Accounting Prof Riccardo Tiscini Training Course Material A

Accounting Prof. Riccardo Tiscini Training Course Material A. A. 2014 -2015

Stages of Firms life FIRMS LIFE 1 st STAGE START-UP 2 nd STAGE GOING CONCERN 3 rd STAGE DISCONTINUANCE v Business idea v Organisation v M&A, Divestures v Location v Management v Winding up v Size v Information v Bankruptcy v Institutional aspects LEGAL STATUS, BYLAWS & GOVERNANCE Prof. Riccardo Tiscini 2

Business management cycle et k ar m FINANCING SALES m ar ke t PURCHASING PROCESSING Prof. Riccardo Tiscini 3

Corporate functions CORPORATE FUNCTIONS Are classified into Operating functions Financial functions v Procurement v Structured Finance v Production v Cash Management v. Sales & Marketing v Capital budgeting v Research&Development Prof. Riccardo Tiscini Coordination and orientation functions v Human Resources management (Organisation) v. Planning & control v. Information systems 4

Financing FINANCING internal (shareholders) (banks or other financial backers) CAPITAL ENDOWMENT LOAN external EQUITY FINANCIAL DEBT Shareholders capital Borrowed capital or Financial liabilities Prof. Riccardo Tiscini 5

Financing FINANCING EQUITY FINANCIAL DEBT Not specified (exceptional) REPAYMENT As per contract expiring dates Related to net profits RETURN As per contract interest rate Shareholders (Property) RIGHTS Creditors Prof. Riccardo Tiscini 6

Financing EQUITY Shareholders (Property rights holders): Entrepreneurs v Entrepreneurial Families v Companies (Groups or Coalitions) Market Investors v Investment Funds v Pension Funds v Private Equity Funds v Venture Capital Funds State v Government Shareholdings in Companies v Capital Endowment in Public Administrations v Households Savings Prof. Riccardo Tiscini 7

Financing FINANCIAL LIABILITIES Financers: Banks Market Investors Other financial institutions v Loans v Bonds v Leasing v Overdrawn accounts v Convertible bonds v Factoring v Advances on invoices by v Project Financing v Short term financing v Investment & Pensions Funds v Households Savings v Others Prof. Riccardo Tiscini 8

Purchasing: Capital Investing & Current Expenses ACQUISITION OF PRODUCTION FACTORS Tangible and intangible resources necessary for production FIXED ASSETS CURRENT EXPENSES PRODUCTION FACTORS WITH LONG TERM UTILITY (USEFUL MORE THAN ONCE, FOR SEVERAL PRODUCTION CYCLES) PRODUCTION FACTORS WITH SHORT TERM UTILITY (USEFUL ONLY ONCE, FOR ONE PRODUCTION CYCLE) Capital Investments Prof. Riccardo Tiscini Costs 9

Purchasing: Capital Investing & Current Expenses ACQUISITIONS OF PRODUCTION FACTORS FIXED ASSETS CURRENT EXPENSES v Buildings v Raw materials v Plant & Machinery v Staff v Equity stakes v Industrial Services v R&D (some cases) v Marketing Costs v Brands v R&D (some cases) v… v… Prof. Riccardo Tiscini 10

Purchasing: Capital Investments FIXED ASSETS Operating investments Financial investments Investments in goods and services necessary for production Investments in bonds and equity stakes tangible Prof. Riccardo Tiscini intangible 11

Purchasing: Capital Investments FIXED ASSETS Plant and machinery Financial investments Plant and machinery account for collective returns, along with all other operating production factors Long-term financial investments account for individual returns The purchase of plants and machinery generates an income only if combined with other production factors Prof. Riccardo Tiscini The acquisition of corporate bonds generates an income regardless of any other production factors 12

Purchasing: Current expenses CURRENT EXPENSES From Operating activities From Financing activities Raw materials Merchandise Goods Services / Rents / Operating Leases Wages and salaries / Social security contributions Other operating expenses Capital losses on receivables and fixed assets Interest expenses Capital losses on bonds, securities and shareholdings Non recurring items Extraordinary and non recurring expenses (i. e. errors, discontinued operations) Taxation Operating income tax Prof. Riccardo Tiscini 13

Sales: Revenues Transfer of a product or a service obtained through the processing of production factors which generates a REVENUE Prof. Riccardo Tiscini 14

Sales: Revenues From Operating activities From Financing activities Revenues from sales Revenues from services Other operating revenues Capital gain on fixed assets Interest revenues Dividends Capital gains on bonds, securities and shareholdings Other financial revenues Non recurring items Extraordinary and non recurring revenues Taxation Tax benefits Prof. Riccardo Tiscini 15

Sales & Marketing To manage and govern company-market relationships ORIENTATION TO products Focus on largescale production 1930 i. e. Ford T Prof. Riccardo Tiscini sales Focus on product placement on the market 1960 i. e. Fiat 500 marketing Focus on consumers and their needs 1990 i. e. Lancia Y 16

Sales & Marketing ORIENTATION TO 2000 i. e. Mini marketing Aimed at meeting the needs of customers with a medium- to long-term strategic approach (finding the right products for one’s customers) Twofold Approach Strategic/functional operational Balanced combination of marketing mix levers Sales and promotion tasks Prof. Riccardo Tiscini 17

Marketing Mix MARKETING MIX PRODUCT PROMOTION WELL-BALANCED COMBINATION OF 4 LEVERS TO SUIT CUSTOMERS’ NEEDS PLACE PRICE Prof. Riccardo Tiscini 18

