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Financial Statement and Ratio Analysis
Cash flow and Financial Planning
Time Value of Money

Written Report

Group B
Lavinia Verzosa
Erwin Yadao
Alvin Orolfo
Gilbertson Tinio

Professor: Ryan Roque

Advanced Financial Management
Subject Code: MBA 656
Time: 2:30PM – 5:30PM
(Reported by Lavinia Verzosa)

What is Financial Statement?

 Represent a formal record of the financial activities of an entity. These are written reports
that quantify the financial strength, performance and liquidity of a company. Financial
Statements reflect the financial effects of business transactions and events on the entity.

 Its general purpose is to provide information about the results of operations, financial
position, and cash flows of an organization. This information is used by the readers of
financial statements to make decisions regarding allocation of resources.

Four Key of Financial Statements

1. Income Statement – provides a financial summary of the firm’s operating results during
a specified period which is also known as the Profit and Loss Statement. Most common
on income statements covering a 1-year period ending at a specified date, ordinarily
December 31 of the calendar year. It provides an overview of revenues, expenses, net
income and earning per share. It usually provides two to three years of data for
Two elements of Income Statement:
o Income - the business has earned over a period (e.g. sales revenue,
dividend income, etc.)
o Expense – the cost incurred by the business over a period (e.g. salaries and
wages, depreciation, rental charges, etc.)

 Performance can be assessed from the income statement in terms of the following:
o Change in sales revenue over the period and in comparison, to industry growth
o Change in gross profit margin, operating profit margin and net profit margin over
the period
o Increase or decrease in net profit, operating profit and gross profit over the period
o Comparison of the entity's profitability with other organizations operating in
similar industries or sectors

 Income statement also forms the basis of important financial evaluation of an entity when
it is analyzed in conjunction with information contained in other financial statements such
o Change in earnings per share over the period
o Analysis of working capital in comparison to similar income statement elements
(e.g. the ratio of receivables reported in the balance sheet to the credit sales
reported in the income statement, i.e. debtor turnover ratio)
o Analysis of interest cover and dividend cover ratios

 Net profit or loss is arrived by deducting expenses from income.

Sample template of Income Statement

2. Balance Sheet – represents a summary of statement of the firm’s financial position at a

given point in time. The statement balances the firm’s asset against its financing, which
can be either debt or equity. The date at the top of the balance sheet tells you when it was
taken, which is generally the end of the fiscal year. The balance sheet equation, also known
as “Accounting Equation”, ca be expressed as:

Assets = Liabilities + Stockholder’s Equity

The balance sheet identifies how assets are funded, either with liabilities, such as
debt, or stockholder’s equity, such as retained earning and additional paid-in capital.

o Assets are something a business owns or controls which are listed on the
balance in order of liquidity (e.g. cash, inventory, plant and machinery,
o Liabilities are something a business owes to someone and listed in which
they will be paid (e.g. creditors, bank loans, etc.) and classified into:
 Short-term or current liabilities are expected to be pain within the
year, while
 long-term or noncurrent liabilities are debts expected to be paid in
over a year
o Equity is what the business owes to its owners. This represents the amount
of capital that remains in the business after its assets are used to pay off its
outstanding liabilities. Equity therefore represents the difference between
the assets and liabilities.
Sample template of Balance Sheet

[ Your business name appears here]

Statement of financial position as at 31st December 2018

2018 2017
Non-Current Assets
Property, Plant & Equipment
Intangible Assets
0 0

Current Assets
Trade Receivables
Cash and cash equivalents
0 0
Total Assets 0 0

Equity and Liabilities

Share Capital
Retained Earnings
Revaluation Reserve
Total Equity 0 0

Non-current liabilities
Long-term borrowings

Current Liabilities
Trade and other payables
Short-term borrowings
Current portion of long-term borrowings
Current tax payable
Total current liabilities 0 0
Total liabilities 0 0
Total equity and liabilities 0 0
3. Statement of cash flows – this merge the balance sheet and the income statement. The
cash flow statement reconciles the income statement with the balance sheet in three major
business activities:
o Operating activities include cash flows made from regular business
o Investing activities include cash flows from the acquisition and disposition
of assets, such as real estate and equipment.
o Financing activities include cash flows from debt and equity investment

