Financial Management - Lecture 03

all right so we continue with financial management lecture number three we continue with assets and liabilities let's see what we have residual claim stockholder equity represents the residual plane so let's explain residual plane all liabilities the right hands line represents a plane on assets some have higher claims some have lower claims higher thing will have employees utilities bills things that you can attain urgently probably one of the highest claims will be the government government taxes will probably have the highest way so you can order different claims by priority that words if you're running short on cash and can't pay everybody that works in the process of bankruptcy who has the highest priority the second highest priority the third highest priority and the question is who has the lowest priority the lowest priority always have common stockholders and that lowest priority represents a residual claim residual means you have a claim after everybody else has been completely claim has been completely satisfied whatever is the residual deplaning so you get whatever is left as a stockholder so common stock have a residual claim that's the meaning of equity that's the meaning of being owned being owner means you take all the risks everybody else gets paid you might get paid Mike Milken pain but you also get all the profits you pay everybody what you owe and you keep all the profit for yourself well that's the meaning of profit the meaning of profit is whatever you get after you pay everybody else whatever you pay it whatever you don't pay you keep for yourself as profit has to be no profit all right and from residual claim comes what we have in accounting and Finance called the balance sheet equation balance sheet sometimes they call it fundamental equation or accounting equation so bevel equation this is equal sign is the same as the accounting equation and the accounting equation is very simple it is assets equal liabilities plus equity which is simply saying or mathematically equivalent to saying that equity is simply assets minus liability well all in saying is that equity is simply the residual claim it is a claim on all assets after you have satisfied all liabilities and whatever is left we call so equity and I'll Circle it here and put the arrow is simply the residual claim well it is the residual claim on assets that's the me that's the definition that's what the calls came all right we move on to again page 31 our edited current assets our edited fixed assets our edited liquidity proper depend equipment and everything else I think I did last time dividend and dividend is simply a payment by the corporation to the investor and it is a partial return of profits by the corporation to the investor usually in the form of cash but sometimes it could be in the form of stock the corporation can pay a dividend in the form of stock for every 10 stocks they give you one more stock this kind of dinner on Scala stock dividend if it's cash it's called cash dividend okay didn't maybe in kind they can give you a hamburger like a Big Mac cheeseburger okay can give you something else they can give you pens or pencils or laptops again but all these new kinds dividends investors don't like it they probably might not need them not everybody needs a watch they may already have a good watch like many don't need a laptop right many don't need fans so the preferred dividend is typically a that's the most common of course what corporations do is try to fool investors in to be listening they're giving them dividend when I say we're going to give you a stock different corporations is we just stop dividend for one reason they don't have cash to give didn't generate enough cash to get so that you stuck and that keeps a lot of investors happy why the investors are happy because they're getting something which is just a piece of clay and most investors they're not taking investment courses like you they're not taking finance courses like you most investors don't understand that the new share that they're getting is not worth anything okay it's not worth anything because if they lose the value of all other existing shares so when a corporation pays your share dividend they like peju nothing okay it's not a big deal that's a very common way to Reese lead in food investors and probably 90% of investors are unsophisticated they don't know they don't understand they think they're getting something when the reality they're not getting something actually stock dividend is more good investors a really negative signal but why they even stopped doing it it's most likely didn't generate enough profit in cash okay all right moving on Karuna okay current assets and we go on page 31 through the different current assets they give you the four or five key ones first one is just cash now cash will include two things number one will include what's called petty cash or vault cash this is cash which the combination keeps in cash in bank notes okay and they just have and they can actually take it from the vault or from the safe and then just take it and give you money okay so what's called petty cash or small all cash of course keeping cash in hand is risky if people know you're keeping a lot of cash you're going to come to try and steal it so most corporations keep their money in the bank okay and we'll call this give an empty possible that's just a deposit at the bank that you can demand meaning you can take in cash or use for immediate payment of any okay question the man yes thank you the man has a letter D demand deposit guess the other is called another type is called cash equivalents and cash equivalents are highly liquid meaning very easy to sell very secure very safe very low-risk securities the chickens sell at any point in time practically no loss so say the secure one example will be kilos Treasury bill there's a big market for them you can sell them anytime but almost data bank will buy from you almost any securities dealer a broker will buy from you easy to sell it's in a matter of minutes maybe even seconds if you