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AUTONOMOUS GROUP LEARNING
Boland1
Dr. Bob Boland
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Mini AGL 101 - Basic Finance
PART I - EARLY MORNING WITH A
PARTNER Geneva, April 2005
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We trust that you will find learning
with AGL to be fun and "efficient" (doing
things right) and "effective" (doing the right
things)...
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Program for Part I - Early Morning
08.30 - 08.50 Sect. 1 - Introduction
08.50 - 09.00 Sect. 2 - Objectives
09.00 - 09.20 Sect. 3 - Key Learning
Points 09.20 - 09.40 Sect. 4 - Study -
Accounting Reportsl 09.40 - 10.00
Sect. 5 - Study - Balance Sheets 10.00 -
10.30 Sect. 6 - Review of Part I
10.30 - 11,00 at last ... a coffee break

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Printing out the program

• Now you can print out file LM1.doc
• a Learning Maintenance Workpack
• which puts the whole program into text.

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CLE - Creative Leqrning Exercise (5 minutes)

• Now to do a CLE (Creative Learning Exercise)
  which prepares your mind .. to learn for the
  full four hours.
• Please take just five minutes to relax, sit
  comforably with hands resting softly on the lap,
  feet flat on the floor... now please close the
  eyes and follow our gentle instructions in the
  Learning Maintenance Workpack printed from file
  LM1.doc.
• Afer CLE you will feel very well with the
  confidence, concenttation, motivation and
  expectation to learn and remember everything!
  Agreed ? Ok ...? Now relax

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1. Introduction (Total time -
20 Minutes)
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1.1 Automated Group Learning - AGL

• AGL (Automated Group Learning) programs are
  group-based 2/3 day management training seminars
  designed by ex-professors from INSEAD/IMD/GSB
  and used in over 20 countries around the world
  in several languages for over 100,000 managers
• AGL 1 Accounting Reports
• AGL 2 Cost Control
• AGL 3 Planning and Budgetary Control
• AGL 8 Communication for Effective
  Management
• AGL 10 EVA and Financial Management of
  Working Capital
• AGL 20 Business Strategy
• This Mini-AGL in just a morning (four hours) is
  based on AGL 1.

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1.2 Good morning ....
This diskette of the short management training
has been specially prepared for INSEAD/CEDEP
as a computer-based learning reinforcement for
the program learning book Accounting Reports -
Boland A customized version for a client
company with local cases usually takes two weeks
of research.
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1.3 The Learning Environment

• To use the program THREE "learning aids" are
  helpful for the morning
• 1. A partner to learn with.
• 2. A pre-learning audio tape (available on
• demand).
• 3. A text book to provide learning
  maintenance.
• ... off we go together .

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1.4 Help Available
Any difficulties? Please call the "hot line" for
help Dr. Bob Boland Tele
33-450-40-89-82 Email robertboland_at_wanadoo.f
r and in return ... FEEDBACK TODAY please gt
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1.5 Pre-test - just for fun
FIRST A LITTLE PRETEST TO SEE HOW MUCH YOU KNOW
BEFORE WE BEGIN THE PROGRAM ... CHOOSE ABOUT
20 QUESTIONS ... AT RANDOM ... SPEND ONLY FIVE
MINUTES ... FOUR HOURS TO GO ... TO COMPLETE THE
WHOLE PROGRAM IN A MORNING! Click on quiz
below then press RETURN, ..., choose Mult.
Choice choose NEW choose PLAY choose 20
questions READY ... STEADY ....GO ...
TRUSTWORTHY ...
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1.6 A New Way of Learning
Now ... do you want to get the most out of this
program then please study very carefully the
next three slides ... quite difficult ... but
very rewarding ... Take just five minutes to
prepare your mind to learn 1. Efficiently -
doing things right, an 2. Effectively - doing
the right things by reflecting very seriously on
how you can adapt yourself ... just for a
morning ... to a very new way of learning ... you
may surprise yourself ...
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1.6 A New Way of Learning
Recognize - that most of what we do in life, we
do without special awareness ... almost ...
non- consciously rather than consciously ...
responding to our environment which communicates
with us all the time ... e.g. driving the
car. Recognize - that our non-conscious mind is
very powerful ... it has an almost unlimited
capacity to learn ... and much much faster than
our conscious mind ... if ... we can make the
emotional investment to allow the learning
process to operate freely and not be blocked ...
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1.6 A New Way of Learning

Convince - our non-conscious mind, that we
really must and can understand, use and
remember, everything in this short learning
process... and for this we must get ...
emotionally invested Develop - the
confidence to relax and let our powerful
non-conscious mind guide us through a very
rewarding and yet highly emotional ... learning
experience ...... we can do it .. just for the
morning together ... OK?
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Question
Now ... choose the "most correct" answer ... If
we buy a whole pig for 100 ECU, the cost of one
of the pig's ears a. may be computed
scientifically b. is related to the
selling price of the pig c. depends upon
why we buy the pig d. is impossible to
compute Now write down your answer and then
click for ours c
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1.7 Remember Please
1. This is a four hour learning experience
using new learning theories to achieve both
conscious and non-conscious learning. 2. The
LEARNING is achieved by studying and speaking ...
so try to speak ... all the time ... to reinforce
your learning as if you were ... continually
... explaining ... to someone else ... 3. The
PARTNER continually encourages you to ...
complete the whole program on time ...
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2. Objectives (Total time - 10
Minutes)
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2.1 Objectives - Cost Control

• (a) Understand accounting language and concepts
• (b) Interpret balance sheets and income
• statements
• (c) Use basic financial ratios
• (d) Develop confidence in using accounting and
• financial data
• (e) Motivate further study in the future

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Question
1. An instantaneous financial picture of a
business as of a particular date is
a) an income statement b) a
statement of retained earnings c) a
balance sheet d) a profit and loss
account now write your answer and then
click for ours ... c
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Minicase - Profeld Co.
Company needs more credit from suppliers to
provide substantial financing and requests
guidelines as to how creditors may be "stretched"
(seven ideas). Please write down your answers to
the case ...
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Minicase - Profeld Co.