Sample template of Statement Cash Flows

[ Your business name appears here]

Statement of cash flows for the year ended 31st December 2018

Cash flows from operating activities

Profit before taxation

Adjustments for:
Investment income
Interest expense
Increase in trade receivables
Increase in inventories
Increase in short term borrowings
Increase in trade payables
Cash generated from operations 0
Interest paid
Income tax paid
Net cash from operating activities 0

Cash flows from investing activities

Purchase of property, plant and equipment
Purchase of intangible assets
Proceeds from sale of equipment
Proceeds from sale of intangible assets
Interest received
Net cash used in investing activities 0

Cash flows from financing activities

Proceeds from issue of share capital
Proceeds from long term borrowings
Dividend paid
Net cash used in financing activities 0

Net increase in cash and cash equivalents 0

Cash & cash equivalents at start of the period
Cash & cash equivalents at end of the period 0
4. Statement of Changes in Equity – also known as the Statement of Retained Earnings, details
the movement in owners' equity over a period. The movement in owners' equity is
derived from the following components:
o Net Profit or loss during the period as reported in the income statement
o Share capital issued or repaid during the period
o Dividend payments
o Gains or losses recognized directly in equity (e.g. revaluation surpluses)
o Effects of a change in accounting policy or correction of accounting error

 Following are the main elements of statement of changes in equity:

o Opening Balance -this represents the balance of shareholders' equity reserves at the
start of the comparative reporting period as reflected in the prior period's
statement of financial position. The opening balance is unadjusted in respect of the
correction of prior period errors rectified in the current period and the effect of
changes in accounting policy implemented during the year as these are presented
separately in the statement of changes in equity.
o Effect of Changes in Accounting Policies - Since changes in accounting policies are
applied retrospectively, an adjustment is required in stockholders' reserves at the
start of the comparative reporting period to restate the opening equity to the
amount that would be arrived if the new accounting policy had always been
o Effect of Correction of Prior Period Error - the effect of correction of prior period errors
must be presented separately in the statement of changes in equity as an
adjustment to opening reserves. The effect of the corrections may not be netted off
against the opening balance of the equity reserves so that the amounts presented
in current period statement might be easily reconciled and traced from prior
period financial statements.
o Restated Balance - this represents the equity attributable to stockholders at the start
of the comparative period after the adjustments in respect of changes in accounting
policies and correction of prior period errors as explained above.
o Changes in Share Capital - Issue of further share capital during the period must be
added in the statement of changes in equity whereas redemption of shares must
be deducted therefrom. The effects of issue and redemption of shares must be
presented separately for share capital reserve and share premium reserve.
o Dividends – its payments issued or announced during the period must be deducted
from shareholder equity as they represent distribution of wealth attributable to
o Income / Loss for the period - this represents the profit or loss attributable to
shareholders during the period as reported in the income statement.
o Changes in Revaluation Reserve - revaluation gains and losses recognized during the
period must be presented in the statement of changes in equity to the extent that
they are recognized outside the income statement. Revaluation gains recognized
in income statement due to reversal of previous impairment losses however shall
not be presented separately in the statement of changes in equity as they would
already be incorporated in the profit or loss for the period.
o Other Gains & Losses - any other gains and losses not recognized in the income
statement may be presented in the statement of changes in equity such as actuarial
gains and losses arising from the application of IAS 19 Employee Benefit.
o Closing Balance – this represents the balance of shareholders' equity reserves at the
end of the reporting period as reflected in the statement of financial position.

 Statement of changes in equity helps users of financial statement to identify the factors
that cause a change in the owners' equity over the accounting periods.

