Finance for E&BI
Table of content:
Table of content:................................................................................................................................................................. 1
Table of content:................................................................................................................................................................. 1
Lecture 1 Financial statements and cash flows........................................................................................... 2
Lecture 1 Financial statements and cash flows........................................................................................... 2
Chapter 5 Financial Statements....................................................................................................................... 2
Chapter 5 Financial Statements....................................................................................................................... 2
Slides Lecture 1............................................................................................................................................................. 8
Slides Lecture 1............................................................................................................................................................. 8
Lecture 2 Measuring Financial Health............................................................................................................. 14
Lecture 2 Measuring Financial Health............................................................................................................. 14
Chapter 6 Measures of financial health.................................................................................................... 14
Chapter 6 Measures of financial health.................................................................................................... 14
Slides lecture 2........................................................................................................................................................... 20
Slides lecture 2........................................................................................................................................................... 20
Lecture 3: The Time Value of Money, chapter 7, 8, 9 + lecture slides........................................24
Lecture 3: The Time Value of Money, chapter 7, 8, 9 + lecture slides........................................24
Chapter 7 Time Value of Money I: Single payment value...........................................................24
Chapter 7 Time Value of Money I: Single payment value...........................................................24
Chapter 8 Time Value of Money II: Equal multiple payments.................................................27
Chapter 8 Time Value of Money II: Equal multiple payments.................................................27
Chapter 9 Time Value of Money III: Unequal Multiple Payment Values...........................29
Chapter 9 Time Value of Money III: Unequal Multiple Payment Values...........................29
Slides lecture 3........................................................................................................................................................... 30
Slides lecture 3........................................................................................................................................................... 30
Lecture 4: Investment decision rules............................................................................................................... 32
Lecture 4: Investment decision rules............................................................................................................... 32
Chapter 16 How companies think about investing......................................................................... 32
Chapter 16 How companies think about investing......................................................................... 32
Slides lecture 4........................................................................................................................................................... 35
Slides lecture 4........................................................................................................................................................... 35
Lecture 5: Risk and cost of capital...................................................................................................................... 36
Lecture 5: Risk and cost of capital...................................................................................................................... 36
Chapter 15 How to think about investing............................................................................................... 36
Chapter 15 How to think about investing............................................................................................... 36
1
, Holding period percentage return: (what got- what cost) / what cost = represents
the % return earned over the entire time the investment is held........................................36
Holding period percentage return: (what got- what cost) / what cost = represents
the % return earned over the entire time the investment is held........................................36
Slides Lecture 5 risk and the opportunity cost of capital............................................................39
Slides Lecture 5 risk and the opportunity cost of capital............................................................39
Chapter 17: How firms raise capital............................................................................................................. 45
Chapter 17: How firms raise capital............................................................................................................. 45
Slides lecture 6............................................................................................................................................................ 51
Slides lecture 6............................................................................................................................................................ 51
Lecture 7: Working capital management.................................................................................................... 55
Lecture 7: Working capital management.................................................................................................... 55
Chapter 19 The importance of trade credit and working capital in planning..............55
Chapter 19 The importance of trade credit and working capital in planning..............55
Slides lecture 7............................................................................................................................................................ 61
Slides lecture 7............................................................................................................................................................ 61
Lecture 1 Financial statements and cash flows
Chapter 5 Financial Statements
§ 5.1 Income statement
● Functionality of the come statement
- The income statement: shows a firm’s performance over a specific period of
time.
- The statement helps financial statement users understand the sales
generated during the period and the expenses incurred to generate those
sales. If the expenses are smaller than the sales, the net result is profitability, or
net income, rather than a net loss.
- Breaking it down→ view on firm’s performance
● Sales and gross profit
- First section= sales, sales revenue, revenue, service revenue, and other similar
titles
- Gains and losses: income from items that aren’t common on the firm’s day-to-
day business, further down on income statement
2
, - Sales and any reductions on sales reported separately on the income
statement, begin with gross sales= all the sales to customers
- Returns on allowance, which is deducted from gross sales in order to find net
sales
- COGS cost of goods sold is deducted from net sales→ gross profit
- Gross profit = total revenue/sales - COGS
- Gross margin = gross profit / sales
- COGS: the costs directly involved in making the product that was sold during
the period, direct labor, direct materials, and the overhead assigned to the
product in production
- Gross profit= a reflection of how profitable the firm’s performance was in its
core business function, includes only the core business and direct costs of
performing that business. It shows financial statement users how effective the
business is at generating top-line profits on their core business function
● Income for operations
- After gross profit is calculated, other operating expenses are deducted in
order to calculate the firm’s income from operations= operating income,
building rents and utilities, property taxes, wages and salaries, and others
overhead costs
- Gross profit→ reflects only how profitable the firm was in making its core
product
- Operating income→ reflects how profitable the firm’s daily operations were as
a whole
- Common-size analysis reflects each element of a financial statement as a
percentage of the base, in case of income statement, the base is net sales
● Net income
- = the bottom line
- Net income (or loss) reflects the net impact of all financial transactions for the
firm, including those that are caused by events outside the normal course of
business. The most common items deducted from operating income to arrive
at net income include interest expense, gains/losses, and income tax expense.
