Finance Shortcourse

Jakarta, 26 Aug 2014

 Some Preliminary Questions
• Determine how the following transactions will impact the financial statements (increase
expense, decrease expense, increase income, decrease income, increase asset, decrease
asset, increase liability, decrease liability, increase stockholders’ equity, decrease
stockholders’ equity, cash inflow, cash outlow):

– Payment of airtime & phone charges of

– Purchase of cellular phones for the Sales Team
– Purchase of raw material
– Sales of your product to Carrefour on credit.
– Purchase of a Toyota Camry for a newly promoted Marketing Director.
– Payment of Staff salaries
– Sales of your product to a store in Cash
– Borrow Rp 200 mio from Bank Mandiri
– Purchase of Ruko for your warehouse via KPR
YOUR EXPECTATION ??
FINANCIAL STATEMENT = FINANCIAL SITUATION

• Income Statement (Laporan Rugi Laba)

• Balance Sheet (Neraca)

• Statement of Cash Flows

Finance for Non Finance

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 HOW DID A COMPANY BECOME
BIGGER…AND BIGGER

Income Statement Balance Sheet/Neraca

Loan and equity generate assets

Assets utilized to
generate profit

Payout as
Dividend

Profit increase the equity

Finance for Non Finance

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 BASIC ACCOUNTING PRINCIPLE:
ACCRUAL vs. CASH BASIS
Accrual Cash
• Revenue: • Revenue:
– Revenue is earned – Cash is received
• Products are delivered /
transfer of ownership titles or
services are provided • Expense
– Revenue is realized or realizable
• Cash is received – Cash is paid
• Cash will be received in the
future

• Expense
– Expense is recognized in the period
in which related revenue is
recognized (Matching Principle)
– Activities / services are completed
or committed, goods are received
Finance for Non Finance
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 Pricing Structure
Factory
Distributor Retailer Consumer
(Principal)

• Buy at COGS • Buy at Base Price less • Buy at Retail Price / • Buy at Consumer
fixed discount Base Price less fixed Price
• Sell at Base Price discount
less Fixed • Sell at Retail Price
discount (Base Price + VAT) • Sell at Consumer
Price (Retail Price +
• Revenue = Fixed
Retail Markup)
discount from
Principal • Revenue = Retail
Markup

Finance for Non Finance

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 BALANCE SHEET
• Shows the financial condition of a business as of a
specific date or point in time.
• Presents a snapshot of the firm’s assets and the funding
for those assets.
• Three components:
– Assets
– Liabilities
– Stockholders Equity

• Assets = Liabilities + Equity

Finance for Non Finance

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 INCOME STATEMENT
• Also called Profit & Loss Statement, P&L or Statement of
Revenue & Expenses

• Shows the profitability of a business over a period of time

as opposed to a point in time

• Details the types of revenues and expenses that

contribute to a Net Income or Net Loss

• Net Income is usually reinvested back

into the business or paid out as a
dividend to stockholders.

Finance for Non Finance

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 CASH FLOW STATEMENT

• Show the major activities that have generated and used cash
during a period.

• Cash include cash & cash equivalents such as short-term,

highly liquid investments (treasury bills, money market funds,
commercial paper)

Finance for Non Finance

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BALANCE SHEET
NERACA
 BALANCE SHEET (NERACA)
• Shows the financial condition of a business as of a specific date
or point in time.
• Presents a snapshot of the firm’s assets and the funding for
those assets.
• Three components of B/S:
– Assets
– Liabilities
– Stockholders Equity
• Assets = Liabilities +Stockholders’ Equity
BALANCE SHEET FRAMEWORK
BALANCE SHEET
 ASSETS
• Economic resources owned by a business:
– Tangible : buildings, equipment, inventories, cash
– Intangible : patents, trademarks, copyrights

• Valued at Historical Cost

– The cost incurred in acquiring the assets, not replacement cost or
market value
• 4 Major Asset Categories
– Current Assets
– Long Term Investments
– Property, Plant & Equipment
– Intangible Assets
 CURRENT ASSETS
• Cash and any other assets that can be converted into cash in the normal
operating cycle of a business, or one year, whichever is greater.