already have the relationship no retail sometimes bank CD's may bank CD's we call this they have to be negotiable negotiable sleep is a certificate of deposit issued by a bank and if it's negotiable means it can be solved it can be transferred negotiable in law and Finance has a different name negotiable in law and Finance means the title can be legally transferred to somebody else that's the meaning it can be legally transferred to somebody else that means negotiable from this it follows that if it's negotiable if you can transfer the title it means that you can actually sell it so you can actually sell the instrument then you can sell the instrument it means you can negotiate the price per okay that's why it's called negotiable not because you can negotiate it because you can actually sell it and because you have the legal right to sell it and in the process of selling getting a price alright so negotiable CD will be another type of cash equivalent alright and maybe more as long as they are safe in liquid okay low-risk a little and another component which the textbook conveniently permits except just in there but of course it immediately as I asked some of my other foreign students of course they say GAAP foreign currency but course for a foreign currency if it is liquid and easily marketable is cash okay for you here in Taiwan US Dollars are highly liquid safe or in currency it sure counts as cash there's no question about it okay well what else in Europe especially my home country Bulgaria we use zero so usually got euro and a lot of banks and a lot of businesses keep a lot of euro deposits and euro in cash foreign currency sure is good as cash spa even better than cash okay because foreign currency is considered to have lower risk in cash cow how is it possible to have lower risk and cap well this is very simple cash in Europe and in u.s. dollars is has lower currency risk in cash in Bulgarian level low here in Paris II so foreign currency as long as the foreign currency is considered to have relatively well currency risk relatively liquid sure counts as cash all right let's dip now what is your question well in a question and on ask me that can you know disrupt your classmate alright number two short-term investments this is partly correct it also would include long-term investments which you intend to sell soon which you intend to sell within one year and of course it includes all short-term investments short-term investments are investments that will mature within one year or will also include long-term investments that you plan to liquidate within one year to raise cash to raise liquidity so these will be a short-term investment and they can include stocks and bonds and some of these CDs okay it may include a non-negotiable CD every CD in the bag is three months you can't sell you can't do anything with it except for hold it and after three months it features in the bank returns you the money back it may include other time deposit the time deposit is a deposit of the bank or a fixed period of time 30 days 60 days 90 days today's and you can't withdraw it before that you can't use the cancer can't do anything with it except for wait put a time and then take the money back from the bank would get the deposit all right so these are all short-term investments that those short-term investments need to have two characteristics first one is to have high quality yeah that's a little tricky I'm reading from the textbook here you see current assets page 31 where it says that these have to be of high quality and low risk it's not exactly clear in finance put it mean high quality I don't know now I can tell you what it supposed to mean it's supposed to be low risk it's supposed to mean like low default risk low currency risk low interest rate risk okay and it has to mean definitely also possibly pipe liquid all right high liquidity let's see what else accounts receivable accounts receivable will be associated with money which is owned by your own customer accounts receivable are created when your self of product to a customer in the customer is not paid but promises to pay later okay an example will be a hewlett-packard HP selling computers to the University and when it ships 100 computers but his video isn't going to pay immediately but the answer is not the same day they're not going to pay cash 100 computers you know 700 computers they're going to send invoice and the university will have to pay within 30 days or within 60 days so account receivable is generated when you have delivered good or delivered service and here's the key on credit so this one is associated with on credit delivering a good or service on credit and if it's on credit the receivable represents the claim against your and here's the key customer so accounts receivable come from well let's use the opposite arrow customers so customers you saw them a good pour delivered all right next one inventory and inventory goes in three groups first one is called raw materials the second one is called work in process work in process and the last one is called finished goods so inventory is associated with companies goods for sale so the key here is for sale to customers so the counters inventory only if it is for sale to customers raw material simply means you bought raw material it is not ready to be solved to customer but it will be ready to be processed and made into a finished good and only then it will be solved so only finished goods are for sale raw materials will be used in we call it processing or production so raw material you take it you process it we call this processing reproduction it has called intermediate good and when it's finished becomes finished good and only the finished goods will go to the customer so the other two will be used in processing is also called manufacturing or production all right that's inventory and you know this looks like what they have over here for shortcut well let's do now I'm moving on page 32 lower case there is no one clear standard you have property sometimes within property they put separately land others real whole property