Mmi finance 1


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Mmi finance 1

  2. 2. Cash Flow – Production Cycle (I) Changes in equity Changes in liabilities Taxes Interest Dividends Collection of credit sales Cash sales Credit sales Depreciation Production Investment Example Cash Accounts receivable Fixed assets Inventory
  3. 3. Cash Flow – Production Cycle (II) <ul><li>Example debriefing: </li></ul><ul><li>For simplicity, suppose the company is a new one that has raised money from owners and creditors </li></ul><ul><li>The company uses cash to purchase raw material and hire workers; it makes the product and stores it in inventory </li></ul><ul><li>When the company sales a product, inventory turns into cash; if the sale is for cash, otherwise, cash is not realized until accounts receivable is collected; the movement of cash to inventory, to cash receivable, ad back to cash is the firm’s working capital cycle. </li></ul><ul><li>On the other hand, over a period of time, fixed assets are consumed; thr accountant recognize the process by continually reducing the value of asets and increasing the value of merchandise flowing into inventory by an ammount called depreciation </li></ul>
  4. 4. Cash Flow – Production Cycle (III) <ul><li>Example debriefing: </li></ul><ul><li>To maintain productive capacity, the company must invest part of its newly received cash in new fixed assets. </li></ul><ul><li>Profit do not equal cash flow. The profitability of a company is not an anssurence that its cash flow will be sufficient to maintain solvency. For example, if the company loses control of its accounts receivable by allowing clients more time to pay, or the company makes more merchandise than it sells, then, though the firm is selling at a profit, its sales may not be generating sufficient cash to replenish the cash for production and investment </li></ul>
  5. 5. Financial statements – Balance Sheet <ul><li>A Balance sheet is a financial snapshot, taken at a point in time, of all the assets the company owns and all the claims against those assets. </li></ul><ul><li>A balance sheet is based upon the basic accounting equation of: </li></ul><ul><li>Assets = Liabilities + Shareholder’s equity </li></ul>
  6. 6. Financial statements – Balance Sheet Asset Liability Something valuable which a business owns or has the use of <ul><ul><ul><ul><li>Factories </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Office buildings </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Plant and equipments </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Computers </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Goods </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Raw material </li></ul></ul></ul></ul>Something which is owed to somebody else <ul><li>A loan </li></ul><ul><li>Amounts owed to suppliers for goods purchased </li></ul><ul><ul><ul><li>Capital and reserves </li></ul></ul></ul>The money put into a business by its owners is capital. Capital is money owned to the shareholders by the business <ul><li>Reserves include retained earning and revaluation reserve </li></ul>
  7. 7. Financial statements – Balance Sheet <ul><li>EXAMPLE (000 EUR) </li></ul>ASSETS = LIABILITIES + EQUITY Cash Accounts Receivable Inventory Fixed Assets Accounts Payable Loans Owners’ equity Beginning balance 1/1/10 250 100 150 Initial purchases (140) 80 60 Sales 875 25 900 Wages (190) (190) Merchandise purchases (360) 30 20 (350) Other expenses (210) (210) Depreciation (15) (15) Interest payment (10) (10) Ending Balance 31/12/10 215 25 110 45 20 100 275
  8. 8. Financial statements – Balance Sheet <ul><li>Example: BS of a newspaper (000 EUR) </li></ul>ASSETS = LIABILITIES + EQUITY Cash Accounts Receivable Inventory Fixed Assets Accounts Payable Loans Owners’ equity Beginning balance 1/1/10 500 100 400 Purchases (140) 80 60 Sales 200 800 1000 Wages (500) (500) Print & Paper (10) 30 370 (350) Other expenses (10) 200 (210) Depreciation (15) (15) Interest payment (10) (10) Ending Balance 31/12/10 30 800 110 45 570 100 315
  9. 9. Financial statements – Balance Sheet <ul><li>EXAMPLE debriefing: </li></ul><ul><li>A new founded newspaper, invested at the beginning of 2010 150 thou. EUR of his personal savings an borrowed additional 100 thou. EUR </li></ul><ul><li>After buying furniture and computers for 60 thou. EUR and merchandise for 80 thous. EUR, his transactions can be summarised: </li></ul><ul><ul><li>Sell 900 thou EUR (advertising+circulation), receiving 875 thou EUR in cash , with 25 thou EUR still to be paid </li></ul></ul><ul><ul><li>Pay 190 thou EUR wages </li></ul></ul><ul><ul><li>Purchaise 380 thou EUR merchandise, with 20 thous EUR still owning to suppliers and 30 thou EUR still in inventory </li></ul></ul><ul><ul><li>Spend 210 thou EUR on other expenses, including distribution, rent, taxes </li></ul></ul><ul><ul><li>Depreciate furniture and computers by 15 thou EUR </li></ul></ul><ul><ul><li>Pay 10 thou EUR interest on loan </li></ul></ul><ul><li>Specific of a Romanian newspaper </li></ul><ul><ul><li>AR are high due tu late payments from distribution and advertising, therefore cash is low. </li></ul></ul>
