Basic

FINANCIAL
MANAGEMENT
For Engineers

Ismail Ab.Wahab
Basic

FINANCIAL
MANAGEMENT
For Engineers

Contents
 Understanding Financial Statements
 Interpreting Financial Data
 Capital Investment Appraisal
Basic

FINANCIAL
MANAGEMENT
For Engineers

 Understanding
Financial Statements
UNDERSTANDING FINANCIAL STATEMENTS

Financial Statements

…are the final products of the accounting

process

…tell how the business is performing and

where it stands
UNDERSTANDING FINANCIAL STATEMENTS

The main financial statements are:

 Cash Flow Statement

 Income Statement
 Balance Sheet

These three statements provide the overall

picture of a firm’s financial position and
performance.
 UNDERSTANDING FINANCIAL STATEMENTS
INCOME
BALANCE SHEET
CASH FLOW STATEMENT STATEMENT
UNDERSTANDING FINANCIAL STATEMENTS

From these statements, we will be able to

determine:
 from where the firm received Cash Flow
cash and how it used the cash Statement

 the wealth that was generated Income

by the firm Statement

 the accumulated wealth at the Balance

end of the period Sheet
UNDERSTANDING FINANCIAL STATEMENTS

Each financial statement provides specific

information, and all three are to be read to get a
complete picture.

One financial statement cannot substitute another.

 UNDERSTANDING FINANCIAL STATEMENTS

CASH FLOW STATEMENT

 The cash flow statement

discloses the net cash
flow for the period.
 The various sources of
business activities from
which the firm receives
cash:
 operations
 investing
 financing.
 UNDERSTANDING FINANCIAL STATEMENTS

CASH FLOW STATEMENT

 Cash Flow From
Operating Activities tells
you how much cash your
company generated from
its core business.
 UNDERSTANDING FINANCIAL STATEMENTS

CASH FLOW STATEMENT

 Cash From Investing
Activities shows the
amount of cash firms
spend on investments.
 UNDERSTANDING FINANCIAL STATEMENTS

CASH FLOW STATEMENT

 Cash Flow From

Financing Activities
includes any activities
that involve the
company's owners or
creditors.
UNDERSTANDING FINANCIAL STATEMENTS
 UNDERSTANDING FINANCIAL STATEMENTS

INCOME STATEMENT
 The income statement
(or profit & loss account)
presents a summary of
revenues for a specific
period of time
 The income statement
shows net profit
(revenues – expenses).
 UNDERSTANDING FINANCIAL STATEMENTS
A simple format for an INCOME STATEMENT:
Revenues – Expenses = Net Profit

 Revenues are earned from

the sale of goods or
services. (E.g. sales,
service revenue and
interest revenue.
 The payment may or may
not have been received.
 UNDERSTANDING FINANCIAL STATEMENTS
A simple format for an INCOME STATEMENT:
Revenues – Expenses = Net Profit

 Expenses are incurred

when a business receives
goods and services.

 Payment may or may not

have been made.
 UNDERSTANDING FINANCIAL STATEMENTS
A simple format for an INCOME STATEMENT:
Revenues – Expenses = Net Profit

 Cost of sales (or cost of

goods sold) represents the
expense a business
incurred to buy or make a
product for resale.
Example - a book store buys a
book for RM25 and then sells it
for RM32. The cost of sales is
RM25.
 UNDERSTANDING FINANCIAL STATEMENTS
A simple format for an INCOME STATEMENT:
Revenues – Expenses = Net Profit

 Operating expenses are

the usual expenses
incurred in operating a
business.
Examples: salaries expense,
utility expense, and
depreciation.
 UNDERSTANDING FINANCIAL STATEMENTS
A simple format for an INCOME STATEMENT:
Revenues – Expenses = Net Profit

 Non-operating items are

revenue, expenses, gains
and losses that do not
relate to the company’s
primary operations.

Examples: interest expense

and gains and losses from the
sale of equipment and
investments.
 UNDERSTANDING FINANCIAL STATEMENTS

BALANCE SHEET

 The balance sheet

reports the financial
position of a business
at a particular point in
time.
 Asset, liability and
owner’s equity are
classified into
subgroups.
 UNDERSTANDING FINANCIAL STATEMENTS
The basic format of the BALANCE SHEET
Assets = Liabilities + Equity

 Assets are resources

of value over which
the firm has control,
and from which the
firm will derive future
economic benefits.
 UNDERSTANDING FINANCIAL STATEMENTS
The basic format of the BALANCE SHEET
Assets = Liabilities + Equity
 Assets can be
classified according to
the primary purpose for
which they are held.
 Non-current assets –
assets held with the
intention of being used
to generate wealth.
 Current assets – cash
and other assets that
can be converted into
cash within one financial
year.
UNDERSTANDING FINANCIAL STATEMENTS
The basic format of the BALANCE SHEET
Assets = Liabilities + Equity

 Equity (Owner’s or
shareholders’ equity)
is ownership interest
of shareholders.
 UNDERSTANDING FINANCIAL STATEMENTS
The basic format of the BALANCE SHEET
Assets = Liabilities + Equity

 Liabilities are debts

owed arising from past
transactions. They are
future obligations that
will involve an outflow
of economic resources
from the business.
 UNDERSTANDING FINANCIAL STATEMENTS
The basic format of the BALANCE SHEET
Assets = Liabilities + Equity

 Classification of
liabilities:
 Long-term liabilities –
obligations that can be
settled after more than
one year.
 Current liabilities –
liabilities that have to be
paid within one year.
 UNDERSTANDING FINANCIAL STATEMENTS
RELATIONSHIP BERTEEN FINANCIAL STATEMENTS
INCOME
BALANCE SHEET
CASH FLOW STATEMENT STATEMENT
UNDERSTANDING FINANCIAL STATEMENTS
RELATIONSHIP BERTEEN FINANCIAL STATEMENTS

Conventional Format Working Capital Format

UNDERSTANDING FINANCIAL STATEMENTS
Example: Preparation of Financial Statements
UNDERSTANDING FINANCIAL STATEMENTS
Exercise: Preparation of Financial Statements
Thank You