chapter 8 - finance (3)

8/13/2019 Chapter 8 - Finance (3)

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Chapter 8

ACCOUNTING &


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Learning Objectives:

-determine the difference between financialaccounting and managerial accounting- explain the sources of business finance in anorganization- appreciate the need for effective financialmanagement in business


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Learning Outcome:

After studying this chapter successful studentshould be able to; -Differentiate financial accounting and managerialaccounting . - State the various financial statements and its importance.-Understand purpose of budget-Identify five types of short-term and five types of long-

term financial sources


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Chapter Outline

8.1 Define accounting and finance 8.2 Differentiate between financialaccounting vs managerial accounting8.3 Financial statements Balance sheet,Income Statement, Cash Flow Statement,Budget

8.4 Sources of funds Short term (operatingexpenditure) and long-term (capitalexpenditure)


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8.1 What Is Accounting?

A comprehensive system for collecting,analyzing and communicating financialinformation

Bookkeeping: the recording oftransactions

Users of Accounting Information:

Business managers Employees and unions Investors and creditors Tax authorities Government regulatory agencies


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8.2 Financial Accounting VSManagerial Accounting

Financial Accounting field of accounting that

informs external users of a companys financial

information

shareholders, banks and suppliers (reporting past

information about a business)

- using balance sheet, profit & loss statement, cashflow report to cover certain financial period. Eg:Balance sheet for the year ending 2010 of thecompany is printed in the shareholders annualreport.


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Managerial Accounting field of accounting thatserves internal users of a companys financial

information.

- Detailed internal accounts cash flow monitoring -monthly basis, setting financial targets(reporting on-going business performance for futuredecisions) done as of when needed, not following

financial period.Eg: Purchasing dept using monthly material costs to

negotiate price with supplier.

8.2 Financial Accounting VSManagerial Accounting


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8.3 Financial Statements Financial statements provide managers

with essential information they need toevaluate the liquidity position of anorganization its ability to meet currentobligations and needs by convertingassets into cash, the firms profitability,

and its overall financial health.


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8.3 Financial Statements

1. Balance sheet statement of a firms financialposition - what it owns and the claims against its assets- at a particular point in time.

o Similar to a photograph of the firms assets together withits liabilities and owners equity at a specific moment intime


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1. Balance sheet Supply detailed information about: Assets

Current assets: Cash/assets that can be converted into cash within ayear

Fixed assets: Capital that has long-term use or value Intangible assets: Patents, trademarks, copyrights, etc. Liabilities

Current liabilities: Debts that must be paid within one year, includingaccounts payable

Long-term liabilities: Debts not due for at least a year Owners Equity

Paid-in (invested) capital Retained earnings (net profits)


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1. Balance sheet


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2. The Income Statement - Is afinancial record summarizing a firms financial

performance in terms of revenues, expenses, andprofits over a given time period. Reports the firmsprofit or loss results.

Sometimes called a profit and loss, or P&L statement,begins with total sales or revenues generated duringa year, quarter, or month


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2. Income Statement(Profit and Loss Statement)

Supply detailed information about: Revenues: The funds that flow into a business fromthe sale of goods or services Cost of revenues: Shows the costs of obtaining therevenues from other companies during the year Cost of goods sold: Costs of obtaining materials tomake products sold during the year Gross profit: Considers revenues and cost ofrevenues from the income statement Operating expenses : Resources that must flow outof a company if it is to earn revenues


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2. Income Statement(Profit and Loss Statement)


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Income Statement


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3. Statement of Cash Flow - Providesinvestors and creditors with relevant information

about a firms cash receipts and cash payments forits operations, investments, and financing during anaccounting period.

presents information on its sources and uses of cash.


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3. Statement of Cash Flow Supply detailed information about: Cash Flows from Operations : Concerns mainoperating activities: cash transactions involved inbuying and selling goods and services. [Cash fromcustomers - cash paid in carrying out the firmsoperating activities] Cash Flows from Investing : Net cash used in orprovided by investing. [Cash paid to acquire noncurrentassets cash from any sale of noncurrent assets] Cash Flows from Financing : Net cash from allfinancing activities. [Cash from issues of long-term debtor new capital dividends paid out]

f f f


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Inflows and Outflows ofCash


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3. Statement of Cash Flow


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Microsofts Cashflow

Examine the cash flow of the company for each year. What

information does this provide for the company?


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Purpose of Budget :

-Predictions about the future enable an organization to

determine its objectives & make plans to achieve them

-To set targets which will enable objectives to be achieved

e.g. sales volume, for revenue & spending limits to control

costs, effective allocation of resources

-Monitor performance to ensure that targets are beingachieved & to enable corrective action to be taken where

this is not happening (Eg: Advertising expenditure more

than budget?)


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4. Sales Budget

Examine the cash position of the company by month in terms of total

cash receipts. What information does this provide for the company?