  10. 10. Assets <ul><li>Two main categories of assets: </li></ul><ul><ul><li>Current Assets - are expected to be converted into cash or consumed within 1 year . Examples: </li></ul></ul><ul><ul><ul><ul><li>Cash </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Accounts Receivables </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Inventory </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Prepaid expenses </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Short term investments ( bonds, stocks) </li></ul></ul></ul></ul><ul><ul><li>Non current Assets (> 1 year) </li></ul></ul>Financial statements – Balance Sheet
  11. 11. <ul><li>Cash </li></ul><ul><ul><li>Usually includes cash in bank, cash in safe, short term investments (deposits). </li></ul></ul><ul><li>Accounts Receivable </li></ul><ul><ul><ul><li>the amount of money owed to the company by its customers ( bad debts, Irrecoverable debts) </li></ul></ul></ul><ul><li>Inventories </li></ul><ul><ul><li>Include raw materials, work in progress (goods in the process of being manufactured), finished goods already available for sale </li></ul></ul>Current Assets Financial statements – Balance Sheet
  12. 12. <ul><li>Assets intended to be held and used by a business for a number of years. </li></ul><ul><ul><ul><ul><li>Tangible Assets (Fixed Assets) – have a physical form: property, plant, equipment </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Intangible Assets - not physical in nature: patents, trademarks, copyrights, goodwill (purchase price less fair value of an asset) , development costs </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Financial assets </li></ul></ul></ul></ul>Non-Current Assets Financial statements – Balance Sheet
  13. 13. Liabilities <ul><li>Current Liabilities - Debts or obligation that will become due over the next 12 months . Examples: </li></ul><ul><ul><ul><li>Accounts Payable or creditors (e.g. suppliers, employees) </li></ul></ul></ul><ul><ul><ul><li>Current tax </li></ul></ul></ul><ul><ul><ul><li>Overdraft (short term credit from banks) </li></ul></ul></ul><ul><ul><ul><li>Accrued expenses </li></ul></ul></ul><ul><ul><ul><li>Current portion of long term debt ( the portion of loan or other debts that become due within one year) </li></ul></ul></ul><ul><ul><ul><li>Provisions </li></ul></ul></ul><ul><li>Long Term Liabilities - Debt or obligations that become due in more than one year from the BS date. Examples: </li></ul><ul><ul><ul><li>Bank loan (long term portion) </li></ul></ul></ul><ul><ul><ul><li>Finance Lease (long term portion) </li></ul></ul></ul><ul><ul><ul><li>Provisions </li></ul></ul></ul>Financial statements – Balance Sheet
  14. 14. Shareholder’s Equity <ul><li>Equity = the amount of the funds contributed by the owners (share capital) plus the retained earnings (or losses) and reserves (revaluation, share premium). </li></ul><ul><ul><li>Equity = Share Capital + Reserves + Retained earnings (net of Dividends) </li></ul></ul><ul><li>More simple: Equity = what the company owns – what it owes </li></ul>Financial statements – Balance Sheet
  15. 15. <ul><li>Income statement - comprises the income and expenses during a period of time (accounting period). </li></ul><ul><li>Income Statement = Profit and loss statement </li></ul><ul><li>Comprises: </li></ul><ul><ul><ul><li>Revenues (Sales) </li></ul></ul></ul><ul><ul><ul><li>Cost of sales </li></ul></ul></ul><ul><ul><ul><li>Gross Profit </li></ul></ul></ul><ul><ul><ul><li>Operating expenses </li></ul></ul></ul><ul><ul><ul><li>Operating income </li></ul></ul></ul><ul><ul><ul><li>Other expenses </li></ul></ul></ul><ul><ul><ul><li>Other non operating Income </li></ul></ul></ul><ul><ul><ul><li>Income before tax </li></ul></ul></ul><ul><ul><ul><li>Tax </li></ul></ul></ul><ul><ul><ul><li>Net Income (Profit) </li></ul></ul></ul>Financial statements – Income Statement
  16. 16. <ul><li>Revenues (Sales): Net Sales = Sales revenue for the period less returns, discounts. </li></ul><ul><li>Cost of Sales: The purchase cost / production cost of goods sold </li></ul><ul><ul><ul><li>Retail business : cost of sales = purchase cost from suppliers + other direct costs </li></ul></ul></ul><ul><ul><ul><li>Manufacturing business : production cost = raw material +labor cost +production overheads </li></ul></ul></ul><ul><li>Gross Profit </li></ul><ul><ul><li>Gross profit = Sales - cost of sales </li></ul></ul><ul><li>Other non operating Income: income form other sources: dividends, interest, sale of assets </li></ul>Financial statements – Income Statement
