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Managerial Finance
Program Magister Manajemen Universitas Gunadarma
Manajemen Keuangan
Budi Hermana
Refferences:
Principles of Managerial Finance, Lawrence J. Gitman, Harper Collins Publishers
Budi Hermana Magister Manajemen-Universitas Gunadarma-1
Managerial Finance
Chapter 1
The Role of Finance and The
Financial Manager
Budi Hermana Magister Manajemen-Universitas Gunadarma-2
Managerial Finance
The Role of Finance and The Financial Manager
Finance? The art and Science of managing money
Concerned with the process, institution, markets, and
instrument involved in the transfer of money among and
between individuals, businesses, and governments
Financial Services
Areas&
The area of finance concerned with the design and
Opportunities?
delivery of advice and financial product to individual,
business, and governments
Managerial Finance
concerned with the duties of the financial manager
in the business firm.
Budgeting
Financial forecasting Actively manage the financial
Cash management
affairs of many tipes of
Task? business- financial and non-
Credit administration
financial, private and public,
Investment Analysis large and small, profit-seeking
Funds procurement and not-for-profit
Budi Hermana Magister Manajemen-Universitas Gunadarma-3
Managerial Finance
Basic Forms Of Business Organization
A Business owned by one person and operated
Sole Proprietorship for his or her own profit
Small firm, unlimited liability
A Business owned by two or more persons and
Partnerships operated for profit
Written contract (article of partnership), unlimited liability,
Limited partership
An Intangible business entity created by law
Corporations (often called a “legal entity”)
Stockholders, board of directors, Chief executive officer
(CEO)
Budi Hermana Magister Manajemen-Universitas Gunadarma-4
Managerial Finance
Basic Forms Of Business Organization
Legal Form
Sole Propriatorship Partenrship Corporation
•Owner receives all profits •Can raise more more funds •Owners have limited liability which
(as well as losses) than sole proprietorships guarantees they cannot lose more than
•Low organizationak costs •Borrowing power enhanced invested
•Income taxed as personnel by more owners •Can achieve large size due to marketability
•More available brain power of stock (ownership)
Strength
income of proprietor
•Secrecy and managerial skill •Ownership is readily transferable
•Ease of dissolution •Can retain good employees •Long-life of firm- not dissolved by detah of
•Income taxed as personnel owners
income of partners •Can hire professional managers
•Can expand more easily due to access to
capital markets
•Receives certain tax advantages
•Owner has unlimited liability- •Owners have unlimited •T axes generally higher since corporate
total wealth can be taken to liability and may have to income is taxed and dividends paid to
satisfy debts covers debts of other less owners ara again taxed
Weaknesses
•Limited fund-raising power financially sound partners •More expensive to organize than other
tends to inhibit growth •When a aparter dies, business forms
•Propietor must be jack-of-all- partership is dissolved •Subject to greater government regualation
trades •Difficul to liquidate or •Employees often lack personnel interest in
•Difficult to give employees transfer partership firm
long run career opportunity •Difficult to achieve large- •Lack secrecy since stockholders must
•Lacks continuity when scale operations receive financial reports
propitor dies
Budi Hermana Magister Manajemen-Universitas Gunadarma-5
Managerial Finance
The Managerial Finance Function
Since most business
decisions are measured Managerial Finance is closely related to,
in financial terms, the but quite different from, Economics and
financial manager plays Accounting
a key role in the
operation of the firm
?
Organizational View
The size and importance of the managerial finance
depend on the size of the firm
In small firm the finance function generally performed by
the accounting department
In medium-to-large-size firm
Financia Separate department, vice-president of finance (CFO),
l Treasurer, Controller
Manage
r
The officer responsible for the firm’s financial activities: financial The officer responsible for the firm
planning and fund raising, managing cash, making capital accounting activities: tax management, data
expenditure decision, managing credit activities and managing processing, and cost and financial
the investment portfolio accounting
Budi Hermana Magister Manajemen-Universitas Gunadarma-6
Managerial Finance
The Managerial Finance Function
Relationship to Economics
The Financial Manager must understand the economic framework, and be
alert to the consequences of varying levels of economic activity and changes in
economic policy
?
