business management & entrepreneurship starter seminars
TRANSCRIPT
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Business Management &
Entrepreneurship
Starter Seminars
Introduction to Finance
November 2020
Marc GoldchsteinProf. dr. Marie-Laure Vandenhaute
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Main source
Prof. Dr. Marie-Laure Vandenhaute
Faculty of Social Sciences & Solvay Business school
Department of Business – Accounting and Auditing
• Office: VUB, Pl.5.3.54
• Tel: +32 (2) 629.84.24
• Email: [email protected]
‛Edited and presented by Marc Goldchstein
3/11/2015 | pag. 2
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Finance: why bother?
entrepreneurs need to understand the financial side of a company
‛entrepreneurs must master the basics of accounting‛what is a balance sheet, a profit and loss statement‛how are business transactions transated into accounting entries
‛entrepreneurs must be able to analyse the financial health of a company‛read and analyse a balance sheet, P&L statement‛entrepreneurs must be able to judge the financial viability of projects & companies‛companies fail when/because they are financially non-viable
‛entrepreneurs must understand the logic of professional investors‛how do they decide to invest, what are their expectations
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Course Outline
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I. Financial Accounting1. Role of Accounting
2. Legal Framework3. Understanding Financial Statements
4. Accrual Accounting
5. Selected Topics6. Financial Statement Analysis
II. Tax Basics
III. Management Accounting
IV. Investing in growth-oriented startups
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3/11/2015 | pag. 5
Course Outline
I. Financial Accounting1. Role of Accounting 2. Legal Framework3. Understanding Financial Statements4. Accrual Accounting5. Selected Topics6. Financial Statement Analysis
II. Tax Basics
III. Management Accounting
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EventAccountant’s analysis and
recording
Financialstatements Users
Accounting - a process of identifying, recording,summarizing, and reporting economic information(transactions) to decision makers in the form offinancial statements
Definition
1. Role of AccountingLanguage of Business
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Accounting information is useful to anyone who makes decisions that have economic results
= parties who are interested in the activities of the business because they’re affected by them (stakeholders / users)
• Investors / Shareholders want to know if a company is a good investment with adequate returns
• Creditors (banks/suppliers) want to know if they should extend credit, how much to extend, and for how long
• Clients want to know if they can rely on proper after sales service.
• Management wants to know if they perform well
• Others (e.g. employees, unions, competitors…)
• Government (tax authorities; national statistics)
1. Role of AccountingStakeholders
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2 important accounting movements:
Anglo-Saxon Continental
Europe
https://www.lifepersona.com/what-are-the-anglo-saxon-countries
1. Role of AccountingAccounting traditions – Some history…
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‛Anglo-Saxon
‛More equity-oriented
and
‛Neutral
‛(fair value)
Continental Europe
‛More debt-focused
‛and
‛Conservative
‛(historical price)
IAS/IFRSEuropean DirectivesNational GAAP (BE-GAAP, French GAAP, ...)
1. Role of AccountingThe Concept of Accounting Conservatism
Anglo-Saxon Continental
Europe
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‛The major distinction between financial and management accounting is theusers of the information:
‛Financial Accounting focuses on the specific needs of decision makersexternal to the organization, such as stockholders, suppliers, banks, andgovernment agencies (summarized information) to help them assess the firm’sfinancial performance.
‛Management Accounting serves internal users, such as top executives,management, and administrators within organizations (detailed information) tohelp them operate the business.
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Externally disseminated financial statements have to be drawn up by referenceto a set of accounting rules. These might be different depending on thejurisdiction.
1. Role of AccountingFinancial versus management accounting
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‛Accounting: a process of identifying,recording, summarizing, andreporting economic information todecision makers in the form of financialstatements.
Auditing: a process of examiningtransactions and financial statements.
1. Role of AccountingAccounting versus Auditing
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Stockholders
Board ofDirectors Auditor
Managers
• Corporate management is responsible for thepreparation of the financial statements. Theboard of directors, the link between ownersand managers, has the responsibility toensure that management acts in theinterests of the stockholders.
• Another way to solve the credibility problem isto introduce an honorable, expert third party.
ü The auditor examines the information thatmanagers use to prepare the financialstatements and provides assurancesabout the credibility of the statements(fair presentation and compliance withGAAP)
èunqualified opinionèqualified opinionèadverse opinion
ü These assurances should make theinvestors more comfortable about usingthe information to guide their investingactivity.
