Augment MBA Financial Accounting

Handbook

Financial Accounting
 Augment MBA Financial Accounting - Introduction 01

Introduction
Welcome to the Financial Accounting module of the Augment MBA. A number on a financial statement
reflects many decisions, stories, and meetings. If you know what these numbers mean, then you know how to
make good, strategic decisions.
Financial accounting is a superpower in business, and it's easier than you might think. It's time to learn to
interpret numbers like a CFO. Then, you are able to make bold, data-driven decisions. By the end of this
module, you will be able to use accounting to interpret financial data for any company.

Key Skills
Make strategic business decisions based on financial data

Assess the health of any business

Analyze balance sheets of public and private companies

Develop sound business strategies

Your Instructor
In this module, you’ll learn from Kelly Richmond Pope. Kelly is a forensic accountant, best-selling author, and
professor. She will teach you everything there is to know to understand a company's finances.
You'll learn to ask the right questions and analyze balance sheets. Moreover, you'll assess a company's
financial health. These skills are essential and help turn financial data into business strategies.

Business Glossary
Get your terminology straight and find explanations for business jargon.
Augment MBA Financial Accounting - Introduction 02

Contents
Introduction 01

Introduction to Accounting 03

The Five Account Types 09

The Accounting Equation 13

Introduction to Financial Statements 17

Income Statements 21

Balance Sheets 28

Statements of Cash Flows 33

Financial Ratios 38

Conclusion 42
Augment MBA Financial Accounting - Introduction to Accounting 03

Kelly Richmond on

Introduction

to Accounting
Augment MBA Financial Accounting - Introduction to Accounting 04

Accounting for Entrepreneurs

Accounting is the process of organizing, analyzing, and sharing financial data. All businesses need
accounting. It is essential for decision-making, cost planning, and measuring performance.

"Accounting is the language of business."

A saying goes, "Accounting is the language of business." It's hard to think of a job where knowing accounting
wouldn't help. As you see in FIGURE 2.1, there are many great reasons to study accounting.

Financial Management Decision-Making Budget Preparation

Improve your control of Make informed business Create accurate budgets and
financial resources, ensuring decisions based on financial improve your understanding of
more efficient use of funds. data, rather than intuition. financial performance.

Cost Control Financial Analysis Compliance

Gain insights into expenses and Use financial statements to Ensure compliance with
cost and identify opportunities understand financial trends financial regulations and
to cut costs. within your business/industry. standards, avoid penalties.

Career Advancement
For career professionals, accounting knowledge can open up opportunities for promotions.

F i g u r e 2.1

Financial vs. Managerial Accounting

There are two major branches of accounting: Financial Accounting and Managerial accounting. For
students of this course, Financial Accounting is more important than Managerial Accounting. It teaches the
first principles of accounting, using universal standards. These standards apply to other fields, including
managerial accounting.
 Augment MBA Financial Accounting - Introduction to Accounting 05

Financial Accounting Managerial Accounting

Users External users Internal users

Help make decisions about credit Assist in planning, controlling, and

Purpose
terms, investments, etc. decision-making processees

Balance sheets, income statements, Job cost sheets, costs of goods

Report Types
cash-flow statements, etc. manufactured, production costs, etc.

Report Frequency Quarterly As needed

Figure 2.2

Financial Accounting is essential for the external reporting of a company's financial status. This branch of
accounting follows standards like GAAP (Generally Accepted Accounting Principles) and IFRS
(International Financial Reporting Standards).
They ensure clarity, consistency, and comparability across all reporting entities. FIGURE 2.3 shows the
differences between GAAP and IFRS.

GAAP IFRS

Origin American standards (USA) International standards

Approach Rules-based (very strict) Principles-based (more flexible)

Figure 2. 3

The Users of Accounting Information

As diverse as the possible applications for accounting are the possible users of financial accounting data.
Again, financial accounting is the language of business. Naturally, there are a lot of stakeholders who rely on
this information.
Users of accounting information are generally divided into two categories: internal and external. FIGURE 2.4
(on the next page) gives you a good overview of both of these groups.
Augment MBA Financial Accounting - Introduction to Accounting 06

Internal Users External Users

Use financial information to Use financial information to

make day-to-day decisions make decisions or evaluate a
and inform future strategy. company’s performance.
Financial

Data
Executives Investors & Analysts

Managers Banks

Employees Auditors

Figure 2.4

The Stakeholders of Financial Accounting

A stakeholder is anyone affected by a company's decisions. This includes investors, creditors, employees,
managers, regulators, auditors, customers, and suppliers. Let’s look at some key stakeholders of financial
accounting.

