M1 BUSINESS MANAGEMENT

M1 BUSINESS LAW MANAGEMENT

25_#6515 AND #4521 FINANCIAL STATEMENT ANALYSIS
Claire GREVET
Henry HALEY
Elie SALAMEH
Baran SIYAHHAN
Amin SOFLA
SESSION 2
Antoine VEZIN BUILDING BLOCKS IN FINANCIAL ACCOUNTING

QUESTIONS
Academic year 2024-25 S1
 S2. BUILDING BLOCKS IN FINANCIAL ACCOUNTING

Building Blocks Financial Financial

Intro Financial Statement Put it all
statements together
Accounting Analysis

Kick-off Basic building S2 BS analytical S4.1 Liquidity ratios S6.1

S1.1
blocks tools S9.4
Liquidity, Solvency Integrative case study
S6.2
Accounting in action: BS analysis S4.2 analysis
Why-What S1.2 S3.1
is FSA Extra-financial information
Efficiency ratios
Solvency S4.3
S7.1
Accounting in action:
Working capital
Extra-financial information S3.2 Mysterious
S7.2
company
BS analysis S4.4

Cash flow stat. S8.1

Dig deeper ICS analytical S5.1 Cash flow

More about Accounting tools analysis S8.2

Profit margin S5.2

analysis ROE Dupont S9.1

ICS analysis
Elearning S5.3 ROE Du Pont
S9.2

Presential class
ROE
S9.3
Collaborate virtual class Alternative
TABLE OF CONTENTS
 BUSINESS ACTIVITIES

 ACCOUNTING EQUATION

 MEASUREMENT PRINCIPLES

 TIMING ISSUES ACCRUAL ACCOUNTING

 DEPRECIATION

 HBP QUESTIONS - RELATIONSHIP BS AND ICS

 VAT
BUSINESS ACTIVITIES

4 4
 BUSINESS ACTIVITIES ARE CLASSIFIED IN 3 GROUPS

OPERATING INVESTING FINANCING

Illustration The Spanish EBRO group

• Major player on rice, fresh and dry pasta
• Multi-company, multi-country and multi-brand business model:
• industrial presence in 18 countries and 5 continents
• customers in 71 different countries.

FINANCING ?
INVESTING ?
OPERATING ?
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BUSINESS ACTIVITIES ARE CLASSIFIED IN 3 GROUPS

OPERATING INVESTING FINANCING

- Property, Plant and Equipment
tangible assets
- Shares  Equity
- Current assets - Borrowings  Liabilities
- Patents intangible assets
- Current liabilities
- Portfolio of securities financial
investments

 OPERATING CYCLE  NON CURRENT ASSETS  EQUITY and DEBT

VALUE CREATION inc. PROFIT

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THE ACCOUNTING EQUATION

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 Accounting
Accounting Transactions
Transactions

Analyzing Transactions
The process of identifying the specific effects of economic events on the accounting
equation.

Basic Accounting Equation

Stockholders’
Assets = Liabilities +
Equity

What is owned What is owed Book value of equity

(Net worth)

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Accounting
Accounting Transactions
Transactions
Analyzing Transactions

9 9
ACCOUNTING EQUATION : LET’S DO IT

ASSETS = LIABILITIES + SHAREHOLDERS’EQUITY

SHAREHOLDERS’
EQUITY = ? + ?

ENDING RETAINED
EARNINGS = ? + ? - ?

ENDING RETAINED
EARNINGS = ? + ? - ? - ?
LINKAGES AMONG FOUR MAJOR FINANCIAL STATEMENTS

BEGINNING YEAR FLOWS ENDING YEAR

Cash Flow Statement

Cash from operations
Beginning Balance Sheet Cash from investing Ending Balance Sheet
Cash from financing
Cash Net change in cash Cash

+ Other Assets + Other Assets

Statement of Shareholders’ Equity
Total Assets Total Assets
Investment & disinvestment by owners
Less Total Liabilities - Less Total Liabilities
Net income less dividends + other earnings

