Fundamentals of BusinessFundamentals of Business国际商务导论 国际商务导论

Lecture 10: Lecture 10: Financial ManagementFinancial Management

财务管理财务管理

What to cover todayWhat to cover today ：：

1.1. AccountingAccounting

2.2. Financial statementsFinancial statements

3.3. Financial ratio analysisFinancial ratio analysis

4.4. Sources of financing Sources of financing

Exercises Exercises

1. Accounting1. Accounting

Accounting Accounting 会计会计 is:is:-- the process of (1) -- the process of (1) collectingcollecting financial data, (2) financial data, (2) organiorgani

zing and analyzingzing and analyzing them using agreed-upon account them using agreed-upon accounting rules, and (3) ing rules, and (3) reportingreporting the results of this analysis the results of this analysis in financial reports and statements in financial reports and statements

Accounting makes its functional contribution to a firm Accounting makes its functional contribution to a firm by providing the tools and methods the firm needs to by providing the tools and methods the firm needs to accurately measure its accurately measure its revenues, costs, expenses, revenues, costs, expenses, money, assets, and capitalmoney, assets, and capital so managers can evalua so managers can evaluate how much te how much profitprofit their business activities are gener their business activities are generating. ating.

An An accounting system accounting system 会计系统会计系统 is often used by a is often used by a firm to facilitate its accounting activities. firm to facilitate its accounting activities.

1.1 Functions of accounting1.1 Functions of accounting 1. 1. ReportingReporting: to report accurate and up-to-the-minute finan: to report accurate and up-to-the-minute finan

cial data, also called cial data, also called financial disclosure financial disclosure 财务披露财务披露 ; ac; accounting activities performed for reporting purposes is tercounting activities performed for reporting purposes is termed med financial accounting financial accounting 财务会计财务会计

Bookkeeping Bookkeeping 簿记簿记 : the recording of a firm’s financial tra: the recording of a firm’s financial transactions nsactions 会计工作的初级阶段会计工作的初级阶段

Reporting to Reporting to investorsinvestors 投资人投资人 : current or potential sha: current or potential shareholders to predict stock price rise or declinereholders to predict stock price rise or decline

Reporting to Reporting to creditorscreditors 债权人债权人 : to assess the firms’ : to assess the firms’ liqliquidity uidity 资产流动性资产流动性 (ability to sell existing assets) so as t(ability to sell existing assets) so as to determine whether to provide loans (potential creditors),o determine whether to provide loans (potential creditors), or to predict the probability that the firms will default on l or to predict the probability that the firms will default on loans (current creditors) oans (current creditors)

Reporting to Reporting to government officialsgovernment officials: : e.g. all U.S. firms ae.g. all U.S. firms are required to periodically report their financial standing tre required to periodically report their financial standing to the Internal Revenue Service (IRS) so that their taxes co the Internal Revenue Service (IRS) so that their taxes can be determinedan be determined

2. 2. Decision supportDecision support: to help managers make deci: to help managers make decisions; accounting activities performed for supportsions; accounting activities performed for supporting decision-making is termed ing decision-making is termed managerial accomanagerial accounting unting 管理会计管理会计 , e.g. , e.g.

financial managersfinancial managers: use historical revenue and : use historical revenue and cost information for budgeting decisionscost information for budgeting decisions

marketing managersmarketing managers: use sales information to e: use sales information to evaluate the impact of a particular promotion stratvaluate the impact of a particular promotion strategy egy

production managersproduction managers: use seasonal sales infor: use seasonal sales information to determine the necessary production lemation to determine the necessary production level in the future vel in the future

3. 3. ControlControl: to help managers maintain control over em: to help managers maintain control over employees, functions or divisions, and products, and to ployees, functions or divisions, and products, and to identify the firm’s strengths and weaknesses, e.g. usidentify the firm’s strengths and weaknesses, e.g. use sales information to monitor the performance of vae sales information to monitor the performance of various products and the salespeople who sell them; alrious products and the salespeople who sell them; also an area covered by so an area covered by managerial accountingmanagerial accounting

Auditing Auditing 审计审计 : an assessment of the records that w: an assessment of the records that were used to prepare a firms financial statementsere used to prepare a firms financial statements

Internal auditors Internal auditors 内部审计师内部审计师 : a firm’s employees w: a firm’s employees who specialize in evaluating various functions or divisiho specialize in evaluating various functions or divisions within the firm to ensure that they are operating ons within the firm to ensure that they are operating efficientlyefficiently

