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Lesson 1.
Creative accounting – an explanation
Creative accounting always starts with human intervention. Rarely can a system, even the most advanced accounting system, create profits and assets out of thin air. Creative accounting can be caused by human error, but statistically, some of these errors would have a positive while others a negative effect on profits. Therefore, a typical creative accounting incident involves both human effort and a bias towards some objectives. Most typically the objective is increased profits, inflated asset values, understated liabilities, and overstated shareholder value, the motivation of management and accountants typically being bonuses, promotion, salary rises, etc. There can be other objectives of creative accounting. Most managers and accountants perform a given role for two or three years before seeking a promotion. Therefore throughout that period they are motivated to show increases in profitability (year on year growth). This results in a form of creative accounting that smoothes out income and costs so that the result over the two or three year period is a growth in profits. Takeovers and acquisitions also create opportunities for creative accounting. In the year of the takeover, the new management and accountant have a bias to show a dismal picture — low profits, deflated asset values, inflated provisions, and perhaps an impacted stock value (as a result of the poor results if they are made public). Then in the years following the takeover, the assets can be re-inflated and provisions released, all contributing to increased profits and a perception that the new management is doing a great job. The above technique may also be used before a management buy-out. This helps the new buyers negotiate a lower purchase price and increases their return after the buy-out.
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Lesson 1.
Financial accounting can be defined as the process of identifying, measuring, classifying, accumulating, summarizing, and communicating information about economic entities that is primarily quantitative and is useful to decision makers . Accounting information is designed to be used in making financial decisions. It is primarily quantitative in nature, and it relates monetary information to a specific entity. Senior management and outside investors rely on the information provided by a firm's financial accounting system. They want to project future cash flows, revenues, or profits and use that information when evaluating the performance of an organization or assessing the feasibility of granting a requested line of credit.
In financial accounting, financial statements comprise the following elements: assets, liabilities and ownership equity which are listed as of a specific date, such as the end of a financial year. A balance sheet is often described as a snapshot of a company's financial condition. Of the four basic financial statements, the balance sheet is the only one which applies to a single point in time.
A company balance sheet has three parts: assets, liabilities and ownership equity. The main categories of assets are usually listed first and are followed by liabilities. The difference between assets and liabilities is known as equity or net assets or net worth or capital of the company and according to the accounting equation, net worth must equal assets minus liabilities.
Assets can be divided into current and fixed. The previous can be consumed or converted into cash during the normal operating cycle of the business, usually a year, and the latter are possessions of a long-lasting and unchanging nature, e.g. buildings, with an expected economic life of longer than one year. Assets can also be classified as tangible, i.e. those having physical existence, and intangible, i.e. those having no material form like patents or goodwill.
Liabilities are owed by a company to its creditors and can be divided into current and long-term ones. The previous must be settled within a year, while the latter are to be paid for in a relatively long time (more than a year).
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Governments finance most of their expenditure by imposing taxes on taxpayers. Taxes are also levied on a regional level by local authorities. In Poland taxation of income is progressive. In other words, the higher the income, the higher the rate of tax payable.
The relation between tax rates and budgetary revenue is illustrated by the Laffer curve. Too high tax rates are disincentive and reduce the tax base as people lose their motivation to work. Taxes are collected either on a direct or an indirect basis. Direct taxes are income taxes, such as personal (PIT) and corporate (CIT). Indirect taxes which burden prices include value added tax, excise duty and customs duties.
In Poland an individual pays tax on his income as a wage earner or as a self-employed person. The tax for an individual who meets the criteria of a 'permanent resident' in Poland will be calculated on his income here and abroad. A foreign resident who is employed in Poland pays tax only on his income earned in Poland.
An individual is a Polish resident if the centre of his life is in Poland , or if he stays in Poland for more than 183 days in a fiscal year. An employer has to deduct the tax payable on an employee's salary on a monthly basis. A self-employed person must prepay income tax that will be offset on filing an annual return. The advance payment is determined on the basis of the return made for the previous year. In the event of a new business, the advance will be calculated on the basis of estimates made by the owner of the business.