= Owners’ equity Net change in owners’ equity = Owners’ equity

Income Statement

Revenues

Expenses
Net income

The four financial statements are linked within and across accounting periods
HBP online course – Pretest question

JACKSON Industries Income Statement for year Ending Dec 31, 2019
$750,000 Sales
95,000 Less: cost of goods sold
80,000 Gross Margin
40,000 Less: Operating expenses
40,000 Operating income = EBIT
5,000 Less: interest expense
35,000 Income before taxes
7,000 Less: tax expense
28,000 Net income

Jackson began 2019 with a retained earnings account balance of $80mios. During 2019, it declared and paid dividends of
$10mios. What is its December 31, 2019, retained earnings account balance _______.

$70 mios $90 mios $98 mios $108 mios

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MEASUREMENT PRINCIPLES:
HISTORICAL COST VERSUS CURRENT VALUE

13
RECORDING THE COST OF AN ASSET
Historical Cost
The historical cost basis records and reports assets at their cost. This is true not only at the time the
asset is purchased, but also over the time the asset is held. However, the cost of the non-current
assets that produce revenues in numerous future periods must be spread across all those periods
(Depreciation, depletion or amortisation process).

Current Value
The current value basis records and reports assets and other accounts at current value. Depending on
the nature of the item being reported, current value is determined based on the item’s fair value (the
price received to sell an asset or settle a liability), value in use (the present value of the future cash
flows associated with the item), or current cost (the current replacement cost of the item).

Current value information may be more useful than historical cost for certain types of assets and
liabilities. For example, where assets are actively traded, such as investment securities, do companies
apply the current value extensively.
COST OF AN ASSET: LET ‘S PRACTISE

Mustard of Dijon SA adheres to IFRS. It recently purchased inventory for €100 million and spent €5 million for
storage prior to selling the goods.

The amount it charged to inventory expense (€ millions) was closest to?

A. €95
B. €100
C. €105
D. None of the above answers

Harvard-online
Financial Accounting
TIMING ISSUES  ACCRUAL ACCOUNTING

16
 WHY IS TIMING A MATTER OF CONCERN IN ACCOUNTING?

In a simple business model, many transactions are handled in cash and settled in a
relatively short time frame. Furthermore, assets and liabilities have a fixed and
determinable value Translating business transactions into accounting system is easy.
But Accounting divides the economic life of a business into artificial time periods.
Difficulty usually arises when a cash receipt or disbursement occurs in a different period
than the related revenue or expense, or when the reportable value of assets vary.
The accounting treatment for these situations include accruals and valuation adjustments.

Accruals are a necessary part of the accounting process and are designed to
allocate activity to the proper period for financial reporting purpose

17
 TIMING ISSUES

 Two accounting principles support the recording of transactions in a given period

(periodicity assumption)
 The revenue recognition principle
Revenues are recognized in the accounting period in which the performance obligation is satisfied
 The expense recognition principle = matching principle
Expenses must be matched with revenues

 Accrual versus Cash basis of accounting

 Transactions that change financial statements are recorded in the periods in which the events occur,
even if cash was not exchanged.
 Alternative would be cash basis accounting, which often produces misleading statements Cash
basis is not in accordance with most accounting standards.
 THE BASICS OF ADJUSTING ENTRIES
 Adjusting entries ensure that the revenue recognition and expense recognition
principles are followed
• Some events are not recorded daily
• Some costs are not recorded during the accounting period
• Some items may be unrecorded

 Two types of Adjusting entries

• Deferrals:
• Prepaid expenses
• Unearned revenues

• Accruals:
• Accrued revenues
• Accrued expenses
 ACCRUALS
Accrual-basis accounting means that transactions that change a company’s
financial statements are recorded in the periods in which the events occur, even if
cash was not exchanged.
 CASH BASIS VERSUS ACCRUAL BASIS: ILLUSTRATION

You plan to sell printed T-shirts for $10 each.

You can purchase 100 plain T-shirts for $5 a piece.

