Session 1

Specialized Masters – Core Courses
Introduction to Financial Accounting
Course coordinator: Carlos RAMIREZ Course instructors: Catalin ALBU

Nadia ALBU
Andrei FILIP
Daniel TAN
Carlos RAMIREZ
Term T0 2022-2023
Rules of the game…when the course goes in “dual teaching mode”
ØRead the slides (theory) before each session
ØBe early for each session
ØRecommended : Respond and participate in class
ØEncouraged : Ask questions to clarify your doubts soonest possible
© MS Financial Accounting 2021-2022 2

Course overview
Philosophy of the course - Why are you here?

Ø Users’ perspective – be informed readers of financial statements!
Ø For this, know the basics of how accounting works
Objectives of the course – What will you be able to do?

Ø Understand how accounting numbers are produced
Ø Appreciate the need for accounting regulation
Ø Interpret accounting numbers and financial statements
Ø Make decisions based on financial statements
Ø Go further into: business valuation, financial analysis, corporate finance

Course organization
Course materials
Ø Course outline
Ø Course notes/slides
Ø Workbook
Ø Reference book: Financial Accounting and Reporting: A Global Perspective (Hervé Stolowy,
Yuan Ding & Luc Paugam), Cengage Learning EMEA, London, 6th edition, 2020
Assessment
Final Exam 100%

Roadmap for the course
Class #3: Class #4: Class #5:

Class #1: Overview Class #2:
Investing cycle Financing cycle,
of financial Operating cycle and non-current End-of-Year
accounting and current assets equity and
assets adjustments
liabilities
Final Exam
Class #6: End-of-Year Class #7: Statement of cash (cumulative all
adjustments (cont.) Class #8: Revision
flows classes)
4 October 9 a.m.

What is Accounting?

What is Accounting?
Accounting is
about producing
relevant
income=core income+other income information
revenue/sales is the core income
To outsiders (shareholders,
governments, clients, suppliers, To insiders (managers)
etc.) =
= Management Accounting (highly
Financial Accounting (Reporting) customized; identifiable
(highly standardized; anonymous audience)
audience)
Accounting is the language of business

What is Accounting?
Source: The Pathways Commission, American Accounting Association; see here

Roadmap for the course
Class #3: Class #4: Class #5:

Class #1: Overview Class #2:
Investing cycle Financing cycle,
of financial Operating cycle and non-current End-of-Year
accounting and current assets equity and
assets adjustments
liabilities
Final Exam
Class #6: End-of-Year Class #7: Statement of cash (cumulative all
adjustments (cont.) Class #8: Revision
flows classes)
4 October 9 a.m.

Class #1 Overview of financial accounting
1. Why is financial accounting important?
2. The Business Equation (BE)
3. The process of producing financial statements

Ø Statement of Financial Position (or Balance Sheet)
Ø Statement of Profit or Loss (or Income Statement)
Ø Statement of Cash Flows

What is finance?
Ø Finance deals with matters related to money and the markets
Ø Finance is concerned with resource allocation, management, acquisition and investment
What is financial accounting?

Ø Financial accounting is concerned with the reporting on the resources levered by the firm and the
use of resources by (management of) the firm

Users of financial reporting information
Stockholders
(Equity investors)
Employees
Customers
Management
Suppliers
Government Bodies
Trade Creditors
Debt investors
It is generally assumed that companies answering the needs of the investors would satisfy
the needs of all users
Financial Analysts
Public
2. The Business Equation when the asset value begins to decrease, it becomes an expense.
accrued: cash is not transacted yet

just use the word payable!
Assets = Liabilities + Shareholders’ equity

share capital
prepaid expense current and non-current
retained earning
short-term and long-term overdraft
tangible and intangible