  17. 17. <ul><li>Operating expenses </li></ul><ul><li>Selling and distribution expenses </li></ul><ul><ul><li>= Costs directly attributable to the selling and delivering goods to customers. </li></ul></ul><ul><ul><li>Sale employees salaries and commissions </li></ul></ul><ul><ul><li>Advertising and promotion expenses </li></ul></ul><ul><ul><li>Delivery costs </li></ul></ul><ul><ul><li>Bad Debt </li></ul></ul><ul><li>General and administration expenses </li></ul><ul><ul><li>= Expenses of providing management and administration for the business. </li></ul></ul><ul><ul><li>Salaries of office staff (corporate function such as HR, Finance) </li></ul></ul><ul><ul><li>Rent, utilities </li></ul></ul><ul><ul><li>Printing, stationery </li></ul></ul><ul><li>Depreciation: </li></ul><ul><ul><li>Total cost of an long term assetmust be spread over the asset’s expected useful life </li></ul></ul><ul><ul><li>Charging the full cost of a long-term asset to one yera distors reported income. Example: suppose in 2002 a company buys a facility expected to be in use for 12 years, for 10 mil EUR. If the entire cost is assign to 2002,income in 2002 will apear depressed, while income in the following years will look too high. </li></ul></ul>Financial statements – Income Statement
  18. 18. <ul><ul><ul><li>Operating income (profit or loss) = profit from day-to-day operations excuding taxes, interest income and expense </li></ul></ul></ul><ul><ul><li>EBITDA = Earning before Interest, Taxation, Depreciation and Amortization. Great use in broadcasting for example, where depreciation overstate true economic depreciation </li></ul></ul><ul><ul><li>EBIT = Earning before Interest and Taxation. Widely used to measure a business income before it is divided among creditors, owners and taxman </li></ul></ul><ul><li>Net income (profit) </li></ul><ul><ul><li>Net profit earned by a company during accounting period </li></ul></ul><ul><ul><li>Two choices: paid out as dividend or retained into the business in the form of retained earning for investments. </li></ul></ul><ul><ul><ul><ul><li>Net profit less dividend paid is transferred to Balance Sheet, as Retained earning </li></ul></ul></ul></ul>Financial statements – Income Statement
  19. 19. Example of a P&L statement of a newspaper
  20. 20. <ul><li>Cash Flow </li></ul><ul><li>Is the movement of money into or out of a cash account over a period of time </li></ul><ul><li>Shows company’s ability to generate cash </li></ul><ul><li>Expands and rearranges the sources into 3 categories: </li></ul><ul><ul><ul><li>Cash Flow from operating activities – result of the principal activity of a company </li></ul></ul></ul><ul><ul><ul><li>Cash Flow from investing activities - Acquisition or disposal of assets or investment in other companies </li></ul></ul></ul><ul><ul><ul><li>Cash Flow from financing activities - Receipt/repayment to external providers of finance (loan, leases) </li></ul></ul></ul>Financial statements – Cash Flow
  21. 21. <ul><li>EXEMPLE – </li></ul><ul><li>Net profit before taxation 3,200 </li></ul><ul><li>Adjustments for: </li></ul><ul><li>Depreciation 500 </li></ul><ul><li>Working capital Changes </li></ul><ul><li>Increase in accounts receivables (300) </li></ul><ul><li>Decrease in inventory 300 </li></ul><ul><li>Decrease in accounts payables (700) </li></ul><ul><li>Cash generated from operation 3,000 </li></ul><ul><li>Income tax paid (300) </li></ul><ul><li>Interest paid (600) </li></ul><ul><li>Net cash from operating activities 2,100 </li></ul><ul><li>Purchase of property, plant, equipment (900) </li></ul><ul><li>Proceed from sale of cars 10 </li></ul><ul><li>Dividends received 100 </li></ul><ul><li>Net cash used in investing activities (790) </li></ul><ul><li>Proceed from issuance of share capital 250 </li></ul><ul><li>Dividend paid (100) </li></ul><ul><li>Net cash used in financing activities 150 </li></ul><ul><li>Net increase in cash and cash equivalents 1,460 </li></ul><ul><li>Cash and cash equivalents at beginning of period 1,000 </li></ul><ul><li>Cash and cash equivalents at end of period 2,460 </li></ul>Financial statements – Cash Flow
  22. 22. <ul><li>Net profit or loss is adjusted for: </li></ul><ul><ul><li>Changes in working capital (inventory, receivables, payables). </li></ul></ul><ul><ul><li>Non-cash items like depreciation, provisions, losses on disposal of assets. </li></ul></ul><ul><ul><li>Other items that need to be classified under investing or financing activities. </li></ul></ul><ul><li>Adjustments (Add/subtract): </li></ul><ul><ul><li>+ Depreciation (non cash item) </li></ul></ul><ul><ul><li>+ Loss on disposal (non cash item) </li></ul></ul><ul><ul><li>- Increase in inventory (cash spent on buying inventory) </li></ul></ul><ul><ul><li>- Increase in receivable (debtors have not paid) </li></ul></ul><ul><ul><li>- Decrease in payables ( cash paid) </li></ul></ul>Financial statements – Cash Flow