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Personal Finance BBPERFIX Establishing your Financial Foundation Ramon Jr., America -  KEY COMPONENTS OF FINANCIAL STATEMENTS Statement of Statement of Statement of Financial Comprehensive Changes in Position Income Equity No...

Personal Finance BBPERFIX Establishing your Financial Foundation Ramon Jr., America -  KEY COMPONENTS OF FINANCIAL STATEMENTS Statement of Statement of Statement of Financial Comprehensive Changes in Position Income Equity Notes to Statement of Financial Cashflows Statements  Statement of Financial Position A company's balance sheet provides an overview of the company's assets, liabilities, and shareholders' equity at a specific time and date. The date at the top of the balance sheet tells you when this snapshot was taken; this is generally the end of its annual reporting period.  Statement of Financial Position ASSETS Cash and cash equivalents are liquid assets, which may include Treasury bills and certificates of deposit. Accounts receivable are the money owed to the company by its customers for the sale of its products and services. Inventory is the goods a company has on hand, intended to be sold as a course of business. Inventory may include finished goods, work in progress that is not yet finished, or raw materials on hand that have yet to be worked. Prepaid expenses are costs paid in advance of when they are due. These expenses are recorded as an asset because their value has not yet been recognized; should the benefit not be recognized, the company would theoretically be due a refund.  Statement of Financial Position ASSETS Property, plant, and equipment (PPE) are capital assets owned by a company for its long-term benefit. This includes buildings used for manufacturing or heavy machinery used for processing raw materials. Investments are assets held for speculative future growth. These aren't used in operations; they are simply held for capital appreciation. Trademarks, patents, goodwill, and other intangible assets can't physically be touched but have future economic (and often long-term benefits) for the company.  Statement of Financial Position Liabilities Accounts payable are the bills due as part of a business's operations. This includes utility bills, rent invoices, and obligations to buy raw materials. Wages payable are payments due to staff for time worked. Notes payable are recorded debt instruments that record official debt agreements, including the payment schedule and amount. Dividends payable are dividends that have been declared to be awarded to shareholders but have not yet been paid. Long-term debt can include a variety of obligations, including sinking bond funds, mortgages, or other loans that are due in their entirety in more than one year.  Statement of Financial Position Shareholders' Equity Shareholders' equity is a company's total assets minus its total liabilities. Shareholders' equity (also known as stockholders' equity) represents the amount of money that would be returned to shareholders if all of the assets were liquidated and all debts paid off. Retained earnings are part of shareholders' equity; this is the amount of net earnings that were not paid to shareholders as dividends.  Statement of Comprehensive Income Unlike the balance sheet, the income statement covers a range of time, generally either a year or a quarter. The income statement provides an overview of revenues, expenses, net income, and earnings per share during that time. The main purpose of the income statement is to convey details of profitability. Revenue Revenue falls into three categories: operating revenue, non-operating revenue, and other income.  Statement of Comprehensive Income Operating revenue is generated from the core business activities of a company. Non-operating revenue is the income earned from non-core business activities. These revenues fall outside the primary function of the business. Other income is the revenue earned from other activities. Other income could include gains from the sale of long-term assets such as land, vehicles, or a subsidiary.  Statement of Comprehensive Income Expenses Primary expenses are incurred during the process of earning revenue from the primary activity of the business. Expenses include: The cost of goods sold (COGS) Selling, general and administrative expenses (SG&A) Depreciation or amortization Research and development (R&D). Typical expenses include employee wages, sales commissions, and utilities such as electricity and transportation. Expenses that are linked to secondary activities include interest paid on loans or debt. Losses from the sale of an asset are also recorded as expenses.  