Marketing Mix PRODUCT Tangible and intangible product characteristics: v quality v design v assistance v warranties v variety v optionals v packaging Prof. Riccardo Tiscini 19

Marketing Mix PRICE Price policies are designed according to profitability and market objectives: v key for the strategic positioning of the company; v behaviour of competitors; v degree of differentiation. Price characteristics: v list price v discounts v payment period v… Prof. Riccardo Tiscini 20

Marketing Mix PROMOTION Different levers and communication tools: v advertising; v sales promotion; v sales force; v public relations; v sponsorship; v direct marketing. Prof. Riccardo Tiscini 21

Marketing Mix PLACE Distribution channel options CHANNEL Direct Short Long No go-betweens One go-between Several go-betweens Other characteristics: v coverage; v locations; v transport. Prof. Riccardo Tiscini 22

Information INFORMATION ABOUT BUSINESS Internal users Directors Management Prof. Riccardo Tiscini External users Stakeholders v shareholders v banks v investors v inland revenue v clients/suppliers v… 23

Information Internal information External information voluntary, not regulated by law constant periodic actual/forecast actual financial statements, budget, cost accounting, reports… financial statements Prof. Riccardo Tiscini 24

Financing A company: 1) is incorporated with a shareholders’ capital of € 200, 000 (paid up by shareholders to a bank account); 2) then applies for a bank loan of € 100, 000 (also credited to the bank account). To describe the transaction, one needs to specify: 1) The quality of capital (that is how it is used, what are the sources the company has) 2) The origin of capital (that is where does it come from, what are the sources) RESOURCES* Cash at bank * Or also “Investments” Prof. Riccardo Tiscini SOURCES 300, 000 Shareholders’ capital 200, 000 Borrowings 100, 000 300, 000 25

Purchasing The company incurs in investments in fixed assets of € 150, 000 (paid cash) and – thanks to an delayed payment granted by suppliers – current expenses amount to € 100, 000. RESOURCES Previous table: Then changed as follows: Cash at bank SOURCES 300, 000 RESOURCES 200, 000 100, 000 SOURCES Cash at bank 150, 000 Fixed Assets 150, 000 Current expenses 100, 000 400, 000 Prof. Riccardo Tiscini Shareholders’ capital Borrowings Shareholders’ capital 200, 000 Borrowings 100, 000 Trade payables 100, 000 400, 000 26

Sales Upon sales of its products, the company records a revenue of € 250, 000 (€ 180, 000 cash and the rest at delayed payment). Previous table: Then changed as follows: RESOURCES Cash at bank 150, 000 Share capital Fixed assets 150, 000 Borrowings 200, 000 100, 000 Current expenses 100, 000 Trade payables 100, 000 IMPIEGHI Cash at bank Trade receivables FONTI 330, 000 Share capital 200, 000 70, 000 Borrowings 100, 000 Fixed assets 150, 000 Trade payables 100, 000 Current expenses 100, 000 Revenues 250, 000 650, 000 Prof. Riccardo Tiscini 650, 000 27

RESOURCES Cash Shareholders’ equity Trade Receivables Financial debts Fixed assets Trade debts Current expenses Revenues Prof. Riccardo Tiscini CAPITAL SOURCE CAPITAL USE Resources and Sources 28

Resources and Sources RESOURCES Cash Shareholders’ equity Trade Receivables Resources with Sources implying future benefits (still future obligations useful) Fixed assets Financial debts Trading debts This red line represents the effects of the “Accrual principle” Current expenses No longer useful Sources not implying resources (~ used future obligations (~ get for production sold) Prof. Riccardo Tiscini Revenues 29

The Financial Statements INCOME STATEMENT (or PROFIT AND LOSS ACCOUNT) BALANCE SHEET ASSETS Prof. Riccardo Tiscini LIABILITIES Cash Shareholders’ equity Trade receivables Financial debts Fixed assets Trading debts Pre-paid expenses Unearned revenues COSTS Current expenses REVENUE Revenues 30

The Financial Statements: the Accrual Principle The Accrual Principle Balance Sheet as of the end of a period (n) and Income Statement (P&L) for a period (n) are prepared on the basis of the Accrual Principle: - a revenue accrues to a period if it refers to sources not implying obligations in the future (that is it refers normally to sources get for the production sold or, otherwise, to no more due liabilities); -a cost accrues to a period if it refers to resources without future benefits (that is it refers normally to resources used for the production sold or, otherwise, to no more useful assets). Costs and Revenues of the P&L must consistently refer to the production sold (matching principle). In this way, the P&L present the comparison between: - the value of the production sold (revenues); - the value of the production factors used for the production sold (costs). to make Balance sheet and P&L have their proper meaning, some adjustments are needed. Prof. Riccardo Tiscini 31

Transactions: Bank loan repayment FINANCING Borrowed capital INSTALMENTS REPAYMENT As per contract RETURN As per contract RIGHTS Creditors Prof. Riccardo Tiscini 32

Transactions: Bank loan repayment INSTALMENT CAPITAL INTERESTS Actual repayment of borrowed capital Remuneration for the service offered by the bank Prof. Riccardo Tiscini 33

Transactions: Bank loan repayment Repayment of a bank loan Instalment 1 Capital Interests Instalment 2 Capital Interests Instalment 3 Capital Interests … Capital Interests Instalment n Capital Interests Borrowed capital Prof. Riccardo Tiscini Repaid amount 34

