11. Conclusions

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From the course by IESE Business School

Accounting: Principles of Financial Accounting

592 оценки

IESE Business School

Accounting: Principles of Financial Accounting

592 оценки

Course 1 of 5 in the Specialization Foundations of Management

Financial Accounting is often called the language of business; it is the language that managers use to communicate the firm's financial and economic information to external parties such as shareholders and creditors. Nobody working in business can afford financial illiteracy. Whether you run your own business, work as a manager or are just starting your career, you want to understand financial information and be able to interact with accountants, controllers, and financial managers. You want to talk business! This course will provide you with the accounting language's essentials. Upon completion, you should be able to read and interpret financial statements for business diagnosis and decision-making. More importantly, you will possess the conceptual base to keep learning more sophisticated accounting and finance on your own. Do not forget that, as with any other language, becoming proficient with accounting requires constant practice.

From the lesson

Week 4: Accrual Accounting

By using accrual accounting we can measure performance when a financial transaction takes place, even if no cash has actually changed hands. In this final session, we'll discuss the difference between accrual and cash accounting and also read and interpret a real enterprise's financial statements. Course objectives: By the end of the session, you will be able to handle numerous transactions for the purposes of financial reporting, and understand the advantages of accrual accounting.

1. Introduction to Week 42:07

2. Recap of Week 35:47

3. Accrual accounting vs. cash accounting5:02

4. Measuring performance with accrual accounting6:24

5. A few examples: prepaid insurance, accrued interest and advances from customers7:12

6. Performance evolution of the Campus Bookstore I8:12

7. Performance evolution of the Campus Bookstore II7:15

8. Reading and interpreting real financial statements I7:52

9. Reading and interpreting real financial statements II4:20

10. Advanced topics you can explore on your own6:47

11. Conclusions6:14

Meet the Instructors

Marc Badia
Assistant Professor
Accounting and Control

[MUSIC]

Welcome to the last video of this course.

If you are still here with me, first of all, thank you for being so patient.

And second, congratulations, you did a great job.

So in this last video what we want to do is a little wrap-up of all the course.

Let me start with accounting.

We said accounting is the process that records financial transactions,

economic events that take place in a firm.

It classifies them in different accounts and it reports them in summaries,

in financial statements.

So accountants do journal entries in order to record each one of these transactions.

So in those journal entries they indicate which account will change and how much.

And all these journal entries are a part of the journal,

one of the accounting books.

As I said, these different journal entries affect different accounts, and so

we classify all those transactions into different accounts.

And all these accounts together are in a book called a ledger.

Actually, in the course we have been using three accounts, two accounts for

each one of the transactions.

Finally, at the end of the year,

at the end of the period, companies make a summary of all these numbers.

And they use the three main financial statements, the balance sheet,

the income statements and the cash flow statements.

All these financial statements are reported every year to the shareholders

in the annual report.

Precisely the goal of this introductory course was that you learn how to read and

interpret these financial statements.

And in order to do that, it was very important to learn the accounting process.

That is, how do these transactions affect the financial statements?

And second, by reading the financial statements

try to understand the underlying business of the company.

So the three main financial statements that we have introduced are the balance

sheet, and we said the balance sheet is a picture with everything.

So the balance sheet is the summary with all the sources of capital in the company.

That's owners' equity and liabilities.

And here you'll find the capital contributed by the shareholders in

the beginning, the profits that are retained in the business, so

these are the resources generated by the same business.

You have here bank loans, you have the financing from the suppliers, and so

on and so forth.

So these are the sources of capital.

On the other side of the summary you have the uses of capital.

How did we use the sources of capital?

And so we have invested in different assets.

And on the assets side you have current assets, which are assets that are either

cash or they're going to turn into cash in the short run,

such as accounts receivable that we expect to collect from customers or

inventories that we expect to sell and collect.

We also have noncurrent assets.

These are long-term investments that are in the company for the long run,

such as furniture and equipment, as we saw here, buildings, land, machinery, etc.

By construction the total amount of assets has to be equal

to the total amount of owners' equity and liabilities.

Why? Because we are talking here about the same

pie sliced in two different ways.

On the right-hand side we slice it from the point of view of

where is the money coming from.

On the left-hand side we slice it from the point of view of where is the money going,

where is it now.

So in order for this equality, this basic accounting equality to hold,

in every single transaction at least two accounts are involved.

So if there is one asset that increases, maybe another asset will decrease, or

maybe a liability will increase.

But what is clear is that after each transaction the basic accounting equality,

assets equal owners' equity plus liabilities, has to hold.

The next thing we said is the balance sheet is great.

It gives a picture of the company at a point in time.

It tells us about the financial position of the company.

However, the only thing that we see here on the balance sheet is the ending balance

of each one of the accounts.

What if we want to learn more about some of these specific accounts?

And so we said, well, we're very interested in the profit and

loss account, which is part of retained profits.

So in order to analyze the profit and loss account, we prepared the income statement,

which is the second financial statement that talks about profitability.

Remember, the profit is the increase in the shareholders' net worth thanks to

the operations.

So if you are selling at a price higher than the cost of purchase, we are creating

a profit here, and that's money that belongs to the shareholders of the firm.

Finally we said, okay, there is another very important account on the balance

sheet that we want to learn more about, and that's cash.

We could be very profitable, but if we run out of cash, we would be out of business.

And so we need some other financial statement to analyze the change in cash

over the period.

In this case, we're not talking about the picture,

we're talking about the movie of what happened during the year with cash.

And so we introduce the cash flow statement using the direct method.

The only thing that the cash flow statement does is to

analyze the generation and consumption of cash in the year.

So it takes the cash tier count, all the cash payments and receipts, and

classifies them in three different groups, cash flow from operation activities,

cash flow from investing activities, and cash flow from financing activities.

All these cash flows explain the total change in cash for the year.

So these are the three main financial statements that companies report, and

with them you can have a more complete picture of the performance of a business.

And remember, as important as information you can extract from these financial

statements are the questions they will raise.

Great, we made it to the end.

Thank you very much for sharing this learning process.

I hope that this course helped you to get the basics of accounting so

that now you can continue this adventure on your own,

learning more advanced topics in accounting and especially applying all

this knowledge to real life, to your business, to the company you work for, or

as someone who wants to analyze companies to invest in them maybe.

So again, thank you very much.

I hope to see you in the future.

And please, I encourage you to keep learning accounting.

[MUSIC]

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