Independent auditors Independent auditors 外部审计师外部审计师 : employees of a: employees of an independent accounting firm who help publicly heln independent accounting firm who help publicly held firms to have their annual financial reports auditedd firms to have their annual financial reports audited

1.2 The rules of accounting1.2 The rules of accounting

Generally Accepted Accounting Principles (GAAP) Generally Accepted Accounting Principles (GAAP) 通通用会计准则用会计准则 :: a set of accounting rules and procedures d a set of accounting rules and procedures developed over time by accounting experts to ensure the eveloped over time by accounting experts to ensure the financial standing of companies is being reported accurafinancial standing of companies is being reported accurately and honestly tely and honestly

Legal enforcabilityLegal enforcability: : All U.S. companies must prepare their financial statemeAll U.S. companies must prepare their financial stateme

nts according to GAAP. nts according to GAAP. Independent accountants with no financial ties to a partiIndependent accountants with no financial ties to a parti

cular company must legally review its financial statementcular company must legally review its financial statements, and make a declaration that they have been prepared s, and make a declaration that they have been prepared in line with GAAP guidelines. in line with GAAP guidelines.

Companies and accountants who break them can be puCompanies and accountants who break them can be punished with fines and/or imprisonment. nished with fines and/or imprisonment.

Practical valuesPractical values: : When all companies use the same set of accounting ruWhen all companies use the same set of accounting ru

les, it becomes much easier for investors and creditors les, it becomes much easier for investors and creditors to evaluate a firm’s performance relative to others.to evaluate a firm’s performance relative to others.

Unethical managers, e.g. Dennis Kozlowski, the former Unethical managers, e.g. Dennis Kozlowski, the former CEO of Tyco (CEO of Tyco ( 泰科国际有限公司，全球最大的电气、泰科国际有限公司，全球最大的电气、电子元件制造商电子元件制造商 ), sometimes try to manipulate and fals), sometimes try to manipulate and falsify accounting data to paint a more positive picture of a ify accounting data to paint a more positive picture of a company’s performance, so as to protect the firm’s stocompany’s performance, so as to protect the firm’s stock price (as in the Tyco case where some investors are ck price (as in the Tyco case where some investors are misled to pay a higher price for Tyco stock than who it misled to pay a higher price for Tyco stock than who it was really worth) and increase their own salary, bonuswas really worth) and increase their own salary, bonuses, and stock options when stakeholders believe a comes, and stock options when stakeholders believe a company is performing well. A well-established set of accopany is performing well. A well-established set of accounting rules greatly reduces such behavior, though therunting rules greatly reduces such behavior, though there are always loopholes. e are always loopholes.

1.3 Types of accountants1.3 Types of accountants

To perform the accounting activities necessary for To perform the accounting activities necessary for a company to meet the strict professional and lega company to meet the strict professional and legal requirements, companies employ two types of al requirements, companies employ two types of accountants: accountants: internal accountants internal accountants 内部会计师内部会计师 , , and and external/independent accountants external/independent accountants 外部外部 //独立会计师独立会计师

Both kinds are required to pass stringent professiBoth kinds are required to pass stringent professional examinations, such as the onal examinations, such as the certified public certified public accountant (CPA) accountant (CPA) 注册会计师注册会计师 exam administerexam administered by the American Institute of Certified Public Aed by the American Institute of Certified Public Accountants.ccountants.

Only CPAs are allowed to audit, or formally evaluOnly CPAs are allowed to audit, or formally evaluate the soundness of a company’s financial stateate the soundness of a company’s financial statements and sign off on them. ments and sign off on them.

Types of internal accountants: Types of internal accountants: internal auditorsinternal auditors: on the lookout for deliberate f: on the lookout for deliberate f

raud by employees within the firm for recording raud by employees within the firm for recording and reporting financial dataand reporting financial data

financial accountantsfinancial accountants: for the reporting functio: for the reporting functionn

managerial accountantsmanagerial accountants: for the decision supp: for the decision support, and control functions ort, and control functions financial analysts financial analysts 财务分析师财务分析师 tax accountants tax accountants 税务会计税务会计 : to structure a compan: to structure a compan

y’s operations to reduce its total tax bill, such as ry’s operations to reduce its total tax bill, such as registering the firms’ headquarters in Bermuda thaegistering the firms’ headquarters in Bermuda that levies little or no taxes on corporations, e.g. Seat levies little or no taxes on corporations, e.g. Seagate, Tyco, Ingersoll-Randgate, Tyco, Ingersoll-Rand

cost accountants cost accountants 成本会计成本会计

Types of external accountants: Types of external accountants: Employed by small accounting firmsEmployed by small accounting firms: work for SMEs an: work for SMEs an

d individuals d individuals Employed by the Big Four (Ernest & YoungEmployed by the Big Four (Ernest & Young 安永安永 , KPM, KPM