Elect
Appoint
1. Role of AccountingAccounting versus Auditing
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Course Outline
I. Financial Accounting1. Role of Accounting 2. Legal Framework3. Understanding Financial Statements4. Accrual Accounting5. Generally Accepted Accounting Principles (GAAP)6. Selected Topics7. Financial Statement Analysis
II. Tax Basics
III. Management Accounting
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2. Legal FrameworkA new Code of Companies and Associations (CCA)
Companies Associations
Distribution of profits
https://justitie.belgium.be/nl/themas_en_dossiers/vennootschappen_verenigingen_en_stichtingen/vennootschappen/vennootschap_1
No distribution of profits
Limited liability Limited liabilityUnlimited liability Unlimited liability
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2. Legal FrameworkA new Code of Companies and Associations
Limited liability
Minimum capital
More than one founder
Legal personality
socio-economic importance
All partersunilimited liable
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2. Legal FrameworkSole proprietorship versus company
Sole proprietorship• Easy to set up
• The income of your business ispersonal income, which is taxedat the (high) progressive ratesin the personal income tax.
• No clear separation between theindividual’s personal assets andthe assets owned by thebusinessà Personal liability!
• Simple Accounting
The Company• A separate legal personality (except for
the ordinary partnership ‘maatschap’)
• More administrative and legalformalities and obligations
• Assets belonging to the company canbe separated and assets belonging tothe businesspersonsà further distinction between limitedand unlimited liability companies.
• Your company's income is taxedseparately in the corporate income taxand you can optimise your personalincome from the company.
• Mainly double-entry accounting
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2. Legal Frameworkminimum legal capital requirements
§ Sole proprietorship : No minimum legal capital requirements
§ Limited liability company (BV/SRL):§ no minimum capital§ but:§ founders must provide enough financial means (capital, loans to conduct the
envisaged activities§ A detailed financial plan is required; its contents is laid down in the Code.
§ plan not publicly available, but can be consulted by the bankruptcy trustee in theevent that the BV/SRL becomes insolvent within three years of its incorporation
§ if the court finds that the founders clearly assembled insufficient meansfor normal operation of the BV/SRL for at least two years, the foundersmay be held liable for all or part of the uncovered liabilities.
§ Public limited liabilty company (NV/SA)§ The minimum subscribed share capital amounts to €61,500. At least one-fourth of the
total subscribed capital must be paid in upon incorporation, with a minimum of €61,500.
§ Shareholders are only responsible/liable up to their own contribution§ Must also have a financial plan
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2. Legal FrameworkBelgian Accounting Law
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§ According to the Code on Economic Law enterprises are required to have a bookkeeping system that corresponds with their size and nature.
§ Are now also subject to the accounting obligations:§ Any natural person carrying out a professional activity on a self-
employed basis in Belgium§ associations and foundations§ organisations without legal
§ Any ‘enterprise’ has to comply with the bookkeeping obligationsimposed by Belgian accounting law and to file its annual accountswith the Belgian National Bank§ some enterprises are exempt from this last obligation
§ Simplified accounting is allowed for small enterprises
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2. Legal FrameworkBelgian Accounting Law
§ Simple Accounting (Cash Accounting)
§ Purchases, Sales and Financial diary and an inventory – no standard form –Not to be deposited
§ Applies too Only possible in case turnover <0,5Mn, otherwise double-entry
accountingo Natural persons carrying out a professional activity on a self-employed
basis o VOF and CommVo Ordinary partnerships (Maatschappen)
§ Double Entry Accounting
§ Balance sheet, Income statement and Notes - standard form – To bedeposited and made public
o NV, BV, CV
§ Specific Accounting Rules
o a.o. associations, banks, insurance companies, hospitals,…
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§ Financial Statements of entities with legal personality consist of three parts
1. Balance Sheet2. Income Statement3. Notes
§ The CCA provides standard models of the annual accounts.§ A distinction must be made between
§ kapitaalvennootschappen (capital companies) (NV)§ kapitaalloze vennootschappen (no-capital companies) (BV and CV)
§ For both types of companies, three standard models apply depending on the sizeof the company:
• Complete standard form for ‘large’ companies and listed companies (VOL)• Abbreviated standard form voor de ‘small’ companies (VKT)• Micro standard form for ‘micro’ undertakings (MIC)
• as from 1 January 2020 the filing of annual accounts in PDF format will beaccepted
https://www.nbb.be/nl/balanscentrale/opmaking/modellen-van-de-jaarrekening
Content & lay-out are fixedaccording to a standard format
2. Legal FrameworkBelgian Accounting Law
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3 De Belgische
2019
2020
With capital(kapitaalvennootschap)
Without capital(Kapitaalloze vennootschap)
2. Legal FrameworkBelgian Accounting Law
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Sole proprietorshipand very small
companies(1)
Micro companies (2)
Small Companies(3)
Large and quotedcompanies
(4)
• Sales < € 500,000• Natural persons
carrying out aprofessional activity ona self-employed basis
• VOF and CommV• Ordinary partnerships
(Maatschappen)
Companies other thanthose mentioned under(1) which, irrespective oftheir legal form, do notexceed more than one ofthe following thresholds:
-Sales: €700,000-Assets: €350,000-Employees: 10
Companies other than thosementioned under (2) which,irrespective of their legal form,do not exceed more than one ofthe following thresholds:
-Sales: €9,000,000-Assets: €4,500,000-Employees: 50
Companies other than those mentioned under (1), (2) and (3)
Cannot be a parent company or subsidiary
Limited liability: the liability of the owner is limited to itsinvestment. In case of financial trouble the owners’ personal
assets are not subject to the creditors’ grasp.
