Robert Uberman, Financial Management, KA im Frycza Modrzewskiego 1

Robert Uberman, Financial Management, KA im Frycza ModrzewskiegoRobert Uberman, Financial Management, KA im Frycza Modrzewskiego

11


What is Finance all about? What is Finance all about?

Finance is about three things:Finance is about three things:

raising moneyraising money

allocating itallocating it

controlling return on money investedcontrolling return on money invested

Spreadsheets and FinanceSpreadsheets and Finance


Course OverviewCourse Overview

Financial statements (1)Financial statements (1) Revenues and Costs (nonfinancial) (2-Revenues and Costs (nonfinancial) (2-44)) Net Working Capital Management (Net Working Capital Management (5-65-6)) Time Value of Money Concept (Time Value of Money Concept (77) ) Investment Decisions (Investment Decisions (88)) Responsibility centers and managerial accounting Responsibility centers and managerial accounting

((99)) Financial ratios (Financial ratios (10-1110-11)) Business Financing (Business Financing (1212)) Business Modelling and Forecasting (1Business Modelling and Forecasting (13-143-14)) Financial Disciplines (1Financial Disciplines (155))


Books & Evaluation RulesBooks & Evaluation Rules Books:Books:

Brealey Richard A., Myers Stewart C.: Brealey Richard A., Myers Stewart C.: Principles of Corporate Principles of Corporate FinanceFinance. McGraw-Hill, New York, 1996 (or any other edition, incl. . McGraw-Hill, New York, 1996 (or any other edition, incl. Polish version)Polish version)

Shim Jae K., Siegel Joel G.: Shim Jae K., Siegel Joel G.: Vest Pocket CEOVest Pocket CEO. Prentice Hall, New . Prentice Hall, New York, 1992 (a very good Polish edition by ABC, 1999)York, 1992 (a very good Polish edition by ABC, 1999)

Atrill Peter, McLaney Eddie: Atrill Peter, McLaney Eddie: Management Accounting for Decision Management Accounting for Decision Makers.Makers. Prentice Hall, Harlow, 2007. Prentice Hall, Harlow, 2007.

Evaluation:Evaluation: Written, in- class, closed books Exam, with 3 out of 4 topics to be Written, in- class, closed books Exam, with 3 out of 4 topics to be

discusseddiscussed Near to all topics will require both calculations and assessment of Near to all topics will require both calculations and assessment of

a problem challenged a problem challenged After class assignments not graded at all but instrumental to After class assignments not graded at all but instrumental to

succeed on the final exam succeed on the final exam


Session One TopicsSession One Topics

General concept of financial statements General concept of financial statements Balance sheetBalance sheet Accrual vs cash flow approachAccrual vs cash flow approach Profit and Loss (Income) StatementProfit and Loss (Income) Statement Cash Flow StatementCash Flow Statement

Brealey, Myers pp. Brealey, Myers pp.


Key financial questionsKey financial questions

How much does the business own (at present, in the How much does the business own (at present, in the past, in near future)?past, in near future)?

How much has the business earned (over a given How much has the business earned (over a given period of time)?period of time)?

How much it will earn in future?How much it will earn in future?

The above indicated are key financial questions for The above indicated are key financial questions for every person but also enterprise, institution, every person but also enterprise, institution, government.government.

We will discuss almost exclusively non-financial We will discuss almost exclusively non-financial businesses although some concepts apply to other types, businesses although some concepts apply to other types, too.too.


Balance Sheet – key notions to Balance Sheet – key notions to rememberremember

AssetsAssets: properties owned (now: or under control : properties owned (now: or under control and with entitlement to key benefits): and with entitlement to key benefits): Long-term (with useful life over 1 year): laptop.Long-term (with useful life over 1 year): laptop. Current (with useful life up to 1 year): enrolment.Current (with useful life up to 1 year): enrolment. Tangible: laptop.Tangible: laptop. Intangible: enrolment right.Intangible: enrolment right.

Liabilities and equityLiabilities and equity:: Long-term (due later than within 1 year): Father’s loan Long-term (due later than within 1 year): Father’s loan

and, by definition, equity.and, by definition, equity. Current (due within 1 year): instalments.Current (due within 1 year): instalments.

A Balance SheetA Balance Sheet: a statement of properties and : a statement of properties and sources financing themsources financing them


Reasons why assets and liabilities Reasons why assets and liabilities have to be recorded separatelyhave to be recorded separately

Even if we have a dual entry approach and Even if we have a dual entry approach and transactions are not divisible their results are:transactions are not divisible their results are: if granted a loan to purchase a specific equipment one if granted a loan to purchase a specific equipment one

cannot use the proceedings for other purpose,cannot use the proceedings for other purpose, howeverhowever

when transaction is closed one has to repay a loan when transaction is closed one has to repay a loan regardless the machine purpose and, of no specific regardless the machine purpose and, of no specific arrangements are made, can do whatever it wishes with arrangements are made, can do whatever it wishes with the equipment.the equipment.