Transactions: Bank loan repayment The company get a bank loan for € 1. 000, paid on the bank account B. S. I. S. Cash at bank Bank Loan Borrowings +1. 000 +1000 Loan instalment payment for € 100, of which interest for € 10 B. S. Cash at bank -100 I. S. Bank Loan Borrowings +1000 Prof. Riccardo Tiscini Interests +10 910 35

Transactions: Bond issue FINANCIAL LIABILITIES Financers: Investors v Bonds v Convertible bonds Prof. Riccardo Tiscini REPAYMENT As per contract RETURN As per contract RIGHTS Creditors 36

Transactions: Bond issue BONDS FACE VALUE ISSUING PRICE Notional value of the credit instrument Price paid by financers Prof. Riccardo Tiscini 37

Transactions: Bond issue BONDS can be FACE VALUE ≠ ISSUE AMOUNT Face value > Issuing Price ISSUE DISCOUNT Face value < Issuing Price PREMIUM ON ISSUE Prof. Riccardo Tiscini 38

Transactions: Bond issue The Company issued a bond with a face value of € 1. 000 at an issuing price of € 1. 200 B. S. I. S. Cash at bank +1. 200 Bonds +1. 000 Premium on bonds issue +200 Corporate Bonds are “Financial Debts”, the Premiums on bonds issue are “Unearned Revenues”, to be recognized as Revenues (I. S. ) in the following years, as long as Interests expenses on Bonds are recognized. Prof. Riccardo Tiscini 39

L’emissione di obbligazioni The Company issued a bond with a face value of € 1. 000 and an issuing price of € 900 B. S. I. S. Cash at bank +900 Bonds +1. 000 Bonds Issue Discount +100 Corporate Bonds are “Financial Debts”, the Discounts on bonds issue are “Prepaid costs”, to be recognized as Expenses (I. S. ) in the following years, as long as Interests expenses on Bonds are recognized. Prof. Riccardo Tiscini 40

Transactions: Factoring FACTORING Transferring receivables to specialised companies or banks WITHOUT RECOURSE The debtor’s default risk is assigned to the factoring company along with the loan Prof. Riccardo Tiscini WITH RECOURSE The debtor’s default risk is not assigned and pertains to the credit company 41

Transactions: Factoring without recourse FACTORING WITHOUT RECOURSE The debtor’s default risk is assigned to the factoring company along with the loan v INCREASE OF CASH v CANCELLATION OF CREDIT v RECORDING OF FINANCIAL CHARGES Prof. Riccardo Tiscini 42

Transactions: Factoring without recourse The Company transfers Account Receivables for € 300 on “without recourse” clause, bearing interests and factoring fees for € 30. B. S. I. S. Cash at bank Interests expenses +270 +30 Accounts receivable (clients) 0 Prof. Riccardo Tiscini 300 43

Transactions: Factoring with recourse FACTORING WITH RECOURSE The debtor’s default risk is NOT assigned to the factoring company v INCREASE OF CASH v RECORDING OF DEBTS DUE TO FACTORING COMPANY (with no impact on receivables) v RECORDING OF FINANCIAL CHARGES Prof. Riccardo Tiscini 44

Transactions: Factoring with recourse Trade receivables are transferred by 300 according to the formula with recourse, paying commissions and interests for 50. The customer Pays his debt Does not pay his debt The accounts receivable item and the corresponding debt to factoring company is cancelled The company must pay the debt to factoring company, maintaining the accounts receivable from customers Prof. Riccardo Tiscini 45

Transactions: Factoring with recourse The Company transfers Account Receivables for € 300 on “with recourse” clause, bearing interests and factoring fees for € 15. B. S. I. S. Cash at bank +285 Debt to factoring co. Accounts receivable (clients) 300 Interest expenses +15 300 To maturity, the client does NOT pay his debt B. S. I. S. Cash at bank -300 Accounts receivable (clients) Debt to factoring co. 300 Prof. Riccardo Tiscini 46

Transactions: Factoring with recourse The Company transfers Account Receivables for € 300 on “with recourse” clause, bearing interests and factoring fees for € 15. B. S. I. S. Cash at bank +285 Debt to factoring co. Accounts receivable (clients) 300 Interest expenses +15 300 To maturity, the client pays his debt B. S. Accounts receivable (clients) I. S. Debt to factoring co. 300 Prof. Riccardo Tiscini 47

Transactions: Advances ADVANCES FROM CLIENTS Unearned revenues Prof. Riccardo Tiscini TO SUPPLIERS Raw materials Fixed assets Pre-paid costs Fixed assets 48

Advances from clients The Company gets an advance payment from clients for € 1. 500, referring to a consulting service whose total value is € 4. 000 B. S. Cash at bank I. S. Advance payments from clients +1500 When the service is rendered, the Company bill the rest of the value and recognize the revenue. The residual payments is delayed. B. S. Accounts receivable (clients) +2. 500 Prof. Riccardo Tiscini I. S. Advance payments from clients +1500 0 Revenues from services +4. 000 49

Advances to suppliers The Company pays an advance to a raw material supplier for € 200 B. S. I. S. Cash at bank -200 Advances to suppliers +200 Raw materials (for which the advance had been paid) are received. The total purchase value is € 500. The rest is paied half cash and half delayed. B. S. I. S. Cash at bank -150 Advances to suppliers 0 Prof. Riccardo Tiscini Accounts payables (suppliers) +150 Raw materials +500 +200 50