Must be able to use economic theories as guidelines for efficient busineness operation
Supply-demand analysis Profit-Maximazing strategies Price Theory
Marginal Analysis
Economic principle which states Example
that financial decisions should be
made and actions taken only Benefits with new computer $100.000
when the added benefit exceed Less: Benefits with old computer 35.000
the added costs (1) Marginal (Added) benefits $65.000
Cost of new computer $80.000
Less: Proceeds from sale of old com 28.000
(2) Marginal (added) costs $52.000
Net Benefit [(1) – (2)] $13.000
Budi Hermana Magister Manajemen-Universitas Gunadarma-7
Managerial Finance
The Managerial Finance Function
Relationship to Accounting
The finance and accounting function are closely related and generally overlap;
indeed, managerial finance and accounting are not often easily distinguishable. In smal
firm the controller often carries out of the finance function, and in large firms many
accountants are intimately involved in various finance activities
Two Basic Differences
?
Emphasis of cash flows Decision Making
Accrual Method vs Cash Method The accountant devotes the
majority of attention to the
Recognizes revenue at the Recognized revenues and collection and presentation of
point of sale and expenses only with respect to financial data
recognized expenses when actual inflow and outflows of
incurred cash The financial manager evaluates
Accounting View Financial View the accountant’s statements,
develops additional data, and
makes decisions based on
Income statement Income statement
ABC Corporation ABC Corporation
subsequent analyses
For the year xxxx For the year xxxx
This does not mean that
Sales Revenue $100.000 Cash inflow $ 0 accountant never make decision,
Less: Costs 80.000 Less: Cash Outflow 80.000 or that financial manager never
gather data
Net Profit $ 20.000 Net Profit ($80.000)
Budi Hermana Magister Manajemen-Universitas Gunadarma-8
Managerial Finance
The Managerial Finance Function
Key Activities of The Financial Manager
Primary Activities
Performing Financial Analysis and Planning
1. Transforming financial data into a form that Performing
can be used to monitor the firm’s financial Financial Analysis
condition and Planning
2. Evaluating the need for increased (or
reduced) productive capacity
Balance Sheet
3. Determining what additional (or reduced)
financing is required
Making Investment
Making Financing
Current Current
Making Investment Decisions Assets Liabilities
Decision
Decision
Determine both the mix and the type of assets found
on the firm’s balance sheet
The left-hand side of the balance sheet Fixed Long-Term
Assets Funds
Making Financing Decision
Deals with The right-hand side of the balance
sheet and involves two major area:
1. Most appropriate mix of short-term and long-
term financing must be established
2. Which individual short-term or long-term
sources of financing are the best at given point
in time
Budi Hermana Magister Manajemen-Universitas Gunadarma-9
Managerial Finance
The Managerial Finance Function
Goal of The Financial Manager
Maximize Profit?
Some pepople believe that the owner’s objective is always EPS:
to maximize profits The amount earned during the
period on each outstanding share
The Financial Manager are expected to make a major of common stock
contribution to the firm’s overall profit
For Corporation, profit are commonly measured in terms of
Earnings per Share (EPS) period’s total earnings avaliable for
the firm’s common stock holders
Earning per share (EPS) The number of shares of common
stock outstanding
Investment year 1 year 2 year 3 total
X $1.40 $1.00 $0.40 $2.80 The chance that actual outcomes
Y 0.60 1.00 1.40 3.00 √ may differs from those expected
Basic primises in managerial
Profit maximization fails for reason: finance is that trade-off exist
between return (cash flow) and
1. Timing of return
risk
2. Cashflow avaliable to stockholder
3. Risk Return and risk are in fact the key
determinant of share price–
Stockholder are risk-averse ? which represents the wealth of the
owners in the firm
Budi Hermana Magister Manajemen-Universitas Gunadarma-10
Managerial Finance
The Managerial Finance Function
Goal of The Financial Manager
Maximizing Shareholder Wealth
The goal of the financial manager
is to maximize the wealth of the
owners for whom the firm is being
managed
Timing of return (cash flow)
Measured by the share
price of the stock magnitude
Risk
Financial decisions and share price
Increase
Financial Financial Decision Return?
Manager Alternative or action Risk?
Share Yes Acept
Price ?
