Riassunti Accounting Finance and Control

Basic terminology

Liability definition

A liability (passività) is something a person or company owes, usually a sum of money. Liabilities are settled over time through the transfer of economic benefits including money, goods, or services. Recorded on the right side of the balance sheet, liabilities include loans, accounts payable, mortgages, deferred revenues, bonds, warranties, and accrued expenses. In general, a liability is an obligation between one party and another not yet completed or paid for.

Stakeholder

A stakeholder is a party that has an interest in a company and can either affect or be affected by the business.

Shareholder

A shareholder (also known as stockholder) is an individual or institution that legally owns one or more shares of a corporation. They are a subset of stakeholders.

Financial statements or financial report

Financial statements are formal records of the financial activities and position of a business, person, or other entity. Relevant financial information is presented in a structured manner and in a form which is easy to understand. They typically include four basic financial statements accompanied by a management discussion and analysis:

• A balance sheet or statement of financial position.
• An income statement—or profit and loss report (P&L report), or statement of comprehensive income, or statement of revenue & expense
• A cash flow statement.
• A statement of changes in equity or statement of equity, or statement of retained earnings.
• A comprehensive income statement involves those other comprehensive income items which are not included while determining net income.

Depreciation

Depreciation is an accounting method of allocating the cost of a fixed (physical, tangible) asset over its useful life in the income statement when we are calculating the profit (and not at the first year) to better represent the matching principles. So, if we purchase a truck of 10k with a lifetime of 5 years and straight-line depreciation, we allocate this cost in 5 years with 2k for each year because the revenue generated by the use of the car is spread in the lifetime of the asset. It complies (rispetta) the matching principles because it represents the usage of it during time. The land asset is not depreciated, because it is considered to have an infinite useful life. This makes land unique among all asset types; it is the only one for which depreciation is prohibited.

Amortization

Amortization is the practice of spreading an intangible asset's cost over that asset's useful life. It is similar to depreciation but applies to intangible assets.

Depletion

Depletion refers to the allocation of the cost of natural resources over time (e.g., goldmine). Only for this reason can we "depreciate" land.

Book value of an asset

The book value of an asset (or carrying amount or carrying value) is the value of the asset in the balance sheet of a company. It’s computed as the original price minus the accumulated depreciation. It is calculated using the formula: Book Value = Original Value – (Depreciation, Amortization, Depletion).

Book value of a company

The book value of a company is the value of a company if it decides to sell everything considering the accumulated depreciation. So, Book Value = Tangible Assets – Liabilities.

Compound interest (future value)

Future Value (FV), Present Value (PV), effective interest rate (i), year (n), nominal interest rate (r). The formula is FV=PV(1+i) with i = r/(compound per anno) and n= year · compound per anno; this formula is used only when the cash flow is constant.

Preferred share or preference dividends

Preferred shareholders have priority over common stockholders when it comes to dividends, which generally yield more than common stock and can be paid monthly or quarterly. Unlike common stockholders, preferred stockholders have limited rights which usually do not include voting.

Financial transaction

A financial transaction is an agreement, or communication, carried out between a buyer and a seller to exchange an asset for payment.

Loan

Loan: Prestito.

Dividend

A dividend is the distribution of some of a company's earnings to a class of its shareholders, as determined by the company's board of directors.

Bonds

Bonds are a fixed income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental).

Capital structure

Capital structure can be a mixture of a company's long-term debt, short-term debt, common stock, and preferred stock. A company's proportion of short-term debt versus long-term debt is considered when analyzing its capital structure. When analysts refer to capital structure, they are most likely referring to a firm's debt-to-equity (D/E) ratio, which provides insight into how risky a company's borrowing practices are.

Accounting principles

Accounting principles are the rules and guidelines that companies must follow when reporting financial data. Based on location, they could be the accounting principles of GAAP or IFRS. Examples of the principles included in GAAP or IFRS are: Accrual principle, Consistency principle, Full disclosure principle, Matching principle, and so on.

Accounting policies

Accounting policies are different from accounting principles, as the principles are the general accounting rules, while policies are the way a company follows the rules. Examples are: in GAAP it's possible to use the accounting policies of FIFO or LIFO to evaluate the inventories, while as a rule, IFRS banned the LIFO; so the accounting policies are the methods that a business decides for themselves allowed by the accounting principles that is the general framework of principle that the company has to follow.

Efficiency vs effectiveness

Efficiency is defined as the ability to accomplish something with the least amount of wasted time, money, and effort or competency in performance. Effectiveness is the degree to which something is successful in producing a desired result.

Revenues

Revenues is the total amount of income generated by the sale of goods or services related to the company's primary operations. NET SALES = NET REVENUE = REVENUE (- resi dei customer).

Profit = Income

Profit is the amount of income that remains after accounting for all expenses, debts, additional income streams, and operating costs.

