Introduction to Finance and Strategy concepts

Class 3

Agenda:
1- Business Session 1.1 Finance Basics 1.1.1 Stock Market 1.1.2 Financial Statements 1.1.3 Additional concepts and terminolgy 1.2 Strategy Basics 1.2.1 Porters model 1.2.2 Strategy definition: Fredrikson model.

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1.1 Finance Basics

Mandatory pre-class readings: http://www.moneychimp.com/articles/financials/fundamentals.htm (how to read an annual report) http://en.wikipedia.org/wiki/Stock_market (Stock Market)

Some definitions Accounting: The process of gathering and preparing of financial

information about a business or other organization in a form that provides accurate and useful records and enables decisions to be made. (www.bookkeeperlist.com/definitionsa.shtml)

Economy: The organization of production and distribution of goods

and services within a socioeconomic system. (www.elissetche.org/dico/E.htm)

Finance: Finance studies and addresses the ways in which

individuals, businesses and organizations raise, allocate and use monetary resources over time, taking into account the risks entailed in their projects. (en.wikipedia.org/wiki/Finance )

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Net Earnings

Goods / Services

Operating Activities

Fruit

Investing Activities

Reinvested

Investments In Producing Assets

Trunk / Branches

Financing Activities

Debt Payments Dividends

Debt Financing Equity Financing

Roots

Businesses are like fruit trees

Adaptation of: Financial Accounting Jamie Pratt, 2003 John Wiley & Sons
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1.1.1 Stock Market Key Concepts: IPO, Equity, Shareholders, Financing (debt/equity). SEC, FASB, GAAP, Market Capitalization. Stock and indexes: NASDAQ, NYSE, LSE, Dow Jones, S&P. Portfolio: Short/long positions Stock and Options
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1.1.2 Financial Statements Key Concepts: Balance Sheet

Financial report showing the status of a companies assets, liabilities and equity on a given date(www.mines.edu/stu_life/organ/mic/glossary.htm)

Income Statement
A financial statement that contains a summary of a business' financial operations for a specific period of time. It shows the net profit or loss for the period by stating the company's revenues and expenses. (www.ncbuy.com/credit/glossary.html)

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Balance Sheet : Assets

Current Assets Cash Short-Term investments Account Receivable Inventory Pre-paid expense Long-term Investments Property, plant, and equipment Intangible Assets Goodwill Patent/Trademark
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Liabililities
Current Liabilities

Equity
Contributed Capital Retained Earnings

Accounts Payable Wages Payable Short-term note payable Current maturities of long-term debt Long-term Liabilities Long-term notes payable Bonds payable Mortgage payable

Balance Sheet :

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Income Statement :

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Review Example :

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1.1.3 Additional Concepts and Terminology Expense or capitalize? Decide in what period the revenue is to be generated. Overstating Operating performance: Revenue and expense recognition. Interest (simple and compound). Future Value. Financial Ratios:
ROE = Net Income / Avg. Stockholder equity ROS = (Net Income + Interest expense * tax shield ) / Net Sales Debt-to-Equity = Avg. Total Liabilities / Avg. Stockholders equity Earnings per share = Net Income / Avg. Number of CSO P/E = Market price per Share / Earnings per share Dividend Yield Ratio = Dividends per Share / Market price per Share
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Financial Ratios:

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