IFWF Educational Program for Teenagers
Financial and Accounting Learning Materials
About Us
Contents
Financial
Unit 1: Business Sources of Funding
Unit 2: Forecasting and Financial Health
Unit 3: Type of Costs
Unit 4: Types of Funding
Accounting
Unit 5: Cash Flow
Unit 6: Recording Transaction
Unit 7: GAAP
Unit 8: Financial Statements
Unit 9: Calculating Financial Ratios
FINANCIAL
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Unit 1: Business Sources of Funding
Concept: Businesses need money to start, operate, expand, and seize new opportunities. These funds can come from within the business or external sources. The choice of funding source depends on factors like the size of the business, its growth stage, and financial health.
• Examples of Funding Sources:
• Internal Funding:
Internal funding comes from within the business, meaning it does not involve any external
borrowing or investors.
• Retained Earnings:
Profits made by the business in previous years are reinvested into the company
instead of being distributed to shareholders.
• Advantages:
• No interest or repayment obligation.
• Retains ownership and control of the business.
• Disadvantages:
• Limited by the amount of past profits.
• Reduces dividends to shareholders, which might cause dissatisfaction.
• Example: A restaurant earns $100,000 in profit and uses $50,000 to open a new
location instead of paying it to owners as dividends.
• Sale of Assets:
Selling unused or underperforming assets like equipment, vehicles, or buildings to
raise funds.
• Advantages:
• Quick access to cash.
• Removes costs associated with maintaining unused assets.
• Disadvantages:
• Loss of assets may limit future operations.
• Example: A factory sells an old, unused machine for $10,000 and uses the money to
repair a production line.
• External Funding:
External funding involves obtaining money from outside the business, often in exchange for interest payments or equity (ownership).
• Loans:
• Borrowing money from banks, credit unions, or private lenders with an agreement to repay with interest.
• Types of Loans:
• Short-Term Loans: Used to cover immediate needs, such as paying suppliers.
• Long-Term Loans: Used for significant investments, like purchasing equipment or real estate.
• Advantages:
• Provides a large amount of capital quickly.
• Retains ownership of the business.
• Disadvantages:
• Interest payments add to the cost.
• Failure to repay can lead to penalties or loss of assets.
• Example: A small business borrows $50,000 from a bank to buy new equipment and agrees to repay it over five years at a 5% annual interest rate.
• Equity:
Selling shares or ownership stakes in the company to raise money.
• Advantages:
• No repayment obligation.
• Investors may provide valuable advice and connections.
• Disadvantages:
• Dilutes ownership and decision-making power.
• Shareholders expect a return on their investment.
• Example: A tech startup raises $1 million by selling 20% of its shares to investors, who then become partial owners of the company.
• Grants:
Non-repayable funds provided by governments, non-profits, or organizations to support specific projects or goals.
• Advantages:
• No repayment or interest.
• Can enhance the company’s reputation.
• Disadvantages:
• Highly competitive application process.
• Limited to specific purposes.
• Example: A renewable energy company receives a $500,000 government grant to develop solar panels.
Example:
A small business wants to open a second store, which requires $50,000. The business uses $20,000
of retained earnings (profits from last year) and borrows $30,000 from a bank at a 6% interest rate.
• Internal Source:
• Retained Earnings: $20,000.
• No interest or repayment, but it reduces available cash reserves.
• External Source:
• Loan: $30,000.
• Repayment plan: $30,000 principal + $1,800 interest (6% per year over one year).
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Outcome:
The business successfully opens the second store, which generates $80,000 in annual revenue, enabling them to repay the loan and earn additional profit.
Unit 2: Forecasting and Financial Health
Concept: Forecasting is the process of estimating a business’s future financial performance basedon historical data, market trends, and business goals. Effective forecasting helps businessesanticipate challenges, identify opportunities, and make informed decisions about resource allocation.
• Steps:
1. Review Past Financial Records:
• Analyze historical revenue, expenses, and profits to identify trends and patterns.
• Example: A retail store observes that its sales consistently increase by 15% during the holiday season based on data from the past three years.
2. Estimate Future Sales and Costs:
• Use historical trends, industry benchmarks, and market conditions to predict future income and expenses.
• Example: If a restaurant knows it spends $5,000 monthly on ingredients, and plans to increase its menu prices by 10%, it forecasts higher revenues but stable costs.
3. Plan for Risks and Unexpected Expenses:
• Consider external factors like economic downturns, competitor actions, or supply chain issues.
• Example: A car dealership factors in potential price increases for imported vehicles due to changing tariffs.
4. Use Financial Models and Tools:
• Employ tools like spreadsheets, forecasting software, or financial ratios to analyze and predict financial performance.
• Tools include linear regression models, time-series analysis, or budgeting software like QuickBooks or Microsoft Excel.
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5. Adjust for Business Goals and Strategies:
• Align forecasts with long-term goals, such as expanding into new markets or launching a new product.
• Example: A startup plans for a 20% increase in expenses next year due to hiring new employees and advertising.
