Management
Accounting
Management Accounting vs. Financial Accounting
MA
user of info
sources of info
internal
internal and external
purpose
mgt decision making
guiding principles
type of info
mgt wants and needs
financial and non fin
future oriented using
past and present data
relevance: timeliness
and materiality
business segments
whenever needed
time orientation
emphasis
focus
frequency
legal requirement
optional
FA
external
internal
financial reporting and
compliance
actng standards: PFRS
financial and monetary
historical
reliability: precision
and verifiability
business as a whole
periodic
mandatory for publicly
listed entities
Goal: maximize shareholder's wealth
Management
Functions
Planning
company goals and objectives
Organizing
how to use company resources
Controlling
corrective actions if plan = actual
Line
to give orders
downward authority
directly involved
vs.
vs.
Treasurer
custody
provision of capital
investor relations
short-term financing
banking and custody
credit and collections
investments and insurance
Staff
to advise
upward authority
provide support
Controller
recording
planning and control
financial reporting
tax administration
govt reporting
protection of assets
economic appraisal
Cost
Behavior
Y
mixed
dependent
Relationship to Production:
Variable
+ Fixed
Total or Mixed
Variable costs / unit
Fixed costs / unit
cost/line function:
=
a
fixed
y-intercept
+
bx
slope independent
variable
High-Low Method
direct
UVC =
constant
inverse
Graphic Method
All observed costs based on
different activity levels are
plotted on a graph.
advantage: more representative
disadvantage: based on observation & judgment
YH - YL
XH - XL
ignore outlier! (abnormal number)
in case of conflict, follow x
in case of common x
- choose lower y for lowest x
- choose higher y for highest x
Least-squares Regression
Ey = na + bEx
Exy = aEx + bEx2
(y = a + bx) x Ex
Coefficient of
Determination
r2
Coefficient of
Correlation
r
Linear
Relationship
+1
+1
direct/positive
0
0
none
+1
-1
inverse/negative
CVP
Analysis
CVP Analysis Formulas
Sales
Less: Variable Cost
Contribution Margin
Less: Fixed Cost
Profit
CM Ratio = CM - Sales
Break-even point
when profit is 0
in units = FC - UCM
in peso = FC - CMR
BEP ratio = BEP - Sales
Target Profit
in units = (FC + TP) - UCM
in peso = (FC + TP) - CMR
TP ratio = FC - (CMR - PR)
pre-tax profit = after tax - (100% - tax rate)
Margin of Safety
max amount by which sales could decrease w/o loss
MS = S - BEP Sales
MS = P - CMR
MS ratio = MS - Sales
= 100% - BEP ratio
= PR - CMR
Sales Mix
Overall BEP units = FC - WAVE UCM
Overall BEP peso = FC - WAVE CMR
Target Units = FC + TP - WAVE UCM
Target Sales = FC + TP - WAVE CMR
Degree if Operating Leverage
how sensitive profit is to sales vol increase and decrease
DOL = CM - PR or CMR - PR or 1 - MSR
% Profit = % in Sales x DOL
Absorption and
Variable Costing
Absorption Costing vs. Variable Costing
VC
AC
Full/GAAP Costing
other names
Direct/Marginal Costing
Period Cost
treatment of
Product Cost
Fully Expensed in the Period
Inventory, then Expense
FFOH
Incurred
Reason behind
Treatment
Inventory Cost
FFOH is necessary to
produce units
higher than VC
IS Presentation
Functional (COGS)
External Financial
Reporting
Financial Statements,
Reporting to BIR & SEC
Main Purpose/
Function
Common
Applications
Main Criticism
Possibility of Income
Manipulation
FFOH is incurred with or
without production
lower than AC
Behavioral (CM)
Management Decision Aid
– for internal use
CVP Analysis, Pricing
Decision, Relevant
Costing
Violation of Matching
Principle
Absorption
Costing
DM - Variable
DL - Variable
Variable FOH
Fixed FOH
Variable S+A
Fixed S+A
Variable