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Financial Statements-Basic Accounting Equation

Assets Liabilities = Owners Equity Balance Sheet

Revenues Expenses = Profit (or Loss)

Income Statement

Cash In and Cash Out from Operating,

Investing and Financing

Statement of Cash Flows

Estimate Actual = Variance

Budget


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Rapid Review - True or False

The four principle business activities of a business firm are(a) establishing goals and strategies (b) obtaining financing

(c) making investments (d) conducting operations

An income statement provides information about a firms cash -generating ability.

An income statement provides information about a firms

profitability. Cash-generating ability information isprovided by the Statement of Cash Flows.

Major purposes of a budget is to make predictions,

To set targets and to control financial performance.


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Group DiscussionAssume you and your friends havestarted your own business using thetraining that you have received atcollege and the experience you andyour friends have gained while workingpart time in a small business organization.Now the business is doing well and

you and your friends plan to expandthe business. Find a suitable sourcesof funds to finance your businessexpansion.


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8.4 Sources Of Funds

Short term funds

Long term funds

Categorized according to length of time it is required for...


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8.4 Short Term Funds

Working capital Trade credit Bank Loan Bank Overdraft Commercial paper


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8.4 Short term fundsa Working Capital

- the difference between the firms current assets

(stocks/inventories in hand, cash balances) and current

liabilities (loans, trade credit given by supplier)

- indicates the firms ability to pay off short -term debts to

outsiders (suppliers & banks)

- liquid fund to maintain short term cash flow


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4.1 Short term funds b) Trade Credit

- good-faith agreement- when a company buys products or

supplies on credit from its suppliers (postponingpayment)

E.g: Open-Book Credit- form of trade credit in which sellers ship merchandiseon faith that payment will be forthcoming.

Other documented agreement- promissory notes (legaldoc stating amt to be paid before shipment) & tradedraft (doc stating date & amt due, signed by theowner)


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Example


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c) Bank Loan- Fixed amount given for fixed period of time- If size & duration increase -collateral (form of security-

legal assets) required by lender

- In case non-payment occur, banks earn outstandingloan value by selling asset (secured for loan)

d) Bank overdraft

- Business takes out more than it has banked- Withdraw limits set with interest payment for each

amount- Used when business face short term cash flow

problems

8.4 Short term funds


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8.4 Short term funds e) Commercial Papershort-term securities, or notes, containing a

borrower's promise to pay.

Buying companies pays less than face value After maturity, issuing company buys back atface valueMatures in 270 days or less.

Eg: Co A issue comm paper at face value RM100,000. Co Bbuy & pay less (RM90,000). End of 90days, Co A buy back atface value (RM100,000). Co B gets profit (buy amt less thansell= RM10,000) and Co A gets lower interest rate thanborrowing fm bank.


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8.4 Long term funds

Venture capital Debt Financing - Corporate Bonds Debt Financing - Long term loans Equity Financing/Investment

Capital Hybrid Financing


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8.4 Long term fundsa) Venture Capital outside equity financing provided in

return for part ownership of the borrowing firm.- Made available by venture capital companies- Usually for new small business undergoing rapid growth

potential (difficulty to convince commercial banks onfuture prospect)

- Due to high risk of investment, demand I/rates higher onreturns


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8.4 Long term funds Debt Financing

- used to cover long-term expenses

such as assets (generally repaid inmore than one year). 2 types:

- Corporate Bonds

- Long term loans


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8.4 Long term funds b) Corporate Bonds

- method of raising money - issuing organization

borrows from an investor and issues a written

pledge (IOU) to make regular interest payments& repay borrowed amount later.

- Terms of a bond (in contract) - amount to be

paid, the interest rate, and the maturity date*IOU= promise by issuer to pay buyer a certain amount of $$ by specific

time in future with interest rate.


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Examples- Bonds
http://pptbusiness.net/more-images-Common-Stock-Trading-2-4498.html


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8.4 Long term funds

c) Long-Term Loans- usually issued by commercial banks. (Eg:

CIMB, RHB etc)

- financial managers try to time their borrowingto take advantage of drops in interest rates.- I/R is negotiated between borrower & lender.

Some banks have fixed rate/ floating rate.

f


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8.4 Long term funds

d) Investment Capital (Equity Financing) use ofcommon stock and/or retained earnings to raise

long-term funding (buy land, building and

equipment)

i. Common Stock selling ownership of company toraise money for investment/pay debt

- stock owners get appreciation (increase in mktvalue) or dividend( income after deduct taxes)

ii. Retained Earnings reinvesting profits in thecompany rather than issue a dividend


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Example Commonstock certificate

8 4 Long term funds


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8.4 Long term funds e Hybrid Financing

- Preferred Stock Preferred stock is a "hybrid" because it

has some of the features of both corporate bonds and

common stocks.

- Like bonds, payment is fixed (e.g: $3 per share per year)

but unlike bonds, it never matures (bonds have a maturity

period)

- Preferred Stockholders of have first right over common

stockholders to dividends (Preferred stockholders get

dividends first)

- Corporate may withhold dividends during lean times


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Example- Preferredstock certificate


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THE END

chapter 8 - finance (3)

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