basics of financial management

Slide 1: 

A balance sheet reports the dollar amounts of a company’s assets, liabilities, and  owner’s equity (or stockholders’ equity) as of a previous date. The balance sheet allows you to easily determine the amount of a company’s working capital and whether the company is highly leveraged.

Slide 2: 

Assets include cash, accounts receivable, inventory, investments, land, buildings, equipment, some intangible assets, and others. Generally assets are reported at their cost or a lower amount due to depreciation, the cost principle, and conservatism. Liabilities are obligations of a company as of the balance sheet date. These include loans payable, accounts payable, warranty obligations, taxes payable, and more.

Slide 3: 

The stockholders’ equity or owner’s equity report the amount of  the assets that came from the owners and not from its creditors. An expense is reported on the income statement. An expense is a cost that has expired, was used up, or was necessary in order to earn the revenues during the time period indicated in the heading of the income statement.

Slide 4: 

An expenditure is a payment or disbursement. The expenditure may be for the purchase of an asset, a reduction of a liability, a distribution to the owners, or it could be an expense. For instance, an expenditure to eliminate a liability is not an expense, while expenditures for advertising, salaries, etc. will likely be recorded immediately as expenses.

Slide 5: 

Here’s another example to illustrate the difference between an expense and an expenditure. A company makes an expenditure of $255,500 to purchase equipment. The expenditure occurs on a single day and the equipment is placed in service. Assuming the equipment will be used for seven years, the cost of the equipment will be reported as depreciation expense of $100 per day for the next 2,555 days (7 years of service with 365 days each year).

Slide 6: 

Dividends are a distribution of a corporation’s earnings to its stockholders. Dividends are not an expense of the corporation and, therefore, dividends do not reduce the corporation’s net income or its taxable income. Interest on bonds and other debt is an expense of the corporation. The interest expense will reduce the corporation’s net income and its taxable income. When interest expense occurs and is paid, the corporation’s cash is reduced by the interest payment, but some cash will be saved by the reduction in income taxes.

Slide 7: 

For example, if a corporation has an incremental tax rate of 40%, interest expense of $100,000 will result in $40,000 less in income tax expense and income tax payments. This means that an interest payment of $100,000 will reduce the corporation’s cash and retained earnings by the net amount of $60,000 ($100,000 of interest minus $40,000 of tax savings).

Slide 8: 

Investors pay a premium for an investment that will return an amount greater than existing interest rates. A common example of an insurance premium comes from auto insurance. A vehicle owner can insure the value of his or her vehicle against loss resulting from accident, theft and other potential problems. The owner usually pays a fixed premium amount in exchange for the insurance company's guarantee to cover any economic losses incurred under the scope of the agreement.

Slide 9: 

“Depreciation is the process by which a company gradually records the loss in value of a fixed asset. The purpose of recording depreciation as an expense over a period is to spread the initial purchase price of the fixed asset over its useful life. Each time a company prepares its financial statements, it records a depreciation expense to allocate the loss in value of the machines, equipment or cars it has purchased. However, unlike other expenses, depreciation expense is a "non-cash" charge.

Slide 10: 

Deferred Tax represents a company's liability for taxes owed that is postponed to future periods.  A deferred tax liability records the fact that the company will, in the future, pay more income tax because of a transaction that took place during the current period, such as an installment sale receivable.

Slide 11: 

An asset on a company's balance sheet that may be used to reduce any subsequent period's income tax expense. Deferred tax assets can arise due to net loss carryovers, which are only recorded as assets if it is deemed more likely than not that the asset will be used in future fiscal periods. If, for example, a company has a deferred tax asset of $25,000 on its balance sheet, and then the company earns $75,000 in before-tax accounting income, accounting tax expense will be applied to $50,000 ($75,000 - $25,000), instead of $75,000.

Slide 12: 

A noncash expense that reduces the value of an asset as a result of wear and tear, age, or obsolescence. Most assets lose their value over time (in other words, they depreciate), and must be replaced once the end of their useful life is reached. There are several accounting methods that are used in order to write off an asset's depreciation cost over the period of its useful life. Because it is a non-cash expense, depreciation lowers the company's reported earnings while increasing free cash flow.

AMORTIZATION : 

AMORTIZATION The deduction of capital expenses over a specific period of time (usually over the asset's life). More specifically, this method measures the consumption of the value of intangible assets, such as a patent or a copyright.