Costing
Throughput
Costing
Super Variable Costing
Product Cost
Product Cost
Product Cost
Period Cost
Period Cost
Period Cost
Profit =
AC Profit - VC Profit
Inventory x unit FFOH
End Inv - Beg Inv
or Prod - Sales
Total FFOH - Units Produced
Pricing Decisions
Customers
Value-based
based on buyer's perception of
product value
Competitors Competition-based
Going-rate pricing
Bidding
Target costing
price = competitor's price
price = lowest bidder price
1. determine MP based on competition & customers
2. target cost = MP - desired profit
3. reduce life-cycle costs to reach target cost lvl
by value engineering
Costs
Cost-based
cover value-chain cost
and provide desired ROI
Cost-plus price = certain costs + target profit
Mark-up price = full costs + target % on costs or SP
Relevant
Costing
Make or Buy
Avoidable Variable Costs
Direct materials
Materials handling
Direct labor
Variable manufacturing overhead
Avoidable Fixed Costs
Opportunity Cost
Cost to Make
xx
Purchase price
Materials handling
Cost to Buy
xx
xx
xx
xx
xx
xx
choose lower cost
Accept or Reject
Incremental revenue
Less: Incremental costs:
Direct materials
Direct labor
Variable manufacturing overhead
Variable selling expenses
Opportunity cost
Additional fixed cost
Incremental profit)
xx
( xx)
xx
.
xx
.
xx
.if positive: accept
xx
.
xx
.
xx
.
(xx
Continue or Shutdown
Sales Revenue
Opportunity cost
Avoidable Revenue )
xx
xx
xx )
if Revenue > Cost: continue
Sales
Less: Variable expenses
Contribution margin
Less: Traceable fixed expenses
Segment margin
Less: Common fixed expenses
Net Income
Variable costs
Traceable fixed costs
Avoidable common fixed costs
Other avoidable costs
Avoidable Cost )
xx
xx
xx
xx
xx )
xx
( xx)
xx
(xx )
xx
( xx)
xx
if positive: continue
Sell or Process Further
Revenue or Selling Price after processing further
Less: Revenue or Selling Price at split off
Additional Revenue)
Less: Cost of processing further
Incremental Revenue)
xx
( xx)
xx)
( xx)
xx)
if positive: process further
Best Product Combination
Selling price
Less: Variable cost per unit
Contribution margin per unit)
Divide: Constrained resource per unit
or
Multiply: Number of units produced per constrained resource
Contribution margin per constrained resource)
rank from highest to lowest
xx
( xx)
xx)
xx)
Linear
Programming
Linear Programming
max revenue, contribution margin, or profit
min cost function, subjectto constraints
limited resources are allocated based on the optimal product mix
Sample problem:
Available resources:
120 grams of Material 1
80 meters of Material 2
OBJ:
CON:
Unit CM
Requires:
Material 1
Material 2
Maximize Z = 5A + 10B
Material 1: 2A + 5B < 120
Material 2: 4A + 2B < 80
Product A
3
Product B
4
2 grams
4 meters
5 grams
2 meters
Optimal product mix:
4A +10B = 240
4A + 8B = 160
8B = 160
B = 160/8
B = 20
A = 10
Budgeting
Purposes of Budgeting
planning
control
communication
Kinds of Budgets
Operating Budget
1. Master Budget
2. Budgeted FS
3. Capital budget
4. Financial budget
Financial Budget
Types of Budget
1. Participative
2. Top-down vs. Bottom-up
3. Budgetary slack
4. Zero-based budgeting
5. Continuous budgeting
6. Flexible budgeting
7. Static budget
8. Incremental budgeting
9. Life-cycle budget
10.Kaizen budgeting
Operating Budget
Sales Budget
Period 1 Period 2
xx
xx
Budgeted sales in units
Px
x Budgeting selling price Px
xx
Budgeted sales revenue xx
Prod. and Purch. Budget
Period 1 Period 2
xx
xx
Budgeted sales in units
xx
Required ending inventory xx
xx
xx
Total units required
( xx)
Less: Estimated Beg. Inv. (xx )
xx
xx
Budgeted Production
xx
xx
x Purchase price
xx
xx
Budgeted Purchases
Budgeted COGS
Period 1 Period 2
Budgeted DM
xx