GG 毕马威毕马威 , PricewaterhouseCoopers , PricewaterhouseCoopers 普华永道普华永道 , Deloitte , Deloitte Touche Tohmatsu Touche Tohmatsu 德勤德勤 ):): audit the books of large, public audit the books of large, public companies, long-term auditing relationship; Congress’ attecompanies, long-term auditing relationship; Congress’ attempt to limit the auditing contracts between large companiempt to limit the auditing contracts between large companies and their auditors to a 5-year period to prevent “cooking ts and their auditors to a 5-year period to prevent “cooking the company’s books”, the 2002 he company’s books”, the 2002 Sarbanes-Oxley Act Sarbanes-Oxley Act 萨班萨班斯斯 ·· 奥克斯利法案奥克斯利法案 requiring a company’s CEO, CFO and erequiring a company’s CEO, CFO and external auditors to sign off on its financial statements, to mxternal auditors to sign off on its financial statements, to make them personally and legally liable for any accounting irake them personally and legally liable for any accounting irregularities regularities

2. Financial statements2. Financial statementsManagers at all levels of a company, from the CEO down to iManagers at all levels of a company, from the CEO down to i

ts first-line managers, need to understand financial statemts first-line managers, need to understand financial statements and the accounting methods used to prepare them, eents and the accounting methods used to prepare them, esp. the following three types:sp. the following three types:

The balance sheet The balance sheet 资产负债表资产负债表 : reports the book value o: reports the book value of all the firm’s assets (what it owns), liabilities (what it owef all the firm’s assets (what it owns), liabilities (what it owes), and owners’ equity (what it is worth) at a given s), and owners’ equity (what it is worth) at a given pointpoint in in timetime

The income statement The income statement 损益表损益表 : indicates the firm’s reve: indicates the firm’s revenue, costs, and earnings over a nue, costs, and earnings over a periodperiod of time, such as a of time, such as a quarter or a yearquarter or a year

The statement of cash flows The statement of cash flows 现金流量表现金流量表 : shows how m: shows how much cash a company generated during a specific time uch cash a company generated during a specific time periperiodod, including where the cash came from and how it was u, including where the cash came from and how it was usedsed

2.1 The balance sheet2.1 The balance sheet Assets Assets 资产资产 : anything owned by a firm, supported partly : anything owned by a firm, supported partly

with funds of the owners (i.e. owners’ equity), partly with bwith funds of the owners (i.e. owners’ equity), partly with borrowed funds (i.e. liabilities), listed on the sheet in order oorrowed funds (i.e. liabilities), listed on the sheet in order of f liquidity liquidity 流动性流动性 (i.e. how fast they can be converted int(i.e. how fast they can be converted into cash)o cash)

Liabilities Liabilities 负债负债 : anything owed by a firm: anything owed by a firm Owners’/Shareholders’ equityOwners’/Shareholders’ equity 所有者所有者 // 股东权益股东权益 : the tot: the tot

al al capitalcapital invested in a company by its founders and stock invested in a company by its founders and stockholders over time as well as the total past holders over time as well as the total past earningsearnings it has it has retained retained

Basic accounting equation Basic accounting equation 基本会计等式基本会计等式 :: Assets = Liabilities + Owners’ equity Assets = Liabilities + Owners’ equity (always balanced)(always balanced)

Current assets Current assets 流动资产流动资产 : assets that can be converted into ca: assets that can be converted into cash within one year, e.g. sh within one year, e.g.

cashcash: typically checking account balances : typically checking account balances marketable securities marketable securities 有价证券有价证券 : short-term securities that ca: short-term securities that ca

n easily be sold and quickly converted to cashn easily be sold and quickly converted to cash accounts receivable accounts receivable 应收账款应收账款 : sales that have been made but : sales that have been made but

for which payment has not yet been receivedfor which payment has not yet been received inventories inventories 库存库存 : the stock of raw materials, components, sem: the stock of raw materials, components, sem

i-finished products, unsold finished productsi-finished products, unsold finished products prepaid expenses prepaid expenses 待摊费用待摊费用 : e.g. rent, insurance premiums, s: e.g. rent, insurance premiums, s

alary advances, prepaid equipment maintenance agreements alary advances, prepaid equipment maintenance agreements

