11 Module 1 for AE 19 - Lecture notes 1,4-7,10 PDF

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COLLEGE OF COMMERCE

DEPARTMENT OF ACCOUNTANCY

MODULE 1 PACKET AE 19 – FINANCIAL MANAGEMENT MODULE 1 OVERVIEW OF FINANCE AND ANALYSIS OF FINANCIAL STATEMENTS Welcome to Module I! In this module, we will discuss what finance entails and analysis of financial statements. Consultation hours Phone / messenger: 1:00 – 2:00 PM Mondays- Fridays Virtual time: 2:00 – 3.30 PM; 5:00-6:30 PM Mondays & Tuesdays

Module I: Learning Objectives By the end of the module, students will be able to: 1. explain what finance entails and why everyone should have an understanding of basic financial concepts. 2. identify different forms of business organization 3. identify major goals that firms pursue 4. explain the roles ethics and good governance play in successful businesses. 5. describe the basic financial statements and the information that each statement provides 6. explain how the firm’s stakeholders use the information in financial statements 7. explain how ratio analysis should be conducted and why the results of such an analysis are important to both managers and investors 8.

discuss potential problems associated with financial statement analysis

2020-2021 Module Packets for AE 19 (Financial Management) | College of Commerce | University of San Agustin, Iloilo City, 5000, Philippines

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DEPARTMENT OF ACCOUNTANCY Module 1: Course Content: Below is the schedule for Module 1:

Activity

Description

Time to Complete

Assigned Reading

Overview of Finance*

30 minutes

Lecture Discussion

Form of Business Organization and Goals of

30 minutes

the Business Assigned Reading

Analysis of Financial Statements

30 minutes

Lecture Discussion

Financial Report and Ratio Analysis

30 minutes

ACTIVITY 1

BUSINESS IN YOUR COMMUNITY

20 minutes

ACTIVITY 2

CASE ANALYSIS – GOOGLE GLASS

ACTIVITY 3

PROBLEM SOLVING

30 minutes

QUIZ

Summative Quiz

30 minutes

20 minutes

*Suggested Readings: Besley, Scott and Brigham, Eugene, Corporate Finance, Philippines Edition. Cengage Learning Chapter 1

An Overview of Managerial Finance

Chapter 2

Analysis of Financial Statements

Any book or related reading materials on the topic.

Deadline for Module I is on in on September 16, 2020

2020-2021 Module Packet for AE 19 (Financial Management) | College of Commerce | University of San Agustin, Iloilo City, 5000, Philippines

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DEPARTMENT OF ACCOUNTANCY LECTURE DISCUSSION I.

FORMS OF BUSINESS ORGANIZATION

The forms of business organizations are: 1. Sole proprietorship – an unincorporated business owned by one individual 2. Partnership – exist whenever two or more persons associate to conduct a noncorporate business 3. Corporation – a legal entity created by a state and it is separate and distinct from its owners and managers 4. Hybrid forms of business (in the US) a. Limited liability partnership b. Limited Liability company c. S corporation

II.

GOALS OF THE FIRM

The primary goal of the firm should be to maximize the wealth of firm’s owners, the stockholders. The simplest and best measure of stockholder wealth is the firm’s share price. A common misconception is that when firms strive to make their shareholders happy, they do so at the expense of other constituencies such as customers, employees, or suppliers. This thinking ignores that in most cases, to enrich shareholders, managers must first satisfy the demands of these other interest groups. Dividends that stockholders received ultimately come from the firm’s profits. To determine whether a particular course of action will increase or decrease shareholder’s wealth, managers have to assess what return the action will bring and how risky that return might be as shown below.

2020-2021 Module Packet for AE 19 (Financial Management) | College of Commerce | University of San Agustin, Iloilo City, 5000, Philippines

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DEPARTMENT OF ACCOUNTANCY

III.