Gains and losses are those that result from unusual transactions outside the
normal course of business.
● EBITA (earning before interest, taxes, depreciation, amortization)
- Amortization is similar to depreciation, it is spreading the cost of an intangible
asset over the course of its useful life. intangible assets= long term assets that
lack physical substance such as patents and copyrights
- EBITDA removes non cash items from the net income equation→ useful
measure in assessing the cash flows provided by operating activities.
- We will asses cash flows using the statement of cash flows
§5.2 the balance sheet
3
, ● The accounting equation and the classified balance sheet
- Income statement→ shows the performance of a firm over the course of time
- Classified balance sheet → shows the financial state of a company as of a
specific point in time, key distinction between two statements
The accounting equation reflects the assets,= items owned by the organization, and
how they were obtained, by incurring liabilities or provided by owners. Liability=
debts owed to other parties
Assets = liabilities + owner’s equity
- Classified balance sheet: assets and liabilities in smaller parts→ current and
noncurrent
- Current assets= those that can be used or converted to cash within a
year(cash, inventory, accounts receivable, and short-term investments)
- Noncurrent assets= assets that will be in use longer than a year (notes
receivable, machinery and equipment, buildings, and land
- Current liabilities= those that will be due in one year (accounts payable, wages
payable, and unearned revenue)
- Noncurrent liabilities= those that are due more than a year into the
future(notes payable)
- Stockholders equity: two primary categories of accounts:
- contributed capital= funds paid in by owners
- earned capital= funds earned by the corporation as part of business
operations
- retained earnings= a key component of the earned capital section, while the
stock accounts such as common stock, and additional paid-in capital are the
primary components of the contributed capital section
● Importance of balance sheet
Limitations:
- Assets under generally accepted accounting principles (GAAP), are recorded
as historical cost= the cost paid for the item it was purchased
- Estimates, if they are incorrect, the net value of the asset can be under- or
overstated
4
Table of content:
Table of content:................................................................................................................................................................. 1
Table of content:................................................................................................................................................................. 1
Lecture 1 Financial statements and cash flows........................................................................................... 2
Lecture 1 Financial statements and cash flows........................................................................................... 2
Chapter 5 Financial Statements....................................................................................................................... 2
Chapter 5 Financial Statements....................................................................................................................... 2
Slides Lecture 1............................................................................................................................................................. 8
Slides Lecture 1............................................................................................................................................................. 8
Lecture 2 Measuring Financial Health............................................................................................................. 14
Lecture 2 Measuring Financial Health............................................................................................................. 14
Chapter 6 Measures of financial health.................................................................................................... 14
Chapter 6 Measures of financial health.................................................................................................... 14
Slides lecture 2........................................................................................................................................................... 20
Slides lecture 2........................................................................................................................................................... 20
Lecture 3: The Time Value of Money, chapter 7, 8, 9 + lecture slides........................................24
Lecture 3: The Time Value of Money, chapter 7, 8, 9 + lecture slides........................................24
Chapter 7 Time Value of Money I: Single payment value...........................................................24
Chapter 7 Time Value of Money I: Single payment value...........................................................24
Chapter 8 Time Value of Money II: Equal multiple payments.................................................27
Chapter 8 Time Value of Money II: Equal multiple payments.................................................27
Chapter 9 Time Value of Money III: Unequal Multiple Payment Values...........................29
Chapter 9 Time Value of Money III: Unequal Multiple Payment Values...........................29
Slides lecture 3........................................................................................................................................................... 30
Slides lecture 3........................................................................................................................................................... 30
Lecture 4: Investment decision rules............................................................................................................... 32
Lecture 4: Investment decision rules............................................................................................................... 32
Chapter 16 How companies think about investing......................................................................... 32
Chapter 16 How companies think about investing......................................................................... 32
Slides lecture 4........................................................................................................................................................... 35
Slides lecture 4........................................................................................................................................................... 35
Lecture 5: Risk and cost of capital...................................................................................................................... 36
Lecture 5: Risk and cost of capital...................................................................................................................... 36
Chapter 15 How to think about investing............................................................................................... 36
Chapter 15 How to think about investing............................................................................................... 36
1
, Holding period percentage return: (what got- what cost) / what cost = represents
the % return earned over the entire time the investment is held........................................36
Holding period percentage return: (what got- what cost) / what cost = represents
the % return earned over the entire time the investment is held........................................36
Slides Lecture 5 risk and the opportunity cost of capital............................................................39
Slides Lecture 5 risk and the opportunity cost of capital............................................................39
Chapter 17: How firms raise capital............................................................................................................. 45
Chapter 17: How firms raise capital............................................................................................................. 45
Slides lecture 6............................................................................................................................................................ 51
Slides lecture 6............................................................................................................................................................ 51
Lecture 7: Working capital management.................................................................................................... 55
Lecture 7: Working capital management.................................................................................................... 55
Chapter 19 The importance of trade credit and working capital in planning..............55
Chapter 19 The importance of trade credit and working capital in planning..............55
Slides lecture 7............................................................................................................................................................ 61
Slides lecture 7............................................................................................................................................................ 61
Lecture 1 Financial statements and cash flows
Chapter 5 Financial Statements
§ 5.1 Income statement
● Functionality of the come statement
- The income statement: shows a firm’s performance over a specific period of
time.