Printing would entail the acquisition of a machine at a $100 cost with a 100 screen-print capacity, and
another $0.75 per printed T-shirt.
Your initial advertisement yields orders for 100 T-shirts.
You invest $700 in the venture, purchase plain T-shirts + the screen, and get the T-shirts printed.
You pay for all expenses in cash.

By the end of the first business week, all T-shirts are ready for sale.
Customers having orders totaling 50 T-shirts pick up their T-shirts in that first week.
But, of the 50T-shirts picked-up, only 25 are paid for in cash. The other 25 T-shirts will be paid next week.

What is the financial performance of your venture?

CASH BASIS VERSUS ACCRUAL BASIS ILLUSTRATION

OPTION 1: CASH ACCOUNTING

HAPPY?
 CASH BASIS VERSUS ACCRUAL BASIS ILLUSTRATION
Option 1: Cash accounting
INTERPRETATION
Cash accounting records indicate that your activity made a loss.
You are surprised as you expected a profit of $3.25 per T-shirt. Explanation?

The analysis of the income statement and balance sheet using cash basis shows that:
- No revenues recognized wrt the 25 T-shirts sold on account
- You have recorded the purchase of all the T-shirts as an expense.
Does this expense match with the recorded revenues?
- You have recorded all the screen purchase and the printing costs as expenses.
Do these expenses match with the recorded revenues?

By moving from Cash basis of Accounting to Accrual accounting,

You would no longer show a “loss”,
But a profit of $162.5 (detailed next page)
CASH BASIS VERSUS ACCRUAL BASIS ILLUSTRATION
OPTION 2: ACCRUAL ACCOUNTING

?
TO CONCLUDE

Current income statements are based on the concept of

accrual accounting whose main purpose is income
measurement and which is driven by revenue recognition and
expense matching.
The accounting income differs from the economic concept of
income which measures changes in shareholders’ wealth.
 LET’S PRACTISE

An adjusting entry that debits an expense and credits a

liability is which type of expense?
a. Accrued expense
b. Cash expense
c. Prepaid expense
d. None of those
 LET’S PRACTISE

All of the following statements are true except one. Which statement is false?
a. Accrual-basis accounting produces better information than cash-basis
accounting
b. Adjusting entries are required for a business that uses the cash-basis
accounting
c. The matching concept directs accountants to identify and measure all
expenses incurred and deduct them from revenues earned during the same
period
d. A fiscal year is not the same as a calendar year
HBP online course – Pretest question

Lincoln Fences receives a shipment of goods from its supplier.

It pays $40,000 at the time of the delivery and promises to pay the remaining $200,000
within the next 40 days.
Which is the appropriate journal entry for this transaction?

• Debit cost of good sold $240,000; credit cash $40,000; credit accounts payable $200,000
• Debit inventory $240,000; credit cash $40,000; credit accounts payable $200,000
• Debit accounts payable $200,000; debit cash $40,000; credit inventory $240,000
• Debit inventory $40,000; credit cash $40,000

Harvard-online
Financial Accounting
 HBP online course – Pretest question

Hampton industries began December with $17.5 million in accounts receivables.

During the month it collected $3.5 million from customers who had previously
purchased on credit and it sold $5 million in merchandise on credit.

What is Hampton’s account receivables at the end of the month?

• $9 million
• $16 million
• $19 million
• $26 million
DEPRECIATION

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 DEPRECIATION : A COST ALLOCATION PROCESS

Depreciation Depreciation for Income

Expense the current year Statement

Accumulated Total of depreciation Balance

Depreciation to date on an asset
Sheet
Contra asset that reduces the gross
amount  Net book value

Net Book Value, or carrying value = Historic Cost Less Accumulated depreciation
DEPRECIATION CONCEPT

Depreciation is the process of allocating to expense the cost of a

plant asset over its useful life in a rational and systematic manner.

Such cost allocation is designed to properly match

expenses with revenues.