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Lesson 1.
Selling can create some problems. Delivery generally takes longer and payment for goods, correspondingly, can take more time.
Payment depends on the conditions outlined in the commercial contract with a buyer. There are four basic methods of payment:
1. Payment in advance,
2. Open account,
3. Bills of Exchange,
4. Documentary Letter of Credit.
An advance payment, or simply an advance, is the part of a contractually due sum that is paid or received in advance for goods or services, while the balance included in the invoice will only follow the delivery.
Open account occurs when a seller ships the goods and all the necessary shipping and commercial documents directly to a buyer who agrees to pay a seller’s invoice at a future date. Open account is typically used between established and trusted traders.
Bills of Exchange are unconditional orders in writing to pay a definite sum of money to a definite person at a definite future date and place.
Documentary Letter of Credit is a method of payment for goods in which the buyer's bank guarantees to pay a specified amount of money to the seller after the presentation of specific documents, before a certain date and in compliance with the International Chamber of Commerce (ICC) rules.
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Lesson 9.
Even a very small business can decide to grant credit to its customers. Larger SMB's grant credit to customers as a way of doing business. About 1/6 of all the assets of U.S. industrial firms are in the form of accounts receivable so granting credit is a major investment in the U.S. today. Granting credit is actually the practice of making an investment in your customers. First, you have to decide what customers are worthy of that investment.
Not all small businesses grant credit. Instead, they make all their sales on a cash basis. In many cases, this costs them sales and customers because, like it or not, we live in a credit-driven society. If a supplier needs to place a larger order from a company, that supplier may not have the funds to pay for it all at once. That order will go to another company unless your small business extends credit. Small businesses face a trade-off. They have to balance the costs of granting credit against the benefits of increased sales).
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Lesson 1.
Types of Financial Statements
When CPAs, that is Chartered Public Accountants, prepare or assist in preparing financial statements, they are required under professional standards to issue a report on those financial statements. This report can be one of three types:
1) Audit report, 2) Review report and 3) Compilation report.
The type of report is determined by mutual agreement between the client and the Chartered Public Accountant. This determination usually depends on many factors, such as the needs of the client, needs of creditors or investors, the size and complexity of the business, and other factors.
Compiled Financial Statements represent the most basic level. In a compilation, the CPA must comply with certain basic requirements of professional standards, such as having a knowledge of the client's industry and applicable accounting principles, having a clear understanding with the client as to the services to be provided, and reading the financial statements to determine whether there are any obvious departures from generally accepted accounting principles. Upon completion, no assurance is expressed that the statements are in conformity with generally accepted accounting principles. This is known as the expression of 'no assurance.'
Reviewed Statements require that the CPA perform inquiry and analytical procedures in addition to the procedures described above for a compilation. Upon completion, a report is issued stating that, firstly, a review has been performed in accordance with professional standards valid in a given country (e.g. those of the American Institute of Certified Accountants), secondly, that a review has a smaller scope than an audit, and thirdly, that the CPA did not become aware of any material modifications that should be made in order for the statements to be in conformity with generally accepted accounting principles. This is known as the expression of 'limited assurance.'
Audited Financial Statements are the product of a CPA's highest level of assurance services. CPA performs all the steps indicated above plus verification and substantiation procedures which may include direct correspondence with creditors or debtors to verify details, physical inspection of inventories or inspection of contracts. Also, the CPA gains a knowledge and understanding of the entity's system of internal control. When the audit is completed, the report states that an audit was performed in accordance with generally accepted auditing standards, and expresses an opinion that the financial statements present fairly the entity's financial position. This is known as the expression of 'positive assurance.'
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Lesson 1.
Management accounting or managerial accounting is concerned with the use of accounting information by managers to make informed business decisions that will allow them to be better equipped in their management and control functions.
The American Institute of Certified Public Accountants (AICPA) states that management accounting extends to the following three areas:
• Strategic management—advancing the role of the management accountant as a strategic partner in the organization.