A Stockholders B Creditors / Lenders C Regulators

A stockholder is an owner of Providers of short, medium, and Governments and agency

shares in a business. long-term credit lines. acting like referees.

Figure 2. 5

A Stockholders
Owners are called stockholders. They buy "stock" or "shares" for cash, gaining a stake in the business.
Businesses can be classified by the availability of their stock.
A publicly traded company has its stock on exchanges like the NYSE. We discussed this earlier. In contrast, a
privately held company does not offer its stock to the public.

Augment Insight
Public companies are typically larger companies with stock available to the general public.
 Augment MBA Financial Accounting - Introduction to Accounting 07

B Creditors / Lenders
A creditor offers other businesses extended payment terms, usually 30 to 45 days to pay for goods and
services. When businesses need large sums for a long time, they go to lenders or banks for a loan with a set
repayment period and interest rate.
Creditors and lenders must ultimately assess whether the borrower will repay the funds. To determine that,
they usually examine the financial information you’re learning about in this course.

Augment Insight
Creditors offer short-term credit-lines while banks offer medium and long-term loans.

C Regulators
A creditor offers other businesses extended payment terms, usually 30 to 45 days to pay for goods and
services. When businesses need large sums for a long time, they go to lenders or banks for a loan with a set
repayment period and interest rate.
Creditors and lenders must ultimately assess whether the borrower will repay the funds. To determine that,
they usually examine the financial information you’re learning about in this course. FIGURE 2.6 displays the 5
main mandates of the SEC (Securities and Exchange Commission).

Inform & Protect Enforce Laws Capital Formation Regulation Provide Data

Prevent fraud, mis- Enforce US federal Enable companies to Ensuring integrity Verifying and
information, and financial laws and raise funds to invest and stability of the distributing data for
other schemes. regulations. in growth. financial market. decision-making.

F i g u r e 2.6

Cash vs. Accrual-Based Accounting

In the following chapters, you will take a look at the different types of financial statements. They all display
financial activities over time. Now, there’s two different ways to determine when a given activity happened:
Cash-Based Accounting tracks actual money movements. Accrual-Based Accounting tracks bookings, like
when you sign a contract. FIGURE 2.7 (next page) goes into depth.
Augment MBA Financial Accounting - Introduction to Accounting 08

Cash-Based Accounting Accrual-Based Accounting

Revenues are recorded when cash is Revenues are recorded when it is earned
Income
actually received. (e.g., a contract is signed).

Expenses are recorded when cash is Expenses are recorded when they are
Expenses
actually spent. incurred (e.g., a contract is signed).

Ease of Use Simple to use More complex

Doesn't give a complete picture of a Gives a better view of a company's

Insights
company's finances. financial performance.

Use Case Used by non-profits and SMBs Used by larger companies

Figure 2.7

Actionable Advice
Here’s what to keep in mind from this module

Takeaways

Accounting: organizing, analyzing, and communicating financial information for decision-making

Decision-Making Tool: make business decisions based on financial data rather than intuition

Different Users: users of accounting information are divided into internal and external

Two Branches: accounting is split into financial and managerial accounting

Financial Accounting: information for external stakeholders like shareholders, creditors, regulators

Managerial Accounting: information for internal stakeholders like managers, employees, etc.

Cash-Based Accounting: transactions are not recorded until money is exchanged

Accrual-Based Accounting: transactions are recorded when they occur

Augment MBA Financial Accounting - The Five Account Types 09

Kelly Richmond on

The Five

Account Types
Augment MBA Financial Accounting - The Five Account Types 10

Introduction to Account Types

Accounting has five account types. They categorize and record business transactions. Each has a distinct
role in the accounting system. They are the vocabulary you need to know to understand the language of
accounting.
These account types are critical for financial statements. They help us understand a business's operations
and financial health. Now, we will go over each of the five main types of accounts described by Kelly.

