Accounting

Educational Cycle

Global

Finance

Board

Financial Statement

The final goal for accounting

“What’s the ROI on that project that BD wants to spend on?”

“What do you mean we have no money in the bank? we have a high gross profit from every exchange we do”

“I’ve been studying the report, and it looks as if our BD peeps are sacrificing gross margin for revenue. Have you talked to them about that?”

“I’m worried about our sustainability. It seems like we are not running investments as much as it used to as we are barely reaching the target.”

This could happen to you. Some of your MC, your EB, your BoA is asking what do you think of money in AIESEC.

How do you feel about that?

But what if you’re not sure on the difference between an income statement and a balance sheet, or between profit and a positive cash flow?

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Don’t despair!

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Financial trainers Karen Berman and Joe Knight reported in “Are Your People Financially Literate?” (HBR October 2009) that when they administered a 21-question quiz on “financial basics” to a representative sample of managers, the average score was only 38%. A failing grade in any classroom.

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And we know the numbers don’t look any different in AIESEC so that is why we prepared this course for you.

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Financial

Statements

A financial statement is a formal record of the financial activities and position of a business, person, or in this case an AIESEC entity.

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Relevant financial information is presented in a structured manner and in a form easy to understand. They typically include basic financial statements, accompanied by a management discussion and analysis

The three main financial statements that we use in AIESEC are mentioned on the right.

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Once all this financial statements are created, don’t forget to review them!

Profit and Loss statement

Balance Sheet

Cash Flow Statement

Creation of the financial statemenTS

Profit and Loss statement: presents information of the financial results of an organization's activities over a period of time. It communicates how much revenue was generated during the period and what costs it incurred to be able to do so.

Important is that it is consistent with revenue and expenses (cost of sales, sales, general and administrative expenses other operating expenses) are recognized when it happened independent of cash movements (so not money in the bank).

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Balance Sheet: Also called statement of financial position or statement of financial condition discloses what an entity owns and owes at a specific point in time. Equity (or what shareholders’ are entitled to (Assets minus liabilities). All in all: the balance sheet shows an entity’s financial position at a specific point in time. It is comprised of the following three elements: Assets. Liabilities and Equity.

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Cash Flow Statement: A cash flow statement is a financial statement that provides aggregate data regarding all cash inflows a company receives from its ongoing operations and external investment sources. It also includes all cash outflows that pay for business activities and investments during a given period.

The Balance Sheet

Assets – Liabilities = Owners’ Equity

Assets = Liabilities + Owners’ Equity

Something AIESEC owns or controls

Something AIESEC owes to someone

What we have left. In AIESEC are our reserves in general

or

This is just another way to say the same thing.

This is known as the Fundamental Accounting Equation and it must always be in balance.

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Example: If you buy a printer with payment due in 30 days, you increase the value of the printer in your assets, and your liabilities in the same amount.

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Resources

Sources of Funding

The balance sheet shows an entity’s financial position at a specific point in time. It is comprised of the following three elements:

• Assets: Something AIESEC owns or controls (e.g. cash, equipment, etc)
• Liabilities: Something AIESEC owes to someone (e.g. bank/other entity’s loans, AI Debts, )
• Equity: Equity represents how much AIESEC is worth of. This represents the amount that remains in the entity after its assets are used to pay off its outstanding liabilities.

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Balance Sheet Continued

Assets

• Cash
• Office Equipment

Liabilities

• AI & RO Payables
• MC Salaries
• Loans

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Owners’ Equity

• Retained Earnings

What resources has the company invested in?

How has the company financed investment in those resources?

Investment Decisions

Financing Decisions

Total Assets

Total L + OE

=

Components of Balance Sheet

ASSETS

LIABILITIES

EQUITY

1. Resources that are expected to provide future economic benefit
2. When can assets be recorded in the books?
• Owned or controlled by the company as a result of a past exchange or transaction
• Expected to provide future benefits that can be reliably measured
3. Classification as current or noncurrent

1. Obligations that the company must repay in the future.

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2. When are liabilities recorded in the books?
• A future payment is probable.
• Amount of the obligation can be reasonably estimated.
• The event that caused the obligation has occurred

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3. Classification as current

or noncurrent

1. Also known as shareholders’ equity, net assets, net book value.

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2. Sources of owner's’ equity.
1. Contributed capital – capital that owners have invested in the company.
2. Retained earnings – earnings that the company has generated and retained

Assets = Liabilities + Owners’ Equity

Sample

The balance sheet lets you know

• What are the resources of the entity?
• What are the entity’s existing obligations?
• What are the entity’s net assets?
• How much debt do you have?