Statement of Comprehensive Income Other comprehensive income includes all unrealized gains and losses that are not reported on the income statement. Examples of transactions that are reported on the statement of comprehensive income include: Net income (from the statement of income) Unrealized gains or losses from debt securities Unrealized gains or losses from derivative instruments Unrealized translation adjustments due to foreign currency Unrealized gains or losses from retirement programs  Statement of Changes in Equity The statement of changes in equity tracks total equity over time. This information ties back to a balance sheet for the same period; the ending balance on the change of equity statement equals the total equity reported on the balance sheet.  Statement of Changes in Equity The formula for changes to shareholder equity will vary from company to company; in general, there are a couple of components: Beginning equity: This is the equity at the end of the last period that simply rolls to the start of the next period. (+) Net income: This is the amount of income the company earned in a given period. The proceeds from operations are automatically recognized as equity in the company, and this income is rolled into retained earnings at year-end. (-) Dividends: This is the amount of money that is paid out to shareholders from profits. Instead of keeping all of a company's profits, the company may choose to give some profits away to investors. (+/-) Other comprehensive income: This is the period-over-period change in other comprehensive income. Depending on transactions, this figure may be an addition or subtraction from equity.  Statement of Cash Flows A cash flow statement tracks the inflow and outflow of cash, providing insights into a company's financial health and operational efficiency. Operating Activities The operating activities on the CFS include any sources and uses of cash from running the business and selling its products or services. Cash from operations includes any changes made in: Cash accounts receivable Depreciation Inventory Accounts payable  Statement of Cash Flows Investing Activities Investing activities include any sources and uses of cash from a company's investments in its long-term future, including changes in equipment, assets, or investments related to cash from investing. This includes: The purchase or sale of an asset Loans made to vendors or received from customers Payments related to a merger or acquisition Purchases of fixed assets such as property, plant, and equipment (PPE)  Statement of Cash Flows Financing Activities Cash from financing activities includes the cash from investors or banks, as well as the cash paid to shareholders. Financing activities include: Debt issuance Equity issuance Stock repurchases Loans Dividends paid Debt repayments  Notes to Financial Statements What are Financial Statement Footnotes? Financial statement footnotes are used as additional information by individuals reading financial statements. Otherwise known as explanatory notes or notes to the financial statements, the footnotes help add supplementary information to help further explain the related information in the financial statements without clouding the primary information that the statements are trying to convey.  FINANCIAL STATEMENT ANALYSIS › Involves the evaluation of an entity’s past performance, present condition and business potentials by way of analyzing the financial statements. Comparative analysis may be made on a number of different bases. › Intracompany basis—Compares an item or financial relationship within a company in the current year with the same item or relationship in one or more prior years. › Industry averages—Compares an item or financial relationship of a company with industry averages. › Intercompany basis—Compares an item or financial relationship of one company with the same item or relationship in one or more competing companies.  FINANCIAL STATEMENT ANALYSIS Tools: 1. Horizontal Analysis - Also called trend analysis - Evaluate FS items over a period of time - Changes as % ∆ 2. Vertical (common size) Analysis - Evaluate items w/n the FS as a percentage of a base amount - BS > Total Assets - IS > Sales - Used when comparing the companies  FINANCIAL STATEMENT ANALYSIS Ratio Analysis Evaluate relationships among FS items Characteristics: a. Liquidity – ability to pay short-term obligations (suppliers) b. Solvency – ability to pay long-term obligations (banks) c. Profitability – analyze performance of a company Patterns: 1. Return > NI (numerator) 2. Margin > Sales (denominator) 3. 2 years BS > Average > IS BS  LIQUIDITY RATIOS Current Ratio Current Assets - Measure of adequacy of working capital. Current Liabilities - Primary test of liquidity to meet current obligations from current assets. Quick Ratio Cash+AR+ST Investment - Measures the number of times that the current (Acid Test Ratio) Current Liabilities liabilities could be paid with the available cash and near-cash assets - Ex. cash, current receivables and marketable securities Receivables Net Credit Sales - Measures the number of times receivables are Turnover Average Receivables recorded and collected during the period. Average Age of 360 - Indicates the average number of days during Receivables ARTO which the (Average Collection Period) company must wait before receivables are (Days’ in Receivables) collected. Inventory Turnover COGS (Sales) - Measures