HKSTP Lunch & Learn – Accounting 101

HKSTP Lunch & Learn named “Accounting 101”, which was the Finance for Non-Financial people #2, was launched on 27 Jun 2017 for help us to know how to read, analyze and interpret the figures on the financial statements.  The agenda included “Introduction to Accounting”, “Fundamental Accounting Concepts”, “Introduction to Financial Statements” and “Analyzing Financial Statements”.

There four purposes of accounting included 1) Recording, 2) Planning, 3) Decision Making and 4) Accountability.  Who are users of financial statement?  They would be Owners/investors, Management, Lenders, Trade creditors, Customers, General Public and Government.

Then the elements of accounting were introduced and they were 1) Assets, 2) Liabilities and 3) Equity.

1)      Assets

-          Current assets (Cash & Cash Equivalents, Receivables, Prepaid expenses and Inventories)

-          Non-current assets (Long-term investments, Fixed assets-Land & equipment, Long-term deposits and Intangibles

2)      Liabilities

-          Current liabilities (Trade and other payables, Current provision, short-term borrowings, Current-portion of a long-term liability and Current tax liabilities)

-          Non-current liabilities (Long-term notes, bonds, and mortgage payables, Deferred tax liabilities and Other long-term obligations)

3)      Equity

-          Shareholder’s capital (Initial and additional contribution of owners / investors and Less of dividend paid out)

-          Accumulative surplus (Accumulate net profit from previous years)

The following diagram showed the Accounting Equation that “Assets = Liabilities + Owners’ Equity”. The accounting principles were discussed.

1)      Revenue recognition

-          Service/sales have been performed/ownership of goods have been transferred

-          Probable of receivables

2)      Expenses recognition

-          When incurred

3)      Capex / Opex?

-          Capex = capital expenditure with useful life more than 1 year

-          Opex = operating expenses pays to run its basic business

After that financial statement was mentioned.  There are four types of statement included 1) Balance Sheet, 2) Income statement, 3) Cashflow statement and 4) Statement of change of equity.

Some examples were demonstrated.

Finally, analyzing financial statements separated into Qualitative and Quantitative.  Qualitative analysis is subjective judgement of unquantifiable information included Marco, Intangibles and Company level analysis.

Quantitative Analysis included Horizontal analysis, Vertical analysis and Ratio analysis.  The Ration analysis included four items below:

1)      Current Ratio = Current Assets / Current Liabilities

-          Measures a company’s ability to pay short-term obligations

2)      Debt to equity ratio = Total Liabilities / Shareholders’ Equity

-          Indicates how much debt a company is using to finance its assets relative to the amount of value represented in shareholders’ equity

3)      Return on Equity = Net Income / Shareholder’s Equity

-          Measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested

4)      Profit margin = Net income divided by revenue

-          Profit margin measures how much a company earn in each dollar of sales

Reference:

HKSTP - http://www.hkstp.org

20170221: HKSTP Lunch & Learn – Finance for Non-Financial People - https://qualityalchemist.blogspot.hk/2017/02/hkstp-lunch-learn-finance-for-non.html