Benefits, costs and Benefits, costs and income statementincome statement

Expenses x costsExpenses x costs

Costs – financila accounting:

Amount of money which the enterprise used to get benefits.

General economic view:

The amount of money used to get higher utility, it includes oportunity costs.

Costs ≠ Expenses

Expenses – any decreases of the amount of money (cash or bank accounts).

Benefits x revenuesBenefits x revenues

Benefits – amount of money, which the enterprise got for a given period aside from the payment of the money. Money equivalent of sold achievement of the enterprise.

revenues – any increase of the amount of money (cash or bank accounts).

Benefits ≠ Revenues

Economic resultEconomic result

Economic result = Benefits – costs

If:

Benefits > Costs → Profit

Benefits < Costs → Loss

Income statement Income statement (profit and loss (profit and loss

account)account)Shows business revenues compared with Shows business revenues compared with

expenses over a given time periodexpenses over a given time period

REVENUESREVENUES – amounts received from – amounts received from customers for goods or services delivered to customers for goods or services delivered to themthem

EXPENSESEXPENSES – costs that have arisen in – costs that have arisen in generating revenuesgenerating revenues

NET INCOMENET INCOME – revenues minus expenses – revenues minus expenses

(loss or profit)(loss or profit)

Income statementIncome statement

http://www.youtube.com/watch?http://www.youtube.com/watch?v=Bpcn7QYOTx0v=Bpcn7QYOTx0

What do you remember about What do you remember about costs?costs?

Fixed costs – are not directly related to the level of production (include depreciation, rate, interest from loan). They change in one shot.

- total fixed costs are the sum of the fixed costs.

Variable costs – change in direct relation to volume of output.

- they may include cost of sold goods or production expenses such as labor and power costs-total variable costs (TVC) are the sum of the variable costs for the specified level of production or output. -average variable costs (AVC) are the variable costs per unit of output or of TVC divided by units of output

In the long term period are all costs variable.

Short- term period:

Categories of variable costsCategories of variable costs

According to the level of output:

a) same period → proportional costs,

b) faster→ progressive costs,

c) slowly → digressive costs.

Break-Even AnalysisBreak-Even Analysis A A break-even point defines when an investment will break-even point defines when an investment will

generate a positive return. generate a positive return.

Break-even analysis is a useful tool to study the Break-even analysis is a useful tool to study the relationship between fixed costs, variable costs and relationship between fixed costs, variable costs and returnsreturns..

Break-even analysis computes the volume of production Break-even analysis computes the volume of production at a given price necessary to cover all costs .at a given price necessary to cover all costs .

Break-even price analysis computes the price necessary Break-even price analysis computes the price necessary

at a given level of production to cover all costs at a given level of production to cover all costs

http://www.youtube.com/watch?http://www.youtube.com/watch?v=RAALn2rwQyUv=RAALn2rwQyU

http://www.youtube.com/watch?http://www.youtube.com/watch?v=sG4YiJZSuI8v=sG4YiJZSuI8

Homework: Homework: http://www.youtube.com/watch?http://www.youtube.com/watch?v=69mVcnewPbw&feature=relatedv=69mVcnewPbw&feature=related

Costs descriptionCosts description

progressive costs

degressive costs

proportional costs

Cos

ts in

CZ

K

volume of production (quantity)

fixed costs

Total costs

Analysis of Break-Even pointAnalysis of Break-Even point

Describes the relationship between profit, costs, volume of production, price of production and benefits. For the same type of production is the total revenue:

TR = P * Q

TR – Total revenues,P – price per unit,Q – quantity of production (= sale).

Cost function: TC = FC + AVC * Q

TC – total costs (proportional costs),FC – fixed costs,AVC – average variable costs (variable cost/unit).

Break-even pointBreak-even point

Break-even point (critical point of rentability) – volume (quantity) of production Q, when total revenues equals total revenues (TR = TC).

AVC - P

FC Q BIP

Break-Even pointBreak-Even point

Loss

Profit

CZK

Quantity of production

FC

TC

TR

0 QBZ

Income

Break- even point in non-linear Break- even point in non-linear modelmodel

bod maximálního zisku

PROFIT

CZK

Quantity of production

FC

TC

TR

0 QBZ1

Income

QBZ2

Break-Even PointBreak-Even PointProblem: Problem: The company had this structure of costs:The company had this structure of costs:Material for consumption Material for consumption 1 000 000 CZK1 000 000 CZK Wages of workers Wages of workers 200 000 CZK200 000 CZKWages of administrative staff Wages of administrative staff 50 000 CZK50 000 CZKRent Rent 400 000 CZK400 000 CZKEnergy for machines Energy for machines 100 000 CZK100 000 CZKHeating and illumination Heating and illumination 50 000 CZK50 000 CZKAdvertisement Advertisement 60 000 CZK60 000 CZKTransport of material Transport of material 80 000 CZK80 000 CZKDepreciation of investment assets Depreciation of investment assets 140 000 CZK140 000 CZK

There wThere wereere produced 1 500 products produced 1 500 products..

Fill in the table and find out the total fixed and variable cost and avarage VC.Fill in the table and find out the total fixed and variable cost and avarage VC.Find out the cost function.Find out the cost function.