Yes
Reject
Budi Hermana Magister Manajemen-Universitas Gunadarma-11
Managerial Finance
The Managerial Finance Function
Goal of The Financial Manager
The Agency Issue Management can be viewed as
agents of the owners who have
The goal of the financial manager
hired them and given them
should be to maximize the wealth
decision-making authority to
of the owners of the firm
manage the firm for the owners’
benefit
In theory In practise
Most financial managers would agree However, managers also concern with
with the goal of owner wealth their personnel wealth, job security,
maximization lifestyle, and privilege
Agency problem
To prevent or minimize problem
The likelihood that managers may place
personnel goals ahead of corporate goals
Agency Cost
Audit&control Monitoring expenditure
Fidelity bond Bonding expenditure
Managerial compensation: Structuring expenditure
stock option, performance share, cash bonuses
Opportunity cost
Budi Hermana Magister Manajemen-Universitas Gunadarma-12
Managerial Finance
The Managerial Finance Function
Goal of The Financial Manager
The Role of Ethics
Ethics – Standard of conduct or
example
moral judgement
Corporate Ethics Guidelines
and Policies Responsibility
Ethics and share price Fairness
Transparency
Issues Update
Accountability
Good Corporate Governance
www.fcgi.or.id
http://www.kpk.go.id/modules/edito/content.php?id=27
http://www.bi.go.id/NR/rdonlyres/2246113B-DC63-4731-8558-3693A 6254962/3449/pbi8406.pdf
Corporate Social Responsibility
http://www.goodyear-indonesia.com/social_responsibility.html
http://www.telkom.co.id/pojok-media/siaran-pers/telkom-memperoleh-penghargaan-corporate-
social-responsibility.html
Certified Financial Analyst
http://www.cfainstitute.org
Budi Hermana Magister Manajemen-Universitas Gunadarma-13
Managerial Finance
Chapter 2
The Operating Environment of
The Firm
Budi Hermana Magister Manajemen-Universitas Gunadarma-14
Managerial Finance
Business Taxation
Ordinary Income
Income earned through the sale
of a firm’s goods and services
Corporate Tax Rate Schedule
Tax Calculation
Range of taxable income Base Tax + (rate x amount over base bracket)
$ 0 to $ 50.000 $ 0 + (15% x Amount over $ 0)
50.000 to 75.000 7.500 + (25 x Amount over 50.000)
75.000 to 100.000 13.750 + (34 x Amount over 75.000)
100.000 to 335.000 22.250 + (39 x Amount over 100.000)
over $335.000 113.900 + (34 x Amount over 335.000)
Example
PT X has before-tax earnings of $250.000 Total Tax due = $22.250 + [0.39 x ($250.000-100.000)]
= $22.250 + (0.39 x $150.000)
= $22.250 + $58.500 = $80.750
Indonesia ?
Budi Hermana Magister Manajemen-Universitas Gunadarma-15
Managerial Finance
Business Taxation
Ordinary Income
Average Tax Rates
A Firm’s taxes divided by its Pretax Tax Average Tax rate
taxable income Income Liability [(2) : (1)]
(1) (2) (3)
Average tax rate ranges from 15 to
34%, reaching 34% when taxable $ 50.000 $ 7.500 15.00%
income ≥ $335.000 75.000 13.750 18.33%
100.000 22.250 22.25%
Average tax rate for PT X 200.000 61.250 30.63%
= $80.750 / $250.000 = 32.3% 335.000 113.900 34.00%
500.000 170.000 34.00%
1.000.000 340.000 34.00%
Marginal Tax Income 2.500.000 850.000 34.00%
The rate at which additional
income is taxed
If PT X’s earnings go up to %300.000,
the marginal tax rate on the additional
$50.000 of income will be 39%. The Total Taxes on the $300.000 = $80.750+$19.500
company will therefore have to pay = $100.250
additional taxes of $19.500 (0.39 x Using Taxe rate schedule:
$50.000) Total Taxes = $22.250+[0.39x($300.000 - $100.000)]
= $22.250+$78.000 =$100.250
Budi Hermana Magister Manajemen-Universitas Gunadarma-16
Managerial Finance
Business Taxation
Ordinary Income
Interest and Dividend Income
Interest received by the
Devidend received on Only 30% of these
corporation is included as common and preferred stock intercorporate
ordinary income held in other corporation, dividends are
and representing less than included as ordinary
20% ownership in them, on income
the other hand, are subject
to a 70% exclusion for tax Avoid triple
puposes taxation
Example
Charnes Industries received Interest Dividend
$100.000 interest on bonds Income Income
it held and $100.000 in
dividends on common stock (1) Before-tax amount $100.000 $100.000
it owned in other Less: Applicable Exclusion 0 (0,70x$100.000) = 70.000
corporation. The firm is Taxable amount $100.000 $ 30.000
subject to a 40% marginal- (2) Tax (40%) 40.000 12.000
tax rate and is eligible for
70% exclusion on its After-tax amount (1)-(2) $ 60.000 $ 88.000
intercorporate dividend
receipts Indonesia ?
