MANAGEMENT ACCOUNTING FINANCE

MANAGEMENT ACCOUNTING & FINANCE INTRODUCTION Management Accounting Management accounting is concerned with the provisions and use of accounting information for managers to make decisions within organizations, to provide them with the basis to make informed business decisions that will allow them to be better equipped in their management and control functions Corporate Finance Corporate finance deals with monetary decisions that business enterprise make and the tools and analysis used to make these decisions The primary goal of corporate finance is to maximize shareholders value while managing the firm's financial risks Management Accounting OBJECTIVES : * Using Management Accounting for decision making * Appreciates and use Budgets & Budgetary Controls for effective decision making * Compute the break-even point for any projects Corporate Finance OBJECTIVES : * Read and interpret financial statements of different corporations * Use investment appraisal techniques to make investment decisions COURSE OUTLINE : PART : From Business Plan to Financial Plan PART : Scope of Financial Management PART : Structure of Accounting PART : Type of Financial Report PART : Financial Budgets PART : Ratio Analysis PART : Break Even Point Analysis PART : Investment Appraisal PART FROM BUSINESS PLAN TO FINANCIAL PLAN Vision Business Plan FROM VISION TO FINANCIAL SUCCESS Costing & Pricing Decision Developing Financial Budgets Implement Business Plan $ Success Measure Financial Success 1)Prepare 1)Prepare 1)Entrepreneur 1) Conversion 1) Making monthly the Vision of details assumptions financial Annual 2) Type of business on the statements Financial businessplan through expected level to track Statements: mfg & trading, detail cost & conditions the financial trading, analysis of : of business results I) Balance Manufacturing, activity and services 2)Monitor Sheet 3) Description of costs, developing changes in ii) Income Operation Products & the expected the market Statement Services costs financial results conditions 4) Description of 2) Determine the that affects iii) Cash market & 2) Determine type & amount the costing Flow market size Pricing of funds required assumptions Statement 5) Opportunities Decision & -Shareholders, 3) Corrective & Risks Sales volume - Loan actions PART SCOPE OF FINANCIAL MANAGEMENT SCOPE OF FINANCIAL MANAGEMENT FINANCIAL INFORMATION Planning MANAGEMENT ACCOUNTING Internal Management MANAGEMENT (for planning & strategy decisions) -Business Plan -Costing & Pricing -Budgeting -Management accounts Reporting Analysis FINANCIAL ACCOUNTING External Parties 1) SHAREHOLDERS 2) BANKERS 3) INLAND REVENUE 4) INVESTORS ( for informing how the company is managed) Finance Financial Decision Making – -Ratio Analysis -Break-Even Point -Capital Budgeting: -ARR -ROI -NPV -IRR The BREAK EVEN ANALYSIS N.B So long as there is POSITIVE CONTRIBUTION MARGIN, it is worthwhile to maintain a particular product even though it is not profitable, as the Contribution would offset part of the Fixed Cost PART INVESTMENT APPRAISAL Investments Decisions • The investment decision is the decision to commit the financial and other resources to a particular course of action Cash Flow Not Profit a) Cash flow analysis considers all cash inflows and outflows resulting from the investment decisions ( Sales Revenue less Cash Costs (including of taxes) ) b) We seek to estimate the streams of cash flows arising from a particular course of action and the period in which they occur Capital Budgeting Techniques Capital Budgeting are basically financial techniques that are used to evaluate the viability of various investment proposals in order to select the most appropriate investment option Types of Appraisal Methods Payback Period - PBP Average Rate of Return – ARR Return on Investment – ROI Net Present Value Method – NPV Internal Rate of Return - IRR PAY-BACK PERIOD – Number of Years/Months The pay-back period is the period of time taken for the future net cash inflows to match the initial cash outlay Example : Lara’s Project requires an initial capital outlay of RM 40,000 It’s expected cash inflows are as follows: Year $ 16,000 Year $ 16,000 Year $ 16,000 Year $ 12,000 Therefore it’s pay back period is ½ years calculated as follows: Initial Outlay $ 40,000 Less Yr Cash inflows ($ 16,000) Yr Cash inflows ($ 16,000) ‘1/2 Yr Cash inflows ($ 8,000) -Note: Pay-back period does not take into account the future value of money AVERAGE RATE OF RETURN – ARR (%) One way of measuring an investment's profitability To calculate,one takes the total net earnings,divides by the total number of years the investment was held,and then divides that answer by the investment's initial acquisition cost ARR = Total Net Earnings / Total number of years of the investment held _ Investment’s initial costs AVERAGE RATE OF RETURN Example: Rainer spent $800,000 to buy an apartment building After deducting all operating expenses, real estate taxes, and insurance, she receives $65,000 in the first year, $71,000 in the second year, $69,000 in the