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3. MBA | Finance and Accounting | Accounting and Finance - Coggle Diagram
3. MBA | Finance and Accounting | Accounting and Finance
Accounting Fundamentals
Basics of Income Statement
In the long run, a company can generate wealth only by selling its products and services
Wealth is the accumulation of profit over a period of time
Profit is the difference between the revenue from sales and the costs involved to generate those sales
The income statement measures the profit generated by a company over a period of time
Basics of Cash Flow Statement
A cash flow statement indicates the amount of cash inflow and outflow of a company over a period of time.
The cash inflows and outflows of a company are generated by its operating, investing, and financing activities.
Basics of Balance Sheet
The balance sheet shows the sources of funds acquired by a company and the uses of those funds. It indicates the amount of money it owns, the amount it owes to external parties, and the amount invested by the shareholders of a company.
Break-even point
= Fixed cost / Variable margin
Variable margin = Selling price - Variable cost
Income statement and Balance sheets
Income Statement - I
Principles of accounting
Matching principle: The cost of goods sold should represent the items that are recorded in the sales revenue for the same time period.
Consistency principle: A company must follow the same accounting principles and methods across all its financial statements for several periods
It includes the cost of marketing, legal, HR, R&D, depreciation and amortisation, etc.
Variable margin
It is the difference between sales revenue and the variable cost of production.
If the variable margin is more than the company’s fixed cost, then the company is said to be operationally efficient
It is often computed as a percentage of sales revenue to enable comparison among companies and benchmarking with the industry average
Compare
margin %
(more comparable)
EBITDA
is a better indicator of cash operating performance as compared to EBIT because of the following:
It helps in benchmarking the operating performance of companies with varying ages of fixed assets. It is free from the bias of depreciation and amortization accounting methods
It strongly correlates with the generation of cash
Income Statement - II
Net interest
EBT
Tax
Net income
Balance Sheet
A balance sheet gives you a snapshot of a company’s financial position at a particular point of time. In fact, if you want to apply for a business loan from a bank, you will need to submit your company’s balance sheet
To draw inferences about a company’s financial health, you need to compare the balance of two subsequent periods.
Dividends
To keep the balance sheet balanced, dividends decrease the 'retained earnings of a current year' from the liabilities and equity side and the ‘cash’ from the assets side
Financial Triangle
The bottom line of the cash flow statement ‘cash at end’, is transferred to the asset side in the balance sheet.
The bottom line of the income statement, ‘net profit’, is transferred to the owner's equity section of the balance sheet
The three financial statements are linked like the three ends of a triangle known as the 'financial triangle'
Financial Framework of Businesses