• Importance: Helps businesses make decisions, such as expanding operations or cutting costs.
Example:
Scenario:
A company’s current revenue is $100,000. It expects a 10% growth in sales next year and anticipates an increase in expenses due to rising material costs.
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Steps:
1. Review Past Data:
• The company observes its annual revenue grew by 8% and 9% in the past two years.
2. Estimate Future Revenue:
• Forecasted Revenue = Current Revenue × (1 + Growth Rate)
• $100,000 × (1 + 10%) = $110,000.
3. Estimate Future Expenses:
• If current expenses are $70,000 and are expected to rise by 5%, forecasted expenses
= $70,000 × (1 + 5%) = $73,500.
4. Calculate Future Profit:
• Profit = Forecasted Revenue - Forecasted Expenses
• $110,000 - $73,500 = $36,500.
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Result:
The company forecasts a profit of $36,500 for next year, a slight improvement from this year’s $30,000.
Unit 3: Type of Costs
Concept: Costs are the expenses a business incurs to produce goods, deliver services, and run operations. Understanding different types of costs helps businesses manage budgets, set pricing strategies, and maximize profits.
• Categories:
• Fixed Costs: Do not change regardless of production level (e.g., rent, salaries).
• Variable Costs: Change based on production (e.g., raw materials, shipping).
• Direct Costs: Tied to specific products/services (e.g., cost of ingredients in a bakery).
• Indirect Costs: Overheads not tied to specific outputs (e.g., electricity, internet).
Example:
A clothing manufacturer produces t-shirts. Here’s a breakdown of their costs:
1. Fixed Costs:
• Monthly factory rent: $5,000.
• Salaries of permanent staff: $4,000.
• Equipment depreciation: $1,000/month.
• Total Fixed Costs: $10,000/month.
2. Variable Costs:
• Fabric: $2 per t-shirt.
• Labor: $1 per t-shirt.
• Packaging: $0.50 per t-shirt.
• Total Variable Cost per t-shirt: $3.50.
3. Scenario:
• Monthly production: 5,000 t-shirts.
• Fixed Costs: $10,000.
• Total Variable Costs: 5,000 × $3.50 = $17,500.
• Total Costs: $10,000 + $17,500 = $27,500.
4. Application:
• If each t-shirt sells for $10, total revenue = 5,000 × $10 = $50,000.
• Profit = Revenue - Total Costs = $50,000 - $27,500 = $22,500.
Unit 4: Types of Funding
Concept: Funding refers to the capital that businesses use to operate, expand, and achieve their goals. Different funding types are suitable for different business stages, sizes, and objectives.
Choosing the right type of funding is crucial for minimizing risks and maximizing growth.
• Examples:
• Equity Financing: Investors provide money in exchange for shares.
• Debt Financing: Borrowing funds that must be repaid (e.g., bonds, loans).
• Crowdfunding: Raising small amounts of money from many people online.
Example:
A fashion startup wants to launch a new clothing line and needs $150,000 for production and
marketing. They consider the following funding options:
1. Equity Financing:
• They sell a 20% ownership stake to an investor for $150,000.
• Pros: No repayment; the investor helps with branding and connections.
• Cons: The founders now own only 80% of the business.
2. Debt Financing:
• They take a $150,000 bank loan at 6% interest, to be repaid over three years.
• Pros: Retain full ownership.
• Cons: Monthly repayments of $4,350, including interest.
3. Crowdfunding:
• They launch a Kickstarter campaign offering contributors early access to their
clothing line.
• Pros: Creates a loyal customer base before production starts.
• Cons: Success depends on marketing, and platform fees reduce funds raised.
Accounting
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Unit 5: Cash Flow
Concept: Cash flow refers to the movement of money into and out of a business. It is one of the most critical indicators of a company’s financial health and its ability to sustain operations, pay obligations, and grow.
• Types:
• Cash Inflows: Money received (e.g., sales revenue, investments).
• Cash Outflows: Money spent (e.g., salaries, purchases).
• Importance: Positive cash flow is necessary for paying bills, investing, and avoiding debt.
Example:
Scenario:
A café has the following cash flows for one month:
• Inflows:
• Sales revenue: $5,000.
• Customer deposits for future events: $500.
• Outflows:
• Rent: $2,000.
• Supplies: $1,000.
• Wages: $500.
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Calculation:
Net Cash Flow = Inflows - Outflows = ($5,000 + $500) - ($2,000 + $1,000 + $500) = $5,500 -
$3,500 = $2,000 (positive cash flow).
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Analysis:
The café has $2,000 available to reinvest, save, or use for upcoming expenses.
Unit 6: Recording Transaction
Concept: Recording transactions is the process of documenting all financial activities of a business to monitor its performance, ensure accuracy, and comply with legal and tax requirements. Accurate records are essential for preparing financial statements, budgeting, and decision-making.
Key Elements of Recording Transactions
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1. Date:
• Specifies when the transaction occurred.