Budi Hermana Magister Manajemen-Universitas Gunadarma-17
Managerial Finance
Business Taxation
Ordinary Income
Tax-Deductible Expenses
Corporation are allowed to deducti Advertising expenses
operating expenses. The tax-
Insurance?
deductible expenses reduces their Sales commision
after-tax cost.
Bad debt
CSR?
Interest expenses
Example
Company X and Y each expect in the Interest Dividend
coming year to have earnings before Income Income
interest and taxes of $200.000. Company X
during the year will have to pay $30.000 in Earning before interest&tax $200.000 $200.000
interest; Company Y has no debt and Less: Interest expenses 30.000 0
therefore will have no interest expenses. Earnings before tax $170.000 $200.000
Calculate the earnings after taxes for these Less: Taxes (40%) 68.000 80.000
two firm, which pay 40% tax on ordinary $ 102.000 $120.000
Earnings after taxes
income
Difference in earning after taxes $18.000
Dividends are not
tax-deductible expense
Budi Hermana Magister Manajemen-Universitas Gunadarma-18
Managerial Finance
Business Taxation
Capital Gains
Amount by which the price at which
an asset was sold exceeds the
asset’s initial purchase price
For corporation, capital gain are
added to ordinary corporate income
and taxed at the regular corporate
rates
Example
The Ross Company has operating Since the asset was sold for more than its initial
earnings of $500.000 and hast just purchased, there is capital gain of $4000
sold for $40.000 a capital asset
($40.000 sale price - $36.000 initial purchase price)
initially purchased two years ago for
$36.000.
The corporation’s taxable income will total
$504.000
($500.000 ordinary income plus $4.000 capital gain)
Since this total is above$335.000, the capital gain
will be taxed at the 34%, resulting in tax of $1.360
(0,34 x $4000)
Budi Hermana Magister Manajemen-Universitas Gunadarma-19
Managerial Finance
Financial Institutions and Markets: An Overview
Financial institutions and markets are
important elements in a firm’s operating
environment
?
Firms that require funds from external
sources can obtain them in three ways
Financial Institution
That accept savings and transfers them to those
needing funds
Financial Market
Organized forum where the suppliers and
demanders of various type of funds can make
transaction
Private placement
Budi Hermana Magister Manajemen-Universitas Gunadarma-20
Managerial Finance
Financial Institutions and Markets: An Overview
Financial Institution
An intermediary that channels the savings of
individuals, businesses, and governments into loans or
investment
Major Financial Institutions
USA Indonesia
Commercial Bank
Accepts both demand (checking) and time (savings) Bank Umum
deposits. Makes loans directly to borrowers or through the
financial market
Savings Bank BPR
Not hold demand (checking) deposits. Generally lends or
invest funds through financial markets Asuransi
Savings and Loan
Similar to a saving bank. Also raise capital through the Dana Pensiun
sale of securities. Lends funds for real estate mortgage
loans and some funds are channeled into financial market
Reksa dana
Credit Union
Deals primarily in transfer of funds between consumers.