there's II better others will have land okay some will have plans plant is realistic use for manufacturing purposes okay another one is equipments and equipment can be moved examples of equipment in the include projector this particular board computer the camera corporation's use a lot of laptops they use a lot of mobile phones so all of these represent equipment most often corporations have one separate item or sorry one grouping called property plant and equipment and use all three property plant and equipment and sometimes they call this PPE and property plant and equipment sometimes that's the most common group within fixed assets property plant and equipment in my accounting course our textbook really insists on having as a separate item within long-term assets on garnish Furniture is very separate okay furniture includes tables chairs and all a lot of things that you can easily throw and replace but do not have the functionality of equipment this is common sense stuff I don't need to explain the difference between furniture lectures and tables and equipment like computers and projectors and so let's see what else we have well these long term assets will have depreciation let's write it in red and depreciation simply mean loss of value of an asset because of normal use because of normal wear and tear in accounting they use the word wear and pair on a simple example of depreciation will with that particular Sony camera does anybody expect this camera to last hundred years no of course not it's going to get broken menu within three five seven years okay maybe it can make five hundred recordings maybe can make thousand recordings that's going to be it okay so that camera probably the last three four five years and just because we use it open turn on turn off download hooking up soon enough it's going to be your family use that's basically we're in there okay it just gets old from usage all right that's the we're here that's depreciation the alternative is called amortization and amortization is similar to depreciation it is again falling value but in depreciation is associated with tangible tangible assets depreciate and amortization is within angel and the few examples of intangible and I'm not quite expert in today's will be number one brand name brand a good example of a brand name will be BMW you guys know BMW of course everybody knows being done everybody wants and likes to have two BMW or Mercedes that's a good brand name so there is a special little value on top of the machine because it's a EMW another good brand name that everybody recognizes I'm sure this classroom is Sony that little piece of equipment you know that's recording the current lecture right everybody like Sony everybody wants to have a Sony ah most people in the world will recognize a Seiko okay another well recognized brand name probably the most common and widely revered brand name in Asia and even in the US will be to Hilton okay everybody likes that too your solid reliable relatively good stuff right so that's an intangible that's the name next one will be and I'm here looking a page 32 fixed assets the third one next will be trademark trademark is basically a particular name that nobody else can use because that name is associated like Xerox OKC rocks is a brand name okay it's a trademark name trademark means no one else can use the same day patents and copyrights beta means you have ownership you've owned this intangible okay and copyright it's copy with Y rest with one top P right is the right to use a particular patents for somehow a particular intangible so I have a copyright on the book itself now you have copyright doesn't mean you have the exclusive you're not the only one maybe ten different people who have the similar or the same copyright okay you don't have to be the one and only who's got a copyright on something okay now that's covered so all of these represent intangible assets and these intangible assets have value in the value is not always retained forever the value can be usually used up for different reason and therefore you need to advertise all right and let's see what else we have we have current liabilities why yes and why I do that this will be current and long-term current means that it will have to be satisfied it will have to be paid for within 1 year now I never said paid for him cash because the liability might not be in the form of cash the one example that I teach very very commonly in my first year accounting class is unearned revenue on earth revenue is not revenue on earth revenue is a liability they prepaid you cash in the unearned revenue represents a liability for future product or service if you pay your university tuition the university has unearned revenue actually today is November 2nd and yesterday November 1st represents the middle of the semester but seven and a half week eight is gone and got eight weeks left okay so if you pay a Jewish tradition of 1,000 the university has already burned half of it so half of your tuition is earned revenue and the other half of your tuition is still unearned revenue and the university has no obligation to you to pay you cash or to pay you money it has the obligation to deliver education service so liabilities do not necessarily mean that it has to be made in cash it may be delivered with a product okay it's a promise to deliver computers within three months okay it's a promise to deliver medicine okay within three months so it may be a promise to deliver a good or service in the future not just cash now what will be including cash well let's see some specific current liabilities yeah short-term loans short there loans this is simply a short-term loan that you had borrowed money from the bank in a promise to pay back in three or six months you go to France and eat two month long thanks is okay to a month no problem here's half a million to a month's got a bowl that's a short-term number two is trade credit well trade credit is essentially somebody else sold you a product on credit in a promise to Pam next month University is used trade credit all time for practically