Accounting & Finance: the Concepts, Models and Scandals Explained

Reporting treatments, appraisal methods and the market models used to price capital and currency.

What this section covers

Three bodies of work sit here, and they answer different questions about the same money. Financial reporting asks what the accounts should say happened. Corporate finance asks which investments to make and how to fund them. International finance asks what happens when the money is in more than one currency.

They meet in the places where a reporting rule changes a real decision: what a company may lawfully distribute, what a revaluation does to the distributable pool, how tax timing moves the value of a project.

How the entries relate

The reporting entries run from the framework down to individual treatments. The regulatory framework explains who writes the rules and how they bind; property, plant and equipment and the distributable profits rules show the framework applied to a specific question, and both turn on the distinction between realised and unrealised amounts that makes creditor protection work.

The appraisal entries are a sequence instead of a list. Capital budgeting sets out the whole process; investment appraisal questions is the working method for applying it, including the errors that cost marks in every attempt. The rights-issue and portfolio entries sit alongside as the financing half of the same decision.

The failure cases — Enron, Polly Peck — are not moral tales. Each is a mechanism: a specific accounting treatment that was permitted, produced a misleading picture, and was closed afterwards. They are the fastest way to see why a rule exists.

Where to start

If you are working on reporting, read the regulatory framework entry first. It answers the question every other reporting entry assumes: who decided this, and what makes it binding.

If you are working on appraisal, read capital budgeting for the process and then investment appraisal questions for the method. The second is written as the order to work in, because the marks in an appraisal question are lost on sequence far more often than on doctrine.

If you are working on international finance, the eurocurrency market entry explains why the market exists at all, which the ratio and parity entries assume.

A caution about the ratios

The ratio entries — the settlement periods, the appraisal measures — all produce a number, and a number invites the mistake of treating the calculation as the answer.

Every one of them is a comparison. A settlement period means nothing without the stated credit terms, the trend and the sector. A net present value means nothing without the assumption it is most sensitive to. The entries are written to end at the interpretation and not at the arithmetic, because that is where both the marks and the money are.

Two habits that separate a pass from a good mark

Say which basis you are on, before the first number. Money or real cash flows. Tax in the year or a year in arrears. Opening, closing or average balances. Almost every appraisal question can be answered correctly on more than one basis, and almost every lost mark in one comes from mixing two without noticing.

Finish at the consequence. A ratio is not a finding and a present value is not a recommendation. The settlement period matters because a number of days converts into an amount of money tied up and a cost of carrying it; a positive appraisal matters because of what has to stay true for it to hold. The entries end there deliberately, and a script that does the same is answering the question that was asked.