Course Code : COM-405

Course Title : INTRODUCTION TO BUSINESS FINANCE

Credit Hours : 3(3-0)
 Teacher Name : Moeez Ul Haq
 Class : Lecture Room (Thu)
 Class Time : 08:00 Am To 10:30 Am
 Email address : moeez5338@gmail.com
 Link for Notes :
https://drive.google.com/drive/folders/1yt22B8epsWPJI
xWPvT4CzIghCJWuprIz?usp=sharing
Business Finance & Types
Working Capital
Agency Problem
Financial Statements
Cash Flow Statement
Bond and it’s Types
Ratio Analysis
The Time Value of Money
Share and its types
Sources of Short-Term Financing
 objective of financial Reporting

 Objective of general purpose financial reporting

 To provide financial information about the reporting entity that is
useful to existing and potential investors, lenders, and other
creditors in making decisions about providing resources to the
entity. Those decisions involve buying, selling, or holding equity
and debt instruments and providing or settling loans and other
forms of credit.
 Investors
 Buy, sell, or hold
 Lenders and other creditors
 Lend or not
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 Amount and terms
 standard-setting bodies and regulatory
authorities
 Generally,
 Standard-setting bodies set the standards and
 Regulatory authorities recognize and enforce the
standards.
 However, regulators often retain the legal authority to
establish financial reporting standards in their
jurisdictions and can overrule private sector standard-
setting bodies.
4
 Examples of standard-setting bodies

 The International Accounting Standards Board (IASB) sets

IFRS (International Financial Reporting Standards).
 The U.S. Financial Accounting Standards Board (FASB) sets
U.S. GAAP (generally accepted accounting principles).

Copyright © 2013 CFA Institute 5

 global convergence of accounting
standards: Differences remain
 Different reporting systems are used in different countries.
 For example, despite convergence efforts, differences remain between U.S.
GAAP and IFRS.
Inventory
 IFRS does not allow for the use of the LIFO (last in, first out) costing
methodology for inventory, which is permitted under U.S. GAAP.
 In the United States, the Internal Revenue Service (IRS) has conformity
provisions such that certain methods of accounting are allowed for income tax
purposes only if the entity also uses that method for financial reporting
purposes. LIFO is one such method subject to conformity provisions.
 Thus, without a change in IRS rules, eliminating LIFO from U.S. GAAP would, in
effect, eliminate its use for tax purposes as well.
6
 Global convergence of accounting
standards: Differences remain
 Despite convergence efforts, differences remain between U.S. GAAP
and IFRS.
Measurement of Certain Asset Classes (optionality permitted under
IFRS)
 Under IFRS, certain assets (e.g., capitalized acquired intangibles and
property, plant, and equipment) are initially recognized at cost. For
subsequent measurement, entities have a choice:
 to continue with a cost model or
 To revalue the assets within each class to fair market value (less
any subsequent accumulated amortization or depreciation).
 U.S. GAAP does not permit use of a revaluation model. 7
 global convergence of accounting
standards: Differences remain
 Despite convergence efforts, differences remain between U.S. GAAP and
IFRS.
Impairment (property, plant, and equipment; inventory; and intangible
assets)
 The IFRS models allow for reversals of impairments up to a certain
amount if there is an indication that an impairment loss has decreased
 U.S. GAAP does not allow reversals of impairments.
 The SEC staff believes that the distinction could result in differences in
the timing and extent of recognized impairment losses.
 Therefore, U.S. issuers could experience greater income statement
volatility if the IFRS models were incorporated (flowing from recoveries
8
of values previously written down).
Situation of different Countries

Pakistan
 Listed companies: Domestic companies whose securities trade in a public
market are required to use IFRS Standards as adopted in Pakistan. Some
important Standards have not been adopted for companies asserting
compliance with IFRS Standards as adopted in Pakistan. And Pakistan has not
applied IFRS 1 First-time Adoption of International Financial Reporting
Standards.
 Financial institutions: IFRS Standards required.
 Which standards do companies follow? IFRS Standards as adopted in
Pakistan
 Reporting Elements

Qualitative Characteristics

Objective
To Provide Financial Information
Useful in Making Decisions about
Providing Resources to the Entity IFRS
 Relevance*
 Faithful Representation
 Comparability, Verifiability,
Timeliness,
Conceptual
Framework
Understandability

 Performance  Financial Position

o Income o Assets
o Expenses o Liabilities
o Capital Maintenance Adjustments o Equity
o Past Cash Flows

o Reporting
Constraint Ele
 Cost (cost/benefit considerations)

Underlying Assumption
 Accrual Basis
 Going Concern 10

*Materiality is an aspect of relevance.

 IFRS conceptual framework:
reporting elements
Measurement of financial position:
 Assets:

Resources controlled by the enterprise as a result of past events

and from which future economic benefits are expected to flow
to the enterprise.
 Liabilities:

Present obligations of an enterprise arising from past events,

the settlement of which is expected to result in an outflow of
resources embodying economic benefits.
 Equity:
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Residual interest in the assets after subtracting the liabilities.
 IFRS conceptual framework:
reporting elements
Elements directly related to the measurement of
performance:
Income:

Increases in economic benefits in the form of inflows or

enhancements of assets or decreases of liabilities that result in an
increase in equity (other than increases resulting from
contributions by owners).
 Expenses:
Decreases in economic benefits in the form of outflows or
depletions of assets or increases in liabilities that result in
decreases in equity (other than decreases because of distributions12
to owners).
 IFRS conceptual framework:
constraints and assumptions

Constraint:

The benefits of information should exceed the costs of providing it.

Underlying Assumptions:
 Accrual Basis:
Financial statements should reflect transactions in the period when
they actually occur, not necessarily when cash movements occur.
 Going Concern:
Assumption that the company will continue in business for the
foreseeable future. 13
 General features of financial
statements
 Fair presentation
 Going concern
 Accrual basis
 Materiality and aggregation
 No offsetting
 Frequency of reporting
 Comparative information
 Consistency
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Question Answer session