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Limitations of the Balance Sheet:

• Assets recorded at historical value
• Only recognizes assets that can be expressed in monetary terms
• Owners’ equity is usually less than the company’s market value

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Summary

The Income Statement

• Sponsorships
• Affiliation Fee
• Product Fee

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The income statement shows an entity’s financial performance over a period of time in terms of revenues, expenses & net earnings.

Revenues

- Expenses

• Office Rent
• Salaries
• Transportation
• Conferences

= Net Earnings

Increase in owners’ equity from organization’s operating activities

(Revenues – Expenses)

Decrease in owner’s equity from the costs incurred to generate revenues

Increase in owners’ equity from selling products or services to customers

Components of Income Statement

Revenues

Expenses

1. Increase in owners’ equity from selling products or services to customers.

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2. When can a company record revenue?
• It is earned (delivery has occurred/services have been rendered)
• It is realizable (cash payment, or something that can be converted readily into cash, has been received); collectibility is reasonably assured.

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• Recorded according to Accrual Accounting

1. Decrease in owners’ equity from costs incurred to generate revenues

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2. When does a company record expenses?
• Matching principle
• Conservatism principle

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3. Recorded according to accrual accounting

Sample

Summary

The Income Statement lets you know

• Shows the results of an entity‘s operations over a period of time.
• What products were sold that provided revenue for the entity?
• What costs were incurred in normal operations to generate these revenues?
• What are the earnings or entity profit?

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Sometimes, in order to increase the profitability of a product or entity, we focus too much time on increasing the revenues. Start asking yourself as well if there are costs you can cut to turn around the corner of profitability!

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Relationship b/w Balance Sheet & Income Statement

To depict a relationship b/w a balance sheet & income statement, a balance is a snapshot of company’s finance at specific time periods while an income statement is a video of the company’s finances showing how we arrive from the beginning point to end point.

The Cash Flow Statement

A cash flow statement shows sources and uses of cash over a period of time.

• AI & RO Fee Payment
• MC Office Costs Payment
• Affiliation Fee Collection

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Operating Activities (CFO)

Investing Activities (CFI)

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• Purchase of office equipment
• Purchase of flat/office space

Financing Activities (CFF)

Cash flow from operating activities

(Cash flows related to usual business activities

• Issuance of loan

Cash flow from investing activities

(Cash flows related to buying and selling of long-term assets

Cash flow from operating activities

(Cash flows related to dealings of loan with your creditors

Change in Cash

CFO + CFI + CFF = Change in Cash

DIFFERENCE BETWEEN CASH INFLOWS & CASH OUTFLOWS

Cash Inflows

Cash Outflows

Operating

Activities

Investing

Activities

Financing

Activities

• Affiliation Fee Collection
• Grants & Donations Collection
• Cash earned from PD raises
• Cash earned from Project Mgmt.

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• Sale of Equipment
• Sale of Intangible assets
• Sale of investments

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• Loan taken from externals

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• Payment for marketing
• AI & RO fee payment
• Payment for Office Costs
• Payment for HR Costs

• Purchase of new equipment
• Purchase of intangible assets
• Purchase of investments

• Repayment of loans taken from externals

Methods of Preparation for Cash Flow

INDIRECT METHOD

DIRECT METHOD

• In Indirect method, the cash flow statement is prepared by taking income statement in consider. Since we follow accrual accounting in income statement, we take net profit and adjust this figure for non-cash transactions e.g. depreciation, accounts payables & receivables etc. and we get our cash flow statement.

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• The primary benefit of the indirect method over the direct method is that it helps you to explain why your net profit is different from your closing bank position.

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• Generating cash flow statement from income statement is a faster method compared to direct method.

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• In direct methods, the cash flow statement is simply prepared by analyzing all transactions that included inflow or outflow of cash based upon our receipts and invoices. It is simply subtracting your cash outflows from your cash inflows and adding the amount in your current cash balance.

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• This method provides more detail about the operating cash flow accounts allowing for further analysis of account heads.