For your learning it is most important that
you actually record your full answers to the case
at this stage Then as you progress you may
find you want to improve or change your answer
completely as you learn more from the program
... Our solution will come before coffee time
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3. Key Learning Points (Total time
- 20 Minutes)
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3.1 Instructions
Relax ... but study carefully. Read each note
with your partner ... with emotion ... use a
variety of tones to try to convince your the
partner (do it alternately) ... show how each
point is ... valid ... practical ... related by
example to you your own experiences ... Review
the glossary as necessary.
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25
Question
2. An accurate report of the flows of sales,
costs, expenses and net profit over an
accounting period is called a/an
a) profit and loss account or income
statememt b) sales report c)
balance sheet d) receipts and payments
account now write your answer and then click
for ours ... a
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3.2 Work to be Completed
The syllabus of the program includes
Accounting terminology, accounting reports,
liquidity, profitability, evaluating the business
potential for new ventures and projects,
accounting concepts, activity analysis, operating
statements, reserves, equity, financial
forecasting, budgeting and the LAPP system of
financial analysis.
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3.3 Special Considerations
Comparison with past years, budget and
industry averages Forecasting a future profit
and loss account based on ratio analysis Effect
of increased sales on assets required Deterioratio
n of E D ratio Bank problems Dividend reduction
to save cash Need for equity base for larger
expansion
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3.4 Materiality
Compare data by amounts and ratios Concentrate
on the big figures (coconuts not
peanuts!) Compare them against a standard (past,
forecast, or industry average) Find out why
they changed Coconuts not peanuts please...
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Question
43. The "matching concept" means that
a. revenues should be matched with relevant
costs and expenses b.
revenues exactly equals costs c.
assets equal claims d. something
else ... now write your answer and then click
for ours ... a
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3.5 Trends to be expected in a Healthy Comapny
Sales and profits increase Profitability ratios
increase Inventory and receivables in relation to
sales Equity Debt (2 1 strong) but not usually
less than 1 1 Note In the EEC of 2001 the
"health" of a business may well depend upon
keeping up with both national and international
industry averages ...
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3.6 Balance Sheet Fixed assets and current
assets financed by liabilities and owners equity.
Investigate how and why the assets are
valued! Should they be "revalued" to more
realistic current values?
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Glossary
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3.7 Income Statement (Profit Loss
Account) Sales less cost and expense give profit
for the accounting period. Distinguish
operating (normal) profit from non-operating
profits and losses. Investigate profit and
losses NOT charged to the income statement but
charged to a. Accumulated profit b. Capital
reserve

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3.7 Income Statement (Continued) In some
countries published financial statements often do
not reveal gross profit or identify operating
expenses. However from 2001 onwards, they
should always show a reconciliation of the profit
figure, with "International Accounting Standards"
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3.8 Method of Financial Analysis Understand
the language. Compare figures and ratios
against standards. Concentrate of material
(significant) items. Forecast forward to see
the effect of transactions on the future
financial health of the enterprise.
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3.9 Comparison and Audit - Keys
to Financial Analysis Compare the amounts and
ratios against a Standard, and ask
What is important? Did it change?
Why did it change? Standard may be
past, budget and industry average. Note
Professional independent audit to IAS standards
is VITAL before any financial reports can be
believed!!

