COMM1140 Financial Management

Week 1
Introduction to Financial Management

Dr. Conor Clune

Senior Lecturer, UNSW Business School

General housekeeping:
• You must enable audio to listen to the lecture
• Use the chat channel to ask questions or make a comment
• If you have poor internet, turn off your video
• Your lecture will begin at 6 pm
Learning Objectives
At the end of this topic, you will be able to:

1. Define Financial Management

2. Understand who uses accounting information
3. Understand how accounting information is presented (Balance
sheet, Income statement and Cash-flow statement).

4. Understand the accounting equation and accrual accounting

LO1. What is financial management?
Financial management is the process of planning, organizing, controlling and
monitoring financial resources with a view to achieve organizational goals and
objectives. The primary objective of financial management is to maximise
shareholder value through appropriate resource utilization and decision-making.
 2021 Curriculum
Year 1 – Integrated First Year Optional
(IFY) Year 2/3
Honours year *

Business Management

myBCom First Year Portfolio

• Financial Management

myBCom Graduate Portfolio

• Organisational Resources Major (48 UOC) Thesis
• Value Creation
• Data, Insights and Decisions (24 UOC)
myBCom Blueprint

Business Ecosystem
•
•
Business Decision Making
Global Business Environments
Free electives/second major Advanced
Course
work
Skills and Capabilities Mandatory WIL (6
UOC)
Final year synthesis (24 UOC)
• Evidence-Based Problem Solving (0 – 6 UOC)
• Innovation and Collaboration in
Can be met with major Gen Ed
Choice between 6 UOC
elective, free elective, (12 UOC)
Business options 0 UOC options, all
GenEd or Synthesis, or
meeting set criteria
from 'other' double
[* for high achieving
students]
myBCom
LO1. What is financial management?
Financial management is the process of planning, organizing, controlling and
monitoring financial resources with a view to achieve organizational goals and
objectives. The primary objective of financial management is to maximise
shareholder value through appropriate resource utilization and decision-making.

In this course, we study important processes organizations implement to manage

and control profitability, expenses, cash, investments and credit.

The integrated approach means the course draws on expertise from accounting,
finance and tax.
Why is financial management important to study?
• Financial literacy is a key life skill;

• Necessary whether you plan to start your own business, work in a

company, in Government or in an NGO;

• Lays important foundations to pursue our most popular majors –

accounting and finance;

• Accounting and finance decisions have implications on all aspects of

business operations (such as Marketing, Management, Tax, Information
Systems, Actuary) and vice-versa.
Accounting and Financial Management
Accounting is the process of identifying, measuring, recording and
communicating economic information to assist users to make decisions.

Why is accounting an important part of financial management?

• Accounting is the language of Business
– Literacy: e.g. accounts receivable, prepayment, debit/credit, creditor,
profit, loss, liquidity, solvency.
– Practice: audit, financial statements, income statement, balance sheet.

• Accounting helps present, analyze, and interpret company

performance
– Investor: How is a company performing?
– Media: Understand discussion of financial information in the mainstream
media
 See Online
Finance and Financial Management
Content
Finance is a function that examines how companies (and other entities) source funding
and informs how that money is invested. While there are many areas of finance, there are
two major ones:

1. Corporate Finance: which focuses on an entity and its management

• Which projects to invest in? How to finance operations? How to pay out
earnings?
2. Investments/Asset Pricing: which focuses on the view of the investor
• What are assets/securities worth? How risky are they? How to form portfolios?

Why is finance an important part of financial management?