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• It is time-consuming since we have to update all accounts involved in cash-transactions

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Important: As it can be seen, the method of recording operating activities for both methods is different while investing and financing activities block is identical.

• Cash flow is essentially the movement of money in and out of your business; it's the cycle of cash inflows and cash outflows that determine your business' solvency while cash flow analysis is the study of the cycle of these cash inflows and outflows, with the purpose of maintaining an adequate cash flow for your business, and to provide the basis for cash flow management.

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• Cash flow analysis also involves examining the components of your  business that affect cash flow, such as accounts receivables, inventory, accounts payables, and credit terms. By performing a cash flow analysis on these separate components, you'll be able to more easily identify cash flow problems and find ways to improve your cash flow.

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Importance of Cash Flow Analysis

How all 3 statements look like for any business

When cash flow statements are used in conjunction with the other financial statements, it provides such information which enables the users to evaluate the changes in net assets of an enterprise, its financial structure, its liquidity and solvency position and its ability to affect the amounts and timing of cash flows in order to adapt to changing circumstances and opportunities. The ability of the enterprises to generate cash and cash equivalents can be accessed through studying the cash flow statements

Release of the financial statements

Once you have finished and corrected the financial statements, it’s time to release them. But be careful! The annual report is a document that anyone can see and often can be sent to companies to evaluate if there are going to cooperate with us.

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The financial statements are formal report, so you should have writing guidelines to ensure the proper communication of the information. Moreover, it is a work that must be done within all the LC/MC, as they are going to explain information from different areas, such as marketing, operations or business development. Usually in the report you compare the reality with the budget.

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The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an organization that is useful in making economic decisions.

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Financial statements should be understandable, relevant, reliable and comparable by readers who have a reasonable knowledge of business, economic activities or accounting and who are willing to study the information diligently.

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Reported assets, liabilities, equity, income and expenses are directly related to an organization's financial position.

Purpose

for

organizations

Although laws differ from country to country, an audit of the financial statements of an organization is usually required for investment, financing, and tax purposes.

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These are usually performed by independent accountants or auditing firms. Results of the audit are summarized in an audit report that either provide an unqualified opinion on the financial statements or qualifications as to its fairness and accuracy.

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The audit opinion on the financial statements is usually included in the annual report.

Audit and legal

Implications

Financial statement analysis is the process of reviewing and evaluating an organization's financial statements,.

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Financial statements record financial data; however, this information must be evaluated through financial statement analysis to become more useful to shareholders, managers and other interested parties for a more effective decision making.

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Several techniques are commonly used as part of financial statement analysis including horizontal analysis, which compares two or more years of financial data in both dollar and percentage form; vertical analysis, where each category of accounts on the balance sheet is shown as a percentage of the total account; and ratio analysis, which calculates statistical relationships between data or even the analysis of budgeted and executed incomes and expenses.

analysis

Financial statement

Summing up

The balance sheet, income statement, and cash flow statement offer three perspectives on an organization’s financial performance. They tell three different but related stories about how well your entity is doing financially:

• The balance sheet shows an organization’s financial position at a specific point in time. It provides a snapshot of its assets, liabilities, and equity on a given day.
• The income statement shows the bottomline. It indicates how much profit or loss was generated over a period of time usually a month, a quarter, or a year.
• The cash flow statement tells where the organization’s cash came from and where it went. It shows the relationship between net profit and the change in cash recorded from one balance sheet to the next.

Together, these financial statements can help you understand what is going on in your entity or in any other organization.

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“I saw the ROI that your MCVP iGET is proposing and it’s looking good, but according to your cash flow statement maybe it’s not the best moment to do the investment.

Our cash flow is increasing considerably. I think it’s time to pay the AI debt to reduce liabilities and increase our equity.

We actually don’t need BD to double their goal, how can we reduce our operating expenses in the MC to increase our net profit?

I think we should renegotiate payment conditions with this stakeholder. Even though the profitability analysis is amazing, the cash flow statement could be affected.

These can be the conversations you could have with your MC Team, LCPs Finance Sub Committee, your BoD/BoA/SG, or anyone that asks what do you think of money in AIESEC.

It’s time for you to actually become the CFO of your entity

How do you feel about that?

Youtube references

1. What is a Profit & Loss Statement? - LINK
2. What is a Balance Sheet? - LINK
3. What is a Cashflow Forecast? - LINK