Slajd 1

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Transcript Slajd 1

Forms of Business Organization • The Sole Proprietorship • The Partnership

– General Partnership – Limited Partnership

• The Corporation

Liquidity Voting Rights Taxation Reinvestment and dividend payout Liability Continuity

A Comparison

Corporation

Shares can be easily exchanged Usually each share gets one vote Double Broad latitude Limited liability Perpetual life

Partnership

Subject to substantial restrictions General Partner is in charge; limited partners may have some voting rights Partners pay taxes on distributions All net cash flow is distributed to partners General partners may have unlimited liability; limited partners enjoy limited liability Limited life

The Agency Problem

• Agency relationship – Principal hires an agent to represent his/her interest – Stockholders (principals) hire managers (agents) to run the company • Agency problem – Conflict of interest between principal and agent

Managerial Goals

• Managerial goals may be different from shareholder goals:

– Expensive perquisites – Survival – Independence

• Increased

growth and size

are not necessarily equivalent to increased shareholder wealth

Managing Managers •

Managerial compensation

– Incentives can be used to align management and stockholder interests – The incentives need to be structured carefully to make sure that they achieve their intended goal •

Corporate control

– The threat of a takeover may result in better management •

Other stakeholders

Financial Statement

• A

financial statement

(or

financial report

) is a formal record of the financial activities of a business, person, or other entity.

• For a business enterprise all the relevant financial information , presented in a structured manner and in a form easy to understand.

annual report

• An

annual report

company's is a comprehensive report on a activities throughout the preceding year. • Annual reports are intended to give shareholders and other interested people information about the company's activities and financial performance.

• Most jurisdictions require companies to prepare and disclose annual reports, and many require the annual report to be filed at the company's registry. • Companies listed on a stock exchange are also required to report at more frequent intervals (depending upon the rules of the stock exchange involved).

Typically annual reports will include:

• • • • • • • • • • • • • • Chairman's CEO's report report Auditor's report on corporate governance Mission statement Corporate governance statement of compliance Statement of directors' responsibilities Invitation to the company's AGM as well as financial statements Auditor's report Balance sheet on the financial statements including: Statement of retained earnings Income statement Cash flow statement Notes to the financial statements Accounting policies

Financial Statements

•

Balance sheet

(BS) : also referred to as statement of financial position or condition, reports on a company's assets, liabilities, and ownership equity at a given point in time. •

Income statement

: also referred to as Profit and Loss statement (" P&LA ") provides information on the operation of the enterprise, reports on a company's income, expenses, and profits over a period of time.

Financial Statements

• • Statement of Owner's Equity shows the change in owner's equity during a given time period. It lists the owner equity balance at the beginning of the period, additions and subtractions to the balance, and the ending balance. Additions come from owner investments and income; subtractions from owner withdrawals and losses.

Statement of cash flows

: reports on a company's cash flow activities, particularly its operating, investing and financing activities. Indicates whether enough cash is available to carry on routine operations.

Financial Statements

• For large corporations, these statements are often complex and may include an extensive set of notes to the financial statements and management discussion and analysis. • The notes typically describe each item on the balance sheet, income statement and cash flow statement in further detail. Notes to financial statements are considered an integral part of the financial statements.

Financial statements

Financial statements should be understandable, relevant, reliable and comparable.

Identification of the user

• The IASB

Framework

states: The objective of financial statements information … that is useful to a wide range of users in making economic decisions.

is to provide •

Owners, prospective investors and managers

continued operations. require financial statements to make important business (investment) decisions (buy/sell/hold) that affect its Return on capital employed (ROCE) and related performance and asset management ratios are likely to be of interest to this group of users.

Financial statements - users

•

Employees

they need to be able to assess the stability and performance of the entity in order to assess how reliable it is to be employed in it in the longer term.

Employees are likely to be interested in disclosures about retirement benefits, remuneration and promotion.

•

Suppliers -

interested in information that helps them to decide whether or not to supply goods or services to an entity. Availability of cash will be of particular interest.

