Accounting and Finance Management

M.
S Ramaiah School of Advanced Studies - Bangalore

PEMP- GP-POM
Session 7
Accounting and Finance
Management
Vinay Basavaraj
1
M.S Ramaiah School of Advanced Studies - Bangalore
PEMP- GP-POM
Session Objectives
At the end of this session, students will be able
to:
Elaborate the accounting rules and concepts
Explain the nuances of financial statements
Perform ratio analysis
Explain the uses of management accounting
Elaborate different business structures
2
PEMP- GP-POM
Session Objectives
At the end of this session, students will be able
to:
Calculate cash flows
Perform capital budgeting
Explain the dividend discount model and using the model,
calculate intrinsic value of common stock
3
PEMP- GP-POM
Contents
Accounting rules and concepts
Financial statements
Ratio analysis
Managerial Accounting
Business Structures
Cash Flow
Capital Budgeting
Dividend discount model
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PEMP- GP-POM
Accountancy, or accounting, is the production
of financial records about an organization
Many tedious accounting practices have been
simplified with the help of computer software
Today, accounting is called "the language of
business"
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PEMP- GP-POM
Key concepts
Accounting period
Accrual
Bookkeeping
Cash flow forecasting
Cost of goods sold
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PEMP- GP-POM
In India, Indian Accounting Standards (AS),
are a set of accounting standards notified by
theMinistry of Corporate Affairswhich are
converged with International Financial
Reporting Standards(IFRS)
These accounting standards are formulated by
Accounting Standards Board of Institute of
Chartered Accountants of India (ICAI)
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PEMP- GP-POM
A financial statement (or financial report) is a
formal record of the financial activities of a
business, person, or other entity
Relevant financial information is presented in
a structured manner and in a form easy to
understand
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PEMP- GP-POM
Statement of financial position: also referred to
as abalance sheet, reports on a
company'sassets, liabilities, andownership
equityat a given point in time
A profit and loss statement provides
information on the operation of the enterprise.
These include sales and the various expenses
incurred during the processing state
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PEMP- GP-POM
Statement of comprehensive income: reports
on a company's income, expenses, and profits
over a period of time
Statement of cash flows: reports on a
company's cash flow activities, particularly its
operating, investing and financing activities
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PEMP- GP-POM
Key concepts
Double-entry system
Mark-to-market accounting
FIFO and LIFO
GAAP / IFRS
Management Accounting Principles
Matching principle
Revenue recognition
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PEMP- GP-POM
Ratio analysis
What is Financial statement analysis?
Financial statement analysis(or financial analysis)
the process of understanding the risk and
profitability of a firm (business, sub-business or
project)
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PEMP- GP-POM
Ratio analysis
What is Financial statement analysis?
The analyst uses reported financial information
and different accounting tools and techniques
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PEMP- GP-POM
Ratio analysis
Constituents of financial statement analysis
Reformulating reported
financial statements
Analysis and adjustments
of measurement errors
Financial ratio analysis
14
PEMP- GP-POM
Management accountingor managerial
accountingis concerned with the provisions
and use of accountinginformation to managers
within organizations
It provides them with the basis to make
informed business decisions that will allow
them to be better equipped in their
management and control functions
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PEMP- GP-POM
In contrast tofinancial accountancy,
management accounting is:
primarily forward-looking
designed and intended for use by managers within
the organization
computed by reference to the needs of managers
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PEMP- GP-POM
Tools of management accounting
Activity-based costing (ABC)
Grenzplankostenrechnung(GPK)
Lean accounting
Resource consumption accounting (RCA)
Transfer pricing
Throughput accounting
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PEMP- GP-POM
Business Structures
Of all the decisions one makes when starting a
business, probably the most important one
relating to taxes is the type of legal structure of
the company
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PEMP- GP-POM
Business Structures
The most common forms of business are
Sole Proprietorship
Partnership
Corporation
A more recent development to these forms of
business is the limited liability company (LLC)
and the limited liability partnership (LLP)
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PEMP- GP-POM
Cash Flow
Cash flowis the movement of moneyinto or
out of a business, project, or financial product
Measurement of cash flow can be used for
calculating other parameters that give
information on a company's value and
situation
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PEMP- GP-POM
Cash Flow
Statement of cash flow
The (total) net cash flow of a company over a
