Finance & Accounting 2 Reviewer
1. Overview of Finance & Accounting 2
Finance & Accounting 2 builds on basic financial concepts, focusing on advanced financial
management, corporate accounting, financial analysis, and decision-making. It includes
topics such as financial statements, budgeting, investment analysis, and risk management.
2. Advanced Financial Statements & Analysis
A. Financial Statements Review
1. Balance Sheet – Shows a company’s financial position (Assets = Liabilities +
Equity).
2. Income Statement – Reports revenues, expenses, and net profit over a period.
3. Cash Flow Statement – Tracks cash inflows and outflows to assess liquidity.
4. Statement of Changes in Equity – Shows changes in shareholders’ equity over
time.
B. Financial Ratio Analysis
● Liquidity Ratios (Ability to pay short-term obligations)
○ Current Ratio = Current Assets / Current Liabilities
○ Quick Ratio = (Current Assets - Inventory) / Current Liabilities
● Profitability Ratios (Measure of profitability and efficiency)
○ Gross Profit Margin = (Gross Profit / Sales) × 100
○ Return on Assets (ROA) = Net Income / Total Assets
○ Return on Equity (ROE) = Net Income / Shareholder's Equity
● Leverage Ratios (Measures debt usage and financial stability)
○ Debt-to-Equity Ratio = Total Debt / Total Equity
○ Interest Coverage Ratio = EBIT / Interest Expense
3. Corporate Finance & Investment Decisions
A. Capital Budgeting (Investment Decision-Making)
● Net Present Value (NPV) – Evaluates the profitability of an investment.
● Internal Rate of Return (IRR) – Determines the rate of return of a project.
● Payback Period – Measures how long it takes to recover the initial investment.
B. Cost of Capital
● The required return a company needs to justify investments.
● Weighted Average Cost of Capital (WACC) formula:
WACC=(E/V×Re)+(D/V×Rd×(1−TaxRate))WACC = (E/V \times Re) + (D/V \
times Rd \times (1 - Tax Rate)) Where:
○ E = Equity, D = Debt, V = Total Value (E + D)
○ Re = Cost of Equity, Rd = Cost of Debt
C. Risk and Return
● Systematic Risk – Market-wide risk that cannot be diversified away.
● Unsystematic Risk – Company-specific risk that can be reduced through
diversification.
4. Working Capital Management
● Ensures the company has enough short-term assets to cover day-to-day operations.
● Key Components:
✅ Cash Management – Maintaining sufficient liquidity.
✅ Accounts Receivable Management – Ensuring timely collection of
payments.
✅ Inventory Management – Keeping optimal inventory levels to reduce
costs.
✅ Accounts Payable Management – Managing supplier payments to maintain
good credit.
5. Financial Markets & Institutions
A. Types of Financial Markets
● Money Market – Short-term financial instruments (T-bills, commercial paper).
● Capital Market – Long-term securities like stocks and bonds.
● Foreign Exchange Market (Forex) – Currency trading for global transactions.
● Derivatives Market – Contracts like options and futures used for hedging.
B. Financial Institutions
● Banks – Provide loans, savings, and financial services.
● Stock Exchanges – Platforms for trading stocks (e.g., NYSE, NASDAQ).
● Investment Firms – Manage mutual funds and portfolio investments.
6. Taxation in Business Finance & Accounting
● Corporate Income Tax – Tax on company profits.
● Value-Added Tax (VAT) & Sales Tax – Taxes on goods and services.
● Withholding Tax – Deducted from employee salaries and supplier payments.
● Deferred Tax – Taxes accounted for in future periods.
7. Auditing & Internal Controls
● Internal Audit – Ensures compliance with policies and financial accuracy.
● External Audit – Conducted by independent auditors to verify financial statements.
● Fraud Prevention – Implementing internal controls to detect and prevent fraud.
8. Challenges in Finance & Accounting
⚠️Market Volatility – Economic fluctuations affect investments and financial stability.
⚠️Regulatory Compliance – Adapting to changing tax laws and accounting standards.
⚠️Technology Disruptions – AI and automation affecting financial processes.
⚠️Cybersecurity Risks – Protecting financial data from cyber threats.
9. Real-World Applications
📌 Apple Inc. – Uses financial strategies like share buybacks to increase stock value.
📌 Amazon – Efficient working capital management through optimized cash flow.
📌 Tesla – Leverages debt and equity financing for rapid expansion.
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