Sample template of Statement of Changes in Equity

[ Your business name appears here]

Statement of changes in equity for the year ended 31st December 2018

Share capital Retained earnings Revaluation Surplus Total equity


Balance at 1 January 2017 0

Changes in accounting policy 0

Restated balance 0 0 0 0

Changes in equity for the year 2017

Issue of share capital 0

Dividends 0
Income for the year 0
Revaluation gain 0

Balance at 31 December 2017 0 0 0 0

Changes in equity for 2018

Issue of share capital 0

Dividends 0
Income for the year 0
Revaluation gain 0

Balance at 31 December 2017 0 0 0 0

(Reported by Erwin Yadao)

What is Ratio Analysis?

 A ratio analysis is a quantitative analysis of information contained in a company’s
financial statements. Financial Ratios can be divided for convenience into five basic
A. Liquidity
B. Activity
C. Solvency
D. Profitability
E. and Market Prospect

A. Liquidity Ratio - measure a company's ability to pay off its short-term debts as they come due
using the company's current or quick assets. It also refers to the solvency of the firm’s overall
financial position- the ease with which it can pay its bill. Liquidity ratios include current ratio,
and quick or acid-test ratio.
i. Current Ratio - commonly cited financial ratio to measure firm obligation to meet
short term debt. To calculate the ratio, analysts compare current assets to current
Current ratio = Current Assets

Current Liabilities

ii. Quick or Acid Test Ratio - essentially this ratio measures the most liquid asset in
relation to its short-term investment. Like the current ratio except it excludes
inventory which is the least liquid current asset. It provides better measure of overall
liquidity only when firms inventory cannot be easily converted to cash.
Acid test ratio = Current Assets - Inventories

Current Liabilities

B. Activity Ratio - also called efficiency ratio, this measures the speed with which various
accounts are converted into sales/ cash, inflows and outflows. This also evaluate how well a
company uses its assets and liabilities to generate sales and maximize profits. Key efficiency ratios
are the asset turnover ratio, inventory turnover, and days' sales in inventory.
i. Inventory Turnover - establishes the relationship between Cost of Goods Sold and
inventory carried during that period. Turnover is meaningful only when it is
compared with that of other firms in the same industry or the firms past inventory
Inventory turnover = Sales

ii. Average Collection Period - this provides the average number of days between a
sale made on credit until receipt of payment.
iii. Average Collection Period = Accounts Receivable 365 Days
Total Sales

iv. Average Payment Period - this indicates the average period taken by the company
in making payments to its creditor.

Average Payment Period = Accounts payable 365 Days

Credit Purchases

v. Fixed Asset Turnover - measure a company ability to generate net sales from fixed
assets investment. It should be compared to a ration in came industry or similar
industry. Commonly used to measure business in manufacturing industry which
uses equipment to increase output.
Fixed Asset Turnover = Sales

PPE -Depreciation

vi. Total Asset turnover Ratio - This indicates the efficiency with which the firm uses
its assets to generate sales. Ratio is commonly calculated annually.
Total Assets Turnover ratio = Sales

Total Assets

C. Solvency Ratio - also called financial leverage ratios, Financial Leverage - is the magnification
of risk and return introduce to the use of fixed-cost financing, solvency ratios compare a
company's debt levels with its assets, equity, and earnings to evaluate whether a company can
stay afloat in the long-term by paying its long-term debt and interest on the debt. Examples of
solvency ratios include debt-equity ratio, debt-assets ratio, and Times Interest earned Ratio.
i. Debt to Assets ratio - leverage ratio that defines the total amount of debt relative to
assets. It can be interpreted as the proportion of a company’s assets that are financed
by debt. The more debt a firm uses in a relation to its total assets the greater its
Financial leverage. The higher the debt ratio, the more leveraged a company is,
implying greater financial risk. At the same time, leverage is an important tool that
companies use to grow, and many businesses find sustainable uses for debt.
Debt to Assets Ratio = Total Liabilities

Total Assets
ii. Debt to Equity Ratio - a measure of financial leverage that demonstrates the degree
to which a firm's operations are funded by equity capital versus creditor financing.
It is a general term describing a financial ratio that compares some form of owner's
equity (or capital) to borrowed funds.
Debt to Equity Ratio = Total Liabilities


iii. Times Interest Earned ratio - also called as interest coverage ratio. This measures the
firm ability to make contractual interest payments and pay its obligation. The high
ratio the better, meaning the firm can fulfill its interest obligation.