Unlimited liability: owner is personnally liable for all of the liabilities of the entity.
The overrun of more than one of the thresholds applicable tomicro-undertakings and small companies shall only have animpact on the corporate qualification if it occurs during aminimum of two consecutive financial years
Criteria are not calculated on a consolidated basis anymore. Only the parent company will have to do so
2. Legal FrameworkBelgian Accounting Law
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Soleproprietorship and
very small companies
(1)
Micro companies (2)
Small Companies(3)
Large and quotedcompanies
(4)
Simple Accounting/ Cash Accounting
Purchase-,Sales-, and Financial diary
Annual accounts: no standard form
Not to be deposited
Annual accounts: Micro-schedule (similar toabbreviated standardform but with limitednotes)
To be made public (except VOF and CommV)
Social balance sheet is no longer part of the annual accounts, but still have to be submit to the NBB
Annual accounts: Abbreviated standard form
To be made public (except VOF and CommV)
Social balance sheet is no longer part of the annual accounts, but still have to be submit to the NBB
Annual accounts: Complete standard form
To be made public (except VOF and CommV)
Social balance sheet is no longer part of the annual accounts, but still have to be submit to the NBB, as well as a director’s report
Double-Entry (Accrual) AccountingBalance sheet, Income statement and Notes
2. Legal FrameworkBelgian Accounting Law
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Source: NBB (2018)
Micro Schedule Accounts deposited
at the National bank of Belgium
AbbreviatedAnnual
Accounts deposited
at theNational bank of Belgium
Full AnnualAccounts deposited
at theNational bank of Belgium
Total Annual
Accounts deposited
at theNational bank of Belgium
174,000
(41%)
226,000
(53%)
23,000
(6%)
423,000
(100%)
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+/- 150 à 200 listedcompanies
Micro + Small companies: 95% of the compaines
20172. Legal FrameworkBelgium
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2. Legal Frameworkwww.nbb.be
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2. Legal Frameworkwww.nbb.be/balanscentrale
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2. Legal Frameworkwww.nbb.be/balanscentrale
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2. Legal Frameworkwww.nbb.be/balanscentrale
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2. Legal Frameworkwww.nbb.be/balanscentrale
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2. Legal Frameworkwww.nbb.be/balanscentrale
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2. Legal Frameworkwww.nbb.be/balanscentrale
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2. Legal FrameworkAnnual vs. Consolidated accounts
A Subsidiary
B Parent
Annual accounts
Consolidated accounts
Annual accounts
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2. Legal Frameworkwww.data.be
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2. Legal FrameworkInternational
+/- 150 listed companies in Belgium
‛Financial Accounting Standards Board (FASB) - responsible for establishingGAAP in the United Stateshttp://www.fasb.org
‛International Accounting Standards Board (IASB) - an organization that isdeveloping a common set of international accounting standards (IAS/IFRS) to beused throughout the worldhttp://www.iasb.orghttp://www.iasplus.com
‛All European quoted companies are obliged to issue their consolidatedfinancial statements in conformity with IAS/
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IFRS is required for Listed (public) companies in more than 140 out of 166 worldwide jurisdictions
2. Legal FrameworkInternational
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When?
§ The statutory financial statements should be approved by theshareholders' meeting within 6 months after closing; and
§ filed at the Central Balance Sheet Office within 1 month after suchapproval.
§ ! Listed companies: 4 months after closing.
2. Legal FrameworkFiling of the financial statements
Research of Graydon 11-08-2009330.000 financial statements were deposited in 2008
Ø2/3 on timeØ1/3 too late
15.000 companies (5%) do not publish financial statements
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2. Legal FrameworkFiling of the financial stataments
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https://www.nbb.be/nl/balanscentrale/neerleggen/tarief/tarieven-voor-vennootschappen-2019
2. Legal FrameworkFiling of the financial stataments – Rates
in €
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Micro Companies Small non-listedcompanies
Large and listedcompanies
Micro Standard Form Abbreviated Standard Form Complete Standard Form
No director’s report No director’s report Director’s report
No auditor No auditor Auditor
1.