Working capital ratios, and the working capital cycle, may be appropriate calculations for this class of user.

Financial statements - users

•

Lenders and potential lenders -

are interested in assessing whether or not the loans that they have made are likely to be repaid, and whether or not the related interest charge will be paid in full and on time. They are particularly interested in ratios such as interest cover and gearing, and will be interested in the nature and longevity of other categories of loan to the entity.

•

Customers -

interested in assessing the risks which threaten their supplier.

Financial statements - users

• Government entities require special-purpose reports, especially tax computations, general-purpose reports statistics.

• Media and the general public are also interested in financial statements for a variety of reasons.

Audit and legal implications

• Although laws differ from country to country, an These are usually performed by independent accountants or auditing firms.

audit the financial statements of a public company is usually required for investment, financing, and tax purposes. of • Results of the audit are summarized in an accuracy. audit report that either provide an unqualified opinion on the financial statements or qualifications as to its fairness and • The audit opinion on the financial statements is usually included in the annual report.

Standards and regulations

• Different countries have developed their own accounting principles over time, making international comparisons of companies difficult. • Recently there has been a push towards standardizing accounting rules made by the International Accounting Standards Board ("IASB"). IASB develops International Financial Reporting Standards that have been adopted by e.g.

Australia , Canada and the publicly quoted companies only) European Union (for • It ensures uniformity and comparability statements prepared by different companies ( a set of guidelines and rules).

between financial

Financial statement analysis

… is the application of analytical tools and techniques to general-purpose financial statements and related data to derive estimates and inferences useful in business analysis. … refers to an assessment of the viability, stability and profitability of a business .

… decreases the uncertainty of business analysis, and provides a systematic and effective basis for it.

Comparability problems

( Accounting risk ) 1. Lack of uniformity in accounting leads to comparability problems.

2. Discretion and imprecision in accounting can distort financial statement information( errors, omissions ).

3. Managers might use their discretion in accounting to manipulate or window-dress financial statements.

The Balance Sheet

 An accountant’s snapshot of the firm’s accounting value at a specific point in time .

 BS reports the resources of the entity, useful for evaluating the ability of the company to meet its long-term obligations.

 BS summarizes the assets, liabilities, and owners’ equity of a company at a specific point in time.

The Balance Sheet

Total Value of Assets: Current Assets Total Firm Value to Investors: Current Liabilities Long-Term Debt Fixed Assets 1 Tangible 2 Intangible Shareholders’ Equity

The Balance Sheet Identity :

• Assets ≡ Liabilities + Stockholder’s Equity • Assets - what a company owns • Liabilities

what a company owes • Owners' Equity claims of owners against the business

Assets valuable resources providing future benefits to the company • Current assets are assets that quickly and easily can be converted into cash (within 12 months), sometimes at a discount to the purchase price. Current assets include cash, accounts receivable, marketable securities, notes receivable, inventory, and prepaid assets such as prepaid insurance.

• Fixed assets (relatively long life) include tangible assets (land, buildings, and equipment, recorded at historical cost, which often is much lower than the market value), and intangible assets such as trademark, patents.

U.S. Composite Corporation Balance Sheet

2007 2006 Current assets

: Cash and equivalents Accounts receivable Inventories Other Total current assets $140 294 269 58 $761 $107 270 280 50 $707

Fixed assets

: Property, plant, and equipment Less accumulated depreciation $1,423 (550)

Net property, plant, and equipment

Intangible assets and other Total fixed assets 873 245 $1,118 $1,274 (460) 814 221 $1,035

Total assets

$1,879 $1,742 Current Liabilities: the length of time it would Accrued expenses Deferred taxes Long-term debt Average values 50 223 $486

2006

$197 53 205 $455 $117 471 $588 $104 458 $562 Preferred stock $39 55 Capital surplus equipment.