- The statement helps financial statement users understand the sales
generated during the period and the expenses incurred to generate those
sales. If the expenses are smaller than the sales, the net result is profitability, or
net income, rather than a net loss.
- Breaking it down→ view on firm’s performance
● Sales and gross profit
- First section= sales, sales revenue, revenue, service revenue, and other similar
titles
- Gains and losses: income from items that aren’t common on the firm’s day-to-
day business, further down on income statement
2
, - Sales and any reductions on sales reported separately on the income
statement, begin with gross sales= all the sales to customers
- Returns on allowance, which is deducted from gross sales in order to find net
sales
- COGS cost of goods sold is deducted from net sales→ gross profit
- Gross profit = total revenue/sales - COGS
- Gross margin = gross profit / sales
- COGS: the costs directly involved in making the product that was sold during
the period, direct labor, direct materials, and the overhead assigned to the
product in production
- Gross profit= a reflection of how profitable the firm’s performance was in its
core business function, includes only the core business and direct costs of
performing that business. It shows financial statement users how effective the
business is at generating top-line profits on their core business function
● Income for operations
- After gross profit is calculated, other operating expenses are deducted in
order to calculate the firm’s income from operations= operating income,
building rents and utilities, property taxes, wages and salaries, and others
overhead costs
- Gross profit→ reflects only how profitable the firm was in making its core
product
- Operating income→ reflects how profitable the firm’s daily operations were as
a whole
- Common-size analysis reflects each element of a financial statement as a
percentage of the base, in case of income statement, the base is net sales
● Net income
- = the bottom line
- Net income (or loss) reflects the net impact of all financial transactions for the
firm, including those that are caused by events outside the normal course of
business. The most common items deducted from operating income to arrive
at net income include interest expense, gains/losses, and income tax expense.
Gains and losses are those that result from unusual transactions outside the
normal course of business.
● EBITA (earning before interest, taxes, depreciation, amortization)
- Amortization is similar to depreciation, it is spreading the cost of an intangible
asset over the course of its useful life. intangible assets= long term assets that
lack physical substance such as patents and copyrights
- EBITDA removes non cash items from the net income equation→ useful
measure in assessing the cash flows provided by operating activities.
- We will asses cash flows using the statement of cash flows
§5.2 the balance sheet
3
, ● The accounting equation and the classified balance sheet
- Income statement→ shows the performance of a firm over the course of time
- Classified balance sheet → shows the financial state of a company as of a
specific point in time, key distinction between two statements
The accounting equation reflects the assets,= items owned by the organization, and
how they were obtained, by incurring liabilities or provided by owners. Liability=
debts owed to other parties
Assets = liabilities + owner’s equity
- Classified balance sheet: assets and liabilities in smaller parts→ current and
noncurrent
- Current assets= those that can be used or converted to cash within a
year(cash, inventory, accounts receivable, and short-term investments)
- Noncurrent assets= assets that will be in use longer than a year (notes
receivable, machinery and equipment, buildings, and land
- Current liabilities= those that will be due in one year (accounts payable, wages
payable, and unearned revenue)
- Noncurrent liabilities= those that are due more than a year into the
future(notes payable)
- Stockholders equity: two primary categories of accounts:
- contributed capital= funds paid in by owners
- earned capital= funds earned by the corporation as part of business
operations
- retained earnings= a key component of the earned capital section, while the
stock accounts such as common stock, and additional paid-in capital are the
primary components of the contributed capital section
● Importance of balance sheet
Limitations:
- Assets under generally accepted accounting principles (GAAP), are recorded
as historical cost= the cost paid for the item it was purchased
- Estimates, if they are incorrect, the net value of the asset can be under- or
overstated
4
