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Financial Management - Atrill book summary and slides
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This document is a summary of parts of the Atrill book and slides of the course Financial Management.
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Solution Manual for Management Accounting for Decision Makers 10th Edition by Peter Atrill, Eddie McLaney ISBN:9781292349459 ALL CHAPTERS COVERD
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Solution Manual for Management Accounting for Decision Makers 10th Edition by Peter Atrill, Eddie McLaney All Chapters Covered ,Latest Edition, ISBN:9781292349459
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Solution Manual for Management Accounting for Decision Makers 10th Edition by Peter Atrill, Eddie McLaney All Chapters 1 to 12 complete Verified editon ISBN:9781292349459
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Lecture 1: Fundamentals of business economicsFinancial accounting
Financial accounting is what auditors do and enables managers to give account of stewardship
of resources to shareholders, tax & regulations and other stakeholders. It is about profit and
loss accounts, balance sheets and cash flow statements.
Balance sheet
A balance sheet is used to assess a company’s financial health and position. It provides a
snapshot of a company’s financial condition at a specific point in time. It adheres to the
fundamental accounting equation:
Asset = equity + liabilities
Equity + liabilities means the sources (financially) that are available (equity is what owners
have brought into the company, liabilities is everything that comes from outside which is
often temporary and there is fixed compensation so they expect it back). Current liabilities are
obligations that expected to be settled within one year (e.g. account payable, short-term loans
and accrued expenses). Non-current liabilities are obligations not expected to be settled within
one year such as long-term loans, bonds and lease obligations.
Assets represents everything that a company owns or has a claim to. There are current assets
which are assets that are expected to be converted into cash or used up within one year (e.g.
cash, accounts receivable and inventory) and non-current assets/fixed assets which are with
the business for longer than a year. Intangible assets for example include goodwill. People are
not on the balance sheet because you do not own them
Income statement
The Income statement reports a
company's financial performance over
a specific accounting period. The table
on the right shows the contents. Sales
are on one end of the statement and
costs on the other. Depreciation cost is
recorded here as an expense, reducing
net income. These costs are related to
the assets.
Cash flow statement
The cash flow statement is about what
has gone out of the pocket and what has gone in and what at the end of the day is generated as
money. In cash flow there are three reasons for expenditures and receipts:
1. Operational activities; payment of salaries, rent, suppliers etc.
2. Investing activities; payment of computers, equipment etc.
3. Financing activities; receipt of a loan, repayment of a loan (is not a cost but still flows
out).
Depreciation costs should be in the income statement but it is not paid out, in the cash flow
statement it is a cost while it is not money going out of the company. It is a non-cash expense
which means it needs to be added back in the cash flow statement in the operating activities. It
is added back to the net income because it was a noncash transaction as the net income was
reduces, but there was no cash outflow for depreciation.
1
,Summary:
Cash flow statement is the cash at the
beginning of period + receipts –
expenditures = cash at the end of the period.
Income statement is revenues – costs =
income (profit or loss) which is added to the
owner’s equity.
Management accounting
Management accounting means to provide
information to managers which is about daily decision-making and is about planning, decision
making, control, budgeting, costing and investment decisions. For it to be useful, it must be
clear for whom and for what purpose the information will be used.
Managers are an important type of user of financial information concerning the business, but
there are several others including owners, employees, lenders and the government.
Management accounting can be viewed as a service as it involves providing information to
clients (managers).
How can we quickly scan financial management of a company?
• Annual report; publicly available document that companies are required to release
annually to provide information about the company’s financial performance.
• Income, balance sheet and cashflow statement
• Financial ratio analysis: involves calculating and examining various financial ratios
using data from the financial statements to provide insights into different aspects of
the company’s financial health and performance
o Liquidity; ability to repay short-term obligations (e.g. current ratio and quick
ratio)
o Solvency; company’s long-term financial stability and ability to repay creditors
in case of bankruptcy (e.g. debt-to-equity and interest coverage ratio)
o Profitability; gauge the company’s overall performance in terms of generating
profit (e.g. return on assets and return on equity)
o Non-financial performance; e.g. greenhouse gas emissions, how safe are my
employees
Over time most companies have determined which ratios are the best fit with their strategy
and business. For example, a technology company may focus on profitability ratios while a
manufacturing company may emphasize liquidity and asset turnover ratios.
In the income statement you can find the profitability and coverage (company’s ability to
cover its financial obligations and debts). In the balance sheet, solvency, liquidity and
efficiency and in the cash flow statement solvency and coverage.
Examples of financial ratios
Examples of frequently used financial ratios are:
• Price-to-earnings ratio: measures the relative value of a company’s stock price to its
earnings per share.
o P/E ratio = Stock price per share / earnings per share
2
, o A high P/E ratio may suggest that investors have high expectations for future
growth.
• Price-to-book ratio; compares a company’s stock price to its book value per share.
Book value is the net asset of the company, calculated as total assets minus liabilities
o P/B ratio = Stock price per share / (Total equity/numbers of shares)
o A P/B ratio less than 1 may indicate that the stock is trading below its book
value, potentially suggesting it is undervalued.
• Return on equity: measures a company’s profitability by assessing its ability to
generate earnings from shareholder’s equity.
o ROE = Net income / shareholders’ equity
o A higher ROE suggests better profitability in relation to shareholders’
investment
• Debt-to-equity ratio: a company’s financial leverage and its ability to cover its debts.
o D/E ratio = Total debt / Shareholders’ equity
o A high D/E ratio may indicate higher financial risk, as it suggests that the
company relies more on debt financing
• Current ratio: a company’s short-term liquidity and its ability to cover its current
liabilities with its current assets.
o Current ratio = Current assets / current liabilities
o A ratio higher than 1 implies that the company has sufficient current assets to
meet its short-term obligations
Cash conversion cycle (CCC)
The cash conversion cycle, also known as the net operating cycle, is a financial metric that
measures the time it takes for a company to convert its investments in inventory and other
resources into cash flow from sales. It provides insights into the efficiency of a company’s
working capital management and its ability to generate cash. It consists of:
1. Inventory turnover: measures how quickly a company sells its inventory
a. Inventory turnover = (Inventory / Sales) x 365 days
2. Settlement period for trade receivables; represents the number of days it takes for a
company to collect payments from its customers after making a sale
a. Period for trade receivables = (accounts receivable / total credit sales) x
number of days in period (365 days)
3. Settlement period for trade payables = average number of days a company takes to pay
its suppliers or vendors
a. Period for trade payables = (Accounts payable / costs of goods sold) x number
of days in the period (365 days)
Then the cash conversion cycle formula is:
CCC = inventory days + trade receivable days – trade payable days
The shorter the CCC, the lower is the working capital which means that you are saving
money.
How are modern companies led: Governance Code
Governance Code
• The Code is based on the notion that a company is a long-term alliance between the
various stakeholders of the company.
• Governance encompasses management, control, responsibility, influence, supervision,
and accountability.
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