financial management 1 cracking the value code.. chapter 1

8/3/2019 Financial Management 1 Cracking the Value Code.. Chapter 1

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Born: Newton, Massachusetts, in 1944.

Affiliations:y Fidelity Investments, Inc.y Fidelity Management & Research Company

Most Famous For: Peter Lynch managed the Fidelity Magellan Fund from 1977 to 1990,

during which time the fund's assets grew from $20 million to $14

billion. More importantly, Lynch reportedly beat the S&P 500 Index

benchmark in 11 of those 13 years, achieving an annual averagereturn of 29%.

He is also famous for several books including, "One Up On Wall

Street" (1989) and "Beating The Street" (1993), which are widely

considered to be mandatory reading for any investor.



Investment Decisions are made by:

1.) Corporate managers

2.) Institutional & Individual investors



Common Things & Similarities of

Corporatemanagers & investors:

1.) They both need to know just what assetstheir companies own & why they own them.

2.) They both need to know what they paidfor those assets & return they produce.



Managers

²know the great deal about their

organization·s investment in Physical &Financial assets.

²they lack in information & insight

about the other sources of value.



Physical Assets also known as atangible asset, which are either valuablein them, or which produce value for theowner.

Financial Assets are those assets thatcan be converted to cash in a reasonablyshort period of time - one year at most,but less time in many cases.



To illustrate the other sources of value, we shouldconsider questions about other assets of the

company rely on to create value. The other assetsthat must be considered are:

1.) Customers

2.) Employees

3.) Suppliers

4.) Investors

5.) Organizations systems & processes

6.) Organizations Leadership team

7.) Organizations corporate culture



Double entry System of Accounting

- first documented by Franciscanfriar and mathematician more than 500 years ago.

- invented to give absentee ownersan accounting of money they provided toa venture or company.



-one of the most beautiful discoveries

of the human spirit

- to record a profit of particularamount, an organization must be able to

point to either a new asset of equivalentsize or to liability that has disappeared.



- when investors/owners buy & sell

stocks in a company, these transactionscreate a problem.

- when transactions provided evidence

that the equity of business was worth morethan the books showed, people inferred thatnew asset had come to light. They called itGOODWILL.



Two things have changed in the NewEconomy:

1.) The 500 year old Accounting System

- reflect the value created ordestroyed by transactions but;

New Economy

- value can be created or destroyedw/o any transactions with third parties.



2.) The equity of most significant businessesis now traded continuously on major stockexchanges. Companies rely less on debtfinancing & equity held by long-term family

members or local stockholders.



Companys value determined

daily as millions of

shareholders buy & sell itsstock.



What makes up todays measurement

system:

1.) Balance sheet

2.) Income statement3.) Cash Flow statement



ASSET REVENUES

LIABILITIES EXPENSES

Receipts

CASH

FLOWdisbursement

Traditional Financial Reporting

Balance sheet Income statement

net equity/net assets net profit



Traditional Financial Reporting Framework

- the balance sheet & income

statement unwittingly pit human values

against economic value.

financial management 1 cracking the value code.. chapter 1

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