xx
Budgeted DL
xx
xx
Budgeted VOH
xx
xx
Fixed OH
xx
xx
Budgeted man. cost
xx
xx
x Budgeted sales in units xx
xx
Budgeted COGS
xx
xx
Manu. OH Budget
Budgeted production
x Var. OH rate per unit
Total VOH rate
Total fixed overhead
Total overhead
Period 1 Period 2
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
DL Budget
Budgeted production
x DLH needed per unit
Total DLH needed
x Cost per DLH
Budgeted DL cost
Period 1 Period 2
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
S&A Expense Budget
Budgeted sales in units
x VSAE per unit
Total VSAE
Total FSAE
Budgeted Total SAE
Period 1 Period 2
xx
xx
xx
xx
xx
xx
xx
xx
xx
xx
Budgeted IS
Period 1 Period 2
Budgeted sales revenue
xx
xx
Less: Budgeted COGS
( xx)
( xx)
Budgeted GP
xx
xx
Less: Budgeted SAE
( xx)
(xx )
Budgeted Operating Income xx
xx
Financial Budget
Operating
C
Cash Receipts Budget
Budgeted Credit Sales
Collections during the period of sale
Collections in the period after sale
Total collections from credit sales
Budgeted Cash Sales
Total Cash Collections
xx
xx
xx
xx
xx
xx
NC
NC
Investing
Investing
Cash Disbursement Budget
Budgeted cost of RM purchased
Amount paid in period of purchase
Amount paid in period after purchase
Total cash payment of RM purchase
Budgeted DL Cost (ex: dep'n )
Budgeted OH Cost ( ex: bad debts )
Budgeted Operating expenses
Total Cash Payments
A
L
E
C
xx
xx
xx
xx
xx
xx
xx
xx
Cash Budget
Beginning Cash Balance
Budgeted Cash Receipts
Less: Budgeted Cash Disbursements
Ending Cash Balance
xx
xx
( xx )
xx
Probability
Analysis
Expected Value
in Peso Probability
Vol
xx
x%
xx
=
xx x SP xx
x%
x
xx
x%
xx
100%
Deterministic Approach
EV
xx
xx
xx
xx
choose highest probability
Best Estimate
average of range x probability
Decision Tree Diagram
probability 1
probability 2
probability 3
Exp. Value
decision 1
xx
xx
xx
xx
decision 2
xx
xx
xx
xx
decision 3
xx
xx
xx
xx
Perfect Information
highest result per situation
Willing to Pay for Perfect Information:
Expected Value of Perfect Information
Perfect Information - Best Decision
probability x ( D1 - D2 of situation )
Standard
Costing
Direct Material Variance
AP x AQ MPV
SP x AQ MQV
SP x SQ
DM Variance
Direct Labor Variance
AR x AH LRV
SR x AH
SR x SH LEV
DL Variance
Total Overhead Variance
Actual
BFO + VR x AH
BFO + VR x SH
Applied
AVOH + AFOH
BAAH
BASH
SR x SH
Controllable Spending
Efficiency
Volume
Volume
OH
Variance
Responsibility
Accounting
Responsibility Accounting
performance measurement tool
decentralized form of organization
must avoid sub-optimization
Performance Report
Cost Center
variance analysis: actual cost vs. budgeted cost
Revenue Center
variance analysis: actual sales vs. budgeted sales
Profit Center
variance analysis: actual profit vs. target profit
segmented income statement
Investment Center
variance analysis: actual profit vs. target profit
segmented income statement
return on investment
residual income
economic value-added
Segmented Income Statement
Sales
Variable Manufacturing Cost
Manufacturing Contribution Margin
Variable Non-Manufacturing Cost
Contribution Margin
Controllable Direct Fixed Cost
Performance Margin
Non-Controllable Direct Fixed Cost
Segmented Margin
Allocated Fixed Cost
Profit
xx
(xx )
xx
(xx )
xx
(xx )
xx
( xx)
xx
(xx )
xx
manager
branch
=
ROI
Operating Income
Operating Assets
RoA
MARGIN
Operating Income
Sales
x
TURNOVER
Sales
Operating Assets
RI
=
INCOME
EVA
=
INCOME - REQUIRED INCOME
AFTER TAX
Total Assets
- REQUIRED INCOME
Weighted FV x Cost
of Liability and Equity
Min. ROI x Assets
- Current Liabilities
x WACC
Transfer
Pricing
Decentralization - separation of organization into more manageable units, each
managed by an individual.