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3.10 LAPP Ratios for Financial Health
VERY ROUGH BASIC STANDARD Good Ave
rage Poor a) Liquidity Gearing CA CL 2
1 1 1 1 2 QA QL 1 1 1 1
1 2 E D 2 1 1 1 1
2
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3.10 LAPP Ratios for Financial
Health (Continued) VERY ROUGH
BASIC STANDARD Good Average Poor (b) Activity
S p.a. 2 1
1/2 A CGS p.a. 3 2
1 I Receivables - Days of Sales 30
60 120 Payables - Days of CGS 30
60 120
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3.10 LAPP Ratios for Financial Health
(Continued) VERY ROUGH BASIC
STANDARD Good Average Poor (c) Profitability
GP 40 30 10 S NP
10 5 1 S NP
p.a. 25 15 5 S
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3.10 LAPP Ratios for Financial Health
(Continued) Note The above are only rough
standards much better standards are industry
averages, budgets or forecasts, or even past
results. (d) Potential - Product, Market,
Facilities, Management, and of course ...
Finance, Sales Orders, Contingent Liabilities,
Risk Management etc.
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3.11 Conclusions 1. The program was
designed to help you to develop financial
language, concepts and confidence and to motivate
you toward further study and practice in the
future. 2. Financial analysis helps to tease out
the questions to ask the layout of the
financial statements is not important, provided
you have the confidence to find your way around
the data. 3. Cash (liquidity) is more important
than profit.
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3.11 Conclusions 4. Sales orders
outstanding and inventory valuation are the keys
to profit! 5. Orders outstanding effect the
inventory valuation, which can have an important
effect on profit. 6. Profit must be judged in
relation to target or budget or industry ratios,
not merely last years performance.
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42
3.11 Conclusions 7. Financial
statements are based on accounting concepts
(which are as flexible as proverbs -- one for
every occasion!). 8. However, always ask for a
reconciliation of the net profit, with
"International Accounting Standards"
and investigate any differences arising.
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43
3.11 Conclusions 9. Figures are
only estimates compare them against a useful
standard to determine their significance. 10.
Don't pretend to be too accurate! 11. Try to
find out management's objectives in preparing
the specific financial statements that you study
(taxes? shareholders? bank? mergers? efficiency?
) may all be different. So study the "Notes to
the Financial Statements" very carefully!
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44
3.11 Conclusions 12. Question
the valuation of the assets. 13. Always
consider the effect of inflation on asset
values and profits during the accounting period.
14. Look out for possible "manipulation",
which must always be politely referred to as
"aggressive" or "creative" accounting.
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45
3.11 Conclusions 15. Check that a firm that is
professionally recognized, independent and
adequately paid to do a full audit to
international auditing standards has
audited financial reports. 16. Look for timely
financial reports, completed and audited within
two months after the end the accounting period.
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46
3.11 Conclusions 17. Long delays in producing
and publishing financial statements (months or
even years - Africa) are always justification for
"concern" ... regardless of the reasons
suggested... 18. For every critical financial
problem, do a PFD (Provision for Disaster)
brainstorming, to avoid the dreaded EI (Emotional
Investment) in only one course of action ...
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3.11 Conclusions 19. There are always seven
alternatives for every financial decision ...
20. In 2001, "Forex and Risk Management" are a
normal part of good financial management. Watch
out for unexpected conrtingent liabilities.
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48
Question
45. Profit is normally recognized by
manufacturing company when goods
are a) manufactured b) ordered by the
customer c) shipped to the customer d) received
by the customer now write your answer and then
click for ours ... c
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49
3.12 Learning Patterns 1. Key Issues

• CASH
• INVENTORY
• ORDERS

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3.12 Learning Patterns 2. Income Statements

• C E P S
• C E P S
• C E P S

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3.12 Learning Patterns 3. B alance Sheets

• A L OE
• OE A - L
• L A - OE

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3.12 Learning Patterns4. Asset Structure

• FA FA
  FA
• CA CA
  CA
• OA OA
  OA

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3.12 Learning Patterns 5.
Funding Structure
CL CL CL
LTL LTL LTL
TL TL TL
OE OE OE
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3.12 Learning Patterns6. The Package

• BS
• IS
• Cash flow
• Funds flow
• BS

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3.12 Learning Patterns7. L.A.P.P.

• 
  
• Liquidity and
  Gearing
• Activity
• Profitability
• Potential

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3.12 Learning Patterns8. Effect of Expansion

• Sales
• 
  Inventory
• 
  
• 
  Receivables

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3.12 Learning Patterns9. Forecasting

• Sales
• Ratios
• Income Statements
• Balance Sheets

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3.12 Learning Patterns10. International
Accounting Standards

• UK/USA/Germany/Russia .... IAS

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3.12 Learning Patterns 11. More Financial
Formulae

• CA CL
• QA QL
• E D
• S/A
• CGS/I
• GP/S
• NP/S
• NP/OE

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... and so now on we go to ...
the next section ...
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4. Study - Financial Concepts (Total time -
20 Minutes)
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4.1 Instructions


a. Study and read the materials with the
same ... convincing emotion ... try to
understand ... everything!
b Use the glossary as you need to ...
c. Note special points as needed ...
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63
Question
19. Physical assets purchased for use in
the business are a) goodwill
b) capital c) fixed assets
d) current assets Write down your answer now
please then check ... c
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64
4.2 Accounting
Accounting has been called the language of
business and, like any language it can never
express out thoughts with absolute precision and
clarity. Our task of learning this language is
complicated by the fact that many of the words
used in accounting mean almost, but not quite,
the same as they mean in everyday life. We must
learn not to think of the words in their popular
meanings.
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4.2 Accounting (Continued)
In this program we have used a standard set of
generally accepted international accounting
terms, although certain other terms are also
commonly used in practice. However, frequent
repetition and WRITING of the standard accounting
terms reinforces our basic grasp of the
accounting language.
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4.3 Rules and Principles
In any language there are some rules or
principles that are definite and some others that
are not definite, The latter are a matter of
opinion or style. Accountants have different
opinions just as grammarians have different
opinions. As language changes to meet the needs
of communication in a society, so accounting
changes to meet the needs of business.

