Financial Management

Huseynzade Jeyhun

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Why are you here?

YOU TELL ME, PLEASE ….

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Why am I here?
• TEACH

•LEARN

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By the time we finish, you will…
Not become the certified financial specialists
BUT

• Understand basics of financial reporting

• Be able to reconcile the core ratios
• Interpret financial figures
• Understand principles of financial valuation
• Touch upon the principles of FINANCIAL management
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SO, TIME IS LIMITED and …
What’s the difference
between an CFO and a
BE ACTIVE ! lawyer? The CFO he’s
boring.

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SO, TIME IS LIMITED and …
State – President
Ministry – Minister
Taxation – Tax Manager
Hospital – Head
Finance ? –

Chief Financial Officer (CFO)

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What to start with
Quick quiz:

a) I don’t know physics, but I want to be a doctor

b) I dislike animals – I don’t want to be a zoologist
c) I hate accounting, I want to become the CFO
d) I don’t like smell of gasoline, I want to be an engineer

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What to start with
Quick quiz:

a) I don’t know physics, but I want to be a doctor

b) I dislike animals – I don’t want to be a zoologist
c) I hate ACCONTING, I want to become the CFO
d) I don’t like smell of gasoline, I want to be an engineer

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 Financial
What to start with
analysis

✓ Basis for all financial analysis

Corporate
✓ Standards finance

Financial
accounting
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 SYLLABUS

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  Senior Tax Advisor (BP)
 Former Senior Manager (PwC)
 Entrepreneurial experience (another side of
barricade)
Hold Bachelor and Master degrees from Azerbaijan
Lecturer 
State University of Economics

Huseynzade  Hold Bachelor degree in Petroleum Engineering from

Azerbaijan State Oil Academy

Jeyhun  Hold MBA degree from Columbia University in the

City of New York
(Background)  Hold MBA degree from London Business School
 Various researches in economy, tax and finance.

17/9/2018 Principles of Taxation 11

Financial and Management Accounting

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 Accounting test

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Financial and Management Accounting

Managerial Accounting
• Financial • Budgets
Statement • Cost reports
Financial Accounting

• External • Variance
Users reports
• Risk reports
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 Interaction
Purchase
Sale
Promise
Commitments
Records
Refusal
Acceptance

Financial
data

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Quiz

Who have invented the accounting?

a) Greeks
b) Arabs
c) French
d) Turks
e) Germans
f) Persians
g) Italians
h) Armenians
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 Who and When?

Double entry bookkeeping was first invented in Milan by Luca

Pacioli (1446 -1517), the father of accounting, who was a
Franciscan monk.

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Why do we need financial statements?

• Fundamental relationships in the decision-making

process:

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Why do we need financial statements?

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Key Accounting Processes

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How the financial information is produced ?

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Principles and standards
Quiz
Why do we need them?

• On 1st of February of 2017 you purchase a batch of yellow markers for AZN
1000 (for credit)
• You have a cash advance payment from the consulting firm in amount of
AZN 1500, markers will be delivered to them next month
• You buy furniture to your office for AZN 200 for cash
• One chair is broken and requires the immediate repair. You call master and
agree to fix one for AZN 50 and you are yet unclear if you will accept the
offer (50% of probability).
• You pay out your rent of AZN 120 for three month in advance in cash
• No depreciation on assets (if any) is considered for 2017
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 Principles and standards

Income - 1500 Income – 1500

Cost of markers – 1000 Cost of markers – 1000
Furniture – 200 Repair – 50
Repair – 50 Rent– 120
Rent – 120 Profit – 330
Profit - 130

Cost of markers – 1000 Income – 1500

Rent– 40 Rent - 1400
Loss – 1040 Profit – 1040

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 Accounting principles
Revenue principle
The revenue principle, also known as the realization principle, states that revenue is earned when the sale is made, which
is typically when goods or services are provided. A key component of the revenue principle, when it comes to the sale of
goods, is that revenue is earned when legal ownership of the goods passes from seller to buyer. Note that revenue isn’t
earned when you collect cash for something.
Expense principle
The expense principle states that an expense occurs when the business uses goods or receives services. In other
words, the expense principle is the flip side of the revenue principle. As is the case with the revenue principle, if you
receive some goods, simply receiving the goods means that you’ve incurred the expense of the goods. Similarly, if
you received some service, you have incurred the expense. It doesn’t matter that it takes a few days or a few weeks
to get the bill. You incur an expense when goods or services are received.

