4th class

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TOPIC

FINANCIAL

ASPECTS IN

BUSINESS PLAN

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 _{Company assets}

 Managing the Financial Function

 _{Depreciation and amortization}

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Company assets

 A piece of property or equipment purchased

exclusively or primarily for business use. Business assets span many categories, such as vehicles, real estate, computers, office furniture and other fixtures. Much of the start-up capital for many

businesses goes toward the purchase of this type of asset. Business Assets are listed on the firm's balance sheet as items of ownership.

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Sources of company assets

 Debt: is an obligation owed by one party (the

debtor) to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor

 _Short-term  _{Long term}

 Equity: the value of an ownership interest in

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 The cost of any physical asset, such as plant or machinery, is written off over its lifetime. This is called depreciation and is a non-cash expense.

Depreciation

 _{Firms use one of these for depreciating}

an asset:

_{Straight line method}

_{Accelerated depreciation method}

Depreciation and

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 Amortization expenses are related to the writing off of the value of intangible

assets, such as:

 Goodwill, Patents, Licenses, etc.

Amortization

Depreciation and

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Three Fundamental Decisions in Financial Management

 _{The capital budgeting decision}_{: Which}

productive assets should the firm buy?

 _{A good capital budgeting decision is one}

in which the benefits are worth more for the firm than the cost of the assets.

The Role of the Financial

Manager

 _{The financing decision}_{: How should the firm}

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Three Fundamental Decisions in Financial Management

 _{Financing decisions involve trade-offs}

between advantages and disadvantages of debt and equity financing.

 _{Working capital management decisions}_{: How}

should day-to-day financial matters be managed?

The Role of the Financial

Manager

 _{The mismanagement of working capital can}

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The Balance Sheet

This financial statement identifies all the assets and liabilities of a firm at a point in time.

 _{Left side of the balance shows all assets}

the firm owns and uses to generate revenues.

 _{Right side represents the liabilities of the}

firm – money that the firm has borrowed from both creditors and shareholders.

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Exhibit 3.1: Diaz Mfg Balance

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 _{Balance sheet also lists the capital raised from}

its shareholders.

 _{Shareholders of the firm’s common equity are}

listed last.

 _{Shareholders will be paid with whatever}

remains after paying all other suppliers of funds.

 _{Assets listed in order of their liquidity.}

 _{Liabilities listed in order in which they must be}

paid.

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Current Assets and Liabilities

 _{Current assets include all assets likely to be}

converted to cash within a year (or within an operating cycle).

 _{These include cash and marketable}

securities, accounts receivables, and inventory.

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Current Assets and Liabilities

 _{Current Liabilities include all liabilities that}

have to be paid within a year.

 _{Bank loans and other borrowings with}

less than a year’s maturity, accounts payables, accrued wages and taxes

The Balance Sheet

Net working capital= Total current assets

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Net working capital example - Diaz Manufacturing

Total current assets = $1,039.8 million Total current liabilities = $377.8 million Net working capital =?

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Inventory Accounting

 _{FIFO (First in first out) refers to practice of}

recognizing a sale as being made up of inventory purchased earlier.

 _{LIFO (Last in first out) calls for firm to attribute any}

sale made to the most recently acquired.

 _{Book Example?}

 _{Inventory (least liquid of current assets)}

usually reported in one of two ways on balance sheet.

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Inventory Accounting

 _{During rising prices, FIFO reporting leads to}

higher current asset value and higher net income.

 _{Firms may switch from one to another only}

under extraordinary circumstances and not frequently.

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Long-Term Assets

 _{Intangible assets also listed here.}

 _{Goodwill, patents, copyrights, etc.}

 _{Real assets firm acquires to produce its}

products and generate cash flows.

 _{Land, buildings, plant and equipment.}

The Balance Sheet

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Long-Term Assets

 _{All long-term real assets that deteriorate with use are} depreciated.

 _{Intangible assets are amortized.}

 _{Depreciating assets allow a firm to lower taxable income} and reduce taxes.

 _{Firms are allowed to depreciate assets}

using straight line method or accelerated depreciation method allowed by IRS.

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Long-Term Liabilities

 _{Long-term debt of the company.}

 _{Includes bank loans, mortgages, and bonds}

with a maturity of one year or longer.

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Equity – There are two sources of equity funds

 _{Preferred Equity}

_{Has features that make it a}

combination of a fixed income security and an equity security.

 _{Common Equity}

_{Common equity represents the true}

ownership of the firm.

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More Balance Sheet Accounts

 _{Retained earnings}

_{Results from funds the firm has}

reinvested from its earnings.

_{These funds are not cash–they already}

have been put to work.

 _{Treasury stock}

_{This account reflects the value of}

the shares that the firm has repurchased from investors.

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The Income Statement

 _{Measures the profitability of a firm for any}

reporting period.

 Revenues represent value of products and services sold by firm–include both cash and credit sales.

 Expenses range from cost of producing goods for sale and asset utilization costs- depreciation or amortization.

 _{Net income = Revenues – Expenses (3.3)}

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Exhibit 3.2: Diaz Mfg Income

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The Income Statement

Revenues = $1,563.7 million Expenses = $1,445.2 million Net Income = ?

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 The cost of any physical asset, such as plant or machinery, is written off over its lifetime. This is called depreciation and is a non-cash expense.

The Income Statement: Depreciation

 _{Firms use one of these for depreciating}

an asset:

_{Straight line method}

_{Accelerated depreciation method}

 _{Firms allowed to use one for internal purposes}

The Income Statement

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 Amortization expenses are related to the writing off of the value of intangible

assets, such as:

 Goodwill, Patents, Licenses, etc.

The Income Statement: Amortization

 _{It is also a non-cash expense like depreciation.}

The Income Statement

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Extraordinary Items

 _{Extraordinary Items refer to income or}

expenses associated with events that are not expected to happen on a regular basis.

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 _{Earnings before interest, taxes, depreciation and}

amortization (EBITDA) .

 Earnings generated from operations prior to payment of expenses not directly connected to production of products.

Bottom Line Accounts

 _{After netting out the expenses related to}

depreciation and amortization, we arrive at earnings before interest and taxes (EBIT).

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 _{Subtracting taxes from EBT yields net}

income or net income after taxes.

 _{This amount tells us amount available}

to management to pay dividends, pay off debt, or reinvest in firm.

Bottom Line Accounts

 _{Earnings before taxes (EBT) represents the}

taxable income for the period.