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Financed bySupported byImplemented in cooperation with Financed bySupported byImplemented in cooperation with Basics of key financial terms …learn the.

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Presentation on theme: "Financed bySupported byImplemented in cooperation with Financed bySupported byImplemented in cooperation with Basics of key financial terms …learn the."— Presentation transcript:

1 Financed bySupported byImplemented in cooperation with Financed bySupported byImplemented in cooperation with Basics of key financial terms …learn the key financial terms

2 Financed bySupported byImplemented in cooperation with Asset/liability: An asset is an economic resource that a company owns. A liability is a resource that the company owes. Book value/market value: Book value is the amount of an asset or liability shown on the companies’ official financial statements based on the historical, or original, cost. Market value is the current value of the asset or liability. In most cases, book value does not equal market value. Capital goods: These are machines and tools used to produce other goods. Review of Basic Terms

3 Financed bySupported byImplemented in cooperation with Depreciation/amortization: a system that spreads the cost of a tangible asset, such as machinery, over the useful life of the asset. Amortization is a system that spreads the cost of an intangible asset, such as a patent, over the useful life of the asset. Fiscal year: A company’s financial reporting year. In most cases the fiscal year is not the same as the calendar year. Profit margin: This is profit—what the company’s owners keep after paying all the bills—a percentage of sales or revenues. Receivables/payables: Receivables are money owed to the company. Payables are money the company owes to others. Revenue/expenses: Revenue is income that flows into a company. Revenue includes sales, interest, and rents. Expenses are costs that are matched to a specific time period. Review of basic terms (Cont’d)

4 Financed bySupported byImplemented in cooperation with Finance & Accounts Picture adapted from

5 Financed bySupported byImplemented in cooperation with Accounting Equation Owner’s Equity AssetsLiabilities This will be the case after every single transaction

6 Financed bySupported byImplemented in cooperation with Something we own or use that should generate income. What is an Asset? It’s an asset! We bought it We receive revenue for doing scans

7 Financed bySupported byImplemented in cooperation with Something we owe because of something we did and we are going to have to pay. What is a liability? It’s a liability Owe money as we bought on credit Purchase nurses uniforms on credit We are going to pay

8 Financed bySupported byImplemented in cooperation with The residual interest in the assets of the entity after deducting all its liabilities. What is Owner’s Equity? Owner’s Equity AssetsLiabilities Is increased by: Revenue and capital contributions Is decreased by: Expenses and drawings/ dividends

9 Financed bySupported byImplemented in cooperation with Overview of the accounting equation Owner’s Equity Assets Liabilities AssetsLiabilities  Buildings  Accounts Receivable  Computer Equipment  Motor Vehicles  Accounts Payable  Accruals  Bank Overdraft  Long-term Debt RevenueExpenses  Government funding  Interest received  Private Donations  Staff Salaries  Consumables  Electricity  Consultants (not always)

10 Financed bySupported byImplemented in cooperation with Financial reports are prepared on an accrual basis. Expenses and revenue are recorded when they are incurred or earned, not when cash is paid or received. Example: Purchase of medical supplies 1. Supplies are ordered on the 30 September. 2. They are delivered on the 24 October. 3. Cash paid for the supplies on the 25 November. Accrual accounting

11 Financed bySupported byImplemented in cooperation with Accrual accounting example (Cont’d) When the goods are ordered – there is no transaction When the goods were received, the expense was recognised The cash was only paid later, the transaction affecting only the cash balance and the accounts payable / creditor balance.

12 Financed bySupported byImplemented in cooperation with Cash flow vs revenue Cash flow is the physical cash received or paid out in the running of the business. Revenue and expenses may be recognised when there has been no cash flow. Cash may also be received / paid with no revenue /expense recognition. Income and expenses Income: Any increase in equity resulting from increases in assets or decreases in liabilities Expense: Any decrease in equity resulting from decreases in assets or increases in liabilities Revenue Cash

13 Financed bySupported byImplemented in cooperation with Key terms

14 Financed bySupported byImplemented in cooperation with Fixed (Indirect/Overheads) – are not influenced by the amount produced but can change in the long run e.g., insurance costs, administration, rent, some types of labour costs (salaries), some types of energy costs, equipment and machinery, buildings, advertising and promotion costs Variable (Direct) – vary directly with the amount produced, e.g., raw material costs, some direct labour costs, some direct energy costs Semi-fixed – where costs not directly attributable to either of the above, for example, some types of energy and labour costs Costs

15 Financed bySupported byImplemented in cooperation with Total Costs (TC) = Fixed Costs (FC)+ Variable Costs (VC) Average Costs = TC/Output (Q) AC (unit costs) show the amount it costs to produce one unit of output on average Marginal Costs (MC) – the cost of producing one extra or one fewer units of production MC = TC n – TC n-1 Costs

16 Financed bySupported byImplemented in cooperation with Total Revenue – also known as turnover, sales revenue or ‘sales’ = Price x Quantity Sold TR = P x Q Price – may be a variety of different prices for different products in the portfolio Quantity – could be global sales Revenue

17 Financed bySupported byImplemented in cooperation with Profit (Π) = TR – TC Normal Profit – the minimum amount required to keep a business in a particular line of production Abnormal/Supernormal Profit – the amount over and above the amount needed to keep a business in its current line of production Profit