TIE Ratio = Earnings Before Interest and Tax (EBIT)


iv. Fixed Charge Coverage Ratio - This ratio accounts the deficiencies of TIE ratio. This
measures a firm's ability to satisfy fixed charges, such as interest expense and lease
expense. Because leases are a fixed charge, the calculation for determining a
company's ability to cover fixed charges includes earnings before interest and
taxes (EBIT), interest expense, lease expense and other fixed charges.
FCCR = EBIT + Lease payments

Interest + Lease Payments

D. Profitability Ratio - a class of financial metrics that are used to assess a business's ability
to generate earnings relative to its associated expenses. It shows how well a company can
generate profits from its operations. For most of these ratios, having a higher value relative to a
competitor's ratio or relative to the same ratio from a previous period indicates that the company
is doing well.
i. Gross Profit Margin - measure of profitability where it shows the percentage of
revenue that exceeds the cost of goods sold. It illustrates how successful a company's
executive management team is in generating revenue from the costs that are
involved in producing their products and services.

Gross Profit Margin = Revenue - COG

ii. Net Profit Margin - profit margin is typically expressed as a percentage but can also
be represented in decimal form. Net profitability is an important distinction since
increases in revenue do not necessarily translate into increased profitability. The net
profit margin illustrates how much of each dollar collected by a company as revenue
translates into profit.
Net Profit margin = Net Income

Total Sales

iii. ROA (Return on Asset) - often called return on Investment (ROI). Indicator of how
profitable a company is relative to its total assets. ROA gives a manager, investor, or
analyst an idea as to how efficient a company's management is at using its assets to
generate earnings.
ROA = Net Income

Total Assets

iv. ROE (Return on Equity) - is a measure of how efficient a company is at generating

profits in relation with its equity. This is a measure of profitability that calculates
how many dollars of profit a company generates with each dollar of equity.
ROA = Net Income

Total Equity

E. Market Prospect Ratio - These are the most commonly used ratios in fundamental analysis.
Investors use these ratios to determine what they may receive in earnings from their investments
and to predict what the trend of a stock will be in the future. Example of these are P/E ratio,
earnings per share, a book to Market ratio.
i. Earnings Per Share - represents the dollar amount earned on behalf of each share -
not the amount of earnings distributed to shareholders. EPS is calculated using the
below formula:
EPS = Earnings available for common Stockholders

Number of Shares of common stock outstanding

ii. Price/Earnings Ratio - the ratio for valuing a company that measures its current
share price relative to its per-share earnings. The price-earnings ratio is also
sometimes known as the price multiple or the earnings multiple. This is also used to
determine how much investors are willing to pay for a stock relative to a company’s
P/E ratio = Price per share

iii. Book to Market Ratio - used to find the value of a company by comparing the book
value of a firm to its market value. Book value is calculated by looking at the firm's
historical cost, or accounting value. Market value is determined in the stock market
through its market capitalization.
Book/Market Ratio = Book Value per Share

Market Value Share

Comparative Ratios Between

ABS-CBN Corporation and Subsidiaries
& GMA Network Inc. 2017
Liquiduty Ratio
Current ratio 2.18 2.71
Quick ratio 1.79 2.12
Activity r atio
Inventory Turnover 80.00 867.91
Average Collection Period 95.33 113.82
Fixed Asset Turnover 1.76 1.42
Total Asset turnover Ratio 0.54 1.04
Sol vency Ra ti o
Debt to Assets ratio 0.55 0.36
Debt to Equity Ratio 1.23 0.05
Times Interest Earned ratio 5.09 158.94
Profi ta bi l i ty Ra ti o
Net Profit Margin 0.08 0.17
Gross Profit Margin 0.39 0.58
ROA 0.04 0.17
ROE 0.09 0.27
Ma rket Va l ua ti on
Price/ Earning Ratio 8.54 11.2

