How to uses financial tools

TABLE OF CONTENTS

Introduction

I-1

Section 1

1.0 Overview of Financial Management Principles (Economy & Finance)

1-1

1.1 General

1-1

1.1.1 Kiss Approach

1-2

1.1.2 Water Bed Approach

1-3

1.2 What Is Financial Management?

1-3

1.3 Accounting Elements

1-5

1.3.1 Budgeting

1-7

1.3.2 Ratio Analysis

1-8

1.3.3 Cost of Capital

1-11

1.3.4 Capital Decisions

1-11

1.3.5 Lease Versus Buy

1-12

1.3.6 Working Capital (Cash Management)

1-12

1.3.7 Summary

1-13

1.4 The Economy & Economic Indicators (Wall Street Journal or Financial Times)

1-13

1.4.1 Monetary Policies

1-16

1.4.2 Raw Resources

1-17

1.4.3 Fiscal Policies

1-17

1.4.4 Productivity

1-19

1.4.5 Balance of Payments

1-19

1.4.6 Treasury Department

1-20

1.4.7 Summary

1-20

Appendix 1A Background writes ups on WSJ & FT Economic Indicators

1A-1

1.5 General Summary

1-21

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Section 2

2.0 Basic Financial Statements and Glossary of Terms

2-1

2.1 General

2-1

2.2 Basic Financial Statements Used In Annual Reports

2-1

2.2.1 What Is An Income Statement?

2-1

2.2.2 What Is A Balance Sheet?

2-3

2.2.3 Statement of Retained Earnings

2-3

2.3 Glossary of Terms

2-8

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Section 3

3.0 Financial Planning and Control

3-1

3.1 General

3-1

3.2 Budgeting and Managing

3-1

3.2.1 Nature of Budgeting for Growth and Profit

3-1

3.2.2 Budgeting Procedures

3-2

3.2.3 Sources of Information

3-3

3.2.4 Elements of Financial Planning

3-4

3.3 Operating Budget

3-5

3.3.1 General

3-5

3.3.2 Profit Objective

3-6

3.3.3 Forecasting Revenue

3-6

3.3.4 Pro Forma Income Statement

3-6

3.3.5 Some Facts Affecting Pro Forma Statements

3-6

3.3.6 Limiting Expenses

3-7

3.3.7 Preparation

3-8

3.3.8 Presentation of. Operating Budget

3-10

3.4 Cash Budget (A Tool for Cash Management)

3-10

3.4.1 General

3-10

3.4.2 Purpose

3-10

3.4.3 Preparation

3-14

3.5 Capital Budget

3-17

3.5.1 General

3-17

3.5.2 Purpose

3-17

3.5.3 Long-Range Planning

3-18

3.5.4 Sources of Capital

3-18

3.5.5 Preparation

3-18

3.6 Balance Sheet Projection

3-20

3.6.1 General

3-20

3.6.2 Purpose

3-20

3.6.3 Preparation

3-20

3.6.4 Use of Financial Ratios

3-24

3.7 Summary

3-24

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Section 4

Section 4.0 Comparative Analysis of Financial Statements

4-1

4.1 General

4-1

4.2 Analytical Methods and Techniques

4-1

4.3 Comparative Statements

4-2

4.3.1 General

4-2

4.3.2 Types of Comparison

4-2

4.3.3 Horizontal Analysis

4-3

4.3.4 Vertical Analysis

4-5

4.3.5 Budgets To Actual(s)

4-7

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Section 5

Section 5.0 Financial Statement Analysis Through Ratios

5-1

5.1 General

5-1

5.1.1 Liquidity Ratios

5-1

5.1.2 Efficiency Ratios

5-1

5.1.3 Leverage Ratios

5-2

5.1.4 Profitability Ratios

5-2

5.1.5 Market Value Ratios

5-2

5.2 Ratio Categories

5-2

5.2.1 Ratio Categories

5-2

5.2.2 Efficiency Ratios

5-7

5.2.3 Leverage Ratios

5-10

5.2.4 Profitability Ratios

5-13

5.2.5 Market Value Ratios

5-17

5.2.6 Summary

5-19

5.3 Trend and Comparative Analysis

5-19

5.4 Limitations of Ratio Analysis

5-20

Appendix 5A Industry Averages

5A-1

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Section 6

Section 6.0 Working Capital (Cash Management)

6-1

6.1 General

6-1

6.1.1 In spite of

6-1

6.1.2 Cash Needs

6-1

6.1.3 Plan to Meet Your Cash Needs

6-2

6.1.4 Cash Budgeting

6-2

6.1.5 Uses of A Cash Budget

6-2

6.2 Working Capital

6-4

6.2.1 Net Working Capital

6-4

6.2.2 The Management of Working Capital

6-4

6.2.3 Flow of Working Capital

6-5

6.2.4 Administration of Current Assets

6-5

6.2.5 Required Working Capital

6-6

6.2.6 Working Capital Ratios

6-7

6.3 Hedging/Matching Principle

6-8

6.3.1 Temporary vs. Permanent

6-9

6.4 Break-even Point

6-10

6.4.1 General

6-10

6.4.2 What is meant by the break-even quantity of output?

6-10

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Section 7

Section 7.0 Cost of Capital, Internal and External

7-1

7.1 General

7-1

7.1.1 Types and Sources of Capital

7-1

7.1.2 Borrowing Working Capital

7-2

7.1.3 Borrowing Growth Capital

7-4

7.1.4 Borrowing Permanent Equity Capital

7-6

7.1.5 Financing Sources for Your Business

7-7

7.1.6 Applying for Capital

7-9

7.2 Market Risk

7-10

7.3 Overview of Risk

7-12

7.4 Cost of Capital

7-14

7.4.1 Weighted Cost of Capital

7-15

7.5 Summary

7-17

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Section 8

Section 8.0 Capital Decision Techniques

8-1

8.1 General

8-1

8.1.1 Capital Budgeting

8-1

8.2 Cash Flows

8-1

8.2.1 The Net Initial Outlay

8-1

8.2.2 After Tax Cash Flows Over the Project's Life

8-2

8.2.3 Terminal Cash Flow 8-2 8.3 Cost of Capital

8-2

8.4 Accept/Reject Criterion

8-2

8.4.1 The Payback Period Method

8-3

8.4.2 The Net Present Value Method (NPV)

8-3

8.4.3 The Profitability Index (PI)

8-3

8.4.4 Internal Rate of Return (IRR)

8-3

8.4.5 Which of the methods is best suited for capital budgeting?

8-4

8.5 Preparation

8-4

8.5.1 Cash Flows

8-5

8.5.2 Cost of Capital

8-6

8.5.3 Accept/Reject Criterion (NPV, PI, IRR)

8-6

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Section 9

Section 9.0 Lease Versus Buy Decision

9-1

9.1 General

9-1

9.1.1 What Is a Lease?

9-1

9.1.2 Types of Leases

9-1

9.1.3 Kinds of Lessors

9-3

9.1.4 Advantages of Leasing

9-3

9.1.5 Disadvantages of Leasing

9-4

9.1.6 Federal Tax Treatment of Leases

9-4

9.1.7 Accounting Treatment of Leases

9-5

9.2 Cost Analysis of Lease Versus Loan/Purchase

9-5

9.3 Look Before You Lease

9-9

End of overall book Introduction

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