18 Financed bySupported byImplemented in cooperation with Break Even

19 Financed bySupported byImplemented in cooperation with Occurs where Total Costs = Total Revenue Start-up costs – fixed costs Running costs – variable costs Revenue stream depends on price charged ‘Low’ price – need to sell more to break-even ‘High’ price – lower level of sales required before breaking even Fixed Costs Break-Even Point = Contribution Break Even

20 Financed bySupported byImplemented in cooperation with Purpose of Accounts

21 Financed bySupported byImplemented in cooperation with Provide information for stakeholders – customers, shareholders, suppliers, etc. Provides the opportunity for the business to monitor its own activities Provides transparency to enable the firm to attract investment Reduces the chance for fraud – not 100% successful!! Purpose of Accounts

22 Financed bySupported byImplemented in cooperation with Provide important information about the value of the firm. Three most relevant: Balance sheet Profit and loss statement (income statement) Cash flow statement Financial analysts and managers learn how to rearrange financial statements to squeeze out the maximum amount of information (using so-called financial analysis) Financial statements

23 Financed bySupported byImplemented in cooperation with The objective is to show how to rearrange information from financial statements into financial ratios that provide information about five areas of financial performance: 1. Short-term solvency: measure the ability of the firm to meet recurring financial obligations (that is, to pay its bills). 2. Activity: measure how effectively the firm’s assets are being managed. 3. Financial Leverage: related to the extent to which a firm relies on debt financing rather than equity. 4. Profitability: measure the extent to which a firm is profitable. 5. Value: One very important characteristic of a firm that cannot be found on an accounting statement is its market value. Financial Statement Analysis

24 Financed bySupported byImplemented in cooperation with Profit and loss account - Flow

25 Financed bySupported byImplemented in cooperation with Shows the flow of sales and costs over a period Shows the level of profit or loss made Shows what has been done with the profit or loss Profit and Loss Account (income statement)

26 Financed bySupported byImplemented in cooperation with Income statement – Key terms SalesIncome generated by the sales of goods and services for the specified period. Sales are often categorized by the product sold. Cost of Goods Sold (COGS) Value of the inventory that was sold. It also is often categorized by the product sold. Gross MarginGross Margin = Sales – Cost of Goods Sales ExpensesExpenses incurred to generate or complete the period’s sales. Administrative & General Expenses Expenses incurred to carry out the management and administrative function of the organization. Many of these expense are incurred whether or not any sales are made. Net Income– is the earning (losses) generated for a period. Net Income = Revenue – COGS – Sales Exp – Adm/Gen. Exp.

27 Financed bySupported byImplemented in cooperation with Balance Sheet - Snapshot

28 Financed bySupported byImplemented in cooperation with A snapshot of the firm’s position at a point in time Shows what a company owns (assets) and what it owes (liabilities) Balance Sheet shows what assets a company has (use of funds) and where the money came from to acquire those assets (source of funds) Balance Sheet

29 Financed bySupported byImplemented in cooperation with Balance Sheet Terms AssetsAll the resources owned by the firm as of the date of the balance sheet. Current assetsAll the resources which are or will be turned into cash or used up by the firm within the year. CashCash on hand or on deposit with a financial institution with a term of less than one year. Accounts Receivable Money owed to the firm usually by customers who have set repayment terms (15 or 30 days to pay). Prepaid expensesExpenses that have be paid in the current accounting period, but all or part of them will apply to the next accounting period. InventoryThe value of goods on hand including all costs in securing or processing the goods. Goods are valued at the lower of cost or market value.

30 Financed bySupported byImplemented in cooperation with Balance Sheet Terms (Cont’d) InvestmentsDeposits being held for more than one year or investments in other organizations. Fixed AssetsAssets of an organization that are used up over a number of accounting periods (years). Fixed assets are not charged against income at the time of purchase because of the long term nature of the investment made. Instead depreciation (an expense item) is used to account for the portion of the asset used each year. LiabilitiesDebts of the organization, what the organization owes its creditors. Current liabilities Debts payable within the next year. Accounts payable Amount owing to trade suppliers. Accrued liabilities Other expenses such as holiday pay which have not been paid at the end of the accounting period.

31 Financed bySupported byImplemented in cooperation with Balance Sheet Terms (Cont’d) Owners’ Equity The members’ share of ownership of the assets of the organization Assets – Liabilities = Owners’ Equity Share CapitalThe members’ direct investment in the organization as an owner. Line of CreditAn bank account overdraft provision that has been pre-arranged with a financial institution. Demand Loans Loans received by organization that are used to finance the firm’s assets and are repayable with set terms. However default on the payment of conditions makes the loans immediately repayable (payable on demand by the financial institution). Retained Earnings The cumulative earnings (losses) from previous accounting periods that have be retained by the firm to support its financial viability and long term development. Current Earning The earnings (losses) generated in the current accounting period.

32 Financed bySupported byImplemented in cooperation with Other terms like the ones related to cash flows, taxes, financial instruments, budgeting will be introduced gradually during the course (in other and specifically dedicated training sessions). Key financial terms


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