Financial liabilities

During the tutorato, mi ha detto che le financial liabilities sono tutte quelle che hanno un tasso di interesse esplicito. La definizione completa la trovi qui. Le non financial liabilities sono = total liabilities – financial liabilities.

Cost of goods sold (COGS)

Cost Of Goods Sold (COGS) = Beg. Finished Goods + COGM – End. Finished Goods + Cost of good Purchased (outsourced).

Cost of goods manufactured (COGM)

Cost Of Goods Manufactured (COGM) = Raw Material Used + Direct Labor + Manufacturing Overhead + Beg. WIP – End. WIP.

Capital expenditures (CapEx)

Capital Expenditures (CapEx): are funds used by a company to acquire, upgrade, and maintain physical assets such as property, plants, buildings, technology, or equipment. It’s a cash outflow recorded in the cash flow statement in Cash Flow From Investing Activities but has an impact in the balance sheet because it increases the PPE, over the years the asset will be depreciated and this depreciation will be recorded in the income statement. We can compute CAPEX as: ΔCAPEX = Purchase of new assets – |disposal of asset|. Or estimate CAPEX as: CAPEX = PPE_fin – PPE_in + Deprec_fin (SENZA DISMISSED/SOLD ASSET).

Operating expenditures (OpEx)

Operating Expenditures (OpEx) also OPERATING COST: an expense a business incurs through its normal business operations. OpEx includes: cost of goods sold; SG&A; depreciation and amortization; other operating expenses; interest expenses; and income taxes. All these expenses can be considered operating expenses, but when determining operating income using an income statement, interest expenses and income taxes are excluded. We can find the OpEx in the Cash flow statement in Cash From operating Activities and in the Income statement as an operating expenses. (Revenues + Δ Inv (Fin-In) + Oth. Operating Income) – OPEX (with D&A) = EBIT.

Difference between operating profit and EBIT

The key difference between EBIT and operating income is that EBIT includes non-operating income, non-operating expenses, and other income. (PERO SEMBRA CHE PER NOI È VERO CHE EBIT = OPERATING PROFIT). Non-operating income is the portion of an organization's income that is derived from activities not related to its core business operations. It can include dividend income, profits or losses from investments, as well as gains or losses incurred by foreign exchange and asset write-downs.

Net present value method (NPV) or discounted cash flow method (DCF)

It’s an evaluation method of an investment. If NPV > 0 we should accept the investment because we earn more than r (the discount rate) which we could see as an opportunity cost, meaning that the cash that we are investing is not free, but could be invested in another project (can be bonds, stocks and so on) with r% as a return. The following formula permits to calculate the today’s value of the future stream of payment. The formula is NPV = Σ(Cash Flow / (1+r)^t) with t number of years, Cash Flow the expected outflow and inflow and r the discount rate.

Internal rate of return (IRR)

Internal Rate of Return (IRR) is an evaluation method of a project that rely on the NPV concept. In fact, the Internal Rate of Return (IRR) is the discount rate that makes NPV = 0. The formula is: 0 = Σ(Cash Flow / (1+IRR)^t). If our calculated IRR is greater than another r, we have to accept the project with r as a discount rate because give value to the company.

Financial indicators

Also called accounting based indicators, are indicators useful to perform a financial analysis so are useful to evaluate and interpret financial data in order to assess the present and future financial condition of the company.

Management hierarchy

Top management consists of managers at the highest level in the management hierarchy (Chairman, Board of Directors, CFO, COO…) whose main functions are to develop long-term objectives, frame policies, organize, and control. Middle management serves as the link between top and operational levels, comprising managers of various departments like Finance Manager, Production Manager… They assign duties to operational managers and coordinate them. Operational management is the bottom level that links middle managers and the workforce, aiming at maintenance of quality and acting as a supervisor.

Contribution margin

Contribution Margin: Price (Sales) per unit – Variable Cost per unit. It represents what we have left to cover our fixed cost. A product is considered profitable if the Unitary Contribution Margin (cm) > 0 because it means that the product is contributing positively to paying the fixed cost. For short-term decisions, we should accept every deal that has a cm > 0. We can also compute the Contribution Margin (CM) that is simply computed as CM = cm · Quantity. Once we have the CM, if we deduct from it the Fixed Cost we obtain the Net Operating Income (NOI). Since the product is profitable, the only point that we can modify is the Quantity to have a positive EBIT.

Net operating income (NOI)

Net Operating Income (NOI): Revenues – All operating expenses. We saw it in the contribution margin computed as NOI = Contribution Margin – Fixed Cost. It is different from the EBIT because the NOI doesn’t take into account the D&A expenses. Io aggiungo che l’EBIT contiene anche Non operating income and expenses.

Organizational unit (OU)

An organizational unit (OU) is one of several organizational groups that accomplish a specific function.