Fixed assets Fixed assets 固定资产固定资产 : assets that cannot be moved or conver: assets that cannot be moved or converted easily, e.g. ted easily, e.g. property, plant and equipment (PP&E)property, plant and equipment (PP&E)

(accumulated) depreciation(accumulated) depreciation （累计）折旧（累计）折旧 : a reduction in the v: a reduction in the value of fixed assets to reflect deterioration in the assets over timalue of fixed assets to reflect deterioration in the assets over timee

net fixed assets net fixed assets 固定资产净值固定资产净值 : fixed assets minus depreciatio: fixed assets minus depreciation n

Intangible assets Intangible assets 无形资产无形资产 : e.g. brand name, goodwill : e.g. brand name, goodwill 商誉商誉 ,, patents patents 专利专利 , copyrights , copyrights

Current liabilities Current liabilities 流动负债流动负债 : liabilities that can be clear: liabilities that can be cleared within one year, e.g.ed within one year, e.g.

accounts payable accounts payable 应付账款应付账款 : money that a firm owes it: money that a firm owes its regular suppliers for the purchase of materials on credis regular suppliers for the purchase of materials on creditt

bonds payable bonds payable 应付债券应付债券 : short-term loans to a firm ma: short-term loans to a firm made by creditors such as banksde by creditors such as banks

taxes payable taxes payable 应付税款应付税款 accrued expenses payable accrued expenses payable 应付预提费用应付预提费用 : unpaid exp: unpaid exp

enses gradually built up over time, e.g. employee salary enses gradually built up over time, e.g. employee salary and wages, pension, vacation pay, bonus, stock optionsand wages, pension, vacation pay, bonus, stock options

current portion of long-term debts current portion of long-term debts 长期负债一年内到长期负债一年内到期部分期部分 : the interest that is due on long-term debts within : the interest that is due on long-term debts within one yearone year

Long-term liabilities Long-term liabilities 长期负债长期负债 : liabilities that will not b: liabilities that will not be repaid within one year, e.g. e repaid within one year, e.g. long-term debts long-term debts 长期贷款长期贷款 :: loans provided by banks longer than one year loans provided by banks longer than one year

Owners’ equity: Owners’ equity: the par value of all common stock the par value of all common stock 普通股面值普通股面值 : :

common stock common stock 普通股普通股 vs. vs. preferred stock preferred stock 优先股优先股 (i.e. stock whose owners have certain privileges, s(i.e. stock whose owners have certain privileges, such as the right to a fixed, regular dividend or the ruch as the right to a fixed, regular dividend or the right to a company’s assets after its creditors)ight to a company’s assets after its creditors)

additional paid-in capital additional paid-in capital 资本公积资本公积 : the dollar a: the dollar account received from issuing common stock that eccount received from issuing common stock that exceeds par value xceeds par value

retained earnings retained earnings 留用利润留用利润 : the accumulation of : the accumulation of the firm’s earnings that are reinvested in the firm’s the firm’s earnings that are reinvested in the firm’s assets rather than distributed as dividends to sharassets rather than distributed as dividends to shareholderseholders

2.2 The income statement2.2 The income statement

The balance sheet does not show directly The balance sheet does not show directly how a company uses its assets to make its how a company uses its assets to make its profits. profits.

More clues about how successful a More clues about how successful a company’s profit-making activities are can company’s profit-making activities are can be provided by the be provided by the income statementincome statement (also (also called called profit and loss statementprofit and loss statement). ).

Basic equation: Profit/Loss = Sales – Cost – Expenses

Net sales Net sales 净销售额净销售额 : the total sales adjusted for any discount s: the total sales adjusted for any discount such as sales returns and allowancesuch as sales returns and allowances

Net sales = Gross sales Net sales = Gross sales 毛销售额 – 毛销售额 – DiscountDiscount

Cost of goods sold (COGS) Cost of goods sold (COGS) 销售成本销售成本 : the cost of all the mat: the cost of all the materials used to produce the goods that were solderials used to produce the goods that were sold

Gross profit Gross profit 毛利润 毛利润 = Net sales – Cost of goods sold= Net sales – Cost of goods sold

(Operating) expenses (Operating) expenses 运营费用运营费用 : : sales/marketing expensessales/marketing expenses: e.g. ad expenses, commissions fo: e.g. ad expenses, commissions fo

r salespeopler salespeople payroll payroll 薪金总额 薪金总额 costscosts: base pay, incentives and benefits: base pay, incentives and benefits R&D expensesR&D expenses: esp. in pharmaceuticals or high-tech business: esp. in pharmaceuticals or high-tech business

eses general expensesgeneral expenses: office supplies, depreciation of fixed assets,: office supplies, depreciation of fixed assets,

utilities, insurance, IT, legal and auditing costs, interests paid o utilities, insurance, IT, legal and auditing costs, interests paid on loans n loans 贷款利息贷款利息

