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Managerial Finance
Magister Manajemen-Universitas Gunadarma-1Budi Hermana
Program Magister Manajemen Universitas Gunadarma
Manajemen Keuangan
Budi Hermana
Refferences:Principles of Managerial Finance, Lawrence J. Gitman, Harper Collins Publishers
Managerial Finance
Magister Manajemen-Universitas Gunadarma-2Budi Hermana
Chapter 1
The Role of Finance and The Financial Manager
Managerial Finance
Magister Manajemen-Universitas Gunadarma-3Budi Hermana
The Role of Finance and The Financial Manager
Finance? The art and Science of managing money
Concerned with the process, institution, markets, and instrument involved in the transfer of money among and between individuals, businesses, and governments
Areas&Opportunities?
Financial Services
Managerial Finance
The area of finance concerned with the design and delivery of advice and financial product to individual, business, and governments
concerned with the duties of the financial manager in the business firm.
Actively manage the financial affairs of many tipes of business- financial and non-financial, private and public, large and small, profit-seeking and not-for-profit
Task?
Budgeting
Financial forecasting
Cash management
Credit administration
Investment Analysis
Funds procurement
Managerial Finance
Magister Manajemen-Universitas Gunadarma-4Budi Hermana
Basic Forms Of Business Organization
Sole Proprietorship
Partnerships
Corporations
A Business owned by one person and operated for his or her own profit
Small firm, unlimited liability
A Business owned by two or more persons and operated for profit
Written contract (article of partnership), unlimited liability,Limited partership
An Intangible business entity created by law (often called a “legal entity”)
Stockholders, board of directors, Chief executive officer (CEO)
Managerial Finance
Magister Manajemen-Universitas Gunadarma-5Budi Hermana
Basic Forms Of Business Organization
Legal Form
Sole Propriatorship Partenrship Corporation
Stren
gth
•Owner receives all profits (as well as losses)•Low organizationak costs•Income taxed as personnel income of proprietor•Secrecy•Ease of dissolution
•Can raise more more funds than sole proprietorships•Borrowing power enhanced by more owners•More available brain power and managerial skill•Can retain good employees•Income taxed as personnel income of partners
•Owners have limited liability which guarantees they cannot lose more than invested•Can achieve large size due to marketability of stock (ownership)•Ownership is readily transferable•Long-life of firm- not dissolved by detah of owners•Can hire professional managers•Can expand more easily due to access to capital markets•Receives certain tax advantages
Weakn
esses
•Owner has unlimited liability-total wealth can be taken to satisfy debts•Limited fund-raising power tends to inhibit growth•Propietor must be jack-of-all-trades•Difficult to give employees long run career opportunity•Lacks continuity when propitor dies
•Owners have unlimited liability and may have to covers debts of other less financially sound partners•When a aparter dies, partership is dissolved•Difficul to liquidate or transfer partership•Difficult to achieve large-scale operations
•Taxes generally higher since corporate income is taxed and dividends paid to owners ara again taxed•More expensive to organize than other business forms•Subject to greater government regualation•Employees often lack personnel interest in firm•Lack secrecy since stockholders must receive financial reports
Managerial Finance
Magister Manajemen-Universitas Gunadarma-6Budi Hermana
The Managerial Finance Function
Managerial Finance is closely related to, but quite different from, Economics and Accounting ?