Depreciation is a Depreciation is NOT

cost allocation an asset valuation
process. process.
TO SUM UP
Depreciation is
not a process of
valuation
Accumulated
depreciation
is not a cash
fund
Depreciation does
not reflect an
anticipated decline
in value*
* In contrast, impairment reflects an
anticipated decline in value
 Depreciation?
Amortization?
Depletion?

Depreciation and amortization are the same concept, but:

- Depreciation refers to the term of allocating tangible assets’ costs with limited
useful life,
- Amortization refers to the term of allocating intangible assets’ costs with finite
useful lives,
- Depletion relates to assets of wasting character that are natural assets such as
mines, quarries, and oil wells, when raw materials are extracted from them,
- Land is not depreciated because it is considered to have an unlimited life. .
 THREE FACTORS AFFECT THE COMPUTATION OF DEPRECIATION

Cost Useful Life Residual Value*

Depreciable amount = Cost Less Salvage value**

* Also called salvage value or scrap value

** Except under declining depreciation method, that ignores salvage value
MAJOR DEPRECIATION METHODS


Straight-line
Straight-line

 Units-of-activity
Units-of-activity

 Declining
Decliningbalance
balance(accelerated
(acceleratedmethod)
method)

More than 95% of companies use the straight-line method for

some or all of their assets disclosed in financial reports.

YOUR QUIZ#1 DOES NOT ASSESS NEITHER

THE UNITS-OF-ACTIVITY METHOD NOR THE
DECLINING BALANCE METHOD
 DIG DEEPER !

ABOUT THE THREE MAJOR DEPRECIATION METHODS

FOLDER “SPECIAL TOPICS”

FOLDER “SPECIAL TOPICS”

HBP online course – Pretest question

On January 1, 2018, Schmidt Industries purchased a new paint sprayer which

cost €400,000. The salvage value after 5 years is estimated to be €100,000. The
management estimates a useful life of 5-years. The company Corp is using a
straight-line depreciation method.
On December 31, 2020, the sprayer is sold for €200,000. Which of the following
is correct regarding the disposal of the sprayer?
a. It results in a taxable gain of €100,000
b. It results in a taxable gain of €20,000
c. It results in a tax loss of €20,000
d. It results in a tax loss of €100,000
 N°1 Container logistic company

REAL WORLD ILLUSTRATION : THE DANISH SHIPPING COMPANY MAERSK

39
MAERSK
MAERSKBALANCE
BALANCESHEET
SHEETAND
ANDINCOME
INCOMESTATEMENT
STATEMENT December
December31,
31,2022
2022ininmillions
millionsUSD
USD

Here is the Asset side of the consolidated balance sheet of Company

Maersk
Maersk is a Danish company,
and a major shipping international company → note that
consolidated statements are disclosed in USD

Which item(s) of the balance

sheet should be depreciated?

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RELATIONSHIP BETWEEN BS* AND ICS**
BS*: BALANCE SHEET
ICS**: INCOME STATEMENT
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 Carlita Company Income Statement for year Ending Dec 31, 2014

120,000 Sales
90,000 Less: cost of goods sold
30,000 Gross Margin
10,000 Less: Operating expenses
20,000 Operating income
2,000 Less: interest expense
18,000 Income before taxes
6,000 Less: tax expense
12,000 Net income

Carlita began 2014 with an interest payable account balance of $13,000. During 2014,
it paid $5,000 in interest to its lenders.
On December 31, 2014, what is its interest payable account balance?
$15,000 $10,000 $13,000 Cannot be calculated
HBP online course – Final exam 1 question

Turnadot & Sons is a small wholesaler of decorative cast iron objects. The following events, related to a special
customer order, occur as described below:
 August 5, 2015: Turnadot receives the special order for 200 outdoor planters at a selling price of $50 each,
including delivery at a future convenient time and location. The customer, with whom Turnadot has had a long-
term, trouble-free relationship, pays $3,000 as a deposit and agrees to pay the rest on delivery. Turnadot
immediately orders $4,000 worth of planters from its supplier and pays a $1,000 deposit for them.
 August 27, 2015: Turnadot pays $3,000 balance due to the supplier upon delivery of the planters to its
warehouse.
 September 5, 2015: The customer calls for delivery of the planters, and pays the balance of $7,000 when they
arrive at the customer site.

