This core course will explain the financial language used in businesses
and discuss the pros and cons of financial metrics used to evaluate the
feasibility and success of businesses. The course will use real cases to
explain how business strategy and its execution are reflected in financial
statements. It will also teach you how to build business budgets and
plans.
There is no book that I am aware of that covers the topics from the
mindset of this course. Therefore, I will provide my materials.
Attendance and penalty for missing classes
Requiring attendance is necessary for several reasons. First, you
incorrectly assume you can catch up on a missed class by watching a
recording (if available). Videos do not engage your brain as much as a
live class. Second, less than 20% of you watch the recording (if
available). You are then lost in class, which provides the wrong signals
to me as an instructor. Third, your absence hurts class discussions.
Fourth, you miss out on feedback if you do not work through the questions
I pose in class. Fifth, I lose the feedback since there are fewer
questions.
The policy below will be in effect only after the add/drop
period.
Without mandatory attendance, attendance is often below 50%. Therefore,
though I dislike doing this, I penalize absences. If you anticipate being
absent for good reasons, please email me well in advance. Please enter
"Excused" on the attendance sheet described below to avoid the
penalty if I approve. If you miss a class due to emergencies and cannot
tell me in advance, do not panic. Take care of the emergency first, and
then email me. I will permit you to change the "Absent" to
"Excused." But if you miss a class without a valid reason, there
is a penalty, as stated below.
For sections meeting in 150-190 minute sessions, you will lose one
grade (A to A-, A- to B+, B+ to B, B to B-, and so on) for EVERY missed
session unless you were explicitly excused via email. Thus, if you miss
two class sessions, you will lose two grades, and so on.
For sections meeting in 75-80 minute sessions, you will lose one grade
(A to A-, A- to B+, B+ to B, B to B-, and so on) for EVERY TWO missed
sessions unless you were explicitly excused via email. Thus, if you miss
four class sessions, you will lose two grades, and so on.
Please sit in the same seat in every class and display your name tags. For
Zoom classes, you must keep your video on AT ALL TIMES. You must also have
a good working headset or mic, as it is extremely rude to be inaudible and
force me to ask you to repeat yourself. After entering the class, please
mark yourself present in the first 20 minutes on the OneDrive sheet (link
posted on Brightspace).
You will be marked absent if you are more than 20 minutes late unless it
is because of factors beyond your control (traffic, subway, or
interviews running late). You will also be marked absent if you leave
the class early unless you have my permission or get it afterward. You
will get an F in the course if you are caught cheating on the attendance
sheet.
Session 1: Introduction to the financial statements
Financial reports
The three major uses of financial reports: Tracking money flows,
performance evaluation of managers, and capital allocation
Tracking money flows: Why even an entrepreneur working alone needs
financial statements?
Performance evaluation of subordinates: Unobservable actions and moral
hazard. What challenges arise a business grows and work needs to be
delegated? What are the strengths and weaknesses of using financial
reports for performance evaluation? What games can people play with
financial numbers?
Capital allocation: Unobservable attributes and adverse selection. How
financial reports help investors measure return on capital. What
challenges arise when a business has to raise money from others? Why are
public audits necessary?
The financial reporting system
Why is the double entry bookkeeping system indispensable?
How do modern accounting systems work?
What is the difference between public and private companies?
How do public companies report to investors?
How do all companies report to tax authorities?
Linkages between the financial statements: Stocks versus flows
Balance sheet: Cumulative effects measured at a point in time
Flow statements: Equity statement, income statement, and cash flow
statement
Session 2: Cash flows versus wealth flows — Revenues versus receipts
Permanent differences: Financing receipts that are never revenues
Receipts from shareholders: Wealth flows that are not wealth created
Receipts from lenders: Cash flows that are never wealth flows
Temporary differences: Receipts that differ in timing from revenues
Accruals: Receivables arising from revenues being accrued before cash is
received
Deferrals: Deferred revenues arising from revenues being deferred after
cash is received
Session 3: Cash flows versus wealth flows — Expenses versus payments
Permanent differences: Financing payments that are never expenses
Payments to shareholders: Wealth outflows that are not wealth consumed
Payments to lenders: Cash outflows that are not wealth outflows
Permanent differences: Payments that differ in timing from expenses
Accruals: Payables arising from expenses being accrued before cash is
paid
Deferrals: Prepayments arising from expenses being deferred after cash
is paid
Special cases of deferrals: Inventories; Property, plant, and equipment,
Intangibles, and Goodwill
Session 4: Size and growth — Revenue and its drivers
Fashion and tech industry revenue metrics
Software service and product based
Number of paying customers or subscribers
Average revenue per user
Customer retention rate
Advertising based
Number of active users
Page views, time spent per visit, price per click, number of clicks
Number of advertisers
Average revenue per user
Consulting based
Revenue per employee: Billable hours per employee, price per
billable hour
Commission rate
Product or location-based
Sales per square foot
“Same-store” growth: This definition can be modified to
mean “same product growth”