period (typically a quarter, half year, or a full year)
is equal to the change in cash balance over this
period
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PEMP- GP-POM
Cash Flow
Statement of cash flow
The total net cash flow is the sum of cash flows
that are classified in three areas:
Operational cash flows
Investment cash flows
Financing cash flows
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PEMP- GP-POM
Capital Budgeting
Capital budgeting(or investment appraisal) is
the planning process used to determine
whether an organization's long
terminvestmentssuch as new machinery,
replacement machinery, new plants, new
products, and research development projects
are worth the funding
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PEMP- GP-POM
Capital Budgeting
It is the process of allocating resources for
major capital, or investment, expenditures
One of the primary goals of capital budgeting
investments is to increase the value of the firm
to the shareholders
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PEMP- GP-POM
Capital Budgeting
Many formal methods are used in capital
budgeting, including the techniques such as:
Accounting rate of return
Payback period
Net present value
Profitability index
Internal rate of return
Modified internal rate of return
Equivalent annuity
Real options valuation
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PEMP- GP-POM
Capital Budgeting
Among the methods of Capital Budgeting
mentioned, the most common are:
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Net present
value (NPV)
Internal rate
of return
(IRR)
PEMP- GP-POM
Capital Budgeting
However, in case of conflict between NPV and
IRR, the former prevails
Conflict arises when the two methods choose
different investment projects
The NPV method is a more technically-sound
method of capital budgeting
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PEMP- GP-POM
Capital Budgeting
Funding Sources
Capital budgeting investments and projects must
be funded through excess cash provided through
the raising of debt capital, equity capital, or the use
of retained earnings
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PEMP- GP-POM
Capital Budgeting
Need For Capital Budgeting
As large sum of money is involved which
influences the profitability of the firm making
capital budgetingan important task
Long term investment once made can not be
reversed without significance loss of invested
capital
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PEMP- GP-POM
Capital Budgeting
Need For Capital Budgeting
Investment decision are the base on which the
profit will be earned and probably measured
through the return on the capital
The implication of long term investment decisions
are more extensive than those of short run
decisions because of time factor involved
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PEMP- GP-POM
Thedividend discount model (DDM) is a
method of valuing a company based on the
theory that astockis worth the discounted sum
of all of its future dividend payments
Also known as the Gordon model
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PEMP- GP-POM
Derivation of equation
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PEMP- GP-POM
Problems with the model
The presumption of a steady and perpetual growth
rate less than thecost of capital may not be
reasonable
If the stock does not currently pay a dividend, like
manygrowth stocks, more general versions of the
discounted dividend model must be used to value
the stock
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PEMP- GP-POM
Problems with the model
The stock price resulting from the Gordon model is
hyper-sensitive to the growth rate chosen
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PEMP- GP-POM
Summary
Accountancy, or accounting, is the production of
financial records about an organization
Key concepts include accounting period,
Bookkeeping, Accrual etc.
A financial statement (or financial report) is a
formal record of the financial activities of a
business, person, or other entity
35
PEMP- GP-POM
Summary
Ratio analysis
Financial statement analysis(or financial analysis)
the process of understanding the risk and
profitability of a firm (business, sub-business or
project)
Managerial accountingis concerned with the
provisions and use of accountinginformation to
managers within organizations
36
PEMP- GP-POM
Summary
Business Structures
Of all the decisions one makes when starting a
business, probably the most important one relating
to taxes is the type of legal structure of the
company
Cash Flow
Cash flowis the movement of moneyinto or out of
a business, project, or financial product
37
PEMP- GP-POM
Summary
Capital Budgeting
Capital budgeting(or investment appraisal) is the
planning process used to determine whether an
organization's long terminvestmentssuch as new
machinery, replacement machinery, new plants,
new products, and research development projects
are worth the funding
38
PEMP- GP-POM
Summary
Capital Budgeting
Among the methods of Capital Budgeting
mentioned, the most common are NPV and IRR
(the former prevails in case of any conflict)
39
PEMP- GP-POM
Summary
Thedividend discount model (DDM) is a method
of valuing a company based on the theory that
astockis worth the discounted sum of all of its
future dividend payments
40

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S Ramaiah School of Advanced Studies - Bangalore

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