Transactions: Disposal of fixed assets DISPOSAL OF FIXED ASSETS Difference between the book value of fixed assets and their transfer price POSITIVE DIFFERENCE NEGATIVE DIFFERENCE Capital gain (non-recurring revenue) Capital loss (non-recurring expense) Prof. Riccardo Tiscini 51

Transactions: Disposal of fixed assets DISPOSAL OF FIXED ASSETS BARTER WITH A FIXED ASSETS CASH PAYMENT v DERECOGNITION OF THE OLD ASSET v RECOGNITION OF THE NEW ASSET v RECORDING OF A CAPITAL GAIN (LOSS) IN THE I. S. v DERECOGNITION OF THE OLD ASSET v INCREASE IN CASH OR IN RECEIVABLES v RECORDING OF A CAPITAL GAIN (LOSS) IN THE I. S. Prof. Riccardo Tiscini 52

Transactions: Disposal of fixed assets Barter transaction exchanging a property having an historical cost of € 100. 000, depreciated for € 20. 000, with a plant having a fair value of € 60. 000. The property is evaluated by the other party € 50. 000 and a difference of € 10. 00 is due by the Company (on delayed payment). B. S. Capital loss on disposals Properties 0 I. S. 80. 000 +30. 000 Plants +60. 000 Accounts payable (suppliers) + 10. 000 Prof. Riccardo Tiscini 53

Transactions: Employees costs WAGES AND SALARIES (GROSS) plus Net wages and salaries Tax withholdings and Social Security witholdings Social Security expenses Cash disbursement Debt to fiscal agency & Debt to social security agency Paid cash to employees (Company witholds and pays to the agencies on behalf of the employees) (company’s own social charges on wages) Paid afterwards (16 days in Italy) Prof. Riccardo Tiscini 54

Transactions: Employees costs EMPLOYEES COSTS Once calculating the payroll it is necessary to record: v THE COSTS OF GROSS WAGES AND SALARIES AND SOCIAL SECURITY v. THE DECREASE IN CASH FOR NET WAGES AND SALARIES v THE DEBTS DUE TO FISCAL AGENCY (for employees tax witholdings) v THE DEBTS DUE TO SOCIAL SECURITY AGENCY (for both employees social security witholdings and company’s own social security expenses) Prof. Riccardo Tiscini 55

Transactions: Employees costs Gross wages and salaries are paid for € 900. Net of fiscal and social security witholdings (respectively € 270 and € 80), the amount paid to employees is € 550. Futhermore, social security (pension) charges for the Company are € 250. B. S. I. S. Cash at bank -550 Debt to social security agency Wages and salaries +900 +330 Debt to fiscal agency +270 Prof. Riccardo Tiscini Social security charges +250 56

Transactions: Employees costs On the 16 th of the following months, the amounts due to fiscal and social security agencies are paid. B. S. I. S. Cash at bank -600 Debt to social security agency +330 0 Debt to fiscal agency +270 Prof. Riccardo Tiscini 0 57

Transactions: Fixed Assets Maintenance MAINTENANCE Expenses incurred in connection with tangible assets Ordinary Extraordinary Expenses incurred to maintain an asset under normal conditions Expenses incurred to increase the useful life of an asset or enhance its functionality (betterments) CURRENT EXPENSES FIXED ASSETS Prof. Riccardo Tiscini 58

Adjustments: Estimating profit or loss On an ACCRUAL BASIS Profit for the period on an accrual basis Loss for the period on an accrual basis Need for ADJUSTMENTS Prof. Riccardo Tiscini 59

Adjustments on Current Expenses ADJUSTMENTS Current expenses increases, to charge the costs of the P&L with: Current expenses decreases, to capitalize on the balance sheet: v depreciation and amortization concerning fixed assets v provisions for certain, uncertain and deferred costs v write-offs of fixed assets (operating and financial) v write-offs of trade receivables v accrued on-going service costs v costs of raw materials inventory v costs of finished goods inventory v costs of pre-paid services v costs of internal fixed assets production Prof. Riccardo Tiscini 60

Adjustments on Revenues ADJUSTMENTS Current revenue increase, to record in the revenues of the P&L: Current revenue decrease, to defer in the balance sheet: v accrued on-going service revenues (for which service production has been performed) v advance payments from customers and unearned revenues (for which future production will be performed) Prof. Riccardo Tiscini 61

Adjustments: on Trade receivables Doubts about a debtor’s reliability: probable no to collect receivables WRITE-OFF OF ACCOUNT RECEIVABLES Prudence principle Accrual basis (prudence in making estimates) (presenting incurred events) When collection is unprobable Prof. Riccardo Tiscini 62

Adjustments: on Trade receivables Sales revenues for € 1. 000 are recognized, payment delayed B. S. I. S. Sales revenues Accounts receivable (clients) +1. 000 A write-off of receivables for € 100 is recognized B. S. Accounts receivable (clients) 900 Prof. Riccardo Tiscini +1. 000 I. S. Write-off of receivables 100 63

Adjustments: on Trade receivables A write-off of receivables for € 100 is recognized B. S. Accounts receivable (clients) 900 I. S. Write-off of receivables +1. 000 1° case: in the following periods, receivables are collected exactly for € 900 B. S. I. S. Cash at bank +900 Accounts receivable (clients) 0 Prof. Riccardo Tiscini +900 64