Goal Congruence - all units have incentives to perform form common interest
Sub-optimization - when one segment takes action that is in its own interest but
detrimental to the firm as a whole
Pricing Schemes
1. Cost-based
2. Market-based
3. Negotiated price
Upper limit / MAX = outside supplier SP
Lower limit / MIN
Transfer Price = Addtl Outlay Cost + Opportunity Cost
Full Capacity: foregone CM
Excess Capacity: 0
Balanced
Scorecard
Four Perspective of Balanced Scorecard
1.
2.
3.
4.
Financial Performance - how do we look to the firm's owners?
Customer - how do the customers see us?
Learning and Growth - how can we continually improve and create value?
Internal Business Process - in what business process mustvthe firm excel in order
to achieve its long term goals?
Order
Received
Productivity =
Total Output
Total Input
Manu. Cycle Efficiency =
Value Added Time
Throughput Time
Production
Started
Wait
value added
Process + Inspection + Move + Queue
Throughput (Manu. Cycle) Time
Delivery Cycle Time
Goods
Shipped
Microeconomics
Law of Demand
price
5
D1
Price Elasticity of Demand
Change in QD - Change in Price
Ave. Qty.
Ave. Price
D2
4
3
2
1
1
2
3
4
5
quantity
relationship: inverse
Downward sloping
movement along the curve
Demand Curve Shift
(D1 to D2)
Marginal Propensity to
Consume or Save
effect of P in revenue
> 1 Elastic
inverse
= 1 Unitary
no effect
< 1 Inelastic
direct
= 0 Perfectly Inelastic
direct
Substitution effect
Income effect
Law of diminishing utility
Expected price changes
Size of market or population
Organized boycott
Consumer preferences
Consumer income and wealth
subtitute - direct
complementary - inverse
direct
direct
inverse
indeterminate
normal - direct
inferior - inverse
MPC = Change in Consumption - Change in Disposable Income
MPS = Change in Savings - Change in Disposable Income
Law of Supply
price
5
S1
Price Elasticity of Supply
Change in QS - Change in Price
Ave. Qty.
Ave. Price
S2
4
3
2
1
1
2
3
4
5
quantity
relationship: direct
Supply Curve Shift
(S1 to S2)
effect of P in supply
> 1 Elastic
inc or dec a lot
= 1 Unitary
< 1 Inelastic
inc or dec a little
= 0 Perfectly Inelastic -
Number of producers
Technological Advances
Expected price changes
Price of complementary goods
Price of substitute goods
Production costs
Government tax and tariffs
Government subsidies
direct
direct
direct
direct
inverse
inverse
inverse
direct
Equilibrium
price
5
D
changes
D
S
S
↑
↓
↑
↓
↓
↑
effect
EP
EQ
↑
↓
↓
↑
↑
↓
↑
↓
↑
↓
↑
↓
-
EQ: DEMAND = SUPPLY
↑
↓
↑
↓
↑
↓
short-run
fixed + variable
law of diminishing return
all inputs are variable
economies of scale
constant return of scale
diseconomies of scale
price floor (surprlus)
4
equilibrium
3
price ceiling (shortage)
2
1
1
2
long-run
3
4
5
quantity
Marginal Revenue =
marginal revenue product
increase in products
D+D
I+D
0+D
D/I + O
Market Structure
Market
No. of
Firms
Products
Price Control
Ease of Entry
pure
competition
very
many
identical or
homogeneous
none
price takers
very easy
no barriers
monopolistic
competition
many
differentiated
limited
fairly easy
low barriers
oligopoly
few
standardized w
differentiation
limited or
wide
hard
high barriers
pure
monopoly
one
unique
wide
price makers
blocked
Pure competition - demand curve is perfectly elastic or horizontal
Monopolistic competition - demand is negatively sloped. focus on innovation.