ETHICS AND GOVERNANCE IN BUSINESS

Business ethics are the standards of conduct or moral judgment that apply to persons engaged in commerce. Violations of these standards in finance involve a variety of actions: “creative accounting,” earnings management, misleading financial forecasts, insider trading, fraud, excessive executive compensation, options back-dating, bribery, and kickbacks. Considering Ethics Robert A. Cooke, a noted ethicist, suggest that the following questions must be used to assess the ethical viability of a proposed action: 1.

Is the action arbitrary or capricious? Does it unfairly single out an individual or group?

2. Does the action violate the moral or legal rights of any individual or group? 3. Does the action conform to accepted moral standards? 4. Are there alternative courses of action that are less likely to cause actual or potential harm? Considering such questions before taking action can help ensure its ethical viability.

IV.

FINANCIAL REPORTS

The four key financial statements required by the SEC for reporting to shareholders are: 1.

The income statement

2. The balance sheet/ statement of financial position

2020-2021 Module Packet for AE 19 (Financial Management) | College of Commerce | University of San Agustin, Iloilo City, 5000, Philippines

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DEPARTMENT OF ACCOUNTANCY 3. The statement of stockholder’s equity 4. The statement of cash flows Income Statement The income statement provides a financial summary of the firm’s operating results during a specified period. Most common are income statements covering a 1-year period ending at a specified date, ordinarily December 31 of the year. Below is the income statement of Barlett Company for the year ended December 31, 2015 and 2014.

2020-2021 Module Packet for AE 19 (Financial Management) | College of Commerce | University of San Agustin, Iloilo City, 5000, Philippines

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DEPARTMENT OF ACCOUNTANCY Balance Sheet The balance sheet presents a summary statement of the firm’s financial position at a given time. The statement balances the firm’s assets (what it owns) against its financing, which can either be debt (what it owes) or equity (what was provided by owners). Below is the balance sheet of Barlett Company as of December 31, 2015 and 2014.

2020-2021 Module Packet for AE 19 (Financial Management) | College of Commerce | University of San Agustin, Iloilo City, 5000, Philippines

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DEPARTMENT OF ACCOUNTANCY Statement of Retained Earnings The statement of retained earnings is an abbreviated form of the statements of stockholders’ equity. Unlike the statement of stockholders’ equity, which shows all equity account transactions that occurred during a given year, the statement of retained earnings reconciles the net income earned during a given year, and any cash dividend paid, with the change in retained earnings between the start and the end of the year. Below is the statement of retained earnings of Barlett Company for the year ended December 31, 2015 and 2014.

Statement of Cash Flows The statement of cash flows is a summary of the cash flows over the period of concern. The statement provides insight into the firm’s operating, investment, and financing, cash flows and reconciles them with the changes in its cash and marketable securities during the period. The statement of cash flows of Barlett Company for the year ended December 31, 2015 and 2014 is shown on the next page.

2020-2021 Module Packet for AE 19 (Financial Management) | College of Commerce | University of San Agustin, Iloilo City, 5000, Philippines

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DEPARTMENT OF ACCOUNTANCY

V.

RATIO ANALYSIS

Ratio analysis involves methods of calculating and interpreting financial ratios to analyze and monitor the firm’s performance

Types of Ratio Comparison 1. Cross-sectional analysis – involves the comparison of different firm’s financial ratios at the same point in time.

2020-2021 Module Packet for AE 19 (Financial Management) | College of Commerce | University of San Agustin, Iloilo City, 5000, Philippines

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DEPARTMENT OF ACCOUNTANCY Benchmarking – comparing a firm’s ratio values with those of a key competitor or with a group of competitors that it wishes to emulate. 2. Time-Series Analysis – evaluates performance over time. 3. Combined analysis – the most informative approach of ratio analysis; combines cross senctional and time-series analysis

2020-2021 Module Packet for AE 19 (Financial Management) | College of Commerce | University of San Agustin, Iloilo City, 5000, Philippines

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DEPARTMENT OF ACCOUNTANCY Categories of Financial Ratios Financial ratios can be divided for convenience into five general categories: liquidity, activity, debt, profitability and market ratios.