• Consists of :
– Cash
– Short Term Investments : Deposit, Money market fund
– Accounts Receivable (AR)
– Inventories
– Prepaid Expenses : Prepaid rental, prepaid insurance, prepaid taxes
 LONG-TERM INVESTMENTS
• Securities or investments that a company plans to hold longer than the
normal operating cycle or one year.
 PROPERTY, PLANT & EQUIPMENT
• Also called “PP&E” or Fixed Assets.
• Consists of Land, Buildings, Building equipment, Machinery & Equipment,
Furniture & fixtures, Computers
• Have a useful life greater than a year and have a value greater than certain
agreed amount
• Except for land, PPE are depreciated or reduced in value over a useful life.
• Depreciation is an expense recognized on the Income Statement.
 OTHER ASSETS
INTANGIBLE ASSETS
• Assets that have no distinct physical form.
• Include Goodwill, Patents, Trademarks, Copyrights.

GOODWILL
• Excess of purchase price over book value.
• KALBE purchases small company for approximately $50 million. The difference
between the asset value purchased and the price paid is Goodwill.
 DEPRECIATION
Depreciation is a process of allocation, systematic and rational process of distributing
the cost of tangible assets over the life of assets.

Cost to be allocated = acquisition cost - salvage value

Allocated over the estimated useful life of assets ; Allocation method should be
systematic and rational.

Depreciation methods based on time :

- Straight line method
- Declining balance method
- Sum-of-the-years'-digits method
 LIQUIDITY…What is it?
• The ability to convert an asset into cash.
• The more liquid the asset, the easier to convert into cash.
• The most liquid assets are listed first on the Balance Sheet.
• For example: Accounts Receivable is easier to convert to Cash than
Property, Plant and Equipment.

• What is the most liquid asset we have?

• What is the least liquid?
 REVIEW # 1
1. What is the accounting equation shown by the balance sheet?

2. The balance sheet shows the financial condition of a company:

a. at one point in time
b. over a period of time
c. average month

3. What is the difference between a liquid asset and one which is not liquid?

4. Name 4 major asset categories

5. Define current assets and give some examples.

6. Define Depreciation.
 LIABILITIES & STOCKHOLDERS’
EQUITY
• Show where the money to buy the company’s assets came from.
• Categories of Liabilities & Equity :
– Current Liabilities
– Long Term Debt

– Stockholders’ Equity
 LIABILITIES
CURRENT LIABILITIES
• Debts and other obligations that become due and must be paid in the
normal operating cycle of the business or one year.
• Examples are:
– Money owed to suppliers for materials/services
– Salaries payable to employees
– Interest on principal payments due on loans
– Taxes
– Anything else due within one year
– ACCRUED LIABILITIES - amounts due but not yet paid on the date that
the balance sheet is completed.

LONG TERM LIABILITIES

• Debts and other obligations that must be paid MORE than one year.
 STOCKHOLDERS’ EQUITY
• Total claim of the owners on the assets of a company after all liabilities and
debts have been paid.
• Components are:
– Capital Stock : Represents the number of shares owned by stockholders times the
par value per share; common stock & preferred stock
– Paid-in capital : Also referred to as Additional Capital , represents the difference
between stock sold at market value and par value.
– Retained Earnings : Earnings that have not been distributed to stockholders as
dividends but have been reinvested in the company. May be held in the form of
cash, other liquid assets, inventories, plant & equipment etc.
 Who Claims to the Company in the Event
of Bankruptcy?
In sequence, money are given back to :
• Short & Long Term Creditors
• Stockholders
 REVIEW # 2
1. What are the 3 categories of information shown on the Liabilities & Equity part of the B/S?
2. What is Current Liability?
3. List the following in the order of their claim on assets:
Preferred Stock
Common Stock
Liabilities