On August 27, 2015, upon delivery of planters to Turnadot's warehouse and payment of $3,000 balance due to
the supplier, which one of the following journal entries best reflects the economic impact of the transaction?
• Debit inventory $3,000; credit cash $3,000
• Debit inventory $4,000; credit the current asset 'advances to suppliers' $1,000; credit cash $3,000
• Debit cost of goods sold $4,000; credit cash $3,000; credit accounts payable $1,000
• Debit inventory $4,000; credit revenues $4,000

Financial Accounting
CURRENT RATIO AND TOTAL DEBT-TO-EQUITY RATIO

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 HBP online course – Final Exam 2
Patnode Corporation - Comparative Balance Sheet (in $)
Dec.31, Dec.31, Dec.31, Dec.31
Assets Change Liabilities
2014 2015 2014 ,2015 Change
Current assets Current liabilities
Cash 34,000 41,000 7,000 Accounts payables 13,000 12,000 -1,000
Account Receivables 22,000 25,000 3,000 Taxes payables 7,000 9,400 2,400
Merchandise Inventories 18,000 12,000 -6,000 Short-term debt 10,000 15,000 5,000
Total current assets 74,000 78,000 4,000 Total current liabilities 30,000 36,400 6,400
Non-Current assets
Machinery, at cost 0 15,000 15,000
Less: Accumul depreciation 0 3,000 3,000 Shareholders' equity
Machinery, net 0 12,000 12,000 Common stock 19,000 22,000 3,000
License, at cost 10,000 10,000 0 Retained earnings 34,000 38,600 4,600
Less: Amortization 1,000 3,000 2,000
License, net 9,000 7,000 -2,000 Total Liabilities and
Total Assets 83,000 97,000 14,000 Shareholders' equity 83,000 97,000 14,000

What is Patnode’s total debt-to-equity ratio at the end of 2014 (rounded to 2 decimals)?
5.30 0.19 0.25 4.04

Harvard-online
Financial Accounting
HBP online course – Final Exam 1

On January 1, 2019, Flip-Flop Inc. purchased a trademark from Cool Shoe Inc
for $200,000. They paid for the purchase of $100,000 in cash and $100,000 in
Flip-Flop common stock.
If Flip-Flop has long-term debt on their balance sheet, which of the following
describes the effect of the transaction on Flip-Flop Inc.?

• Current ratio will decrease and total debt to equity ratio will increase
• Current ratio will be unaffected and total debt to equity ratio will decrease
• Current ratio will decrease and total debt to equity ratio will decrease
• Current ratio will increase and total debt to equity ratio will increase

Harvard-online
Financial Accounting
SALES TAX – VALUE ADDED TAX (VAT)
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Which statement is correct?

a. When a credit sales involves VAT (sales tax), the receivable balance does not include
the amount of VAT
b. When a credit sales involves VAT (sales tax), the sales revenues include the amount of
VAT
c. Accumulated depreciation is a cash fund
d. None of the above
BIGCORP Cy design semiconductor and electronic components. On July 1, 2022, they did a big
transaction with customer Pompom and earned revenues of €1,000,000 VAT included. Pompom paid
cash 60% of that transaction and will pay the rest one month later.
VAT is a sales tax, also called Value-Added Tax whose current rate is 20%.
What is the correct journal entry to record that transaction?

a. Debit Cash €600,000 ; Credit Sales revenues €833,333; Credit Tax payable €166,667; Debit
Trade receivables €400,000
b. Debit Cash €600,000 ; Credit Sales revenues €833,333; Credit Tax payable €166,667; Debit
Trade receivables €333,333; Debit Tax receivable €166,667
c. Debit Cash €600,000 ; Credit Sales revenues €500,000; Credit Tax payable €100,000
d. Debit Cash €1,000,000 ; Credit Sales revenues €833,333; Credit Tax payable €166,667

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