1 Assets 2 Liabilities
Assets are resources that have value and can provide Liabilities are obligations that the business owes.
future benefits. They include cash, accounts They include accounts payable, loans, mortgages,
receivable, inventory, equipment, and buildings. and other debts that must be paid in the future.

3 Equity 4 Revenues
Equity represents the claims to the assets of the Revenues track earnings from selling goods,
business after all liabilities have been deducted. It services, and interest. They include revenue from
can be defined as the net worth of a business. sales, service, and interest income.

5 Expenses
These accounts record costs incurred to generate
revenue. They include costs of goods sold, rent,
utilities, salaries, and marketing costs.

F i g u r e 3 .1

Augment Insight

FIGURE 3.2 on the next page explains every account type one more time with great detail.
 Augment MBA Financial Accounting - The Five Account Types 11

Account Type Description Examples Key Principles

Resources owned by a Cas Classified as current

business expected to Inventor (liquid) or non-current
Assets
provide future economic Equipmen (long-term use)
benefits to the company. Real estate

Amounts owed to Loan Classified as current

others, reflecting the Accounts payabl (due within one year) or
Liabilities
business's financial Mortgages non-current
obligations.

Residual interest in Owners’ stak Reflects the financial

assets of a business after Shareholders’ stake health and solvency of
Equity
deducting liabilities. the business.
Reflects ownership value.

Total income generated Coffee shop sales Recognition Principle:

from core operations (coffee, pastries, etc. revenues are recorded
Revenues
before any expenses are Income from catering when earned, regardless
subtracted. or delivery of payment (accrual).

Costs incurred in the Costs of goods sol Matching Principle:

Expenses process of generating Operating expenses Recorded in the same
revenues. way as revenues.

Figure 3.2

Don’t worry if you didn’t understand everything. We’ll go back to the key principles discussed in this table at
throughout this course.
Augment MBA Financial Accounting - The Five Account Types 12

Actionable Advice
Here’s what to keep in mind from this module

Takeaways
Assets: resources owned by a business that have economic value and can provide future benefits.
They include cash, accounts receivable, inventory, equipment, and buildings

Liabilities: obligations or debts that the business owes to others. They include accounts payable,
loans, mortgages, and other debts that must be paid in the future

Equity: the owner's claims to the assets of the business after all liabilities have been deducted. It
can be defined as the net worth of a business

Revenues: the income a business earns from selling goods or providing services. Includes sales
revenue, service revenue, and interest income

Expenses: the costs incurred by a business to generate revenue. Expenses include cost of goods
sold, rent, utilities, salaries, and marketing costs
Augment MBA Financial Accounting - The Accounting Equation 13

Kelly Richmond on

Using the

Accounting Equation
 Augment MBA Financial Accounting - The Accounting Equation 14

The Accounting Equation

The accounting equation is key in financial accounting. It underpins double-entry bookkeeping. This method
records each transaction in two accounts using debits and credits. Every financial transaction affects at least
two parts of the equation to maintain this balance.
For example, when a company borrows money from a bank, its assets (cash) and liabilities (loan payable)
increase by the same amount. This keeps the equation balanced.

The Accounting Equation

Assets = Liabilities + Equity

Figure 4.1

Augment Example
Let’s say a family purchases a home worth $200,000. After making a down payment of
$25,000, they secure a bank loan to pay the remaining $175,000. What is the value of the
family’s equity in the home? If you guessed $25,000, you are correct.

Liabilities Equity

$175,000 $25,000

Assets - $200,000 Value

Figure 4.2
Augment MBA Financial Accounting - The Accounting Equation 15

Augment Exercise
You can find a worksheet at the end of this chapter to create your own accounting equation

Actionable Advice
Here’s what to keep in mind from this module

Takeaways
Accounting Equation: the accounting equation is expressed as Assets = Liabilities + Equity

Use of the Equation: it’s the basis of the double-entry bookkeeping system, a method of
accounting that involves recording each financial transaction in two separate accounts

Components: Every financial transaction affects at least two components of the accounting
equation in order for it to balance
 Augment MBA Financial Accounting - The Accounting Equation 16

Accounting Equation Worksheet

Use these three columns to create your own accounting equation. In column I, list all your assets. In column II,
list all your liabilities. And finally, in column III, calculate your equity (the net amount of the asset). When
finished, total the columns to determine your net worth. Hint: do not forget to subtract the liability from the
value of the asset.

