Lezione del 23 settembre di Economia aziendale

The issue is that when you havea parent company, and many other

subsidiaries, you have to find a way to group together the infor concerning

financial of all the subsidiaries, thefinal result is a consolidated financial

statement.

• The starting point when preparing financial statements is the identification of

business transactions

• A business transactionis an event that involves an exchangeof something of

value(goods, services, money, assets, labor…) between a business entityand a

third party(another entity or individual person)

• A business transaction has an effect onany of the accounting elements

assets, liabilities, equity, income, and expenses

Financial statements represent the result arising from the thousands business

transaction that involve business entity in a specific reporting period.

A business transaction can be recorded in financial statements when the

exchange:

– Has happened (1)

– Occurred at arm’s length (parties act in their own self-interest)

– Its value can be reliably measured in monetary terms

- monetary concept

– Is not related to any personal transactions of the owners

– entity concept

(1)We are looking at the past, so a business transaction that will happening

in the future, cannot be reported in the financial statements

(2)Must be the result of a kind of market relationships, a donation is not a

business transaction.

(3)If a transaction cannot be mesure, if you cannot assigna monetary value

cannot be included in the financial statements

(4)If I purchase a car, with the money generated by the business entity, this

is not a business transaction, this is a personal transaction.

Some examples

• Cash purchase of raw materials from a supplier: there’s money involve in

exchange for raw materials, there is three part involve, you can assume that

this is a kind of marketing relationship, we assume that is has happened,

this can be a business transaction

• Payment of wages to employees: has happened, time in exchange for

money, this is a business transaction

• Signing a contract with a new employee that will start working on January,

2025: this is not happen yet, even tho there is a signing contract, the

employee is gonna start working for the company starting from the next

year, it means that the exchange has not happen yet, so we cannot report

as an business transaction in 2024, in 2025, when this employee will

working for this company and when the exchange will be happen, hen we

will record this as a business transaction

• Owner’s purchase of a car using the income generated by the company:

the income has been generated by the company, but is a personal

transaction and not a business transaction.

• Sale of goods on credit (cash will be received later) to a customer

• Negotiating the loan agreement with a bank

• Personal transactions are transactions of the owners, partners or

shareholders that are unrelated to the operation of the business

• Business events are occurrences that will probably affect the entity in

some way, but are not recorded as business transactions until an exchange

occurs between the business entity and the outside entity/individual person

Other Example

• Contribution of capital by owners: Money in exchange of the ownership of

the business entity.

• Payment of wages

• Receipt of bank interest:

• Purchase of digital camera for business purposes

• Payment of trade payables: is when a business entity purchase some raw

material and the business generate an obligation to pay later in the future

so is settling an obligation to a supplier (which is called trade payables).

Money in exchange for the elimination of this obligations

• Sale of goods to customer

• Provision of services to client

• Purchase of accounting software

• Withdrawal of capital

• Repayment of short-term loan to financial institution

• Cash purchases of office supplies

• Payment of advertising

Nature and purpose of the balance sheet

• To achieve profits, business entities need to invest in productive assets

(investment decisions) (1)

– Properties, land, equipment, machinery….

• The acquisition of assets requires financing, which are provided by (financing

decisions):

– External parties (e.g. lenders such as banks and financial institutions)

– Internal parties (owners)

Investment decisions relate to the acquisition of some resources that will be

crucial for generating some positive profits in the future. In order to achieve

profits is important to acquire the right resources. In order to make this profits

you need the money, finance, typically this money come from the owners, but

sometimes the owner don’t have the money that he needed, so at the start you

need someone that trust you and give you the money to start and create a new

business.

• The balance sheet is a financial statement that details the entity’s assets,

liabilities and equity as at a particular point in time — the end of the reporting

period

• It shows:

– What the entity owns (or controls) — the assets

– The external claims against the entity’s assets — the liabilities

– The internal claims against the entity’s assets — the equity

The resource that will generate hopefully benefits for the owner are called the

assets

The liabilities refers to financial decisions that involves an external part, bank

ecc, and this create some obligations that must be settle by using the assets of

a business entity, so that’s the reason why the liabilities that refers to financial

from external parties can be define as external claims against entity’s assets.

