Samenvatting – Corporate Finance & Accounting for Business Lawyers
Week 1 – Financial Statements
Learning goals:
1. Students know and can describe what corporations (companies) are;
2. Students know and can describe what financial statements contain and why they are
important;
3. Students know what balance sheets are and can apply their knowledge in a case;
4. Students know what income statements are, can describe the different elements of
these income statements, and can apply their knowledge in a case;
5. Students know the different capital terms (i.e., legal capital, market capitalisation, issued
capital, etc.);
6. Students know and can describe what cash flow statements are;
7. Students know how the different elements of financial statements are interconnected
and can create financial statements;
8. Students know what the different profitability analyses are, why these are important and
can apply them in a case.
Corporate finance is about the funding of corporations. Accounting is about the recording
and reporting of financial transactions.
Creditors are seeking interest which stands fixed. That is why creditors are called fixed
claimants. Shareholders are seeking efficiency which fluctuates. That is why they are called
residual claimants.
,The availability of outside funding has enabled corporations to dominate the economy.
There is no restriction on who can own shares in a corporation. Stock ownership is (usually)
the investor his sole tie to the company. Through financial statements shareholders and
others can be informed about the performances of the corporation.
People who are involved with financial statements are: managers, society, lenders, investors,
customers, regulators, creditors, employees and owners.
Financial statements also contain non-financial information nowadays. The disclosure of
non-financial and diversity information by certain large undertakings and groups:
‘undertaking’s development, performance, position and impact of its activity, relating to, as
a minimum, environmental, social and employee matters, respect for human rights, anti-
corruption and bribery matters’.
There are three types of financial statements:
1. Balance sheet – how much assets and liabilities does a company have?
2. Income statement – how much does a company earn?
3. Statement of cash flows – how much cash does a company generate?
Important is to see the difference between the record result from the balance sheet and the
record result of the cash flow statement and income statement.
The balance sheet contains two sides: liabilities and equities on one hand and on the other
the assets. Liabilities belong to the creditors and equites belong to the shareholders.
Tangible is everything that is physique like inventories. Intangible is everything you
cannot touch. For example, a brand name or goodwill.
Current is everything that can be converted into money or can be paid off in less than
a year. Non-current are goods or liabilities and equity that cannot be converted into money
or can be paid off in less than a year.
,The current assets, liabilities and equity together is called the working capital. If the working
capital is positive, then the company could pay off all the deaths in short term.
Equity contains share capital, retained earnings and other reserves.
What is the relationship between the normal value of a share and the market value? There is
not a relationship between these two. Shares can be put on the market for a price that is
approximately the market value.
The difference between the nominal value per share and the market value is called
APIC.
The share capital is aggregate of all contributions of shareholders. The share capital =
par value of shares * number of shares
Example
A corporation has 100 shares that are fully paid by the shareholders with a par value of
1,000 euro per share. This means that the share capital has a value of 100,000 euro. Yet,
because the corporation is making a profit, the value of the corporation is currently 200,000
euro. This is shown on the following balance sheet:
, Since there are 100 shares, each share has a value of 2,000 euro. Now, suppose that the
corporation wants to issue additional shares to fund its expanding business operations.
Particularly, the company wants to issue 100 shares. What would happen if the company
sells these shares for 1,000 euro par value?
The assets are 300.000 euro and the total of liabilities and equities too. The value per share
is: 300.000/200 = 1.500 euro. Because of this the value of the shares will water down for the
shareholders. A solution is given in the following balance sheet:
The income statement is over a whole period and not just a moment like the balance sheet.
There is an order of claimants. In front of line there are the fixed claimants from creditors.
The company’s liabilities come first. After this, the residual claimants from the shareholders
have a claim.
