Classification of financial values i.e. Assets, Liabilities and Equity. It looks at measuring values and attributing them to labels according to what we own and what we owe.
It tells us where a company's returns are coming from
Finance expands on
Valuation of our assets and
The understanding of value of what we own as well as the value of what we owe and how we intend to finance our assets.
Where a company's obligations are owed
"A person should not go to sleep at night until the debits equal the credits" - Luca Pacioli
Obligations to payback an amount of money that is borrowed
Interest payments over the period we have borrowed the money
Required return to shareholders:
The return that shareholders demand from their investment in a given firm or single asset.
Risk: The effect of Uncertainty on Objectives. It highlights any deviations from what was expected.
Liability-->Debt holders face Credit Risk.
In case of insolvency, Debt holders are paid first, shareholders are paid second.
Therefore, shareholders demand a higher return than debt holders.
Financial Risk connects the dots (between accounting and finance) by highlighting the returns that debtholders and equity-holders require of an organisation in order to feel adequately compensated for what risk they have respectively taken on.
Capital Gain: When a shareholder makes more money from the sale of shares than what they bought it for.
Dividends are paid to shareholders annually or biannually
Difference between Accounting and Finance
Accounting is historical looking while Finance is future looking
Accountants make different financial statements. Finance use those statements to predict future and based on those assumptions decisions are made on how to spend the case and resources today.
Accounting: Risk of material misstatement of financial statements.
Finance: Risk of incorrect assumptions about the future.
A record of financial activity in a business, an overview of financial operations and a record of financial health of a company.
Types of Basic Financial Statements
Cash Flow Statement
Statement of Shareholders Equity
What Is Financial Statement Analysis?
Horizontal analysis compares data horizontally, by analysing values of line items across two or more years.
Vertical analysis looks at the vertical affects line items have on other parts of the business and also the business’s proportions.
Ratio analysis uses important ratio metrics to calculate statistical relationships.
Cash Flow Statement
Ratio analysis can be used to isolate some performance metrics in each statement and also bring together data points across statements collectively.
Financial Risk Management helps determining value creation by managing risks.
How does liquidity risk differ from commodity price risk?
Commodity price risk is associated with where that commodity is used in. If that commodity is used as a manufacturing material then the manufacturing cost will be increased hence decreasing the profit margins.
However, liquidity risk is related to how much liquid assets are available to make any payments to suppliers.
Next: Financial Ratios