Adjustments: on Trade receivables A write-off of receivables for € 100 is recognized B. S. Accounts receivable (clients) 900 I. S. Write-off of receivables +1. 000 100 2° case: in the following period, receivables are collected for € 850 B. S. Cash at bank I. S. +850 Other operating charges Accounts receivable (clients) +50 0 Prof. Riccardo Tiscini +900 65

Adjustments: on Trade receivables A write-off of receivables for € 100 is recognized B. S. Accounts receivable (clients) 900 I. S. Write-off of receivables +1. 000 100 3° case: in the following period, receivables are collected for € 950 B. S. Cash at bank I. S. +950 Other operating revenues Accounts receivable (clients) +50 0 Prof. Riccardo Tiscini +900 66

Adjustments: Fixed asset-related expenses FIXED ASSET-RELATED EXPENSES Depreciation Amortization Write-off The physiological and predictable decrease in the future benefits of tangible assets having a limited useful life The physiological and predictable decrease in the future benefits of intangible assets having a limited useful life The unpredictable decrease in the future benefits of fixed assets, often influenced by external factors or low future profitability of products Prof. Riccardo Tiscini 67

Adjustments: Depreciation & Amortisation DEPRECIATION & AMORTISATION The physiological and predictable decrease in the future benefits, and hence in the value, of fixed assets having a limited useful life Hence, it represents the portion of the total utility of a fixed asset that is considered used in a certain period It is necessary to record: v THE DECREASE IN THE VALUE OF FIXED ASSETS (in the BS) v. THE INCREASE IN THE COSTS (in the P&L) Prof. Riccardo Tiscini 68

Adjustments: Depreciation & Amortisation On the january 1° 200 X, a plant is bought for € 200. 000. The expected useful life of the plant is 10 years. 1/01/0 X B. S. I. S. Cash at bank - 200. 000 Plants +200. 000 31/12/0 X Depreciation Plants 20. 000 +200. 000 180. 000 Prof. Riccardo Tiscini 69

Adjustments: Depreciation & Amortisation On the january 1° 200 X, a plant is bought for € 200. 000. The expected useful life of the plant is 10 years. In the following years: 0 X Cost 0 x+1 0 x+2 0 x+3 … 0 x+10 200. 000 Depreciation 20. 000 … 20. 000 Accumulated depreciation 20. 000 40. 000 60. 000 80. 000 … 200. 000 Prof. Riccardo Tiscini 70

Adjustments: Accruals on on-going services ON-GOING SERVICES AT YEAR-END ADVANCE PAYMENT DEFERRED PAYMENT Advance cash-out for services to be used PRE-PAID COSTS (°) Deferred cash-out for services used ACCOUNT PAYABLES (*) Advance cash-in for services to render UNEARNED REVENUES (°) Deferred cash-in for services rendered ACCOUNT RECEIVABLES (*) (°) For the non-accrued pro-rata Prof. Riccardo Tiscini (*) For the accrued pro-rata 71

Adjustments: Pre-paid costs 31/12/0 X 1/10/0 X EN T PA YM 1/10/0 X+1 On 1/10/0 X € 120, 000 is paid for an annual insurance contract ACCRUED COST PRE-PAID COST DURATION OF SERVICE Prof. Riccardo Tiscini 72

Adjustments: Pre-paid costs On 1/10/0 X € 120, 000 is paid for an annual insurance contract B. S. 1/10/0 X Cash at bank I. S. Insurance services - 120. 000 B. S. 31/12/0 X I. S. Insurance services Pre-paid costs - 90. 000 Prof. Riccardo Tiscini 73

Adjustments: Unearned revenues 31/12/0 X 1/10/0 X RE VE NU E 1/10/0 X+1 On 1/11/0 X € 240, 000 is collected for a six-month consultancy ACCRUED REVENUE UNEARNED REVENUE DURATION OF SERVICE Prof. Riccardo Tiscini 74

Adjustments: Unearned revenues On 1/11/0 X € 240, 000 is collected for a six-month consultancy B. S. 1/10/0 X I. S. Cash at bank Service revenues + 240. 000 31/12/0 X B. S. I. S. Service revenues Unearned revenues 160. 000 - 160. 000

Adjustments: Accounts receivable (pro-rata) RE VE NU E 1/10/0 X 31/12/0 X 1/10/0 X+1 On 1/10/0 X an annual consultancy contract is drawn up for a total amount of € 240, 000. The payment is deferred at service-end. ACCOUNTS RECEIVABLE DURATION OF SERVICE Prof. Riccardo Tiscini 76

Adjustments: Accounts receivable (pro-rata) On 1/10/0 X an annual consultancy contract is drawn up for a total amount of € 240, 000. The payment is deferred at service-end. 1/10/0 X 31/12/0 X B. S. I. S. Service revenues Accounts receivable 60. 000 Prof. Riccardo Tiscini 77

Adjustments: Accounts payable (pro-rata) PA YM EN T 1/09/0 X 31/12/0 X 1/09/0 X+1 On 1/9/0 X a six-month operating lease contract is drawn up for a total amount of € 60, 000. The payment is deferred at the end of the six months. ACCOUNTS PAYABLE DURATION OF CONTRACT Prof. Riccardo Tiscini 78

