17/09/2021

Exam = 60%

 similar as examples and exercises we do in class

Syllabus:
1. Financial statements
 3 parts: Financial statements – balance sheet and profit and loss Cashflow
 3 financial statements most important in a business:
o Profit/loss: We may find that there are companies with a P/L positive, but it has
strong financial problems – we also need to look at the balance sheet
o Cashflow statement
o Balance sheet
 Profit 100 doesn’t mean that the company has generated cash 100
2. Financial Ratios:
 There are thousands of them (ration is basically x dividend by y)
3. Investment Appraisal
 A company cannot grow without investing but the company has limited resources – where
should we invest it to optimize the use of these resources?
 How to do this investment? With our own funds or with someone else’s funds?
 If I have a prfot, what should I do with that money? Should I invest it back to the company or
give it out
 Dividend = a proportional part of the company’s profit given back to the investors
 How to decide about an investment?

Apple = a typical company that gains millions of money (cow cash) – there are analysts who make
reports on what each company is doing. If the reports are positive the share goes up, if it’s
negative – share price goes down

Critique of Apple = they have too much cash, and don’t make the most of it. Each company needs
and operative cash but then there is the excess cash – with this you can invest but Apple doesn’t
always do it. Or they don’t invest in the correct thing.

Many companies such as Google decide to invest in startup, eg Drones (corporate venture
capital) – it’s less expensive than creating a division of engineers, and employees (so google
becomes the owner of that company).

4. Operative Finance
 Day to day finance a company needs
 HRM manager (operation manager)
o You have to know about the financial consequences of your decisions

Learning Objectives:
1. Understand the content of the 3 basic financial statement:
a. Income statement
b. Balance sheet statement
c. Cash flow statement
2. Evaluate firm’s profitability using their income statement.
BASIC FINANCIAL STATEMENTS:

1. Income statement shows: the profit and losses the company made during the whole year
a. How much money you made last year?
b. Revenue, expenses, profits over a year or quarter
c. Expenses and Revenues and we’re seeing what the balance is between the two
i. Expenses = salaries, suppliers, renting the building or machinery, financial
costs (paying down a loan), marketing costs
2. Balance sheet: What’s your current financial situation? A snapshot on a specific date
a. Assets = value of what the firm owns
b. Liabilities = value of firm’s debts
c. Shareholder’s equity (the money invested by the company owners)
d. There is no company that grows without investing (machinery, people, …)
e. If I invest 100 into a building that’s really worth 50, we’re not investing wisely
3. Cash flow: real cash movements
a. Cost of salaries = 100
b. I can a have a revenue of 1 million but from cash perspective is 500k because my
client is due to pay me the resting 500k

Why Study financial statements?

 Assess current performance

 Monitor and control operations
 Forecast future performance

INCOME STATEMENT
 Sales
o Minus cost of goods sold
 =Gross profit
 Minus Operating Expenses
o Selling expenses
o General and Administrative expenses
o Depreciation and Amortization Expense
 = Operating income (EBIT)

 Minus Interest Expense

 = Earnings before taxes (EBT)
 Minus Income taxes
 = Net income (EAT)

 Sales = number of units sold (I sell 100 pens at 5 dollars each => revenue is 500) or services

 Cost of goods sold = how much I spend on making the product, even salaries of people who
are directly linked to the production, or the product
o Formula of cost of goods sold: Stock initial + purchases – stock final
o EX:Day 1 – my warehouse is empty (Stock initial 0)  in order to sell I need to buy
100 pens , and my supplier charges me 2 euros per unit (I must pay 200 = purchase)
 I now have 100 in my warehouse so my Cost of goods sold is 100 (0+200-100)
o I sell 50 pens to my client, 5 euros a unit- my revenue is 250

My gross profit = 250 – 100 = 150