mmi finance 1

Chapter IFINANCIAL

STATEMENTS

Cash Flow – Production Cycle (I)

Cash

Accounts receivable

Fixed assets

Inventory

Cha

nges

in e

quity

Cha

nges

in li

abilit

ies

Taxe

sIn

tere

stD

ivid

ends

Collection of credit sales

Cash sales

Credit salesDepreciation

Production

Investment

Example

Cash Flow – Production Cycle (II)Example debriefing:• For simplicity, suppose the company is a new one that has raised

money from owners and creditors

• The company uses cash to purchase raw material and hire workers; it makes the product and stores it in inventory

• When the company sales a product, inventory turns into cash; if the sale is for cash, otherwise, cash is not realized until accounts receivable is collected; the movement of cash to inventory, to cash receivable, ad back to cash is the firm’s working capital cycle.

• On the other hand, over a period of time, fixed assets are consumed; thr accountant recognize the process by continually reducing the value of asets and increasing the value of merchandise flowing into inventory by an ammount called depreciation

Cash Flow – Production Cycle (III)Example debriefing:

• To maintain productive capacity, the company must invest part of its newly received cash in new fixed assets.

• Profit do not equal cash flow. The profitability of a company is not an anssurence that its cash flow will be sufficient to maintain solvency. For example, if the company loses control of its accounts receivable by allowing clients more time to pay, or the company makes more merchandise than it sells, then, though the firm is selling at a profit, its sales may not be generating sufficient cash to replenish the cash for production and investment

Financial statements – Balance Sheet• A Balance sheet is a financial snapshot, taken at a point

in time, of all the assets the company owns and all the claims against those assets.

• A balance sheet is based upon the basic accounting equation of:

Assets = Liabilities + Shareholder’s equity

Financial statements – Balance Sheet

Asset

Liability

Something valuable which a business owns or has the

use of

FactoriesOffice buildings

Plant and equipmentsComputers

GoodsRaw material

Something which is owed to somebody else

A loan Amounts owed to

suppliers for goods purchased

Capital and reserves

The money put into a business by its owners is capital. Capital is money owned to the shareholders by the business

Reserves include retained earning and revaluation reserve

Financial statements – Balance SheetEXAMPLE (000 EUR)

ASSETS = LIABILITIES + EQUITY

Cash Accounts Receivable

Inventory Fixed Assets

Accounts Payable

Loans Owners’ equity

Beginning balance 1/1/10

250 100 150

Initial purchases (140) 80 60

Sales 875 25 900

Wages (190) (190)

Merchandise purchases

(360) 30 20 (350)

Other expenses (210) (210)

Depreciation (15) (15)

Interest payment (10) (10)

Ending Balance 31/12/10

215 25 110 45 20 100 275

Financial statements – Balance SheetExample: BS of a newspaper (000 EUR)

ASSETS = LIABILITIES + EQUITY

Cash Accounts Receivable

Inventory Fixed Assets

Accounts Payable

Loans Owners’ equity

Beginning balance 1/1/10

500 100 400

Purchases (140) 80 60

Sales 200 800 1000

Wages (500) (500)

Print & Paper (10) 30 370 (350)

Other expenses (10) 200 (210)

Depreciation (15) (15)

Interest payment (10) (10)

Ending Balance 31/12/10

30 800 110 45 570 100 315


EXAMPLE debriefing:• A new founded newspaper, invested at the beginning of 2010 150 thou.

EUR of his personal savings an borrowed additional 100 thou. EUR• After buying furniture and computers for 60 thou. EUR and merchandise

for 80 thous. EUR, his transactions can be summarised:– Sell 900 thou EUR (advertising+circulation), receiving 875 thou EUR in cash , with 25 thou

EUR still to be paid– Pay 190 thou EUR wages– Purchaise 380 thou EUR merchandise, with 20 thous EUR still owning to suppliers and 30

thou EUR still in inventory– Spend 210 thou EUR on other expenses, including distribution, rent, taxes– Depreciate furniture and computers by 15 thou EUR– Pay 10 thou EUR interest on loan

• Specific of a Romanian newspaper– AR are high due tu late payments from distribution and advertising,

therefore cash is low.

Assets

• Two main categories of assets:1. Current Assets - are expected to be converted

into cash or consumed within 1 year. Examples: Cash Accounts Receivables Inventory Prepaid expenses Short term investments ( bonds, stocks)

2. Non current Assets (> 1 year)


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Cash Usually includes cash in bank, cash in safe, short term

investments (deposits).

Accounts Receivable the amount of money owed to the company by its

customers (bad debts, Irrecoverable debts)

Inventories Include raw materials, work in progress (goods in the

process of being manufactured), finished goods already available for sale

Current Assets


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Assets intended to be held and used by a business for a number of years.