2.
2. Legal FrameworkDocuments to be filed with the annual accounts
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Course Outline
I. Financial Accounting1. Role of Accounting 2. Legal Framework3. Understanding Financial Statements4. Accrual Accounting5. Selected Topics6. Financial Statement Analysis
II. Tax Basics
III. Management Accounting
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3. Understanding financial statements
‛The primary questions about anorganization’s success that decisionmakers want to know are:
‛What is the financial picture of the organization on agiven day?
‛How well did the organization do during a given period?
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3. Understanding financial statements
‛The primary questions about anorganization’s success that decisionmakers want to know are:
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‛How well did the organization do during a given period?
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3. Understanding financial statementsComponents of financial statements
‛Accountants answer these primary questionswith some basic financial statements:
‛Balance sheet: shows financial position on a given day.
‛Income statement: shows performance over a given period.
‛Notes/Annexes to the financial statements.
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3. Understanding financial statementsThe Accounting Time Period
‛accounting time period• time period over which performance is measured
- At least once a year.- The most popular period: calendar year= 1/1-31/12- Alternative: a year that starts on a date other than December 31,
o usually at the low point in annual business activity.
‛Companies also prepare statements for interim periods, generallyon a half-yearly or quarterly basis.
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3. Understanding financial statementsBalance sheet
‛The balance sheet provides a snapshot of an entity’s financial position at an instant in time.
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Company XBalance Sheet
31 December 2013AssetsOwner’s Equity +
Liabilities
Long lived assetsLandEquipment
Current AssetsInventoryAccounts receivableCash
Total Assets
€ 16,2559,7556,500
€ 6,5652,3002,0402,225
€ 22,820
Owner’s equityCapital / Shareholder contributions
LiabilitiesLong-term DebtCurrent Liabilities
Accounts Payable Wages Payable
Total Liabilities & Owner’s Equity
€ 9,2559,255
€ 13,5655,800
3,7654,000
€ 22,820
In order of increasing liquidity In order of claim on assets
3. Understanding financial statementsBalance sheet
Account format
Resources of the firm (everything the firm owns)
Where is the money coming from?
Claims against the resources
Obligations (debts) of the business to outsiders (external)= first claim on the assets
Residual claim to assets (internal)
3. Understanding financial statementsBalance sheet
Assets always equal to Owner’s Equity + Liabilities
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3. Understanding financial statementsBalance sheet
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Balance Sheet31/12/X1
Assets Owner’s EquityLiabilities
Account format
Report format AssetsOwner’s Equity
Liabilities
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3. Understanding financial statementsBalance sheet
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3. Understanding financial statementsBelgian Standard Format
Assets
Company Formation expenses
Fixed assets Intangible assets Tangible fixed assets Financial fixed assets
Current assets Claims on more than a year Stocks and orders in progress Accounts receivable within one year Cash investments Liquid assets Deferred revenue
Total assets
Owner’s Equity + Liabilities
EquityCapitalRevaluation surpluses ReservesRetained earningsCapital grants
Provisions and deferred taxesProvisions for risks and costsDeferred taxes
DebtsDebts > 1 yearDebts ≤ 1 yearAccrued expenses
Total liabilities
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‛= ‘Uitgestelde opbrengsten’ en ‘toe te rekenen kosten’ (a.k.a. overlopenderekeningen)
§ costs or revenues that you already have this year, but that are related to the next financial year
§ Deferred revenue represents a prepayment by its customers for goods or services that have yet to be delivered. It is an asset on the balance sheet
§ Example: Pre-paid subscriptions
§ Accrued expenses are expenses a company knows it must pay, but cannot account for because it has not yet been billed for them. It is a liability on the balance sheet
§ examples: Salaries; interest; rent; commission and royalties; utilities; taxes
§ purpose: to ensure that all costs and revenues of the company are always allocated to the correct financial year
DEFERRED REVENUE AND ACCRUED EXPENSES
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14-11-2020 |
63
‛TOT HIER DEEL 2
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3/11/2015 | pag. 64
3. Understanding financial statementsBelgian Standard Format
Activa
I. OprichtingskostenVaste activaII. Immateriële vaste activaIII. Materiële vaste activaIV. Financiële vaste activaVlottende activaV. Vorderingen op meer dan
één jaarVI. Voorraden en bestellingen in
uitvoeringVII. Vorderingen op ten hoogste
één jaarVIII. GeldbeleggingenIX. Liquide middelenX. Overlopende rekeningen/
Uitgestelde opbrengsten
Totaal der activa
PassivaEigen vermogenI. InbrengII. HerwaarderingsmeerwaardenII. ReservesIV. Overgedragen resultaatV. KapitaalsubsidiesVoorzieningen en uitgestelde belastingenVII A. Voorzieningen voor risico’s en
kostenVII B. Uitgestelde belastingenSchuldenVIII. Schulden > 1 jaarIX. Schulden ≤ 1 jaarX. Overlopende rekeningen/ toe
rekenen kosten
Totaal der passiva
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75
NewCoBalance Sheet
31 December 2013AssetsOwner’s Equity +
Liabilities
Long lived assetsLandEquipment
Current AssetsInventoryAccounts receivableCash
Total Assets
€ 16,2559,7556,500
€ 6,5652,3002,0402,225
€ 22,820
Owner’s equityCapital / Shareholder contributions
LiabilitiesLong-term DebtCurrent Liabilities
Accounts Payable Wages Payable
Total Liabilities & Owner’s Equity
€ 9,2559,255
€ 13,5655,800
3,7654,000
€ 22,820
3. Understanding financial statementsBalance sheet
3/11/2015 | pag.
