquidity: La capacidad de un negocio de tener el dinero en cash a mano.

Ratio Analysis

Financial Analysis tool used in the interpretation and assessment of a firm’s financial
statements.

This is a fnancial analysis tool used in the interpretation and assessment o a frms fnancial
statements. It helps in evaluating a frms fnancial perormance by determining certain trends
and exposing its various strengths and weaknesses. It aids in decision making by making
meaningul historical and inter-frm comparisons through analysing past ratios and ratios o
other businesses in the same or dierent industries. The ollowing types o ratio will be explored
below: proftability ratios, efciency ratios, and liquidity ratios.

Profitability ratios

These ratios assess the perormance o a frm in terms o its proftgenerating ability. Other
variables are used in interpreting this

proftability. Two types o proftability ratio are gross proft margin

(GPM) and net proft margin (NPM).

Net profit margin (NPM)

un NP alto significa que la empresa tiene muy controlados sus gastos

Efficiency ratios: how well a firm internally uses its assets and liabilities
How to improve ROCE?

Reduce the amount of loan capital while ensuring that the NPBIT remains, unchanged.
 - Loan capital may be needed to purchase essential fixed assets ( machinery)
- A firm might declare and pay additional dividends to shareholders. This will have the
eect o reducing the retained proft, and hence raising the ROCE, assuming net proft
remains unchanged or does not decrease. The drawback is that reducing retained proft
leads to less ploughed-back proft or uture investment.

Liquidity Ratios

- Asses the firm’s ability to pay it’s short term debt

- Business need liquid assets to help in meeting their day-to-day bills.
- Liquidity is measure of how quickly an assets can be converted into cash
If the ratio is 1:1: It means the firm does not have as much money to pay.

How to improve CURRENT RATIO?

- Reduce bank overdrafts and seek for long-term loans

- Increasing long-term loan could increase interes payable affecting its efficiency and
future liquidity position.
- Sell existing long-term assets for cash: Increase available working capital for the
business, because in the future the firm would have to either rent or buy that object
again.
How can we improve acid test ratio?

How to improve ACID TEST RATIO?

● Sell off stock at discount for cash

 ● Improve liquidity position of the business and avail more working capital to pay off
short-term debts
● Selling stock at a discount may reduced the amount of liabilities

3.7 Cash Flow

Objectives

Cash Flow: It is the document where we have all the money transactions that come in and
out, it can be done month by month or annually.

Profit VS. Cash Flow

Cash is the money that gets into the business through either the sales of its G/ S borrowing
from financial institutions or investment by shareholders.

- All of the transactions of money that enters and leaves, to analyze the amount of
money that is left, the one obtained and how much money is currently.
-
- Cash is the money that gets into the business through either sale of its goods and
services borrowing from financial institutions or investment by shareholders.
- Its the most liquid asset and is part of the current assets in the balance sheet.
- It’s essential to the smooth running of any business. A lack of it could result in
business failure and bankruptcy.
- Cash Flow is the money that flows in and out a business over a given period of time
- Cash inflows: money received by a business
- Cash outflows: money paid by a business.
- This is a key indicator of a firm’s ability to meet its financial obligations.
-

Profit is obtained by subtracting total costs from total revenue

 - Great indicator of the financial success of a firm’s core operations
- So whats the difference between profit and cash flow?
- Profit and cash flow are different. When buying goods or services,
- customers can either use cash or buy on credit. I either o the two
- methods are used, this will still count as part o the sales revenue o
- a business. Moreover, i the sales revenue exceeds the total costs, a
- business will be said to have earned a prot. However, i most o the
- purchases were credit purchases then the cash-fow position at that
- point in time or the business will differ with its profitability

Profit VS Cash Flow

A business can be profitable but have little no cash (insolvency)

● Poor collection of funds, by allowing customers a very long period of credit

● Paying suppliers too early and leaving little to no cash for operations
● Purchasing capital equipment or many non current assets at the same time
● Overtrading: purchasing too much stock with cash.
● Serviving loan with cash

A business can have a positive cash flow but be profitable

● Sourced from bank loans

● Gained from the sale of a firm’s fixed assets.
 ● Obtained from shareholder’s funds.