Oligopoloy - demand curve is kinked down at market price. if unregulated, tends to
established a cartel, through collusion.
Pure monoply - demand curve is negatively sloped. subj to govt regulation.
Monopsony - only one buyer exists for all sellers
Black Market - illegal market wherein people conduct transactions at prices
forbidden by the government.
Macroeconomics
Aggregate
Demand
Aggregate
Supply
Multiplier effect
shifts
when consumers, business, or govt are
willing to spend more or less
when demand for domestic products
abroad increase of decrease
shifts
technological improvements
change in resources availability
change in resource costs
increase in spending has a multiplied effect in
equilibrium GDP
1 - MPS = multiplier
3 Major Economic Goals
1. Promote economic growth
2. Limit unemployment
3. Limit inflation
Promote Good Wealth
Gross Domestic
Product
market value of all the final goods and services produced by
a country within a given time period
intermediate goods
not included non-production transactions
non-market and illegal activities
Expenditure Approach
GDP = Consumption expeditures + Investment + Govt purchases + ( Exports - Imports )
Income Approach
GDP = Rent + Wages + Interest + Profit
Real GDP
Nominal GDP
GDP Gap
at price level adjusted prices. eliminates inflation.
at current prices. doesn't acc for inflation
Potential GDP = Real GDP
Peak
Recession - at least 2 consecutive
quarters
Peak
trough
Recession
Expansion
Depression - prolonged recession
Limit Unemployment
Unemployment Rate =
Types of
Unemployment
no. of unemployed
x 100
no. of labor force
1. Structural mismatch making some skills obsolete
temporary or being between jobs
2. Fictional
caused by recession
3. Cyclical
Phillips Curve - relationship between inflation and unemployment rate
Limit Inflation
CPI =
price of market basket
x 100
price of market basket in basket base year
Inflation Rate =
CPI this yr - CPI last yr
x 100
CPI last year
GDP Deflator = Nominal GDP x 100
Real GDP
Causes of Inflation
Demand-pull - real GDP exceeds potential GDP
Cost-push - decrease in aggregate output and unemployment
M1 - highest liquidity
Money M2 = M1 + savings acc, cert of deposits, money market, time deposits
M3 = M2 + other less liquid
increase govt spending
Expansionary
decrease taxes
↓UE ↑GDP
combination of two
Fiscal Policy
decrease govt spending
Contractionary
increase taxes
↓INF ↓GDP
combination of two
Monetary
Policy
Expansionary
Contractionary
lower interest rates
buy back govt securities
decrease reserve requirements
increase interest rates
sell govt securities
increase reserve requirements
International
Trade and Foreign
Currency
Common reasons for international trade
Expansion - to develop new markets
Outsourcing - to obtain commodities not available domestically
Cost-cutting - at lower cost than available domestically
Comparative advantage - lower opportunity cost
Balance of Trade
Trade surplus: export > import
Trade deficit: export < import
Effect of Currency Appreciation
Cheaper foreign goods
Downward pressure on inflation
Competition problems for domestic producers
Effect of Currency Depreciation
Cheaper domestic goods
More domestic employments due to higher exports
Higher cost of imported materials and other inputs
Working Capital
Management
Net Working Capital = Current Assets - Current Liabilities
Working Capital Financing
conservative
low risk, low return
relaxed
aggressive
high risk, high return
restricted
moderate
not too low, not too high
balanced
matching
maturity useful life
hedging
Transaction purposes
Precautionary reserves
Why hold cash?