Assets (things you own) Liabilities (amounts owed) Equity (net amount of the asset)
Create Your Accounting Equation

Augment Business School - Printable Exercise Page 1/1

Augment MBA Financial Accounting - Introduction to Financial Statements 17

Kelly Richmond on

Introduction to

Financial Statements
Augment MBA Financial Accounting - Introduction to Financial Statements 18

Financial Statements
Financial statements are reports by accountants. They show an organization's financial performance and
position. The three financial statements are: the income statement, the balance sheet, and the statement of
cash flows. Remember, the goal of this unit is to help you understand and interpret financial statements, not
create them.

Definition Timeframe

Financial performance of a business. Over a given period of time

Income Statement Show how a business incurs
revenues and expenses.

Shows the financial position of a At a specific point in time

Balance Sheet business. It serves as a snapshot of a
company’s financial health.

Tracks the flow of cash in and 
 Over a given period of time

Cashflow Statement
out of a business.

Figure 5.1

Augment Insight
It is important to know that the three financial statements don’t exist in a vacuum. They are all
intertwined “speaking” to each other and offer a different perspective on the same business
helpful for various stakeholders.

The Elements of Financial Statements

To help accountants prepare and users better understand financial statements, the accounting profession
has outlined 10 elements of financial statements. These are the categories or accounts that accountants use
to record transactions and prepare financial statements. There are ten elements of financial statements - we
have already discussed most of them.
FIGURE 5.2 (next page) goes into depth on each of these ten, key elements.
 Augment MBA Financial Accounting - Introduction to Financial Statements 19

Element Explanation

Revenues Value of goods and services the organization sold or provided.

Costs of providing the goods or services for which the organization

Expenses
earns revenue.

Economic benefits that are not from normal business operations. For
Gains
example, profits from selling an asset, like equipment or real estate.

Losses from outside business activities, like selling an asset or lawsuit

Losses
costs.

Assets Items the organization owns, controls, or has a claim to.

Liabilities Amounts the organization owes to others (also called creditors).

Equity The net worth (or net assets) of the organization.

Cash or other assets provided to the organization in exchange for an

Investments by Owners
ownership interest.

D istributions to Owners Cash, other assets, or ownership interest (equity) provided to owners.

Figure 5.2

Apple Inc. Financial Statements

To illustrate these theoretical concepts in practice, we will analyze Apple Inc.’s financial statements in the
next three chapters. Starting with the income statement and followed by balance sheet and cashflow
statement. FIGURE 5.3 (next page) gives you a preview of these financial documents.
Augment MBA Financial Accounting - Introduction to Financial Statements 20

Figure 5.3

Actionable Advice
Here’s what to keep in mind from this module

Takeaways
Financial Statements: reports created by accountants that communicate an organization’s
financial performance and financial position

Three Types: the three financial statements are the income statement, the balance sheet, and the
statement of cashflows
Augment MBA Financial Accounting - Income Statements 21

Kelly Richmond on

Income

Statements
Augment MBA Financial Accounting - Income Statements 22

Apple Inc.’s Income Statement

Figure 6.1
Augment MBA Financial Accounting - Income Statements 23

The Elements of Income Statements

Element Explanation

Revenues Total income from business operations minus expenses.

Expenses Costs incurred to earn revenue.

Gross Margin Revenue minus cost of goods sold.

Operating Expenses (OPEX) Costs related to daily business operations.

Earnings from a company's core business activities before

Operating Income (EBIT)
deducting interest payments and taxes.

Total earnings (or profit) after subtracting all expenses from

Net Income
revenue.