The primary objective of financial management is to maximise shareholder value through
appropriate resource utilization and decision-making. Finance plays a key role helping
organisations what to spend, where to spend and when to spend.
 Will be
discussed in
The investment decision COMM1180
• A corporation first determines the assets in which it will invest funds
according to organisational objectives.
• Competing investment alternatives should be evaluated on the basis
of shareholder wealth maximisation, taking into accounts constraints
on financial, physical and managerial resources.
• Two important measures used to quantify the contribution of an
investment to shareholder wealth and are used as the basis of
decision rules whether to invest or not:
1. Net present value (NPV)
2. Internal rate of return (IRR)
 Will be
discussed in
The financing decision COMM1170
• The financing decision concerns the capital structure used to fund the
firm’s business activities.
• The financial objective of a corporation is to maximise return of the
shareholders, subject to an acceptable level of risk for shareholders.
• Shareholder returns are generated from the net cash flows of the business
(what is left over when all bills are paid).
• Risk is the uncertainty or variability of expected cash flows derived from:
• business risk: product markets, competition, customers, legislation
• financial risk: interest rates, exchange rates, credit risk of
counterparties, liquidity, access to financing, ability to absorb losses
 Will be
discussed in
Tax and Financial Management Week 10
A tax is a compulsory financial charge, or some other type of levy imposed on a taxpayer,
by a governmental organization in order to fund government spending and various public
expenditures.

Why is tax important in the context of financial management?

Companies are responsible for collecting and paying several forms of tax, including
corporate tax on profits, GST on product sales, income tax and payroll tax on employee
wages etc.

A failure to pay, along with evasion of or resistance to taxation, is punishable by law.

Key accounting concepts discussed in the course show how accounting and tax are inter-
connected, along with the concept of internal control (week 5) and responsible financial
management (week 10).
 The intersection of Accounting, Finance and Tax

Financial Management
side:
• Investing/budgeting,
financing & payouts,
Working Capital
management Financial Accounting side:
- Accounting, controlling, costing
- Tax management
Learning Objectives
At the end of this topic, you will be able to:

1. Define Financial Management

2. Understand who uses financial information
3. Introduction to how accounting information is presented (Balance
sheet, Income statement and Cash-flow statement).

4. Understand the concept of accrual accounting.

LO2. Users of financial information
Remember: Accounting is the process of identifying, measuring, recording and
communicating economic information to assist users to make decisions.

Accountants are responsible for the preparation and presentation of

financial information to a range of users

External Users Banks

Owners and other stakeholders

Investors
Internal Users
Shareholders Users within a Company

Trade Unions
Board of Directors
Creditors Managers
Employees
Tax Office
Media

Students Governments
Users and their needs
User Type of information
Management Profitability of different divisions
Bankers Determine credit rating
Shareholders Prospect of future dividends
Suppliers Determine ability to pay on time
Tax Office Calculate profit based on tax law
Trade Unions Profit since last enterprise agreement
ASIC Agreeing listing price on stock
exchange
 What are the different types of information in
accounting?

Will be • Financial accounting focuses on the provision of information to users

discussed in external to the enterprise.
this course
• This information is presented in the financial statements.
Will be
discussed in • Management accounting focuses on the provision of information to
COMM1170 & users within the enterprise (to aid in operational planning and control
COMM1180 decisions).
Will be
discussed in
• Social and environmental accounting focuses on the provision of non-
week 10 financial information to users external to the enterprise.
 Accounting System
Accounting System

Will be Management
Management
ManagementAccounting
Accounting
Accounting Financial
Financial
FinancialAccounting
Accounting
Accounting Social
Social Accounting
Accounting
discussed in Detailed
Detailed
Detailedplans
plans
plansand
and
andcontinuous
continuous
continuous Periodic
Periodic
Periodicfinancial
financial
financialstatements
statements
statementsand
and
and Periodic
Periodic
disclosures
disclosures
on on
social
social
and
COMM1170 & performance
performance
performancereports
reports
reports related
related
relateddisclosures
disclosures
disclosures and
environmental
environmentalperformance
performance
COMM1180
Internal decision makers
External decision makers
Help managers make
Investors, creditors, supplies, customers
decisions

Reporting
ReportingStandard:
Standard: Reporting Standard: Reporting Standard:
None
None Set by AASB (GAAP) GRI or IIRC

Verification: Reporting Standard:

Verification:
None but sometimes Non-Mandatory Audit
Mandatory Audit
occurs

Covered in Covered in
ACCT2511 ACCT3625
What is an annual report?

Glossy magazine that contains a lot of descriptive information about the

company and the three key financial statements, together with a wide
range of additional information about the company provided in the notes.

Where do you get it from?

• Company websites
• Stock exchanges
For example,
What accounting information is in an annual report?

 What is your estimate for the total CEO salary of Woolworths for the year
ended 30 June 2020?

