1. Robert Uberman, Financial Management, KA im Frycza Modrzewskiego 1

2. What is Finance all about? Finance is about three things: raising money raising money allocating it allocating it controlling return on money invested controlling return on money invested Spreadsheets and Finance Spreadsheets and Finance

3. Robert Uberman, Financial Management, KA im Frycza Modrzewskiego Course Overview Financial statements (1) Financial statements (1) Revenues and Costs (nonfinancial) (2-4) Revenues and Costs (nonfinancial) (2-4) Net Working Capital Management (5-6) Net Working Capital Management (5-6) Time Value of Money Concept (7) Time Value of Money Concept (7) Investment Decisions (8) Investment Decisions (8) Responsibility centers and managerial accounting (9) Responsibility centers and managerial accounting (9) Financial ratios (10-11) Financial ratios (10-11) Business Financing (12) Business Financing (12) Business Modelling and Forecasting (13-14) Business Modelling and Forecasting (13-14) Financial Disciplines (15) Financial Disciplines (15)

4. Robert Uberman, Financial Management, KA im Frycza Modrzewskiego Books & Evaluation Rules Books: Books: Brealey Richard A., Myers Stewart C.: Principles of Corporate Finance. McGraw-Hill, New York, 1996 (or any other edition, incl. Polish version) Brealey Richard A., Myers Stewart C.: Principles of Corporate Finance. McGraw-Hill, New York, 1996 (or any other edition, incl. Polish version) Shim Jae K., Siegel Joel G.: Vest Pocket CEO. Prentice Hall, New York, 1992 (a very good Polish edition by ABC, 1999) Shim Jae K., Siegel Joel G.: Vest Pocket CEO. Prentice Hall, New York, 1992 (a very good Polish edition by ABC, 1999) Atrill Peter, McLaney Eddie: Management Accounting for Decision Makers. Prentice Hall, Harlow, 2007. Atrill Peter, McLaney Eddie: Management Accounting for Decision Makers. Prentice Hall, Harlow, 2007. Evaluation: Evaluation: Written, in- class, closed books Exam, with 3 out of 4 topics to be discussed Written, in- class, closed books Exam, with 3 out of 4 topics to be discussed Near to all topics will require both calculations and assessment of a problem challenged Near to all topics will require both calculations and assessment of a problem challenged After class assignments not graded at all but instrumental to succeed on the final exam After class assignments not graded at all but instrumental to succeed on the final exam

5. Robert Uberman, Financial Management, KA im Frycza Modrzewskiego Session One Topics General concept of financial statements General concept of financial statements Balance sheet Balance sheet Accrual vs cash flow approach Accrual vs cash flow approach Profit and Loss (Income) Statement Profit and Loss (Income) Statement Cash Flow Statement Cash Flow Statement Brealey, Myers pp. Brealey, Myers pp.

6. Robert Uberman, Financial Management, KA im Frycza Modrzewskiego Key financial questions How much does the business own (at present, in the past, in near future)? How much does the business own (at present, in the past, in near future)? How much has the business earned (over a given period of time)? How much has the business earned (over a given period of time)? How much it will earn in future? How much it will earn in future? The above indicated are key financial questions for every person but also enterprise, institution, government. The above indicated are key financial questions for every person but also enterprise, institution, government. We will discuss almost exclusively non-financial businesses although some concepts apply to other types, too. We will discuss almost exclusively non-financial businesses although some concepts apply to other types, too.

7. Robert Uberman, Financial Management, KA im Frycza Modrzewskiego Balance Sheet – key notions to remember Assets: properties owned (now: or under control and with entitlement to key benefits): Assets: properties owned (now: or under control and with entitlement to key benefits): Long-term (with useful life over 1 year): laptop. Long-term (with useful life over 1 year): laptop. Current (with useful life up to 1 year): enrolment. Current (with useful life up to 1 year): enrolment. Tangible: laptop. Tangible: laptop. Intangible: enrolment right. Intangible: enrolment right. Liabilities and equity: Liabilities and equity: Long-term (due later than within 1 year): Father’s loan and, by definition, equity. Long-term (due later than within 1 year): Father’s loan and, by definition, equity. Current (due within 1 year): instalments. Current (due within 1 year): instalments. A Balance Sheet: a statement of properties and sources financing them A Balance Sheet: a statement of properties and sources financing them

8. Robert Uberman, Financial Management, KA im Frycza Modrzewskiego Reasons why assets and liabilities have to be recorded separately Even if we have a dual entry approach and transactions are not divisible their results are: Even if we have a dual entry approach and transactions are not divisible their results are: if granted a loan to purchase a specific equipment one cannot use the proceedings for other purpose, if granted a loan to purchase a specific equipment one cannot use the proceedings for other purpose, however however when transaction is closed one has to repay a loan regardless the machine purpose and, of no specific arrangements are made, can do whatever it wishes with the equipment. when transaction is closed one has to repay a loan regardless the machine purpose and, of no specific arrangements are made, can do whatever it wishes with the equipment. Both relations can be discontinued separately in a different time and circumstances. Both relations can be discontinued separately in a different time and circumstances.