Figure 6.2

The Simplified Income Statement

Imagine your friend Chris started a landscaping business on August 1, 2023. She owns a tractor and covers
its fuel and maintenance. By August 31, she checked her account. It had only $250. This was surprising. She
expected more from her customers.
Chris investigates why her checking account is low. She finds she made $1,400 from customers. However,
she spent $100 on tractor brakes, $50 on fuel, and $1,000 on business insurance.
Her checking balance was lower than expected. She spent $1,150 on brakes, fuel, and insurance, but earned
$1,400. This left her with a net gain of $250. Though she hopes for a higher balance each month, she notes
that most August expenses were one-time. The brake and insurance costs were unusual. Especially, the
insurance was much higher than normal.
She believes the account will grow more in September. She will earn money from new customers and have
fewer expenses.
Augment MBA Financial Accounting - Income Statements 24

Figure 6.3

Apple Inc. - Income Exercise

Below are two lists: one of Apple's products and services, and another with revenue figures. Match the
revenue figure on the right to the product or service it corresponds to, based on Apple's 2022 income
statement. As you match, consider each product's popularity and market presence.

The Income Exercise

Revenue Figures Products & Services

$109 Billion Hardware (iPhone, Mac, etc.)

$60 Billion Services (Music, iCould, etc.)

Figure 6.4
 Augment MBA Financial Accounting - Income Statements 25

Augment Insight
An income statement shows what a company earns, spends, and if it’s making profit over a
specific period of time.

Apple’s Revenue Breakdown

Now that you’ve made a guess about the revenue distribution of Apple’s products and services, let’s break
down how things are in reality.
FIGURE 6.6 on the next page shows the two branches in relation. As you can see revenues from ‘product’
claims a much bigger chunk of their total revenue than ‘services.’ However, over the last few years, ‘services’
has seen much more significant growth than ‘product.’

Services Revenue
$60 Billion
35%

Product Revenue
$109 Billion
65%

Figure 6.5

GAAP (FY ‘23) IFRS (FY ‘23)

Products $109 Billion 65%

Services $60 Billion 35%

Figure 6.6
 Augment MBA Financial Accounting - Income Statements 26

EBIT
EBIT (earnings before interest and taxes) measures a company's core profit. It excludes interest and tax
costs. To calculate EBIT, subtract operating expenses from revenues.

Calculating EBIT

EBIT = Net Income + Interest + Taxes

Figure 6.7

EBITDA
EBITDA (earnings before interest, taxes, depreciation, and amortization), gives you a clearer picture of
earnings than EBIT because it leaves out two key non-cash expenses: depreciation and amortization. These
expenses reduce the value of your assets over time.
The key difference is that depreciation affects tangible assets, like buildings and equipment, while
amortization affects intangible assets, like patents and copyrights. EBITDA removes these factors to clarify a
company's cash flow and earnings from core operations. This is useful for assessing the profitability of
companies with high fixed asset investments. These assets are subject to heavy depreciation or
amortization.
The reason is simple. Companies with big fixed assets, like factories or patents, face high depreciation and
amortization costs. These costs lower net income significantly. However, they don't impact cash flow
directly, as they are non-cash expenses.

Net Income: The Bottom Line

The final element of the balance sheet is net income. et income is found at the bottom of the income
N

statement, which is why it's often referred to as the bottom line.

" "

N et income represents a company's total profit after all expenses have been deducted from revenues. This
includes deductions for cost of goods sold (C OGS ), operating expenses (such as A, wages, and rent),
SG&

interest expenses on debt, taxes, and other miscellaneous expenses. FI GURE 6. shows the formula for
9

calculating net income.

Augment MBA Financial Accounting - Income Statements 27

The Accounting Equation

Net Income = Total Revenues + Total Expenses

Figure 6.8

Actionable Advice
Here’s what to keep in mind from this module

Takeaways
Income Statement: provides an overview of a company's financial performance over a specific
time period, telling us whether a business is profitable

Components: revenues, expenses, gross margin, operating expenses (OPEX), and net income

EBIT: calculated by subtracting OPEX from revenues before interest and taxes are considered

EBITDA: expands on EBIT by also excluding depreciation and amortization from earnings

Net Income: a company's profit after deducting all expenses from revenues, including COGS,
OPEX, interest, taxes, and other expenses
Augment MBA Financial Accounting - Balance Sheets 28

Kelly Richmond on

Balance Sheets
Augment MBA Financial Accounting - Balance Sheets 29

Apple Inc.’s Balance Sheet

Figure 7.1
 Augment MBA Financial Accounting - Balance Sheets 30

Balance Sheets vs. Income Statements

The balance sheet provides a snapshot of a company's finances—what it owns and owes—at a specific time.
Think of the balance sheet as being like a sport team’s overall win/loss record.
Notice the change of time frame in the two reports. The income statement reports performance over a
period of time. The balance sheet lists the financial position at closing on a specific date only.