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67
4.3 Rules and Principles FOR RELIABLE ...
INTERNATIONAL FINANCIAL REPORTS ... ALWAYS ASK
FOR AUDITED REPORTS BY ... INTERNATIONALLY
RECOGNIZED ... PROFESSIONAL ACCOUNTANTS IN
ACCORDANCE WITH ... OR RECONCILED WITH ...
INTERNATIONAL ACCOUNTING STANDARDS ... DON'T
SETTLE FOR LESS...
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4.4 Uncertainty Accounting encompasses the
facts about a business that can be expressed in
money. However, many important business facts,
i.e. the health of the management, the morale of
the workers, the state of the market etc., cannot
be expressed in money. Accounting must
necessarily therefore provide only a limited
picture of business.
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69
Question
5. Valuable things owned by a business are
called a) capital b) assets
c) fixed assets d) liabilities Write the
answer then b
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70
4.5 Consistency and Comparability
Accounting figures become significant or
material" (coconuts) not in themselves but when
they are compared with other figures for a
similar period, with a budget estimate, or even
with figures for another product or
business. The accountant therefore, despite the
problems of uncertainty, tries to be, consistent
in his judgement so that the figures he produces
are comparable.
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4.6 Financial Accounting
Financial accounting generally relates to the
records and concepts necessary to prepare
financial statements e.g. balance sheets, income
statement (profit and loss accounts) and funds
flow statements. Financial statements should
present fairly the overall position and business
activity, in accordance with some accounting
standards.
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4.6 Financial Accounting International
Accounting Standards (IAS) are now available to
reconcile the differing accounting standards used
in various countries, and thus make financial
statements more comparable. Effective financial
accounting provides the essential foundation for
effective cost accounting, financial planning and
budgetary control.
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4.7 Cost Accounting Cost accounting is
concerned not with the overall results of the
business but with the efficiency and
effectiveness of the various sections of the
business and with the cost of a unit of
production. The cost is not a scientific fact
but depends upon the judgment of the cost
accountant, in following the accounting
standards, chart of accounts, and procedures
established by the management of the business.

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74
4.8 Accounting Reports (a) Income
Statement (IS) Profit and Loss Account or
Operating Statement Accounting period is one
year Sales less cost of goods actually sold
gross Profit Gross profit less expenses
net profit Ratios are thermometers
Gross profit over sales gross profit
percentage Net profit over sales net
profit percentage
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75
4.8 Accounting Reports (b) Balance Sheet
(BS) Situation at the beginning of accounting
period Situation at end of accounting
period Assets of a business are financed by
liabilities and owners equity
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76
4.9 Assets and Liabilities ASSETS
(A) Things owned by a business, which have a
measurable cost cash, accounts
receivable (debtors), inventories
(stock), prepayments, equipment,
buildings, land, etc. LIABILITIES (L) Amounts
due to be paid (cash must be paid to
them") accounts payable, trade creditors,
other liabilities, taxation payable, long
term liabilities.
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77
4.9 Owners Equity Rights of the
owners of a business Initial capital
plus profits Assets less liabilities
owners' equity Profits increase owners'
equity Losses reduce owners' equity
Note Ratio Equity Debt (liabilities) E
D This means equity as distinct from
liabilities Ratio of assets financed from
owners' equity and liabilities
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4.10 Transactions Each transaction has
a dual effect Assets increase and cash
decreases, or Assets increase and liabilities
increase, or dddCash decreases and liabilities
decrease
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79
Question
6. Assets less liabilities equals
a) share capital b) retained earnings
c) owner's equity
d) reserves Write eh ansswer ...c
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80
4.11 Learning Patterns 1. Key Issues

• CASH
• INVENTORY
• ORDERS

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4.11 Learning Patterns 2. Income Statements

• C E P S
• C E P S
• C E P S

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4.11 Learning Patterns 3. B alance Sheets

• A L OE
• OE A - L
• L A - OE

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4.11 Learning Patterns 4. Credit Transactions

• CASH 0 A L
• CASH - L -
  

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3.12 Minicase - Eliza Manufacturing Company
Your proposed budget for the year 2000
indicates a doubling of sales but a stable
(unchanged) inventory and a gross profit
increase from 32 to 40. Why do you feel that
budget is probably not reasonable? How can you
quickly check out what is reasonable in your
industry in 2002? Please write down your answers
to the questions ...Plea
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85
6.2 Minicase - Eliza Manufacturing Company
For your learning it is most important that
you actually record your full answers to the case
at this stage and we promise that our
solution will come before coffee time
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86
5. Study - Balance Sheets (Total time - 20
Minutes)
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87
5.1 Instructions
a. Study and read the materials with the
same ... convincing emotion ... try to
understand ... everything!
b Use the glossary as you need to ...
c. Note special points as needed ...
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88
5.2 Assets Valuable things
owned by a business. Fixed assets are for long
term use in a business valued at cost less
depreciation, not market value e.g., land,
buildings, machinery, equipment, motor cars, etc.

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89
5.2 Assets Current assets are
cash or near cash within one year valued at
cost or lower realizable (market) value
examples cash, accounts receivable (debtors),
inventories (stock) prepaid expenses,
marketable securities. Other assets are
special assets valued at cost or lower
examples patents, trade investments, goodwill,
etc.
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90
5.3 Liabilities Amounts due to be
paid by the business to someone else. Accounts
payable (creditors) are liabilities. Current
liabilities are due for payment within one
year, e.g., accounts payable, creditors, other
payables, income tax payable, dividends payable.
5.2 Assets Valuable things owned by a business.
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91
5.3 Liabilities Long term
liabilities are due for payment in more than one
year examples mortgages, loans, debentures,
etc. Bank loans and overdrafts are normally
classified as current liabilities whereas bank
loans for more than one year are long term
liabilities. Liabilities are normally unsecured
but may have special security on particular
assets.
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92
5.3. Owners Equity

• Assets are financed by either liabilities or
  owners' equity.
• Owners' equity is the capital issued to
  shareholders (stockholders), in exchange for
  cash, plus reserves accumulated in the business.
• Reserves include capital reserves (share premium)
  or revenue reserves (retained earnings) or
  accumulated profits.