Adjustments: Accounts payable (pro-rata) On 1/9/0 X a six-month operating lease contract is drawn up for a total amount of € 60, 000. The payment is deferred at the end of the six months. 1/10/0 X 31/12/0 X B. S. I. S. Accounts payable Rents 40. 000 Prof. Riccardo Tiscini 79

Adjustments: Raw materials and Goods Inventory CHANGE IN RAW MATERIALS AND GOODS INVENTORY (LEFT-OVERS) Anglo-saxon solution PROFIT AND LOSS ACCOUNT UNDER ‘COST OF GOODS SOLD’ Prof. Riccardo Tiscini Italian solution PROFIT AND LOSS ACCOUNT UNDER ‘COSTS OF PURCHASES AND CHANGE IN INVENTORY’ 80

Adjustments: Raw materials and Goods Inventory PROFIT AND LOSS ACCOUNT UNDER ‘COST OF GOODS SOLD’ During the fiscal year, goods for a total value of € 1, 000 are purchased (payment through bank deposits) As at 31/12 the goods in the warehouse are valued at € 100. B. S. Goods Inventory Cash at bank - 1, 000 100 I. S. Goods + 1, 000 Prof. Riccardo Tiscini Goods purchases + 1, 000 consumption 900 81

Adjustments: Raw materials and Goods Inventory PROFIT AND LOSS ACCOUNT UNDER ‘COSTS OF PURCHASES AND CHANGE IN INVENTORY’ During the fiscal year, goods for a total value of € 1, 000 are purchased (payment through bank deposits) As at 31/12 the goods in the warehouse are valued at € 100. B. S. Goods inventory Cash at bank - 1, 000 100 I. S. Goods + 1, 000 Prof. Riccardo Tiscini Purchases Unused goods/materials Goods + 1, 000 Change in goods inventory -100 82

Adjustments: Raw materials and Goods Inventory 31/12/0 X B. S. Goods inventory 100 I. S. Goods sold / Raw materials used for production 1000 -100 = 900 Goods 1000 Change in goods inventory -100 * The Italian solution is unused in the international context Prof. Riccardo Tiscini 83

Adjustments: Products & Work-in-progress Inventory INCREASE IN FINISHED PRODUCTS AND WIP INVENTORY VALUE Anglo-saxon solution PROFIT AND LOSS ACCOUNT UNDER ‘COSTS AND REVENUES FROM SALES’ Prof. Riccardo Tiscini Italian/German solution PROFIT AND LOSS ACCOUNT UNDER ‘COSTS AND REVENUES OF PRODUCTION’ 84

Adjustments: Products & Work-in-progress Inventory PROFIT AND LOSS ACCOUNT UNDER ‘COSTS AND REVENUES FROM SALES’ During the fiscal year, total production costs are € 10, 000 and total revenues from sales are € 18, 000, respectively for 1000 cars produced and 900 sold. As at 31/12, 100 cars valued at 1000 are still in stock B. S. Products inventory 1000 I. S. … Revenues … + 18, 000 Tot. Production costs + 10, 000 Prof. Riccardo Tiscini … Tot. Production costs + 10, 000 Changes in products inventory -1000 Revenues + 18, 000 TOT. COST OF PRODUCTION SOLD 9. 000 85

Adjustments: Products & Work-in-progress Inventory PROFIT AND LOSS ACCOUNT UNDER ‘COSTS AND REVENUES OF PRODUCTION’ During the fiscal year, total production costs are € 10, 000 and total revenues from sales are € 18, 000, respectively for 1000 cars produced and 900 sold. As at 31/12, 100 cars valued at 1000 are still in stock B. S. Products inventory 1000 I. S. Revenues … + 18, 000 Tot. Production costs + 10, 000 Prof. Riccardo Tiscini … Tot. Production costs + 10, 000 + 18, 000 Changes in products inventory -1000 TOT. ‘VALUES’ OF PRODUCTION 19. 000 86

Adjustments: Products & Work-in-progress Inventory PROFIT AND LOSS ACCOUNT UNDER ‘COSTS AND REVENUES OF PRODUCTION’ As at 31/12, 100 cars valued at 1000 are still in stock B. S. Products inventory 1000 I. S. … … Tot. Production costs + 10, 000 Prof. Riccardo Tiscini Revenues + 18, 000 Change in products inventory + 1000 products sold valued at sale price products unsold valued at production cost 87

Adjustments: Internal fixed assets production INCREASE IN FIXED ASSETS FOR INTERNAL PRODUCTION Anglo-saxon solution PROFIT AND LOSS ACCOUNT UNDER ‘COSTS AND REVENUES FROM SALES’ Prof. Riccardo Tiscini Italian/German solution PROFIT AND LOSS ACCOUNT UNDER ‘COSTS AND REVENUES OF PRODUCTION’ 88

Adjustments: Internal fixed assets production PROFIT AND LOSS ACCOUNT UNDER ‘COSTS AND REVENUES FROM SALES’ During the fiscal year, total production costs were equivalent to € 8, 000, which included a limited budget to build a new goods shed B. S. Fixed assets 200, 000 I. S. … Tot. Production costs + 8, 000 Internal fixed assets production -200, 000 Prof. Riccardo Tiscini 89

Adjustments: Internal fixed assets production PROFIT AND LOSS ACCOUNT UNDER ‘COSTS AND REVENUES OF PRODUCTION’ During the fiscal year, total production costs were equivalent to 8, 000, which included a limited budget to build a new goods shed B. S. Fixed assets 200, 000 I. S. … … Tot. Production costs + 8, 000 Prof. Riccardo Tiscini Internal fixed assets production 200, 000 90