Slide 14: 

Suppose XYZ Biotech spent $30 million dollars on a piece of medical equipment and that the patent on the equipment lasts 15 years, this would mean that $2 million would be recorded each year as an amortization expense.While amortization and depreciation are often used interchangeably, technically this is an incorrect practice because amortization refers to intangible assets and depreciation refers to tangible assets. Amortization can be calculated easily using most modern financial calculators, spreadsheet software packages such as Microsoft Excel, or amortization charts and tables.

Slide 15: 

A trade-off (or tradeoff) is a situation that involves losing one quality or aspect of something in return for gaining another quality or aspect. It implies a decision to be made with full comprehension of both the upside and downside of a particular choice. In economics the term is expressed as opportunity cost, referring to the most preferred alternative given up. A trade-off, then, involves a sacrifice that must be made to obtain a certain product, rather than other products that can be made using the same required resources. For a person going to a basketball game, its opportunity cost is the money and time expended, say that would have been spent watching a particular television program.

Slide 16: 

When u buy a bond or debenture u become a creditor to the company. When u buy a share, u become a shareholder of the company. The company will pay u dividend on the shares held by you (share of your profit in the company is called dividend). Deposits are like any bank deposit. Interest is paid in various ways on the deposits.

Slide 17: 

bond will have low rate of interest, while company in financial difficulties bond holders payed first and then after debenture holder will be payed. bonds and debentures are acknowledgments of debts. Generally governments issue bonds for raising funds. Central Government, State Governments, and even municipal corporation today issue bonds for raising funds form the public. where as debentures are used by companies for raising long term debt from the public

Slide 18: 

What Does Compulsory Convertible Debenture - CCD Mean?A type of debenture in which the whole value of the debenture must be converted into equity by a specified time. The compulsory convertible debenture's ratio of conversion is decided by the issuer when the debenture is issued. Upon conversion, the investors become shareholders of the company.

Slide 19: 

What Does Convertible Debenture Mean?Any type of debenture that can be converted into some other security. For example, a convertible bond can be converted into stock.

Slide 20: 

What Does Debenture Redemption Reserve Mean?A provision that was added to the Indian Companies Act of 1956 during an amendment in the year 2000. The provision states that any Indian company that issues debentures must create a debenture redemption service to protect investors against the possibility of default by the company. Under the provision, debenture redemption reserves will be funded by company profits every year until debentures are to be redeemed. If a company does not create a reserve within 12 months of issuing the debentures, they will be required to pay 2% interest in penalty to the debenture holders. Only debentures that were issued after the amendment in 2000 are subject to the debenture redemption service.

Slide 21: 

A stock variable is measured at one specific time, and represents a quantity existing at that point in time, which may have been accumulated in the past. A flow variable is measured over an interval of time. Therefore a flow would be measured per unit of time. The diagram provides an intuitive illustration of how the stock of capital currently available is increased by the flow of new investment and depleted by the flow of depreciation.

FLOW AND STOCK VARIABLE : 

FLOW AND STOCK VARIABLE

LEVERAGE : 

LEVERAGE the use of a small initial investment, credit, or borrowed funds to gain a very high return in relation to one's investment, to control a much larger investment, or to reduce one's own liability for any loss.

Slide 24: 

Most companies use debt to finance operations. By doing so, a company increases its leverage because it can invest in business operations without increasing its equity. For example, if a company formed with an investment of $5 million from investors, the equity in the company is $5 million - this is the money the company uses to operate. If the company uses debt financing by borrowing $20 million, the company now has $25 million to invest in business operations and more opportunity to increase value for shareholders.

Slide 25: 

Leverage helps both the investor and the firm to invest or operate. However, it comes with greater risk. If an investor uses leverage to make an investment and the investment moves against the investor, his or her loss is much greater than it would've been if the investment had not been leveraged - leverage magnifies both gains and losses. In the business world, a company can use leverage to try to generate shareholder wealth, but if it fails to do so, the interest expense and credit risk of default destroys shareholder value.

EQUITY AND PREFERENCE SHARE CAPITAL : 

EQUITY AND PREFERENCE SHARE CAPITAL Four Major Difference between Equity and Preferencial Share capital. 1)Voting rights Equity share holders: Yes Preference Share holders: No Equity share holders are having ownership and voting rights. They make a decision to through his voting rights 2)Dividend Equity shareholder may get dividend after geting prefernce share holders.so company gives preference to shareholder thats why we call as a preferencial shareholders. Eg: PS look like this way: 15% Preferencial share capital 15% is the dividend.

Slide 27: 

3)At the time of liquidation At the time of liquidation preference shareholder get back the money from the company rather than equity shareholders. 4)Redeemable and convertiable. Preference share capital can be redeemed and covertable as a equity shares and debentures .But equity share capital cann't be redeemable and convertable as a shares.