As I sojourn on this LBS journey, I am amazed as to the practicability the facilitator of the Corporate Financial Accounting (CFA) has made accounting. Preceding my entrance into LBS, I would consider myself conversant with the application of accounting as I have been engaging with financial statement for years. I have also been involved with several audit engagements. In addition to that, I have been involved in different financial advisory activities e.g., forensic, due diligence etc., I have also been involved in performing various accounting activities e.g., preparation of financial statements for SMEs, Using several accounting packages like SAGE accounting. With such vast experience, I was humbled having attended just one month of this course called CFA. Although, there is no significant disparity between my prior understanding of accounting and that which is thought at this prestigious school. I am more intrigued in the intricate understanding I have been able to get from this course in just one month. There are several phenomena I have learnt to my greatest shocked in this school highlighted below;
- Depreciation has nothing to do with wear or tear:
Before my admittance into the LBS if I were to be asked what is the concept of depreciation is, I would boldly say depreciation is amount of wear and tear attributed to an asset. LOL!!! I would say that with pride.
However, after a session with the facilitator, depreciation has nothing to do with wear and tear, it simply means the spread or cost of a tangible non-current asset. What does this mean? I was perplexed when the facilitator mentioned this statement, having raised up my hand boldly to answer the question with great speed I dropped the hand after that statement was made. How? Why? Confused and uncertain if this was true or if it was a prank. The facilitator further explained. A company is created with the idea that the company with continue as a going concern this simply means that the company’s financial statement is prepare with the notion that it will not end in a foreseeable future. However, the financial statement is also prepared on a concept of periodicity, this means that this unforeseeable future life cycle of the business should be contained within period which is 12 months. Additionally, when an asset is bought, because of the utilization of that asset is split within different years, there is a need to apply the matching concept which dictates that companies report expenses at the same time as the revenues they are related to. Consequently, the asset that was bought should be spread to certify this concept. For example, a company car bought for #5 million and is expected to have a utilization period of 5 years, the depreciation charge due to the matching concept will be 1 million per year for 5 years where it is fully utilized. From these explanations, there is no mention of wear and tear and this even as I type is shocking to me. Lol!
- Which is the riskier form of financing a business is it Equity or Debt?
Another learning shock for me was to the insight as to which is riskier to a business, financing the business with Equity Or debt. Without a reasoning I would have chosen the former- equity. But after the session with the facilitator on this, I have been greatly humbled that the one which is riskier is dependent on the availability of cashflow and the type of business it is. For business like a farm business which requires cashflow at the moment and gets a harvest in the short term, it would be riskier to finance such business with equity and usually a debt financing is encouraged. However, the opposite is the case for business like a fintech company. This is because the benefit is envisioned to accrue at a much future date. Consequently, financing with debt possess more risk since the actual break even and thereafter profit of the firm is envisioned in the future. If the business finances with debt, there might be a trigger to pay certain accruing interest that eat up the profit yearly and this is a serious risk to such a business since the profit is not expected in the nearest future but organically. This might lead to a serious cashflow constraint which might propel the business to sell of its asset so as to pay back the loan.
In addition, financing by equity also means dilution of control to the extent of the agreement, so, there are several factors that come to place to decide on what financing option a firm to choose and it not a cast in stone. This was a very eye-opening revelation for me.
- The position of a business
To know the position of a business it is the total asset of the business. The total asset of the business is either a non-current asset and the current asset. I also learnt that the statement of financial position is prepared and arranged based on its level of liquidity. This came as a shock to me as I have been involved in several audit, several advisory on this same financial statement and I have not had the open eye to realize that this was the case. I instantly became amazed as I checked financial statement upon financial statement after this discovering and realized how true this statement was. Also, the financial position of the business is the use of the funds which refers to the asset. Also, the source of funds refers to the Sum of the capital structure and the financial structure.
The financial structure which refers to the long-term liabilities and the short-term liabilities and the capital structure which refers to Debt or equity (as explained above)
In conclusion, the CFA course in just four weeks has made me realize and appreciate just how practicable Accounting can be. There is a logical flow of every item recorded in the financial statement and I cannot contain my excitement as I look to learn a whole lot more of practicable knowledge in this wise.
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