Computations are all based on the data of 2017 Financial Annual Report of each companies
downloaded at the
ABS-CBN Corporation and Subsidiaries
Consolidated Statements of Fnancial Position
2017 2016

Current Assets
Cash and Cash Equivalents 12,346,556.00 10,964,524.00
Short term investment 1,358,429.00 3,065,793.00
Trades and Other Receivables 10,630,014.00 10,204,118.00
Inventories 508,721.00 349,821.00
Program rights and other intangibles 1,137,234.00 1,067,144.00

Other current Asset 5,062,390.00 4,141,388.00

Total current Asset 31,043,344.00 29,792,788.00

Non- Current Assets

Property and Equipment 25,700,997.00 24,509,980.00
Program rights and other intangibles
7,707,460.00 7,215,644.00
net of current
Goodwill 5,473,725.00 5,314,677.00
Available for Sale Investments 242,743.00 210,219.00
Investment Properties 200,740.00 202,114.00
Investments in Assiosiates and Joint
524,953.00 530,005.00
Deffered Tax Assets 2,462,942.00 2,498,677.00
Other Non -Current Asset 1,768,425.00 2,459,848.00
Total Non current Asset 44,081,985.00 42,941,164.00
Total Assets 75,125,329.00 72,733,952.00

Liabilities and Equity

Current Liabilities
Trade and other Payables 13,272,821.00 13,648,504.00
Income tax payable 263,329.00 277,239.00
Obligations for programs and rights 349,736.00 439,316.00
Interest bearing loans and borrowings 350,678.00 354,950.00
Total Current Liabilities 14,236,564.00 14,720,009.00

Non Current Liabilities

Interest bearing loans and borrowings
20,036,027.00 20,117,283.00
net of current portion
Obligations for programs and rights net
554,657.00 660,667.00
of current portion
Accrued pension obligationand other
5,757,944.00 4,906,236.00
employee benefits
Deffered tax liability 138,271.00 138,271.00
Convertible Note 205,380.00 221,063.00
Other Non-Current Liabilities 485,542.00 278,730.00
Total Non Current Liabilities 27,177,821.00 26,322,250.00
Total Liabilities 41,414,385.00 41,042,259.00
Equity Attributable to Equity
Holders of the Current Company
Captital Stocks:
Common 872,124.00 872,124.00
Preffered 200,000.00 200,000.00
Additional Paid in Capital 4,745,399.00 4,740,811.00
Exchange Differenceson Translation of
359,816.00 18,349.00
Foreign operations
Share based Payment Plan 180,408.00 147,884.00
Unreallized Gain on AFS Investment - 4,588.00
Retained Earnings 28,560,106.00 26,709,981.00
Treasury Shares andPhilippine
depository receipts convertible to -1,638,719.00 -1,638,719.00
Common Shares
Equity Attributable to Equity
33,279,134.00 31,055,018.00
Holders of the Parent
Noncontrolling Interests 431,810.00 636,685.00
Total Equity 33,710,944.00 31,691,703.00