Speculation
Contractual requirements
Potential investment opportunities
Types of Float
should be increased
Positive float (disbursement): bank > book
Negative float (collection): bank < book
should be decreased,
if possible, eliminated
a. mail float
b. processing float
c. clearing float
Cash and Marketable Securities Management
Cash mgt strategies
accelerate cash collection
lockbox system
control cash disbursements
line of credit
reduce precautionary idle cash
zero-balance account
Marketable Securities Risk
Default risk - issuer may not be able to pay
Inflation risk - inflation may reduce the real value of investment
Interest rate risk - price may fluctuate due to changes in market int rate
Baumol Model
Optimal Cash Bal =
Economic Cash Qty
2DT
O
D = Annual Demand for Cash
T = Cost per Transaction
O = Opportunity Cost
Opportunity Cost = (ECQ - 2) O
Transaction Cost = (D - ECQ) x T
ECQ - 2 = Ave. Cash Balance
D - ECQ = No. of Transactions
Receivables Management
Credit period
Credit terms
Credit standards
Collection policy
Credit Policy
Ave. AR Bal = Ave. Daily Cr. Sales
x Ave. Coll Period
Ave. Invest. in AR = Ave. AR Bal x Cost %
benefit - cost = net dis/advantage
in Ave. AR Bal
x Rate of Return
Annual Return
discount +↑coll cost +↑bad debt + opp cost
PxRxT
Age of Receivable
Age of Inventory
purchased
Age of AP
paid
collected
sold
Cash Conversion Cycle
Normal Operating Cycle
CCC = Age of Inv + Age of AR - Age of AP
NOC = Age of Inv + Age of AR
Credit Standard
Character
Capacity
Capital
Conditions
Collateral
Ave. AI = Inventory - CGS per day
Ave. AR = Receivables - Sales per day
Ave. AP = Payables - Purchases per day
Inventory Management
How many should be ordered?
Economic Order Qty =
2DO
C
Carrying Cost = (EOQ - 2) C
Ordering Cost = (D - EOQ) x O
For Production: Economic Lot Size
D = Annual Demand in Units
O = Cost of Placing One Order
C = Cost of Carrying One Unit
EOQ - 2 = Ave. Invty in Units
D - EOQ = No. of Orders per Year
D = Annual Production in Units
O = Set up Costs per Batch
When should it be reordered?
Reorder Point = Delivery Time Stock + Safety Stock
or Max LT x Ave. Usage per Unit of Time
DTS = Normal Lead Time x Ave. Usage per Unit of Time
SS = (Max Lead Time - Normal Lead Time) x Ave. Usage per Unit of Time
Short-Term Credit Financing
Cost of
Trade
Credit
Discount %
100% - Discount %
Cost of
Bank Loans
Cost of
Commercial Papers
Cost of
Factoring
Receivables
x
360 days
Credit Period - Discount Period
Interest
Face Value - Interest - Compensating Bal
Interest + Issue Cost
Face Value - Interest - Issue Cost
Interest + Factor's Fee
x
FV - Int - Holdback - Factor's Fee
x
x
360 days
Loan Term
360 days
Paper Term
360 days
Rem. Maturity Period
Costs of
Capital
Cost of Capital
desired rate
standard rate
cut-off rate
Cost of Capital
Source of Capital
Long-term Debt
min. acceptable rate of return
req. rate of return
hurdle rate
YTM =
Interest + (-) Discount (Premium) Amort
(Net Proceeds + FV) - 2
note: after tax
Preferred Stock
DY =
Dividend % x Par Value per Share
Market Price per Share - Float/Issue Cost
note: ignore tax
Common Stock
Retained Earnings
Next Dividend per Share
+ Growth Rate
MP per Share - Float/Issue Cost
ignore if RE
note: ignore tax
Capital Assets
Pricing Model
Ke = Krf + B ( Km-Krf )
Krf = Risk-free rate
B = Beta-coefficient
Km = Market Return
Leverage