Matching principle
The matching principle is related to the revenue and the expense principles. The matching principle states that when you recognize
revenue, you should match related expenses with the revenue. The best example of the matching principle concerns the case of
businesses that resell inventory. for example, if you own a hot dog stand, you should count the expense of a hot dog and the expense of
a bun on the day you sell that hot dog and that bun. Don’t count the expense when you buy the buns and the dogs. Count the expense
when you sell them. In other words, match the expense of the item with the revenue of the item.
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Accounting principles
Cost principle
The cost principle states that amounts in your accounting system should be quantified, or measured, by using historical cost.
For example, if you have a business and the business owns a building, that building, according to the cost principle, shows
up on your balance sheet at its historical cost; you don’t adjust the values in an accounting system for changes in a fair
market value.
Objectivity principle
The objectivity principle states that accounting measurements and accounting reports should use objective, factual, and
verifiable data. In other words, accountants, accounting systems, and accounting reports should rely on subjectivity as little
as possible. An accountant always wants to use objective data (even if it’s bad) rather than subjective data (even if the
subjective data is arguably better).
Continuity assumption
The continuity assumption states that accounting systems assume that a business will continue to operate. The
importance of the continuity assumption becomes most clear if you consider the ramifications of assuming that a
business won’t continue. If a business won’t continue, it becomes very unclear how one should value assets if the
assets have no resale value. If a business won’t continue operations, no assurance exists that any of the inventory
can be sold. If the inventory can’t be sold, what does that say about the owner’s equity value shown in the balance
sheet?
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 Accounting principles
Unit-of-measure assumption
The unit-of-measure assumption assumes that a business’s domestic currency is the appropriate unit of measure for the
business to use in its accounting. In other words, the unit-of-measure assumption states that it’s okay for U.S. businesses
to use U.S. dollars in their accounting. The unit-of-measure assumption also states, implicitly, that even though inflation
and, occasionally, deflation change the purchasing power of the unit of measure used in the accounting system, that’s still
okay.
Separate entity assumption
The separate entity assumption states that a business entity, like a sole proprietorship, is a separate entity, a separate thing
from its business owner. And the separate entity assumption says that a partnership is a separate thing from the partners
who own part of the business. The separate entity assumption, therefore, enables one to prepare financial statements just
for the sole proprietorship or just for the partnership. As a result, the separate entity assumption also relies on a business
being separate and distinct and definable as compared to its business owners.

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Standards

IFRS OTHER
• issued by the IFRS • US GAAP
Foundation and the • NAS ( in Azerbaijan)
International Accounting
Standards Board (IASB)

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Standards
• Fair presentation : Fair presentation requires the faithful representation of the effects of the transactions
• Going concern: Financial statements are present on a going concern basis unless management either intends
to liquidate the entity or to cease trading, or has no realistic alternative but to do so
• Accrual basis of accounting: An entity shall recognise items as assets, liabilities, equity, income and expenses
when they satisfy the definition and recognition criteria for those elements in the Framework of IFRS
• Materiality and aggregation: Every material class of similar items has to be presented separately. Items that
are of a dissimilar nature or function shall be presented separately unless they are immaterial
• Offsetting: Offsetting is generally forbidden in IFRS
• Frequency of reporting: IFRS requires that at least annually a complete set of financial statements is
presented.
• Comparative information: IFRS requires entities to present comparative information in respect of the
preceding period for all amounts reported in the current period's financial statements. In addition
comparative information shall
• Consistency of presentation: IFRS requires that the presentation and classification of items in the financial
statements is retained from one period to the next unless

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Cash vs Accrual
In simple words:

Cash – payment is the basis for recognition of revenue or cost

Accrual – cost or revenue is recognized upon the pass of ownership
(i.e. when the transaction takes place).

