Lecture 1
15-04-2019
Agency problem
Separation of Ownership & Control
Delegation of decision making authority
Financial accounting vs. Management accounting & reporting & management control
Information: relevant & reliable?
Corporate governance mechanisms; two mechanisms are:
1) Accounting standards
2) External auditor
Agency problem
Who are the principal (P) and the agent (A) in Financial Accounting (FA) and in Management Accounting (MA):
Assumptions
• Bounded rationality
• Opportunistic, self-interested behavior
• Risk attitudes / preferences
• Goal conflict among participants
• Information asymmetry
• …
Behavioral risk
• Adverse selection
• Moral hazard
IFRS/IASB
IFRS: International Financial Reporting Standards
IAS: International Accounting Standards
1
,Objective of financial reporting
The objective of general purpose financial reporting is to provide financial information about the reporting
entity that is useful to existing and potential investors, lenders and other creditors in making decisions about
providing resources to the entity.
Examples of economic decisions
• buy, sell or hold shares (and other equity instruments) − provide or settle loans and other forms of
credit
• ...
1) Communicate information that is useful in making decisions
a. in making resource allocation decisions
2) Assessing management stewardship
a. monitor managers’ activities
• accountability
• discharge management from responsibility
Relationship economic decision making & stewardship
3) capital protection
Income assessment & dividend distribution
The management decides to pay dividends for 2018
Is it economically and legally acceptable to pay dividends?
→ Even if you have a loss, you can pay dividend to the shareholders.
What is the maximum amount of dividends that may be paid?
a) Not allowed
b) € 0
c) € 300.000
d) € 1.100.000 → what you have at the retained earnings.
e) € 1.200.000
f) € 1.400.000
g) € 1.500.000
h) € 2.200.000
i) Correct answer is missing
2
,Corporate financial statement
Key financial statements
1) Income statement (USA) / Profit and loss account (UK) Statement of comprehensive income
2) Balance sheet / Statement of financial position (IASB)
3) Statement of cash flows
o Direct statement of cash flows
o Indirect statement of cash flows
4) Statement of changes in (shareholders’ / stockholders’) equity
• Consolidated financial statements
• Company financial statements
Preparation of financial statements – “Homework”
AJM International
AJM is a starting trading company that deals in parts for block chain technology. AJM had the following balance
sheet at 1 January 2018:
The following transactions occurred in 2018:
1) Parts costing € 200.000 were purchased on account during 2018. At the end of 2018, all purchases
were paid.
2) In 2018, all parts purchased were sold for €400.000 on account. During 2018, € 320.000 was collected
on accounts receivable.
3) At the end of 2018, AJM repaid half of the loan (€100.000) as well as interest expenditures (€10.000)
to the bank.
4) At the end of 2018, AJM recorded depreciation expenses on equipment for € 20.000 in its income
statement 2018.
5) On 31 December 2018, cash dividends of € 50.000 were paid to the shareholders.
Presume – for the sake of simplicity – no taxes.
Questions
1) Prepare AJM’s income statement for 2018.
2) Prepare AJM’s balance sheet for 31 December 2018.
3
, Lecture 2
16-04-2019
Financial information
Revenues receipts
Expenses expenditures
Net income cash flows (from operations)
Investment → cash outflow, no expense
Depreciation, amultisation → expense, no expenditure
Debter (accounts receivable) → Revenue, no receipt
Loan → Receipt, no revenue
Cash vs. accrual basis of accounting
Suppose you pay the rent for the room for May 2019 in April 2019
What I see: in April a decline in my bank account, but I also see an increase in expenses.
→ we swap one asset for another type of asset.
Owner (landlord):
It is the same as for the person that paid the rent for the room, but in the opposite way.
4
15-04-2019
Agency problem
Separation of Ownership & Control
Delegation of decision making authority
Financial accounting vs. Management accounting & reporting & management control
Information: relevant & reliable?
Corporate governance mechanisms; two mechanisms are:
1) Accounting standards
2) External auditor
Agency problem
Who are the principal (P) and the agent (A) in Financial Accounting (FA) and in Management Accounting (MA):
Assumptions
• Bounded rationality
• Opportunistic, self-interested behavior
• Risk attitudes / preferences
• Goal conflict among participants
• Information asymmetry
• …
Behavioral risk
• Adverse selection
• Moral hazard
IFRS/IASB
IFRS: International Financial Reporting Standards
IAS: International Accounting Standards
1
,Objective of financial reporting
The objective of general purpose financial reporting is to provide financial information about the reporting
entity that is useful to existing and potential investors, lenders and other creditors in making decisions about
providing resources to the entity.
Examples of economic decisions
• buy, sell or hold shares (and other equity instruments) − provide or settle loans and other forms of
credit
• ...
1) Communicate information that is useful in making decisions
a. in making resource allocation decisions
2) Assessing management stewardship
a. monitor managers’ activities
• accountability
• discharge management from responsibility
Relationship economic decision making & stewardship
3) capital protection
Income assessment & dividend distribution
The management decides to pay dividends for 2018
Is it economically and legally acceptable to pay dividends?
→ Even if you have a loss, you can pay dividend to the shareholders.
What is the maximum amount of dividends that may be paid?
a) Not allowed
b) € 0
c) € 300.000
d) € 1.100.000 → what you have at the retained earnings.
e) € 1.200.000
f) € 1.400.000
g) € 1.500.000
h) € 2.200.000
i) Correct answer is missing
2
,Corporate financial statement
Key financial statements
1) Income statement (USA) / Profit and loss account (UK) Statement of comprehensive income
2) Balance sheet / Statement of financial position (IASB)
3) Statement of cash flows
o Direct statement of cash flows
o Indirect statement of cash flows
4) Statement of changes in (shareholders’ / stockholders’) equity
• Consolidated financial statements
• Company financial statements
Preparation of financial statements – “Homework”
AJM International
AJM is a starting trading company that deals in parts for block chain technology. AJM had the following balance
sheet at 1 January 2018:
The following transactions occurred in 2018:
1) Parts costing € 200.000 were purchased on account during 2018. At the end of 2018, all purchases
were paid.
2) In 2018, all parts purchased were sold for €400.000 on account. During 2018, € 320.000 was collected
on accounts receivable.
3) At the end of 2018, AJM repaid half of the loan (€100.000) as well as interest expenditures (€10.000)
to the bank.
4) At the end of 2018, AJM recorded depreciation expenses on equipment for € 20.000 in its income
statement 2018.
5) On 31 December 2018, cash dividends of € 50.000 were paid to the shareholders.
Presume – for the sake of simplicity – no taxes.
Questions
1) Prepare AJM’s income statement for 2018.
2) Prepare AJM’s balance sheet for 31 December 2018.
3
, Lecture 2
16-04-2019
Financial information
Revenues receipts
Expenses expenditures
Net income cash flows (from operations)
Investment → cash outflow, no expense
Depreciation, amultisation → expense, no expenditure
Debter (accounts receivable) → Revenue, no receipt
Loan → Receipt, no revenue
Cash vs. accrual basis of accounting
Suppose you pay the rent for the room for May 2019 in April 2019
What I see: in April a decline in my bank account, but I also see an increase in expenses.
→ we swap one asset for another type of asset.
Owner (landlord):
It is the same as for the person that paid the rent for the room, but in the opposite way.
4
