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ACCOUNTING AND FINANCE

Choirunnisa Arifa

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WHAT IS ACCOUNTING?
Accounting Identifying
A system
for:
Recording
Financial Information:
• Relevant
Communicating • Reliable
• Comparable

used for
ECONOMIC
DECISION
MAKING

Akuntansi Keperilakuan- Choirunnisa Arifa


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 Balance sheet – provides a snapshot of a firm’s
financial position at one point in time.
 Income statement – summarizes a firm’s revenues and
expenses over a given period of time.
 Statement of retained earnings – shows how much of
the firm’s earnings were retained, rather than paid out
as dividends.
 Statement of cash flows – reports the impact of a firm’s
activities on cash flows over a given period of time.

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The Balance Sheet is a financial statement that
shows the firm’s assets and liabilities at a
particular time.

Why is it useful?

Shareholders’ Equity = Total Assets – Total Liabilities

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Current Assets Current Liabilities
• Cash & Securities • Payables
• Receivables • Short-term Debt
• Inventories +
+ Long-term Liabilities
Fixed Assets
• Tangible Assets = +
• Intangible Assets
___________________
Shareholders’ Equity
Total Assets ____________________
Total Liabilities &
Shareholders’ Equity

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Assets represent the uses of a firm’s funds
i.e. Assets show what the firm “owns”

• Liquid Assets can be converted easily into cash

• Current vs. Fixed Assets

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Which of the following Which of the following is
assets is typically a current asset?
considered most liquid?
Least liquid? • Property that a firm
owns
 Marketable securities
• A firm’s production
 Accounts receivable
equipment
 Inventories
• Unsold inventories

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• Tangible Assets

• Intangible Assets

• Goodwill

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 Which of the following represent tangible
assets? Intangible assets?
 Property
 Production Facilities
 Patents
 Production Equipment
 Trademarks
 Copyrights

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Liabilities represent the sources of a firm’s funding.
(i.e. Liabilities represent what a firm “owes.”)

 Current vs. Long-Term Liabilities

Current Assets – Current Liabilities = Net Working


Capital

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Which of the following is a current liability?
• Bond debt that matures in 3 years
• A bank loan that is due in 24 months
• An obligation to pay a supplier within 6 months

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In the balance sheet below, what was the value of net working capital in 2008? 2009?

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All balance sheet items are expressed as a
percentage of total assets.

Why is this useful?

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Note the changes from 2008 to 2009.

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 Book Value
 Value of assets or liabilities according to the
balance sheet.
 Values recorded at their historical cost adjusted
for depreciation
 Market Value
 The value of assets or liabilities were they to be
resold in a market

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Suppose that Home depot borrows $500 million by
issuing new long-term bonds. It places $100 million of
the proceeds in the bank and uses $400 million to buy
new machinery.
 What item (s) of the balance sheet would change?
 Would shareholders’ equity change?

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Income Statement: a financial statement that
shows the revenues, expenses, and net income
of a firm over a period of time.

Why is this useful?

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All items on a common-size income
statement are expressed as a percentage of
revenues.

Why is this useful?

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what was the value of Home Depot’s EBIT in 2009?

Common
Size
Income
Statement
(right column)

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Differences between profits & cash flow:

 Depreciation

 Cash vs. accrual accounting

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Consider a firm that spends $200 to produce goods
in period 1. in period 2 it sells half of those goods for
$150, but it doesn’t collect payment until one period
later. In period 3, it sells the other half of the goods
for $150, and it collects payment on these sales in
period 4.
 Calculate the profits and the cash flows for this firm
in period 1 to 4.

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Period 1 2 3 4
Sales 0 150 150 0
Cost of goods sold 0 100 100 0
Net Income 0 50 50 0
Change in Account Receivable 0 -150 150 150
-150
Change in Inventories -200 100 100 0
Net Cash Flows -200 0 150 150

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The Statement of Cash Flows shows the firm’s cash
receipts and cash payments over time.

Why is it useful?

Free Cash Flow is cash available for distribution to


investors after the firm pays for new investments or
additions to working capital.

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Structure:

Cash flow from operations


+
Cash flow from investments
+
Cash flow from financing
____________________________
Change in cash balance

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Net income for your firm was $10,000 last year. The depreciation
expense was $2,500; accounts receivable increased $1,250;
accounts payable increased $800; and inventories increased by
$2,000.
What was the total cash flow from operations for the period?

Net income: 10,000


Depreciation: 2,500
Accounts Receivable: (1,250)
Accounts Payable: 800
Inventories: (2,000)
Cash flow from operations: 10,050

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Most managers say that accounting earnings is
the single most important number reported to
investors.

What implications does this have for the investor?

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Grey areas for financial managers:

 Revenue recognition

 Cookie-jar reserves

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Additional grey areas for financial managers:

 Off-balance sheet assets and liabilities

 Mark-to-market accounting

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 Both have a progressive structure (the higher the
income, the higher the marginal tax rate).
 Corporations
 Rates begin at 15% and rise to 35% for corporations
with income over $10 million.
 Also subject to state tax (around 5%).
 Individuals
 Rates begin at 10% and rise to 38.6% for individuals
with income over $307,050.
 May be subject to state tax.

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 Interest paid – tax deductible for corporations (paid out of pre-
tax income), but usually not for individuals (interest on home
loans being the exception).
 Interest earned – usually fully taxable (an exception being
interest from a (muni”).
 Dividends paid – paid out of after-tax income.
 Dividends received – taxed as ordinary income for individuals
(“double taxation”). A portion of dividends received by
corporations is tax excludable, in order to avoid “triple
taxation”.

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In the United States, corporations pay tax on their income.

US Corporate Tax Rates, 2011

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How about in Indonesia?

TAXABLE INCOME (Rp) TAX RATE (%)


Less than 4.8 billions 1% x Gross Profit
rupiah
4.8 billions – 50 billions [25% - (0.6 billions / gross
rupiah profit)] x taxable income
More than 50 billions 25% x taxable income
rupiah

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When a corporation issues a dividend, each dividend
dollar is effectively taxed twice:

1. Each dollar of earnings taxed at corporate rate.

2. Shareholders pay personal income taxes on all


dividends received.

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Construct a balance sheet for sophie’s sofas given
the following data. What is shareholders’ equity?
 Cash balances = $10,000
 Inventory of sofas = $200,000
 Store and Property = $100,000
 Accounts receivable = $22,000
 Accounts payable = $17,000
 Long-term debt = $170,000

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 Cost of goods sold = $8,000
 Income taxes paid (20%) = $2,000
 Administrative expense = $3,000
 Interest expense = $1,000
 Depreciation = $1,000
From the above data:
a. What was EBIT?
b. What was the firm’s net income?
c. What must have been the firm’s revenues?

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The year-end 2013 balance sheet of brandex inc.
Listed common stock and other paid-in-capital at
$1,100,000 and retained earnings at $3,400,000. the
next year, retained earnings were listed at
$3,700,00.the firm’s net income in 2014 was $900,000.
there were no stock repurchases during the year.
What were the dividends paid by the firm in 2014?

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