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Cash vs Accrual
Quiz:

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 Basic Concept (Cash Accounting and Accrual Accounting)

Report Version 2 (Accrual Basis)

Cash vs Accrual Revenues

Sale of 3 spouse houses
January Report

$4,500
Less Cost of Good Sold (3 Spouse Houses @ $900 each) (2,700)
Gross profit 1,800
Expenses
Office rent $400
Telephone service 30
Automobile rent 280
Electricity 100
Advertising 300
Basic Concept (Cash Accounting and Accrual Accounting) Total Cash Disbursements $1,110
Excess of receipts over disbursements $690
Report Version 1 (Cash Basis)

January Report
Cash Receipts
Sale of 3 spouse houses $4,500
Cash Disbursements
Purchase of 2 spouse houses $1,800
Office deposit and rent 800
Telephone purchase 150
Telephone service 30
Advertising 300
Total Cash Disbursements $3,080
Excess of receipts over disbursements $1,420

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Assets & Liabilities
IFRS Framework: "An asset is a
resource controlled by the enterprise
as a result of past events and from
which future economic benefits are
expected to flow to the enterprise.“
Cash and cash equivalents
Short-term investments
Receivables
Inventory
Prepaid expenses
Property, Plant and Equipment (PPE )
Long term Investments
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Liability is defined as the future sacrifices of
economic benefits that the entity is obliged to
make to other entities as a result of past
transactions or other past events, the
settlement of which may result in the transfer
or use of assets, provision of services or other
yielding of economic benefits in the future.
Current liabilities — these liabilities are reasonably
expected to be liquidated within a year. They usually
include payables such as wages, accounts, taxes, and
accounts payable, unearned revenue when adjusting
entries, portions of long-term bonds to be paid this year,
short-term obligations (e.g. from purchase of equipment).
Long-term liabilities — these liabilities are reasonably
expected not to be liquidated within a year. They usually
include issued long-term bonds, notes payables, long-term
leases, pension obligations, and long-term product
warranties.
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Equity (Capital)
• Share capital (common stock)
• Capital surplus
• Retained earnings
• Treasury stock
• Reserves

….CALLED “NET ASSETS” or “ASSETS – LIABILITIES”

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Accounting equation

ASSETS = EQUITY +
LIABILITIES

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Quiz
•
•
Office equipment (not for sale)
Unearned revenue
ASSET
• Unpaid invoice (to supplier)
• Received advance payment
• Car (for sale)
•
•
1000 items of spare parts for the sale
Increasing of the share numbers
LIABILITY
• Cash in bank
• Cash in hands
•
•
Payment to be received from your customer
Retained earnings EQUITY
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 Double entry technique
• Every transaction affects two
sides of the record
• Inflow is impossible without
outflow

RECALL THE LAW OF

CONSERVATION OF ENERGY!
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 EQUITY

AZ 1000,000

Cash

AZ 1000,000

BUSINESS STARTS FROM CAPITAL

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Double entry technique

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 https://www.youtube.com/watch?v=PJWUGTUaSsI&sns=em

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Apple case
1. Issued stock USD 300
2. Purchased iPods on credit for USD 2000
3. Sell iPods for USD 700 on credit (at cost of USD 600)
4. Pay USD 50 for dividends
5. Pay USD 200 in advance for advertisement (50 for current month)
6. Received USD 400 in advance for the iPod sale (unearned revenue)
7. Delivered USD 400 IPods to customer (reverse of unearned revenue)
8. Record cost of USD 150 for above USD 400 sale of Ipods
9. Incur USD 100 in wages not yet paid
10. Incur rent of USD 25 not yet paid
11. Sell USD 500 of Ipods in credit (record cost of USD 400 for the sold party)

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Apple case (Trial Balance)

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 Slow here….

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