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Financial Management

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  1. Financial Management Lecture 3: Financial Statements, Cash flow, and taxes


  3. History Financial Management • Why is it Important? • The economic system has grown enormously and has become quite complex

  4. The objective of financial statements • To provide a picture of the overall financial position and performance of the business. • For this objective to be achieved, the accounting system normally produces three statements at regular intervals. • The cash flow statement (tracks cash movements (in/out) in a given period) • Profit and loss account (income statement) – information on how much wealth was generated or lost in a given period • Balance sheet ( shows the accumulated wealth or the status of an organisation at the end of a given period)

  5. Cash Flow Statement • “Summary of a company's cash receipts and cash disbursements over a period of time; Lists cash to and cash from operating, investing, and financing activities, along with the net increase or decrease in cash for the period”. • Refer to the National Express statement

  6. Net Cash Flow • The actual net cash, as opposed to accounting profit (net income), that a firm generates during a specified period • Net cash flow = Net Income + Depreciation and Amortization

  7. Cash flow statement • It is important that a manager understands what happened in his business over a period of time(i.e. trace the flow of cash during the period) • The cash flow in a business organisation revolve around three key business activities. • Use assets and fund raised to operate the business • Investment in assets to conduct business • Raising funds to finance the assets • Cash flow statement provides information on how a company's operations are running, where its money is coming from, and how it is being spent

  8. Balance Sheet • “A record of a company's financial structure, showing what a company owns (assets), what it owes (liabilities) and what is left over for the owners (shareholders) after what it owes is deducted from what it owns (the net worth, also commonly referred to as equity)”. • For additional information please consult the following link:

  9. Balance Sheet • Provides information on an organisation’s assets, liabilities and equity and their relationships to each other at a point in time. • Assists in answering the following questions: • Can the firm meet its financial obligations? • How much money has already been invested in this company? • Is the company overly indebted? • What kind of assets has the company purchased with its financing? (Ameritrade, 2003)

  10. Trading Profit & Loss Account(Income Statement) • “A financial statement that contains a summary of a business' financial operations for a specific period of time. It shows the net profit or loss for the period by stating the company's revenues and expenses”. GLOSARY DATA LOOK UP

  11. Trading Profit & Loss Account(Income Statement) • Provides information on: • sales • direct cost of sales • gross profit • administrative and other expenses • corporation tax liability • net profit • dividends (declared and proposed) • retained earnings.

  12. Modified Accounting and Data for Investor and Managerial Decision • Prepared by accountants and presented in annually report (mostly) • Helpful for corporate decision making and stock valuation purposes • If company obtains more assets than it actually needs, it will have raised too much capital and can impact to unnecessarily high capital cost

  13. Cont’ • Operating Assets and Operating Capital • When evaluating a company’s overall position and value, analyst often focus on net operating working capital (NOWC) • NOWC

  14. Cont’ • NOWC • Operating working capital less accounts payable and accruals. It is the working capital acquired with investor supplied funds • Total operating capital = NOWC + Fixed assets

  15. Cont’ • Net Operating Profit After Taxes (NOPAT) the profit a company would generate if it had no debt and held only operating assets. • Free cash flow which is available for distribution to all investors ( stockholders and debt holders ) after company made all the investments in fixed asset, new product and working capital

  16. The Federal Income Tax System and terms • Corporate Taxes • Personal Taxes • Interest Paid • Interest Earned • Dividends Paid • Dividends Received • Depreciation