Lesson 5 1

Course : BUS1100E Introduction to Business

Lecturer : Dr Tee Mcxin

Source: Ebert, R. J. & Griffin, R. W. (2020) Business Essentials (12th ed.). Pearson Education.
▪ Understand the difference between financial and
managerial accounting.

▪ Describe the three basic financial statements and

show how they reflect the activity and financial
condition of a business.

▪ Describe the various ways that firms raise capital

and identify the pros and cons of each method.

▪ Explain how to build financial plan.

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 ▪ Financial Accounting: field
of accounting concerned with
external users of a company’s
financial information.

▪ Managerial (Management)
Accounting: field of
accounting that serves
internal users of a company’s
financial information.
Source: https://resources.tallysolutions.com/us/wp-content/uploads/2021/08/financial-
accounting-vs-managerial-accounting-difference-definition.jpg
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 ▪ Financial Statement:
any of several types of
reports summarizing a
company’s financial
status to stakeholders
and to aid in
managerial decision
making.

Source: https://st2.depositphotos.com/4428871/7729/i/950/depositphotos_77293918-stock-photo-financial-
statements.jpg

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▪ Balance Sheet:
financial statement
that supplies detailed
information about a
firm’s assets,
liabilities, and owners’
equity.

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Types of assets:
1. Current Asset: asset that can or will be converted
into cash within a year.
▪ Liquidity: ease with which an asset can be
converted into cash.

2. Fixed Asset: asset with long-term use or value, such

as land, buildings, and equipment.
▪ Depreciation: accounting method for
distributing the cost of an asset over its useful life.

3. Intangible Asset: nonphysical asset, such as a

patent or trademark, that has economic value in the
form of expected benefit.
▪ Goodwill: amount paid for an existing business
above the value of its other assets.
Source:
https://cdn.corporatefinanceinstitute.com/assets/ 6
types-of-assets-1024x575.jpeg
 Types of liabilities and equity:
1. Current Liability: debt that must be
paid within one year.
▪ Accounts Payable (Payables):
current liability consisting of bills
owed to suppliers, plus wages and
taxes due within the coming year.
2. Long-Term Liability: debt that is not
due for at least one year.
3. Shareholders’ equity:
▪ Paid-In Capital: money that is
invested in a company by its
owners.
▪ retained Earnings: earnings
Source: retained by a firm for its use rather
than paid out as dividends
https://www.investopedia.com/thmb/CaCxK01Pf6kZSOwQbWZumDdy8IU=/3000x1687/s
mart/filters:no_upscale()/balancesheet.asp-V1-5c897eae46e0fb0001336607.jpg

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▪ Income Statement
(Profit-and-Loss
Statement): financial
statement listing a firm’s
annual revenues and
expenses so that a
bottom line shows
annual profit or loss.

▪ Profit(or Loss) =
Revenues – Expenses

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1. Revenues: funds that flow into a business
from the sale of goods or services.
2. Cost of revenues: costs that a company
incurs to obtain revenues from other
companies.
▪ Cost of goods sold: costs of obtaining
materials for making the products sold
by a firm during the year.
3. Gross Profit: preliminary, quick-to-
calculate profit figure calculated from the
firm’s revenues minus its cost of revenues
(the direct costs of getting the revenues).
Source: https://blog.mint.com/wp-content/uploads/2020/01/HEADER-
3.jpg?w=653&h=352&crop=1 9
4. Operating Expenses: costs,
other than the cost of revenues,
incurred in producing a good
or service.
5. Operating Income: gross
profit minus operating
expenses.
6. Net Income (Net Profit or Net
Earnings): gross profit minus
operating expenses and
income taxes.
Source: https://youberelentless.com/wp-
content/uploads/2018/11/what-is-annual-income.jpg
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▪ Statement of Cash
Flows:
financial statement
describing a firm’s yearly
cash receipts and cash
payments.

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1. Cash Flows from Operations
▪ concerns main operating activities: cash transactions
involved in buying and selling goods and services.
2. Cash Flows from Investing
▪ reports net cash used in or provided by investing. It
includes cash receipts and payments from buying and
selling stocks, bonds, property, equipment, and other
productive assets.
3. Cash Flows from Financing
▪ reports net cash from all financing activities. It
includes cash inflows from borrowing or issuing
stock, as well as outflows for payment of dividends
and repayment of borrowed money.

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Source: https://capital.com/files/imgs/glossary/750xx/5-Cash-flow_1.jpg
Budget: detailed statement of
estimated receipts and
expenditures for a future
period of time.

▪ Although that period is

usually one year, some
companies also prepare
three or five-year budgets,
especially when considering
major capital expenditures.
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 Secured Loans for Equipment
▪ Secured Loan (Asset-Backed Loan): loan to finance an asset,
backed by the borrower pledging the asset as collateral to the
lender.
▪ Collateral: asset pledged for the fulfillment of repaying a loan.
▪ Loan Principal: amount of money that is loaned and must be
repaid.
▪ Interest: fee paid to a lender for the use of borrowed funds;
like a rental fee.
▪ Annual Percentage rate (APr): one-year rate that is charged
Source: https://pix4free.org/photo/6443/secured-
loan.html
for borrowing, expressed as a percentage of the borrowed
principal.
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Working Capital and Unsecured Loans from Banks
1. Working capital = Current assets - Current liabilities
2. Unsecured Loan: loan for which collateral is not required.
▪ In many cases, the bank requires the borrower to maintain a
compensating balance; the borrower must keep a portion of the
loan amount on deposit with the bank in a non-interest-bearing
account.

Source: https://miro.medium.com/max/1100/1*vtlcZP9KBNAgiZmHcMpsZg.png

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 Angel Investors and Venture
Capital
▪ Angel Investors: outside
investors who provide new
capital for firms in return for a
share of equity ownership.
▪ Venture Capital: private funds
from wealthy individuals seeking
investment opportunities in new
growth companies.
Source: https://assets.entrepreneur.com/content/3x2/2000/20151125052533-shutterstock-199610807.jpeg
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Sale of Corporate Bonds

▪ Corporate Bond: formal

pledge obligating the issuer
(the company) to pay interest
periodically and repay the
principal at maturity (a preset
future date) to the lender.

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Characteristics of Corporate Bonds:
▪ The bondholder (the lender) has no claim to
ownership of the company and does not receive
dividends.
▪ Interest payments and repayment of principal are
financial obligations; payments to bondholders have
priority over dividend payments to stockholders in
cases of financial distress.
▪ Bond Indenture: legal document containing
complete details of a bond issue.
▪ Maturity Date: future date when repayment of a
bond is due from the bond issuer (borrower).
▪ Face Value (Par Value): amount of money that the
bond buyer (lender) lent the issuer and that the
lender will receive on repayment.

Source:
https://www.schroders.com/pl/sysglobalassets/ 18
digital/insights/2020/hero-images/bond.jpg
▪ Financial Planning:
process of looking at
one’s current financial
condition, identifying
one’s goals, and
anticipating
requirements for
meeting those goals.

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THE END.

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