Earnings before interest and taxes (EBIT) Earnings before interest and taxes (EBIT) 税息前利润 税息前利润 = Gross = Gross profit – Expenses + Interestprofit – Expenses + Interest

Net income before taxes Net income before taxes 税前利润 税前利润 = Gross profit – Expenses = Gross profit – Expenses Net income/profit Net income/profit 净利润 净利润 = Net income before taxes – Taxes= Net income before taxes – Taxes

3. Financial ratio analysis3. Financial ratio analysis-- an evaluation of the relationships between financi-- an evaluation of the relationships between financi

al statement variables al statement variables 财务报表中的变量财务报表中的变量

Comparison Comparison across companiesacross companies: One important : One important use of the financial statements is to assess the fiuse of the financial statements is to assess the financial condition of the firm relative to competing nancial condition of the firm relative to competing firms in the same industry by comparing its financfirms in the same industry by comparing its financial ratios to other firms’, or to the industry norm ial ratios to other firms’, or to the industry norm 行业标准行业标准 . .

Comparison Comparison across timeacross time: Firms can also assess : Firms can also assess the ratios over time to determine whether financiathe ratios over time to determine whether financial characteristics are improving and deteriorating. l characteristics are improving and deteriorating.

Classification of financial ratios:Classification of financial ratios:

Measures of liquidity Measures of liquidity 流动性流动性 Measures of efficiency Measures of efficiency 效率效率 Measures of financial leverage Measures of financial leverage 财务杠杆财务杠杆 Measures of profitability Measures of profitability 盈利性盈利性

3.1 Measures of liquidity3.1 Measures of liquidity

Liquidity Liquidity 流动性流动性 is:is:-- a firm’s ability to convert its short-term assets (i.e.-- a firm’s ability to convert its short-term assets (i.e.

current assets) into cash and meet its short-term current assets) into cash and meet its short-term obligations (i.e. current liabilities)obligations (i.e. current liabilities)

A high degree of liquidity can enhance the firm’s A high degree of liquidity can enhance the firm’s safety, but an excessive degree of liquidity can rsafety, but an excessive degree of liquidity can reduce its return (less fixed assets to used for proeduce its return (less fixed assets to used for production). duction).

Firms attempt to maintain a proper degree of liquFirms attempt to maintain a proper degree of liquidity to remain idity to remain safesafe and at the same time and at the same time profitaprofitableble. .

Current ratio Current ratio 流动比率流动比率 = Current assets / Curre= Current assets / Current liabilitiesnt liabilities

The larger a firm’s current ratio, the greater is its The larger a firm’s current ratio, the greater is its liquidity. liquidity.

For most manufacturing firms, the current ratio is For most manufacturing firms, the current ratio is between 1.0 and 2.0. between 1.0 and 2.0.

Quick ratio/Acid test ratioQuick ratio/Acid test ratio 速动比率速动比率 // 酸性试验比酸性试验比率率 = (Current assets – Inventories) / Liabilitie= (Current assets – Inventories) / Liabilitiess

Since inventories may not be easily liquidate (i.e. Since inventories may not be easily liquidate (i.e. converted into cash), it is excluded in the quick rconverted into cash), it is excluded in the quick ratio calculation to get a more conservative indicaatio calculation to get a more conservative indication of a firm’s liquidity.tion of a firm’s liquidity.

The quick ratio is smaller than the current ratio foThe quick ratio is smaller than the current ratio for any firm that has some inventories. r any firm that has some inventories.

3.2 Measures of efficiency 3.2 Measures of efficiency

Efficiency ratios measure how efficiently a Efficiency ratios measure how efficiently a firm manages its assets. firm manages its assets.

Types of efficiency ratios:Types of efficiency ratios: Inventory turnover Inventory turnover Asset turnoverAsset turnover Accounts receivable turnover Accounts receivable turnover

Inventory turnover Inventory turnover 库存周转率库存周转率 : a measure of ho: a measure of how quickly a firm’s inventory is being soldw quickly a firm’s inventory is being sold

Inventory turnover = Cost of goods sold / AveraInventory turnover = Cost of goods sold / Average inventoryge inventory

Average inventory Average inventory 平均库存平均库存 = (Beginning inven= (Beginning inventory + Ending inventory) / 2tory + Ending inventory) / 2

Excessive investment in inventory makes too much fund tied up, while very low levels of inventory can also result in shortages which can reduce sales.