1. Liquidity Ratio – is the firm’s ability to satisfy its short-term obligations as they come due.

2020-2021 Module Packet for AE 19 (Financial Management) | College of Commerce | University of San Agustin, Iloilo City, 5000, Philippines

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DEPARTMENT OF ACCOUNTANCY

2. Activity Ratio – measure the speed with which various accounts are converted into sales or cash, or inflows or outflows

2020-2021 Module Packet for AE 19 (Financial Management) | College of Commerce | University of San Agustin, Iloilo City, 5000, Philippines

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DEPARTMENT OF ACCOUNTANCY

2020-2021 Module Packet for AE 19 (Financial Management) | College of Commerce | University of San Agustin, Iloilo City, 5000, Philippines

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DEPARTMENT OF ACCOUNTANCY

2020-2021 Module Packet for AE 19 (Financial Management) | College of Commerce | University of San Agustin, Iloilo City, 5000, Philippines

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DEPARTMENT OF ACCOUNTANCY

3. Debt Ratios – The debt position of a firm indicates the amount of other people’s money being used to generate profits. In general, the more debt a firm uses in relation to its total assets, the greater its financial leverage. Financial leverage is the magnification of risk and return through the use of fixed-cost financing, such as debt and preferred stock.

2020-2021 Module Packet for AE 19 (Financial Management) | College of Commerce | University of San Agustin, Iloilo City, 5000, Philippines

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COLLEGE OF COMMERCE

DEPARTMENT OF ACCOUNTANCY

2020-2021 Module Packet for AE 19 (Financial Management) | College of Commerce | University of San Agustin, Iloilo City, 5000, Philippines

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DEPARTMENT OF ACCOUNTANCY

2020-2021 Module Packet for AE 19 (Financial Management) | College of Commerce | University of San Agustin, Iloilo City, 5000, Philippines

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DEPARTMENT OF ACCOUNTANCY 4. Profitability ratios – as a group, these measures enable analysts to evaluate the firm’s profits with respect to a given level of sales, a certain level of assets, or other owner’s investment. Common-Size Income Statements – each item on this statement is expressed as a percentage of sales. It is especially useful when comparing performance across the years because it is easy to see if certain categories of expenses are trending up or down as a percentage of the total volume of business that the company transacts. Below is the common-size income statement of Bartlett Company for 2015 and 2014

2020-2021 Module Packet for AE 19 (Financial Management) | College of Commerce | University of San Agustin, Iloilo City, 5000, Philippines

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COLLEGE OF COMMERCE

DEPARTMENT OF ACCOUNTANCY

2020-2021 Module Packet for AE 19 (Financial Management) | College of Commerce | University of San Agustin, Iloilo City, 5000, Philippines

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DEPARTMENT OF ACCOUNTANCY

2020-2021 Module Packet for AE 19 (Financial Management) | College of Commerce | University of San Agustin, Iloilo City, 5000, Philippines

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DEPARTMENT OF ACCOUNTANCY

5. Market Ratios – relate to the firm’s market values, as measure by its current share price, to a certain accounting values. These ratios give insight on how investors in the market place believe that the firm is doing in term of risk and return.

2020-2021 Module Packet for AE 19 (Financial Management) | College of Commerce | University of San Agustin, Iloilo City, 5000, Philippines

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COLLEGE OF COMMERCE

DEPARTMENT OF ACCOUNTANCY

2020-2021 Module Packet for AE 19 (Financial Management) | College of Commerce | University of San Agustin, Iloilo City, 5000, Philippines

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DEPARTMENT OF ACCOUNTANCY Activity 1-1 Businesses in Your Community a. Describe each form of business organization. What are the advantages and disadvantages of each form? b. Make a survey of the different forms of business organization in your community. Give at least one example of a sole proprietorship, partnership, and corporation. Be sure to get the business name or trade name, line of business, form of business organization, address, and capitalization (if available). Your output will be graded using the rubric below: Businesses in your community CRITERIA

RATINGS

Pts.