Organizational View
Since most business decisions are measured in financial terms, the financial manager plays a key role in the operation of the firm
The size and importance of the managerial finance depend on the size of the firm
In small firm the finance function generally performed by the accounting department
In medium-to-large-size firm
Separate department, vice-president of finance (CFO),Treasurer, Controller
The officer responsible for the firm’s financial activities: financial planning and fund raising, managing cash, making capital expenditure decision, managing credit activities and managing the investment portfolio
The officer responsible for the firm accounting activities: tax management, data processing, and cost and financial accounting
Financial
Manager
Managerial Finance
Magister Manajemen-Universitas Gunadarma-7Budi Hermana
The Managerial Finance Function
Relationship to Economics
The Financial Manager must understand the economic framework, and be alert to the consequences of varying levels of economic activity and changes in economic policy ?Must be able to use economic theories as guidelines for efficient busineness operation
Supply-demand analysis Profit-Maximazing strategies Price Theory
Marginal Analysis
Economic principle which states that financial decisions should be made and actions taken only when the added benefit exceed the added costs
Benefits with new computer $100.000Less: Benefits with old computer 35.000 (1) Marginal (Added) benefits $65.000
Cost of new computer $80.000Less: Proceeds from sale of old com 28.000 (2) Marginal (added) costs $52.000
Net Benefit [(1) – (2)] $13.000
Example
Managerial Finance
Magister Manajemen-Universitas Gunadarma-8Budi Hermana
The Managerial Finance Function
Relationship to Accounting
The finance and accounting function are closely related and generally overlap; indeed, managerial finance and accounting are not often easily distinguishable. In smal firm the controller often carries out of the finance function, and in large firms many accountants are intimately involved in various finance activities ?Two Basic Differences
Emphasis of cash flows Decision Making
Accrual Method vs Cash Method
Recognizes revenue at the point of sale and recognized expenses when incurred
Recognized revenues and expenses only with respect to actual inflow and outflows of cash
Accounting View Financial View
Income statementABC CorporationFor the year xxxx
Sales Revenue $100.000Less: Costs 80.000
Net Profit $ 20.000
Income statementABC CorporationFor the year xxxx
Cash inflow $ 0Less: Cash Outflow 80.000
Net Profit ($80.000)
The accountant devotes the majority of attention to the collection and presentation of financial data
The financial manager evaluates the accountant’s statements, develops additional data, and makes decisions based on subsequent analyses
This does not mean that accountant never make decision, or that financial manager never gather data
Managerial Finance
Magister Manajemen-Universitas Gunadarma-9Budi Hermana
The Managerial Finance FunctionKey Activities of The Financial Manager
Primary Activities
Performing Financial Analysis and Planning
Making Investment Decisions
Making Financing Decision
1. Transforming financial data into a form that can be used to monitor the firm’s financial condition
2. Evaluating the need for increased (or reduced) productive capacity
3. Determining what additional (or reduced) financing is required
Determine both the mix and the type of assets found on the firm’s balance sheet
The left-hand side of the balance sheet
Deals with The right-hand side of the balance sheet and involves two major area:
1. Most appropriate mix of short-term and long-term financing must be established
2. Which individual short-term or long-term sources of financing are the best at given
point in time
Balance Sheet
CurrentAssets
FixedAssets
CurrentLiabilities
Long-TermFunds
Performing Financial Analysis
and Planning
Mak
ing
Inve
stm
ent
Dec
isio
n
Making F
inancing
Decisio
n
Managerial Finance
Magister Manajemen-Universitas Gunadarma-10Budi Hermana
The Managerial Finance FunctionGoal of The Financial Manager
Maximize Profit?
Some pepople believe that the owner’s objective is always to maximize profits
The Financial Manager are expected to make a major contribution to the firm’s overall profit
For Corporation, profit are commonly measured in terms of Earnings per Share (EPS)
EPS:The amount earned during the period on each outstanding share of common stock
period’s total earnings avaliable for the firm’s common stock holders
The number of shares of common stock outstanding Investment year 1 year 2 year 3 total
X $1.40 $1.00 $0.40 $2.80 Y 0.60 1.00 1.40 3.00
Earning per share (EPS)
Profit maximization fails for reason:1. Timing of return2. Cashflow avaliable to stockholder3. Risk
The chance that actual outcomes may differs from those expected
Basic primises in managerial finance is that trade-off exist between return (cash flow) and risk
Return and risk are in fact the key determinant of share price– which represents the wealth of the owners in the firm
Stockholder are risk-averse ?
√
Managerial Finance
Magister Manajemen-Universitas Gunadarma-11Budi Hermana
The Managerial Finance FunctionGoal of The Financial Manager
Maximizing Shareholder Wealth
The goal of the financial manager is to maximize the wealth of the owners for whom the firm is being managed
Measured by the share price of the stock
Timing of return (cash flow)
magnitude
Risk
FinancialManager
Financial DecisionAlternative or action
Return?Risk?
Increase SharePrice ?