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93
5.3. Owners Equity
Assets less liabilities owners' equity Assets
liabilities plus owners' equity Assets less
owners' equity liabilities
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94
5.3. Ratios

• Ratios are like a thermometer which takes the
  actual temperature of a business in relation to
  some standard scale.
• Good Average Poor (a)
  Liquidity
• CA CL 21 11 12
• QA QL 1½ 1 11 12
• E D 21 11 12

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95
5.3. Ratios
Ratios are like a thermometer which takes the
actual temperature of a business in relation to
some standard scale. Good
Average Poor (b) Profitability
GP/S Up Same Down NP/S Up Same
Down NP/OE p.a Up Same Down
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96
5.3 Learning Patterns1. Asset Structure

• FA FA
  FA
• CA CA
  CA
• OA OA
  OA

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5.3 Learning Patterns1. Receivables Payables

• R - receives the cash ,...
• P - pays the cash ...

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5.3 Learning Patterns3. Funding Structure

• CL CL CL
• LTL LTL LTL
• TL TL TL
• OE OE OE

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Question
People who owe debts to a business are listed on
a balance sheet of that business
as a) creditors b) sales c) claims against the
assets d) debtors (receivables) Write and then
d
Glossary
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100
Question
14. What is most important in actually running a
business? a) love b) cash c)
profit d) security Write ... b
101
5.4 Overall
so much for the study ... and now can
you do a little CLE before the review
and the coffee ...
Glossary
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102
6. Review of Part I (Total time -
30 Minutes)
Glossary
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103
6.1 Instructions
1. Study each mini-case study which follows.
2. Respond intuitively ... in ONLY three
minutes ... in writing ... 3. Then check with
our answer after three minutes ... make
SPECIFIC NOTES of what you missed ... and think
about ... WHY ... VERY IMPORTANT ...
WHY ... you just did not think about it
although you really knew it ... 4.
Then try the next minicase ... and do better
Glossary
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104
6.2 Minicase - Eliza Manufacturing Company
Your proposed budget for the year 2000
indicates a doubling of sales but a stable
(unchanged) inventory and a gross profit
increase from 32 to 40. Why do you feel that
budget is probably not reasonable? How can you
quickly check out what is reasonable in your
industry in 2001?
Glossary
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105
6.2 Minicase Eliza Manufacturing (cont,)
OUR ANSWER a. The underlying assumptions do
not seem to be consistent with
"normal" financial expectations. When you double
sales in one year, you normally need the
support of a higher inventory
investment. Has this already been made?
Can the unchanged inventory levels be justified
by special studies? b. Similarly
receivable levels would be higher unless sales
are mainly for cash. With a competitive
market, it would seem that doubling
sales and increasing the gross profit increase
by 3 would be difficult e. Overall the
budget seems to be over-optimistic check it
out with the industry averages to see if other
companies are achieving similar rults?
106
6.3 Minicase - Potter Production
Financial director insists that he needs ECU
500,000 loan from the bank for working capital.
What seven alternatives could be investigated?

107
6.3 Minicase - Potter Production.
OUR ANSWER Seven alternatives to a bank loan
are as follows (a) Reduce investment in
inventory. receivables and cash. (b) Stretch
the suppliers. (c) Factor receivables. (d
Get suppliers to hold the inventory and
deliver and invoice as
required. (e) Lease rather than buy fixed
assets. (f) Get long term loan or
mortgage. (g) Expedite receivables with
better credit policies, discounts and
credit control. Reduce cash reserves. Get
customer deposits.
108
6.3 Minicase - Rees Dev. Co.
A bank loan of ECU 100.000 was requested but the
bank refused. CEO suggests changing banks
immediately! What difficulties and opportunities
would this give my company Is he right?
Glossary
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109
6.3 Minicase - Ress Dev.Co.
OUR ANSWER Changing banks provides financial
flexibility but batter alternative V Is to keep
both banks and play off one against another. Old
bank will give us better service as an existing
client, but the new bank may seek to get our
business and thereby force the old bank to give
us more. Keep relationships with both bankers in
a healthy condition despite the competitive
situation. Keep both accounts active. Never
let a bank account lie idle.
110
6.4 Minicase - Gladstone Co.
Old established company has a policy of paying
all suppliers before time and never borrowing
anything from anyone. Management is convinced
that this is the way to do business and good
financial management. Do you agree?
Glossary
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111
6.4 Minicase - Gladstone Co.
OUR ANSWER Paying suppliers before time is
never justified. Pay early to get discount.
Otherwise don't pay until required to pay.
Company probably has excessive equity. Failure
to use equity and debt. Is not good financial
management.
Glossary
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112
6.5 Minicase - Profeld Co.
Company needs more credit from suppliers to
provide substantial financing and requests
guidelines as to how creditors may be "stretched"
(seven ideas).
113
6.5 Minicase - Profeld Co.
OUR ANSWER (a) Pay each supplier a little
regularly and keep him happy with
"extra orders" promise. (b) Insist that as an
old and loyal customer. supplier must give better
credit terms. (c) Tell supplier that
his competitors are offering longer credit terms.
(d) Place large orders on condition that extra
credit terms are granted. (e) Ask
supplier to supply copy invoices and thus delay
payment. (f) Query the prices and amounts
thus delay payment. (g) Take unreasonable
discounts and take time negotiating so as to
complicate the account thereby making it
difficult to expedite. (h) Pay the wrong amount
on invoices and statements thereby
confusing the supplier accounting system.
114
6.6 Summary Lecture
... and so end the minicases ... on to a
summary lecture for Part 1 ...
Glossary
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115
6.6 Summary LectureObjectives