2. The Business Equation
v Assets = present economic resources controlled by the entity as a result of past events. An
economic resource is a right that has the potential to produce economic benefits; assets are
usually classified as non-current or current
v Liabilities = present obligations of the entity to transfer an economic resource as a result of
past events; liabilities are also usually classified as non-current or current
v Equity = the residual interest in the assets of a company after deducting all its liabilities; it is
the claim shareholders have over the net worth of the company; it comprises share capital
and retained earnings
v Income (Revenue) = Increases in economic benefits during the accounting period in the form of inflows or
enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to
contributions from equity participants.
v Expenses = decreases in economic benefits during the accounting period in the form of outflows or depletions of
assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to
equity participants.
v Net income (profit or loss) = Income (Revenue) – expenses
v Net income (profit or loss) is part of equity

EXAMPLE COMPOFRUIT
Compofruit is making jam and other fruit products. Identify the company’s assets and liabilities:
a) A car bought to transport the fruits and canned products
b) Sugar bought for the jam but not yet paid
c) The jam not sold yet
d) Money in the bank account
e) The management decided to buy a new machine to double the production capacity
f) Employees hired to produce the jam.
https://frozenpeafund.com/how-manchester-united-treats-its-soccer-stars-like-financial-instruments/

How Manchester United treats its Soccer Stars like Financial Instruments
JANUARY 11, 2014 - FROZEN PEA FUND LEAVE A COMMENT
While digging through the financial statements of Manchester United out of interest, I came
across a pretty novel accounting concept that changed the way in which I look at sports teams
as a business model. Between the way in which the company recorded a solid half of its entire
balance sheet as being composed of intangible assets with no real value, and the sheer amount
of debt that financed these intangibles, it was the accounting treatment of the players’ contracts
that struck me as most peculiar, and left me to the realization that a soccer team’s balance sheet
is strikingly similar to that of a highly-leveraged investment bank.
Specifically, the way in which the company lists players’ contracts is very similar to how it is
that a hedge fund would report its investment positions, along with losses and gains being
recognized as a result of trades or injuries. By then digging into this concept a little bit further, I
was able to come up with an interesting insight into the industry that I would have never before thought of.
The first thing I noticed about the ManU financial statements is the way in which the company recorded the value of players contracts as being
capitalized financial instruments. In plain-speak, this means that the company essentially records the expenses associated with paying out a
players monstrous wages upfront as being an asset called the “Players’ Registration”, and then amortize it over time as the wages are paid out.
As the contract ages, the contract is effectively worth less to buy out, and the player can be more easily traded. From there, the event of a trade can
actually create either a profit or loss for the team itself, or the injury of a player could result in a situation where the value of their contract needs
to be written down, as it suggests as though the player will never again be worth the same amount as they were before.
With all that in mind, let’s jump back just a second to the part where we capitalized the player’s registration over time, and decided to simply
write it down over time against depreciation. What this strategy illustrates is a situation where the company has effectively claimed a long-term
liability as being an asset, because they own the right to put Ronaldo on the field, which is expected to sell more t-shirts and TV-subscriptions
over the long term.
From there, the assumption is that the values of the individual registrations directly create incomes, even though they themselves cost money to
incur over time. So what happens if Manchester United goes bankrupt and needs to liquidate its roster? It is very likely that the shareholders wind
up taking a huge loss as a result of the huge write-down associated with
Any transaction must preserve the equilibrium between sources and uses of funds, and involves
either a change in both, or a reallocation within one side of the balance sheet equation:
Ø Assets +X = Liabilities + Equity +X
Ø Assets –X = Liabilities + Equity –X
Ø Assets +X –X = Liabilities + Equity
Ø Assets = Liabilities + Equity +X –X
Ø Etc.
Revenues and expenses impact shareholders’ equity

Ø Revenues, and therefore profits, increase equity
Ø Expenses, and therefore losses, decrease equity

Case Verdi (see workbook) – Transaction 1
The shareholders decide to create an advertising agency VERDI with a capital contribution of 150 €. They
deposit the agreed upon amount of cash in the bank account.
Tr. # Assets = Liabilities + Shareholders’ equity
Cash = Share capital Details of SE transactions
1 +150 +150 Initial investment
Ending 150 150

balance
150 = 0 + 150

Case Verdi – Transaction 2
Verdi obtains a 60 € loan from its bank. The principal of the loan is deposited in Verdi’s bank account. The
contract specifies that the interest shall be paid at the end of each period, on the remaining principal.
Cash = Bank loans Share capital Details of SE transactions

