No. 1 - Finance for Non-Financial Managers
AUTONOMOUS GROUP LEARNING
(AGL)
NO. 1 - FINANCE FOR NON-FINANCIAL MANAGERS
COURSE DIARY
(Retained)
Note: All figures have been simplified to facilitate very rapid learning.
Copyright: RGAB 2012/2
No copies of without written permission.
INDEX
Item Page No
1.Important note on the learning 3
2.Summary lecture - Part I 4
3.Summary lecture - Part II 10
4.Short quiz - worksheet 18
5.Tom Lyster - worksheet 19
6.Bill Brown - worksheet 20
7.Optional quiz on financial arithmetic 21
8.Action plan for the future 34
9.Financial shorthand 35
10.Minicases 36
11.Things to think about 46
12.Local case series 47
APPENDICES:
A - Registration sheet 49
B - First feedback summary 52
C - Second feedback summary 54
D - Quiz answer sheets 58
E - Further Study - AGL 10 - Financial Management 59
1. IMPORTANT NOTE ON THE LEARNING
1.AGL is specially designed as an intensive basic finance course in five parts, for the manager with relatively little or no formal financial training or experience. Some parts may be less challenging for the experienced financial director with many years of experience.
2.AGL creates a very special group learning environment that is new to the group members. It is a highly effective but rather challenging learning experience. Members should therefore try to keep an open mind on their reactions until the second day of the program.
3.Members can and do solve ALL the problems and answer ALL the questions, from the special materials provided and the experience of other members of the group.
4.The Organiser is not a teacher. The Organiser's job is to help members to:
a.Understand the AGL learning system
b.Use fully and effectively the special learning materials and the group experiences.
c.Solve administrative problems
5.The Organiser is not usually allowed under AGL Learning Systems to respond directly to technical financial questions, since the learning is better when members help each other. The critical[B1] skill of the Organiser is to HELP the participants to WORK TOGETHER to resolve successfully, all questions arising. Thus by the end of the program EVERY QUESTION is resolved!
6.Since the same learning materials are used for both the two day and the three day versions of the course, the Organiser will occasionally outline differences in the timing of some parts of the work.
7. Members should not be disturbed by references to various currencies since the AGL materials are used extensively in many different countries.
8. Since 1970 over 40,000 executives have successfully completed AGL programmes throughout the world. This wide international experience s resulted in development of the "Learning Maintenance Program" which is designed to reinforce and sustain the learning achieved from the course.
9.We hope you too will find AGL stimulating, efficient and effective for you!
2. SUMMARY LECTURE FOR PART 1
11.1 OBJECTIVES
(a) Understand accounting language and concepts
(b)Interpret balance sheets and profit and loss accounts
(c)Use basic financial ratios
(d)Develop confidence in using accounting and financial data
(e)Motivate further study in the future
11.2 ACCOUNTING LANGUAGE
(a)Glossary of ASS is a continuous reference
(b)Two hundred words (only) is the basic vocabulary
(c)The USA/European Accounting languages may be compared:
U.S.A.EUROPEAN
receivablesdebtors
payablescreditors
inventorystock
capital stockshare capital
capital surpluscapital reserve
earned surplus)accumulated profit
retained savings)revenue reserve
earnings statement)
operating statement)profit and loss account
income statement)
Note: The layout of the financial statements may not affect the content; you just have to search harder to find the data that you want.
2. SUMMARY LECTURE FOR PART I
11.3 ACCOUNTING CONCEPTS
Records of transactions are converted into accounting reports by using practical accounting concepts:
cost (assets generally at cost)
consistency
conservatism
comparability
accounting period
going concern (not break-up values)
entity (the business not its workers)
profit realisation
accrual (cash and credit transactions included)
true and fair (as possible)
MATERIALITY (most important of all!)
11.4ACCOUNTING PERIOD
Accounting periods create uncertainty and doubt.
Try to associate all sales costs, expenses and profits with a specific accounting period. All accounting figures are estimates not scientific facts.
11.5 PROFIT AND LOSS ACCOUNT
Sales less cost of goods sold equals gross profit.
Gross profit less selling and administrative expenses equals net profit for the accounting period. Profit depends upon: charging
all the proper costs and stock valuation.
2. SUMMARY LECTURE FOR PART I
11.6 BALANCE SHEET
Assets of the business: how they are financed from liabilities and owners equity.
