Summary of Courses in Finance State Exam

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Summary of Coursesin Finance (State Exam)

• Mihály Ormos

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Some Words on the State Exam

• 22 questions in four different blocks (subjects)
• Accounting (3 Theorems)
• Basics of Business Economics (3 Theorems)
• Corporate Finance (9 Theorems)
• Macro-Finance (7 Theorems)
• Only one out of twenty-two should be drawn
• 8 10 minutes for the answer
• Conversation
• Coherent knowledge
• Preparation time
• Two or three different boards, with 4 members
• Immediate mark as it was in the course unit exam

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Accounting

• 1. Balance Sheet
• Notation of balance sheet
• The structure of the balance sheet
• Contents of main groups and groups
• 2. Income Statement
• The concept and of structure of the income
  statement
• Total cost and turnover cost type of income
  statement
• The contents of profit and loss categories
• 3. Cash-flow
• The concept and of structure of the cash flow
  statement
• Direct and indirect type of cash flow
• Effect of economic events on the BS, CF and
  IS(Connection between the three statements)

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Accounting
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Balance Sheetas the Part of the Financial Report
(Statement)
Balance Sheet Income Statement Notes to the
Report Business Report
Disclosure
Report
Ledger (Continuous record of economic events)
Order of documents
Analytical records
Documents (i.e. invoices)
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Balance Sheettypes of financial report

• Simplified report
• Started to use this type before January 2001.
• Revenue lt 50 million
• Simplified annual financial statement
• Revenue
• Average number of employees
• Total Assets
• Annual financial statement
• Consolidated annual financial statement

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Balance SheetConcept and Structure

• Purpose is to show the financial position of a
  business on a specific date.
• The financial position is shown from two points
• Assets are the properties and property rights of
  the firm(what we hold)
• Liabilities are the equity of the owners and the
  debts(from what we bought)
• ? Assets ? Liabilities ( owners equity)
• The properties are listed in a predefined order
• Measurement unit Value
• Signed by a chartered accountant
• Two value column (for the previous and actual
  year)

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Balance Sheet Structure
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Balance SheetMain Groups and Groups
Balance Sheet, 200X. Dec.. 31.
D. Owners equity E. Provisions F. Liabilities
(Debts) G. Passive Accruals and deferred
items
A. Fixed Assets B. Current Assets C. Accrued
Incomes and prepaid expenses
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Assets Balance SheetMain Groups and
Groups

• The assets are classified by the duration of
  ownership
• Fixed Assets
• Properties which have been held by the firm for
  more than one year.
• Current Assets
• Those which cannot be included in the above
  group.
• The management should decide on the
  classification.
• Active Accruals(Accrued incomes and prepaid
  expenses)
• The revenues and expenditures has to be cleared
  to the year for which it has been occurred, in
  this main group the cleared revenues are
  increased or the expenditures are decreased.

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Liabilities Balance SheetMain Groups
and Groups

• Shareholders Equity
• Capital which is placed at owner's disposal for
  permanent use.
• Provisions
• Provisions are liabilities, which created in
  charge of the Earnings Before Interest and Tax
  (EBIT) by definition, so it formulate transition
  between shareholder's equity and liabilities.
• Liabilities
• are acknowledged debts that has to be performed
  in money
• Passive Accruals(Deferred incomes and accrued
  expenses)
• in this main group the cleared revenues are
  decreased or the expenditures are increased.

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Balance SheetMain Groups and Groups
Balance Sheet, 200X. Dec.31.
D. Equity I. Subscribed Capital II. Unpaid
Subscribed Capital III. Capital Reserve IV.
Committed Reserve V. Accumulated profit
Reserve VI. Evaluation Reserve VII. Retained
Earnings E. Provision F. Liabilities I. Junior
Debt II. Long-term Debt III. Short-term Debt G.
Passive Accruals
A. Fixed Assets I. Intangible Assets II.Tangible
Assets III. Invested Financial Assets B. Current
Assets I. Inventories II. Receivables III.
Securities IV. Cash C. Active accruals
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Fixed Balance SheetAssets Main
Groups and Groups

• Intangible assets
• Tradable, non-material assets which permanently
  (for more than one year) serve the firm.
• Constituents
• Rights representing pecuniary value, Goodwill,
  Intellectual product,
• RD, Value of establishment or reorganisation,
  Revaluation upwards
• Tangible assets
• Material assets which directly or indirectly and
  permanently serve the company.
• Constituents
• Land, buildings and connecting property rights,
  Machinery and equipment, Other equipment,
  Investments, Advance payments towards
  investments, Revaluation upwards
• Depreciation

