Explain differences of use of financial statements in accountancy and finance GROUP -TON DUC THANG UNIVERSITY Structure of presentation • Definition of Financial statements oBalance sheet oIncome statement oStatement of retained earnings oStatement of cash flows • Differences of use of Financial statements in Accountancy vs Finance Definition of Financial statements Financial statement is a report that records the financial activities of a business, individuals or any other entity There are basic statements: Balance sheet Income statement Statement of Retained Earnings Statement of Cash Flows Balance sheet Definition: a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership, a corporation or other business organization A balance sheet is often described • as a "snapshot of a company's financial condition" • the balance sheet is the only statement which applies to a single point in time Balance sheet Assets = Equity + Liabilities There are elements in a balance sheet • Assets: tangible and intangible things that can be converted into cash • Liabilities : Current liabilities and long-term liabilities, which are needed to raise capital investment • Equity : Capital stocks, share premium, retained earnings, others,…which are the amount of shareholders holding The Balance sheet equation: Assets = Liabilities + Stockholders’Equity Income statement • Definition: An income statement (statement of income, statement of earnings, or statement of operations…) shows the revenues and expenses of a company during the accounting period • There are some elements: Revenues: Cash and promises received from sale of goods or services to customer Expenses: money used to earn revenues during period Net income: is the excess of total revenues over total expenses The Income Statement equation: Net income=Total Revenues-Total Expenses Statement of Retained Earnings • Definition: a statement of retained earning shows how the net income and distribution of dividends affected the financial position of a company during the accounting period The Statement of Retained Earning equation: Ending RE = Beginning RE + Net Income-Dividends Statement of Cash Flows • Definication: a cash flow statement (or statement of cash flows) shows: how changes in balance sheet accounts income affect cash and cash equivalents breaks the analysis down to operating, investing, and financing activities Statement of Cash Flows Main categories Operating activities Investing activities Financing activities Operating activities • Operating activities : includes net income, depreciation, changes in current assets and liabilities other than cash, short-term investment, and shortterm debt =>shows how much cash comes from sales of the company's goods and services, less the amount of cash needed to make and sell those goods and services Investing activities • Investing activities: includes investments in or sales of fixed assets Þ this section largely reflects the amount of cash the company has spent on capital expenditures, such as new equipment or anything else that needed to keep the business going Þ It also includes acquisitions of other businesses and monetary investments such as money market funds.  Financing activities • Financing activities: includes raising cash by selling short-term investment or by issuing short-term debt, or shock => This section describes the goings-on of cash associated with outside financing activities • Typical sources of cash inflow would be cash raised by selling stock and bonds or by bank borrowings Likewise, paying back a bank loan would show up as a use of cash flow, as would dividend payments The Statement of Cash Flows equation: +/- Cash Flows from Operating activities (CFO) +/- Cash Flows from Investing activities (CFI) +/- Cash Flows from Financing activities (CFF) = Change in Cash Relationship of Financial Statements Differences of use of Financial statements in Accountancy vs Finance DIFFERENCES ACCOUNTANCY FINANCE Primary function _Develop & provide data measuring the performance of firms _It uses the financial statements prepared by accountants: _Assess its financial position, and pay  to make decisions about the firm’s taxes financial condition _The accountant is responsible for preparing financial statements such as the income statement, balance sheets, and cash flows  to advise others about possible losses and profits _Finance also deals a lot with risk _Derivative securities (options, futures, swaps, etc) are used to hedge against possible increase in risk DIFFERENCE S Purpose ACCOUNTANCY Measuring, preparation, analyzing, and interpretation of financial statements => To collect and present financial information of a company Making decision regarding working capital issues: o level of inventory o cash holding o credit levels o financial strategy o managing and controlling cash flow To forecast the future performance of the business Based on accrual system: Based on cash: System of determination _Revenue is acknowledged at the point _Revenues are acknowledged during the of sale and not when it was collected actual receipt in cash as in cash flow of funds _Expenses are acknowledged when they _Expenses are acknowledged when the (That is are incurred than when they are paid actual payment is made as in cash Income & outflow Expenditures) Goal To see how the company is performing FINANCE DIFFERENCE S ACCOUNTANCY FINANCE Balance sheet is used to test, evaluate the accuracy of the accounts, data recording, and the fluctuation of assets and capital Is used for decision of the company’s plant Statement of Retained Earnings • Only visible to the shareholders or those who want to use the information in the financial statements • The income share that companies use to reinvest in the core business of it • Provide for shareholders and those who want to use the information in financial statements about the effectiveness of using retained earnings by:  measuring return on investment  answer the question of whether the retained earnings to be reinvested could help firm earn the return on investment or whether the company could developed or not If not, the ... Relationship of Financial Statements Differences of use of Financial statements in Accountancy vs Finance DIFFERENCES ACCOUNTANCY FINANCE Primary function _Develop & provide data measuring the performance...Structure of presentation • Definition of Financial statements oBalance sheet oIncome statement oStatement of retained earnings oStatement of cash flows • Differences of use of Financial statements in. .. are used to hedge against possible increase in risk DIFFERENCE S Purpose ACCOUNTANCY Measuring, preparation, analyzing, and interpretation of financial statements => To collect and present financial