=75
3. Understanding financial statementsBalance Sheet
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Balance sheet equation:
Assets = Liabilities + Owners’ Equityor
Assets – Liabilities = Owners’ Equity
The ‘balance sheet equation’ basis for double-entry accounting
= recording method whereby at least two accounts are always affectedby each transaction.
3/11/2015 | pag.
An account = a summary record of the changes in a particular asset, liability or owners’ equity.
76
3. Understanding financial statementsBalance Sheet
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TRANSLATING THE START-UP OF A COMPANY IN ACCOUNTING TERMS
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For the following transactions in Year 1, please post theirimpact on the balance sheet, the income statement and thecash flow statement.
1. Entrepreneur invests €1,000 of capital in Newco to start operations2. Bank lends Newco €1,000 to help fund operation3. Newco purchases €100 of Property, Plant, & Equipment necessary to begin production4. Newco buys €100 worth of inventory on credit5. Newco pays wages of €100 to employees6. Newco sells one-half of its inventory for €200 to customers on credit
79
Case Study – NewCo
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80
NewCoBalance Sheet
31 December 2013AssetsOwner’s Equity +
Liabilities
Long lived assetsLandEquipment
Current AssetsInventoryAccounts receivableCash
Total Assets
€ 000
€ 0000
€ 0
Owner’s equityCapital / Shareholder contributions
LiabilitiesLong-term DebtCurrent Liabilities
Accounts Payable Wages Payable
Total Liabilities & Owner’s Equity
€ 00
€ 00
00
€ 0
NewCo Case StudyBalance sheet (Belgian Format)
80
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81
NewCoBalance Sheet
31 December 2013AssetsOwner’s Equity +
Liabilities
Long lived assetsLandEquipment
Current AssetsInventoryAccounts receivableCash
Total Assets
€ 000
€ 1,00000
1,000
€ 1,000
Owner’s equityCapital / Shareholder contributions
LiabilitiesLong-term DebtCurrent Liabilities
Accounts Payable Wages Payable
Total Liabilities & Owner’s Equity
€ 1,0001,000
€ 00
00
€ 1,000
NewCo Case StudyTransaction 1
Entrepreneur invests € 1,000.
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Case Study – NewCo
For the following transactions in Year 1, please post theirimpact on the balance sheet, the income statement and thecash flow statement.
Entrepreneur invests €1,000 of capital in Newco to start operations 2. Bank lends Newco €1,000 to help fund operation3. Newco purchases €100 of Property, Plant, & Equipment necessary to begin production4. Newco buys €100 worth of inventory on credit5. Newco pays wages of €100 to employees6. Newco sells one-half of its inventory for €200 to customers on credit
82
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83
NewCoBalance Sheet
31 December 2013AssetsOwner’s Equity +
Liabilities
Long lived assetsLandEquipment
Current AssetsInventoryAccounts receivableCash
Total Assets
€ 000
00
Owner’s equityCapital / Shareholder contributions
LiabilitiesLong-term DebtCurrent Liabilities
Accounts Payable Wages Payable
Total Liabilities & Owner’s Equity
€ 1,0001,000
00
NewCo Case StudyTransaction 2
2,0001,000
€ 1,000
€ 1,000€ 2,000
€ 2,000
Bank lends € 1,000.
€ 001,000
€ 1,000
€ 2,000€ 1,000
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For the following transactions in Year 1, please post theirimpact on the balance sheet, the income statement and thecash flow statement.
