Dr Irena Jindrichovska Corporate finance A1

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Corporate Finance A1

Vysoká škola finanční a správní

Summer Semester 2013

Irena JindřichovskáIrena.jindrichovska@mail.vsfs.cz

Dr Irena Jindrichovska Corporate finance A1

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Corporate finance A1

Literature• Block, Stanley: Foundations of Financial Management

McGraw-Hill, 2009ISBN 978-0-07-128525-4

• Gowthorpe, Catherine, Business accounting and finance for non-specialists (2nd ed., London: Thomson Learning, 2005). ISBN: 978-1-84480-200-5

Dr Irena Jindrichovska Corporate finance A1

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Introduction to financial statements (CH1)

• Forms of business organization

• Uses and users of financial information

• Business activities

• Communication with users

• Starbucks’ financial statements

• Assumptions and principals of financial reporting

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Definition

• Accounting is the process of identifying measuring recording and communication financial information about organizations activities to permit informed decisions

• Recording the information and maintaining records = bookkeeping

• Accountants participate in designing the accounting and non-accounting systems for business managers

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Users of accounting information

• Sole proprietorship– Owned by one person

• Partnership– Owned by more than one person

• Corporation– Organised as a separate legal entity and owned

by stockholders - easy to transfer ownership, easier to raise funds, no personal liability

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Uses and users of financial information

• Accounting is information system, that identifies, records and communicates the economic events of an organisation to interested parties– Internal– External users

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Uses and users of financial information

• Internal users: detailed information for the needs of specific decisions– Managers: marketing, production, finance, directors– Employees

• External users: – investors (owners), – creditors (suppliers and bakers), – tax authorities, – regulatory agencies (SEC, FTC – fed trade commission), – customers, – labour unions, – economic planners

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Business activities

• Financing– To start and operate the business, owns funds, outside

sources – banks, selling shares and bonds

• Investing– To operate the business and finance assets, long term

assets and short term assets

• Operating– Creation of revenues from sales, services and interests

and spending expenses – costs of sales, general and admin expense interest expense

Dr Irena Jindrichovska Corporate finance A1

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Communication with users

• Communication via financial statements– Assets and liabilities – balance sheet– Revenues and expenses – income statement– Dividends and undistributed earnings – retained

earnings statement– Cash receipts and cash uses - statement of cash

flow

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Income statement

• To report the success of failure of the company’s operation for a period of time

• Lists company’s revenues and its expenses• Result is net income or net loss = bottom

line • Issuance of new stock and dividend

distribution are not part of income statement and do not determine the result.

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Retained earnings statement

• Retained earnings is the income the net earnings retained in the corporation.

• Retained earnings statement shows the amounts and causes of changes in retained earnings during the period.

• Beginning retained earnings is shown then net income is added and dividends are subtracted.– Dividend policy

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Balance sheet

• Reports assets and claims to those assets at a specific point in time

• Claims of creditors are liabilities

• Claims of owners are shareholder’s equity

• Basic accounting equation:– Assets = Liabilities + Stockholders’ equity

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Balance sheet II

• Assets• Liabilities and stockholders’ equity

– Common stocks– Retained equity

• Creditors use B/S as a source of information of whether they will be repaid– Capital structure?– Can the assets be easily sold to repay, etc.

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Statement of Cash Flow

• Cash receipts and cash payments– Operating activities– Investing activities– Financing activities

• Net increase and decrease of cash during the period

• Cash amount at the end of period

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Statement of Cash Flow II

• Where did cash come form during the period ?

• How was cash used during the period ?

• What was the change in the cash balance during the period ?

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Interrelationships of statements

• The retained earnings statement is dependent on the result of income statement

• The balance sheet and retained earnings statements are interrelated because the ending amount on the retained earnings statement is reported in B/S

• Statement of cash flow and balance sheet are related. Cash flow shows how the cash changed through the cash sources and uses and ending amount of cash must agree with cash in the B/S.

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Statements of Starbucks Corporation

• Financial statements that report information for more that one period are comparative financial statements

• Every set of financial statements is accompanied by explanatory notes

• Companies use different year end, often 31.12. but Starbucks uses Sunday closest to September 30 of each year.– Discuss the statements

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Other elements of annual reports

• U.S. companies that are publicly traded must provide their shareholders with annual report each year.

– Management report and analysis covers• Ability to pay near term obligations

• Ability to fund operation and expansion

• Results of operation

– Notes to financial statements • Provide additional details on items presented in main body of

the report

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Other elements of annual reports II

– Auditor’s report• If accounts are in accordance with GAAP

unqualified report is issued

• If auditor expresses anything else then unqualified opinion, then financial statements should be used with caution

– Enron and Arthur Anderson

– Auditor’s independence

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Assumptions and principles in financial reporting

• Money unit assumption– Only issues that can be expressed in money are

reported (non-financial measures, are important?)• Economic entity assumption

– Only entities can report• Time period assumption

– Life of a business can be divided into artificial time periods

• Going concern assumption– Business will remain in operation for foreseeable future

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Assumptions and principles in financial reporting II

• Cost principle– All assets are recorded at the amount paid for

them – Revaluation of assets? market value of assets?

• Full disclosure principle– All events that would make a difference to

financial statement users should be disclosed.

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Overview

• Describe the primary forms of business organisation.• Identify the uses and users of accounting.• Explain the three principal types of business activity.• Describe the content and the purpose of each of the

financial statements.• Explain the meaning of assets, liabilities and stockholders’

equity.• State the basic accounting equation.• Describe the components that supplement the financial

statements in an annual report.• Explain the basic assumptions and principles underlying

financial statements.