• Understand accounting language and concepts
• Interpret balance sheets and profit and loss
  accounts
• Use basic financial ratios
• Develope confidence in using accounting and
  financial data
• Motivate further study in the future

116
6.6 Accounting Language

• Glossary of ASS is a continuous reference
• Two hundred words (only) is the vocabulary
• USA/European accounting languages may be compared

117
6.6 Accounting Language

• USA/European accounting languages may be
  compared
• receivables debtors
• payables creditors
• inventory stock
• capital stock share capital
• capital surplus capital reserve
• earned surplus ) accumulated profit
• retained savings ) revenue reserve
• earnings statement )
• operating statement ) profit and loss account
• income statement )

118
6.6 Accounting Concepts

• Records of transactions are converted into
  accounting reports by using practical accounting
  concepts
• cost (assets generally at cost)
• consistency/conservatism/comparability
• accounting period
• going concern (not break-up values)
• entity (the business not its workers)
• profit realisation
• accrual (cash and credit transactions
  included)
• true and fair (as possible)
• MATERIALITY (most important of all!)

119
6.6 Accounting Period

• Try to associate all sales costs, expenses and
  profits with a specific accounting period.
• All accounting figures are estimates, not
  scientific facts.

120
6.6 Profit Loss

• Sales less cost of goods sold equals gross
  profit.
• Gross profit less selling and administrative
  expenses equals net profit for the accounting
  period.
• Profit depends upon charging all the proper
  costs and stock valuation.

121
6.6 Balance Sheet

• Assets of the business how they are financed
  from liabilities and owners equity.
• Fixed assets valued at cost less depreciation
  (based on the horizon of the asset).
• Fixed assets such as land and building may have
  to be revalued periodically. Accounting periods
  create uncertainty and doubt.
• Current assets (one year only) valued at cost or
  lower realisable (market) value. Inventory valued
  at the lower cost or market value.

122
6.6 Health of the Business

• LAPP System
• Liquidity - cash and gearing are more
  important than profit.
• Activity - turning over the assets and the
  stock more activity
• requires more assets!
• Profitability - gross and net profit related
  to sales and owners
• equity.
• Potential - depends upon market, product
  ,finance,
• management, sales
  orders, contingent liabilities.
• risk analysis etc.

123
6.6 Basic Financial Ratios

• Good
  Average Poor
• a) Liquidity
• CA CL 2 1 1 1
  1 2
• QA QL 1 1 1 1 1
  2
• E D 2 1 1 1
  1 2
• b) Activity
• Sales/ Assets Up Same
  Down
• CGS/Stock Up Same
  Down

124
6.6 Basic Financial Raios

• Good
  Average Poor
• c) Profitability
• Gross Profit/Sales Up
  Same Down
• Net Profit/Sales Up Same
  Down
• Net Profit/Owners Equity Up Same Down

125
6.6 Materiality

• Look for the big figures (coconuts) which are
  significant.
• Compare them with the past, the future and the
  industry averages to determine the significance
  of changes.
• Look for "CHANGE" and ask the reasons why.

126
6.6 Learning Patterns 1. BS IS

• Yr. 1 Yr. 2 Yr. 3 Yr. 4 Yr.
  5
• IS IS IS IS
  IS
• S S S S
  S
• C C C C
  C
• P P P P
  P
• BS BS BS BS BS
  BS

127
6.6 Learning Patterns2. Accounting Concepts

• Conservatism Consistency
  Materiality
• Comparability Cost
  IAS
• Profit realisation Accounting
  period Entity

128
6.6 Learning Patterns 3. Financial Formulae

• A - L OE
• A - O L
• OE L A
• S - C - E P

129
6.6 Learning Patterns 4 More Financial
Formulae

• CA CL
• QA QL
• E D
• S/A
• CGS/I
• GP/S
• NP/S
• NP/OE

130
6.6 Learning Patterns 5. Materiality

• Peanuts .........................................
  ............. and coconuts ...

131
6.6 Summary Lecture
... and so ends our summary lecture ...
... time for a coffee ... and then on to Part
II ... plan for a wonderful lunch ...
Glossary
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132

Part II .... is downhill all the
way ....