1. Entrepreneur invests €1,000 of capital in Newco to start operations 2. Bank lends Newco €1,000 to help fund operation3. Newco purchases €100 of Property, Plant, & Equipment necessary to begin production; pays cash4. Newco buys €100 worth of inventory on credit5. Newco pays wages of €100 to employees6. Newco sells one-half of its inventory for €200 to customers on credit
84
Case Study – NewCo
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85
NewCoBalance Sheet
31 December 2013AssetsOwner’s Equity +
Liabilities
Long lived assetsLandEquipment
Current AssetsInventoryAccounts receivableCash
Total Assets
0
00
Owner’s equityCapital / Shareholder contributions
LiabilitiesLong-term DebtCurrent Liabilities
Accounts Payable Wages Payable
Total Liabilities & Owner’s Equity
€ 1,0001,000
00
NewCo Case StudyTransaction 3
2,000
1,000€ 1,000
€ 2,000
€ 2,000 € 2,000
85
NewCo buys equipment worth €100, pays cash.
1,900
1000
€ 0€ 100
€ 1,900
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For the following transactions in Year 1, please post theirimpact on the balance sheet, the income statement and thecash flow statement.
1. Entrepreneur invests €1,000 of capital in Newco to start operations 2. Bank lends Newco €1,000 to help fund operation3. Newco purchases €100 of Property, Plant, & Equipment necessary to begin production4. Newco buys €100 worth of inventory on credit5. Newco pays wages of €100 to employees6. Newco sells one-half of its inventory for €200 to customers on credit
86
Case Study – NewCo
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87
NewCoBalance Sheet
31 December 2013AssetsOwner’s Equity +
Liabilities
Long lived assetsLandEquipment
Current AssetsInventoryAccounts receivableCash
Total Assets
0
0
Owner’s equityCapital / Shareholder contributions
LiabilitiesLong-term DebtCurrent Liabilities
Accounts Payable Wages Payable
Total Liabilities & Owner’s Equity
€ 1,0001,000
0
NewCo Case StudyTransaction 4
1,000€ 1,000
€ 2,000 € 2,000
87
1,900
100
€ 100
€ 1,900
NewCo buys inventory worth € 100, pay on credit.
0100€ 2,000
€ 2,100 € 2,100
0100
€ 1,100
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3. Understanding financial statements
‛The primary questions about anorganization’s success that decisionmakers want to know are:
‛What is the financial picture of the organization on agiven day?
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3. Understanding financial statementsBalance sheet and income statement
‛The balance sheet provides a snapshot of an entity’s financial position at an instant in time.
‛The income statement provides a moving picture of events over a span of time and explains the changes that have taken place between balance sheet dates.
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3. Understanding financial statementsBalance sheet and income statement
Balance sheet
31-12-2017
Balance sheet
31-12-2018
Balance sheet
31-12-2019
Incomestatement
2018
Incomestatement
2019
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3. Understanding financial statementsThe income statement (Anglo-Saxon format)
The income statement is used to show the revenues (sales) generatedand the expenses incurred over one financial year.
3/11/2015 | pag.
Revenue
Cost of goods Sold (COGS)
Cost of the inventory that a company sells
Operating expenses (Selling, General & Administrative expenses)
e.g. wages, rent, heating, telephone,…
Non-operating expenses e.g. interest expense
Net Income or Net Profit
Taxes
91
à Costs are primarily divided according to function
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DANIELS COMPANYIncome Statement
for the Year Ended December 31, 2015
Sales $98,600Expenses:
Cost of Goods Sold 30,500Wages expense 15,300Rent expense 12,000Utilities expense 6,500Depreciation expense 5,000
Total expenses 69,300Net Income $29,300
Single step income statement
92
3. Understanding financial statementsThe income statement: Single-step
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Net sales- Cost of Goods Sold COGS (materials & direct labor cost)
= Gross Profit- Operating expenses (selling, general, and administrative)
= Operating income (EBIT)+/- Non-operating net income (= from non-core business)
= EBT (Earnings before taxes)- Taxes
= EAT (Earnings after taxes)Extraordinary items (net of taxes)
= Net income
Multiple step income statement
93
3. Understanding financial statementsThe income statement: Multiple-step
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Balance Sheet 31/12/XX
Assets Owners’ equityCapital / Contributions
Retained earnings
3. Understanding financial statementsRetained earnings
Liabilities
100
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3. Understanding financial statementsRetained earnings
‛Retained income = additional owners’ equity generated by income or profits
• Revenues increase owners’ equity.
• Expenses decrease owners’ equity.