Accept members’ deposit and lends to other members Modal Ventura
Life Insurance Company
Receive premium payments that are placed in invesments Anjak-Piutang
to accumulate funds to cover future benefit payment
Pension Fund Sewa guna usaha
Money is sometimes transferred directly to borrowers, but
the majority is lent or invested via the financial markets
Mutual Fund
Pools funds of savers and makes them available to
business and government demanders. Creates a portfolio
of securities to achieve a specified investment objective
Budi Hermana Magister Manajemen-Universitas Gunadarma-21
Managerial Finance
Financial Institutions and Markets: An Overview
Financial Markets
Provide a forum in which suppliers of funds Money Market
and demanders of loans and investments Transactions in short-term debt instruments, or
can transact business directly marketable securities, take place in the money
market
Capital Market
Long-term securities (bonds and stocks) are
traded in the capital market
Primary market
Financial market in which securities are
initially issued; the only market in which
the issuer is directly involved in the
transaction
Secondary Market
Financial market in which preowned
securities (those that are not new issues)
are traded
Budi Hermana Magister Manajemen-Universitas Gunadarma-22
Managerial Finance
Financial Institutions and Markets: An Overview
Financial Markets
Flow of funds for financial institutions and market
Funds Funds
Deposits/Shares Financial Loans
Institutions
Securities
Funds
Suppliers of Funds Demanders of
Private
Funds Funds
Placement
Securities
Funds Funds
Financial
Markets
Securities Securities
Budi Hermana Magister Manajemen-Universitas Gunadarma-23
Managerial Finance
Financial Institutions and Markets: An Overview
The Money Market
A financial relationship created between
suppliers and demanders of short-term
funds, which have maturities of one year or
less
Certain individuals, businesses, Other individuals, businesses,
governments, and financial institution have Money gevernments, and financial
temporary idle funds that they wish to Market institution find themselves in need
place in some type of liquid asset or short- exists of seasonal or temporary
term, interest earning instrument financing
Most money market transactions are made in
marketable securities
Short-term debt instruments, such as US Treasury
Bill, Commercial Papers, and Negotiables
Certificate of Deposits issued by government,
business, and financial institution
Indonesia?
Budi Hermana Magister Manajemen-Universitas Gunadarma-24
Managerial Finance
Financial Institutions and Markets: An Overview
The Capital Market
A financial relationship created by
institutions and arrangements that allows
suppliers and demanders of long-term
funds- funds with maturiry of more than Bond
one year- to make transactions. Long-term debt instrument used by business
and governments to raise large sums of
The backbone of the capital market is money
formed by the various securities exchange
that provide a forum for debt and and Common stock
equity transaction
Units of ownership interest, or equity. In a
corporation
Key Securities
Common stockholders expect to earn a return
by receiving Dividend
Periodic distribution of earnings to the owners
of stock in a firm
Preferred stock
A special form of ownership having a fixed
periodic dividend that must be paid prior to
payment of any common stock dividends
Budi Hermana Magister Manajemen-Universitas Gunadarma-25
Managerial Finance
Financial Institutions and Markets: An Overview
The Capital Market
Major Securities Exchange
Provide the marketplace in 1. Organized Securities Exchanges
which firms can raise funds
through the sale of new Tangible organozations on whose premises
securities and in which outstanding securities are resold
purchasers can resell
securities New York Stock Exchange (NYSE)
To make transaction on the “floor”, individual
or firm must own a “seat” on the exchange
For “listing”, a firm must file an application and
meet a number requirements
Have at least 2000 stockholders with 100 ≤ shares
Min 1,1 million share of publicly held stock
Earning power of $2,5 million before taxes
Net tangible asset of $16 million
A total of $18 million in market value of publicly
traded shares, etc
Jakarta Stock Exchange (JSX)
Persyaratan
“listing”?
Budi Hermana Magister Manajemen-Universitas Gunadarma-26
Managerial Finance
Financial Institutions and Markets: An Overview
The Capital Market
Major Securities Exchange
2. The-Over-the-Counter Exchange (OTC)
Not an organization, but an intangible market for the
purchase and sale of securities not listed by the organized
exchange
The market price of OTC securities results from a matching
of the forces of supply and demand for securities by traders
known as dealer
National Association of Securities Dealers Automated Quotation (NASDAQ)
Sophisticated telecommunications system that provide current
bid and ask prices on thousands of actively traded
The bid price is the highest price offered Automated The ask price is the lowest price at which
by dealer to purchase a given security matched the dealer is willing to sell the security
Jakarta Automated Trading System
(JATS) ?
Budi Hermana Magister Manajemen-Universitas Gunadarma-27
Managerial Finance
Interest Rates and Required Return
Interest rates and required returns represent the
costs of obtaining various forms of financing
?
The level of funds flow between suppliers and
demanders can significantly affect economic
growth
?
Growth results from the interaction of variety of
economic factors, such as the money supply,
trade balance, and economic policy, that affect
the cost of money – the interest rate or
required return
?
The level of interest rate acts as regulating
device that controls the flow of funds
?
The lower the interest rate, the greater the
funds flow and therefore the greater the
economic growth, and vice versa
?