Leverage - portion of the fixed costs which represents a risk to the firm
Operating Leverage - risk of being unable to cover operating cost
Financing Leverage - risk of being unable to cover financial obligations
Total Leverage - how EPS is affected by changes in sale
CM
Exp
EBIT
FFC
NI
xx
(xx ) - DOL
xx
( xx) - DFL
xx
-
-
-
-
% in EBIT
% in Sales
x
% in EPS
% in EBIT
DTL
% in EPS
% in Sales
Fixed Financing Charges = Interest Charges + Pre-Tax Preferred Dividends
Capital
Structure
Capital Structure mix of long term financing
Optimal Capital Structure
target capital structure
mix of debt and equity financing that maximizes a firm's
market value while minimizing its overall cost of capital
Debt Financing
Equity Financing
Hybrid
Control
none
diluted
none except in
financial distress
Cost
after tax interest
expense
CAPM or DGM
WACC
Tax effect
interest paid is tax
deductible
dividends are not
tax deductible
dividends are not
tax deductible
Financial
Obligations
specified and of
fixed nature
none
none but cumulative
pref dividends are
almost mandatory
Inflation
effect
may be paid back wt
cheaper peso
none
none
Payment req
or default
risk
high risk if the
earnings fluctuate
not required
only when profits
are available
no default risk
except cumu ps
Maturity date
debt usually has
maturity date
no fixed maturity
date
no fixed maturity
date
Limitations
cost of debt is
limited
common share grows
in value wt the
success of the firm
dividend payment is
limited to stated
amount
Flexibility
call provisions in the
bond indenture
none
call features and
provision of sinking
fund
Hybrid Financing
Preferred stock
Lease financing
Convertible securities
Warrants
Capital
Budgeting
Capital
Investment
Independent
Screening
evaluated against criteria
Mutually exclusive
Preference
choosing from among alternatives
Purchase price, net
Other incidental costs
Working capital req
Tax on gain
MV of idle asset to be used
Training cost, net of tax
Net cash flow pre-tax
Depreciation
Profit before tax
Taxes
Profit after tax
Depreciation
Net cash flow after tax
Cash Out
Less: Cash In
Net Investment
Trade-in value of old
Proceeds from sale of old
Avoidable costs, net of tax
Tax on Loss
Alt:
xx x (100%-Tax)
xx
xx
(xx) x Tax %
xx
xx NCFAT
(xx) Cost to remove, net of tax
xx Working capital recovery
xx Tax on gain or loss
xx New salvage value
Terminal value
xx
xx
xx
xx
xx
Capital Budgeting
Identification
Net Investments
Net Returns
Costs of Capital
Net Investments
Annual Cash Flows
cash out - cashcumulative
in* - SV*
PBP < Life - 2
ARR > COC
NPV
Net Income
Net Investments
PV Cash In - PV Cash Out
PI
PV Cash In - PV Cash Out
PI > 1
IRR
PV Cash In = PV Cash Out
IRR > COC
PBP
Non-discounted Bail-out PB
ARR
Discounted
Decision
Evaluation
PBP < Life - 2
NPV > 0
Investment Risks
and Return
Diversifiable
Unsystematic
Controllable
Non-diversifiable
Systematic
Non-controllable
Investment Risk
possibility that actual returns differs from expected returns
Expected Rate of Return
Probability
x
x%
x
x%
Cash flow
xx
xx
Expected Return
=
xx
=
xx
ER = xx
Standard deviation = variance
risk-appetite
CF - ER
Variance
xx
xx
2
xP
xx
xx
xx
Coefficient of variation = SD – ER
risk-taker
risk-neural
risk-averse
aggressive
moderate
conservative
Financial
Statements
Analysis
Horizontal analysis
Vertical Analysis
process of comparing
figures in the FS w/in
a single period.