4. What 3 types of information is presented in the Shareholders’ equity section of the B/S?
5. Match the following:
assets A. ownership
liabilities B. everything owned
stockholders’equity C. everything owed
current assets D. cash & assets to be turned into cash within 1 year
long term debt E. Reinvested profits
retained earnings F. Distributed profits
dividends G. bank loans not payable within 1 year
INCOME STATEMENT
LAPORAN LABA RUGI
 P&L DEFINITIONS
• Net sales : Revenue from selling less all discounts, rebates, distributor margin, etc
• Cost of Goods Sold : Cost of Manufacturing Product that is sold
– 2 major components : Standard & Non-standard
– Standard Cost
• Material : Raw materials, packaging components & waste
• Conversion : Labor, employee related benefits, manufacturing supplies
• Support : Building Costs (Utilities, Depreciation etc.)
– Non-standard Cost : Variances vs. Standard, Product Liability, Idle Facility

• Gross Profit : Net Sales - Cost of Goods Sold

• Operating Expenses
– Selling : Field Sales & Sales Administrative expenses
– G&A : Expenses to support marketing management personnel
– R&D : Mark

• Operating Profit : Gross Profit – Operating Expenses

• Other Charges: Expense/income from interests, capital gain/loss, depreciation, etc
 P&L DEFINITIONS
• EBT/NPBT: Earning before taxes / Net Profit Before Taxes
• Taxes : Income tax (PPh Badan)
• EAT/NPAT: Earning after taxes / Net Profit After Taxes
 REVIEW # 3
1. Describe the information presented by the income statement.

2. What time period is covered by the income statement?

3. What does a company usually do with net income?

4. Write “R” for Revenue and “E” for expenses next to the each of the following
– sales of products or services
– interest on long term debt
– employee salaries
– interest from securities
– insurance & rent
– dividends from securities
– Office equipment
CASH FLOW STATEMENT
LAPORAN ARUS KAS
The CASH FLOW
 CASH FLOW STATEMENT
• Show the major activities that have generated and used cash during a
period.
• Cash include cash & cash equivalents such as short-term, highly liquid
investments (treasury bills, money market funds, commercial paper)
• Organized into 3 activities:
– Operating CF
– Investing CF
– Financing CF
CASH FLOW STATEMENT
 OPERATING CASH FLOW
• OPERATING ACTIVITIES : transactions that enter into the determination of
Net Income. These transactions include:
• Cash receipts from:
– Sales of goods or services
– Interest from all sources
– Dividends received from stock of other companies
– Miscellaneous income
• Cash payments to:
– Suppliers for purchases of inventory
– Employees for services
– Insurance, utilities, rent, interest for debt, etc.
– Taxes
 INVESTING CASH FLOW
• INVESTING ACTIVITIES - transactions that are involved in acquiring or
disposing of non-current assets. These transactions include:

• Cash provided by:

– Sale of property, plant & equipment
– Sale of securities that are not cash equivalents
– Collection on loans made to others
• Cash used to:
– Purchase property, plant & equipment
– Purchase of securities that are not cash equivalents
– Lend money to others
– Acquisition of Businesses
 FINANCING CASH FLOW
• FINANCING ACTIVITIES - transactions that involve borrowing from creditors
and any transactions involving the owners of the company. These
transactions include:

• Cash Provided by:

– Borrowing from creditors other than accounts payable
– Sale of capital stock to owners

• Cash used to:

– Retire notes, bonds, mortgages etc
– Repurchase stock from owners
– Pay cash dividends to owners
 REVIEW # 4
1. What are the 3 main activities shown in the Statement of Cash Flow?

2. Classify the following activities into operating, investing and financing:

– collection of accounts receivable
– proceeds from sale of fixed assets
– payment of dividends to stockholders
– proceeds from loans
– investment in club shares
– purchase of raw and packaging materials
– acquisition of land
 REVIEW # 5
• Determine how the following transactions will impact the financial statements (increase
expense, decrease expense, increase income, decrease income, increase asset, decrease
asset, increase liability, decrease liability, increase stockholders’ equity, decrease
stockholders’ equity, cash inflow, cash outlow):

– Payment of airtime & phone charges of

– Purchase of cellular phones for the Sales Team
– Purchase of raw material
– Sales of your product to Carrefour on credit.
– Purchase of a Toyota Camry for a newly promoted Marketing Director.
– Payment of Staff salaries
– Sales of your product to a store in Cash
– Borrow Rp 200 mio from Bank Mandiri
– Purchase of Ruko for your warehouse via KPR