Differentiate between Economy and Politics

1. Economy and Politics
• Highlight various current economy
parameters which really correlates the
finance industry.
• Spot the political outcomes which directly
or indirectly affect the industry.
• Conclude the comments based on the
current affairs and economic numbers.

2. The Accounting Cycle
Journal Entry
Ledger Posting
Trial BalanceAdjusted Trial Balance
Periodical Adjustments
Financial Statements
Accounting
Cycle

3. Introduction
• Financial statements are a snapshot of a company's well being at a
specific point in time.
• The length of time (the accounting period) that these financial
statements represent varies;
• The timing and the methodology used to record revenues and
expenses may also impact the analysis and comparability of financial
statements across companies.
• Accounting statements are prepared in most cases on the basis of
these three basic premises:
1. The company will continue to operate (going-concern
assumptions).
2. Revenues are reported as they are earned within the specified
accounting period (revenues-recognition principle).
3. Expenses should match generated revenues within the
specified accounting period (matching principle).

4. Financial statement analysis framework
Consist of six steps:
1) Sate the objective and context: Determine what questions the analysis seeks
to answer, the form in which this information needs to be presented, and what
resources and how much time are available to perform the analysis.
2) Gather Data: Acquire the company’s financial statements and other relevant
data on its industry and the economy. Ask questions of the company’s
management, suppliers and customers and visit company sites.
3) Process the data: Make any appropriate adjustments to the financial
statements, calculate ratios. Prepare exhibits such as graphs and common-
size balance sheet.
4) Analyze and interpret the data: Use the data to answer the questions stated in
the first step. Decide what conclusions or recommendations the information
supports.
5) Report the conclusion or recommendations: Prepare a report and
communicate it to its intended audience. Be sure the report and its
dissemination comply with the code and standards that relate to investments
analysis and recommendations.
6) Update the analysis: Repeat these steps periodically and change the
conclusions or recommendations when necessary.

5. Business Environment, Accounting and Financial Statements
Business Environment
Labor Markets
Capital Markets
Product Markets:
• Suppliers
• Customers
• Competitors
Business Regulations
Business Strategy
Scope of Business:
• Degree of Diversification
• Type of Diversification
Competitive Positioning:
• Cost Leadership
• Differentiation
Key Success Factors & Risks
Accounting Environment
Capital Market Structure
Contracting & Governance
Accounting Conventions &
Regulations
Tax & Financial Accounting
Linkage
Independent Auditing
Legal System for Accounting
Disputes
Accounting Strategy
Choice of:
• Accounting Policies
• Accounting Estimates
• Reporting Formats
• Supplementary
Disclosures
Business Activities
Operating
Investment
Financing
Accounting System
Measure & Report
Economic
Consequences of
Business Activities
Financial Statements

6. Basic Accounting Methods
• Cash-basis accounting – This method consists of recognizing
revenue (income) and expenses when payments are made (checks
issued) or cash is received (deposited in the bank).
• Accrual accounting – This method consists of recognizing revenue
in the accounting period in which it is earned (revenue is recognized
when the company provides a product or service to a customer,
regardless of when the company gets paid). Expenses are recorded
when they are incurred instead of when they are paid.
• Benefits of Cash Accounting: It is easy to use and implement
because the company records income only when it gets paid and
records expenses only when it pays them.
• Benefits of Cash Accounting: If accepted by the IRS (limited cases
only), the company is taxed when it has money in the bank.
• Benefits of Cash Accounting: On average, fewer transactions will be
recorded (bookkeeping).

7. • Biggest drawback of cash accounting: Cash accounting can
distort a company's actual income and expenses, especially if it
extends credit to its customers, purchases raw materials on credit
from its suppliers or keeps inventory.
Benefits of Accrual Accounting
• Generally, it provides a clearer picture of the financial performance
(income statement) and financial health (balance sheet).
• It allows management to keep track of accounts receivables and
payables more efficiently.
• It is more representative of the economic reality of the business. A
service provider may not require upfront payment for an annual
service; this revenue will be recorded as it is performed, not when it is
paid. Similarly, expenses that are paid in advance - such as property
taxes, which are paid semiannually - will be recognized on a monthly
basis.
• It enhances comparability of performance (income statement) and
financial stability (balance sheet) from one period to the next.
• There is a smoother earning stream.
• There is enhanced predictability of future cash flow.

8. Cash Basis Accounting
Taken as is, the financial statements in Figure 6.1 below indicate that XYZ
Corporation is not doing well, with a net loss of $43,200, and may not be a good
investment opportunity. Figure 6.1: XYZ Corporation's Financial Statements
using Cash Basis Accounting

9. Accrual Basis Accounting:
Armed with some additional information, let's see what the income
statement would look like if the accrual-basis accounting method was
used.
Additional Information:
A1. June 12, 2005 – The company received a rush order for $80,000 of
wood panels. The order was delivered to the customer five days later.
The customer was given 30 days to pay. (With the cash-basis method,
sales are not recorded in the income statement and not recorded in
accounts receivables: no cash, no record).
A2. June 13, 2003 – The company received $60,000 worth of wood
panels to replenish their inventory, and $40,000 was related to the rush
order. The company paid the invoice in full to take advantage of a 2%
early-payment discount. (With the cash-basis method, this is recorded
in full on the income statement, and there is no record of inventory on
hand).
A3. June 1, 2005 – The company launched an advertising campaign that
will run until the end of August. The total cost of the advertising
campaign was $15,000 and was paid on June 1, 2005.

10. XYZ Corporation's Restated Financial Statements using Accrual Basis Accounting