Chapter 2: Accounting & Controlling

Module 1:
Introduction to Financial Management, Cost
Accounting and Controlling

Fall Term 2024/25

GBUS1VO - General Business Administration
1st Semester, Bachelor Informatics
Prof. (FH) Mag. Gerhard Kormann
Gerhard.Kormann@fh-krems.ac.at
GBUS1VO - General Business Administration
◼ Chapter 1: Business Objectives and Principles
◼ Chapter 2: Accounting and Controlling
 Module 1: Introduction to Financial Management, Cost Accounting and Controlling
 Module 2: Decision Making & Controlling
 Module 3: Finance and Investment
◼ Chapter 3: Marketing
◼ Chapter 4: Strategy, Management and Innovation
◼ Chapter 5: Business Ethics and Implications on Informatics
Content
◼ M1: Introduction to Financial
Management, Cost Accounting and
Controlling
◼ M2: Profit and Cost Theory
◼ Cost Accounting Methods
 M3: for Decision Making
 M4: for Budgeting
◼ M5: Finance and Investment Decisions
What Businesses Do
Take Inputs Process/Manufacture Output

Costs – Fixed and Variable Revenue

Profit
The four basic economic principles
1. The combination of production factors
 By combining production factors we create „Value
added“.
 The product has a greater value than the sum of its parts.
2. Economic principle (because of shortage of goods)
 Minimum principle: try to reach a defined output at a
minimum level of input
 Maximum principle: try to reach the maximum output at a
given level of input
3. Financial equilibrium
 To ensure solvency at any time
4. Profit orientation (surplus of revenue over cost)

Source: Gutenberg
Main types of accounting
◼ Financial accounting
… which is concerned with the supply of
information to the owners of an entity
◼ Management accounting (controlling)
… which is concerned with the supply of
information to the managers of an entity
 Cost accounting - Decision making and
Budgeting
 Controlling process
Financial Accounting:
Main questions

Balance sheet: How rich are we?

Income statement: Did we make/loose money?

Purpose of Financial Accounting
◼ Provide information for stakeholders –
customers, shareholders, suppliers, etc.
◼ Provides the opportunity for the business to
monitor its own activities
◼ Provides transparency to enable the firm to
attract investment
◼ Reduces the chance for fraud – not 100%
successful!!
The Balance Sheet
Assets (Aktiva) Liabilities
(Passiva)

Fixed Assets Debt Capital

Current Assets Equity Capital

Use of Capital Source of Capital

Investing Financing

lists what the entity owns (its assets) and what it owes (its liabilities)
Balance Sheet
◼ A snapshot of the firm’s position at a point in
time
◼ Shows what a company owns (assets) and what
it owes (liabilities)
◼ Balance Sheet shows what assets a company
has (use of funds) and where the money came
from to acquire those assets (source of funds)
The Balance Sheet
Assets (Aktiva) Liabilities
(Passiva)

Fixed Assets Debt Capital

Current Assets Equity Capital

Use of Capital Source of Capital

Investing Financing

lists what the entity owns (its assets) and what it owes (its liabilities)
Definition - Assets
◼ Assets are economic resources owned by
business or company - usually considered as
applicable to the payment of one's debts.
Simplistically stated, assets are things of value
that can be readily converted into cash (although
cash itself is also considered an asset).

Sullivan, Arthur; Steven M. Sheffrin (2003)

Definition – Current Assets
◼ Current assets are cash and other assets expected to
be converted to cash, sold, or consumed either in a year
or in the operating cycle. There are 5 major items
included into current assets:

1. Cash and cash equivalents — it is the most liquid asset, which includes currency,
deposit accounts, and negotiable instruments (e.g., money orders, cheque, bank
drafts).
2. Short-term investments — include securities bought and held for sale in the near
future to generate income on short-term price differences (trading securities).
3. Receivables — usually reported as net of allowance for uncollectable accounts.
4. Inventory — trading these assets is a normal business of a company. The inventory
value reported on the balance sheet is usually the historical cost or fair market value,
whichever is lower. This is known as the "lower of cost or market" rule.
5. Prepaid expenses — these are expenses paid in cash and recorded as assets
before they are used or consumed (a common example is insurance). See also
adjusting entries.
Definition – Fixed Assets
◼ Fixed Assets: Also referred to as PPE
(property, plant, and equipment), these are
purchased for continued and long-term
use in earning profit in a business.
◼ Long-term is usually determined as „more
than a year“
The Balance Sheet
Assets (Aktiva) Liabilities
(Passiva)