• Performance management—developing the practice of business decision-making and managing the performance of the organization.
• Risk management—contributing to frameworks and practices for identifying, measuring, managing and reporting risks to the achievement of the objectives of the organization.
In contrast to financial accountancy information, management accounting information is:
• primarily forward-looking, instead of historical;
• model based with a degree of abstraction to support decision making, instead of case based;
• designed and intended for use by managers within the organization, instead of being intended for use by shareholders, creditors, and public regulators;
• usually confidential and used by management, instead of publicly reported;
• computed by reference to the needs of managers, often using management information systems, instead of by reference to general financial accounting standards.
Within the area of management accounting there are almost an infinite number of tools, methods, techniques and approaches floating around.
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Lesson 1.
Inventory management is primarily about specifying the size and placement of stocked goods. There are four basic reasons for keeping an inventory:
Most companies usually divide their 'goods for sale' inventory into:
Each country has its own rules about accounting for inventory that fit with their financial-reporting rules. An organization's inventory can appear a mixed blessing, since it counts as an asset on the balance sheet, but it also ties up money that could serve for other purposes and requires additional expense for its protection.
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Lesson 1.
Managerial finance is the branch of finance dealing with the managerial significance of finance techniques. It is focused on assessment rather than technique. The difference between a managerial approach and a technical one can be seen in questions one might ask of annual reports. The concern of a technical approach is primarily measurement. It asks: is money being assigned to the right categories? Were generally accepted accounting principles (GAAP) followed?
The purpose of a managerial approach, however, is to understand what the figures mean. Someone using such an approach might compare the returns to other businesses in their industry and ask: are we performing better or worse than our peers? If we are performing worse, what is the source of the problem? Do we have the same profit margins? If not, why? Do we have the same expenses? Are we paying more for something than our peers? They may look at changes in asset balances or red flags that indicate problems with bill collection or bad debt. They will analyze working capital to anticipate future cash flow problems.
Managerial finance is an interdisciplinary approach that borrows from both managerial accounting and corporate finance. Sound financial management creates value and organizational agility through the allocation of scarce resources amongst competing business opportunities. It is an aid to the implementation and monitoring of business strategies and helps achieve business objectives.
The role of managerial accounting
To interpret financial results managers use Financial analysis techniques. Managers also need to look at how resources are allocated within an organization. They need to know what each activity costs and why. These questions require managerial accounting techniques such as e.g. Activity based costing. Managers also need to anticipate future expenses. To get a better understanding of the accuracy of the budgeting process, they may use variable budgeting.
The role of corporate finance
Managerial finance is also interested in determining the best way to use money for improving future opportunities to earn money and minimize the impact of financial shocks. To accomplish these goals managerial finance uses the following techniques borrowed from Corporate finance:
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Lesson 1.
Firms are units of business organization conducting some productive activity (for example production of goods or supply of services) to meet consumer demand. These types of business units tend to grow from small – scale businesses, often run by sole traders, to large - scale enterprises of national and even international importance. The size of a business depends upon the amount of capital invested in it.
Here are the types of business units:
A. CIC or community interest companies
1. CIO or Charitable Incorporated Organization
2. Industrial and Provident Society, e.g. a Co-operative (which does not include Ltd. at the end of its name) or charity
B. Partnerships:
1. General Partnership
2. LLP or Limited liability partnership
3. LP or Limited partnership
C. Companies:
1. Ltd - a private company limited by shares which are not traded publicly .
2. Private company limited by guarantee which is similar to a private company limited by shares, but it does not have a share capital. There are no shares and so no shareholders, but a company does have members. Such companies are commonly used by non-profit organizations, which may omit Ltd. at the end of their names.
3. PLC – private limited company whose shares may be traded publicly. It requires an authorized minimum share capital of £50,000 and a minimum of 25% must be fully paid up prior to starting business.
4. Unlimited company - A company either with or without a share capital whose members or shareholders do not benefit from limited liability even if the company goes into formal liquidation. Unlimited companies are exempted from filing accounts with the Registrar of Companies for public disclosure, subject to a few exceptions (unless the company was a qualified subsidiary or a parent of a limited company during the accounting period).