Fixed assets valued at cost less depreciation (based on the working life of the asset).
Fixed assets such as land and building may have to be revalued periodically.
Current assets (one year only) valued at cost or lower realisable (market) value.
Stock valued at the lower cost or market value.
11.7 HEALTH OF THE BUSINESS
LAPP System
Liquidity -cash is more important than profit.
& Gearing
Activity -turning over the assets and the inventory; more activity requires more assets!
Profitability -gross and net profit related to sales and owners equity.
Potential - depends upon: market, product life cycle, facilities, management, strategy etc.
2. SUMMARY LECTURE FOR PART I
11.8 BASIC FINANCIAL RATIOS
ROUGH STANDARD SCALE
GoodAveragePoor
a)Liquidity:
CA : CL 2 : 11 : 11 : 2
QA : QL1+: 11 : 11 : 2
E : D 2 : 11 : 11 : 2
b)Activity:
Sales
Assets Up SameDown
CGS
Stock UpSameDown
c)Profitability:
Gross Profit
SalesUpSameDown
Net Profit
SalesUpSameDown
Net Profit
Owners EquityUp SameDown
11.9MATERIALITY
Look for the big figures which are significant. Compare them with the past, the future and the industry averages to determine the significance of changes. Look for the big figures ... the coconuts ... ignore the peanuts ... Look for "CHANGE" and ask the reasons why.
2. SUMMARY LECTURE FOR PART I
11.10 LEARNING PATTERNS - REVIEW 
2. SUMMARY LECTURE FOR PART I
11.11 INSTRUCTIONS (20 minutes)
(a) Reassemble in SG
(b) Review the Summary Lecture for Part I in the course diary and discuss questions arising
(c) To get the best out of Part II of the program, try to complete ALL of the following homework tonight:
1.Read the articles on the accounting
2.In the ASS text, review the chapter summaries and the glossary
3. Do the "optional" exercises in the course diary and check the answers
4. Review the summary lecture for Part I in the course diary
5. Review your notes for Part I of the course and list outstanding questions to be resolved in Part II
(d)Now, would you please return the workpack to the organiser?
NOTE OF APPRECIATION
Thank you for working so hard today We hope the AGL experience is rewarding for you From tomorrow ... it's downhill all the way ... !!
2. SUMMARY LECTURE FOR PART II
12.1WORK COMPLETED
ASS
Package of accounting reports
Basic financial analysis
12.2POINTS ON CASES
Tom Lyster
Ratios: GP/S and NP/S
Comparison with past years, budget and industry averages
Forecasting a future profit and loss account based on assumptions of: sales, ratios, estimates
Bill Brown
Interpretation of financial statements
Working capital (CA - CL)
Par and book value of owners equity; EPS
Special Supply Company
Comparison of financial statements against past and forecast figures
Ratio analysis
Effect of increased sales on assets required
Deterioration of E : D ratio
Bank problems
Dividend reduction to save cash
Need for equity base for larger expansion
12.3MATERIALITY
Compare data by amounts and ratios
Concentrate on the big figures
Compare them against a standard (past, forecast, or industry average) Find out why they changed Coconuts not peanuts please !
2. SUMMARY LECTURE FOR PART II
12.4TRENDS TO BE EXPECTED IN A HEALTHY COMPANY
Sales and profits increase
Profitability ratios increase
Inventory and receivables in relation to sales
Equity : Debt (2 : 1 strong) but not usually less than 1 : 1
Note: "In the EU of the 1990's the "health" of a business may well depend upon keeping up with both national and international industry averages ... "
12.5BALANCE SHEET
Fixed assets and current assets financed by liabilities and owners equity. Investigate how and why the assets are valued! Should they be "revalued" to more realistic current values?
Note on liabilities :
In some countries, there may be a long delay in actually paying corporation tax on profits; this may lead to two figures of tax liabilities on the balance sheet:
a.Current tax liability - probably tax on the previous year's profit, and
b.Deferred taxation - probably tax on the current year's profit
12. 2. SUMMARY LECTURE FOR PART II
12.6PROFIT AND LOSS ACCOUNT – INCOME STATEMENT
Sales less cost and expense gives profit for the accounting period.
Distinguish operating (normal) profit from non-operating profits and losses.