Adjustments: Provisions UNCERTAIN LIABILITIES (related to past events) PROVISIONS: Probable to pay (more likely than not) Necessary to recognize a contingent liability in the B. S. (prudence principle). Examples: v Staff severance fund (i. e. Italian TFR) v Maintenance cost fund v Litigation Risk fund v Deferred Tax fund v etc. Prof. Riccardo Tiscini CONTINGENT LIABILITIES: Possible (but not probable) to pay Only necessary to give disclosure in the notes (no recordings in B. S. and I. S. ). Examples: v Litigation in which it is more likely to win than to loose v etc. 91

Adjustments: Provisions PROVISIONS RISKS OF FUTURE CASH-OUT CERTAIN FUTURE CASH-OUT Uncertain EXISTENCE, AMOUNT and EXPIRY Certain EXISTENCE but uncertain AMOUNT and EXPIRY If the cash-out is ‘more likely than not’, they have the same accounting treatment Prof. Riccardo Tiscini 92

Adjustments: Provisions PROVISIONS RISKS OF FUTURE CASH-OUT The Financial Police fines the company for irregularities. An appeal is lodged. Uncertain existence (the appeal could be upheld, even if it is unprobable), expiry and amount Prof. Riccardo Tiscini CERTAIN FUTURE CASH-OUT Ordinary maintenance works or products warranties. Certain existence, uncertain expiry and amount 93

Profit (Loss) for the period PROFIT (LOSS) To understand if the company has created or destroyed value, resources without future benefits must be compared with sources without future obligations PROFIT LOSS Revenues > Costs Revenues < Costs Prof. Riccardo Tiscini 94

Profit (Loss) for the period At year-end, further to any necessary adjustments, the revenue generated by the company is equivalent to 1, 000 against 600 of total costs : Revenue (1, 000) > Costs (600) = PROFIT for the period (400) B. S. I. S. Shareholders’ Equity … … … … PROFIT for the period 400 TOTAL COSTS 600 TOTAL REVENUES 1, 000 PROFIT for the period 400 Prof. Riccardo Tiscini 95

Profit (Loss) for the period At year-end, further to any necessary adjustments, the revenue generated by the company is equivalent to 800 against 900 of total costs: Revenue (800) < Costs (900) = LOSS for the period(100) B. S. I. S. Shareholders’ Equity … LOSS for the period (100) … … … TOTAL COSTS 900 TOTAL REVENUE 800 LOSS for the period 100 Prof. Riccardo Tiscini 96

Profit (Loss) for the period Revenue (1, 000) > Costs (600) = PROFIT for the period (400) ALLOCATION OF PROFITS Distributed to shareholders (Dividends) . Retained to reserves (Retained earnings) Partly distributed and partly retained to reserve Prof. Riccardo Tiscini 97

Profit (Loss) for the period Revenue (1, 000) > Costs (600) = PROFIT for the period (400) ALLOCATION OF PROFITS Distributed to shareholders (Dividends) B. S. Cash at bank -400 I. S. EQUITY Profit for the period 400 Prof. Riccardo Tiscini 0 98

Profit (Loss) for the period Revenue (1, 000) > Costs (600) = PROFIT for the period (400) ALLOCATION OF PROFITS . Retained to reserves (Retained earnings) B. S. I. S. EQUITY Profit for the period 400 0 Retained earnings 400 Prof. Riccardo Tiscini 99

Profit (Loss) for the period Revenue (1, 000) > Costs (600) = PROFIT for the period (400) ALLOCATION OF PROFITS Partly distributed and partly retained to reserve . B. S. I. S. EQUITY Cash at bank -200 Profit for the period 400 0 Retained earnings 200 Prof. Riccardo Tiscini 100

Profit (Loss) for the period Revenue (800) < Costs (900) = LOSS for the period (100) REGISTRATION OF LOSS Compensated with shareholders’ contributions . Offset by reserves Carried forward Prof. Riccardo Tiscini 101

Profit (Loss) for the period Revenue (800) < Costs (900) = LOSS for the period (100) REGISTRATION OF LOSS Compensated with shareholders’ contributions B. S. Cash at bank +100 I. S. EQUITY Loss for the period (100) Prof. Riccardo Tiscini 0 102

Profit (Loss) for the period Revenue (800) < Costs (900) = LOSS for the period (100) REGISTRATION OF LOSS Offset by Reserves B. S. I. S. EQUITY Loss for the period (100) 0 Retained Earnings 200 Prof. Riccardo Tiscini 100 103

Profit (Loss) for the period Revenue (800) < Costs (900) = LOSS for the period (100) REGISTRATION OF LOSS Carried forward B. S. I. S. EQUITY Loss for the period (100) 0 Retained Losses 100 Prof. Riccardo Tiscini 104

The Annual Report – The Italian Case ART. 2423 ITALIAN CIVIL CODE «The directors are directly responsible for the preparation of the annual financial statements, including the statement of assets and liabilities, the profit and loss account and the notes to the financial statements. The above-said financial statements must provide a trueful and fair view of the assets and liabilities and the financial situation of the company and of its economic result. …» Prof. Riccardo Tiscini 105