• Example: A store records a sale on January 10, 2025.
2. Description of the Transaction:
• Provides a clear summary of the activity, such as “Sale of product,” “Payment for rent,” or
“Purchase of raw materials.”
• Example: “Sold 10 units of Product A to Customer X.”
3. Amount (Debit or Credit):
• Reflects the monetary value of the transaction, categorized as a debit (increase in assets or
expenses) or credit (increase in liabilities or revenue).
• Example: A $100 sale is recorded as:
• Debit: Cash $100 (increase in assets).
• Credit: Sales Revenue $100 (increase in revenue).
4. Account Affected:
• Identifies the accounts impacted by the transaction, such as “Cash,” “Accounts Payable,”
“Inventory,” or “Sales Revenue.”
• Example: When rent is paid, the accounts affected are “Cash” (decrease) and “Rent
Expense” (increase).
• Tools:
• Journals
• Ledger books
• Accounting software like QuickBooks
Example:
Scenario:
A retail store sells a product for $100, and the customer pays in cash.
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Step-by-Step Recording:
1. Date: January 10, 2025.
2. Description: “Sold Product B to Customer Y.”
3. Accounts Affected:
• Cash: Increases by $100 (Debit).
• Sales Revenue: Increases by $100 (Credit).
4. Journal Entry:
• Debit: Cash $100.
• Credit: Sales Revenue $100.
Unit 7: GAAP
Concept: GAAP refers to a standardized set of rules and guidelines that accountants and businesses follow when preparing financial statements. These principles ensure financial data is accurate, consistent, and comparable, helping businesses, investors, and regulators make informed decisions.
• Principles:
• Revenue Recognition: Record revenue when it is earned, not when cash is received.
• Matching Principle: Match expenses with related revenues.
• Full Disclosure: Clearly disclose all financial information.
Example:
Scenario:
A consulting firm provides services worth $10,000 in December but receives payment in January.
Additionally, it incurs $3,000 in advertising expenses in November to generate these December sales.
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Application of GAAP Principles:
1. Revenue Recognition:
• The $10,000 revenue is recorded in December, the period when the service was
delivered, even though payment is received in January.
2. Matching Principle:
• The $3,000 advertising expense is recorded in December, as it directly relates to the
revenue generated during that period.
3. Full Disclosure:
• If the client delays payment beyond January, this information is disclosed in the
financial statement notes to alert stakeholders to potential cash flow risks.
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Result:
The firm reports $10,000 in revenue, $3,000 in expenses, and $7,000 in net profit for December.
Unit 8: Financial Statements
Concept: Financial statements are reports that summarize a business’s financial activities, showing
its financial performance and position over a specific period. These statements are essential for
stakeholders, including business owners, investors, and creditors, to make informed decisions.
• Types:
• Income Statement: Shows profits/losses (revenue - expenses).
• Balance Sheet: Displays assets, liabilities, and equity.
• Cash Flow Statement: Tracks cash inflows and outflows.
Example:
Scenario: A retail business prepares its financial statements for the month of January.
1. Income Statement:
• Revenue from sales: $40,000.
• Expenses (rent, wages, supplies): $25,000.
• Net Profit: $40,000 - $25,000 = $15,000.
2. Balance Sheet:
• Assets:
• Cash: $10,000.
• Inventory: $20,000.
• Equipment: $50,000.
• Liabilities:
• Accounts Payable: $15,000.
• Bank Loan: $25,000.
• Equity: $10,000 (cash) + $20,000 (inventory) + $50,000 (equipment) - $40,000
(liabilities) = $40,000.
3. Cash Flow Statement:
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• Operating Cash Flow: $12,000 (cash received from sales minus expenses).
• Investing Cash Flow: -$5,000 (purchase of new equipment).
• Financing Cash Flow: +$10,000 (loan received).
• Net Cash Flow: $12,000 - $5,000 + $10,000 = $17,000.
Unit 9: Calculating Financial Ratios
Concept: Financial ratios are tools used to assess a company’s performance and financial health by analyzing relationships between different financial statement figures. They help stakeholders
understand liquidity, profitability, efficiency, and risk.
• Common Ratios:
• Current Ratio: Current Assets ÷ Current Liabilities (Liquidity measure).
• Debt-to-Equity Ratio: Total Debt ÷ Total Equity (Leverage measure).
• Profit Margin: Net Income ÷ Revenue (Profitability measure).
Example:
Scenario: A company has the following financial data:
• Current Assets: $80,000.
• Current Liabilities: $40,000.
• Total Debt: $100,000.
• Total Equity: $150,000.
• Revenue: $500,000.
• Net Income: $50,000.
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Calculations:
1. Current Ratio:
2. Debt-to-Equity Ratio:
3. Profit Margin:
Analysis:
• The company has strong liquidity (Current Ratio = 2:1).
• It maintains moderate leverage (Debt-to-Equity = 67%).
• Its profitability (Profit Margin = 10%) is reasonable but could improve by reducing expenses.