Costs formCosts form Fixed CostsFixed Costs Variable costsVariable costs

TotalTotal

Problem II:Problem II:

The enteprise had production results in 2010 The enteprise had production results in 2010 and 2011:and 2011:

YearYear Quantity of Quantity of production production (units)(units)

Total costs Total costs (CZK)(CZK)

20102010 30 00030 000 60 00060 000

20112011 45 00045 000 81 00081 000

Find out the cost function and the total costs, if in the year 2003 the quantity of production was 50 000.

Break Even pointBreak Even point

1) From the cost function given before find out the 1) From the cost function given before find out the break even point in units, if the price/unit is 5 CZK.break even point in units, if the price/unit is 5 CZK.

2) Find out the break-even point in CZK.2) Find out the break-even point in CZK.

Statement of Cash FlowStatement of Cash Flow In financial accounting, a In financial accounting, a cash flow statementcash flow statement, also known , also known

as as statement of cash flowsstatement of cash flows or  or funds flow statementfunds flow statement,, is is a financial statement that shows how changes in balance a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and and breaks the analysis down to operating, investing, and financing activities. Essentially, the cash flow statement is financing activities. Essentially, the cash flow statement is concerned with the flow of cash in and out of the business.concerned with the flow of cash in and out of the business.

http://www.youtube.com/watch?v=JGcbsj6FN6chttp://www.youtube.com/watch?v=JGcbsj6FN6c

Statement of Cash Flows Statement of Cash Flows (2002)(2002)

OPERATING ACTIVITIESOPERATING ACTIVITIESNet incomeNet income

Add (Sources of cash):Add (Sources of cash):DepreciationDepreciationIncrease in A/PIncrease in A/PIncrease in accrualsIncrease in accruals

Subtract (Uses of cash):Subtract (Uses of cash):Increase in A/RIncrease in A/RIncrease in inventoriesIncrease in inventories

Net cash provided by ops.Net cash provided by ops.

(160,176)

116,960378,560353,600

(280,960)(572,160)(164,176)

Statement of Cash Flows Statement of Cash Flows (2002)(2002)

L-T INVESTING ACTIVITIESL-T INVESTING ACTIVITIESInvestment in fixed assetsInvestment in fixed assets

FINANCING ACTIVITIESFINANCING ACTIVITIESIncrease in notes payableIncrease in notes payableIncrease in long-term debtIncrease in long-term debtPayment of cash dividendPayment of cash dividendNet cash from financingNet cash from financing

NET CHANGE IN CASHNET CHANGE IN CASH

Plus: Cash at beginning of yearPlus: Cash at beginning of yearCash at end of yearCash at end of year

(711,950)

436,808400,000

(11,000)825,808

(50,318)

57,6007,282

Enterprise´s objectivesEnterprise´s objectives

Some conceptions:

1) Maximalization of profit – total profit or some coefficient of the rentability (ROI, ROE, ROA).

2) Maximalization of market price of shares,

3) Maximalization of value of the enterprise (MVA, EVA).

Value of corporationValue of corporation

Present value of expected future net cash flow (profits) discounted to the present by the suitable discount rate.

n

1it

tn

n2

21

1

i)(1

CF

i)(1

CF...

i)(1

CF

i)(1

CF n corporatio of Value

CFi – expected future cash flow t

i – discount rate

Market Value AddedMarket Value Added

Market Value Added – MVA

Market Value Added (MVA) is the difference between the equity market valuation of a listed/quoted company and the sum of the adjusted book value of debt and equity invested in the company.

The higher the Market Value Added (MVA), the better.

The objectives of managers is a maximalization of MVA.

Disadvantage: It is possible to count it only for enterprises with marketable shares.

Economic Value AddedEconomic Value Added

Economic Value Added – EVA

Difference between net profit of the enteprise and its costs of capital.

WACC*C - NOPAT EVA

WACC*C-T)-(1*EBITEVA

EBIT – Earnings Before Interest and Tax,T – profit tax rate (decimal number),C – long-term invested capital,NOPAT – net operating profit after tax=profit after tax,WACC – náklady na kapitál (decimal number).

EBITEBIT

An advantage of An advantage of EBITEBIT is it is easier to is it is easier to calculate and easier to observe at calculate and easier to observe at divisional or sub divisional levels of the divisional or sub divisional levels of the firm. firm.

Instead of Instead of EBITEBIT also the term Operating also the term Operating profit is widely used.profit is widely used.

WACCWACC

The cost of capital generally measured as The cost of capital generally measured as weighted average cost of capital (WACC).weighted average cost of capital (WACC).

WACC is the cost of debt, such as interest WACC is the cost of debt, such as interest on a loan, and the cost of equity on a loan, and the cost of equity investment, or rate of return. investment, or rate of return.

EVAEVA is a financial performance method to is a financial performance method to

calculate the true economic profit of a calculate the true economic profit of a corporation. corporation.

EVA can be calculated as net operating after EVA can be calculated as net operating after taxes profit minus a charge for the taxes profit minus a charge for the opportunity cost of the capital invested. opportunity cost of the capital invested.

Economic Value Added is a flow and can be Economic Value Added is a flow and can be used for performance evaluation over timeused for performance evaluation over time

Economic Value AddedEconomic Value Added

EVA can be plus or minus number. The aim of business is to have plus results of economic value added, in this case the value of the firm increases.

The enterprise should stop all the activities, which profit margin ration is lower than WACC.

EVA shows that also own capital has to bring sufficient rate of return.