Yes
Yes
Reject
Acept
Financial decisions and share price
Managerial Finance
Magister Manajemen-Universitas Gunadarma-12Budi Hermana
The Managerial Finance FunctionGoal of The Financial Manager
The Agency Issue
The goal of the financial manager should be to maximize the wealth of the owners of the firm
Management can be viewed as agents of the owners who have hired them and given them decision-making authority to manage the firm for the owners’ benefit
In theory In practise
Most financial managers would agree with the goal of owner wealth maximization
However, managers also concern with their personnel wealth, job security, lifestyle, and privilege
Agency problem
The likelihood that managers may place personnel goals ahead of corporate goals
Agency Cost
Monitoring expenditure
Bonding expenditure
Structuring expenditure
Opportunity cost
To prevent or minimize problem
Audit&control
Fidelity bond
Managerial compensation: stock option, performance share, cash bonuses
Managerial Finance
Magister Manajemen-Universitas Gunadarma-13Budi Hermana
The Managerial Finance FunctionGoal of The Financial Manager
The Role of Ethics
Ethics – Standard of conduct or moral judgement example
Corporate Ethics Guidelines and Policies
Ethics and share price
Issues Update
http://www.cfainstitute.org
Good Corporate Governance
Corporate Social Responsibility
Certified Financial Analyst
http://www.kpk.go.id/modules/edito/content.php?id=27 http://www.bi.go.id/NR/rdonlyres/2246113B-DC63-4731-8558-3693A6254962/3449/pbi8406.pdf
Responsibility
Fairness
Transparency
Accountability
www.fcgi.or.id
http://www.goodyear-indonesia.com/social_responsibility.html http://www.telkom.co.id/pojok-media/siaran-pers/telkom-memperoleh-penghargaan-corporate-social-responsibility.html
Managerial Finance
Magister Manajemen-Universitas Gunadarma-14Budi Hermana
Chapter 2
The Operating Environment ofThe Firm
Managerial Finance
Magister Manajemen-Universitas Gunadarma-15Budi Hermana
Business TaxationOrdinary Income
Income earned through the sale of a firm’s goods and services
Corporate Tax Rate Schedule
Range of taxable income Base Tax + (rate x amount over base bracket)$ 0 to $ 50.000 $ 0 + (15% x Amount over $ 0) 50.000 to 75.000 7.500 + (25 x Amount over 50.000) 75.000 to 100.000 13.750 + (34 x Amount over 75.000)100.000 to 335.000 22.250 + (39 x Amount over 100.000) over $335.000 113.900 + (34 x Amount over 335.000)
Tax Calculation
Example
PT X has before-tax earnings of $250.000 Total Tax due = $22.250 + [0.39 x ($250.000-100.000)] = $22.250 + (0.39 x $150.000) = $22.250 + $58.500 = $80.750
Indonesia ?
Managerial Finance
Magister Manajemen-Universitas Gunadarma-16Budi Hermana
Business TaxationOrdinary Income
Average Tax Rates
A Firm’s taxes divided by its taxable income
Average tax rate ranges from 15 to 34%, reaching 34% when taxable income ≥ $335.000
Average tax rate for PT X = $80.750 / $250.000 = 32.3%
Marginal Tax Income
The rate at which additional income is taxed
Pretax Tax Average Tax rate Income Liability [(2) : (1)] (1) (2) (3)
$ 50.000 $ 7.500 15.00% 75.000 13.750 18.33% 100.000 22.250 22.25% 200.000 61.250 30.63% 335.000 113.900 34.00% 500.000 170.000 34.00% 1.000.000 340.000 34.00% 2.500.000 850.000 34.00%
If PT X’s earnings go up to %300.000, the marginal tax rate on the additional $50.000 of income will be 39%. The company will therefore have to pay additional taxes of $19.500 (0.39 x $50.000)
Total Taxes on the $300.000 = $80.750+$19.500 = $100.250
Using Taxe rate schedule:Total Taxes = $22.250+[0.39x($300.000 - $100.000)]
= $22.250+$78.000 =$100.250
Managerial Finance
Magister Manajemen-Universitas Gunadarma-17Budi Hermana
Business TaxationOrdinary Income
Interest and Dividend Income
Interest received by the corporation is included as ordinary income
Devidend received on common and preferred stock held in other corporation, and representing less than 20% ownership in them, on the other hand, are subject to a 70% exclusion for tax puposes
Only 30% of these intercorporate dividends are included as ordinary income
Avoid tripletaxation
Example
Charnes Industries received $100.000 interest on bonds it held and $100.000 in dividends on common stock it owned in other corporation. The firm is subject to a 40% marginal-tax rate and is eligible for 70% exclusion on its intercorporate dividend receipts
InterestIncome
DividendIncome
(1) Before-tax amount Less: Applicable Exclusion
Taxable amount(2) Tax (40%)
After-tax amount (1)-(2)
$100.000 0
$100.000 40.000
$ 60.000
$100.000 70.000
$ 30.000 12.000
$ 88.000
(0,70x$100.000) =
Indonesia ?
