Understanding Accounting and Finance Lecture 9 PDF

Understanding Accounting and Finance  * WHAT’S ACCOUNTING? * Accounting -- Accounting is like keeping a diary of your money. It's about tracking where...

Understanding Accounting and Finance  * WHAT’S ACCOUNTING? * Accounting -- Accounting is like keeping a diary of your money. It's about tracking where your money comes from (income) and where it goes (expenses). It is a systematic process of recording, classifying, summarizing, and reporting financial information. Finance (Financial Management)-- Finance is like planning your future with your money. It involves making decisions on how to spend, invest, or save money to grow wealth, fund projects, or ensure financial stability. 17-2 Accounting  * The ACCOUNTING SYSTEM * 17-4  Who are the users of Accounting Information The accountant must be clear for whom the information is being prepared and for what purpose the information will be used.  Two types of Accounting Management accounting – usually prepared for managers/owners Financial accounting- Usually prepared for all the users except for managers/owners Differences  * Understandin FINANCIAL STATEMENTS g Key Financial * Statements LG3 Financial Statement -- A summary of all the financial transactions that have occurred over a particular period. Key financial statements of a business are: - Balance sheet - Income statement (known as profit and loss account) - Statement of cash flows 17-8  The Income statement Income Statement (Profit and Loss Statement) This shows how much money a company made or lost over a specific time period (like a month or year). It includes: Revenue, Expenses, Net Profit/Loss  Balance Sheet This shows what a company owns and owes at a specific point in time. It’s like a snapshot of the company’s finances. It includes: Assets: What the company owns (cash, equipment, buildings). Liabilities: What the company owes (loans, unpaid bills). Equity: The value left for the owners after paying off liabilities (Assets - Liabilities = Equity). Assets = Liabilities + Owners Equity  Cash Flow Statement Shows the inflows and outflows of cash during a specific period. Finance  What is Finance? Finance is the art and science of managing money. How to use it, grow it, save it, or invest it. Whether it's a person, a business, or a government, finance involves making smart decisions with money to reach goals. Everyone cares for Finance- Individuals, households, businesses, governments 13  A few Simple Questions You received Tk100,000 as a gift from your grannies and want to invest it for the next 5 years before you go abroad for higher studies. – What are your choices? – What matters will you consider in making your choice? You need Tk100,000 to pay your tuition fee that you do not have now. – What are your choices? – What matters will you consider in making your choice? 14  Investment decisions & Financing decisions. In financial management, the two major functions are investment decisions and financing decisions. Investment Decision is about deciding where to put the company's money to help it grow. A business needs to choose the best places to invest money, such as: Buying new equipment. Investing in other companies to get returns (Bank) Financing decision is about deciding how to get the money the company needs for its investments or operations. A business has two main ways to get money = Borrowing money (bank loans), Raising money from investors (venture capital).  Making proper financial decisions To make good financial decisions, we must understand three simple concepts: – More return is preferred to less; – The sooner cash is received, the more valuable; and – Less risky assets are preferred to riskier assets. Interrelationships of Finance with other Fields of Business Administration Economics Accounting HRM Marketing Operations and Supply Chain Management Information Systems & Technology  Some Financial Institutions Commercial banks- BRAC Bank Investment banks – EBL Investments Ltd. Green Delta Capital Limited Investment funds- IDLC, Impress Capital Life insurance companies – Delta Life Insurance Pension funds 18 International Conditions Affecting the Financial transactions Country risk: Risk that arises from investing or doing business in a particular country, and it depends on the country’s economic, political, and social environment. Exchange rate risk: Exchange rate risk is the chance that the value of a country's currency will change, which can affect how much money you gain or lose when you deal with foreign currencies. This risk is mostly a concern for businesses, investors, or travelers who buy, sell, or hold assets in different currencies. 19  Finance & Corporate Social Responsibility (CSR) How is finance related to CSR? 20  Agency Conflict: Between Managers and Stockholders The agency problem happens when there’s a conflict of interest between two groups: the owners (shareholders) of a company and its managers (executives) who run the company. For example – Shareholders want the company to make decisions that maximize the value of their investment. Managers, however, might have personal goals, like increasing their own pay or making decisions that benefit them even if they’re not the best for 21 the shareholders.  Key Topics 1.Different types of Accounting 2.Different types of Financial Statements 3.Making Proper financial decisions 4.Agency Problem