2 +60 +60
Ending 210 60 150

balance
210 = 60 + 150

Verdi acquires some equipment (a computer, a color printer, …). These cost 125 € in total. The supplier is
paid for this purchase with a check drawn on Verdi’s bank account.
Cash Equipment = Bank loans Share capital Earnings Details of SE transactions

2 +60 +60
3 -125 +125
Ending 85 125 60 150

balance
210 = 60 + 150

Sam Suffit, a retailer, approaches Verdi for an advertising campaign for his spring season products. They
agree on the amount of 250 € for the service rendered by Verdi. The invoice will be paid in 30 days.
Cash Equipment Accounts = Bank loans Share capital Earnings Details of SE transactions
receivable

2 +60 +60
3 -125 +125
4 +250 +250 Services rendered
Ending 85 125 250 60 150 250

balance
460 = 60 + 400

Sam Suffit sends a check for 180 € of the 250 € debt to Verdi

Cash Equipment Accounts = Bank loans Share capital Earnings Details of SE transactions
receivable

2 +60 +60
3 -125 +125
5 +180 -180
Ending 265 125 70 60 150 250

balance
460 = 60 + 400

Expenses are either paid cash (salaries for 101 €, interest for 4 €) or on credit (third party expenses for
85 €)

Cash + Equipment + Accounts = Accounts Bank loans Share Earnings Details of SE transactions
receivable payable + + capital+ +

2 +60 +60
3 -125 +125
5 +180 -180
6a -101 -101 Salaries expense
6b -4 -4 Interest expense
6c +85 -85 Third party expense
7
8
Balance … … … … …. … …
355 = 145 + 210

Partial settlement of liabilities for 80 €

2 +60 +60
3 -125 +125
5 +180 -180
7 -80 -80
8
Balance … … … … … … …
… = … + …

Case Verdi – Transaction 8 and summary table
Partial repayment of the bank loan for 12 €

2 +60 +60
3 -125 +125
5 +180 -180
7 -80 -80
8 -12 -12
Ending 68 125 70 5 48 150 60
balance
263 = 53 + 210

2. The Business Equation – Some key points
The two sides of the business equation must always balance (Assets = Liab. + Owners’s equity)
Each transaction must be analyzed specifically to identify its possible impact on shareholders’
equity, because…
Ø the results of transactions that create/consume value for/of the shareholders are summarized
separately in the Statement of profit or loss (Income Statement).
Ø Earnings result from transactions with the outside business environment (not shareholders),
that create value for the business (shareholders)
Net income is very different than cash

Ø Some transactions only impact cash but earnings (e.g., debt, equipment)
Ø Some transactions affect earnings and cash in different periods (e.g. credit to customers and
from suppliers)

We are interested in the information that financial statements provide
Published financial statements provide

information for various decision-making
purposes:
- firm valuation
- loan decisions
Financial - etc.
Book keeping statements
Fiscal year

Shareholders
Elect Board of Directors
Board of Directors
Audit Committee
Sets company policy
Assists the BD
Declares dividends
Helps choosing the
Sets management compensation
auditor and monitors
Hires/fires management
management and auditor
Appoints audit committee
Management
Audit fee Auditor
Manages the company

There are multiple (competing) frameworks

Ø International level: IASB (International Accounting Standards Board)
(International Accounting Standards/International Financial Reporting Standards – IAS/IFRS)
Ø Regional level: European Union (European Directives)
Ø National level:
FASB (Financial Accounting Standards Board, US) (US GAAP)
ANC (Autorité des normes comptables, France) (French GAAP)
Rule-based (US, Continental Europe) vs. Principle-based (UK FRS, IFRS)

• Differences between accounting regimes can be significant:
Daimler Benz (DB) decided to cross list in the US in 1993
Under German GAAP, DB reported a profit of DM 615 million
Based on US GAAP, DB calculated a loss of DM 1,839 million
• There has been some progress since 1993… and there is a

general trend towards harmonization
• European Union – “IFRS as adopted by the EU”
• China, Australia, New Zealand, Japan: adopted National Accounting Standard described as
IFRS equivalents or similar to IFRS as adopted in the EU
• US: IFRS is allowed for foreign registrants but not allowed for US registrants; IASB-FASB
convergence process was significant but is now over