COGS is used instead of sales to exclude the markup that is reflected in sales.

If the inventory turnover ratio is 10, it means that the firm turns its inventory over 10 times during the year.

Asset turnover Asset turnover 资产周转率资产周转率 : a measure of : a measure of how well a firm’s assets are being put to uhow well a firm’s assets are being put to use to generate sales se to generate sales

Asset turnover = Net sales / Total AssetsAsset turnover = Net sales / Total Assets Firms prefer to support a high levels of sal

es with a relatively small amount of assets, so that they efficiently utilize the assets they invest in.

If the asset turnover ratio is 2, it means that the firm’s sales during the year are two times the level of its total assets.

Accounts receivable turnover Accounts receivable turnover 应收账款周转率应收账款周转率 : a : a measure of how quickly a firm’s receivables are cmeasure of how quickly a firm’s receivables are collected ollected

Account receivable turnover = Net sales / AveraAccount receivable turnover = Net sales / Average accounts/notes receivable ge accounts/notes receivable

Average accounts/notes receivable Average accounts/notes receivable 平均应收账平均应收账款和应收票据款和应收票据 = (Beginning accounts/notes re= (Beginning accounts/notes receivable + Ending accounts/notes receivable ) ceivable + Ending accounts/notes receivable ) / 2/ 2

If the inventory turnover ratio is 5, it means that the firm turns its accounts receivable into cash over 10 times during the year.

Generally speaking, higher accounts receivable turnover means the firm has higher efficiency to use its asset, but the evaluation of accounts receivable turnover may depend on the credit policy of the firm.

3.3 Measures of financial leverage3.3 Measures of financial leverage

Financial leverage Financial leverage 财务杠杆财务杠杆 is:is:-- the degree to which a firm uses borrowed funds t-- the degree to which a firm uses borrowed funds t

o finance its assetso finance its assets （（企业使用固定成本融资的程企业使用固定成本融资的程度，反映财务风险大小；度，反映财务风险大小；财务风险财务风险指使用财务杠杆指使用财务杠杆导致的导致的 EPSEPS 变动性的增加，以及可能丧失偿债能变动性的增加，以及可能丧失偿债能力的风险）力的风险）

Firms that borrow a large proportion of their assetFirms that borrow a large proportion of their assets have a higher degree of financial leverage. s have a higher degree of financial leverage.

When the firms performs well, a high leverage deWhen the firms performs well, a high leverage degree is favorable because the profits can be spregree is favorable because the profits can be spread among a relatively small group of owners; but ad among a relatively small group of owners; but when the firm performs poorly, a high leverage dwhen the firm performs poorly, a high leverage degree is dangerous. egree is dangerous.

Debt-to-equity ratio Debt-to-equity ratio 债务资本比率债务资本比率 : a measure of t: a measure of the amount of long-term financing provided by debt he amount of long-term financing provided by debt relative to equity relative to equity

Debt-to-equity ratio = Long-term debt / Owners’ eDebt-to-equity ratio = Long-term debt / Owners’ equityquity

If the debt-to-equity ratio is 1.25, it means the long-term debt is 1.25 times the amount of owner’s equity.

Times interest earned Times interest earned 已获利息倍数已获利息倍数 : a measure o: a measure of a firm’s ability to cover its interest paymentsf a firm’s ability to cover its interest payments

Times interest earned = Earnings before interest Times interest earned = Earnings before interest and taxes / Annual interest expenseand taxes / Annual interest expense

If the times interest earned ratio is 3.0, it means the EBIT of the firm is 3 times its interest expense.

3.4 Measures of profitability3.4 Measures of profitability A number of profitability ratios can be used to measure a A number of profitability ratios can be used to measure a

company’s financial performance.company’s financial performance. Each ratio relates a company’s profits to a certain Each ratio relates a company’s profits to a certain

financial variable, such as sales, equity, or total capital, financial variable, such as sales, equity, or total capital, to measure how effectively a company’s business model to measure how effectively a company’s business model is generating profit.is generating profit.

