Basic Accounting and Finance Skills Prof Oyedokun.pptx

LCU Basic Accounting and Finance Skills Prof Oyedokun

Being a Lecture Paper Presented at Lead City University, Ibadan on Tuesday, May 14, 2024.

1. Basic Accounting and Finance Skills Being a Lecture Paper Presented at Lead City University, Ibadan on Tuesday, May 14, 2024 . Prof. Godwin Emmanuel Oyedokun Professor of Accounting and Financial Development Department of Management & Accounting Faculty of Management and Social Sciences Lead City University, Ibadan, Nigeria Principal Partner; Oyedokun Godwin Emmanuel & Co (Accountants, Tax Practitioners & Forensic Auditors)

2. ND (Fin), HND (Acct.), BSc. (Acct. Ed), BSc (Fin.), LLB., LLM, MBA (Acct. & Fin.), MSc. (Acct.), MSc. (Bus & Econs ), MSc. (Fin), MSc. ( Econs ), Ph.D. (Acct), Ph.D. (Fin), Ph.D. (FA), CICA, CFA, CFE, CIPFA, CPFA, CertIFR , ACS, ACIS, ACIArb , ACAMS, ABR, IPA, IFA, MNIM, FCA, FCTI, FCIB, FCNA, FCFIP, FCE, FERP, FFAR, FPD-CR, FSEAN, FNIOAIM, FCCrFA , FCCFI, FICA, FCECFI, JP Prof. Godwin Emmanuel Oyedokun Professor of Accounting and Financial Development Department of Management & Accounting Faculty of Management and Social Sciences Lead City University, Ibadan, Nigeria Principal Partner; Oyedokun Godwin Emmanuel & Co (Accountants, Tax Practitioners & Forensic Auditors)

3. Basic Accounting and Finance Skills

4. Contents

5. Introduction

6. Types of Enterprises What is an Enterprise?

7. Who is an Entrepreneur? Characteristics of a Successful Entrepreneur

8. What is Entrepreneurship?

9. The Entrepreneurial Journey

10. Benefits of Entrepreneurship

11. Challenges of Entrepreneurship

12. The Future of Entrepreneurship

13. Introduction

14. Accounting

15. Basic Accounting Terminologies

16. Basic Accounting Terminologies

17. Basic Accounting Terminologies

18. Basic Accounting Terminologies

19. Accounting Concepts

20. Accounting Concepts Going Concern This assumes that unless there is some substantial evidence the business will continue (hence the term ‘Going Concern’) to exist This assumption is extremely important to understand, as the businesses go through difficult and successful periods of time However, they will be able to meet their commitments to the stakeholders in spite of seemingly difficult position Auditors and the management of the firms have the responsibility to certify / state, whether the firm can continue to operate Dual Aspect Concept or Double Entry System Double entry is a simple yet powerful concept each and every one of a company's transactions will result in an amount recorded into at least two of the accounts in the accounting system Every transaction has two-fold aspects, i.e., one party giving the benefit and the other receiving the benefit Because of the double entry system all of a company’s transactions will involve a combination of two or more accounts from the balance sheet and/or the income statement The whole Financial Accounting depends on Accounting Equation which is also known as Balance Sheet Equation The basic Accounting Equation is: Assets = Liabilities + Owner’s equity Or A = L + E Where A = Assets, (Resources) L = Liabilities, (Obligation) E = Capital (Equity or debt)

21. ASSETS N N NON-CURRENT ASSETS Property plant and equipment X Intangible assets X Financial assets X Investment X Total non- current assets X   CURRENT ASSETS Inventories X Trade receivables X Other current assets X Cash and cash equivalent X Total current assets X Total assets XX   EQUITY AND LIABILITIES EQUITY Share capital X Share premium X Retained earnings X Other components of equity X Total equity X Statement of Financial Position Asset Accounts (Examples: Cash, Accounts Receivable, Supplies, and Equipment) Liability Accounts (Examples: Notes Payable, Accounts Payable, and Wages Payable) Stockholders' Equity Accounts (Examples: Common Stock, Retained Earnings) NON-CURRENT LIABILITIES Loan notes X Long-term borrowings X Deferred tax X Total non- current liabilities X   CURRENT LIABILITIES Trade and other payables X Short term borrowings X Current portion of long term borrowings X Current tax payable X Provisions X Total current liabilities X   TOTAL EQUITY AND LIABILITIES XX