5. Sole proprietorship / sole trader - a type of business entity owned and run by one individual. There is no legal distinction between the owner and the business.
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Lesson 1.
Mergers and acquisitions (abbreviated M&A) are aspects of corporate strategy, corporate finance and management dealing with the buying, selling, dividing and combining of different companies. One size does not fit all. Many companies find that the best way to grow is through M&A. At least in theory. mergers and acquisitions create synergies and economies of scale enabling businesses to expand operations, cut costs and enhance their market power.
An acquisition or takeover is the purchase of 100%, or nearly 100%, of the assets or ownership equity of another company. In contrast, consolidation occurs when two companies combine together to form a new enterprise altogether, and neither of them survives independently.
Acquisitions are divided into 'private' and 'public', depending on whether the acquiree or a merging company (also named a target) is or is not listed on a stock market. It seems to be very difficult to achieve acquisition success. Studies show that 50% of them are unsuccessful.
Whether a purchase is perceived as being 'friendly' or 'hostile' depends on how the proposed acquisition is seen by the target company's board of directors, employees and shareholders. In the case of a friendly transaction, the companies cooperate in negotiations, while in the case of a hostile deal, the board and/or management of the target strongly oppose the deal.
'Acquisition' usually refers to the purchase of a smaller firm by a larger one. Sometimes, however, a smaller firm will acquire management control of a larger and well-established company and keep its name. To talk about generating a second unit which may or may not be separately listed on a stock exchange we use the term 'demerger' or 'spin-off'. To sum up, one plus one makes three: this equation is the special alchemy of M&As.
The factors influencing brand decisions in such transactions can range from political to tactical. Ego can be equally important as common sense.
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Lesson 1.
Measures Used in Economics
The measures used in economics are physical measures, nominal price value measures and fixed price value measures. They differ from one another by the variables they measure and by the variables excluded from measurement. The measurable variables in economics are quantity, quality and distribution. Excluding some variables from measurement makes it possible to better focus the measurement on a given variable. This, however, means a narrower approach.
Appraisal Rights
Multiple valuation methods are often used in determining the fair stock price and value of the acquired company, including asset-based methods, income or cash flow methods, comparable market data models, and hybrid or formula methods. While most occurrences of appraisal rights are based on consolidation or mergers, it may also apply to instances when the corporation takes any extraordinary action that shareholders deem harmful to their interests. In mergers and acquisitions, appraisal rights guarantee that shareholders are adequately compensated for being overridden in a merger or acquisition.
Appraisal Approach
The above term refers to a procedure for determining an asset's value. The appraisal approach values assets on the basis of a number of factors, such as its cost, the income it generates or its fair market value as compared to similar assets. A different value will be assigned to an asset depending on which of these factors the appraiser primarily bases his or her estimate on. Sometimes the appraised value will not coincide with an asset's market value and buyers will often pay more or less than an asset's appraised value based on what the asset is worth to them. No matter which appraisal approach is used, an appraisal is only an educated guess as to what price the asset would fetch in a free market.
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Lesson 1.
In finance investment is the purchase of an asset or item with the hope that it will generate income or appreciate in future and be sold at a higher price. It generally does not include deposits with a bank or similar institution. The term investment is usually used when referring to a long-term outlook. This is the opposite of trading or speculation, which are short-term practices involving a much higher degree of risk. Financial assets take many forms and can range from the ultra-safe low return government bonds to much more risky international stocks. A good investment strategy will diversify the portfolio according to the specified needs. The most famous and successful investor of all time is Warren Buffet. In March 2013 Forbes magazine had Warren Buffett ranked as number 2 in their Forbes 400 list. Buffett has advised in numerous articles and interviews that a good investment strategy is long-term and that choosing the right assets to invest in requires due diligence.
