Unit 8
Accounting and financial statements
Content
Definition of accounting
Accounting books
Accounting process
Financial statements
Definition of accounting
Definition: Accounting is the process of identifying, measuring,
recording, classifying, summarizing, analyzing, interpreting and
communicating financial transactions.
Financial transactions: purchasing materials, issuing shares to raise
capital etc
Functions: + keep systematic records of financial transactions
+ communicate the relevant information to user groups.
Account: a record of financial transactions, including similar
transactions, often recorded according to double entry system.
Basic Accounting equation: Assets= equity + liabilities
Double entry bookkeeping
One amount of money can be recorded as debit in one account and credit in other accounts to
make sure Credit= debit
Example of double entry bookkeeping.
Use cash in bank account to purchase materials as inventory
Money in bank account and inventory belong to Assets, so
Cash in bank account decrease Credit
Inventory increase Debit
Use cash to pay for accounts payables of raw materials
Cash belong Assets, Account payable belong Liabilities
Cash decrease Credit
Accounts payable decrease Debit
Accounting books
Source documents: act as evidence for financial transactions: bank
statements, receipts, invoices, bill, confirmation of order/ delivery
Book of original entry/ Journal: records of financial transactions
for the first time
Ledger accounts: periodical records from journals, in the form of
T- accounts (credit- debit)
Final accounts/ financial statements: end products of accounting
process, official documents to the public.
Accounting process
1. Identify transactions and collect source documents.
2. Record transaction for the first time in a journal/ book of original entry.
3. Post/ Transfer information from journal to ledger accounts periodically.
4. Do a trial balance to make sure that Total credits are equal to total debits.
5. Use information in the ledger accounts to make financial statements.
Double
Financial entry system
transaction Recording for the Posting
first time information
periodically
Source documents Journal Ledger
Total credit=
total debit
Trial balance
Make financial
statements
Final accounts
Financial statements
Balance
sheet
What does it tell us about?
Income
statement
Cash flow What does it list?
statement
Balance sheet
• It shows the financial position of a company on a particular date.
• It lists Assets, Liabilities and Owner’s equity.
Assets= Liabilities + Owner’s equity
Assets include current and noncurrent assets. Noncurrent assets
include tangible and intangible assets.
Liabilities include current and long- term liabilities
Short- term and long- term can be distinguished on the basis of using or
paying within a financial year or business cycle.
Income statement (Profit and loss
account)
It shows how much money a company makes and spends over a period
of time.
It lists total sales/ net sales , gross profit, costs of goods sold (chi phí
trực tiếp), operating expenses= overheads (chi phí gián tiếp), net
profit (bottom line- profit or loss).
Net sales- COGS= gross profit
Net sales- COGS- operating expenses/ overhead= operating income
(EBIT)
Cash flow statement
It shows cash flow in and out of a company in a period of time.
It lists cash flow into 3 categories: Operating activities, Investing
activities, Financing activities.
[Link]
financial-statements/
Management vs Financial accounting
Financial Management
• Fixed format • No fixed format
• Legally required • No legally required
• Both internal and external users • For internal users
• Cyclical (yearly) • Anytime if necessary
• Less detailed • More detailed
Questions
What does an accountant do in general?
What are 3 common forms of financial statements and what do they
show?
What is an account, basic accounting equation, journal, ledger, short-
term assets/ liabilities, long- term asset/ liability, depreciation, gross
profit, operating income?
Unit 9
Financial analysis
Financial analysis
Financial ratios
Financial analysis
• Definition
F.A is the selection, evaluation and interpretation of financial data,
along with pertinent information to assist in investment and financial
decision- making.
• Importance
Internal people (manager/ employee): evaluate employees’
performance, efficiency of company operations, credit policies
External people (investor/ creditor): evaluate potential investments,
credit- worthiness of borrowers.
Annual
reports and
disclosures
Market SOURCES
Economic
data data
Company’s
economic
events
• Annual reports and disclosures: financial statements
such as balance sheet and their notes, disclosures
required by securities laws to add information. They are
provided company.
• Market data: information about the market such as price
of stock on the stock market. It can be updated daily and
found in financial press, electronic media
• Economic data: information about the economy such as
GDP, CPI. It can be updated periodically and got from
government or private source
• Company’s economic events: all events happen in a
company such as bankruptcy, product launching
Financial ratios
• Ratio is the mathematical relation between one quantity and another.
• Financial ratio is the mathematical relation between one bit of
financial information and another.
Eg: gearing= long- term loan/ equity (tỉ số vốn vay)
Financial ratios
• By construction, ratios have 4 groups:
Coverage ratio: shows the ability to meet debts/ obligations- tỉ số về
khả năng thanh toán
Current ratio= current assets/ current liabilities
Return ratio: shows the net profit relative to the financial resources- tỉ
số doanh thu ròng (lợi nhuận) so với số vốn, tài sản
ROA= net profit/ total assets
ROE= net profit/ equity
Financial ratios
Turnover ratio: shows the gross benefit relative to the financial
resources- tỉ số doanh thu so với số vốn, tài sản
Component percentage: shows the component of an item to an item- tỉ
lệ phần trăm thành phần
Total debt to asset ratio= total debt/ total asset
Component percentage for net income= net income/ total sales
Financial ratios
• By operating performance and financial condition, there are 6
aspects:
• Liquidity ratio: Tỉ số thanh toán khoản nợ ngắn hạn
Current ratio= current assets/ current liabilities
• Profitability ratio: tỉ số khả năng sinh lời
Tỉ số sinh lời trên doanh thu = lợi nhuận/ doanh thu
• Activity ratio: tỉ số hiệu quả hoạt động
Kì thu tiền bình quân=các khoản phải thu/ doanh thu bình quân
ngày
• Financial leverage ratio: tỉ số đòn bẩy tài chính
Tỉ số nợ trên tài sản= tổng nợ/ tổng tài sản
• Shareholder ratio: tỉ số liên quan cổ phần
Thu về từ bán 1 cổ phiếu (earnings per share) = lợi nhuận ròng từ
cổ phiếu phổ thông/ số cổ phiếu phổ thông
• ROI ratio: tỉ số lợi nhuận so với vốn đầu tư
ROI= (doanh thu từ đầu tư- chi phí đầu tư)/ chi phí đầu tư
Questions
• What is F.A and how is it important?
• What are some sources of information to make F.A?
• How are financial ratios classified?
• What is a ratio, financial ratio, liquidity ratio, coverage ratio,
profitability ratio, activity ratio, return on investment ratio, financial
leverage ratio, return ratio, turnover ratio, shareholder ratio,
overleveraged= high gearing?