01 Introduction
Accounts vs Finance¶
| Accounting | Finance | |
|---|---|---|
| Past-Looking | Future-Looking | |
| Aspect | Reporting | Planning |
| Easy to automate | ✅ | ❌ |
Accounting¶
- Measure performance of organization
- Provides useful info for decision-making
Public Offerings¶
When a corporation wants to list itself in the stock market, there are offerings (for valuation of my company)
| Meaning | |
|---|---|
| IPO | Initial Public Offer |
| FPO | Follow-Up Public Offer |
Earnings Management¶
Situation when management tries to increase their earnings, by intentionally focusing on increasing stock valuation, and nothing else.
Brances of Accounting¶
| Branch | Alias Name | Purpose |
|---|---|---|
| External | Financial Accounting | Official records |
| Internal | Management Accounting (Revenue Optimization, Internal Audit) | Decision process |
Financial Accounting¶
Systematic procedure of recording, classifying, summarizing, analyzing, and reporting a business’ monetary transactions
Advantages¶
The systematic record helps
- Protect property
- Communicate results to interested parties
- Comply with legalities
Disadvantages¶
-
Records only monetary transactions
-
Inflation not considered
-
Historical in nature
-
Costly
-
Window-dressing
Fund manager sells stocks with large losses and purchases high-flying stocks near the end of the quarter or year
Interested Parties¶
| Party | Why are they interested in accounts |
|---|---|
| Investors | If they will get return on their investment |
| Creditors | If they will get loan back |
| Workers | If a company closes, you will not get salary |
| Customers | If a company closes, you will not get maintanance/replacement |
| Government | Checking for Fraud |
Financial Management¶
Decisions on
- Investment
- Financing
- Dividend
Goal of Corporation¶
Maximizes current wealth, ie value of company; not maximize profit
Expenditure vs Expenses¶
| Expenditure | Expenses | |
|---|---|---|
| Meaning | Buying assets for long-run gain | Payment for something you have already consumed |
| Example | Investment Buying laptop | Giving Salary Depreciation of assets Buying chocolates |
Asset¶
Anything that provides you right to use/gain renenue generated by that item
eg: Prepaid Telephone Service, Accrued income (deferred income; revenue that's been earned, but has yet to be received)
| Type | Duration | Nature changes | Example | |
|---|---|---|---|---|
| Current | Period of 12months | Short | âś… | Inventory |
| Non-current/Fixed | Long | ❌ | Land, Buildings | |
| Fictitious | deferred revenue expenditures with no resale value | Set up costs Company Logo Goodwill |
Types of Assets¶
| Real Asset | Financial Asset/Securities | |
|---|---|---|
| Something that can generate revenue | Contracts that provide a right to gain income from real assets One party’s financial assets are another party’s liability | |
| Can be tangible/intangible | âś… | âś… |
| Liquidity | Low | High |
| Examples | Tangible (Machinery, property) Intangible (Technical know-ho) | Shares Bonds These can be tangible (hard-copy)/intangible |
| Purpose | Functioning of business Represents society’s wealth | Separation of ownership & management Efficient allocation of capital Efficient allocation of risk |
Securities are actually financial assets with collateral, but they are used interchangeably
Financial Assets¶
| Income | ||
|---|---|---|
| Ownership/Equity Claims (Equity Shares/Common Stocks) | Variable | |
| Creditor Claims (Bonds) | Fixed | |
| Hybrid Claims (Preferential Stocks) | Hybrid | |
| Derivatives (Claims on other financial assets) | Synthetic | |
| Indirect Financial Assets (Mutual funds, Hedge funds) | Synthetic |
Bonds¶
Interest rate of bond depends on
- Credit rating of corporation
- Duration
- Short-term bond has low interest rate
- Long-term bond has high interest rate
Derivatives¶
Synthetically-created instrument that obtains value from underlying set of assets
- Spot price
- Expiry
- Exercise price
Types¶
| Type | |
|---|---|
| Forward | |
| Future contract | |
| Call Option | Right to buy an asset |
| Put Option | Right to sell an asset |
| Swap - CDS (Credit Default Swap) |
Indirect Investing¶
- Hedge funds invest at a higher risk-return compared to Mutual funds
Liability¶
Anything that has requirement for you to pay for it
eg: Outstanding expenses, Unaccrued income (receiving advance payment, bank overdrafting)
| Type | Example | |
|---|---|---|
| Current | Short Term (Period of 12months) | Rent |
| Non-Current | Long Term | Loans |
| Contingent | Conditional | Guarantee/Warranty |
Keywords¶
| Underwriters | Assurance that they will buy in case the value of a commodity reduces eg: Insurance |
| Standards | The standards we follow is INDAS (INDian Accounting Standards) |
| Market Cap | Valuation |
| Free-Floating Ratio | Ratio of stocks publicly available for purchase |
| Liquidity | Ratio of assets in cash |
| BPL | Below poverty line |
| White Goods | Household/domestic goods, such as fridge, dryers, etc |
Documents¶
| Document | Meaning | Time | Shows |
|---|---|---|---|
| Journal | Chronological record of transactions | continuous | Debit, Credit |
| Ledger | Classification of transactions into different accounts | continuous | Debit, Credit |
| Trial Balance | list of balances of the ledger accounts at a point of time | Debit, Credit | |
| Balance Sheet | Shows the assets and liabilities | at particular instant | Assets, Liabilities |
| Profit-Loss/ Income Statement | Shows the revenue and expenses relevant to the core operations of company | during period of time | Assets, Liabilities |
| Cashflow Statement | Show the source and uses of cash | during period of time |