The Balance Sheet and the Accounting Equation

The balance sheet lists, at a specific time, what the company owns (assets), what it owes (liabilities), and its
net worth (equity). You may recall that these are the same elements that are found in the accounting
equation: Assets = Liabilities + Equity (FIGURE 4.1).
The balance sheet shows the accounting equation at a specific time. It details what the company owns (its
assets) and how they are financed (through debt or owners' equity).
Each transaction a company makes affects at least two accounts and keeps the equation in balance. This
includes borrowing money, purchasing inventory, and earning revenue. This equation must always balance
and underlies the structure of the balance sheet.

C u ent and on u ent Assets and ia ilities

rr N -C rr L b

C u ent
rr N on u ent
-C rr

They turn into cash within a year. E amples

x Long-term investments like property, plant,
are cash, securities, receivables, and equipment, and intangible assets like patents.
Assets

inventory. They show a business's liquidity and They represent a company’s long-term
short-term planning. commitment and future growth prospects.

These are short-term debts due within a year. B onds payable and long-term lease
ia ilities

They include accounts payable, short-term obligations show a company's financial health.
loans, and other payables. They show a They re ect its long-term financing
b

fl

company's urgent financial obligations. strategies.

L

F .
igure 7 2

Augment Exercise

You can nd a alance sheet e e cise on the last age o this cha te .
fi b x r p f p r
 Augment MBA Financial Accounting - Balance Sheets 31

Components of Equity
Equity refers to the ownership value held in a business by its shareholders. It represents the residual interest
in the assets of the entity after deducting all its liabilities. Comprising common stock, retained earnings, and
accumulated other comprehensive income. It's an indicator of the company’s cumulative success and
investor trust.

Actionable Advice
Here’s what to keep in mind from this module

Takeaways
Balance Sheet: a snapshot of a company's finances—what it owns (assets), owes (liabilities), and
what it is worth (equity)—at a specific point in time

Current Assets: a company’s most liquid resources, meaning they can easily be turned into cash or
are already in the form of cash

Listing: current assets are always listed in order of liquidity and are expected to be converted into
cash within a year

Non-Current Assets: a company’s long-term investments for which the full value will not be
realized within the accounting year

Equity: indicates the value that would be returned to shareholders if all assets were liquidated and
debts paid off
 Augment MBA Financial Accounting - Balance Sheets 32

Balance Sheet Worksheet

Components to Match
Match each component of the balance sheet to its corresponding definition.

Current Assets
Non-Current Assets
Current Liabilities
Non-Current Liabilities
Shareholders’ Equity

Definitions

A: Resources owned by the company expected to be used or converted to cash within one year
B: Obligations the company is due to pay within the coming year
C: Long-term investments and assets that provide benefits for more than one year
D: Obligations due beyond the next twelve months
E: The residual interest in the assets of the company after deducting liabilities

Augment Business School - Printable Exercise Page 1/1

Augment MBA Financial Accounting - Statements of Cash Flows 33

Kelly Richmond on

Statements

of Cash Flows
Augment MBA Financial Accounting - Statements of Cash Flows 34

Apple Inc.’s Statement of Cash Flows

Figure 8.1
 Augment MBA Financial Accounting - Statements of Cash Flows 35

The Final Statement

The Statement of Cash Flows is another financial report. It tracks cash and cash equivalents entering and
leaving a company over a period.
It splits cash flows into three parts: operating, investing, and financing activities. This shows the company's
liquidity and financial health. Before we dive in, let's revisit the difference between cash-based and accrual-
based accounting.

