Some Key Concepts I Have Learned In Corporate Financial Accounting (Part Three)

In my last two articles here and here, I explained some key concepts I had learned so far in my Corporate Financial Accounting class at LBS. This is the third and final piece for now, and as with the others, I’ll be sharing some more useful terms I’ve come across. 

• Goodwill: Goodwill is an intangible asset that is recognized when an entity is purchased as a going concern. Goodwill is typically valued through the process of a purchase price allocation when one company acquires another. The purchase price allocation allocates the total purchase price to the identifiable assets acquired and liabilities assumed, with any remaining amount representing the value of goodwill. Goodwill encompasses valuable aspects like a company’s positive reputation, a loyal customer base, brand recognition, a skilled workforce, and proprietary technology. While these elements are indeed valuable assets, they lack physical presence and their precise monetary value is challenging to quantify. It is extremely difficult to assign any life span to goodwill, and as such, it is not amortized.
• Operating activities: Operating activities involve the daily activities of a company involved in producing and selling its product or service, generating revenues, general administrative and maintenance activities, manufacturing, sales, advertising, and marketing activities. A negative figure in cash flow from operating activities indicates that the organisation has not been operating profitably and is short of cash to repay its creditors and to finance its day-to-day running.

• Investing activities: Investing activities involve acquiring physical assets, making investments in securities, or selling securities or assets. A decrease in cash flow resulting from investing activities may not necessarily indicate a negative situation, especially if the management is making strategic investments for the company’s long-term well-being.

• Financing activities: Financing activities encompass everything that represents the flow of cash between a business and its owners and creditors. It focuses on how the business raises capital and pays back its investors. The activities include issuing and selling stock, paying cash dividends and adding loans.

• Accrual concept: This concept implies that revenue can be recorded even when cash hasn’t been received, as long as it has been earned. This method also aligns with the matching principle, which says revenues should be recognized when earned and expenses should be matched at the same time as the recognition of revenue.

• Going concern: Going concern is an accounting term for a company that is financially stable enough to meet its obligations and continue its business for the foreseeable future. Certain expenses and assets may be deferred in financial reports if a company is assumed to be a going concern.

• Qualified report: A qualified report means that the auditor found something in a financial statement that can impede the decision-making of anyone who views it. Based on these issues, they will give a disclaimer that they found material misstatements in it. The goal is to have an unqualified audit report on the financial statement as this means that auditors didn’t find any material information that may affect the viewpoint of anyone who views the report. Essentially, it means the auditors have endorsed its accuracy. 

That is all for today! Hopefully, I can continue this series as I learn more on the course.