Summary of Short Introduction to Accounting (Richard Barker, 2011) C5-8
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Course
Economics and Management
Institution
Oxford University (OX)
Summary of the recommended introductory reading for Oxford Economic and Management first year financial reporting class.
Chapters 5 to 8 are summarised (1-4 are sufficiently covered in the introductory lecture).
Prepared by a student scoring 88% on the Financial Management Prelims Paper.
(Barker, 2011)
FM Book Chapter 5: Accounts as a lens on growth
CFS and BS can be used to understand the rate of growth achieved and routes by which growth has
taken place
2 ways to increase assets
Use existing assets to generate further assets
o Sales of inventory for profit, financial securities, use of equipment to develop product/
service for sale
External funding (loan/ equity)
CFS
Operating CF- positive means growth in assets from operations. Reinvested (investing CF) or
paid out as dividend/ repayment (financing CF)?
Investing CF- negative means increase in productive capacity to improve ability to increase
assets in future. Determine if it is funded by operating (organic growth) vs financing cash flow.
Scaling up (growth) or scaling down (negative growth) or no growth?
Financing CF- used for investment (growth) or operating (could be worrying if not paired with
investment, suggesting low growth opportunities)? Paying off (could be later stage) or
fundraising (could be early stage)?
BS
Depreciation means capital expenditure is needed to maintain productive capacity of business
(ratio of capital expenditure to depreciation as an indicator of growth, more or less than 1)
AR/AP increase/decrease means operating CF understates/overstates trading performance of
business
AR is unproductive asset that cannot be reinvested for growth
IS
Profit equals change in net assets and is thus a measure of growth
However, cannot see business size, need BS. Larger business with more assets and liabilities
have same net assets as smaller business with less assets and liabilities.
FM Book Chapter 6: Measuring value creation
Improving return on capital by increasing efficiency in employing assets to generate sales and by
increasing profit margins on sales. Economic profit.
Growth (Chapter 5) differs from wealth/ value creation. Growth (investment in additional assets)
may not be good if it is ineffective (does not create value well)
Distinction between cost of making an investment (initial asset value and 'growth' in C5) and
return earned on that investment (ROE, ROCE)
Value is created if business can achieve greater return on capital employed than alternatives.
This requires measuring profit, capital employed, cost of capital.
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