Augment Insight
With cash-based accounting, transactions are not recorded until money is exchanged. With
accrual-based accounting, transactions are recorded when they occur.

These financial statements use accrual accounting. So, stakeholders often lack a clear view of the business's
cash activities. The statement of cash flows solves this by focusing on cash flows. The Statement of Cash
Flows seeks to reconcile cash and revenue.

The Structure Cashflow Statements

Cash transaction directly related to generating revenue
e ating

Op r

Activities Sales, buying inventory, paying expenses (like salaries and utilities), interest, dividend
revenue, and income tax.

Cash transaction related to investments in long-term assets

nvesting

Activities Identified by changes in the fixed assets section of the balance sheet. Includes
payments for buying land, building, equipments, and cash receipts from selling them.

Cash transaction related to raising money (debt, stock, etc.)

Financing
Cash from issuing debt (notes/bonds), selling stock, dividends, or buying back stock.
Activities Can be found in the Statement of Stockholder’s Equity which this course does not
cover. Long-term liabilities can be found in balance sheets.
Figure 8.2
Augment MBA Financial Accounting - Statements of Cash Flows 36

Cashflow Statements and the Accounting Equation

Like so much in accounting, the Statement of Cash Flows stems from the accounting equation. Breaking
down the equation helps further clarify the nature of cash flows and their impact on a company's financial
health.
Current assets and liabilities belong in the operating section of the statement.
Long-term assets belong in the investing section of the statement.
Long-term liabilities and equity belong in the financing section of the statement.

The Accounting Equation

Assets = Liabilities + Shareholder’s Equity

Figure 8.3

Actionable Advice
Here’s what to keep in mind from this module

Takeaways
Cashflow Statements: designed to give stakeholders a clear idea of a company's cash activities on
top of the other statements

3 Cash Flows: operating activities, from investing activities, and from financing activities

Inflows & Outflows: every category of cashflow has both inflows (when the company earns money)
and outflows (when the company spends money)

Company Diary: the statement of cash flows offers a comprehensive overview of how a company
earns and spends its cash

Financial Health: the cash flow statement is used in a company's balance sheet and income
statement but reports a more granular, daily overview of cash activities
 Augment MBA Financial Accounting - Statements of Cash Flows 37

Cashflow Statement Worksheet

Components to Match
Match each numbered item with the appropriate section from the Statement of Cash Flows.

Payment for Property, Plant, and Equipment

Depreciation and Amortization Adjustments
Dividends and Dividend Equivalents
Changes in Accounts Receivable
Proceeds from Maturities of Marketable Securities
Share-Based Compensation Expense
Issuance/Repayment of Debt
Net Income
Repurchase of Common Stock
Purchase of Marketable Securities

Definitions

A: Operating Activities
B: Investing Activities
C: Financing Acitivities

Augment Business School - Printable Exercise Page 1/1

Augment MBA Financial Accounting - Financial Ratios 38

Kelly Richmond on

Financial Ratios
 Augment MBA Financial Accounting - Financial Ratios 39

Assessing a Company’s Health

Financial ratios are diagnostic tools. They offer insights into a company's efficiency, liquidity, and solvency.
Ratios such as the current ratio and debt-to-equity ratio simplify complex financial data. This helps
stakeholders assess the company's financial health.

Financial Ratios

Current Ratio: This metric evaluates whether a company, such as Apple, can meet its short-term
obligations with its short-term assets. A ratio under 1 might indicate liquidity issues, suggesting that
Apple could struggle to cover immediate liabilities without additional cash inflow or asset liquidation.

Debt-to-Equity Ratio: This ratio measures a company's financial leverage, comparing its total liabilities
to its shareholders' equity. A higher ratio indicates greater use of borrowing as opposed to funding from
equity, which can signal higher risk but also potential for higher returns on equity investments.

Return-on-Equity Ratio: Return on Equity (ROE) is a financial ratio used in accounting to measure the
profitability of a company relative to the shareholders' equity. It essentially tells investors how effectively
their capital is being employed to generate earnings. ROE calculated by dividing net income by
shareholders' equity.