The Working capital cycle

- Working capital is the money needed to pay off its day to day running costs of a
business.
- Paying wages, purchasing raw materials, paying electricity and gas
- To have sufficient working capital, businesses need to ensure that their current assets
exceed their current liabilities.
- If C.A<C.LIABILITIES→ The business could run into working capital problems and
face insolvency or a serious liquidity crisis.
- An illiquid crisis business (not able to pay it’s short-term debts) could also eventually
be liquidated (when all a firms assets are sold or to pay any unds owing leading to its
closure).

Working capital management is an assessment of the way the current assets and current
liabilities are being administered. It is important for businesses to manage working capital
effectively so as to maximize the gains rom the net current assets by maintaining optimal
levels o these assets.

Working Capital Cycle

The longer the business cycle, the greater are the working capital needs of the business.

Como el dinero se mueve por las fases hasta que vuelva a ser invertido o trabajado.
Cash Flow Forecasts→ Prediction

These are future predictions of a firm’s cash inflows and outflows over a given period of time.

- Its the most liquid asset and is part of the current assets in the balance sheet.
- It’s essential to the smooth running of any business. A lack of it could result in
business failure or bankruptcy.

Closing balance es la cantidad de dinero que tenemos al inicio menos la cantidad de dinero
que tenemos al final
Closing balance Febuary→ 4500 +1100

Es util en terminos de liquidez para verificar cuanto crédito le debo dar a los clientes.

Investment VS Profit VS Cashflow

Investing is spending money on purchasing an asset with the expectation of future earnings.
Investing involves wealth creation, including hoping that the bought asset appreciates in value
over time. All forms of investment come with risks, brought about by unexpected changes in
the market conditions in an economy.

* Star up :High investment no profit→ Cash flow is gonna be negative (a lot of money
coming out)
* Growing: Medium stage investing less than in the beginning and gaining more tha in the
start (Cash flow could be positive or negative)

* Established/ Thriving: Almost no investment (no outside investment→retained profits)

Retained cash flow

Cash Flow Problems

Reducing Cash outflows

- Negotiate with suppliers or creditors to delay payment. This helps the business to have
working capital for its short-term needs. The drawbacks with this are that negotiations
may be time consuming and delaying payment to suppliers could affect future
relationships, including their refusal for future supply.
- Purchases of fixed assets can be delayed: Assets such as machinery and equipment
may take a lot of cash for the business . If the machines or equipment are becoming
obsolete or outdated, a lack of purchasing replacements may lead to decreased
effliciency and higher costs.
- A business may decrease specific expenses such as advertising costs that will not
affect production capacity. If not well checked, this may reduced future demand of a
business product.

Increasing Cash inflow

- A business may insist that customers pay cash only for goods purchased. This avoids
the problem of delayed payments from debtors, which tie down cash. The
disadvantages is that the busines may lose customers who prefer to buy goods on
credit.
- Offering discounts or incentives can encourage debtors to pay early. This will reduce
the debt burden or debtors as they will pay less than earlier agreed. The limitation here
is that, after discount businesses will receive less cash than earlier expected.
- A firm’s may diversify its product offering. This will help avail a variety of goods on
offer for sale to customers, potentially increasing sales. Its worth remembering that
diversification come with higher costs.
Additional Sources of Finance

Bank Overdraft: Small loan, interest payments are really high|13

Sale and Leasback: Alquiler de cash

Debt factoring: Seccion de facturas, la empresa cede las facturas. El banco agarra esa factura
como si yo la fuera a cobrar y me la da en prestamos. El banco pago.

Subsidies: Ayudas publicas que da el gobierno a stuggling business.

Limitations of cash flow Forecasting

Investment Appraisal

The quantitative techniques used in evaluating the viability or attractiveness of an investment

proposal.
Payback Period: Estimates the length time required for an investment project to payback its
initial cost outlay

● It looks at how long a business will take to recover its principal investment amount
from its net cash flow.
Advantages of payback period
The average rate of return
Measures the annual net return on an investment as a percentage of its capital cost.

● It assess the profitability per annum generated by a project over a period of time.
● It is also known as the accounting rate of return.

A business compare this figure with th ARR of other projects and choose the project showing
the highest rate. The ARR can also be compared with bank’s interes rates on loans, to asses
the level of risk.

● For example: in the above case if banks offer an interest rate of 15% businesses may
find it worthwhile to pursue investment projects with a return of 11% higher than the
base leading rate.
● Other businesses set criterion rates or a minimum rate that an investment project
should not go below i it is to be selected. For example, the criterion rate was 20% or
the above business, the ARR is 6% above this rate and would still be considered a
desirable project to pursue.