This is a summary for the Financial Management exam. It contains chapters 3-5, 10, and 15 of the book "Principles of
Managerial Finance" by Lawrence J. Gitman and Chad J. Zutter. the summary has all equations and theory needed during the exam.
Financial Statements
Assess financial performance/ financial decision making
“Do I want to do business?”
Income Statement
Provides financial summary of firm’s
operating results during specified
period.
Includes:
• (Sales) Revenues
• Cost of goods sold
• Gross profits
• Expenses
• Taxes
• Net Profit/Income after Taxes
Revenues: rewards for selling goods/
providing services, any increase to
shareholders equity based on every
transaction
Cost of goods sold: expenses incurred in
making/buying product Interest vs. Operating Expenses
Gross Profit: amount of profit
Interest expenses: to finance business efficiently
remaining to satisfy operating,
Operating expenses: to do business efficiently
financial, and tax costs,
Expenses: cost of doing business,
operating expenses(seeling, general + Operating Profit/Income
administrative, depreciation), Interest = earnings before interest and taxes (EBIT)
expenses • profits earned from producing and selling
Taxes: calculate earnings/income products
before and after taxes
Net Income: difference between Other Items
revenues and expenses = the “profit” Preferred stock dividends: fixed cash payment from
for owners/shareholders/investors the company to preferred shareholders
Preferred equity: financial capital (like interest-
Type of Expenses bearing debt or common equity)
Selling expenses: expenses incurred in Earnings per share (EPS): profit per 1 common share
selling the product outstanding
General & administrative expenses: cost of Dividend per share (DPS): dividend per 1 common
maintaining the organisation share outstanding
Other operating expenses: other expenses Dividends: payment from the company to common
incurred in the day-to-day operations shareholders, a part of earnings available for
Depreciation expenses: expenses that reflect common shareholders
the use of long-term assets Retained earnings: a part of earnings available for
Interest expenses: expenses that are related to common shareholders NOT paid out, but retained
interest-bearing debt of the company for future investment
, Why Steps?
To see possible improvement in profitability of company Proprietorship
Gross profit: where to find improvement = product mix, Money taken it by owner is NOT
selling prices, cost of products (buying/producing) salary (salary business expense)
• if something wrong change: selling price / cost of BUT withdrawal
products Withdrawal = dividends in
• if okay (but still not enough profit) change: company
operating expenses = changes happen after gross
profit
If taxes to high: see how to reduce in “funny ways” =
relocate to low tax country
Purpose:
• shows how much money company
has earned and how much it has
spent during the period
Analysis:
• company's profitability and
operating efficiency
Limitations:
• does not take into account any
changes in value of company's
assets or liabilities Purpose:
• shows how company has used its profits or
• does not provide complete picture of
losses over time
company's financial health
• how much of earnings have been retained
for reinvestment or distribution to
shareholders
Retained Earnings Statement Impact on Shareholders:
• if company retains its earnings can
Reconciles net income earned during reinvest them to grow business> higher
given year, and any cash dividends stock prices and dividends in future
paid, with change in retained earnings • if company pays out large portion of its
between start and end of that year earnings as dividends = shareholders
• savings that stay inside company may see lower stock prices and dividends
• Profit after paid out shareholders in future
Analysis:
An abbreviated form of the statement of • company's financial health and growth
stockholders’ equity potential
Includes: Limitations:
• Beginning retained earnings • does not take into account any changes in
• Net income after taxes (find on value of company's assets or liabilities
income sheet) • does not provide complete picture of
• Dividends company's financial health
• Ending retained earnings (find on
balance sheet)
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