the number of times that the inventory Avg.Inventory is replaced during the period  LIQUIDITY RATIOS Average Age of Inventory* 360 - Indicates the average number of days during (Inventory Conversion Period) ITO which the company must wait before the (Days’ in Inventory) inventories are sold. Accounts Payable Turnover Net Credit Purchases - Measures the speed with which a company pays Avg. Trade Payables its suppliers. Average Age of Accounts 360 - indicates the length of time during which payables Payable APTO remain unpaid. Normal Operating Cycle Average Age of - The time it takes a company to acquire inventory, Inventory + Average sell that inventory, and receive cash from its Age of Receivables customers in exchange for the inventory sold. Cash Conversion Cycle Average Age of - The time (measured in days) it takes for a Inventory + Average company to convert its investments in inventory Age of Receivables and other resources into cash flows from sales. - Average Age of Accounts Payable  PROFITABILITY RATIOS Return on Sales Income - Determines the portion of sales that went (Net Profit Margin) Net Sales into company’s earnings. Return on Assets Income - Efficiency with which assets are used Average Asset operate the business. Return on Equity Income - Measures the amount earned on the Average Common Equity owner’s or stockholders’ investment. Earnings Per Share Net Income-preferred dividends -Measure of a company's profitability that Ave. No. of outstanding common indicates how much profit each shares outstanding share of common stock has earned. Cash Flow Margin Operating CF Measures the ability of the firm to translate Net Sales sales to cash.  PROFITABILITY RATIOS Price-Earnings (PE) Ratio Price per share - It indicates the number of pesos required EPS to buy 1 of earnings. Dividend Yield Dividend per share - Measures the rate of return in the Price per share investor’s common stock investments. Dividend Pay-out Ratio Dividend per share - It indicates the proportion of earnings EPS distributed as dividends.  SOLVENCY RATIOS Times Interest Earned (TIE) EBIT - It determines the extent to which operations cover Interest Expense interest expense. Debt-Equity Ratio Total Liabilities - Proportion of assets provided by creditors Total Equity compared to that provided by owners. Debt Ratio Total Liabilities - Proportion of total assets provided by creditors Total Assets Equity Ratio Total Equity - Proportion of total assets provided by owners. Total Assets › Josephine Inc. has the following income statement (in millions): Josephine Inc. Income Statement For the Year Ended December 31, 20X0 Net Sales P180 Cost of Goods Sold 120 Gross Profit 60 Operating Expenses 33 Net Income P 27  Top Personal Financial Habits and Tips › Question 1: Using vertical analysis, what percentage is assigned to Cost of Goods Sold? a. 67% c. 100% b. 33% d. None of the above Question 2: Using vertical analysis, what percentage is assigned to Net Income? a. 100% c. 15% b. 85% d. None of the above Question 1: What is the firm's current ratio? a. 0.97 c. 1.20 b. 1.08 d. 1.33 Question 2: What is the firm's quick ratio? a. 0.49 c. 0.73 b. 0.61 d. 0.87 Question 3: What is the firm's days sales outstanding? Assume a 360-day year for this calculation. a. 48.17 c. 56.19 b. 50.71 d. 59.14 Question 4: What is the firm's total assets turnover? a. 0.90 c. 1.40 b. 1.12 d. 1.68 Question 5: What is the firm's inventory turnover ratio? a. 4.38 c. 4.82 b. 4.59 d. 5.06 Question 6: What is the firm's times interest earned (TIE)? a. 1.94 c. 2.39 b. 2.15 d. 2.66 Question 7: What is the firm's EBITDA coverage? a. 3.29 c. 3.64 b. 3.46 d. 3.82 Question 8: What is the firm's debt ratio? a. 45.93% c. 56.70% b. 51.03% d. 70.00% Question 9: What is the firm's ROA? a. 2.70% c. 3.26% b. 2.97% d. 3.59% Question 10: What is the firm's ROE? a. 8.54% c. 9.44% b. 8.99% d. 9.91% Question 11: What is the firm's profit margin? a. 1.40% c. 1.73% b. 1.56% d. 1.93% Question 12: What is the firm's dividends per share? a. P2.62 c. P3.20 b. P2.91 d. P3.53 Question 13: What is the firm's EPS? a. P5.84 c. P6.47 b. P6.15 d. P6.80 Question 14: What is the firm's P/E ratio? a. 12.0 c. 13.2 b. 12.6 d. 13.9 Question 15: What is the firm's book value per share? a. P61.73 c. P68.40 b. P64.98 d. P72.00 Question 16: What is the firm's equity multiplier? a. 3.33 c. 3.68 b. 3.50 d. 3.86 A. Setting Financial Values, Goals, and Strategies Financial Values - Money values are an extension of your personal values. They are a set of core beliefs and principles that can shape your relationship with money and drive money decisions regarding how you spend, save, or invest. Similar to your personal values, your financial values are often shaped by your lived experiences. They can be influenced by your age, family’s values, religious or spiritual beliefs, culture, or socio-economic background. Some examples of money values include freedom, security, legacy, genericity, or experiences, just to name a few. Financial Goal - One way to set your financial goals is to use so-called