Less treasury stock Total equity 347 390 (26) $805 Total liabilities and stockholder's equity $1,879 $39 32 327 347 (20) $725 $1,742

Liabilities (claims to assets)

• represent the portion of a firm's assets that are owed to creditors; • present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits • Current liabilities ( expected to be liquidated within a year ) include accounts payable, notes payable, interest payable, wages payable, and taxes payable. • Long-term liabilities ( expected not to be liquidated within a year ) include mortgages, notes payable and bonds payable.

Equity (TA – TL)

• Equity is referred to as owner's equity in a sole proprietorship or a partnership, and stockholders' equity or shareholders' equity in a corporation. • The equity owners of a business are residual claimants, having a right to what remains only after the creditors have been paid.

• In the case of a corporation, equity would be listed as common stock, preferred stock, and retained earnings.

U.S. Composite Corporation Balance Sheet

Labilities and Owners’ Equity 2007 2006 Total current liabilities 486 455 Accounts payable 213 197 Notes payable 50 53 Accrued expenses 223 205 Long-term debt 588 562 Total owners’ equity 805 725 Preferred stck 39 39 Common stock ($1) 55 32 Capital surplus 347 327 Retained earnings 390 347 Total liabilities 1879 1742

The Capital Budgeting Decision

Current Assets Current Liabilities Long-Term Debt Fixed Assets 1 Tangible 2 Intangible What long-term investments should the firm choose?

Shareholders’ Equity

The Capital Structure Decision

Current Assets Fixed Assets 1 Tangible 2 Intangible How should the firm raise funds for the selected investments?

Current Liabilities Long-Term Debt Shareholders’ Equity

Balance Sheet Analysis When analyzing a balance sheet, the analyst should be aware of three concerns:

1. Liquidity 2. Debt versus equity 3. Value versus cost

Liquidity

• Refers to the ease and quickness with which assets can be converted to cash —without a significant loss in value (cost, time) • Current assets are the most liquid.

• The more liquid a firm’s assets, the less likely the firm is to experience problems meeting short-term obligations (financial distress).

Net Working Capital

 A measure of both a company's efficiency and its short-term financial health.

 Net Working Capital ≡ Current Assets – Current Liabilities  NWC usually grows with the firm

Short-Term Asset Management

Current Assets Fixed Assets 1 Tangible 2 Intangible Net Working Capital Current Liabilities Long-Term Debt How should short-term assets be managed and financed?

Shareholders’ Equity

Net Working Capital

• Positive working capital means that the company is able to pay off its short-term liabilities. • Negative working capital means that a company currently is unable to meet its short-term liabilities with its current assets (cash, accounts receivable and inventory). • A declining working capital ratio over a longer time period could also be a red flag that warrants further analysis.

U.S.C.C. Balance Sheet

$252m = $707- $455 Current assets: Cash and equivalents Accounts receivable Inventories Other Total current assets

2007

$140 294 269 58 $761

2006

$107 270 280 50 $707 Fixed assets: Property, plant, and equipment Less accumulated depreciation Net property, plant, and equipment Intangible assets and other Total fixed assets $1,423 (550) 873 245 $1,118 $1,274 (460 814 221 $1,035 $275m = $761m- $486m Total assets $1,879 $1,742 Current Liabilities: Accounts payable Notes payable Accrued expenses Total current liabilities

2007

$213 50 223 $486

2006

$197 53 205 $455 Long-term liabilities: Here we see NWC grow to $104 Total long-term liabilities $252 million in 2005.

Stockholder's equity: 471 $588 Common stock ($1 par value) $39 55 347 Accumulated retained earnings Less treasury stock 390 (26) Total equity $805 458 $562 $39 32 327 347 (20) $725 Total liabilities and stockholder's equity $1,879 $1,742

Debt versus Equity • Creditors generally receive the first claim on the firm’s cash flow.

• Shareholder’s equity is the residual difference between assets and liabilities.

• Shareholders’ equity = Assets – Liabilities

Capital Structure

The value of the firm can be thought of as a pie.

The goal of the manager is to increase the size of the pie.

The Capital Structure decision can be viewed as how best to slice the pie.