Managerial Finance
Magister Manajemen-Universitas Gunadarma-18Budi Hermana
Business TaxationOrdinary Income
Tax-Deductible Expenses
Corporation are allowed to deducti operating expenses. The tax-deductible expenses reduces their after-tax cost.
Advertising expenses
Sales commision
Bad debt
Interest expenses
Insurance?
CSR?
Example
Company X and Y each expect in the coming year to have earnings before interest and taxes of $200.000. Company X during the year will have to pay $30.000 in interest; Company Y has no debt and therefore will have no interest expenses. Calculate the earnings after taxes for these two firm, which pay 40% tax on ordinary income
InterestIncome
DividendIncome
Earning before interest&taxLess: Interest expenses
Earnings before taxLess: Taxes (40%)
Earnings after taxes
$200.000 30.000
$170.000 68.000
$ 102.000
$200.000 0
$200.000 80.000
$120.000
Difference in earning after taxes $18.000
Dividends are not tax-deductible expense
Managerial Finance
Magister Manajemen-Universitas Gunadarma-19Budi Hermana
Business TaxationCapital Gains
Amount by which the price at which an asset was sold exceeds the asset’s initial purchase price
For corporation, capital gain are added to ordinary corporate income and taxed at the regular corporate rates
Example
The Ross Company has operating earnings of $500.000 and hast just sold for $40.000 a capital asset initially purchased two years ago for $36.000.
Since the asset was sold for more than its initial purchased, there is capital gain of $4000
($40.000 sale price - $36.000 initial purchase price)
The corporation’s taxable income will total $504.000
($500.000 ordinary income plus $4.000 capital gain)
Since this total is above$335.000, the capital gain will be taxed at the 34%, resulting in tax of $1.360
(0,34 x $4000)
Managerial Finance
Magister Manajemen-Universitas Gunadarma-20Budi Hermana
Financial Institutions and Markets: An Overview
Financial institutions and markets are important elements in a firm’s operating environment ?
Firms that require funds from external sources can obtain them in three ways
Financial Institution
Financial Market
Private placement
That accept savings and transfers them to those needing funds
Organized forum where the suppliers and demanders of various type of funds can make transaction
Managerial Finance
Magister Manajemen-Universitas Gunadarma-21Budi Hermana
Financial Institutions and Markets: An Overview
Financial Institution
An intermediary that channels the savings of
individuals, businesses, and governments into loans or investment
Major Financial InstitutionsUSA Indonesia
Commercial Bank
Savings Bank
Savings and Loan
Credit Union
Life Insurance Company
Pension Fund
Mutual Fund
Accepts both demand (checking) and time (savings) deposits. Makes loans directly to borrowers or through the financial market
Not hold demand (checking) deposits. Generally lends or invest funds through financial markets
Similar to a saving bank. Also raise capital through the sale of securities. Lends funds for real estate mortgage loans and some funds are channeled into financial market
Deals primarily in transfer of funds between consumers. Accept members’ deposit and lends to other members
Receive premium payments that are placed in invesments to accumulate funds to cover future benefit payment
Money is sometimes transferred directly to borrowers, but the majority is lent or invested via the financial markets
Pools funds of savers and makes them available to business and government demanders. Creates a portfolio of securities to achieve a specified investment objective
Bank Umum
BPR
Asuransi
Dana Pensiun
Reksa dana
Modal Ventura
Anjak-Piutang
Sewa guna usaha
Managerial Finance
Magister Manajemen-Universitas Gunadarma-22Budi Hermana
Financial Institutions and Markets: An Overview
Financial Markets
Provide a forum in which suppliers of funds and demanders of loans and investments can transact business directly
Money Market
Capital Market
Primary market
Secondary Market
Transactions in short-term debt instruments, or marketable securities, take place in the money market
Long-term securities (bonds and stocks) are traded in the capital market
Financial market in which securities are initially issued; the only market in which the issuer is directly involved in the transaction
Financial market in which preowned securities (those that are not new issues) are traded
Managerial Finance
Magister Manajemen-Universitas Gunadarma-23Budi Hermana
Financial Institutions and Markets: An Overview
Financial Markets
Flow of funds for financial institutions and market
FinancialInstitutions
FinancialMarkets
Suppliers ofFunds
Demanders ofFunds
Funds Funds
Funds Funds
Fu
nd
s
Deposits/Shares Loans
Securities Securities
Secu
rities
Funds
Securities
PrivatePlacement
Managerial Finance
Magister Manajemen-Universitas Gunadarma-24Budi Hermana
Financial Institutions and Markets: An Overview
The Money Market
A financial relationship created between suppliers and demanders of short-term funds, which have maturities of one year or less
Most money market transactions are made in marketable securities
Short-term debt instruments, such as US Treasury Bill, Commercial Papers, and Negotiables Certificate of Deposits issued by government, business, and financial institution
Indonesia?