The Balance Sheet (art. 2424 C. C. ) ASSETS LIABILITIES A) Due from shareholders for unpaid capital A) Shareholders’ Equity B) Fixed assets B) Provisions § tangible § intangible § financial C) Current assets § inventory § receivables § trading financial assets § Cash D) Prepaid costs & Accrual receivables Prof. Riccardo Tiscini C) Staff severance fund D) Debts E) Unearned revenues & Accrual payables 106

The Income Statement (art. 2425 C. C. ) A) Production value B) Production cost A – B = difference between production value and cost C) Financial revenues and expenses D) Value adjustments of financial investments E) Extraordinary revenues and expenses Earnings Before-tax Income taxes for the period Profit/Loss for the period Prof. Riccardo Tiscini 107

The Balance Sheet (art. 2424 C. C. ) A DUE FROM SHAREHOLDERS for unpaid capital B FIXED ASSETS I. Intangible assets 1) incorporation expenses 2) research & development and advertising costs 3) industrial patent and intellectual property rights 4) permits, licences, trademarks and other rights 5) goodwill 6) fixed assets under construction and advances 7) other assets TOTAL II. Tangible assets 1) land buildings 2) plant and machinery 3) industrial and commercial equipment 4) other assets 5) fixed assets under construction and advances TOTAL Prof. Riccardo Tiscini A SHAREHOLDERS’ EQUITY I. Shareholders’ capital II. Issue premium III. Re-valuation reserves IV. Legal reserve V. Own shares or quotas reserve VI. Statutory reserves VII. Sundry reserves VIII. Retained Profit (loss) IX. Profit (loss) for the period TOTAL B PROVISIONS 1) pension and kindred outlays funds 2) deferred taxes fund 3) sundry funds TOTAL C STAFF SEVERANCE FUND 108

The Balance Sheet (art. 2424 C. C. ) III. Long-term investments 1) participations in: a) subsidiaries b) associated companies c) parent companies d) other companies 2) due a) from subsidiaries b) from associated companies c) from parent companies d) from other companies 3) other securities 4) own shares TOTAL FIXED ASSETS D DEBTS 1) bonds 2) convertible bonds 3) due to shareholders for borrowings 4) due to banks 5) due to other financers 6) advances 7) due to suppliers 8) bonded debts 9) due to subsidiaries 10) due to associated companies 11) due to parent companies 12) tax liabilities 13) due to social security institutions 14) other liabilities TOTAL E UNEARNED REVENUES AND ACCRUAL PAYABLES Prof. Riccardo Tiscini 109

The Balance Sheet (art. 2424 C. C. ) C CURRENT ASSETS I. Inventory 1) raw and subsidiary materials, commodities 2) goods in process and semi-finished goods 3) works in progress 4) finished products and materils 5) advances TOTAL II. Due 1) from customers 2) from subsidiaries 3) from associated companies 4) from parent companies 4 bis) tax receivables 4 ter) deferred tax assets TOTAL III. Other financial assets 1) participation in subsidiaries 2) participation in associated companies 4) participation in parent companies TOTAL Prof. Riccardo Tiscini 110

The Balance Sheet (art. 2424 C. C. ) IV. Cash funds 1) bank and postal deposits 2) cheques 3) cash on hand TOTAL CURRENT ASSETS C D PREPAID COSTS AND ACCRUAL RECEIVABLES Prof. Riccardo Tiscini 111

The Income Statement (art. 2425 Civil Code) A PRODUCTION VALUE 1) renevues from sales and services 2) changes in inventory of process, semifinished and finished goods 3) changes in construction contracts 4) increase in fixed assets for internal production 5) other revenues TOTAL B PRODUCTION COSTS 6) for raw and subsidiary materials, commodities 7) for services 8) for use of third-party assets (rents and leases) 9) for staff: a) wages and salaries b) social security contributions c) severance indemnities d) retirement pay and kindred outlays e) sundry administrative expenses 10) depreciations, amortisation and write-offs: a) amortisation of intangible assets b) depreciaton of tangible assets c) other write-offs d) receivables write-off 11) changes in inventory of raw and susbisdiary materials, commodities 12) risk provisions 13) other provisions 14) sundry operating costs TOTAL DIFFERENCE BETWEEN PRODUCTION VALUE AND COSTS (A-B) Prof. Riccardo Tiscini 112

The Income Statement (art. 2425 Civil Code) C FINANCIAL REVENUES AND CHARGES 15) income from equity investments 16) other financial revenues: a) due from fixed financial assets b) due from equity investments c) due from non-equity investments d) sundry financial revenues 17) interest and other financial charges 17 bis) foreign exchange rates income (losses) TOTAL (15+16 -17± 17 bis) D VALUE ADJUSTMENTS OF FINANCIAL INVESTMENTS 18) Revaluations of a) equity investments b) non-equity financial assets c) securities 19) devaluations of a) equity investments b) non-equity financial assets c) securities TOTAL ADJUSTMENTS (18 -19) Prof. Riccardo Tiscini 113

The Income Statement (art. 2425 Civil Code) E EXTRAORDINARY REVENUES AND CHARGES 20) revenues (plus capital gains from disposals not registered under item 5) 21) charges (plus capital losses from disposals not registered under item 14 and taxes) TOTAL EXTRAORDINARY REVENUES AND CHARGES (20 -21) EARNINGS BEFORE-TAX ( A – B ± C ± D ± E) 22) Income tax, current and deferred 23) PROFIT (LOSS) FOR THE PERIOD Prof. Riccardo Tiscini 114