Finance refresher course

Transcription

1 Finance refresher course Bertrand Groslambert Skema Business School A few tips to improve your comprehension of finance You don t need to be intelligent You don t need to be good at maths You only need to work hard and more important regularly (every week) Do the homeworks Read the materials 1

2 Course outline What s a firm from a financial perspective? Financial statements Net Working Capital (NWC) Time value of money Balance sheet ASSETS (investments) Current Assets Cash Accounts receivable Inventories Fixed Assets Machinery Land, etc, etc Other Assets Patents Goodwill TOTAL ASSETS = LIABILITIES (resources) Equity (shareholders) Preferred and Common stock Retained earnings Debt Long-Term Debt Long-term notes Mortgages Current Debt Accounts payable Accrued expenses Short-term notes TOTAL LIABILITIES 2

3 The balance sheet gives a picture of the firm What are the assets available to run the business? How were these assets financed? Now that we are given the assets, we can run the business and start to record our activity It s going to be recorded in the Income statement 3

4 Operating Activities Financing Activities Income Statement Sales - Cost of producing or acquiring product/services = Gross Profit - Operating Expenses marketing and selling expenses general and administrative expenses depreciation expenses = Operating Income - Interest expense = Earnings before taxes - Corporate taxes = Net Income Mysmallbusiness company was incorporated in August Money was raised at that time, equipments were purchased as well as frozen croissants. The company start its operations on Sept 1, 2012 and goes until Dec 31, Over this 4 months, it sells for $100 of croissants (warm not frozen ) destocking for $20 of its frozen croissants. In order to inform Skema students about its new business, it makes and distributes flyers for a cost of $8. On Dec 6, it decides to replenish its stock of frozen croissant and goes to Carrefour Antibes. Bus ticket costs $2. It buys for $20 of frozen croissants. You pay a 10% interest rate to your parents for the money they lent to you. Tax rate is 40%. All income and expenses are paid cash (no credit on sale) Write down the income statement for the period Sep 1, 2012 up to Dec 31, No dividend, all earnings are reinvested. Write down the balance sheet as of Jan 1,

5 Depreciation Depreciation is the process by which a company gradually records the loss in value of a fixed asset. Depreciation is a cost (recorded in the income statement) and impact the net value of the assets (recorded in the balanced sheet) Depreciation is a non-cash expense Let s consider again Mysmallbusiness corp. Give the new income statement assuming we record $10 of depreciation on the equipments (fixed assets) Let s recap The balance sheet records the assets available in the firm and how are they financed at a particular time The income statement reports the earnings of a company by recording all income and expenses of the company over a certain period Balance sheet and income statement do not reflect the actual disbursements (cash outflows) made by the firm nor the actual payments (cash inflows) received by the firm. It is done with a third financial statement called the cash flow statement 5

6 4 a)cash reinvested Cash Flows What are the different kinds of cash flows circulating in or around a firm? 2 )Cash invested in projects 1 )Cash raised from investors Firm's operations Financial manager Financial resources 3 )Cash generated by operations 4 b)cash returned to investors Cash flow statement Three sections in the cash flow statement Cash flow from the operations Cash flow from investing Cash flow from financing Two ways to prepare a cash flow statement Direct method: Reports all cash receipts and cash disbursements from operating activities. (lenghty) Indirect method the Indirect method adjusts net income for items that affected reported net income but didn't affected cash (easier) 6

7 Cash flow statement (indirect method) Cash flow from the operations Cash flow from operations Net income Additions to cash + Depreciation + Decrease in accounts receivable + Increase in accounts payable + Increase in taxes payable + Decrease in inventory Subtractions from cash - Increase in accounts receivable - Decrease in accounts payable - Decrease in taxes payable - Increase in inventory = Net cash from operations Cash flow statement (indirect method) Cash flow from investing Cash flow from investing - In Fixed assets Net cash from investing Cash flow from financing Cash flow from financing - Dividends paid - Payment of loans + Proceeds from loans Net cash from investing Net cash position at the end of the period Initial cash position + increase/decrease in cash 7

8 Let s consider again Mysmallbusiness corp. Following the Income Statement, give also the Cash Flow statement as well as the Balance Sheet at the end of Dec 2012 Let s consider again Mysmallbusiness corp. Same exercise but now we are said that the company sell $80 cash and $20 on credit It is offered a 4-month delay for paying the marketing expenses and taxes will be paid next year (in 2013). Give IS, CF and BS statements from Sept 1 to Dec 31,

9 wrap-up If a company incurs $10 (pretax) of depreciation expense, how does that affect the three financial statements? A company makes a $100 cash purchase of equipment on Dec. 31. How does this impact the three statements this year and next year? Same question as the previous but the company finances the purchase of equipment by issuing debt rather than paying cash. Continuing with the last question, on Jan. 1 of Year 3 the equipment breaks and is deemed worthless. The bank calls in the loan. What happens in Year 3? wrap-up Balance sheet Income statement Cash flow statement 9

10 Abercrombie & Fitch Look at A&F 2011 and 2012 financial statements. Analyze them and explain what happened between 2011 and 2012 Balance sheet: What are the assets made of? How did they change from 2011 to 2012? Same questions for the liabilities Income statement Find out what are the main items made of? Explain the evolution from 2011 to 2012 Cash flow statement Explain what happened in 2012 and relate it to the balance sheets The Role of the Financial Manager The CFO (Chief Financial Officer) stands between Cash flows invested in the real assets of the firm Cash flows generated by the real assets of the firm Cash flows invested in the firm by the investors Cash flows generated by the firm and returned to the investors or retained into the firm 10

11 The Role of the Financial Manager CFO is in charge of Treasurer Capital budgeting Financing Cash management Recommending dividend policy Insurance Pension plans Controller Accounting Preparation of financial statements Preparing budgets Internal auditing The Role of the Financial Manager The CFO tries to maximize the value of the firm through Investment decision Financing decision Dividend decision 11