everything alright universities really pay the same day when they get delivered something all right then when it's tough to they're bad it's just it's a huge University and don't give it it's something delivering you get paid within you know ten seconds all right this is not the local supermarket there versus going to bathe gotta have documents procedures accounting and other thing it applies to major businesses too like IBM and so on so trade credit is loans that you have received from your business customers or suppliers or suppliers you need a particular supply the supplier gives it to you you're going to use it for production or something else and then you will pay them later example will be university getting let's say gasoline for its cars on credit or some other stuff all right trade credit what else oh damn it that's weird all right now let's make it right and correct of course dividends is known as liability that's absurd we have a special type it's called declared dividend that's what's wrong here in the textbook so I gotta delete this and write the correct one here so declare it in English in red deep player all right businesses are not required to pay a dividend they don't have to paint a vivid if they have they could maybe they should maybe they have but they still don't want to but if the Board of Directors declares the difference if the dividend is decided declared voted declare and publish the dividend becomes immediately a liability at that point it becomes payable it may happen according to law that if the corporation cannot pay its declared dividend if investors to stop all this can force the company into bankruptcy they have the legal right to force it into bankruptcy they have the legal right to demand their dividend payments declare the answer is well what if they don't have well if they did not have the money to pay they should not have we're okay if they declared it in one month later there aren't the money to pay then the smart thing for stockholders to this force the bankruptcy and get them out because you don't want to have people bore the director and then it will declare a dividend which they and pay one month later two months later think you don't want that kind of board of directors you don't want that kind of manner all right so the clear dividend is strictly a short-term liability as soon as it's been voted and declared next interest you may have borrowed short term or long term UFO some interest and you need to take all right well that's interest payable and it's a short-term obligation nothing special another one is consumer deposits a consumer will deposit sometimes money with the business for whatever reason the business is okay we need your money for one month and then we will return it or whatever that's the simple liability let's see what else within trade credits I'll just write it here on the side you have account payable look you'll have two guys that separate I mean you just keep you know if you have questions you don't ask him during that okay so you guys separated again for now you don't ask him during the lecture we record this lecture for you on video so that you can watch it and have all the questions and everything else you have you can watch it later ten times you can forward back and pour note now while you're distracting him down all right right that's why we do this thing back to accounts payable it is part of trade credit or goods and services delivered on credit to you the other part is called notes okay the basic difference is that notes payable actually you have a nose well you guys still separate the rest I mean you keep doing this for a while why don't you go far away from the other a nose is a promise to pay is a written unconditional promise to pay a note for 100 or 1000 simply means it will be paid that amount of money on that particular date no matter what unconditional full promise that's it that's a note then becomes not fair okay now if somebody else gives you a note becomes a note receivable so if they make the promise and make the promise to you and give the loan to you it becomes don't receive if you make a promise and give enough a promise to somebody else and the promises in writing becomes a note okay so that's it let's see what else we have well last one which they don't have in the textbook but it's clearly a short dermis salaries hair salaries payable you have workers and workers work for you you don't always pay them again of the wig sometimes you pay them at the end of the month okay sometimes you promise them to pay them at the end of the year okay and sometimes you promised to pay them at the end of their contract which is 12 months from New York whatever the contract completes in that particular case you promised employee a salary and for example for us foreign professors in this university the university has written and promised us to pay on the fifth of the month so I'm working on October and burning salary leftover on the last day of October the university owes me a salary and it's called salary payable it will have to pay on the fifth that's our agreement that's what they have been doing every month on the fifth is just money that have to pay a few days or weeks later that salaries came another common table salt taxes payable taxes let's provide a very simple example very simple example is property tax government sends you a simple note and it simply says it's called a tax know for tax know this you owe 1 million tax on your property but the government never says pay tomorrow they say K by April alright then usually give it 2 3 or 4 months so if they say pay next by next April they just give it 3 months it becomes taxes BAM okay amount of money you need to pay to the government but they don't demand immediately now let me give it 2 or 3 months all right break time okay lecture finish and we continue with other stuff

Channel: Krassimir Petrov

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Keywords: Financial, Management, 03

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Length: 44min 54sec (2694 seconds)

Published: Wed Nov 02 2011