Accounting for Financial Instruments

A Guide to Valuation and Risk Management

Emanuel Camilleri, Roxanne Camilleri

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781315299419
• Edition: 1
• Topic: Negocios y empresa
• Subtopic: Finanzas

Accounting for Financial Instruments is about the accounting and regulatory framework associated with the acquisition and disposal of financial instruments; how to determine their value; how to manage the risk connected with them; and ultimately compile a business valuation report.

Specifically, the book covers the following topics, amongst others: Accounting for Investments; Bills of exchange; Management of Financial Risks; Financial Analysis (including the Financial Analysis Report); Valuation of a business (including the Business Valuation Report) and Money laundering. Accounting for Financial Instruments fills a gap in the current literature for a comprehensive text that brings together relevant accounting concepts and valid regulatory framework, and related procedures regarding the management of financial instruments (investments), which are applicable in the modern business world.

Understanding financial risk management allows the reader to comprehend the importance of analysing a business concern. This is achieved by presenting an analytical framework to illustrate that an entity's performance is greatly influenced by its external and internal environments. The analysis of the external environment examines factors that impact an entity's operational activities, strategic choices, and influence its opportunities and risks. The analysis of the internal environment applies accounting ratio analysis to an entity's financial statements to examine various elements, including liquidity, profitability, asset utilisation, investment, working capital management and capital structure.

The objective of the book is to provide a fundamental knowledge base for those who are interested in managing financial instruments (investments) or studying banking and finance or those who wish to make financial services, particularly banking and finance, their chosen career. Accounting for Financial Instruments is highly applicable to bothprofessional accountants and auditors and students alike.

Part 1
Accounting fundamentals

The objective of this part is to set the scene and provide the fundamental accounting knowledge that a novice in financial services practice needs to master in the turbulent world of finance. There is an explanation of the accounting principles related to the documentation of business transactions and the classification of business activities, so that voluminous transactions may be presented in a concise and logical manner that enable them to be easily understood by the users of the financial reports.

This part will help the reader to understand the application of three important accounting concepts, namely the accounting process, the double entry bookkeeping method, and the relationship between the accounting financial statements. The accounting process consists of a series of steps that begins with a business transaction and ends with the closing of the accounts and the compilation of the financial statements. Since this process is repeated each reporting period, it is often referred to as the accounting cycle or bookkeeping cycle. The steps in the accounting process adhere to a number of rules and conventions that abide by the accepted accounting standards.

Understanding the relationship between the accounting process and the double-entry bookkeeping framework to obtain a holistic view of the accounting cycle becomes critical, because the financial statements generated by the accounting system provide the underlying information for analysing the financial position of an entity, including credit and equity analysis, and security valuation

1
Introduction

I never teach my pupils. I only attempt to provide the conditions in which they can learn.

Albert Einstein
Theoretical physicist and philosopher

This book is in response to a common criticism about the lack of a text that embraces the fundamental accounting concepts for those commencing their profession in financial services. The term financial services includes a wide spectrum of activities, such as commercial banking, corporate finance, financial planning, hedge funds, insurance, investment banking, money management, private equity and real estate. While these diverse financial services require different skills and talents, they all require a good understanding of accounting and written communication skills. The level of accounting knowledge does not need to be that of a professional accountant but must be sufficient for one to understand the rationale behind the various accounting entries and to critically analyse accounting numbers.

Book structure and contents

As the book title suggests, the objective of this text is to provide a fundamental knowledge base for those studying banking and finance or those who wish to make financial services, particularly banking and finance, their chosen career. Figure 1.1 illustrates that this book is divided into four related parts, comprising 12 chapters.

Part 1 – Accounting fundamentals

This part of the book consists of three chapters. These three chapters progressively build the readers’ knowledge about the fundamental accounting principles. This first chapter presents a description of the general book structure. Chapter 2 provides a detailed explanation of the financial reporting instruments by presenting the applicable key accounting concepts. It provides a detailed discussion about the common classification of business activities, namely operational, financing and investment management. Chapter 2 also examines the typical accounts maintained by companies and the components of the key financial statements. This includes an explanation of the accounting equations related to the balance sheet, income statement and statement of retained earnings.

Figure 1.1 Book structure: accounting fundamentals for services practitioners

Chapter 3, which is the final chapter in Part 1, elaborates further on the accounting principles discussed in Chapter 2. Chapter 3 examines in detail the accounting process, which consists of eight major phases, starting with the initial business transactions and ending with the closing of the accounts and the compilation of the financial statements. The section dealing with th...