Both relations can be discontinued separately in a Both relations can be discontinued separately in a different time and circumstances.different time and circumstances.


Accruals vs cash flowAccruals vs cash flow

In private life we tend to equalize revenues with In private life we tend to equalize revenues with cash inflows and costs with cash outflows, cash inflows and costs with cash outflows, sometimes recognizing special character of sometimes recognizing special character of investments (eg. nobody would treat creating a investments (eg. nobody would treat creating a bank deposit as a cost albeit identifying it as a bank deposit as a cost albeit identifying it as a cash outflow).cash outflow).

In the least complex business activity it is a In the least complex business activity it is a handy approach but:handy approach but: even in such cases carries certain risk,even in such cases carries certain risk, it would be dangerous in case of complex businesses. it would be dangerous in case of complex businesses.


Reasons why not all costs are Reasons why not all costs are represented by cash outflowsrepresented by cash outflows (1) (1)

Long term assets will loose their value over time Long term assets will loose their value over time and eventually become useless (except for and eventually become useless (except for ground plots and some other specific items).ground plots and some other specific items).

The above mentioned process may be long and The above mentioned process may be long and involve very valuable items (f.e. a car)involve very valuable items (f.e. a car)

Consequently we need a mechanisms to allocate Consequently we need a mechanisms to allocate expenses incurred to acquire them over pertain expenses incurred to acquire them over pertain time.time.

We say, we „depreciate” them (amortise We say, we „depreciate” them (amortise intangible assets, deplete natural resources)intangible assets, deplete natural resources)


Reasons why not all costs are Reasons why not all costs are represented by cash outflowsrepresented by cash outflows (2) (2)

Commercial credit.Commercial credit. Concurrent services (eg. electricity, employment Concurrent services (eg. electricity, employment

costs).costs). Deferred obligations and revenues (f.e. in Deferred obligations and revenues (f.e. in

construction business).construction business).


Two financial statement addressing Two financial statement addressing the issue of resultsthe issue of results

Income (Profit and Loss) StatementIncome (Profit and Loss) Statement Cash Flow StatementCash Flow Statement


Income Statement – key notions to Income Statement – key notions to rememberremember

RevenuesRevenues: Cash inflows or other enhancements : Cash inflows or other enhancements of assets (for example acceptance of services of assets (for example acceptance of services delivered)delivered)

CostsCosts: use of assets attributable directly or : use of assets attributable directly or indirectly to the revenues recognisedindirectly to the revenues recognised cash costs.cash costs. non-cash costs (DDA)non-cash costs (DDA)

Income (gross)Income (gross): revenues – costs: revenues – costs Income tax(es)Income tax(es): obligatory levies on income (but : obligatory levies on income (but

not VAT, stamp duties, etc.)not VAT, stamp duties, etc.) Income (net)Income (net): Income (gross) – taxes: Income (gross) – taxes


Cash Flow Statement – key notions Cash Flow Statement – key notions to remember (1)to remember (1)

Operational activities Operational activities :: receipts from the sale of goods or services,receipts from the sale of goods or services, payments to suppliers for goods and services,payments to suppliers for goods and services, payments to employees or on behalf of employees,payments to employees or on behalf of employees, buying Merchandisebuying Merchandise some otherwise typically financial items if strictly some otherwise typically financial items if strictly

connected with operational activities (eg. interests on connected with operational activities (eg. interests on delayed payments for services).delayed payments for services).


Cash Flow Statement – key notions Cash Flow Statement – key notions to remember (2)to remember (2)

Financial activitiesFinancial activities:: dividends paid (with tax if applicable),dividends paid (with tax if applicable), sale or repurchase of the company's stock,sale or repurchase of the company's stock, net borrowings,net borrowings, interests paid & other borrowing costs (incl. certain leasing interests paid & other borrowing costs (incl. certain leasing

related payments),related payments), repayment of debt principal, including capital leases.repayment of debt principal, including capital leases.

Investing activitiesInvesting activities:: Payments resulting from purchase or sale of a long term asset Payments resulting from purchase or sale of a long term asset

(assets can be land, building, equipment, marketable (assets can be land, building, equipment, marketable securities, etc.)securities, etc.)

Payments related to mergers and acquisition.Payments related to mergers and acquisition. (Under certain regimes) loans made to suppliers or received (Under certain regimes) loans made to suppliers or received

from customersfrom customers

Documents

Robert Uberman, Financial Management, KA im Frycza Modrzewskiego 1