Investigate profit and losses NOT charged to the income statement but charged to:
a.Accumulated profit
b.Capital reserve
In some countries published financial statements often do
not reveal gross profit or identify operating expenses.
However from 1990 onwards, they should always show a
reconciliation of the profit figure, with International Accounting
Standards
12.0 SUMMARY LECTURE FOR PART II
12.7RATIOS
ROUGH STANDARD
GoodAveragePoor
a)Liquidity:
CA : CL2 : 11 : 11 : 2
QA : QL1+: 11 : 11 : 2
E : D2 : 11 : 11 : 2
(b)Activity:
S p.a. 2 11/2
A
CGS p.a. 3 2 1
I
Receivables
- Days of Sales3060120
Payables
- Days of CGS3060120
(c)Profitability
GP40%30%10%
S
NP10%5% 1%
S
NP p.a.25%15%5%
OE
(d) Potential - Product, Market, Facilities, Management, and of course ... Finance
Note: The above are only rough standards; much better standards are: industry averages, budgets or forecasts, or even past results(d)
2. SUMMARY LECTURE FOR PART II
12.9CONCLUSIONS
The program was designed to help you to develop financial language, concepts and confidence and to motivate you toward further study and practice in the future.
Financial analysis helps to tease out the questions to ask; the layout of the financial statements is not important, provided you have the confidence to find your way around the data.
Cash (liquidity) is more important than profit. Sales orders outstanding and inventory valuation are the keys to profit! (Orders outstanding effect the inventory valuation which can have an important effect on profit).
Profit must be judged in relation to target or budget or industry ratios, not merely last years performance.
Financial statements are based on accounting concepts (which are as flexible as proverbs -- one for every occasion!). However, always ask for a reconciliation of the net profit, with "International Accounting Standards" and investigate any differences arising.
Figures are only estimates; compare them against a useful standard to determine their significance. Don't pretend to be too accurate!
Try to find out management's objectives in preparing the specific financial statements that you study (taxes? shareholders? bank? mergers? efficiency? etc.).
Study the "notes to the financial statements" very carefully!
Question the valuation of the assets. Always consider the effect of inflation on asset values and profits during the accounting period.
12.0 SUMMARY LECTURE FOR PART II
12.9CONCLUSIONS
Look out for possible "manipulation", which is often politely referred to as "aggressive" or "creative" accounting.
Check that financial reports have been audited by a firm that is professionally recognised, independent and adequately paid to do a full audit to international auditing standards.
Look for timely financial reports, completed and audited within two months after the end the accounting period. Long delays in produc- ing and publishing financial statements (months or even years) are always justification for "concern" ... regardless of the reasons suggested ...
For every critical financial problem, do a PFD (Provision for Disaster) brain-storming, to avoid the dreaded EI (Emotional Investment) in only one course of action ... there are always seven alternatives for every financial decision ....so watch out for EI, PFD, peanuts and coconuts ... get into your helicopter ... but come down again and resolve the problems ...
Note: In finance good luck is helpful, so ALWAYS remember Napoleon ... who said: I want good generals ... but ... I want lucky ones too!
12.0 SUMMARY LECTURE FOR PART II
This ends our AGL program; the first of a six part series (finance, cost control, budgets and business planning, capital investment analysis, forex & risk management, and finally, EVA and the management of working capital. We hope it has inspired you to develop your skills by practical application.
Thank you for your interest and hard work. Keep ASS glossary handy as a daily reference for accounting language.
We hope that you have much enjoyed the AGL experience and that it motivates you to read widely in finance and accounting and to continue your studies in the future.
Now reinforce your learning from the program by using the LRT (Learning Recall Tape) to help you with the "Learning Maintenance Program" (Exhibit A which follows), as explained by the organiser.
Then please send us the Final Feedback Summary and quiz results on day 34.
We trust that you have found AGL to be both "efficient" (doing things right) and "effective" (doing the right things).
Thank you for being a member of our programs.
RGAB/IR
March 20, 2012
DAYS 4 34 LEARNING MAINTENANCE PROGRAM
1.Objective to ensure that learning from the course is both maintained and reinforced.
2.Help discuss problems arising with your local Controllers, and for any outstanding questions, do not hesitate to FAX us for whatever assistance may be needed.