Description

6 pts Full Marks Participant was able to describe all three forms of business organization

3 pts Half Mark Participant was able to describe at least 1 form of business organization

0 pts No Mark Participant was not able to describe any form of business organization

6

Explanation

6 pts Full Marks Participant was able to give the advantages and disadvantages of all three forms of business organization

3 pts Full Marks Participant was able to give the advantages and disadvantages of at least 1 form of business organization

0 pts No Mark Participant was not able to the advantages and disadvantages of any form of business organization

6

Example

8 pts Full Marks Participant was able to give example of all three forms of business organization complete with details

4 pts Full Marks Participant was able to give example of at least 1 form of business organization complete with details

0 pts No Mark Participant was not able to give example of any form of business organization

8

Total Points

2020-2021 Module Packet for AE 19 (Financial Management) | College of Commerce | University of San Agustin, Iloilo City, 5000, Philippines

20

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DEPARTMENT OF ACCOUNTANCY Activity 1-2 Case Analysis

“Source: Gitman, L. J. and Zutter, C. J., Principles of Managerial Finance, Global Edition. Pearson Education Limited”

Your output will be graded using the rubric below: Businesses in your community CRITERIA

RATINGS

Pts.

Question 1

4 pts Full Marks Participant was able to give and explain his answer well.

2 pts Half Mark Participant was able to give an answer but did not have a good explanation,

0 pts No Mark Participant was not able to give an answer.

4

Question 1

6 pts Full Marks Participant was able to give and explain his answer well.

3 pts Half Mark Participant was able to give an answer but did not have a good explanation,

0 pts No Mark Participant was not able to give an answer.

6

Ttotal Points

2020-2021 Module Packet for AE 19 (Financial Management) | College of Commerce | University of San Agustin, Iloilo City, 5000, Philippines

10

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DEPARTMENT OF ACCOUNTANCY Activity 1-3 Problem Solving Problem 1

Problem 2

The following financial data for 2015 are also available: 1. Sales totaled $1,800,000 2. The gross profit margin was 25% 3. Inventory turnover was 6.0 4. There are 360 days in the year 5. The average collection period was 40 days 6. The current ratio was 1.60 7. The total asset turnover was 1.20 8. The debt ratio was 60%

2020-2021 Module Packet for AE 19 (Financial Management) | College of Commerce | University of San Agustin, Iloilo City, 5000, Philippines

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DEPARTMENT OF ACCOUNTANCY Problem 3 Classify the ratio by checking the appropriate classification below: Liquidity Ratio

Activity Ratio

Debt Profitability Ratio Management

Market Value

1. Current ratio Current assets current liabilities 2. Quick ratio Current assets-inventory Current Liabilities 3. Inventory turnover Cost of goods sold Inventory 4. Average daily sales Annual Sales 365 5. Average collection period Accounts receivable Average daily sales 6. Fixed asset turnover Sales Net fixed asset 7. Debt ratio Total Liabilities Total Assets 8. Asset to equity ratio Total Assets Common Equity 9. Debt to equity ratio Long-term debt Stockholders’ equity 10. Times Interest earned Earnings before interest and taxes Interest expenses 2020-2021 Module Packet for AE 19 (Financial Management) | College of Commerce | University of San Agustin, Iloilo City, 5000, Philippines

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DEPARTMENT OF ACCOUNTANCY 11. Gross profit margin Gross Profit Sales 12. Operating Profit Margin Operating Profit Sales 13. Net profit Margin Earnings available for common stockholders Sales 14. Earnings per share Earnings available for common SH No. of shares of common stock outstanding 15. Return on total assets Earnings available for common SH Total Assets 16. Return on common equity Earnings available for common SH Common stock equity 17. Price/Earnings Market price per share Earnings per share 18. Market/Book Market Price per share Book value per share

2020-2021 Module Packet for AE 19 (Financial Management) | College of Commerce | University of San Agustin, Iloilo City, 5000, Philippines

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DEPARTMENT OF ACCOUNTANCY Ratio Analysis Data for Strawberry Company is as follow: Strawberry Company Statement of Financial Position As of December 31, 2020 (in thousands) Assets Cash Receivables Inventories Total current assets Net fixed assets

77,500 336,000 241,500 ₱ 655,000 292,500

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