Tangible Assets (Fixed Assets) – have a physical form: property, plant, equipment

Intangible Assets - not physical in nature: patents, trademarks, copyrights, goodwill (purchase price less fair value of an asset) , development costs

Financial assets

Non-Current Assets


Liabilities Current Liabilities - Debts or obligation that will become

due over the next 12 months. Examples: Accounts Payable or creditors (e.g. suppliers, employees) Current tax Overdraft (short term credit from banks) Accrued expenses Current portion of long term debt ( the portion of loan or other

debts that become due within one year) Provisions

Long Term Liabilities - Debt or obligations that become due in more than one year from the BS date. Examples:

Bank loan (long term portion) Finance Lease (long term portion) Provisions


Shareholder’s Equity

Equity = the amount of the funds contributed by the owners (share capital) plus the retained earnings (or losses) and reserves (revaluation, share premium).

Equity = Share Capital + Reserves + Retained earnings (net of Dividends)

More simple: Equity = what the company owns – what it owes


Income statement - comprises the income and expenses during a period

of time (accounting period).

Income Statement = Profit and loss statement Comprises:

Revenues (Sales) Cost of sales Gross Profit Operating expenses Operating income Other expenses Other non operating Income Income before tax Tax Net Income (Profit)

Financial statements – Income Statement

Revenues (Sales): Net Sales = Sales revenue for the period less returns, discounts.

Cost of Sales: The purchase cost / production cost of goods sold Retail business: cost of sales = purchase cost from

suppliers + other direct costs Manufacturing business: production cost = raw material

+labor cost +production overheads

Gross ProfitGross profit = Sales - cost of sales

Other non operating Income: income form other sources: dividends, interest, sale of assets


Operating expenses Selling and distribution expenses

= Costs directly attributable to the selling and delivering goods to customers.

Sale employees salaries and commissions Advertising and promotion expenses Delivery costs Bad Debt

General and administration expenses= Expenses of providing management and administration for the

business. Salaries of office staff (corporate function such as HR, Finance) Rent, utilities Printing, stationery

Depreciation: Total cost of an long term assetmust be spread over the asset’s expected useful life Charging the full cost of a long-term asset to one yera distors reported income.

Example: suppose in 2002 a company buys a facility expected to be in use for 12 years, for 10 mil EUR. If the entire cost is assign to 2002,income in 2002 will apear depressed, while income in the following years will look too high.


Operating income (profit or loss) = profit from day-to-day operations excuding taxes, interest income and expense EBITDA = Earning before Interest, Taxation, Depreciation

and Amortization. Great use in broadcasting for example, where depreciation overstate true economic depreciation

EBIT = Earning before Interest and Taxation. Widely used to measure a business income before it is divided among creditors, owners and taxman

Net income (profit) Net profit earned by a company during accounting period Two choices: paid out as dividend or retained into the

business in the form of retained earning for investments. Net profit less dividend paid is transferred to

Balance Sheet, as Retained earning


P/L STATEMENT TOTAL

RON

Subscribtions - Newsstands Sales 90.258.318 Advertisement 47.918.037 Other Incomes - Total Turnover 138.176.355 Main Product extern 57.113.368

- Prod.Costs Paper 36.367.521

- Prod. Costs Others 20.745.847

Other raw material / Prod. cost - Total Production 114.226.736 Contribution 23.949.620 Editorial 82.365.000 Advertisement Departement - Distribution Departement 1.913.019 Marketing Departement 12.963.036

- Personal Costs -

- Other Costs -

- Promotion extern 11.299.109

- Promotion barter 984.848

Publishing Departement 4.731.069 - Other Costs 1.855.069

- Depreciation 2.876.000

Total direct Costs 101.972.124 Oparational Profit -78.022.504 Administration (Finance, HR, IT) - Total indirect Costs 7.475.202 Profit / Loss -85.497.706

Example of a P&L statement of a newspaper

Example of a P&L statement of a newspaper

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Cash Flow Is the movement of money into or out of a cash

account over a period of time Shows company’s ability to generate cash

Expands and rearranges the sources into 3 categories:

Cash Flow from operating activities – result of the principal activity of a company

Cash Flow from investing activities - Acquisition or disposal of assets or investment in other companies

Cash Flow from financing activities - Receipt/repayment to external providers of finance (loan, leases)

Financial statements – Cash Flow

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EXEMPLE – Net profit before taxation 3,200Adjustments for:Depreciation 500 Working capital Changes

Increase in accounts receivables (300)Decrease in inventory 300Decrease in accounts payables (700)

Cash generated from operation 3,000Income tax paid (300)Interest paid (600)

Net cash from operating activities 2,100

Purchase of property, plant, equipment (900)Proceed from sale of cars 10Dividends received 100

Net cash used in investing activities (790)

Proceed from issuance of share capital 250Dividend paid (100)

Net cash used in financing activities 150

Net increase in cash and cash equivalents 1,460

Cash and cash equivalents at beginning of period 1,000 Cash and cash equivalents at end of period 2,460


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Net profit or loss is adjusted for: – Changes in working capital (inventory, receivables, payables).– Non-cash items like depreciation, provisions, losses on disposal of

assets.– Other items that need to be classified under investing or financing

activities.

Adjustments (Add/subtract): + Depreciation (non cash item) + Loss on disposal (non cash item) - Increase in inventory (cash spent on buying inventory) - Increase in receivable (debtors have not paid) - Decrease in payables ( cash paid)


mmi finance 1

Economy & Finance