>
changes of corresponding FS items over a period
current year - base year
Percentage Change =
base year
Cash Flow Analysis
Operating activities - changes in CA and CL
Investing activities - changes in NCA
Financing activities - equity and NCL
✓ BS - total assets
✓ IS - net sales
✓ common-size
statements or
percentage
composition FS
Financial Ratios
Liquidity ratios - ability to meet short-term obligations
Solvency ratios - leverage ratios. long-term financial viability
Profitability ratios - performance ratios. ability to generate income
Activity ratios - ability to use its assets and manage its liab effectively
Market value ratios - trends in earnings, dividends and stock prices
-
Liquidity Ratios
Net working capital
Current Assets –
Current Liabilities
Current Ratio
Quick Ratio
(Working Capital Ratio)
(Acid Test Ratio)
Current Assets
Current Liabilities
Quick Assets
Current Liabilities
Solvency/Leverage Ratios
Debt Ratio
Total Liabilities
Total Assets
Equity Ratio
Total Equity
Total Assets
Equity Multiplier
1
Equity Ratio or
Times Interest Earned
(Interest Coverage Ratio)
Debt-Equity Ratio
Total Liabilities
Total Equity
Assets
Equity
EBIT
Interest Payments
Profitability/Performance Ratios
Return on Equity
Income
Average Equity
Return on Sales
Income
Sales
Return on Assets
Income
Average Assets
Operating Profit Margin
EBIT
Sales
(Net) Profit Margin
Profit
Sales
Gross Profit Margin
Gross Profit
Sales
Activity/Efficiency/Asset Utilization Ratios
Inventory Turnover
(for merchandisers)
Cost of Goods Sold
Average Inventor
Receivable Turnover
Payable Turnover
Net Credit Sales
Average Receivables
Net Credit Purchases
Average Payables
Activity/Efficiency/Asset Utilization Ratios
Raw Material Turnover
Work-in-Process Turnover
(for manufacturers)
(for manufacturers)
Cost of Materials Used
Ave. RM Inventory
Cost of Goods Manufactured
Ave. WIP Inventory
Finished Good Turnover
Inventory Turnover
(for manufacturers)
Cost of Goods Sold
Ave. FG Inventory
Age of Inventory
(Inventory Conversion Period)
Age of Receivable
(Receivable Collection Period)
Age of Payable
(Payable Deferral Period)
(for manufacturers)
FG Turnover
+ WIP Turnover
+ RM Turnover
360 days
Inventory Turnover
360 days
Receivables Turnover
360 days
Payables Turnover
Activity/Efficiency/Asset Utilization Ratios
Asset Turnover
Sales
Average Total Assets
Fixed Asset Turnover
Sales
Average Fixed Assets
Normal Operating Cycle
Age of Inventory
+ Age of Receivables
Cash Conversion Cycle
Normal Operating Cycle
- Age of Payables
Market Value/Market Prospect Ratios
Price-Earnings Ratio
Market Price per Share
EPS
Dividend Payout
Dividend Per Share
EPS
Dividends Yield
Dividend Per Share
Market Price per Share
Retention Ratio
(Plowback Ratio)
100% - Dividend Payout
Other Financial Ratios
Cash Ratio
Cash + Marketable Securities
Current Liabilities
Defensive Interval
Quick Assets
Average Capital Expenditures
Cash Flow Margin
Operating Cash Flow
Net Sales
Times Preferred
Dividends Earned
Net Income After Tax
Preferred Dividends
Capital Intensity Ratio
Total Assets
Net Sales
Free Cash Flow
Operating CF + After-Tax
Interest - Capital Expenditures
Other Topics
Learning Curve
Learning Curve
experience curve
productivity curve
efficiency curve
labor time decreases in a definite pattern as labor operations are repeated
Sample problem:
Estimated 80% learning curve.
First unit required 20 labor hours to complete.
UNITS
1
AVERAGE
2
16
4
12.8
Cumulative ave. time
per unit after 4 units
are completed? 12.8.
TOTAL
20
20
12 hrs
80%
32
80%
51.2
Hours required to
produce a total of 2
19.2 hrs units? 32.
Hours required to
produce 2nd unit? 12.
Financial Markets
Financial Markets any marketplace where trading of securities occurs
Money Markets
short-term debt instruments
low-default risk
Banker's Acceptance
BSP Treasury Bills
Repurchase Agreements
Commercial Papers
Mutual Funds
Certificate of Deposits
Capital Market
long-term debt or equity securities
directly with the company
Primary Market
selling of new securities thru IPO
can be sold only once
traded between entities
Secondary Market thru dealer or broker market - PSE
no limit to no. of times it can be traded