3.Routine
a.Play the LRT (Learning Recall Tape) several times to reinforce the your learning recall, achieve deeper understanding of EVERY aspect of the course, and to identify the learning materials that will require extra study time.
b.Study the WSJ (supplied without charge for 30 days) for at least 20 minutes daily. Use the special note provided, to interpret the more difficult technical sections.
c.Review all course learning materials.
d.From day 15 onwards, study the text book Analysis for Financial Management (Higgins)@ which is used in the MBA program at the Harvard Business School. And be sure to buy the Dictionary of Finance & Investment - Barons ( over 250 pages for a cost of only $20.00!). .
4.On day 34, complete the quiz of 100 questions (open book) and return it to the Organiser with your mature feedback on the course content and its direct application to your area of responsibility.
4. SHORT QUIZ - WORKSHEET
For a manufacturing company show the effect of each of the transactions listed below as of the time the event described takes place: cash, current assets, net working capital (current assets less current liabilities), net profit for the current period. In the spaces provided enter: plus sign (+) to indicate an increase, or minus sign (-) to indicate a decrease, or zero (0) to indicate no effect at all. Item No. 0 is given as an example.
Example:CashCANWCNP
0. Wages earned by employees during
the period were paid in cash and
charged to expense - - - -
1.Materials purchased for cash and
charged to inventory
2.Some of the above materials (in
inventory) were used up and sold
for cash at a profit and the cost
was charged to cost of goods sold
3.Capital (share) stock was issued for cash
4.Depreciation for the period was
estimated and recorded in the books
5.Money was borrowed from the bank on a
30-day note payable (disregard interest)
6.Equipment (fixed asset) was purchased
for cash (ignore depreciation)
7.Equipment was purchased on long term
credit (ignore depreciation)
8.An account (creditor) payable was
reduced by a cash payment
9.Dividends were paid in cash and
charged to accumulated profit
10.Wages accrued in a prior accounting
period were paid in cash
11.A fixed asset sold for cash at a profit
12.A fully depreciated asset was scrapped for no value (Score: /48)
5. TOM LYSTER WORKSHEET
Operating Statements - Year ended December 31,
ActualActualBudget
000 % 000 % 000 %
Net Sales5,0001003,2401004,000100
Less cost of goods sold:
Direct labour1,850 37 810 25
Materials 750 15 486 15
Depreciation 150 3 130 4
Manufacturing overhead1,000 20 680 21
3,750 752,106 65
Gross Profit1,250 251,134 35
Operating Expense
Selling 300 6 292 9
General & administrative 300 6 194 6
600 12 486 15
Operating Profit 650 13 648 20
Non-operating income & expenses
Dividends received 450 9 200 7
Interest paid (200) (4) (200) (7)
250 5 0 0
Profit before taxes 900 18 648 20
Income tax 450 9 324 10
NET PROFIT 000 50 9% 324 10%
6. BILL BROWN - WORKSHEET
Study the attached financial statement for the year ended December 31 (Exhibits 2 and 3) and complete the following:
1. The current assets were:
2.The current liabilities were:
3. The working capital was:
4. The issued common stock (ordinary share capital) totalled:
5. The owners equity was:
6.Total liabilities were:
7.Net fixed assets were:
8.The opening inventory (stock) was:
9.The closing inventory (stock) was:
10.The cost of sales was:
11.The gross profit percentage to sales was:
12.The net profit percentage to sales was:
13.The net profit percentage to owners equity was:
14.The ratio of current assets to current liabilities was about:
15.Acid test or "quick ratio" was about:
16.The par (nominal) value of one common (ordinary) share was:
17.The book value of one common share was:
18.The preference (preferred stock) dividend was:
19.The EPS (Earnings per Share) for each ordinary shareholder: net profit ... less preferred dividend ... equals ... ; divided by the 2,000 issued ordinary shares were ...
20.The market value of one common share was:
Score: /20
7. OPTIONAL QUIZ ON FINANCIAL ARITHMETIC PROBLEMS
Some skills in basic financial arithmetic may be developed from this short quiz (answers given at the end).
1.Depreciation - a machine costs 1,000,000 and is depreciated on a straight line basis for a five year economic life.
(a)What is the depreciation in year 1?
(b)What is the net book value after 3 years?
(c)If sold for 200,000 after 3 years, what is the profit or loss on the sale?
2.Depreciation - a machine costs 1,000,000 and is depreciated on a diminishing balance basis of 30% per year.
(a)What is the depreciation in year 1?