22. Statement of Profit and Loss and Other Comprehensive Income Revenue accounts (Examples: Service Revenues, Investment Revenues) Expense accounts (Examples: Wages Expense, Rent Expense, and Depreciation Expense) Statement of profit or loss and other comprehensive income N N Revenue X Cost of sales (X) Gross profit X Other income X Administrative expenses (X) Distribution cost (X) Finance costs (X) Other expenses (X) Total expense (X) Profit before tax X Taxation (X) Profit for the year XX   OTHER COMPREHENSIVE INCOME Gains on property revaluation X Other comprehensive income XX   TOTAL COMPREHENSIVE INCOME XXX

23. Introduction

24. Accounting Convention

25. Convention of Consistency The convention of consistency means that same accounting principles should be used for preparing financial statements year after year A meaningful conclusion can be drawn from financial statements of the same enterprise when there is comparison between them over a period of time But this can be possible only when accounting policies and practices followed by the enterprise are uniform and consistent over a period of time If different accounting procedures and practices are used for preparing financial statements of different years, then the result will not be comparable   Convention of Full Disclosure Convention of full disclosure requires that all material and relevant facts concerning financial statements should be fully disclosed Full disclosure means that there should be full, fair and adequate disclosure of accounting information Adequate means sufficient set of information to be disclosed. Fair indicates an equitable treatment of users Full refers to complete and detailed presentation of information. Thus, the convention of full disclosure suggests that every financial statement should fully disclose all relevant information. Let us relate it to the business The business provides financial information to all interested parties like investors, lenders, creditors, shareholders etc The shareholder would like to know profitability of the firm while the creditor would like to know the solvency of the business

26. Convention of Materiality The convention of materiality states that, to make financial statements meaningful, only material fact i.e. important and relevant information should be supplied to the users of accounting information The question that arises here is, what is a material fact is The materiality of a fact depends on its nature and the amount involved. Material fact means the information of which will influence the decision of its user The following points highlight the significance of Convention of Materiality It helps in minimizing errors in calculation It helps in making Financial Statements more meaningful It saves time and resources Convention of conservatism This convention is based on the principle that “Anticipate no profit, but provide for all possible losses” It provides guidance for recording transactions in the books of accounts. It is based on the policy of playing safe in regard to showing profit The main objective of this convention is to show minimum profit Profit should not be overstated. If profit shows more than actual, it may lead to distribution of dividend out of capital This is not a fair policy and it will lead to the reduction in the capital of the enterprise Thus, this convention clearly states that profit should not be recorded until it is realized But if the business anticipates any loss in the near future provision should be made in the books of accounts for the same

27. Accounting Principles Cost Principle (Historical Cost) This principle assumes the importance in the field of accounting in the sense that monetary values of items are recorded in the books of accounts as per this concept As per cost concept, all assets are required to be recorded in the books of accounts at their original cost In other words, the assets are recorded at their purchase price which comprises cost of acquisition and all expenditure incurred for making the asset ready to use such as amount spent on its transportation, installation etc. Not only the assets are recorded at their cost price, the underlying principle also serves as the base for all subsequent accounting for the assets Matching Principle The matching principle facilitates to ascertain the amount of profit or loss incurred in a particular period by deducting the related expenses from the revenue recognized during that period Accordingly , all expenses incurred by the business entity during an accounting period should be matched with the revenue recognized during the same period Similar to revenue recognition, expenses should not be recognized at the time when cash is actually paid Instead it should be recognized when an asset or service has been used to earn the revenue

28. Accounting Principles Revenue recognition (Realization concept) Recognizing the revenue means recording the income in the income statement, prepared for a particular period The revenue recognition facilitates to recognize the revenue, which should be included in the income statement The term revenue means and includes gross inflow of cash or other consideration arising from the sale of goods, rendering services and by use of resources of enterprise by others such as yielding interests, royalties and dividend etc. Revenues are assumed to be realized at that point of time at which goods have been sold and/or services have been rendered to the customers and a legal right to receive the revenue arises Need When all transactions are settled in cash, revenue can be recognized immediately However , this is not so in practical life. Many times, goods and services are sold or purchased on credit basis Revenue recognition concept facilitates to recognize the revenue to be considered in the income statement for any particular year The concept prevents the management from giving wrong information about the income, which is yet to be earned, to the various users of accounting information Limitation It fails to recognize the revenue in case of contracts for long-term projects  