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Fixed Balance SheetAssets Main
Groups and Groups

• Invested financial assets (Long term investments)
• Investment into another entity for the sake of
  some kind of cause like control or long term
  return.
• Constituents
• Profit-sharing, Securities, Loans, Long-term bank
  deposits
• Depletion

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Current Balance SheetAssets Main
Groups and Groups

• Inventories
• Those current assets, which can be stocked, and
  have quantitative measure, like
• Stock (in hand),
• Goods,
• Advance payments made towards inventories,
• Livestock,
• Work in progress and semi-finished products,
• Finished products
• Receivables
• Contractual claims that acknowledged by the
  partner.
• Constituents
• Accounts receivable (buyers),
• Draft receivables,
• (Unpaid issued capital),
• Other receivables

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Current Balance SheetAssets Main
Groups and Groups

• Securities
• Short term securities (maturity or its owning is
  shorter than one year)
• E.g.
• Shares bought for sale,
• Own shares, shares Other securities
• Bonds and other securities bought for sale,
• Cash
• Liquid assets include
• cash, cheques and
• bank deposit

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Owners Balance SheetEquity Main
Groups and Groups

• Subscribed Capital
• Paid-in capital represents the amounts invested
  in the corporation by the stockholders. This
  amount can be found in the statement of
  establishment.
• Unpaid Subscribed (Issued) Capital
• Some kind of receivable, just for better
  information this is shown here
• Capital reserve
• Capital which is paid in above the par value by
  the owners.
• Committed Reserve
• Limit for dividend pay off, formed in charge of
  the capital reserve or the accumulated profit
  reserve
• Accumulated profit reserve
• is the sum of the retained earnings in the
  previous years.
• Evaluation reserve
• is the sum of the revaluation upwards on the
  asset side.
• Retained Earnings (Net profit)

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Liabilities Balance Sheet Main
Groups and Groups

• Junior Debts
• Long-term liabilities
• Long-term loans
• Convertible bonds
• Debts on issue of bonds
• Investment and development credits
• Other long-term credits
• Other non-current liabilities
• Short-term liabilities
• Liabilities with expiration less than one year,
  or with a less then one year ownership. Like
• Short-term loans
• Short-term credits
• Advance payments received from purchasers
• Accounts payable (suppliers)
• Overdraft debts
• Other short term liabilities (like Accrued
  salaries, Social insurance etc.)
• Passive accruals

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Income Statement As the Part of the Financial
Report
Balance Sheet Income Statement Notes to the
Report Business Report
Disclosure
Report
Ledger (Continuous record of economic events)
Analytical records
Documents (i.e. invoices)
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Income Statement Concept and Structure

• The income statement shows the difference of the
  annual revenues and expenditures.
• Uniform structure, predefined earning categories.
• It gives information on the profit gaining
  capability of the firm.
• It is a report about the derivation of retained
  earnings.
• By the law of accounting
• The profit and loss account shall contain the
  breakdown of the entrepreneur's balance-sheet net
  profit figure, that is the after-tax profit
  retained by the entrepreneur, the main factors
  influencing the development of profits and
  losses,...

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Income Statement Concept and Structure

• Trading Revenues
• - Trading expenditures (costs)
• A/ Trading profit (EBIT)
• Financial revenues
• - Financial expenditures
  .
• B/ Financial profit
• C/ Usual Entrepreneurial Profit or Loss (? A ? B)
• Extraordinary Revenues
• - Extraordinary Expenditures
  .
• D/ Extraordinary profit
• E/ Pre-tax profit (EBT) (? C ? D)
• - Tax liability
  .
• F/ After-tax profit
• - Paid (approved) dividend
  .
• G/ Retained earnings (balance-sheet net profit)

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Income Statement Types

• In Hungary
• Total Costs profit and loss account procedure
  (A)
• Turnover costs profit and loss account procedure
  (B)
• (US, UK GAAP single step and multiple step)
• The differences between the two types can be
  found in the derivation of the trading profit.