Total Liabilities and Equity 75,125,329.00 72,733,962.00

Income Statement

ABS-CBN Corporation and Subsidiaries

Year Ending Previous Year Ending
December 31,2017 December 31,2016
Gross Revenue 40,698,244.00 41,630,599.00
Gross Expense 36,572,029.00 36,690,112.00
Non-Operating Income 781,594.00 688,762.00
Non-Operating Expense 971,774.00 948,378.00
Income /(Loss) Before Tax 3,936,035.00 4,680,871.00
Income Tax Expense 772,458.00 1,155,555.00
Net Income /(Loss) After Tax 3,163,577.00 3,525,316.00
Net Income /(Loss) Attributable to
3,333,889.00 3,885,278.00
Parent Equity Holder
Earnings/ (Loss) per Share(Basic) 4.05 4.72
Earnings/ (Loss) per Share(Dilluted) 4.05 4.72
Capital Stocks 4,864,692,000.00 4,864,692,000.00
Additional Paid in Capital 1,659,035,196.00 1,659,035,196.00
Revaluation increment on land-net of Tax 1,017,247,029.00 1,017,247,029.00
Remeasurement loss on retirement plans -
-666,224,427.00 -664,042,118.00
Net of tax
Net Unrealized loss on AFS Financial assets-
-8,092,181.00 -10,113,681.00
net of tax
Retained Earnings 2,570,710,400.00 3,574,757,302.00
Treasury stocks -28,483,171.00 -28,483,171.00
Underlying shares of the acquired
-5,790,016.00 -5,790,016.00
Philippine Deposits Receipts
Total Equity Attributable to Equity holders
9,403,094,830.00 10,407,302,541.00
of the Parent Company
Non-Controlling Interest 46,611,737.00 48,630,059.00
Total Equity 9,449,706,567.00 10,455,932,600.00

Total Liabilities and Equity 14,793,114,282.00 16,058,775,515.00

Income Statement

GMA Network Inc.

Year Ending Previous Year Ending

December 31,2017 December 31,2016
Gross Revenue 15,344,868,827.00 16,673,380,502.00
Gross Expense 11,809,282,693.00 11,596,978,782.00
Non-Operating Income 145,424,010.00 148,318,915.00
Non-Operating Expense 23,010,666.00 16,905,154.00
Income /(Loss) Before Tax 3,657,999,478.00 5,207,815,482.00
Income Tax Expense 1,098,269,843.00 1,561,200,222.00
Net Income /(Loss) After Tax 2,559,729,635.00 3,646,595,260.00
Net Income /(Loss) Attributable to 2,543,897,957.00 3,626,334,920.00
Parent Equity
Earnings/ Holder
(Loss) per Share(Basic) 0.52 0.75
Earnings/ (Loss) per Share(Dilluted) 0.52 0.75
(Reported by Alvin Orolfo)


Cash flow is the net amount of cash and cash-equivalents being transferred into and out of a
business. At the most fundamental level, a company’s ability to create value for shareholders is
determined by its ability to generate positive cash flows, or more specifically, maximize long-
term free cash flow.

Depreciation - a portion of the costs of fixed assets charged against annual revenues over time.

Modified Accelerated Cost Recovery System (MACRS) - System used to determine the
depreciation of assets for tax purposes.

All depreciation methods require you to know an asset’s depreciable value and its depreciable

Depreciable Value - Under the basic MACRS procedures, the depreciable value of an asset (the
amount to be depreciated) is its full cost, including outlays for installation. Even if the asset is
expected to have some salvage value at the end of its useful life, the firm can still take depreciation
deductions equal to the asset’s full initial cost.

Depreciable life - Time period over which an asset is depreciated. The shorter the depreciable
life, the larger the annual depreciation deductions will be, and the larger will be the tax savings
associated with those deductions, all other things being equal. Accordingly, firms generally
would like to depreciate their assets as rapidly as possible. However, the firm must abide by
certain Internal Revenue Service (IRS) requirements for determining depreciable life.

Recovery period - The appropriate depreciable life of a particular asset as determined by MACRS.
Depreciation Methods
For financial reporting purposes, companies can use a variety of depreciation methods:
 straight-line
 double-declining balance, and
 sum-of-the-years’-digits

For tax purposes, assets in the first four MACRS property classes are depreciated by the double-
declining balance method, using a half-year convention (meaning that a half-year’s depreciation
is taken in the year the asset is purchased) and switching to straight-line when advantageous.
Developing the Statement of Cash Flows
Statement of cash flows is the summary of inflows and outflows of cash during a given period.
It is the summary of the firm’s operating, investment, and financing cash flows and reconciles
them with changes in its cash and marketable securities during the period.

Three (3) Categories of Cash flow Activity in a Statement of Cash Flows:

 Operating activities - Cash flows directly related to sale and production of the firm’s
products and services.
 Investing activities - Cash flows associated with purchase and sale of both fixed assets
and equity investments in other firms.
 Financing activities - Cash flows that result from debt and equity financing transactions;
include incurrence and repayment of debt, cash inflow from the sale of stock, and cash
outflows to repurchase stock or pay cash dividends.