SMART goals. In the acronym, S stands for specific, M is for measurable, A is for achievable, R is for relevant, and T is for time-based. Write out specific goals you have, prioritize them, and then go through all the SMART factors. Strategic financial management - refers to the long-term plans a company makes to grow in the long-term, and ultimately maximize value for the shareholders. Although exact strategies will vary, this typically entails setting precise objectives, and analyzing the company's advantages and resources in order to achieve those goals. What is a PESTEL Analysis? A PESTEL analysis is a strategic framework commonly used to evaluate the business environment in which a firm operates. Traditionally, the framework was referred to as a PEST analysis, which was an acronym for Political, Economic, Social, and Technological; in more recent history, the framework was extended to include Environmental and Legal factors as well.  POLITICAL FACTORS Broadly speaking, political factors are those driven by government actions and policies. They include, but are not limited to, considerations like: › Corporate taxation › Other fiscal policy initiatives › Free trade disputes › Antitrust and other anti-competition issues Example: A multinational company closes several facilities in a higher tax jurisdiction in order to relocate operations somewhere with lower tax rates and/or greater state funding and grant opportunities.  ECONOMIC FACTORS Economic factors relate to the broader economy and tend to be expressly financial in nature. Many analysts in the financial services sector tend to overweight economic factors in their analysis since they’re more easily quantified and modeled than some of the other factors in this framework (which are somewhat qualitative in nature). They include: Interest rates Employment rates Inflation Exchange rates Example: a rise in inflation may result in a business laying off its workers to save money. This action may lead to an increase in unemployment.  SOCIAL FACTORS They refer to shifts or evolutions in the ways that stakeholders approach life and leisure, which in turn can impact commercial activity. Examples of social factors include: Demographic considerations Lifestyle trends Consumer beliefs Attitudes around working conditions Example: Post-pandemic, management at a technology firm has had to seriously reevaluate hiring, onboarding, and training practices after an overwhelming number of employees indicated a preference for a hybrid, work-from-home (WFH) model.  TECHNOLOGICAL FACTORS › Management teams and analysts alike must understand how technological factors may impact an organization or an industry. The speed and scale of technological disruption in the present business environment are unprecedented, and it has had a devastating impact on many traditional businesses and sectors. They include, but are not limited to: Automation How research and development (R&D) may impact both costs and competitive advantage Technology infrastructure (like 5G, IoT, etc.) Cyber security Example: if consumers find it easier or preferable to purchase items online, a business may decide to refocus its efforts toward an online store rather than a physical storefront. Alternatively, advancements in automation can help manufacturers streamline production processes and produce more goods at a time.  ENVIRONMENTAL FACTORS Environmental factors involve the impacts that changes in the natural environment can have on businesses. This includes factors such as: Weather Pollution Climate change Waste disposal Sustainability practices Example: if customers care more about recycling, businesses that use recyclable materials in their products may encounter more success.  LEGAL FACTORS Legal factors are those that emerge from changes to the regulatory environment, which may affect the broader economy, certain industries, or even individual businesses within a specific sector. They include, but are not limited to: Industry regulation Licenses and permits required to operate Employment and consumer protection laws Protection of IP (intellectual property) Labor laws Environmental Law  LEGAL FACTORS Legal factors are those that emerge from changes to the regulatory environment, which may affect the broader economy, certain industries, or even individual businesses within a specific sector. They include, but are not limited to: Industry regulation Licenses and permits required to operate Employment and consumer protection laws Protection of IP (intellectual property) Labor laws Environmental Law  LEGAL FACTORS Legal factors are those that emerge from changes to the regulatory environment, which may affect the broader economy, certain industries, or even individual businesses within a specific sector. They include, but are not limited to: Industry regulation Licenses and permits required to operate Employment and consumer protection laws Protection of IP (intellectual property) Labor laws Environmental Law References: www.investopedia.com www.corporatefinanceinstitute.com www.abacuswealth.com