Budi Hermana Magister Manajemen-Universitas Gunadarma-28
Managerial Finance
Interest Rates and Required Return
Rate that creates an equilibrium
Interest Rate Fundamentals between the supply of savings and the
demand for investments funds in perfect
Interest rate world, without inflation, where funds
suppliers and demanders have no
The compensation paid by the borrower of liquidity preferences, and all
funds to the lender; from the borrower’s outcomes are certain
point of view, the cost of borrowing funds
Ignoring risk factors, the nominal or actual
interest rate (cost of funds) results from the
Required Return real rate of interest adjusted for inflationary
expectation and liquidity preferences
The level of return expected on equity
investment
D General preferences of
So investors for shorter-term
securities
S1
The actual rate of interest
Real Rate of Interest
ko* chargeb by the supplier of funds
and paid by demander
k 1*
The required return on a risk-free
So asset, tipically a three-month US
Treasury Bill (Obligasi Pemerintah)
k1= k* + IE + IC1
S1
D
k1= RF + IC1
So=D S1=D Risk-free Risk
rate Premium
Funds supplied/demanded
Budi Hermana Magister Manajemen-Universitas Gunadarma-29
Managerial Finance
Interest Rates and Required Return
Term Structure of Interest Rates
The relationship between the interest rate
or rate of return and the time to maturity
Inverted Yield Curve
A Downward-sloping yield curve that
indicates generally cheaper long-term
Yield to maturity
borrowing costs than short-term
Annual rate of interest earned on a security borrowing costs
purchased on a given day and held to 17
maturity 16
15
Yield Curve
14 May 22, 1981
A Graph that depicts the relationship 13
between the yield to maturity (y-axis) and
the time to maturity (x-axis)
10 October 30, 1987
9 September 29, 1989
8
7
It reflects similar borrowing costs for
both short- and longer-term loans
0 5 10 15 20 25 30
Normal Yield Curve
An upward-sloping yield curve that indicates generally
cheaper short-term borrowing costs than long-term-
borrowing costs
Budi Hermana Magister Manajemen-Universitas Gunadarma-30
Managerial Finance
Interest Rates and Required Return
Term Structure of Interest Rates
Theory of Term Structure
1. Expectation Hypothesis Example
Theory suggesting that the yield curve reflects
Nominal Real Inflation
investor expectations about future interest rates; interest interest Expectation,
an increasing inflation expectation results in Rate, RFt Rate, k* IEt
upward-sloping yield curve, and vice versa Maturity, t [(1) - (2)]
(1) (2)
2. Liquidity Preference Theory 3 Months 5,17% 2,00% 3,17%
Theory suggesting that for any given issuer, long- 1 years 6,51 2,00 4,51
term interest rates tend to be higher than sort- 5 years 8,38 2,00 6,38
term rates due to the lower liquidity and higher
responsiveness to general interest rate 30 years 9,05 2,00 7,05
movements of longer term securities; causes the
yield curve to be upward-sloping
3. M arket Segmentation Theory
Theory suggesting that the market for loans is
segmented based on maturity and that the
sources of supply and demand for loans, within
each segment, determine its prevailing interest
rate; the slope of yield curve is determines by the
geberal relationship between the prevailing rates
in each segment
Budi Hermana Magister Manajemen-Universitas Gunadarma-31
Managerial Finance
Interest Rates and Required Return
Term Structure of Interest Rates
Risk and Return
Risk-Return Trade-off
The expectation that for accepting greater risk,
investors must be compensated with greater
returns
Speculative Common Stocks
Qualtiy Common Stocks
Preferred Stocks
Annual Return (cost to issuer)
Medium-Grade Bonds
Investment-Grade Bonds
Investment-Grade Notes
Prime-Grade Commercial Paper
US Treasury Bills
Risk
Budi Hermana Magister Manajemen-Universitas Gunadarma-32
Managerial Finance
Chapter 3
Financial Statement
Budi Hermana Magister Manajemen-Universitas Gunadarma-33
Managerial Finance
The Stockholders’ Report
A Stockholder’s report summarizes and documents a
publicly held corporation’s financial activities over the
year. Who receives theses reports? What types of
informastion do you think they typically include? Why
are they important?
1. Regulator or Goverments
?
2. Creditor (lenders)
3. Owners
4. Management ?
1. The letter to stockholders An important vehicle for
Events, management influencing owners’
philosophy, strategy, and perceptions of the company and
action its future outlook.