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Income Statement Types
Total cost type Net sales
revenues Other revenues Capitalised value
of own performance Trading Incomes Annual
total costs Other expenditures Trading
expenditures . A/ Trading (Business)
profit
Turnover cost type Net sales
revenues Other revenues Trading
incomes Costs of sales Other expenditures Tradi
ng expenditures . A/ Trading
(Business) profit
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Net sales Income Statement
Revenues Types

• The consideration
• value of sold inventories (products, materials,
  good etc), and services performed,
• accepted by the partner,
• not including the VAT
• increased by the subsidies and extra charges and
• reduced by consumption tax and any reductions
  shall be entered as net revenues
• Net Domestic Sales Revenue
• Net Export Sales Revenue
• Revenues ? Cash inflow

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Other Income Statement Revenues
Types

• Other revenues are revenues not forming part of
  the net sales revenues which arise in the course
  of regular activity (business), like
• Received compensation
• Received penalty
• Revenues from intangible and tangible asset sold
• Utilisation of the previous years provisions
  formed

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Capitalised value of Income Statementown
performance Types

• Two parts
• Capitalised value of self-manufactured assets
  arethe total amount of the value of
  self-manufactured assets capitalised (entered
  among assets) in the calendar (business) year.
• Change in self-manufactured inventoriesdifference
  between the opening and closing
  self-manufactured inventory of the year.

A
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Total Income StatementCosts
Types

• Material type expenditures
• utilisation of material purchased
• purchase value of goods sold
• utilized service used
• other services
• further billed value of subcontractors work
• Payments to personnel
• wages
• personnel involvement
• other payments to personnel, etc.
• Depreciation

A
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Costs of Income StatementSales
Types

• That part of the total costs which can be
  connected to the revenues, so it is equal to
• Total costs - Capitalised value of own
  performance
• Direct cost of sales as
• costs of products,
• materials and
• goods sold
• services performed accounted as direct cost
• costs of trading activities that may accounted
  for directly
• Indirect cost of sales as
• costs of sales (marketing costs)
• administrative costs
• other general costs (overheads)

B
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Other Income StatementExpenditures
Types

• Other expenditures are costs and payments not
  connected directly or indirectly to the net sales
  revenues which are incurred in the course of the
  regular activity (business).
• Paid compensation
• Paid penalty
• Expenditures of (i.e. book value) of intangible
  and tangible asset sold
• Provisions formed
• etc.

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Comparison Income Statementof the two
types Types

• Net sales revenue 10.000 thousand HUF
• Other incomes 3.000 thousand HUF
• Other expenditures 2.000 thousand HUF
• Total costs 11.000 thousand HUF
• Capitalised value of selfmanufactured assets
  1.000 thousand HUF
• Change in self-manufacturedinventories
  2.000 thousand HUF
• Calculate the trading profit!
• (Use the total - and turnover cost type of profit
  and loss accounts!)

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Comparison Income Statementof the two
types Types

• 1. Calculate the capitalised value of own
  performance
• 100020003000 thousand HUF
• 2. Determine the costs of sales
• 11000-30008000 thousand HUF

Type A Net sales revenues 10000 Other
revenues 3000 Capitalised value of own
performance 3000 Trading Incomes
16000 Yearly total costs 11000 Other
expenditures 2000 Trading expenditures
13000. A/ Trading (Business)
profit 3000
Type B Net sales revenues
10000 Other revenues 3000

. Trading incomes 13000 Costs of
sales 8000 Other expenditures
2000 Trading expenditures 10000
. A/ Trading (Business) profit 3000
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Income Statement Profit and Loss Categories

• Trading Revenues
• - Trading expenditures (costs)
• A/ Trading profit (EBIT)
• Financial revenues
• - Financial expenditures
  .
• B/ Financial profit
• C/ Usual Entrepreneurial Profit or Loss (? A ?
  B)
• Extraordinary Revenues
• - Extraordinary Expenditures
  .
• D/ Extraordinary profit
• E/ Pre-tax profit (EBT) (? C ? D)
• - Tax liability
  .
• F/ After-tax profit
• Use of accumulated profit reserve for
  dividends
• - Paid (approved) dividend
  .
• G/ Retained earnings (balance-sheet net profit)

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Financial Income StatementProfit
Profit and Loss Categories

• Financial profit is the difference of the
  revenues and expenditures of financial
  transactions.
• Financial revenues
• interest received
• interest related revenues
• dividends
• profit-sharing
• other revenues of financial transactions
• Financial expenditures
• interest paid
• interest related payments
• write-off (depletion) of financial investments
  dividends
• other expenditures of financial transactions

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Usual Entrepreneurial Income
StatementProfit or Loss Profit and Loss
Categories

• The sum of the trading (business) profit or loss
  and the financial profit or loss.
• Gives information on the profit gaining
  capability of the firms normal course of
  activity.