Consider the following separate events:
1. Co. A purchases a share issued by Co. B in September 2017, for €5. At the end of 2017 the value of
this share is €30. What are the implications on the financial statements prepared by Co. A as at
December 2017?
2. Raul’s Billiards, Inc. sells a pool table to a bar on December 31. The pool table was not paid for until
January 15th and it was not delivered to the bar until January 31. When and how are you going to
record this transaction?
3. A firm spends €60 mil. for Research and Development (R&D). Management expects huge revenues
from this investment. How would you record these costs?
This is why certain ‘rules of the game’ must be established, regarding

• the valuation of assets & liabilities
• the recognition of revenue & expenses
• the distinction between assets & expenses

Accounting principles
Ø Going concern
Ø Faithful representation (complete, neutral, free from error)
Ø Consistency (over time and space)
Ø Accrual accounting (vs. cash accounting)
Ø Prudence
Ø Monetary measurement unit convention
Ø Conventional measurement bases
Historical cost
Fair value

HISTORICAL COST
• Financial accounting is still largely based on historical cost measurement
• Historical cost = acquisition/production cost of the item

• Historical consideration given
• Past cost needed to acquire an asset on the date of acquisition (the
cash-equivalent acquisition cost)
• Pros and cons

• Advantage: historical cost is relatively easy to determine and can be verified
• Disadvantage: subsequent to the date of acquisition, the continued reporting of
historical cost based values does not reflect any changes in the market value

FAIR VALUE
• Fair value can be equated to current market value

• Fair value is often used as a measurement basis
• where there is no observable monetary transaction from which the historical cost can be
taken
• to allocate value between different components of a transaction
• for financial assets and liabilities in general
• Fair value accounting better reflects risks and value of financial instruments
and informs about hidden profits and losses
• Fair value is not typically used for tangible assets under normal conditions

Companies around the world report their transactions using at the following main financial
statements
Ø the Statement of financial position, also called Balance Sheet, which reports on the origin
(liabilities or equity) and the use (assets) of the resources managed by the firm
Ø the Statement of profit or loss, also called Income Statement, which reports on the earnings
(revenues minus expenses) obtained during the period (financial performance); and
Ø the Statement of Cash Flows, which reports on the changes in the cash position of the firm;
comprises increases and decreases of cash and cash equivalents

Non current assets Equity
Intangible Capital
Tangible Earnings
Financial
SFP
Current assets Non current liabilities (Balance
Inventories
Sheet)
Receivables
Investments
Current liabilities
Cash
Operating Cash flow Statement Revenues SPL

Investing Cash flow of Cash - Expenses (Income
Flows Statement)
Financing Cash flow

Case Verdi – Summary

Cash Equipment Accounts = Accounts payable Bank loans Share capital Earnings Details of SE transactions
receivable

2 +60 +60
3 -125 +125
5 +180 -180
6 -101 -101 Salaries expense
7 -4 -4 Interest expense
8 +85 -85 Third party expense
9 -80 -80
10 -12 -12
Ending 68 125 70 5 48 150 60
balance
263 = 53 + 210

Case Verdi – SFP (Balance Sheet) as of December 31st
Assets Shareholders equity and liabilities

Non-current asset 125 Shareholders equity 210
Equipment 125 Share capital 150
Earnings 60
Current assets 158 Liabilities 53
Accounts receivable 70 Bank loans 48
Cash at bank 68 Accounts payable 5
Total assets 263 Total OE+L 263

Case Verdi – SPL (Income statement) during the year N
Total Revenues 250

Sales 250
Total Expenses 190

Third party service expense 85
Personnel expense 101
Interest expense 4
Income (Revenues – Expenses) +60

Case Verdi – Statement of cash flows during the year N
Cash received from clients +180
Cash paid to suppliers - 80
Wages paid -101
Operating cash flow -1
Acquisition of equipment -125
Investing cash flow -125
Capital contribution +150
Cash received from bank loans +60
Reimbursement of bank loan -12
Interest paid -4
Financing cash flow 194
Total cash flow 68
Cash beginning of the period 0
Cash end of the period 68

Key take-aways (1/2)
• Financial statements are linked and complement each other
• Accounting is NOT purely mechanistic

This activity, much as every other human activity, involves decision-making and subjectivity. This
is why we need rules and principles to:
(1) guide accountants and CFO’s choices,
(2) ensure a minimum level of consistency across firms.
• Accounting information is useful to internal and external users

Accounting is used in contracts, by competitors, investors, regulators etc.