9. Robert Uberman, Financial Management, KA im Frycza Modrzewskiego Accruals vs cash flow In private life we tend to equalize revenues with cash inflows and costs with cash outflows, sometimes recognizing special character of investments (eg. nobody would treat creating a bank deposit as a cost albeit identifying it as a cash outflow). In private life we tend to equalize revenues with cash inflows and costs with cash outflows, sometimes recognizing special character of investments (eg. nobody would treat creating a bank deposit as a cost albeit identifying it as a cash outflow). In the least complex business activity it is a handy approach but: In the least complex business activity it is a handy approach but: even in such cases carries certain risk, even in such cases carries certain risk, it would be dangerous in case of complex businesses. it would be dangerous in case of complex businesses.

10. Robert Uberman, Financial Management, KA im Frycza Modrzewskiego Reasons why not all costs are represented by cash outflows (1) Long term assets will loose their value over time and eventually become useless (except for ground plots and some other specific items). Long term assets will loose their value over time and eventually become useless (except for ground plots and some other specific items). The above mentioned process may be long and involve very valuable items (f.e. a car) The above mentioned process may be long and involve very valuable items (f.e. a car) Consequently we need a mechanisms to allocate expenses incurred to acquire them over pertain time. Consequently we need a mechanisms to allocate expenses incurred to acquire them over pertain time. We say, we „depreciate” them (amortise intangible assets, deplete natural resources) We say, we „depreciate” them (amortise intangible assets, deplete natural resources)

11. Robert Uberman, Financial Management, KA im Frycza Modrzewskiego Reasons why not all costs are represented by cash outflows (2) Commercial credit. Commercial credit. Concurrent services (eg. electricity, employment costs). Concurrent services (eg. electricity, employment costs). Deferred obligations and revenues (f.e. in construction business). Deferred obligations and revenues (f.e. in construction business).

12. Robert Uberman, Financial Management, KA im Frycza Modrzewskiego Two financial statement addressing the issue of results Income (Profit and Loss) Statement Income (Profit and Loss) Statement Cash Flow Statement Cash Flow Statement

13. Robert Uberman, Financial Management, KA im Frycza Modrzewskiego Income Statement – key notions to remember Revenues: Cash inflows or other enhancements of assets (for example acceptance of services delivered) Revenues: Cash inflows or other enhancements of assets (for example acceptance of services delivered) Costs: use of assets attributable directly or indirectly to the revenues recognised Costs: use of assets attributable directly or indirectly to the revenues recognised cash costs. cash costs. non-cash costs (DDA) non-cash costs (DDA) Income (gross): revenues – costs Income (gross): revenues – costs Income tax(es): obligatory levies on income (but not VAT, stamp duties, etc.) Income tax(es): obligatory levies on income (but not VAT, stamp duties, etc.) Income (net): Income (gross) – taxes Income (net): Income (gross) – taxes

14. Robert Uberman, Financial Management, KA im Frycza Modrzewskiego Cash Flow Statement – key notions to remember (1) Operational activities : Operational activities : receipts from the sale of goods or services, receipts from the sale of goods or services, payments to suppliers for goods and services, payments to suppliers for goods and services, payments to employees or on behalf of employees, payments to employees or on behalf of employees, buying Merchandise buying Merchandise some otherwise typically financial items if strictly connected with operational activities (eg. interests on delayed payments for services). some otherwise typically financial items if strictly connected with operational activities (eg. interests on delayed payments for services).

15. Robert Uberman, Financial Management, KA im Frycza Modrzewskiego Cash Flow Statement – key notions to remember (2) Financial activities: Financial activities: dividends paid (with tax if applicable), dividends paid (with tax if applicable), sale or repurchase of the company's stock, sale or repurchase of the company's stock, net borrowings, net borrowings, interests paid & other borrowing costs (incl. certain leasing related payments), interests paid & other borrowing costs (incl. certain leasing related payments), repayment of debt principal, including capital leases. repayment of debt principal, including capital leases. Investing activities: Investing activities: Payments resulting from purchase or sale of a long term asset (assets can be land, building, equipment, marketable securities, etc.) Payments resulting from purchase or sale of a long term asset (assets can be land, building, equipment, marketable securities, etc.) Payments related to mergers and acquisition. Payments related to mergers and acquisition. (Under certain regimes) loans made to suppliers or received from customers (Under certain regimes) loans made to suppliers or received from customers