2. Financial statements
(a) the income statemnet, (b) The stockholders’ report may
the balance sheet, (c) the effect expected risk, return,
statement of retained stock price, and the viability
earnings, and (d) the of the firm
statements of cash flows
3. Other feature
Firm activities, new product,
R&D, etc
Budi Hermana Magister Manajemen-Universitas Gunadarma-34
Managerial Finance
Basic Financial Statements
Income Statement
Provide a financial summary of the
operating results during a specified
period
ABC Corporation Income Statement ($000) for the year Ended
December 31, 2000
Sales revenue $ 1.700
Less: Cost of goods sold 1.000
Gross profits $ 700
Less: Operating expenses
Selling expense $ 80
General and administrative expense 150
Depreciation expense 100
Total operating expense 330
Operating profits $ 370
Less: Interest expense 70
Net profits before taxes $ 300
Less: Taxes (rate = 40%) 120
Net profits after taxes $ 180
Less: Prefered stock dividends 10
Earning available for common stockholders $ 170 The number of
Earning per share (EPS) $ 1,70 common stock=
100.000
Budi Hermana Magister Manajemen-Universitas Gunadarma-35
Managerial Finance
Basic Financial Statements
Balance Sheet
Summary statement of the firm’s financial position at given point in time
ABC Corporation Balance Sheets ($000)
December 31
Assets 2000 2001
Current assets
Cash $ 400 $ 300
Marketable securities 600 200
Account receivable 400 500
Inventories 600 900
Total current assets $ 2000 $ 1900
Gross fixed assets (at cost)
Land and buildings $ 1200 $ 1050
Machinery and equipment 850 800
Furniture and fixtures 300 220
Vehicles 100 80
Other 50 50
Total gross fixed assets (at cost) $ 2500 $ 2200
Less: Accumulated depriciation 1300 1200
Net fixed assets $ 1200 $ 1000
Total assets $ 3200 $ 2900
Budi Hermana Magister Manajemen-Universitas Gunadarma-36
Managerial Finance
Basic Financial Statements
Balance Sheet
Summary statement of the firm’s financial position at given point in time
ABC Corporation Balance Sheets ($000)
December 31
Liabilities and stockholders’ equity 2000 2001
Current liabilities
Accounts payable $ 700 $ 500
Notes payable 600 700
Accruals 100 200
Total current liabilities $ 1400 $ 1400
Long-term debt $ 600 $ 400
Total liabilities $ 2000 $ 1800
Stockholders’ equity
Preferred stock $ 100 $ 100
Common stock- $1,20 par, 100000
shares outstanding in 2000&2001 120 120
Paid in capital in excess of par on
common stock 380 380
Retained earnings 600 500
Total stockholders’ equity $ 1200 $ 1100
Total liabilities and stockholders’ equity $ 3200 $ 2900
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Managerial Finance
Basic Financial Statements
Statement of Retained Earning
Reconciles the net income earned during a
given year, and any cash dividends paid,
with the change in retained earnings
between the start and end of that year
ABC Corporation Statement of Retained Earnings ($000) for the end year
Ended December, 2001
Retained earnings balance (january 1, 2001) $500
Plus: Net Profit after taxes (for 2001) 180
Less: Cash dividend (paid during 2001)
Preferred stock ($10)
Common stock ( 70) 80
Retanined earnings balance (Dec 31, 2001) $600
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Managerial Finance
Basic Financial Statements
Statement of Cash Flows
Provides a summary of the firm’s operating, investment, and
financing cash flows, and reconciles them with changes in its cash
and marketable securities during the period of concern
ABC Corporation Statement of Cash Flows ($000) for the end year
Ended December, 2001
Cash Flow from Operating Activities
Net Profits after taxes $ 180
Depreciation 100
Decrease in account receivable 100
Decrease in inventories 300
Increase in account payable 200
Decrease in accruals (100)
Cash provided by operating $780
Cash Flow from investment activities
Increase in gross fixed asset ($300)
Changes in business interest 0
Cash used for investment activities (300)
Cash Flow from financing Activities
Decrease in notes payable ($100)
Increase in long-term debts 200
Changes in stockholders’ equity 0
Dividends paid (80)
Cash provided by financing activities 20
Net increase in cash and marketable securities $500
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