Class notes
MGT388 Finance for Engineers Notes
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Comprehensive notes on the finance part of this course. This part of the course prepares engineers for real-word scenarios where finance plays a big part in projects
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Finance Cheat Code1. Financial Accounting
a. Provide information about the financial position, performances and changes in
financial position of a company that will be useful to a wide range of users in making
economic decision
2. Management Accounting
a. Provide information, financially or non-financially, to people within the organisation
to make better decisions to achieve better efficiency and goals
Financial Accounting Management Accounting
General Specific (tailored to needs)
For use of shareholders and other external For the management of the organisation
stakeholders
Annually or bi-annually As frequent as possible
Broad overview Considerable detail
Subject to accounting regulation, stock No specific regulation and customised to the
exchange rules, external auditor and company needs of the department
law
Backward looking Backward and Forward looking
3. Annual Report
a. Financial statement of the company, subject to regulations and audited
b. Contain 4 elements:
i. Income Statement
ii. Statement of Financial Position
iii. Statement of Changes in Equity
iv. Statement of Cash Flow
4. Regulation
a. Statutory Regulation
b. Accounting Standards
c. Stock Exchange Regulation
5. Audit
a. Independent examination of the financial statements to determine the true and fair
view of the financial performance (profit) and position (value) of the company
6. Income Statement
a. Profit and loss account
b. Information on the performance of the company
c. Elements under income statement:
i. Revenue
• Sale/turnover
• Income only from the main business (line of operation)
ii. Cost of Sale
• Expenses/costs that are involved in manufacturing and producing
the product
iii. Gross Profit
• Performance of core business
iv. Administration expenses
, • Office based cost of a company (accountant and lawyer fees, invoice
fees)
v. Operating Profit
• Performance of the company from full operation
• More volatile than gross profit and very important figure in a
competitive market
vi. Finance Charges
• Payment of interest, loans, leases and overdrafts
7. Statement of Financial Position
a. Also known as Balance Sheet
b. Represent the worth of a company
c. Elements in Statement of Financial Position:
i. Asset
• Resources that are controlled by the company as a result of past
transaction that are expected to bring economic benefits
• Two types; Non-Current Assets and Current Assets
a. Non-Current Assets: owned for longer than 12 months
(Example: Land & Building)
b. Current Assets: owned at the reporting date but are to be
used by business to make profit in the next 12 months
(Example: Inventory)
ii. Liability
• Legal obligation of the company arising from course of business
• Settled through the transfer of economic benefits
• An amount owed by the company
• Two types; Non-Current and Current
a. Non-Current: payment due is after 12 months (bank loan)
b. Current: payment due is within 12 months (trade payable)
iii. Equity
• Residual interest in the assets after deducting all liabilities
• Belong to the owner of the company aka the shareholders
8. Accrual concept
a. Expenses matched to revenue they helped to generate
b. Expenses, cost, revenue and income are accounted when they are incurred/earned,
not when cash flow in or out of the company
c. For Non-Current Assets, cost is on the statement of financial position
d. Each year, depreciation is taken off from the cost as an expense in the income
statement
e. The part of the cost of the asset has been matched with the revenue it helps to
generate
f. Example: Asset worth $9,000 for 3 years. Expense: $9,000/3=$3,000. The cost of the
asset is $9,000, $6,000, $3,000 and $0 in Year 1,2,3,4.
9. Ratio Analysis
a. Return on Capital Employed (ROCE)
i. Efficiency of management in using the funds provided by shareholders and
debenture holders
b. Gross Profit Margin
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