Key take-away (2/2)
Cash ≠ profit
Cash collections (respectively, cash disbursements) differ from revenue (respectively, expenses)
Known as the accruals principle
It is critical that these distinctions be made when discussing the income statement versus the
statement of cash flows

MCQs
1. Only events with a monetary implication (potential impact on cash) must be recorded in financial accounting. Is this statement true or false?
a) True
b) False
2. Financial accounting has the great advantage of being completely objective, and thus leaves no room for subjectivity in decision-making. Is this
statement true or false?
a) True
b) False
3. Contracting long-term bank loans will affect:

a) operating liabilities (accounts payable);
b) financial liabilities;
c) shareholders’ equity;
d) retained earnings;
e) none of these
4. An example of an item that is not usually classified as a current asset is:

a) accounts receivable
b) inventory
c) equipment
d) cash
e) none of these

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Specialized Masters – Core Courses

Introduction to Financial Accounting

Course coordinator: Carlos RAMIREZ Course instructors: Catalin ALBU

ØRead the slides (theory) before each session

ØBe early for each session

ØRecommended : Respond and participate in class

ØEncouraged : Ask questions to clarify your doubts soonest possible

© MS Financial Accounting 2021-2022 2

Philosophy of the course - Why are you here?

Objectives of the course – What will you be able to do?

© MS Financial Accounting 2021-2022 3

© MS Financial Accounting 2021-2022 4

Class #3: Class #4: Class #5:

© MS Financial Accounting 2021-2022 5

© MS Financial Accounting 2021-2022 6

Accounting is the language of business

© MS Financial Accounting 2021-2022 7

Source: The Pathways Commission, American Accounting Association; see here

© MS Financial Accounting 2021-2022 8

Class #3: Class #4: Class #5:

© MS Financial Accounting 2021-2022 9

1. Why is financial accounting important?

2. The Business Equation (BE)

3. The process of producing financial statements

© MS Financial Accounting 2021-2022 10

What is financial accounting?

© MS Financial Accounting 2021-2022 11

Users of financial reporting information

accrued: cash is not transacted yet

Assets = Liabilities + Shareholders’ equity

short-term and long-term overdraft

tangible and intangible

© MS Financial Accounting 2021-2022 13

© MS Financial Accounting 2021-2022 14

a) A car bought to transport the fruits and canned products

b) Sugar bought for the jam but not yet paid

c) The jam not sold yet

d) Money in the bank account

f) Employees hired to produce the jam.

© MS Financial Accounting 2021-2022 15

Revenues and expenses impact shareholders’ equity

© MS Financial Accounting 2021-2022 17

1 +150 +150 Initial investment

Ending 150 150

© MS Financial Accounting 2021-2022 18

1 +150 +150 Initial investment

Ending 210 60 150

© MS Financial Accounting 2021-2022 19

1 +150 +150 Initial investment

Ending 85 125 60 150

© MS Financial Accounting 2021-2022 20

1 +150 +150 Initial investment

Ending 85 125 250 60 150 250

© MS Financial Accounting 2021-2022 21

Tr. # Assets = Liabilities + Shareholders’ equity

1 +150 +150 Initial investment

Ending 265 125 70 60 150 250

© MS Financial Accounting 2021-2022 22

Tr. # Assets = Liabilities + Shareholders’ equity

1 +150 +150 Initial investment

355 = 145 + 210

© MS Financial Accounting 2021-2022 23

Tr. # Assets = Liabilities + Shareholders’ equity

© MS Financial Accounting 2021-2022 24