→ The Retained income of the company can be described as the
- cumulative lifetime earnings less its cumulative lifetime losses and dividends.- cumulative lifetime revenues less its cumulative expenses
Balance Sheet31/12/X1
AssetsCurrentLong Lived
LiabilitiesCurrent
Long termOwners’ equityCapital / COntirbutionsRetained earnings
Cumulative revenues
Cumulative expenses
-
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Balance Sheet1/1/X2
Assets Assets
Income statement 1/1/X2 – 31/12/X2
Revenues 1/1-31/12- Expenses 1/1-31/12
RE 1/1+ net income 1/1-31/12 – Dividends = RE 31/12
Owners’ equityCapital / ContributionsRE1/1
Liabilities
3. Understanding financial statementsRetained earnings: the link between the balance sheet and the income statement
Balance Sheet31/12/X2
Owners’ equityCapital / ContributionsRE31/12
Liabilities
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3. Understanding financial statementsStatement of Owner’s equity (Statement of retained income)
Retained income, January 1, 2017 $108,600
Net income for the year 2017 29,300Total $137,900
Dividends declared 10,000
Retained income, January 1, 2018 $127,900
Although dividends decrease retained income, they are nottreated as expenses: dividends are not necessary for the generation of revenue, they are the result of the revenue generation process!
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3. Understanding financial statementsA double test for any distribution to the shareholders in a BV
o New rules for the distribution of profits:
o The net assets test (nettoactieftest/ test d’actif net) : the distributionof net assets may not result in negative net assets for the company(asset – liabilities)
o The liquidity test (liquiditeitstest/test de liquidité): the distribution ofnet assets will not lead to the situation whereby the company would nolonger be able to pay the debts as they become due for a period of atleast twelve months.
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3. Understanding financial statementsIncome Statement Ablynx Prepared in accordance with
International Financial Reporting Standards (IFRS)
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3. Understanding financial statementsIncome Statement
Alarm bell procedure NV
Procedure must be followed when a company’s:
• net assets fall below½ of its share capitalà Board of Directors must convene a general shareholders’ meeting
within two months
à Board of Directors must compile a special report, to be submitted tothe general shareholders’ meeting, in which dissolution is proposed ora set of measures to redress company’s financial position
à Dissolution requires the approval of a 75% majority of those voting atthe general meeting)
à Non-compliance makes the directors liable
• net assets fall below¼ of its share capitalà the dissolution of the company requires only 25% approval
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3. Understanding financial statementsIncome Statement
follows the same rules as those of the distribution to shareholders:
* The net assets test: the company has negative net assets (asset – liabilities)* The liquidity test: the company is no longer able to pay the debts as they become due in 12 months
à As soon as either of these two circumstances arises, Board of Directors must convene a general shareholders’ meeting
à BoD must compile a special report, to be submitted to thegeneral shareholders’ meeting, in which a set of measuresto redress company’s financial position
à Only the general meeting can decide to dissolve the company.
Alarm bell procedure BV
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For the following transactions in Year 1, please post theirimpact on the balance sheet, the income statement and thecash flow statement.
1. Venture Capital firm invests €1,000 of capital in Newco to start operations2. Bank lends Newco €1,000 to help fund operation3. Newco purchases €100 of Property, Plant, & Equipment necessary to begin production4. Newco buys €100 worth of inventory on credit5. Newco pays wages of € 100 to employees6. Newco sells one-half of its inventory for €200 to customers on credit
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Case Study – NewCo
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111
NewCoBalance Sheet
31 December 2013Assets Owner’s Equity + Liabilities
Long lived assetsLandEquipment
Current AssetsInventoryAccounts receivableCash
Total Assets
€ 1000
100
1000
Owner’s equityCapitalRetained Earnings
LiabilitiesLong-term DebtCurrent Liabilities
Accounts Payable Wages Payable
Total Liabilities & Owner’s Equity
1,000
€ 1,1001,000
1000
Income Statement
Sales 0
Cost of Goods Sold 0
Gross Margin 0
(100)Selling, General, Admin
Operating Profit (100)
Interest Expense
Income Tax Expense
Net Income
Newco pays wages of €100 to employees
€ 2,000
1,900
€ 2,100
(100)
0
0
€ 1,000
€ 2,100
111
NewCo Case StudyTransaction 5
1,800
€ 1,900
€ 2,000
0(100)
€ 900
€ 2,000
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For the following transactions in Year 1, please post theirimpact on the balance sheet, the income statement and thecash flow statement.