Fixed Assets Debt Capital

Current Assets Equity Capital

Use of Capital Source of Capital

Investing Financing

lists what the entity owns (its assets) and what it owes (its liabilities)
Definition: Liability and Equity
◼ Liabilities are obligations of the company; they are
amounts owed to creditors for a past transaction Along
with owner's equity, liabilities can be thought of as a
source of the company's assets.
◼ Equity: Subtracting the value of aggregate liabilities
from the value of aggregate assets reveals the value of
owners' equity. Ideally, it should be positive.
 Owners' equity consists of capital invested by owners over the
years and profits (net income) or internally generated capital,
which is referred to as "retained earnings"; these are funds to be
used in future operations.
Profit and Loss Account (Income
Statement)
◼ Shows the flow of sales and costs over a
period
◼ Shows the level of profit or loss made
◼ Shows what has been done with the profit
or loss
 Income Statement 2020 in k€ 2019 in k€
1. Net sales 1,934,027.4 1,499,813.6
2. Cost of sales (1,320,386.0) (1,004,415.7)
3. Gross profit 613,641.4 495,397.9
4. Other operating income 55,615.5 58,525.8
5. Distribution expense (306,692.9) (288,185.9)
6. Adminstrative expense (117,417.1) (106,154.6)
7. Amortization of goodwill (5,672.7) (4,666.4)
8. Other operating expense (47,572.7) (41,474.9)
9. Earnings before interest and tax (EBIT) 191,901.5 113,441.9
10. Income/expense from shares
and associated companies 0.0 33.1
11. Income/expense from securities 586.1 956.9
12. Interest expense (net) (29,944.9) (23,141.5)
13. Other financial result (1,072.8) 489.1
14. Financial result (30,431.6) (21,662.4)
15. Earnings before tax
and extraordinary charges (EBT) 161,469.9 91,779.5
16. Income tax expense (51,388.0) (34,279.5)
17. Net income before minority interest 110,081.9 57,500.0
18. Minority Interest (1,434.2) (1,508.3)
19. Net income 108,647.7 55,991.7
Basic earnings per share (in €) 10.3 5.3
Diluted earnings per share (in €) 9.9 5.1
Average number of shares outstanding – basic 10,531,766 10,495,100
Average number of shares outstanding – diluted 11,000,000 11,000,000
Income Statement (Single-Step)

Source
Income Statement (Multi-Step)

Source
Income Statement

◼ The income statement, or profit and loss statement, is one of the

main financial statements of a business that shows its profit or loss
for a specific period.
◼ The income statement starts with a company’s revenue and ends
with its net profit after subtracting operating and non-operating
expenses, such as cost of goods sold or SG&A (Selling, General &
Administrative expenses).
◼ Having a complete understanding of the income statement is
essential for investors to analyze a company’s long-term outlook.

Source
Income Statement
A Real Example – Apple Inc. (2019 to 2021)

Source
Income Statement
Apple Inc. Trend

Source
Cash Flow Statement and Analysis
◼ What is Cash Flow?
◼ Cash flow refers to the net amount of cash and cash equivalents moving in and
out of a business. It is a crucial metric for understanding the financial health of
a company. Cash flow can be categorized into three main types:

◼ 1. Operating Activities: Cash generated from the core business activities, such
as sales and day-to-day operations.

◼ 2. Investing Activities: Cash used for investments in equipment or assets,

including purchasing property or other capital expenditures.

◼ 3. Financing Activities: Cash related to funding, such as loans, repayments, or

investor contributions.

◼ See additional lecture note document Chapter2_M1_Cash_Flow_Lecture_Notes

Cash Flow Statement and Analysis
Case Study
◼ TechSpark Solutions is a small tech startup that has been developing a new
software product. The company recently received a $50,000 investment, and they
want to use it wisely to cover expenses and grow their business.

◼ See the detailed case study document: Chapter2_M01_Cash Flow Case Study -
Input
Main types of accounting
✓ Financial accounting
… which is concerned with the supply of
information to the owners of an entity
◼ Management accounting (controlling)
… which is concerned with the supply of
information to the managers of an entity
 Cost accounting - Decision making and
Budgeting
 Controlling process
Controlling
◼ Controlling takes place when manager and
controller cooperate. Controlling is the whole
process of setting objectives, of planning and
controlling (in the sense of steering and
regulating) where money and/or activities are
important.
◼ It follows, that managers must practise
controlling since it is them who have to decide
on what and how high the objectives should be
and work out the content of the plan.
Controlling

Controlling
Manager Controller

Is responsible for Is responsible for

the result the transparency of
the result
Operative controlling
◼ Operative controlling is a management
activity that covers the fixing of
objectives, planning and controlling in
the middle-term and single year time
span.
◼ Typical objectives would be
 liquidity,
 profitsand
 financial stability.
Strategic controlling
◼ Strategic controlling is a management activity
that comprises the planning, testing,
implementation and monitoring of strategies.
The time span is unlimited and is just as long as
the period covered by the strategy.
◼ Typical objectives here would be
 existing and future potentials for success,
 market shares as well as
 (free) cash flow.
Controller
◼ A mission-statement for Controllers according to
the „International Group of Controlling“ (IGC)
◼ Controllers provide an accompanying service in
management accounting and financial analyses
for managers which will enable them to plan and
control their operations according to agreed
objectives. This means:
 Controllers are responsible for the transparency of
business results, finance, processes and strategy
thus contributing to higher profitability.
Controller
◼ Controllers coordinate sub-targets and sub-plans in a
holistic way and organize a reporting-system which is
future-oriented and covers the business as a whole.
◼ Controllers moderate the controlling process so that
every decision-maker can act in accordance with agreed
objectives.
◼ Controllers ensure that managers receive all necessary
information.
◼ Controllers create and maintain the controlling system.
◼ Controllers are internal economic consultants (advisors)
to all decision-makers and act in the role of a navigator
towards the achievement of goals.