All profitability ratios are multiplied by 100, and All profitability ratios are multiplied by 100, and expressed as a expressed as a percentagepercentage, e.g. a 6% return on sales , e.g. a 6% return on sales

Types of profitability ratios:Types of profitability ratios: Gross margin Gross margin Profit margin/Return on sales (ROS)Profit margin/Return on sales (ROS) Return on equity (ROE)/Return on investment (ROI)Return on equity (ROE)/Return on investment (ROI) Return on invested capital (ROIC)Return on invested capital (ROIC)

Gross margin Gross margin 毛利润率毛利润率 : a measure of how much : a measure of how much of each sales dollar is left over after a firm pays fof each sales dollar is left over after a firm pays for the cost of goods sold, or how much profit can or the cost of goods sold, or how much profit can be potentially earned after a company has paid fbe potentially earned after a company has paid for the costs of goods soldor the costs of goods sold

Gross margin = Gross profit / Net sales × 100%Gross margin = Gross profit / Net sales × 100% The higher the gross margin, the more The higher the gross margin, the more likelylikely a co a co

mpany is to earn higher profits, e.g. the supermampany is to earn higher profits, e.g. the supermarket industry: 5% or less, the home video game irket industry: 5% or less, the home video game industry: 90%.ndustry: 90%.

If the gross margin is 25%,If the gross margin is 25%, it means that in every it means that in every 100 dollars of sales, 25 dollars are gross profit. 100 dollars of sales, 25 dollars are gross profit.

(Net) Profit margin/Return on sales (ROS) 净利润率/ 销售额回报率 : a measure of how much profit a company generates from its sales; differs from gross margin in that all expenses and taxes are deducted from gross profit to determine the net income (i.e. profit)

Net profit margin = Net income / Net sales × 100% The higher the profit margin, the greater profit a firm

earns from its sales. If the profit margin is 3%, it means that the firm make

s $3 in profit on each $100 of sales.

Return on equity (ROE)/Return on investment (ROI) 资本回报率 / 投资回报率 : a measure of how much profit a company has earned on each $100 of stockholders’ equity invested in the business

Return on equity = Net income / Owners’ equity × 100% The higher the ROE, the more a company’s managers are a

dding to the value of its owners’ investment, and thus the more attractive the company’s stock to investors.

If the ROE is 25%, it means that each $100 of stockholders’ investment can generate $25 net income.

Another ratio stockholders use to determine how well the company is building the value of their capital is:

Earnings per share (EPS) 每股收益 / 盈余 : a measure of how much profit a company has earned for each share of its stock issued

Earnings per share = Net income / Total number of shares

Return on invested capital (ROIC) 已投资本回报率 : a measure of how much profit a company generates for each dollar invested in its business

Return on invested capital = Net income / Total capital (Liabilities + Owners’ equity) × 100%

The higher the ROIC, the more profit generated per dollar of investment, and thus the greater a company’s profitability.

If the ROIC is 25%, it means that each $100 total investment can generate $25 net income.

ROIC is widely believed by financial analysts as the best measure of a company’s profitability and the management’s effectiveness (cf. ROE which considers only owners’ equity but ignores the borrowed capital).

ListeningListening: What is real : What is real financial management?financial management?Listen to Richard, a senior clerk of a financial Listen to Richard, a senior clerk of a financial

house, and then decide whether the following house, and then decide whether the following statements are true or false.statements are true or false. (00:20) (00:20)

1.1. According to one survey, over 17% of all financial According to one survey, over 17% of all financial management functions are spent on the processing of management functions are spent on the processing of accounting transactions. accounting transactions.

2.2. A great deal of financial management is spent on “real” A great deal of financial management is spent on “real” financial management.financial management.

3.3. Things like performance measurement, risk Things like performance measurement, risk management, forecasting, strategic planning, investment management, forecasting, strategic planning, investment analysis, competitive intelligence generate real value. analysis, competitive intelligence generate real value.

4.4. Moving out of the traditional accounting box and getting Moving out of the traditional accounting box and getting into real financial management is one of the first steps to into real financial management is one of the first steps to create value.create value.

Key: F F T TKey: F F T T

4. Sources of financing4. Sources of financing

Financing 融资 is ：-- the process a company engages in to obtain the

money it needs to fund its business activities at the lowest possible cost

Short-term financing 短期融资 vs. long-term financing 长期融资

Debt financing 债务融资 (liabilities: loans and bonds) vs. equity financing 股权融资 (owner’s equity: stock)

Short-term financing:Short-term financing: Trade credit Trade credit 行业信用行业信用 : open account : open account 赊账账户赊账账户 , promiss, promiss

ory note ory note 本票本票 , trade draft , trade draft 行业汇票行业汇票 Loans Loans 贷款 贷款 and lines of credit and lines of credit 信用额度 信用额度 from banksfrom banks Commercial paper Commercial paper 短期融资券短期融资券（（企业发行的无抵押、短期债务，企业发行的无抵押、短期债务，