70% Debt 30% Equity If how you slice the pie affects the size of the pie, then the capital structure decision matters.

Value versus Cost • Under Generally Accepted Accounting Principles (GAAP), audited financial statements of firms in the U.S. carry

assets at cost

.

• Market value

is the price at which the assets, liabilities, and equity could actually be bought or sold, which is a completely different concept from historical cost.

The Income Statement (a video)

• measures financial performance (the results of the entity's operations) over a specific period of time.

• summarizes the revenues and expenses of a company for a period of time.

• The accounting definition of income is: Revenue – Expenses ≡ Income

Income Statement

Revenue

refers to inflows from the delivery or manufacture of a product or from the rendering of a service.

Expenses

are outflows incurred to produce revenue (cost of doing business ).

It is an outflow of cash or other valuable assets from a person or company to another person or company.

U.S.C.C. Income Statement

The operations section of the income statement reports the firm’s revenues and expenses from principal operations.

Total operating revenues Cost of goods sold Selling, general, and administrative expenses Depreciation Operating income Other income Earnings before interest and taxes Interest expense Pretax income Taxes $2,262 1,655 327 90 $190 29 $219 49 $170 84 Current: $71 Deferred: $13 Net income $86 Addition to retained earnings $43 Dividends: $43

U.S.C.C. Income Statement

The non-operating section of the income statement includes all financing costs, such as interest expense.

Total operating revenues Cost of goods sold Selling, general, and administrative expenses Depreciation Operating income $2,262 1,655 327 90 $190 29 Other income Earnings before interest and taxes Interest expense Pretax income Taxes Current: $71 $219 49 $170 84 Deferred: $13 Net income $86 Addition to retained earnings: $43 Dividends: $43

U.S.C.C. Income Statement

Net income is the “bottom line.” Total operating revenues Cost of goods sold Selling, general, and administrative expenses $2,262 1,655 327 Depreciation Operating income Other income Earnings before interest and taxes Interest expense Pretax income Taxes Current: Deferred: Net income 90 $190 29 $219 49 $170 84 $71 $13 $86 Retained earnings: $43 Dividends: $43

Cash Flow Statement

• The nature of accrual accounting is such that a company may be profitable but nonetheless experience a shortfall in cash. • The statement of cash flows is useful in evaluating a company's ability to pay its bills. For a given period, the cash flow statement provides the following information: – Sources of cash – Uses of cash – Change in cash balance

Cash Flow Statement

• The financial statement that summarizes an entity’s cash receipts and cash payments during the period. It breaks the sources and uses of cash into the following categories: – operating activities – concerned with the acquisition and sale of products and services – investing activities – concerned with the acquisition and disposal of long-term assets – Financing activities - concerned with the raising and repayment of funds in the form of debt and equity.

Financial Cash Flow

• The information used to construct the cash flow statement comes from the beginning and ending balance sheets for the period and from the income statement for the period.

• the cash flow received from the firm’s assets must equal the cash flows to the firm’s creditors and stockholders.

CF(

)

≡

CF(

)

CF(

)

CASH FLOW EQUATIONS –

Cash flow from assets

Cash flow from assets = operating cash flow – net capital spending Change in net working capital OCF = EBIT + depreciation – taxes NCS = ending net fixed assets – beginning net fixed assets + depreciation change in NWC = ending NWC – begining NWC

CASH FLOW EQUATIONS-

cash flow to creditors

Cash flow to creditors

= interest expense-

net new borrowing from creditors Net new borrowing = ending long-term liabilities – begining long-term liabilities

CASH FLOW EQUATIONS-

cash flow to owners

Cash flow to owners = dividends – net new borrowing from owners Net new borrowing from owners = change in equity Change in equity = ending common stock and paid-in-surplus

–

beginning common stock and paid-in-surplus

U.S.C.C. Financial Cash Flow

Cash Flow of the Firm

Operating cash flow (Earnings before interest and taxes plus depreciation minus taxes) Capital spending (Acquisitions of fixed assets minus sales of fixed assets) Additions to net working capital Total