Certain individuals, businesses, governments, and financial institution have temporary idle funds that they wish to place in some type of liquid asset or short-term, interest earning instrument
Other individuals, businesses, gevernments, and financial institution find themselves in need of seasonal or temporary financing
MoneyMarketexists
Managerial Finance
Magister Manajemen-Universitas Gunadarma-25Budi Hermana
Financial Institutions and Markets: An Overview
The Capital Market
A financial relationship created by institutions and arrangements that allows suppliers and demanders of long-term funds- funds with maturiry of more than one year- to make transactions.
The backbone of the capital market is formed by the various securities exchange that provide a forum for debt and and equity transaction
Key Securities
Bond
Long-term debt instrument used by business and governments to raise large sums of money
Common stock
Units of ownership interest, or equity. In a corporation
Common stockholders expect to earn a return by receiving Dividend
Periodic distribution of earnings to the owners of stock in a firm
Preferred stock
A special form of ownership having a fixed periodic dividend that must be paid prior to payment of any common stock dividends
Managerial Finance
Magister Manajemen-Universitas Gunadarma-26Budi Hermana
Financial Institutions and Markets: An Overview
The Capital Market
Major Securities Exchange
1. Organized Securities ExchangesProvide the marketplace in which firms can raise funds through the sale of new securities and in which purchasers can resell securities
Tangible organozations on whose premises outstanding securities are resold
New York Stock Exchange (NYSE)
Jakarta Stock Exchange (JSX)
To make transaction on the “floor”, individual or firm must own a “seat” on the exchange
For “listing”, a firm must file an application and meet a number requirements
Have at least 2000 stockholders with 100 ≤ shares
Min 1,1 million share of publicly held stock
Earning power of $2,5 million before taxes
Net tangible asset of $16 million
A total of $18 million in market value of publicly traded shares, etc
Persyaratan“listing”?
Managerial Finance
Magister Manajemen-Universitas Gunadarma-27Budi Hermana
Financial Institutions and Markets: An Overview
The Capital Market
Major Securities Exchange
2. The-Over-the-Counter Exchange (OTC)
Not an organization, but an intangible market for the purchase and sale of securities not listed by the organized exchange
The market price of OTC securities results from a matching of the forces of supply and demand for securities by traders known as dealer
National Association of Securities Dealers Automated Quotation (NASDAQ)
Sophisticated telecommunications system that provide current bid and ask prices on thousands of actively traded
The bid price is the highest price offered by dealer to purchase a given security
The ask price is the lowest price at which the dealer is willing to sell the security
Automatedmatched
Jakarta Automated Trading System(JATS) ?
Managerial Finance
Magister Manajemen-Universitas Gunadarma-28Budi Hermana
Interest Rates and Required Return
The level of funds flow between suppliers and demanders can significantly affect economic growth
Interest rates and required returns represent the costs of obtaining various forms of financing
?
?Growth results from the interaction of variety of economic factors, such as the money supply, trade balance, and economic policy, that affect the cost of money – the interest rate or required return
?The level of interest rate acts as regulating device that controls the flow of funds ?The lower the interest rate, the greater the funds flow and therefore the greater the economic growth, and vice versa
?
