Financial Transaction Analysis

It’s a necessity for MBA students to be skilled in the usage of financial statements in decision-making processes in their business places. These skills cover functional areas such as budgeting, profitability measuring, forecasting, benchmarking, and business valuation relevant to the business decision-making process. To this end, it has been mandated at Lagos Business School (LBS) that all MBA students must undertake a course on Corporate Financial Accounting (CFA) to enhance the skills needed in making managerial inferences and decisions. Today we will be reflecting on Financial Transaction Analysis a topic in our CFA class.

Financial Transactions are the foundation of business activity. Any event that can be accurately measured and has an impact on the company is considered a transaction. But not all things can be regarded as financial transactions. Transactions offer unbiased data about a company’s financial effects.

Every transaction has two sides:

• You give something, and
• You receive something.

We consistently record both sides of a transaction in accounting. And, before recording the event as a transaction, we must be able to quantify its financial impact on the business.

What are Assets?

Assets are economic resources that provide a business with a future benefit. The following asset accounts are commonly used by businesses:

• Cash: Cash refers to any form of currency, including bank account balances, paper currency, coins, certificates of deposit, and cheques.
• Accounts Receivable: The total amount of money owed to a company by consumers for products or services that have been provided but have not been paid for. On a company’s balance statement, accounts receivable takes the form of a current asset. Accounts receivable refer to any money owed by customers for transactions made on credit.
• Inventory: The term “inventory” is used to describe a company’s stockpile of products waiting to be sold in order to generate revenue.
• Prepaid Expenses: Rent and insurance premiums are just two examples of foreseeable costs that can be covered by making a lump-sum payment in advance, a practice known as prepayment. Prepaid expenditures are initially recognized as an asset on the balance sheet. Over time, the asset’s value is reduced, and the cost associated with it is written off as expenses.
• Land and Building: This is the cost of a company’s land, office structure, and manufacturing facility.
• Equipment, Furniture, and Fixtures: This refers to movable furniture, fixtures, and other equipment that is not permanently attached to a building’s structure. We classify an asset as belonging to this category if it is used in the ordinary course of business operations.

Liabilities

Liabilities are obligations. A payable is always an obligation. The following are examples of the most prevalent types of liabilities:

• Accounts Payable: These functions exactly in the contrary way as the Accounts Receivable account. The Accounts Payable ledger contains the total amount that the company owes for its debts, which may have resulted from a credit purchase of inventory or from a utility payment.
• Accrued Liabilities: A obligation that has already been incurred but for which payment has not been made is known as an accrued liability. Accounts for Interest Payable and Salary Payable typically fall under the category of accrued obligation for most businesses. Another accrued obligation is income tax which needs to be paid.

Stockholders’ (Owners’) Equity

The rights that the owners of a corporation have on the assets of the corporation are referred to as the stockholders’ equity, shareholders’ equity, or simply owners’ equity. The Common Stock account, the Retained Earnings account, and the Dividends account are the ones that are used to document changes in the stockholders’ equity of the business. There can only be one financial account maintained for a proprietorship. When it comes to a partnership, each participant will have their own individual owner-equity account.

• Common Stock: The Common Stock account details the amount of money that the proprietors have invested in the company. The most fundamental form of ownership in a business is represented by its common shares. Common stock is present in every organization.
• Retained Earnings: The Retained Earnings account displays the cumulative net income generated by the company over the lifetime of the company, less its cumulative net losses and dividends. This is done after adjusting for cumulative dividends.
• Dividends: A company’s board of directors has the ability (but not the obligation) to proclaim and pay a cash dividend following the completion of profitable operations. Dividends are not mandatory; their payment is left up to the discretion of the board of directors. It’s possible that the company will have a distinct account for dividends, which would show a decrease in retained earnings if it existed.

Revenue and Expenses

• Revenue: Revenue, which is also known as income, refers to the amount of money brought into the business. This money is typically brought in through the sale of products, services, or other goods. It is the overall sum of money that is brought in by a company’s activities over a specific period, and it is recorded in this amount. A company’s revenue is its gross income before any expenditures have been subtracted from that amount. Revenue can be defined as the financial gain that an organization experiences because of sales made or services provided. Revenue can also be defined as profits and overall earnings.
• Expenses: Expenses are the operational costs that are paid to make revenues in a business. Expenses are the cost of doing business. It refers to the transfer of cash in exchange for the acquisition of products or services. Expenses can also be written as the sum of all activities that typically bring in a profit. This is another way of expressing expenses. A cost is generally understood to refer to the amount of money spent to acquire an asset, whereas an expenditure is understood to refer to a recurrent cost, such as the salary of an employee or the rent on a retail space.

Until next week when we will be considering another reflection on my learnings at LBS, have a great week ahead.

Wale