133
We trust that you find learning with AGL
to be fun and "efficient" (doing things right)
and "effective" (doing the right things)...
134
Help For any help needed in the program,
contact Dr. Bob Boland 33 450 40 89 82
or robertboland_at_wanadoo.fr 24 hour service
on we go ...
135
AUTONOMOUS GROUP LEARNING
Boland1
Dr. Bob Boland
136
Mini AGL 101 - Basic Finance

• PART II - LATE MORNING
• WITH A PARTNER
• Geneva, April 2005

137
Program for Part II - Late Morning
11,00 - 11.20 Sect. 1 - Study - Income
Statements 11.20 - 12.00 Sect. 2 -
Case Studies 12.00 - 12.20 Sect. 3 -
Study - Financial Reporting 12.20 - 12.40
Sect. 4 - Key Learning Points 12.40
- 13.00 Sect. 5 - Learning Maintenance
... and at the end ... and that well earned
lunch ...
Glossary
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138
We trust that you find learning with AGL
to be fun and "efficient" (doing things right)
and "effective" (doing the right things)...
139
CLE - Creative Learning Exercise (5 minutes)

• Now to do again the CLE (Creative Learning
  Exercise) which prepares your mind .. to learn
  for the full four hours.
• Please take just five minutes to relax, sit
  comforably with hands resting softly on the lap,
  feet flat on the floor... now please close the
  eyes and follow our gentle instructions in the
  Learning Maintenance Workpack printed from file
  LM1.doc.
• Afer CLE you will feel very well with the
  confidence, concenttation, motivation and
  expectation to learn and remember everything!
  Agreed ? Ok ...? Now relax

140
1. Study - Income
Statements (Total time - 20 Minutes)
Glossary
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141
1.1 Introduction
Relax ... but study carefully. Read each note
with your partner ... with emotion ... use a
variety of tones to try to convince your the
partner (do it alternately) ... show how each
point is ... valid ... practical ... related by
example to you your ownexperiences Review the
glossary ... just relax ... relax ... and press
vocabulary and check out some words for three
minutes ...
Glossary
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142
Question
The excess of the issue price of a share over
its nominal value is a. Profit b.
Share premium c. Accumulated profit d.
Rather illegal .... Click b
143
Case Zondi Co.
Company's profit is low this year and
management seeks to be "a bit creative"
(manipulate) to have a higher profit, and
thus avoid complaints from the shareholders.
What methods could the company consider which are
in accordance with GAAP (Generally Accepted
Accounting Principles) and IAS
(International Accounting Standards)? (seven
methods)?
144
Question
ANSWER coming soon Keep your notes going
145
1.2 Accounting Period Concept
Income statement (profit and loss account,
earnings statement) for the accounting
period. Balance sheet at the start and end of
the accounting period. Normally one year.
Glossary
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146
Question
A gross profit percentage is computed a)
sales over gross profit times 100 b) gross
profit over net income times 100 c) gross
profit over net sales times 100 d) cost of
good sold/inventory Click ... c
147
1. 3 Accrual Concept
Sales, cost and expenses may be for cash or
credit. Income statement includes both cash and
credit transactions.
148
1. 4 Income Statement and Balance
Sheet
Income statement shows how the profit was
made. Balance sheet shows assets and how they
are financed.
Glossary
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149
1. 5 Sales and Gross Profit
Sales - A measure of activity is
Sales/Assets Cost of goods sold means cost of
sales. "Trading Account" is part of income
statement which indicates Sales less
Cost of Sales Gross Profit (GP)
150
Case Williams Bank
Client with large loan sends monthly reports to
its bank six to eight weeks late, because "the
auditors are in" and no information is available
for two months". Reasonable?
151
Case Williams Bank (cont.)
ANSWER? Coming later be sure to keep a record
of your reaction ...
152
Question
Profits always increase a) owner's
equity b) cash c) inventory problems
d) debtors (receivables) Click ... a
Glossary
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153
1. 5 Sales and Gross Profit
Cost of sales for a trading company (buying and
selling finished goods) is opening inventory
plus purchases of finished goods less closing
inventory. Cost of sales for a manufacturing
company is different because it does not purchase
finished goods. Finished goods are manufactured
from factory labor, raw materials and
manufacturing overhead.
154
1. 5 Sales and Gross Profit
Manufacturing cost of finished goods must be
adjusted for work in process changes.
For a manufacturer, therefore manufacturing
labor manufacturing materials used
manufacturing overhead or work in process
changes cost of finished goods
manufactured for the period. This is the
same as the "purchase of finished goods" by a
trading company.
Glossary
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155
1. 5 Sales and Gross Profit
Work in process is inventory unfinished. As
the amount at the beginning and end of the
accounting period changes, this difference must
be added or deducted to manufacturing cost
incurred ... in order to compute the Cost of
Finished Goods Manufactured. This is the same as
the "purchase of finished goods" by a trading
company.
156
Question
Assets in the balance sheet are stated at
a) cost or market value, or cost less
depreciation b) selling price in normal
business c) market value less depreciation
d) almost nothing at all - for
conservatism Click ... a
Glossary
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157
1. 6 Net Profit
Net income, net earnings, net profit.
Expenses divided into (a) normal
operating expenses, and (b) special
non-operating expenses Operating expenses
(including selling, general and
administrative) are normal costs not connected
with manufacturing.
158
1. 6 Net Profit
Non-operating expenses are abnormal costs not
connected with normal operations (e.g., loss of
sales of assets, interest paid). There may be
non-operating income too! (e.g., profit on sales
of assets, dividends received, etc.)
159
Question
24. A profit on sale of goods is recognised when
it is a) realised in cash b) known
to exist c) a real chance to make money
d) is realised in cash or in receivables Click
... d
160
Question
A loss is recognised a) when paid for in
cash b) as soon as it is known c)
only when offset by a corresponding profit d)
only if there is adequate cash available Click
... b
161
1. 6 Net Profit
Gross profit less operating expenses operating
profit. Operating profit less non-operating
expenses profit before taxes. Profit before
taxes less income tax net profit.
162
Question
27. Sales less cost of sales equals a)
net profit b) working capital c)
owners equity d) gross profit Click ... d
163
1. 7 Ratios
Profitability Gross Profit
Sales x 100 Net Profit
Sales x 100 Net
Profit Owners Equity x 100 (p.a.)
Glossary
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164
Question
Gain on sale of fixed assets is a)
non-operating profit b) operating profit
c) gross profit d) not ethical Click
... a
165
1. 7 Ratios
Activity Sales
Assets measure of "turnover" of assets
p.a. Cost of Goods Sold
Inventory measure of "turnover" of inventory
p.a.
Glossary
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166
Case Qualo Co.
Due to sale of an investment, the company
suffered a major loss this year which will
upset shareholders and cause the share price
to fall. No capital reserve available but
company buildings are undervalued. What
can be done to avoid showing a loss this year?
167
Case Qualo Co. (cont.)
OUR ANSWER coming ...
168
1. 8 Accumulated Profit
Retained earnings, revenue reserves. Part
of the Reserves in the Owners Equity
part of the Balance Sheet. Appropriation
Account or Statement of Retained Earnings.
Balance brought forward net profit less
dividends balance c/f Profit
increases owners equity. Reserves increase the
owners equity of the business but not
necessarily the cash. Cash may have been
used to buy more assets or pay creditors.
Glossary
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169
Question
32. Dividends declared and paid to stockholders
always a) reduce liabilities b)
reduce profit c) reduce owner's equity
d) bring happiness to someone Click c
170
Question
Profits always increase a) owner's
equity b) cash c) stock d)
debtors (receivables) Click a
171
Question
The "matching concept" means that a)
revenues should be matched with relevant
costs and expenses b) revenues exactly
equals costs c) assets equal claims d)
a marriage is planned Click a
172
1. 8 Learning Patterns 1. Credit Transactions

