Documentos de Académico
Documentos de Profesional
Documentos de Cultura
Economics and Accounting for Finance Economics: risk analysis, pricing theory, comparative return analysis, GDP, interest rate, inflation, central bank, taxes A Accounting: fi ti financial d t i i l data, income statement, t t t balance sheet, cash flow statement Financial Management: financial managers use economics and interpret accounting reports in decision-making about raising capital and getting the highest return
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Issues in Finance
Old: allocating financial capital by purchasing real capital (long-term plant and equipment) Recent: capital structure theory (Miller), (Miller) inflation and disinflation on forecasting, required rate of return for capital budgeting Computer technologies to run businesses
Financial Managers
Allocate funds to current and fixed assets Get the best mix of financing (debt and equity) D Develop appropriate di id d policy l i t dividend li Maximize shareholders wealth
Risk-Return Trade-Off
Influences operational side (capital versus labor/ Product A versus Product B) Influences financial mix (stocks versus bonds versus retained earnings)
Stocks are more profitable but riskier. Savings accounts are less profitable and less risky (or safer)
Corporate Governance
Agency theory: conflict between managers and stockholders. Management has an agency position of making decisions that are best for stockholders interests There is a tradeoff between maintaining a status quo and maximizing stockholders wealth Social responsibility and ethical behavior
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Roles of Corporations
Maximizing values in the market by attracting capital, providing employment, and offering benefits to communities. Pollution controls is a hot topic nowadays Unethical and illegal financial practices (like insider trading) should never go unpunished. Who controls? SEC?
Financial Markets
Anyone who needs money or have money to lend or invest can use financial markets Short-term products are in Money Markets L Long-term products are in Capital M k t t d t i C it l Markets
Capital markets
Long-term markets Securities include common stock, preferred stock and corporate and government bonds.
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Capital Structure
Bondholders
Capital The Firm Financial Manager Budgeting Working Capital Projects Management g
Make decisions that increase the value of the stock (maximize shareholders wealth)
What long-term investments should the firm take? How should the firm manage its everyday financial activities?
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Where the firm get the long-term financing to pay for investments?
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Financial Statements
Balance Sheet reports financial position of a business at a specific point in time. Profit & Loss Statement reports results of earning activities for a specific time period. Statement of Cash Flows reports cash inflows and outflows from operating and other activities over a reporting period.
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Accounting Equation
Assets = Liabilities + Owners Equity Assets: Service potential or future economic benefits controlled by entity as result of past transactions or other events. E.g. land buildings equipment accounts receivable patents patents Liabilities: Future sacrifices of service potential or future economic benefits that an entity is presently obliged to make as a result of past transactions or other events. E.g. accounts payable mortgages payable wages & salaries payable Owners equity: Residual interest of owner/s in the assets (less liabilities) of the entity. E.g. Net assets Proprietorship Capital
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Short-term obligations
Accounts payable: amounts owed on open accounts to suppliers. Notes payable: short-term signed obligations to bankers and other creditors. Accrued expense: payment yet to be made towards - service already provided or an obligation incurred.
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Stockholders Equity
Represents total contribution and ownership interest of preferred and common stockholders.
Preferred stock. stock Common stock. Capital paid in excess of par. Retained earnings.
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Income Statement
Device to measure the profitability of a firm over a period of time.
It covers a defined period of time. It is presented in a stair step or progressive stair-step fashion
To examine the profit or loss after each type of expense item is deducted.
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Return to Capital
Three primary sources of capital:
Bondholders Preferred stockholders Common stockholders
Cash flow analysis helps in combating the discrepancies faced through the accrual method of accounting.
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Depreciation Methods
A depreciation method based on the expiration of times means that depreciation expense is recognised at the end of each period regardless of the quantity of use obtained from the asset.
Straight Line
Asset value $
Reducing B l R d i Balance
Asset value $
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Ratio Analysis
Financial ratios
Used to weigh and evaluate the operating performance of a firm. Used to compare performance record as against other firms in the industry. Analyzing ratios and numerical calculations. Such data is provided by various organizations.
B. Asset utilization ratios ( How efficiently the firm uses its assets to generate sales )
4. 5. 6. 7. 8. Receivable turnover. [how fast a firm collects its credits] Average collection period. [=365/RT, on average] Inventory turnover. [times the firm sold off the entire inventory] Fixed asset turnover. [sales generated for every $ in fixed assets] Total asset turnover. [sales generated for every $ in total assets]
D. D Debt utilization ratios (The firms long run ability to meet its obligations, or firm s long-run obligations its financial leverage )
11. Debt to total assets. [how capital structure matters] 12. Times interest earned. [how well a firm has its obligations covered] 13. Fixed charge coverage. [ability to meet all fixed obligations rather than interest payments alone]
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Profitability Ratios
A1
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Liquidity Ratios
A2
A3
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Importance of Ratios
Which ratio is most important? It depends on your perspective. Suppliers and banks (lenders) are most interested in liquidity ratios. Shareholders are most interested in profitability ratios. A long-run trend analysis over a 5-10 year period is usually performed by an analyst.
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Example:
A company sells 3 of the following items at the end of the year. Item #1 #2 #3 #4 #4 Purchase Price $5 $7 $8 $9 $11
During Inflation
LIFO
Produces the highest COGS expense and the lowest ending inventory valuation
Accounting Method Cost of Goods Sold (Income Statement) FIFO LIFO Average Cost #1, #2, #3 =$20 #5, #4, #3 =$28 [Total cost/5] x 3 =$24
Inventory Valuation (Balance Sheet) #4, #5 = $20 #2, #1 = $12 [Total cost/5] x 2 = $16
FIFO
Produces the lowers COGS expense and the highest inventory valuation
Explanation of Discrepancies
Explanation of Discrepancies
Sales
Use of defer recognition until each payment is received or full recognition at the earliest p possible date.
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