Basics of accounting (master)

Session 6

November 28, 2005

Topics of the day (outline) : Reading and understanding a balance sheet (with a stress on the liability side) (cont'd)

• Double-entry accounting applies to the exchanges of any economic agent, or group of economic agents
• Example of a community :
  • Substuting imports to auto-consumption must be paid for
  • Consequences on the local economy
  • Payment with local money vs payment with international money
  • Payment with debts

   

• When a firm F buys a firm G : impact on the balance sheet of F
• Goodwill
  • If a firm F buys a firm G for a price higher than the Net Book Value of G (= Equity of G), this implies that F buys also some "goodwill" on top of the assets of G,
  • The assets of G, plus this extra goodwill, will end up in the assets of F (decreased by the cash paid out to G's owners)
  • The external liabilities of G will end up in the external liabilities of F
  • Purchasing G for cash does not affect the equity of F
• Exercises

• Sources of funds for a firm
  • Sales
  • Disposal of assets
  • Stock issue
  • Bond/loan issue
• Loan - borrowing money : the point of view of the firm
• Loan - lending money : the point of view of the bank
• Creating money

• Minority interest
• Treasury stocks
• The mechanism of issuing bonds, and other debt
• Convertibles, etc.
• Value creation