Net Profit Margin: Profit margin is a profitability ratio that represents how much of sales revenue has
translated into income. This ratio shows how much of each $1 of sales is returned as profit. Net profit
margin is one of the most important indicators of a company's overall financial health.

F igure 9 .1

Practice Calculating Financial Ratios

We'll use Apple's money details from the balance sheet to do this. Here's the info we need:
Cash to be used soon (Current Assets): $135,405 million
Bills to pay soon (Current Liabilities): $153,982 million
All the money borrowed (Total Liabilities): $302,083 million
Owners' share (Shareholders' Equity): $50,672 million
Profit (Net Income): $99,803 million
Augment MBA Financial Accounting - Financial Ratios 40

Current Ratio
Calculate the Current Ratio (“Does Apple have enough current assets to cover its current
liabilities?”)

Formula: Current Ratio = Total Current Assets / Total Current Liabilities

Debt-to-Equity Ratio
Calculate the Debt-to-Equity Ratio (“To what extent can shareholder equity cover
outstanding debts?”)

Formula: Debt-to-Equity Ratio = Total Liabilities / Total Shareholders' Equity

$350,000m

$300,000m Total Assets

2021: $351,002 million
$250,000m 2022: $352,755 million

Total Liabilities
$200,000m 2021: $287,912 million
2022: $302,083 million
$150,000m
Total Shareholder’s Equity
2021: $63,090 million
$100,000m
2022: $50,672 million

$50,000m

2021 2022

F i g u r e 9. 2
Augment MBA Financial Accounting - Financial Ratios 41

Current Ratio
Calculate the Current Ratio (“Does Apple have enough current assets to cover its current
liabilities?”)

Current Ratio = $135,405 million / $153,982 million ≈ 0.88

(A current ratio below 1 suggests that Apple may not have enough current assets to cover its short-term
liabilities without selling off long-term assets.)

Debt-to-Equity Ratio
Calculate the Debt-to-Equity Ratio (“To what extent can shareholder equity cover
outstanding debts?”)

Debt-to-Equity Ratio = $302,083 million / $50,672 million ≈ 5.96

(A higher ratio indicates that Apple is significantly leveraged, using more debt relative to equity to finance its
operations.)

Actionable Advice
Here’s what to keep in mind from this module

Takeaways

Financial Ratios: derived from financial statements, they compare companies' performance in
similar industries over time

Current Ratio: liquidity ratio that measures a company’s ability to pay short-term obligations

Profit Margin: profitability ratio representing how much sales revenue has translated into income

Return on Equity (ROE): financial ratio used in accounting to measure a company's profitability
relative to the shareholders' equity

Debt to Equity: indicates how much debt the company has for every dollar of equity. It measures
the degree to which a company finances its operations with debt rather than own resources
Augment MBA Financial Accounting - Conclusion 42

Conclusion
 Augment MBA Financial Accounting - Conclusion 41

Conclusion
Congratulations! You’ve completed the Financial Accounting module of the Augment MBA Program. You
learned principles of financial accounting, including interpreting financial statements, understanding financial
ratios, and making informed decisions.
With a strong understanding of finance, you’re now able to examine the financial aspects that underpin every
successful business and apply complex accounting concepts to your own company.

Recap

In Unit 2, you went through the two major branches of accounting: Financial Accounting and
Managerial accounting. Financial Accounting generates information for external stakeholders,
Managerial Accounting generates information for internal users.

In Unit 4, you studied the Accounting Equation is expressed as Assets = Liabilities + Equity.

In Unit 5, you learned that financial statements are reports created by accountants that communicate
an organization's financial performance and financial position. The three financial statements are
the income statement, the balance sheet, and the statement of cash flows - in that order.

In Units 6-8, you learned how the Income Statement provides an overview of a company's financial
performance over a specific time period, telling us whether a business is profitable.

In Units 8-10, you learned that the balance sheet is a statement that lists what the company owns
(assets), what it owes (liabilities), and what it is worth (equity) at a specific point in time.

In Units 11-14, you learned that the statement of cash flows is a financial statement that tracks the
amount of cash (and cash equivalents) entering and leaving a company over a specific period..

Questions?
If you have any questions, book 1:1 office hours with our center of student advising.