Managerial Finance
Magister Manajemen-Universitas Gunadarma-29Budi Hermana
Interest Rates and Required Return
Interest Rate Fundamentals
The compensation paid by the borrower of funds to the lender; from the borrower’s point of view, the cost of borrowing funds
Interest rate
Required Return
The level of return expected on equity investment
Ignoring risk factors, the nominal or actual interest rate (cost of funds) results from the real rate of interest adjusted for inflationary expectation and liquidity preferences
General preferences of investors for shorter-term securities
Rate that creates an equilibrium between the supply of savings and the demand for investments funds in perfect world, without inflation, where funds suppliers and demanders have no liquidity preferences, and all outcomes are certain
The actual rate of interest chargeb by the supplier of funds and paid by demander
DSo
S1
ko*
k1*
D
So
S1
Funds supplied/demandedSo=D S1=D
Re
al
Ra
te o
f In
tere
st
k1= k* + IE + IC1
k1= RF + IC1
Risk-freerate
RiskPremium
The required return on a risk-free asset, tipically a three-month US Treasury Bill (Obligasi Pemerintah)
Managerial Finance
Magister Manajemen-Universitas Gunadarma-30Budi Hermana
Interest Rates and Required Return
Term Structure of Interest Rates
The relationship between the interest rate or rate of return and the time to maturity
Annual rate of interest earned on a security purchased on a given day and held to maturity
Yield to maturity
Yield Curve
A Graph that depicts the relationship between the yield to maturity (y-axis) and the time to maturity (x-axis)
7
8
9
10
13
14
15
16
17
0 5 10 15 20 25 30
May 22, 1981
October 30, 1987
September 29, 1989
Inverted Yield CurveA Downward-sloping yield curve that indicates generally cheaper long-term borrowing costs than short-term borrowing costs
Normal Yield CurveAn upward-sloping yield curve that indicates generally cheaper short-term borrowing costs than long-term- borrowing costs
It reflects similar borrowing costs for both short- and longer-term loans
Managerial Finance
Magister Manajemen-Universitas Gunadarma-31Budi Hermana
Interest Rates and Required Return
Term Structure of Interest Rates
Theory of Term Structure
1. Expectation Hypothesis
Theory suggesting that the yield curve reflects investor expectations about future interest rates; an increasing inflation expectation results in upward-sloping yield curve, and vice versa
2. Liquidity Preference Theory
Theory suggesting that for any given issuer, long-term interest rates tend to be higher than sort-term rates due to the lower liquidity and higher responsiveness to general interest rate movements of longer term securities; causes the yield curve to be upward-sloping
3. Market Segmentation Theory
Theory suggesting that the market for loans is segmented based on maturity and that the sources of supply and demand for loans, within each segment, determine its prevailing interest rate; the slope of yield curve is determines by the geberal relationship between the prevailing rates in each segment
Example
Nominal interestRate, RFt
RealinterestRate, k*
InflationExpectation,IEt
Maturity, t (1) (2) [(1) - (2)]
3 Months
1 years
5 years
30 years
5,17%
6,51
8,38
9,05
2,00%
2,00
2,00
2,00
3,17%
4,51
6,38
7,05
Managerial Finance
Magister Manajemen-Universitas Gunadarma-32Budi Hermana
Interest Rates and Required Return
Term Structure of Interest Rates
Risk and Return
The expectation that for accepting greater risk, investors must be compensated with greater returns
Risk-Return Trade-off
An
nu
al R
etu
rn (
cost
to
issu
er)
Risk
US Treasury Bills
Prime-Grade Commercial Paper
Investment-Grade Notes
Investment-Grade Bonds
Medium-Grade Bonds
Preferred Stocks
Qualtiy Common Stocks
Speculative Common Stocks
Managerial Finance
Magister Manajemen-Universitas Gunadarma-33Budi Hermana
Chapter 3
Financial Statement
Managerial Finance
Magister Manajemen-Universitas Gunadarma-34Budi Hermana
The Stockholders’ Report
A Stockholder’s report summarizes and documents a publicly held corporation’s financial activities over the year. Who receives theses reports? What types of informastion do you think they typically include? Why are they important? ?