Claims means that the business entity has a portion of the assets in order to

settle this obligations.

Equity is the internal claim, once that obligations with external parties are

settle than the owners can claim against the entity assets

Example of a balance sheet

On the top of this table, you see the description of the assets of the business

entity, in semptember 2015, there are different type of assets; cash, account

recivable (are basically the money that will be receive from customers in the

future), office furniture and office equipment, these are the resource that are

available in the business entity in order to have some profits in the future. Than

we have the claim against this resources, from external parties (loan 50 000),

this means that in the future the entity will need to use a portion of this assets

in order to settle this obligations. There are resources, this resources can be

claimed by different individuals, or institution and other entity, and we

classifies this resources as: the internal (owners) and external (banks etc…).

The total of the resources that are available by the business entity must equal

the value of the claims of this resources, this claims refers again to external or

internal parties of the owners.

Assets must always equal the total of liability and equity. Every business

transaction will affect this accounting equations, in a way that this equation is

always in balance after thie each transaction, so even if there are an increasing

of the asset, must be a correspond increase even the correspond of liabilities

and equity, if there are an increasing of the liability there must be an increasing

of the asset or a decreasing of the equity, otherwise this balance are not

assure. This is the golden rule of the balance sheet.

• An asset is formally defined as ‘a resource controlled by the entity as a result

of past events and from which future economic benefits are expected to flow to

the entity’

An asset is a kind of resources, can be used by the entity to build the business.

There are 3 important things to consider n order to record a resource as a

available asset for a business entity.

1. The resource must be controlled by the entity

• The concept of control refers to the capacity of the entity to

– Use the asset in the pursuit of its objectives

– Deny or regulate the access of others

• Examples

– Purchase of a investment property

– Car leasing

The business entity must own the resource, but must can excluded other to

use this resources, and use this resource in order to achieve the entities

objectives. The first important point is Ownership.

2. The resource must be as a result of a past event

• Every asset must have arisen from a transaction that has happened

– A company cannot include an asset it will be getting in the future

This relate to the definition of a business transaction, basically we are

looking at the past. So there is must be a transaction that generated the

fact that the business entity is in control of the resources. If the business

entity will intent to purchase an investment property I can not record a

value of this investment property.

3. Future economic benefits are expected to flow to the entity from

the resource

• Items must provide benefits to the entity that uses them in order to be

regarded as assets

– Benefit can be cash or control of resources

The resource must be controlled arising from a past event and must is likely

to generate future benefits of the business entity.

• Satisfying the definition criteria is only part of the process in recording an

item on the balance sheet

• The recognition criteria must also be satisfied

• Recognition: recording items in the financial statements with a monetary

value assigned to them

There are two additional criteria that we should considering that many

release to the fact that we are able to assign a number to the asset.

• The monetary value associated to the asset must be reliable:

– The value of the asset can be measured reliably

– Involves the use of estimates (e.g. patent)

• Future economic benefits must be probable:

– It is more than likely that the future economic benefits will flow from the

asset to the business controlling it

The estimate must be reliable, so I can provide an estimate that at the end

make sense, even tho this estimate is based on assumptions. Assumptions

must be reasonable, if not I can not provide a reasonable number on the

balance sheet.

This benefits must be probable, having this asset can make the difference

for the competitors, in the case of a partent this criteria can make the

difference, if I have a partent and my competitors don’t have the resource I

have an advantage, so having a partent is better that not having a partent.

The difficult part is obtaining a reliable estimate of the value of the partent.

if I can not obtain a reasonable estimate even tho I have a partent I don’t

have a number on the balance sheet.

EXAMPLE

• An entity has sold a product to a