29. Accounting Principles Objectivity Principle (Verifiability & Objectivity Evidence Concept) This principle proposes that every accounting entry in the books should be verifiable against evidences like vouchers, cash memos, cheques etc. In other words, if there is a certain quantity of goods purchased, it should be verified against the cash memo for the quantity, quality and price mentioned therein The evidence showing the validity of a business transaction should be objective enough In other words, the evidence should state the facts as they are, without a bias towards either side Need The verifiability and objectivity in accounts support the thought that books and accounts show true and fair view of the business concern This principle also serves as the base for adoption of Historical Cost, as assets are recorded at their cost price instead of market value and this cost price can be verified from the books of accounts, if those transactions are duly supported with the documentary evidences Limitations Each and every transaction is not subject to verification because the same is neither possible nor feasible

30. Accounting Principles Timeliness This principle basically proposes to provide and update the various users in accounting with the relevant and recent financial and operational information about the business enterprise Necessary steps should be taken to inform the relevant information to the different users in time The relevant information should be regularly and timely made available to the interested parties Need We know that accounting is the process of identification, measurement, recording and communicating economic events of an entity to all concerned When at the time of recording data, details of the current year’s sales are not furnished, the whole purpose of accounting i.e., to make the relevant information available to the users for their convenience is defeated The information should be regularly and timely made available to the interested parties Limitations Information furnished without waiting for the audited results may mislead the users because in many cases it had happened that there was a huge difference in the before audited and after indicted financial statements

31. Accounting Principles

32. Introduction

33. Finance

34. Equity Financing

35. Types of Equity Financing

36. Debt Financing

37. Financing Decision

38. Basic Financial Decisions

39. Introduction

40. Sources of Entrepreneurial Financing

41. Entrepreneurial Finance A Review of the Domain 114 in exchange for cash and strategic advice Venture capital investors look for fast-growing companies with low leverage capacity and high-performing management teams Their main objective is to make a profit by selling the stake in the company in the medium term They expect profitability higher than the market to compensate for the increased risk of investing in young ventures Key differences between Business Angels and Venture Capital : Own money (BA) vs. other people’s money (VC ) Fun + profit vs. profit Lower vs. higher expected IRR , Very early stage vs. start-up or growth stage Longer investment period vs. shorter investment horizon ( Grilli & Murtinu , 2014; Hellmann & Thiele, 2015 )

42. Entrepreneurial Finance Buyouts Buyouts are forms of corporate finance used to change the ownership or the type of ownership of a company through a variety of means. Once the company is private and freed from some of the regulatory and other burdens of being a public company, the central goal of buyout is to discover means to build this value*. This may include refocusing the mission of the company, selling off non-core assets, freshening product lines, streamlining processes and replacing existing management. Companies with steady, large cash flows, established brands and moderated growth are typical targets of buyouts (Wright et al., 2013). There are several variations of buyouts: Leveraged buyout (LBO): combination of debt and equity financing. The intention is to unlock hidden value through the addition of substantial amounts of debt to the balance sheet of the company, Management buyout (MBO), Management buy in (MBI) and Buy in management buyout (BIMBO): Private equity becomes Journal of Entrepreneurship, Business, and Economics, 2015, 3(2): 110–120 115 the sponsor of a management team that has identified a business opportunity with a price well above the team’s wealth. The difference is in the position of the purchaser: the management is already working for the company (MBO), the management is new (MBI) or a combination (BIMBO). Buy and built ( B&B): the acquisition of several small companies with the objective of creating a leader (highly fragmented sectors such as supermarkets, gyms, schools, private hospitals). Recaps : re-leveraging of a company that has repaid much of its LBO debt, Secondary Buyout (SBO) : Sale of LBO-company to another private equity firm, and Public to private : Takeover of public company that has been „punished‟ by the market, i.e. its price does not reflect the true value (see, Tripathi , 2012; Le, 2012; Yeboah et al., 2014).

43. Entrepreneurial Financial Planning

44. Introduction

45. Conclusion

46. Recommendations

47. Prof. Godwin Emmanuel Oyedokun Professor of Accounting & Financial Development Lead City University, Ibadan, Nigeria Principal Partner; Oyedokun Godwin Emmanuel & Co (Accountants, Tax Practitioners & Forensic Auditors) [email protected]; [email protected] [phone] & 2348055863944