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Extraordinary Income StatementProfit
Profit and Loss Categories

• Extraordinary profit figure is the difference of
  the extraordinary revenues and extraordinary
  expenditures.
• Extraordinary revenues and extraordinary
  expenditures are independent of the
  entrepreneurial activity i.e. fall outside of the
  entrepreneurs normal course of business, they
  are listed in the law of accounting.

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Cash-Flow Concept and Structure

• The statement of cash-flows focuses on cash
  receipts and cash payments, so the main question
  to be answered is
• Did the companys cash balance increase or
  decrease during the year and, why?
• The statement shows why cash changed over the
  period by reporting net cash provided or used by
• operating activities,
• investing activities and
• financing activities.

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Cash-Flow Direct and indirect method

• Direct method
• involves listing each major class of cash
  receipts transactions and cash disbursements
  transactions for each of the three activity
  areas.
• The operating activity transactions include cash
  received from customers, cash paid to merchandise
  or raw material suppliers, cash paid to employees
  for salaries or wages, and cash paid for other
  operating expenses etc.
• Indirect method
• This method shows the net income as the first
  source of operating cash,
• derives cash flows from operating activities by
  explaining the CHANGE in each of the non-cash
  operating accounts in the balance-sheet.

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Direct Cash-Flowmethod
Structure

• Cash-flows from operating activities
• Cash received from customers
• Cash paid to suppliers
• Payments for compensation of employees
• Other operating expenses paid
• Interest paid
• Taxes paid
  .
• Net cash provided by operating activities
• Cash-flows from investing activities
• Proceeds from sale of land
• Investment in plant and equipment .
• Net cash used for investing activities
• Cash flows from financing activities
• Additional long-term borrowing
• Payment of long-term debt
• Purchase of treasury stock
• Payment of dividends on common stocks .
• Net cash used for financing activities

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Indirect Cash-Flowmethod
Structure

• Cash-flows from operating activities
• Net profit (income)
• Add (deduct) items not affecting cash
• Depreciation expenditures
• Increase in accounts receivable
• Increase in inventories
• Increase in current liabilities
• Other net
  .
• Net cash provided by operating activities
• Cash-flows from investing activities
• Proceeds from sale of land
• Investment in plant and equipment .
• Net cash used for investing activities
• Cash flows from financing activities
• Additional long-term borrowing
• Payment of long-term debt
• Purchase of treasury stock
• Payment of dividends on common stocks .
• Net cash used for financing activities

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Law of Cash-FlowAccounting
Structure

• Cash-flows from operating activities
• Pre-tax profit
• Depreciation
• Depletion
• Forming or using provisions
• Profits of selling fixed assets
• Change in accounts payable
• Change in other short term debts
• Change in passive accruals and deferred items
• Change in accounts receivable
• Change in current assets(without accounts
  receivable and cash)
• Paid, payable tax
• Paid dividend
  .
• Net cash provided by operating activities
• Cash-flows from investing activities
• Proceeds from sale of land, plant and equipm.
• Investment in plant and equipment
• Received profit-sharing and dividend
  .
• Net cash used from investing activities

Cash flows from financial activities Incomes of
public offering Incomes of bond or other security
offering Long-term borrowing Payment of
long-term debt Received cash Stock
withdrawal Payments of debts Long term loans,
bank deposits Permanently granted cash Change in
claims against founding membersand in other long
term liabilities . Net
cash used for financing activities Change in cash
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Cash-FlowConnection between the CF, the IS, and
the BS

• Balance sheet vs. income statement
• Retained earnings can be found in both statements
• Change in cash cannot be seen in the profit and
  loss account
• Cash-flow
• this statement can be compiled from the data
  presented in the balance-sheet and income
  statement
• Both the balance-sheet and income statement use
  accrual accounting (recognises revenue when it is
  earned, expenses when they are incurred) while
  the cash-flow uses cash-flow accounting
  (recognises transactions when cash has been
  received or paid).

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An economic evente.g. provision

• IS
• Cleared as other expenditure, so decreasing the
  pre-tax profit
• BS
• Increasing in provision
• Decreasing in retained earnings
• CF
• The pre-tax profit is decreased (-)
• Provisions formed ()