third year, and $70,000 in the fourth year ARR = Total Net Earnings / Total number of years of the investment held _ Investment’s initial costs Note: Drawback: The procedure does not take into account the time value of money.The $65,000 received in the first year was more valuable than the $70,000 received in the fourth year, because the $65,000 could have been invested to earn still more money RETURN ON INVESTMENT- ROI (%) Return on investment is frequently derived as the “return” (incremental gain) from an action divided by the cost of that action That is “simple ROI,” as used in business case analysis and other forms of cash flow analysis Simple ROI = Gains – investment costs -investment costs Simple ROI is the most frequently used form of ROI and the most easily understood With simple ROI, incremental gains from the investment are divided by investment costs RETURN ON INVESTMENT – ROI (%) For example, what is the ROI for a new marketing program that is expected to cost $500,000 over the next five years and deliver an additional $700,000 in increased profits during the same time? Simple ROI = Gains – investment costs -investment costs NET PRESENT VALUE he net present value method measures between the difference etween an Investments market value and it’s costs n investment should be accepted if it’s net present value ( NPV ) positive and rejected if it is negative PV computation of a specific project involves the following : Discounting the future cash inflow streams into it’s present lue using the company’s cost of capital Adding up the cumulative present value of the cash inflow reams Offsetting the Cumulative Present Value of the Cash Inflows against the Present Value of the Investment Costs 1) Example : Project : Investment Cost is $ 850,000 ( Cost of Capital is 15 %) Year Cash flow Discount Factor Present Value ($850,000) 1.0 ($850,000) $ 180,000 0.87 $ 156,600 $ 180,000 0.75 $ 135,000 $ 180,000 0.66 $ 118,800 $ 180,000 0.57 $ 102,600 $ 180,000 0.50 $ 90,000 $ 180,000 0.43 $ 77,400 $ 180,000 0.38 $ 68,400 $ 180,000 0.33 $ 59,400 $ 180,000 0.28 $ 50,400 10$ 180,000 0.25 $ 45,000 -Net Present Value $ 53,600 ======== * NPV > 1, so project is acceptable INTERNAL RATE OF RETURN - IRR % The IRR on an investment is the required return that results in a zero NPV when it is used as the discount rate Based on the IRR Rule, an investment is acceptable if the IRR exceeds the required return It should be rejected otherwise Example: Project A has the following information Year CashFlow DCF @ 18 % PV DCF @ 20% ($ 40,000) 1.0 ($40,000) 1.0 $ 16,000 0.84746 $ 13,559 0.83333 $ 16,000 0.71818 $ 11,490 0.69444 $ 16,000 0.60863 $ 9,738 0.57870 $ 12,000 0.51579 $ 6,189 0.48225 N.P.V $ 976 IRR = 18 % + (976/ ( 976+ 510)) * % = 19.31% NPV 976 18% 20% (510) PV ($ 40,000) $ 13,333 $ 11,111 $ 9,259 $ 5,787 -($ 510) THANK YOU [...]...PART 3 STRUCTURE OF ACCOUNTING: ACCOUNTING EQUATION 1 January Accounting Equation CAPITAL - Total value in $ Invested in the company by investors LIABILITIES - Total value of $ Loan to the company by loan creditors (Balance Sheet Statement)... ASSETS (ACCOUNTING EQUATION) Inflow of $ from Sales Revenue Customers 6 1 Business Plan 7 2 Fixed Invests Assets Money (CAPITAL) 3 (CAPEX) + Net Current Borrowing Assets (LIABILITY) (Working Profits Capital) PROFITS 8 Value Added Goods Goods 5 Value Added Services Operation People Costs PROFITS 4 CAPITAL 2 + PROFITS 7 + LIABILITIES 2 Sales ASSETS 2 + PROFITS 7 Outflow of $ to Pay 31 December -Accounting. .. RESOURCES EQUITY +LIABILITIES _ 22,875,414,056,636 5,307,060,807,329 17,545,489,315,423 22,863,933,884 22,875,414,056,636 Accounting Equation; Net Asset = Equity + Liab CASH FLOW STATEMENT - Statement to show how cash is generated and used by an organization throughout an accounting period - It reconciles the opening cash balance position to the closing cash balance position of the organization... 6,534,133,662,834 7,839 BALANCE SHEET Statement of Financial Position after a period of business operation ( 12 months) as at a Particular Point in Time – e.g 31 Dec, 30 March, etc; - It reflects the ACCOUNTING EQUATION EQUITY + LIABILITY = ASSET Notes to definition of items in the Balance Sheet : Balance Sheet is a Statement of Financial Position at a point in time – end of the financial period 1)... Balance Sheet 1 Anticipated Business Conditions Budgetary Assumptions Desired Financial Results J , F , M , A , M , J , JL , AG , S , O , N , D Implementation of business activities 2 TOTAL 3 Financial Accounting Monthly Recording: Trading, P&L A/C Balance Sheet * Corrective actions Actual : Trading, P&L A/C Balance Sheet PREPARING A BUDGET 1.Income Budget 2.Expenses Budget 3.Capital Budget 4.Cash Budget... performance from one financial period as compared to the past period, or between companies in the same industry or with companies performance from other industries Clear interpretation of those ratios enables management to understand the financial position of the organization better and to make better decisions to improve the financial position of the organization