Pre-read Module 1 Basic Concepts in Finance

Objectives of this module

Introduce basic financial concepts & terminology with a focus on financial reporting

Explain difference between regulatory reporting & management reporting

Explain the main components of each financial statement

Explain how the financial statements interact Explain the typical cash cycle of a company

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There are 2 types of financial reporting

1. Project profitability

2. Product line profitability

3. Customer profitability

4. Business Unit P&L

13/04/2023 3

For an external audiencePrepared in collaboration with

accountant

For an internal audienceFull freedom in what you do &

how you do it

RegulatoryReporting

1. Income Statement or Profit & Loss (P&L)

2. Balance Sheet

3. Cash flow statement

ManagementReporting

There are 2 types of financial reporting

1. Project profitability

2. Product line profitability

3. Customer profitability

4. Business Unit P&L

13/04/2023 4

RegulatoryReporting

1. Income Statement or Profit & Loss (P&L)

2. Balance Sheet

3. Cash flow statement

ManagementReporting

External audiencePrepared in collaboration with

accountant

Internal audienceFull freedom in what you do &

how you do it

3 parts in the regulatory reporting

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Balance SheetP&L or Income

StatementCash Flow Statement

Shows what the business owns, what it owes to lenders & creditors, and other obligations or claims on the assets at a selected point in time

Shows whether a company made or lost money during the period being reported

Shows where the cash that the company used came from and where the cash that the company generated went to during the period being reported

Indication of the overall financial stability of the

company

Indication of the profitability of the

company

Indication of the ability to pay the bills

3 parts in the regulatory reporting

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Balance SheetP&L or Income

StatementCash Flow Statement

Shows what the business owns, what it owes to lenders & creditors, and other obligations or claims on the assets at a selected point in time

Shows whether a company made or lost money during the period being reported

Shows where the cash that the company used came from and where the cash that the company generated went to during the period being reported

Indication of the overall financial stability of the

company

Indication of the profitability of the

company

Indication of the ability to pay the bills

Balance sheet shows the current status of what the company owns and owes

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2012 (In ‘000)

Assets Liabilities

Cash & equivalents $972,309 Current liabilities $415,379

Short term investments $479,141 Deferred tax $27,717

Property, Plant & Equipment (Net) $186,677 Long Term Liabilities $30,810

Working Capital $603,418 Equity $908,424

$1,382,330 $1,382,330

Example: Linkedin

Everything the company OWNS

Everything the company OWES

Owed to sharehold

ers

Balance Sheet- A simple example from personal life

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Assets (All Your Stuff) €220,000

Cash savings €6,000

Flat €200,000

Car €10,000

Piano €4,000

Liabilities €220,000

Mortgage flat €120,000

Loan (not a gift) from my parents €10,000

Equity €90,000

Gift from parents ends up here

Example: Linkedin buys a $100K-building with cash

13/04/2023 9

2012 (In ‘000)

Assets Liabilities

Cash & equivalents $972,309 Current liabilities $415,379

Short term investments $479,141 Deferred tax $27,717

Property, Plant & Equipment (Net) $186,677 Long Term Liabilities $30,810

Working Capital $603,418 Equity $908,424

$1,382,330 $1,382,330

Example: Linkedin

-100K

+100K

=

Example: Linkedin buys a $100K-building with a loan

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2012 (In ‘000)

Assets Liabilities

Cash & equivalents $972,309 Current liabilities $415,379

Short term investments $479,141 Deferred tax $27,717

Property, Plant & Equipment (Net) $186,677 Long Term Liabilities $30,810

Working Capital $603,418 Equity $908,424

$1,382,330 $1,382,330

Example: Linkedin

+100K +100K

+100K +100K

Example: Linkedin gives $100K dividend to shareholders from cash

13/04/2023 11

2012 (In ‘000)

Assets Liabilities

Cash & equivalents $972,309 Current liabilities $415,379

Short term investments $479,141 Deferred tax $27,717

Property, Plant & Equipment (Net) $186,677 Long Term Liabilities $30,810

Working Capital $603,418 Equity $908,424

$1,382,330 $1,382,330

Example: Linkedin

-100K

-100K

-100K -100K