1. Venture Capital firm invests €1,000 of capital in Newco to start operations2. Bank lends Newco € 1,000 to help fund operation3. Newco purchases € 100 of Property, Plant, & Equipment necessary to begin production4. Newco buys € 100 worth of inventory on credit5. Newco pays wages of € 100 to employees6. Newco sells one-half of its inventory for € 200 to customers on credit
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Case Study – NewCo
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113
NewCoBalance Sheet
31 December 2013Assets Owner’s Equity + Liabilities
Long lived assetsLandEquipment
Current AssetsInventoryAccounts receivableCash
Total Assets
€ 1000
100
Owner’s equityCapitalRetained Earnings
LiabilitiesLong-term DebtCurrent Liabilities
Accounts Payable Wages Payable
Total Liabilities & Owner’s Equity
1,000
€ 1,1001,000
1000
Income Statement
Sales 200
Cost of Goods Sold 50
Gross Margin 150
Selling, General, Admin
Operating Profit 150
Interest Expense
Income Tax Expense
Net Income
€ 1,900
1,800
€ 2,000
150
0
0
€ 900
€ 2,000
113
NewCo Case StudyTransaction 5
(100)
Newco sells one half of its inventory for €200 to customers on credit
020010050
€ 2,050
€ 2,150
50
€ 1,050
€ 2,150
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3/11/2015 | pag. 120
Course Outline
I. Financial Accounting1. Role of Accounting 2. Legal Framework3. Understanding Financial Statements4. Accrual Accounting5. Selected Topics6. Financial Statement Analysis
II. Tax Basics
III. Management Accounting
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4. Accrual AccountingAccrual Basis versus Cash Basis
The most common ways of measuring income are the accrualbasis and the cash basis.
* Cash basis: recognizes the impact of transactions only when cash is received or disbursed.
* Accrual basis: recognizes the impact of transactions for the time periods when revenues and expenses occur even if no cash changes hands.
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4. Accrual AccountingRevenue recognition
‛Under the accrual basis revenues are recorded/recognised when:
‛Earned: goods are delivered or a service is performed
‛Realised: cash or a claim to cash (on credit) is received in exchange for goods or
services
For example:
Ø A sale on account is recorded as revenue when the goods are delivered even though the seller receives no cash at that moment.
Ø Magazine subscriptions are received in advance, but the revenue is not earned until the issues are delivered.
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4. Accrual AccountingExpenses
‛Two types of expenses:
‛Product costs: cost of inventory linked directly with revenue earnedin the same period.
• Without sales there is no cost of goods sold or salescommissions.
‛Period costs: not directly linked with revenue, but with the timeperiod itself.
• Rent is paid even if no sales are made.
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4. Accrual AccountingExpense recognition - Matching
‛Under the accrual basis:
‛Product costs are recorded in the same time period as the relatedrevenues are recognized (Matching).
• e.g. COGS is recorded in the same time period as the relatedsales. As long as the inventory is not yet sold, it remains anasset on the balance sheet.
‛Period costs are recorded in the time period in which they incur.• e.g. Rent for January can only be recorded as an expense in
January even if the payment has occurred already inDecember. In December the prepaid rent will be shown as anasset on the balance sheet.
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‛An example of matching is depreciation.
Assets are used up over a period of time, so more and more of their original costs are transferred from asset accounts to expense accounts.
‛example: a car of 30.000 € ‛depreciated over 3 years = 10.000€ per year‛–> 10.000 € costs per year for 3 years
‛Depreciation - the systematic allocation of the acquisition cost of long-lived or fixed assets to the expense accounts of particular periods that benefit from the use of the assets
Under the cash basis, the cost of the asset would be expensed immediately when the asset would be paid for.126
4. Accrual AccountingMatching Principle
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127
NewCoBalance Sheet
31 December 2013Assets Owner’s Equity + Liabilities
Long lived assetsLandEquipment
Current AssetsInventoryAccounts receivableCash
Total Assets
€ 1000
100
Owner’s equityCapitalRetained Earnings
LiabilitiesLong-term DebtCurrent Liabilities
Accounts Payable Wages Payable
Total Liabilities & Owner’s Equity
1,000
€ 1,1001,000
1000
Income Statement
Sales
Cost of Goods Sold
Gross Margin
10Depreciation
Operating Profit -10
Interest Expense
Income Tax Expense
Net Income
€ 1,900
1,800
€ 2,000
-10
0
0
€ 900
€ 2,000
127
NewCo Case Studydepreciation
(100)
Newco depreciates its equipment @ 10% per year
0100
90 (110)
€ 890
€ 1,900 € 1,900
€ 90
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4. Accrual AccountingAccrual Basis versus Cash Basis
‛The accrual basis is the current accountingstandard for the measurement of income.
• Presents a more complete summary of what happenedduring the year.
• Represents best economic reality.
128