Financial Accounting and Capital Budgeting in Business

Introduction and Course Overview

In the world of business, it is vital for business owners to measure the value of their assets and evaluate the performance of their business at any point in time. In fact, the strategies for popular multinational corporations such as Samsung, Apple, and Starbucks are formulated based on the companies' financial performance compared to competitors in their respective industries. Two foundational courses introduce learners to fundamental principles in accounting and finance, equipping them with the knowledge and skills needed to understand how businesses are valued and how leaders make important financial decisions that affect their companies in the long run. This paper summarizes the readings and assignments covered in these courses, the skills learned, and their applicability to future careers.

Financial Accounting Principles and Analysis

Module 1 introduced the analysis of various financial statements. Using this skill, we compared the financial status of four companies: Verizon Communications, Agilent Technologies, The Gap, and Facebook, Inc. This analysis revealed why some companies performed poorly despite holding significant assets and which methodologies management applied to remain solvent. The Gap, for example, lacked sufficient cash to pay off debts. Management resorted to closing 28 stores in North America and shifting its brands to Athletica and Intermix, where they were better positioned to perform (The Gap, Inc., 2015). Shifting its brands into global markets would identify the most profitable areas, significantly increasing revenues earned.

Module 2 focused on the regulation of financial statements through Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS), which every organization must follow during financial reporting. We also examined the International Accounting Standards Board (IASB) and the Securities and Exchange Commission (SEC), bodies that ensure efficiency, orderliness, and fairness in financial markets. We learned the mandatory financial disclosures stipulated by GAAP, IFRS, IASB, and SEC standards. More specifically, we studied the correct formats for creating the income statement, balance sheet, statement of cash flows, and statements of retained earnings. We also understood the components comprising the accounting equation: assets, liabilities, and equity.

Modules 3, 4, and 5 distinguished key concepts in accounting. We learned differences in valuation between GAAP and IFRS, a source of ongoing debate for accountants and financial analysts. Other compared components included expenses versus assets, period expenses, and current versus long-term assets and liabilities. We studied different points of revenue recognition and how the matching concept reinforced the accrual basis of accounting. Module 5 clarified the different categories within the cash flow statement, making it easier to distinguish between its direct and indirect methods of reporting.

The three modules included assignments comparing additional companies: Apple, Samsung, and Nybrostand. These analyses examined financial statements to compare their financial wellness. However, the fact that accounting periods for different companies ended in different months complicated comparisons. For instance, Apple's accounting period ended on September 27, while Samsung's ended on December 31, 2014 (Yahoo! Finance, 2015). Expenses were also reported differently across firms, and more detailed guidance on comparing companies with different reporting standards would have strengthened understanding.

Finance and Capital Budgeting

Module 1 of the finance course taught the various ways of financing businesses and the steps involved in making financing decisions. We selected a company for the session-long project; Starbucks was chosen due to its success and abundance of publicly available information. Module 1 also examined the traits of successful CEOs. Module 2 addressed shares, options, futures, and the present value of money. The assignments reinforced this learning through calculations of present value in different scenarios and determination of futures prices for Starbucks.

The calculation of the Capital Asset Pricing Model (CAPM) taught in Module 3 was initially challenging, as the author was not conversant with Beta calculations. However, after further research, we were able to identify risks in three corporations—Apple, Google, and Starbucks—and determine which company's stocks offered better investment opportunities. Capital Budgeting processes introduced in Module 4 involved finding viable projects to invest in. We plotted graphs showing the relationship between net present value (NPV) and the discount rate, learning how to identify attractive investment options from these visualizations. Additionally, we identified a potential project for Starbucks: opening high-end coffee shops in major U.S. cities, with emphasis placed on associated costs and risks.

The different ways of financing a business were explained in detail in Module 5. We explored equity and debt financing and the advantages and disadvantages associated with each. In the assignments, we analyzed the capital structure of American Superconductor Corporation (AMSC) and agreed with their decision to shift to equity financing, as it would enable the company to enjoy increased capital without the conditions associated with debt financing. For Starbucks, equity financing was identified as the best option for long-term projects, since it had 2 million in stockholders' equity while public debts exceeded 5 billion.

Key Competencies and Professional Applications

The main differences between management and financial accounting were well understood. According to Weygandt, Kimmel, and Kieso (2010), while management accounting is not required by law, financial accounting is mandatory. Financial accounting deals with an organization as a whole and provides information to both outsiders and insiders. Management accounting, by contrast, focuses on specific points in the organization that earn revenue and is more useful to insiders.

The analysis of the income statement, balance sheet, and cash flow statements highlighted the importance of financial accounting: to prepare financial statements of an organization that clearly portray its financial performance in a given period and to provide users with a true and fair view of its financial position. The roles of financial accounting were emphasized throughout both courses, with the most important being the ability to compare the financial performance of different companies according to the varied needs of investors, management, accountants, or financial analysts. For example, among the four companies compared in Module 1 of the accounting course, the financial statements revealed that Facebook was the most financially healthy due to its diverse investments. Although larger, Verizon's financial reports revealed the highest level of debt, with liabilities totaling $194,491,000 million compared to assets of $6,734,000 (Yahoo! Finance, 2015; Verizon, 2015). Companies such as Apple, Samsung, and Nybrostand also determined what they owed to suppliers and what they were owed by debtors. The assessment of CEOs in Module 1 of the finance course highlighted the importance of financial controls in business, as these controls ultimately determine how efficient and effective organizational leaders are. Important concepts such as the matching principle and revenue recognition enable organizations to produce accurate financial reports that make it easy to interpret business performance.

Financial statement analysis, learned in the accounting course, will ensure familiarity with the financial status of a company at any given time. This knowledge will prove invaluable when making economic and business decisions, particularly regarding the situation of assets, liabilities, revenues, and expenditures. It also makes it easier to pinpoint the causes of poor performance. Analysis of cash flow statements will help identify the organization's ability to continually generate profitable cash flows. One will be able to weigh the pros and cons of equity and debt financing and choose the option most suitable to the business.

Capital budgeting will enable pursuit of investments that are profitable in the long run and facilitate informed decisions that save considerable resources. The lessons learned have equipped the skills to identify opportunities and, using CAPM, assess the risks associated with each business venture. The cash flows associated with each venture will be easier to calculate, with emphasis placed on the time value of money. More specifically, capital budgeting will help make smart investment choices in a career, which will avoid popular though disastrous pursuits and give a business a competitive edge.

Conclusion

Both courses provide very important knowledge and skills for everyone, regardless of their career choice. Financial statements will enable interpretation of the financial results of any company and use of that information for relevant purposes. All financial statements will follow stipulated laws and principles, making them more accurate and reliable. Capital budgeting and financing skills prove relevant when making viable investments and evaluating businesses to apply the most suitable methods and concepts. Overall, the skills learned in these two courses will make us well-informed decision makers and will help us prosper in whichever career paths we choose.