Investments are often made indirectly through intermediaries, such as pension funds, banks, brokers and insurance companies. These institutions may pool money received from a large number of individuals into funds such as investment trusts, unit trusts, SICAVs etc. to make large scale investments. Each individual investor then has an indirect or direct claim on the assets purchased, subject to charges levied by the intermediary, which may be large and varied. It generally does not include deposits with a bank or similar institution. Investment usually involves diversification of assets in order to avoid unnecessary and unproductive risk.
Currency carry trade is a strategy in which an investor borrows money in a country that has low interest rates and lends or invests the funds in a country that has high interest rates. Many professional traders use this strategy because profits can become very large when leverage is taken into consideration. The trade relies on currency and interest-rate stability in order to succeed. If the spot currency rate changes too much to keep the interest rate advantage, money can be lost even though the trade is profitable. The yen carry trade in the late 1990s was a popular use of this strategy. Traders bought yen and then invested the proceeds in the U.S. Treasury market to earn the differential between the relatively high U.S. interest rates and the very low Japanese ones.
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Lesson 1.
The Association of Polish Banks (ZBP) is a member of the European Banking Federation since 1992, the ICC Poland since 2000 and the European Payments Council since 2002. In 2000 and 2003, the Association was granted the Alice Award for all its activities, for establishing the institution of the Banking Ombudsman, and for the Campaign for Direct Debit. The ZBP has also received the 'European Pearl' award for the institutional input in the promotion of the European idea in Poland, and in particular for the creation of the Polish banking infrastructure.
The Accounting Standards Advisory Forum (ASAF) is an advisory group to the International Accounting Standards Board (IASB), consisting of national accounting standard-setters and regional bodies with an interest in financial reporting. The principal purpose of the new advisory group is to provide technical advice and feedback to the IASB.
The Association of International Accountants (AIA) is a global body for professional accountants. It aims to create world class accountants through offering high-standard, relevant and innovative qualifications, and providing first-class, tailored and pertinent services for its members around the world. Founded in 1928, the AIA has promoted the concept of ‘international accounting’ to create a global network of accountants in over 85 countries worldwide. It promotes the principles of opportunity, quality, diversity, accountability and transparency.
The International Chamber of Commerce (ICC) is the largest, most representative business organization in the world. Its hundreds of thousands of member companies in over 130 countries have interests spanning every sector of private enterprise. A world network of national committees keeps the ICC International Secretariat in Paris informed about national and regional business priorities. More than 2,000 experts drawn from ICC’s member companies feed their knowledge and experience into crafting the ICC stance on specific business issues.
The International Organization of Securities Commissions (IOSCO) is an association of organizations that regulate the world’s securities and futures markets. Members are typically the securities commission or the main financial regulator from each country. The IOSCO has members from over 100 different countries, who regulate more than 90 percent of the world's securities markets. The organization's role is to assist its members in promoting high standards of regulation and act as a forum for national regulators to cooperate with each other and other international organizations. The IOSCO is structured into a number of committees that meet several times per year at different locations around the world and it has a permanent secretariat based in Madrid.
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Lesson 1.
In capital markets individuals and institutions trade financial securities. In the United States capital markets provide the lifeblood of capitalism. Companies turn to them to raise funds necessary to finance the building of factories, to conduct research and development and to support a host of other essential corporate activities. Much of the money comes from institutional investors such as pension funds, insurance companies, banks, foundations, colleges and universities. Increasingly, it comes from individuals as well.
Both the stock and bond markets are parts of capital markets. For example, when a company conducts an IPO (initial public offering), it is tapping the investing public for capital and is therefore using the capital market. This is also true when a country's government issues Treasury bonds in the bond market to fund its spending initiatives.
A key division within the capital market is between the primary and secondary markets. In the primary markets, new stock or bond issues are sold to investors, often via a mechanism known as underwriting. In the secondary markets existing securities are sold and bought among investors or traders, usually on a stock exchange.
Capital markets are different from money markets. The former are used for raising long term finance, such as the purchase of shares or loans that are not expected to be fully paid back for at least a year. The latter, in contrast, are used for raising short term finance, sometimes for loans that are expected to be paid back as early as overnight.
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