Corporate Finance A1

Vysoká škola finanční a správníSummer Semester 2012

Jaromír R. Stembergjaromir@mail.vsfs.cz

Course Layout

• Twelve two-hour lessons• The course is to introduce general financial

management problems, realtions, terminology, and solutions

• Ends with Credit (zápočet)

Literature

• Block, Stanley: Foundations of Financial ManagementMcGraw-Hill, 2009ISBN 978-0-07-128525-4

Grading

• Pass / Fail

• 50%: Five mathematical group excercises

• 50%: Written test

• Minimum to pass: 70%

Contents

• Introduction- history of finance - goals of financial management- financial markets

• Review of Accounting- the nature and role of the balance sheet - theories of balance and their development- creation of the second balance - third and fourth balance, their formation and construction

Contents

• Concept of capital- preservation of the capital substance of a company- ways of addressing it

• Accounting systems in the world- characteristics of accounting systems- process of accounting harmonization- US GAAP- IAS/IFRS, link to the directives of the European Union

History of Money and Accounting

Barter Trade

• Exchange of personal possessions of value for other goods

• From 9,000-6,000 B.C., livestock was often used as a unit of exchange; as agriculture developed, people used crops for barter

• This kind of exchange started at the beginning of humankind and is still used today

Barter Trade Problems

• Finding the other party: - interest - time

• Establishing equal value of exchanged goods• Durability of the exchanged goods, potentiality to

store it• Need for a common, durable, storable, non-decaying,

generally accepted unit of exchange

Cowry Shells

• The first money (or medium of exchange)• Began to be used at about 1200 B.C. in China• Accepted in some African regions till 1950s

Metal Coins

• China, 1000 BC: Bronze and copper cowry imitations were considered the earliest forms of metal coins. They contained holes so they could be put together like a chain.

• Lydia (Turkey), 500 BC:The first coins developed out of lumps of silver and were stamped with emperors to mark their authenticity. The techniques were quickly copied by the Greeks, Persians, and the Roman Empire. Unlike Chinese coins, these were made from precious metals such as silver and gold, which had more inherent value.

Banknotes

• China, 100 BC:Leather money – pieces of painted white deerskin.

• China, 800 AD:The first paper banknotes appeared.

• China, 1450 AD:Printing money led to a soaring inflation so the use of paper money in China disappeared (this was still years to come before paper currency would be used in Europe).

Development of Accounting

• Babylon, 18th century B.C.- first organized records kept to account for assets and loans- other ancient civilizations (Roman Empire, Greek Cities, Egypt) followed

• Europe, 1st millennium A.D.fall of the Roman Empire caused serious setback in education

• Italy, 13th century A.D. - growing trade in the Mediterranean and accumulation of wealth in Italy gave grounds to the development of banking- double-entry bookkeeping was invented by Luca Pacioli

Modern Times Accounting

• 17th century France: - obligation to present bi-yearly balances of financial situation

Italy:- complete theory of accounting

Holland:- first corporation established, need for equity accounting

• 19th century- massive increase of accounting operations- perfection of accounting principles- rules for asset evaluation

History of Accounting Standards

• 1938: American Institute of Certified Public Accountants began to develop accounting standards (request of the Securities and Exchange Commission)

• 1959: Accounting Principles Board established, introduction of GAAP

• 1973: the International Accounting Standards Board (IASB) formed to develop International Accounting Standards (IAS)

• 2001: end of IAS (41 issued so far, still valid); new standards are from now on called International Financial Reporting Standards (IFRS) that quickly became accepted world wide

Principles of Accounting

Record Keeping

• Information – a basic management tool needed for - past references and reporting- present registration and evidence - future planning and management decision making

• Registered entries keep track of: - amount how much- count how many- time when- place where- person who

Double-Entry Accounting

• Accounts- recognition of individual transactions- debit and credit to be recorded at the same time

• General Ledger (hlavní kniha)- transactions recorded in accounts, total of both sides must be equal- can be extended by subsidiary ledgers

• Journal (účetní deník)- transactions recorded in order as they occurred- both sides of the record must be equal

Purpose of Record Keeping

• Financial accounting- provides information for owners, investors and other stake holders- serves as a base for income tax due calculation- subject to regulations by accounting standards- must be true and honest

• Managerial accounting- serves the managers as base for strategy planning and decision making- provides specified pieces of information - outcomes don’t have to be understood by the general public