• Buy now A L
• Pay later A - L -

173
1. 8 Learning Patterns 2. Cost of Sales -
Trading Co.

• Inventory Purchases - Closing Inventory
• Cost of Goods Sold Cost of Sales

174
1. 8 Learning Patterns 1. Cost of Sales -
Manufacturing Co.

• RM Labour Manufacturing Overhead - Work in
  Process Changes
• Cost of Finished Goods "purchased" from the
  factory

175
1. 8 Learning Patterns 4. Charges

• Type - material, labour, overhead

Function - production, sales, administration

176
Question
Gross profit less operating expenses equals
a) net income b) net sales c)
non-operating income d) operating
profit Click d
177
Question
Operating profit less non-operating expense
equals a) net income b) a loss
c) profit before taxes d) profit after
taxes Click c
178
Question
In valuing stock at the lower of cost or market
value, the term "market value" means
conservatively a) always the realisable
value on quick sale b) the replacement
price plus inflation c) some value lower
than cost d) realisable value or
replacement value accordingly to what
type of stock is considered Click d
179
1.9 End of Section
And so ends Section 1 on to Section2 - cases ...
180
2. Case Studies (Total time - 20
Minutes)
Glossary
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181
2.1 Instructions
1. Study each case study which follows. 2.
Respond intuitively ... in ONLY three minutes ...
in writing ... 3. Then check with
our answer ... make SPECIFIC NOTES of what
you missed ... and think about ... WHY ...
VERY IMPORTANT ... WHY ... you just did not
think about it although you really knew
it ... 4. Then on to the next
minicase ... to do much better ...
182
2.2 Case Merville Holdings
Management insists that to achieve
increased sales, the inventory and receivables
must increase substantially. What can be
done to manage inventory and receivables?
Glossary
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183
2.2 Case Merville Holdings (cont.)
OUR ANSWER Rapidly increasing sales
will probably require inventory expansion
ahead of the sales. They almost always increase
... inventory and receivables and thus
working capital ... Managing the inventory
investment by operations research, better
purchasing, getting suppliers to hold inventory
until required with JIT etc. Manage
receivables by credit control, customer
selection, factoring, credit terms, quicker
billing, expediting, customer research,
settling claims quickly, getting deposits etc.
184
2.3 Case Zondi
Company's profit is low this year and
management seeks to be "a bit creative"
(manipulate) to have a higher profit, and
thus avoid complaints from the shareholders.
What methods could the company consider which
are in accordance with GAAP (Generally
Accepted Accounting Principles) and IAS
(International Accounting Standards)? Give
seven methods.
185
2.3 Case Zondi (cont.)
OUR ANSWER To be "creative" (manipulate) for a
higher profit a. Make high (less
conservative) inventory values. b. Capitalise
heavy maintenance as a fixed or deferred
asset. c. Depreciate fixed assets over longer
"horizons" (working lives) certified by
engineers. d. Defer advertising, R D and
other expenses. e. Keep accruals and reserves
to the minimum. f. Release reserves into
profits and ....
186
2.3 Case Zondi (cont.)
g. Charge losses to restructuring reserve or
accumulated profits. h.