1. Under $1,000,000
2. $1,000,000 - $5,000,000
3. $5,000,000 - $10,000,000
4. More than $10,000,000
 Kahoot!
Today’s learning objectives:

At the end of this topic you will be able to:

1. Define Financial Management

2. Understand who uses financial information
3. Introduction to how accounting information is presented
(Balance sheet, Income statement and Cash-flow statement).

4. Understand the concept of accrual accounting.

LO3. Key financial statements
 Balance sheet
• Financial position of an enterprise at a particular point in time.
– Sometimes referred to as the Statement of Financial Position
• Financial position: Enterprise’s set of financial resources and obligations at a
point in time
• What are the entity’s resources and how were they financed?
 Income statement
• Financial performance of an enterprise over a period of time.
• Financial performance: Generating new resources from operations over a
period of time
• Has the entity used its resources efficiently and effectively?
– Sometimes referred to as the Profit and Loss Statement (P&L)
 Cash flow statement: (To be covered in week 8)
• Cash inflows and outflows over a period of time.
 Statement of Changes in Equity (Not covered in COMM1140) and Notes to the
financial statements (details how the statements were prepared)
Introduction to the Balance Sheet

The balance sheet reports the financial position of an entity at a point in

time.

Jan 1 2018 Dec 31 Dec 31 Dec 31

2018 2019 2020
Balance Balance Balance
Sheet Sheet Sheet

Used to assess financial structure and ability to pay debt

Balance sheet

Three main elements:

 Assets
• Resources - they will benefit the company this year (current) or in future years
(non-current)
• e.g., cash, property, equipment, inventory
 Liabilities
• What the company owes
• e.g., accounts payable, loan payable
 Equity (net assets)
• What belongs to the owners, the residual i.e. what is left after liabilities are
taken care of e.g., share capital and retained profits
Balance sheet

 Assets are due to debt or equity.

 The balance sheet shows resources (assets) and claims on those resources (liabilities
and equity) at a point in time.

 We can represent this with the accounting equation:

Assets = Liabilities + Equity

Resources Sources

 This will be very important to us in later weeks when we consider double-entry book
keeping
 There are always two aspects of a transaction
Example

A company purchased a one-bedroom apartment for $500,000 on 1/7/2018 and rented it

to tenants.
Finance source: cash of $100,000, borrowing from bank $400,000 (maturity 20 years,
principal will be paid at the end of maturity).
Revenue (cash) $400/week, interest expense (cash) $200/week, tax expense (cash)
$1000/year.
Assume 52 weeks per year and no depreciation.
How does the purchase of the apartment impact on the accounting equation?
Assets = Liability + Equity
(Apartment) 500,000 – 100,000 (Cash) = 400,000 (liability)
400,000 = 400,000
Consolidated Balance Sheet – Woolworths group (2020)
Note: Consolidated financial statement

Financial statements that factor the holding company (parent

company)'s subsidiaries into its aggregated accounting figure.
 A subsidiary is a company controlled by parent company which has the power, directly
or indirectly, to govern the financial and operating policies of an entity so as to obtain
benefits from its activities.
 Intragroup balances, and any unrealised gains and losses or income and expenses
arising from intragroup transactions, are eliminated

It shows how the holding company is doing as a group. The consolidated

accounts should provide a true and fair view of the financial and operating
conditions of the group.
 Will be
discussed in
For example: ACCT2542

Woolworths group

• Woolworths limited
• Countdown
• BWS
• BigW
• Caltex
Income Statement

 Shows the results of business operations over a specific time period

 Reports revenues earned, and any expenses incurred
 Revenue: inflows of economic benefits that increase owner’s equity
 e.g., sales revenue, service revenue, fees earned
 Expenses: Use or loss of economic benefits that decrease owner’s equity.
 Incurred when you use resources to generate revenue (matching principle)
 If revenues are greater than expenses, there is a net profit
 If revenues are less than expenses, there is a net loss
Consolidated Income Statement – Woolworths group (2020)
Income Statement

Revenues & Expenses are recognised when an economically meaningful event has
occurred
 This is called Accrual Accounting
 It does not have to involve cash!