Activity based costing (ABC)

Activity Based Costing (ABC) is a way to allocate indirect costs different from the traditional costing method. In the traditional method, we use the overhead and divide it for a single driver, which could be, for example, the labor hours or machine hours, then multiply this ratio for the usage time. In the activity based costing (ABC) approach instead, we create cost pools that are categories representing better how the OVH is spent (like assembly, customers supports…) with their measurement (like numbers of units, numbers of orders, and so on). Then we assign to each cost pool an overall utilization percentage of that pool by interviewing workers inside the factory. So now that we have the cost of that specific pool, because it’s the percentage of the OVH that we asked through the interview, we can compute the rate that we will use to better allocate the cost of the OVH for each unit.

Capitalize

In accounting, capitalization refers to the process of expensing the costs of acquiring an asset over the life of the asset, rather than the period the expense was incurred. Rather than listing the asset as an expense, the asset is added to the company’s balance sheet and depreciated over its useful life. For example, office supplies are expected to be consumed in the near future, so they are charged to expense at once. A car is recorded as a fixed asset in the balance sheet (if it’s greater than a certain capitalization threshold) and charged to expense over a much longer period through depreciation, since the vehicle will be consumed over a longer period of time than office supplies.

Depreciation and amortization in income statement and balance sheet

The term depreciation is found on both the income statement and the balance sheet. On the income statement, it is listed as depreciation expense and refers to the amount of depreciation that was charged to expense only in that reporting period. On the balance sheet, it is listed as accumulated depreciation, and refers to the cumulative amount of depreciation that has been charged against all fixed assets. Accumulated depreciation is a contra account and is paired with the fixed assets line item to arrive at a net fixed asset total.

Current ratio

The current ratio is a measure of a firm's short-term liquidity: Current Assets / Current Liabilities. With this measure, we have an indication of how much the firm is ready to cover its obligation in the current year. If greater than 1, it means that they are ready. The problem is that this ratio includes inventories and maybe the firm's inventories are not ready to sell. That’s why we need the quick ratio which is (Current assets – Inventories) / Current Liabilities.

Quick ratio also called acid test

The quick ratio is a measure of firms’ short-term liquidity. For the current ratio, we said that the problem was the inventories that could be not so liquid, so we can deduct them from the current assets: Quick Ratio = (Current Assets - Inventories) / Current Liabilities. If the quick ratio > 1, the firm is able to repay the current obligation.

Marketable securities

Marketable securities are liquid financial instruments that can be quickly converted into cash at a reasonable price. The liquidity of marketable securities comes from the fact that the maturities tend to be less than one year, and the rates at which they can be bought or sold have little effect on prices. Marketable securities include common stock, Treasury bills, and money market instruments, among others.

Lost margin (overcapacity)

When I don’t have enough capacity, I have to understand which one of my products is more profitable. I can calculate the Lost margin for each product in the following way: Lost Margin = Contribution Margin per Unit · (products produced / total products). I will produce the product with the HIGHER lost margin.

Retained earnings

Retained earnings is the amount of net income left over for the business after it has paid out dividends to its shareholders. So it’s the historical profits earned by a company, minus any dividends it paid in the past (all the net income from the start of the company minus all the dividends that the company has given to the shareholders every year). This retained capital is reinvested in the company.

Debit and credit

Business transactions are events that have a monetary impact on the financial statements of an organization. When accounting for these transactions, we record numbers in two accounts, where the debit column is on the left and the credit column is on the right. We use the basic accounting equation (Assets = Liabilities + Equity) to understand what is a debit and what is a credit. Basically:

• If something INCREASES the left side (asset side) increase the debit;
• If something INCREASES the right side (Liabilities and Equity side) increase the credit.

Obviously, if something decreases the asset side, it increases the credit and if something decreases the liabilities and equity side, it increases the debit.

Net identifiable assets (NIA)

Net Identifiable Assets (NIA): Purchase price – D&A and Impairment (contra assets) - Liabilities is the aggregation of all assets, contra assets, and liabilities related to the company's assets.

Consolidated balance sheet

Assets

• Add line by line.
• Recognize the fair value of the subsidiary assets.
• Eliminate the investment in the subsidiary.
• Recognize the goodwill = price of the M&A at 100% – FAIR VALUE of net identifiable asset (NIA) (so fair value of asset and fair value of liabilities).

Liabilities

• Add line by line.
• Recognize the fair value of the subsidiary liabilities.
• Eliminate the equity of the target.
• In the stockholder equity account add the non-controlling interest (computed as the percentage of the 100% which is not ours).

Invested capital

Invested capital is the total amount of money raised by a company by issuing securities to equity shareholders and debt to bondholders, where the total debt and capital lease obligations are added to the amount of equity issued to investors. Invested capital refers to the combined value of equity and debt capital raised by a firm, inclusive of capital leases.

Dividends

Cash or stock dividends distributed to shareholders are not recorded as an expense on a company's income statement.