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CFA SIMPLIFIED (PART 1)

Queen Bello Written by kquinxtarbells · 1 min read >

Never had a doubt, not once about my reasons for studying Accounting as a first degree. It was a decision I made and stood by right from secondary school.

I had proceeded to take some accounting courses after Uni to certify me a chartered accountant both locally and on a global scale. It was a herculean task combining them all with work, I bet it was preparing me for LBS MBA.

For each certification, there was something profound to learn. It grounded my knowledge base. One that stood out for me was the Chartered Institute of Management Accounting (CIMA). CIMA had taught me the infusion of technical skills learnt in my first degree with the practical reality of business. Accounting goes beyond debit and credit as most people think, it is the interpretation that adds value and weight into business decisions.

Joining LBS and seeing Corporate Financial Accounting in the MMBA course curriculum. I had exclaimed “Yaaz! This is needed!”. You can’t be a complete business student without a basic knowledge of accounting. It is one of the bedrocks of decision making. When you understand it, you are better equipped to make rational business decisions.

One of the knowledge critical to know as a business student is “The 5 Fundamental Financial Statements”. I will briefly explain each of the terms here.

The Statement of Financial Position

This shows the financial health of a business at a specific point in time; what the business owns and owes. It summarizes the Assets, Liabilities and Capital on a specific date usually the end of a financial year.

Assets: Overall resources of a business. What the business owns. There are the short and long term assets.

Non-Current Asset: Long-term assets that takes longer than a year to convert to cash. Examples: Land &Building, Motor Van, Furniture & Fittings

Current assets: Short-term assets that can be easily converted to cash within a period of one year. Examples: Inventory, Account Receivables, Cash etc.

Liabilities: Overall obligations to third parties. What the business owes outsiders.

Fundamental Accounting Equation

Non-Current Liabilities: Long-term Obligations not due for more than a year. Examples: Long-term loans, Lease payable etc.

Current liabilities: Short-term obligations due within a year. Examples: Account Payables, Salaries payables, Taxes payable etc.

The Statement of Cashflow

Summarizes the actual inflows and outflows of cash in the business during a period of time. Profit is not equal to Cash. Cash flows are impacted significantly by:

  • Cash tied up in high level of inventory.
  • High level of accounts receivables/Credit sales
  • Purchase of assets
  • Advance Payments to vendor

There are 3 Key Areas of Business Activities where cashflow emerges: Operating Activities, Investing Activities and Financing Activities

Statement of Changes in Equity

This is also known as Statement of changes in shareholder’s equity for companies. It measures the movement in owners’ equity during a specific accounting period. It reconciles the beginning and ending balances of the basic elements such as; the opening equity, Net profit or loss, Dividend payments, Equity withdrawals, Accumulated reserves and retained Earnings over a specific period of time.

To be continued…

#MMBA3

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