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Financial Management

by: Tre Kohler IV

Financial Management FINN 3120

Tre Kohler IV
GPA 3.91

Donald Plath

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Donald Plath
Class Notes
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This 3 page Class Notes was uploaded by Tre Kohler IV on Sunday October 25, 2015. The Class Notes belongs to FINN 3120 at University of North Carolina - Charlotte taught by Donald Plath in Fall. Since its upload, it has received 42 views. For similar materials see /class/228896/finn-3120-university-of-north-carolina-charlotte in Finance at University of North Carolina - Charlotte.


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Date Created: 10/25/15
CH3 I INCOME STATEMENT A income statement indicates the amount of profits generated by a firm over a given period sales ICOGSL G Profit OP Exp OP income INT Exp Earnings before taxes Income tax NET INCOME 1 Sales cogs gross profit op exp op income are OPERATING ACTIVITES 2 Interest exp earrings before taxes are FINANCING ACTIVITES B Op Exp operating income is the result of management s decisions relating only to the operations of the business C Marketing and selling expensecost of promoting the firms products or services D General and administrative EXPthe firm s overhead EXP Executive salaries and rent exp E Depreciation EXPnoncash exp To allocate the cost of depreciable assets F Financing expense the interest expense resulting from the use of debt financing G NET INCOM E a figure representing a firms profit or loss for the period It also represents the earnings available to the firm s common stockholders H PROFIT MARGIN financial ratios that reflect the level of the firm s profits relative to its sales An important measurement of how well the firm is doing financially they are also important in assessing a firm s performance I Gross Profit Margin gross profit net sales It is a ratio denoting the gross profit earned by the firm as a of its net sales J OP Profit Margin OP income sales This ratio serves as an overall measure of the companies operating effectiveness K Net Profit Margin net incomesales A ratio that measures the net income of the firm as a of sales II BALANCE SHEET A Balance Sheet a statement that shows a firms assets liabilities and shareholder equity at a given point in time It is a snapshot of the firm s financial position on a particular date The conventional practice is to report the value of the firms various assets in the balance sheet by using the actual cost of acquiring them Thus the balance sheet does not reflect the current market value of the company s assets and does not reflect the value of the company itself It is the accounting book value B Accounting book value the value of an asset as shown on affirms balance sheet It represents the historical cost of the asset rather than its current market value or replacement cost Accounting book value is not the same as the market value of assets C TOTAL ASSTOTAL LIAB DEBT TOTAL SHAREHOLDERS EQUITY D Current assetsare liquid expected to be converted into cash win 12 months 1 cashcash on hand demand deposits and short term marketable securities that can quickly be converted into cash 2 Accounts rec the amounts owed to the firm by its customers who but on credit 3 inventories raw materials works in process and finished goods 4 Other current ass Ex Prepaid expenses E Fixed assets long term in nature such as machinery and equipment buildings and land 1 Depreciation expense a non cash expense to allocate the cost of depreciable assets such as plant and equipment over the life of the asset 2 Accumulated depreciation the sum of all depreciation taken over the entire life of a depreciable asset III Types of Financing A Liabilities debt capital is financing provided by a creditor 1 Short term 2 long term B Current debt must be repaid win 12 months 1 Acc payable 2 Trade Credit 3 Accrued exp expenses that have incurred but not yet paid in cash wages 4 Short term note money borrowed from the bank and will be paid win 1 year C Long term debt loans longer than 1 year D Equity shareholders investment 1 Preferred stockholders have claims on the firm s income and assets after creditors but before common stockholders 2 Common stockholders common stockholders are the residual owners of the firm a par value the value a firm put on each share of stock for sale b addition paid in capital the amount the co receives from selling stock to investors above par value c treasury stock stock that has been repurchased by the firm d retained earnings cumulative profits retained in a business up to the date of the balance sheet IV WORKING CAPITAL A gross working capital is the same as current assets GWCCurrent Assets B net working capital the difference between the firm s current assets and its current liabilities When the term WORKING CAPITAL is used it is frequently intended to mean new working capital NETWORKING CAPITAL CURRENT ASSETS CURRENT LIABILITIES C CURRENT ASSETS cash CURRENT OPERATING ASSETS market securities inventory rec and prepaid expense D CURRENT LIABILITIES OPERATING no interest accounts payable accrual accounts FINANCING interest interest payable notes payable C the larger the net working capital a firm has the more able the firm will be to pay its debt as it come due The amount of net working capital is important to a company s lenders D One reason a firm would have a negative net working capital is that businesses involve mostly cash sales V MEASURING CASH FLOWS A Accrual basis accounting a method ofaccounting whereby revenue is recorded when it is earned whether or not the revenue has been received in cash Likewise expenses are recorded when the incurred even if the money has not actually been paid out Sales for a given year do not correspond exactly to the actual cash collected from sales Profits and cash flows are not the same thing A business could be profitable but have negative cash flows even to the point of going bankrupt B Free cash flows the amount of cash available from operations after the firm pays for the investments it has made in operating working capital and fixed assets This cash is available to distribute the firm s creditors and owners The remaining cash is free to be distributed to the creditors and shareholders thus the term free cashflows It is always included in the financial section of affirms annual report This method for presenting cash flows focuses on identifying the sources and uses of cash that explain the change in a firms cash balance reported in the balance sheet C 3 key activities that explain the cash inflows and outflows 1 Generating cash flows from day to day business operations Ex purchasing on credit selling on credit paying for the inventories and collecting on sales 2 Investing in fixed assets and other long term investments Ex equipment building 3 Financing the business Ex borrowingrepaying debt paying dividends issuing stock buying back stock VI Cash flows from operations A cash flows from operations we want to convert the company39s income from accrual basis to cash basis OPERATIONS CASH FLOW CHANGE IN NET OPERATING WORKING CAPITAL OPERATING CASH FLOWNE39 NCOMEDEPERATION EXP AMMERAZION EXPNTREST EXP 1 Add back depreciation to net income Depreciation is not a cash exp 2 Subtract any uncollected sales increase in accounts rec and cash payments for inventories increases in inventories less increases in acc pay B investing in fixed assets when a company purchases fixed assets these expenditures are shown as an increase in gross fixed assets not the increase in net fixed assets 1 If it goes UP you spend money the is a SUBTRACT 2 If it goes DOWN you earn money that is an ADD C Financinga Business 1 Paying dividends to the owners 2 increasingdecreasing short and long term debt preferred and common stock a if it goes up you ADD b if it goes down you SUBTRACT 3 Interest Exp You always SUBTRACT 4 Payment of preferred and common stock you always SUBTRACT D NET CASH FLOWS WILL ALWAYS CHANGE IN CASH


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