经常用来筹集应收账款及库存的资金，利率一般低于当时市场利率 经常用来筹集应收账款及库存的资金，利率一般低于当时市场利率 ）） Factors Factors （对应收账款的）贴现（对应收账款的）贴现

Long-term financing:Long-term financing: Retained earnings Retained earnings 留用利润留用利润 Depreciation Depreciation 折旧折旧 Long-term loans Long-term loans 长期贷款长期贷款 Bonds Bonds 债券债券 : face/par value : face/par value 面值面值 , interest rate , interest rate 利率利率 , ma, ma

turity date turity date 到期日到期日 , redemption premium , redemption premium 赎金赎金 // 赎回溢价赎回溢价 Stock Stock 股票股票 : preferred stock : preferred stock 优先股 优先股 vs. common stock vs. common stock

普通股普通股

Case studyCase study: :

A cut at a wrong timeA cut at a wrong time

Exercises Exercises

1. Translation1. Translation(1) 注册会计师 (2) 管理会计(3) 折旧 (4) 库存(5) 净利润率 (6) 股权融资(7) 应收账款 (8) 流动资产(9) 流动性 (10) 留用利润(11) 每股盈余 (12) 优先股

2. 2. Visit the English website of a corporation to obtain its balance sheet and income statement, e.g. Starbucks: see Lecture 10.doc Apple Inc.

http://ycharts.com/financials/AAPL/income_statement/quarterly

Baidu Inc. http://ir.baidu.com/phoenix.zhtml?c=188488&p=irol-newsArticle&ID=1686769&highlight

Translate them into Chinese Use the financial variables given on the statement

s to do financial ratio analysis (e.g. currant ratio, profit margin, ROI, ROIC, etc.), and then present and interpret the results to the class.

3. Supplementary reading3. Supplementary reading

(1)(1) Balance Sheet for StarBalance Sheet for Starbucks (Jones, p369) bucks (Jones, p369)

(2)(2) The Statement of CasThe Statement of Cash Flows (Jones, p375)h Flows (Jones, p375)

Topic for the Case Study part Topic for the Case Study part in your final exam: in your final exam:

In the first half of 2010, a series of abnormal suiIn the first half of 2010, a series of abnormal suicide occurred at the Shenzhen-based electronics cide occurred at the Shenzhen-based electronics manufacturing giant Foxcoon (manufacturing giant Foxcoon ( 富士康富士康 ). The tragi). The tragic and also thought-provoking “13 consecutive jumc and also thought-provoking “13 consecutive jumps” shocked the whole country, and made people ps” shocked the whole country, and made people re-evaluate how to satisfy assembly line laborers’ re-evaluate how to satisfy assembly line laborers’ needs at various levels. needs at various levels.

As a sharp contrast, a chain hotpot restaurant named “HaiDiLaoHuoGuo” emerged during the same period, and became reputed for its exceptional service and high employee motivation.

People rush to DaiDiLao and wait for 3 hours for a table at Beijing’s 35℃ summer, not for the food but for the “abnormal” service. The smiling staff are always there before you need them after working for 12 hours; the only thing they will complain is that you leave them alone for a break. The turnover rate of the company is kept around 10%, significantly lower than the overage rate of 28.6% in China’s catering industry.

The above facts and figures are even more astonishing considering that the pay level of HaiDiLao is around the industry average.

黄铁鹰 梁钧平 潘洋，海底捞的管理智慧”，《哈佛商业评黄铁鹰 梁钧平 潘洋，海底捞的管理智慧”，《哈佛商业评论》中文版 ，论》中文版 ， 20092009 ， ， http://wenku.baidu.com/view/93http://wenku.baidu.com/view/93d86228915f804d2b16c11f.htmld86228915f804d2b16c11f.html

黄铁鹰，《海底捞你学不会》，中信出版社，黄铁鹰，《海底捞你学不会》，中信出版社， 20112011 杨铁峰，《海底捞你学得会》，人民邮电出版社，杨铁峰，《海底捞你学得会》，人民邮电出版社， 20112011

You analysis and discussion You analysis and discussion might be centered around:might be centered around:

What led to Foxconn’s management crisis, and What led to Foxconn’s management crisis, and HaiDiLao’s remarkable management success? HaiDiLao’s remarkable management success?

What theories of leadership, employee motivation and HRM are behind their practice?

What suggestions would you give to help the dissatisfied workers and the troubled management in Foxconn out?

What can other companies in catering or other What can other companies in catering or other industries learn from HaiDiLao’s experience?industries learn from HaiDiLao’s experience?