Finance for Non-Finance_2012

7/30/2019 Finance for Non-Finance_2012

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Finance for Non-Finance

People

Finance for Non-Finance People

Better Together Breath School


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Overview of Finance

Overview of Financial Management

Financial Statements ( e.g. Balance Sheet,Cash Flows, Profit loss statement)

Overview of Working Capital

Overview of Accounting

Break Even Point Capital Budgeting

Investment Appraisal

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Meaning of Finance

Before we begin anything about finance, First of all lets

understand the origin of word Finance.

The world finance was originally a French word. Which is

adopted by English As The management of money.

Basically, finance is an art of managing various available

resources like money, assets, investments, securities etc.

At present we can't imagine a world without finance. It is the

soul of our economic activities.

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Definitions of Finance

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According Experts, Finance is a simple task of

providing the necessary funds required by thebusiness entities which are most favorable to achieve

their economic objectives.

According Entrepreneurs, finance is concerned withcash. And every business transaction involves cash

directly and indirectly.

In general Sense, Finance is the management of

money and other valuable, which can be easilyconverted into cash.


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Investment Opportunities

Profitable Opportunities

Optimal mix of funds

System of Internal Controls

Future Decision Making

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Features of Finance


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The financial management is the process of

putting the available funds to the best advantage

from the long term point of view of businessobjectives.

Financial management means planning, organizing

directing, and controlling the financial activities

like procurement and utilization of funds of

the enterprise.


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Functions of Financial

ManagementEstimation of capital requirements

Management of cash

Choice of sources of funds

Investment of funds

Financial controls

Disposal of surplus

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Overview of financial statement

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There are four financial statement a company uses toreport its financial condition and operation for a period

of time.

Balance Sheet

Income Statement

Statement of Shareholders equity

Statement of Cash flow


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Balance sheetA balance sheet describes the financial situation of acompany at a specific point in time. It has three parts.

Assets: - In financial accounting, assets are economicresources. These are thing of value owned orcontrolled by a business.

Liabilities: - Liabilities are amounts the business owesto other outside the business.

Shareholders Equity: - The claims of owner are calledshareholders equity.

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Assets LiabilitiesOwners

Equity


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Assets can be classified into two Categories.

Current Assets: - Are those assets which are held

for short time. E.g. Cash in hand, Cash at bank,

debtors, bill receivable, stock, Prepaid expenses.

Non-Current Assets: - Are those assets which are

acquired for long term in the business. Which are

increase the profit earning capacity of the

business. E.g. Land, Building, furniture,Machinery, and Vehicles etc.


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Income statement is also known as statement

of earnings, or the statement of operations, orthe profit and loss statement.

The Income Statement summarizes the resultsof a firms operation for a period of time. FourMajor types of items appear on incomestatement: -

Revenue

Expenses Gain Loss


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Revenues

Assets (cash or AR)created throughbusiness operations

Expenses

Assets (cash or AP)consumed throughbusiness operations

Net Income or (NetLoss)

Revenues - Expenses

What goods were sold orservices performed thatprovided revenue for thecompany?

What costs were incurredin normal operations togenerate these revenues?

What are the earnings or

company profit?

Shows the results of acompanys operationsover a period of time.

AR:A/cs receivable; AP:A/cs payableBack Next

ILLUSTRATION OF INCOME STATEMENT


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Cash FlowThus far, our focus has been on the two long-standing,

conventional financial statements the balance sheetand the income statement. We now turn our attentionto the statement of cash flows

The statement of cash flows is designed to provideinformation about a firms inflows and outflows ofcash during a period of time


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Working capital is the amount of money that a companyhas tied up in funding its day to day operations.

Stocks


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ValueAddition

FinishedGoods

AccountsReceivable

Cash Sales

AccountsPayable

Operating Cycle of Working

Capital

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In every business concern, We have to take somany decision. So We need to record all

accounting information.

What is Accounting ?

Accounting is a Finance support system that

records, classify and express the transaction inmonetary terms. And helps to monitor financial

performance & condition of the business.

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Balancesheet

(Closing)

Transaction

Journal

LedgerTrial

Balance

TradingAccount

Profit & lossA/c

BalanceSheet

(Opening)

Accounting Cycle

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Accounting EquationEach transaction that takes place in a business can be recorded

in the accounting equation. Which is describes as: -

Assets = Liabilities + Shareholders Equity

Contributed + Retained

Capital Earnings

Beginning retainedearning

+ Net Income

- Dividends

= Ending retained

earnings

Balance Sheet

Shareholders Equity

Income Statement

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Break Even Analysis

Definition: A technique used to examine the

relationship

between a firms sales, costs, and profits at various

levels

of output. It is sometimes termed cost-volume-profit

analysisBreak Even Point =

Fixed cost + Target Profit

Price Variable cost

=(Targeted Volume)

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Output, Q

Revenue,Cost

($)

TR

TC

Break Even Point

- EBIT(operating loss)

+ EBIT

(Operation profits)

FC

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Capital Budgeting

Capital budgeting is the process by which the firmdecides which long term investment to make.

The decision to accept or reject a capital budgeting

project depends on an analysis of the cash flowgenerated by the project and its cost.

The following three capital Budgeting decision

rules will be presented below: -

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Capital Budgeting decision rules

Net Present Value (NPV)

Internal Rate of Return (IRR)

Profitability Index (PI)

Payback (PB) Period


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NET PRESENT VALUE (NPV)

The NPV of a Capital budgeting projectindicates the expected impact of theproject on the value of the firm.

The NPV is calculated as the present valueof the projects cash inflows minus thepresent value of the projects cashoutflows.

NPV = (NCF)t/(1+k)t - NINV


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Internal Rate of Return (IRR)

The internal rate of return (IRR) of aCapital budgeting project is the discount

rate at which the NPV of a project equals

zero.

The IRR method indicate that a project

whose IRR is greater than or equal tothe firms cost of capital should be

accepted.


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Profitability Index (PI)

Profitability index is a index that attempts toidentify the relationship between the costs andbenefits of a proposed project through the use ofa ratio calculated as: -

PV of Future Cash Flows

Initial Investment

A Project whose PI is greater than orequal to 1 is considered acceptable


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Finance for Non-Finance_2012

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