1. Regulator or Goverments2. Creditor (lenders)3. Owners4. Management
1. The letter to stockholdersEvents, management philosophy, strategy, and action
2. Financial statements(a) the income statemnet, (b) the balance sheet, (c) the statement of retained earnings, and (d) the statements of cash flows
3. Other featureFirm activities, new product, R&D, etc
An important vehicle for influencing owners’ perceptions of the company and its future outlook.
The stockholders’ report may effect expected risk, return, stock price, and the viability of the firm
?
Managerial Finance
Magister Manajemen-Universitas Gunadarma-35Budi Hermana
Basic Financial Statements
Income Statement
Provide a financial summary of the operating results during a specified period
Sales revenue
Less: Cost of goods sold
Gross profits
Less: Operating expenses
Selling expense
General and administrative expense
Depreciation expense
Total operating expense
Operating profits
Less: Interest expense
Net profits before taxes
Less: Taxes (rate = 40%)
Net profits after taxes
Less: Prefered stock dividends
Earning available for common stockholders
Earning per share (EPS)
$ 1.700
1.000
$ 700
330
$ 370
70
$ 300
120
$ 180
10
$ 170
$ 1,70
$ 80
150
100
ABC Corporation Income Statement ($000) for the year Ended December 31, 2000
The number of common stock= 100.000
Managerial Finance
Magister Manajemen-Universitas Gunadarma-36Budi Hermana
Basic Financial Statements
Balance Sheet
Summary statement of the firm’s financial position at given point in time
ABC Corporation Balance Sheets ($000)
Current assets Cash Marketable securities Account receivable Inventories Total current assetsGross fixed assets (at cost) Land and buildings Machinery and equipment Furniture and fixtures Vehicles Other Total gross fixed assets (at cost)Less: Accumulated depriciationNet fixed assets Total assets
Assets 2000 2001
$ 400 $ 300 600 200 400 500 600 900$ 2000 $ 1900
$ 1200 $ 1050 850 800 300 220 100 80 50 50$ 2500 $ 2200 1300 1200$ 1200 $ 1000$ 3200 $ 2900
December 31
Managerial Finance
Magister Manajemen-Universitas Gunadarma-37Budi Hermana
Basic Financial Statements
Balance Sheet
Summary statement of the firm’s financial position at given point in time
ABC Corporation Balance Sheets ($000)
Current liabilities Accounts payable Notes payable Accruals Total current liabilitiesLong-term debt Total liabilitiesStockholders’ equity Preferred stock Common stock- $1,20 par, 100000 shares outstanding in 2000&2001 Paid in capital in excess of par on common stock Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity
Liabilities and stockholders’ equity 2000 2001
$ 700 $ 500 600 700 100 200$ 1400 $ 1400$ 600 $ 400$ 2000 $ 1800
$ 100 $ 100 120 120
380 380 600 500$ 1200 $ 1100$ 3200 $ 2900
December 31
Managerial Finance
Magister Manajemen-Universitas Gunadarma-38Budi Hermana
Basic Financial Statements
Statement of Retained Earning
ABC Corporation Statement of Retained Earnings ($000) for the end yearEnded December, 2001
Retained earnings balance (january 1, 2001) $500Plus: Net Profit after taxes (for 2001) 180Less: Cash dividend (paid during 2001) Preferred stock ($10) Common stock ( 70) 80
Retanined earnings balance (Dec 31, 2001) $600
Reconciles the net income earned during a given year, and any cash dividends paid, with the change in retained earnings between the start and end of that year
Managerial Finance
Magister Manajemen-Universitas Gunadarma-39Budi Hermana
Basic Financial Statements
Statement of Cash Flows
ABC Corporation Statement of Cash Flows ($000) for the end yearEnded December, 2001
Cash Flow from Operating Activities Net Profits after taxes $ 180 Depreciation 100 Decrease in account receivable 100 Decrease in inventories 300 Increase in account payable 200 Decrease in accruals (100) Cash provided by operating $780Cash Flow from investment activities Increase in gross fixed asset ($300) Changes in business interest 0 Cash used for investment activities (300)Cash Flow from financing Activities Decrease in notes payable ($100) Increase in long-term debts 200 Changes in stockholders’ equity 0 Dividends paid (80) Cash provided by financing activities 20
Net increase in cash and marketable securities $500
Provides a summary of the firm’s operating, investment, and financing cash flows, and reconciles them with changes in its cash and marketable securities during the period of concern