Example
You receive a telephone bill dated 20 December 2020 for $120 from Vodafone. You are
given 30 days to pay this bill. You pay on 15 January 2020. In what period do Vodafone
record the sale transaction? Assume Vodafone’s year end is 31 December 2020.
 Recorded as Revenue for Year Ended 31 Dec 2020?
 Recorded as Revenue for Year Ended 31 Dec 2021?
Statement of cash flows

Statements of cash flows provide details of movements in an entity’s cash

balance over a specific time period.

The cash flows are normally categorised into:

• operating activities: main revenue producing activities
• investing activities: acquisition and disposal of long term assets
• financing activities: equity capital and borrowing
Consolidated Cash Flow Statement – Woolworths group (2020)
 We discuss cash
Why is the Cash Flow Statement Important? flows in Week 8

The cash flow report is important because it informs the

user of the business cash position. For a business to be
successful, it must have sufficient cash at all times. It
needs cash to pay its expenses, to pay bank loans, to pay
taxes and to purchase new assets.

Accrual accounting means profit does not equal cash.

Cash generated usually is dependent on the company life-
cycle
 We discuss cash
Why is the Cash Flow Statement Important? flows in week 8

Consider the Business Life Cycle:

We can’t analyze business performance solely based on profit.
Today’s learning objectives: Kahoot!

At the end of this topic you will be able to:

1. Define Financial Management

2. Understand who uses financial information
3. Introduction to how accounting information is presented
(Balance sheet, Income statement and Cash-flow statement).

4. Understand the concept of accrual accounting.

LO4. Accrual vs. Cash Accounting

An income statement reports revenues and expenses

 Prepared using accrual accounting

A cash flow statement reports cash inflows and outflows

 Prepared using cash accounting

Lets consider a question:

• Assume a company sells $250,000 worth of inventory during the year. $100,000 was for cash, the
reminder was on credit. $50,000 remains owed from customers at the end of the year. The inventory
sold cost $120,000, of which $110,000 has been paid for by the company. The remainder will be paid
next year.

• Calculate profit according to accrual accounting and cash accounting.

Accrual vs. Cash Accounting

• Accrual accounting includes the impact of transactions on the financial

statements in the time periods where revenues and expenses occur rather
than when the cash is received or paid.

• Cash accounting only accounts for revenues and expenses when cash is
paid or received.

Hint:
Always prepare an income statement and balance sheet under accrual
accounting. But be careful with MCQs as to whether we ask you to use
accrual or cash accounting. If we don’t outline which approach to use,
always assume accrual accounting!
A Key objective for this session (and the coming
weeks): understand the Accrual concept
Consider how accrual accounting impacts on how we record transactions
on the accounting equation:
- We buy a building worth $700,000 for cash?
- We buy a car worth $50,000 on credit?
- We buy inventory worth $25,000 and have 30 days to pay our supplier?
- We pay our supplier for inventory purchased last month?
- We receive cash worth $40,000 from a customer for a sale recorded last
month?
Take away and coming up…next week!

• Accounting equation and accrual accounting (revisited)

• Balance Sheet
 Assets
 Liabilities
 Shareholders’ equity
• Income Statement
 Revenue (flow of income generated by selling goods or services)
 Expense (flow of expenses incurred in providing the goods or services for sale)
COMM1140 – What’s next?
Part One: Foundations of Financial Management
Week 1 – Introduction to financial management
Week 2 – Measuring & Evaluating Financial Position & Financial
Performance
Week 3 – Recording Business Transactions – part one
Week 4 – Recording business transactions – part two
Week 5 – Audit and internal control
Part Two: Application of key concepts
Week 7 – Financial statement analysis – part one
Week 8 – Financial statement analysis – part two
Part Three: Integrating financial management in Organisations
Week 9 – Finance and capital markets
Week 10 – Responsible Financial Management
What you I do for the rest of the week?
Week 1:
- Listen to lecture – complete, good job!

- Complete tutorial questions (available on Moodle) and make sure you

submit them on Moodle if you are in an online tutorial (only)!

- Tune-in to summation video on Friday afternoon to wrap up the

week. Don’t forget to post questions to the Forum on Moodle by early
Friday morning.

- Solutions to all tutorial activities will be posted on Friday evening

after all tutorials are complete for the week