Classifying Inflows and Outflows of Cash

Noncash charge - An expense that is deducted on the income statement but does not involve the
actual outlay of cash during the period; includes depreciation, amortization, and depletion. When
measuring the amount of cash flow generated by a firm, we have to add depreciation back to net
income or we will understate the cash that the firm has truly generated. For this reason,
depreciation appears as a source of cash in Table 4.3.

Preparing the Statement of Cash Flows

Statement of cash flows uses data from the income statement, along with the beginning- and end-
of-period balance sheets.
Sample Income Statement

Sample Balance Sheets

Statement of Cash flows

People and groups interested in Statement of Cash Flows include:

 Accounting personnel, who need to know whether the organization will be able to cover
payroll and other immediate expenses
 Potential lenders or creditors, who want a clear picture of a company's ability to repay
 Potential investors, who need to judge whether the company is financially sound
 Potential employees or contractors, who need to know whether the company will be able
to afford compensation
 Shareholders of the business.

Operating Cash Flow (OCF) - The cash flow a firm generates from its normal operations;
calculated as net operating profits after taxes (NOPAT) plus depreciation.

Net Operating Profits After Taxes (NOPAT) - A firm’s earnings before interest and after taxes,
EBIT * (1 - T).

OCF = NOPAT + Depreciation (where NOPAT = EBIT * (1 - T))

OCF = [EBIT x (1 - T)] + Depreciation

Free Cash Flow (FCF) - The amount of cash flow available to investors (creditors and owners)
after the firm has met all operating needs and paid for investments in net fixed assets and net
current assets.

FCF = OCF - Net fixed asset investment (NFAI) - Net current asset investment (NCAI)

NFAI = Change in net fixed assets + Depreciation

NCAI = Change in current assets - Change in (accounts payable + accruals)

(Reported by Alvin Orolfo)


Financial planning is an important aspect of the firm’s operations because it provides road maps
for guiding, coordinating, and controlling the firm’s actions to achieve its objectives.

Two key aspects of the financial planning process are:

1. Cash planning involves preparation of the firm’s cash budget.

2. Profit planning involves preparation of pro forma statements.
Both the cash budget and the pro forma statements are useful for internal financial planning.

Financial planning process - Planning that begins with long-term, or strategic, financial plans
that in turn guide the formulation of short-term, or operating, plans and budgets.

Long-term (strategic) financial plans - Plans that lay out a company’s planned financial actions
and the anticipated impact of those actions over periods ranging from 2 to 10 years.

Short-term (operating) financial plans - Specify short-term financial actions and the anticipated
impact of those actions. These plans most often cover a 1- to 2-year period.

Short-term financial planning begins with the sales forecast. From it, companies develop
production plans that take into account lead (preparation) times and include estimates of the
required raw materials. Using the production plans, the firm can estimate direct labor
requirements, factory overhead outlays, and operating expenses. Once these estimates have been
made, the firm can prepare a pro forma income statement and cash budget. With these basic
inputs, the firm can finally develop a pro forma balance sheet.

Cash budget (Cash forecast) - A statement of the firm’s planned inflows and outflows of cash
that is used to estimate its short-term cash requirements.

Sales forecast - The prediction of the firm’s sales over a given period, based on external and/or
internal data; used as the key input to the short-term financial planning process.

External forecast - A sales forecast based on the relationships observed between the firm’s sales
and certain key external economic indicators such as the gross domestic product (GDP), new
housing starts, consumer confidence, and disposable personal income.

Internal forecast - A sales forecast based on a buildup, or consensus, of sales forecasts through
the firm’s own sales channels.

Preparing the Cash Budget

The general format of the cash budget is presented in Table 4.7.

Cash receipts - All of a firm’s inflows of cash during a given financial period. The most common
components of cash receipts are cash sales, collections of accounts receivable, and other cash

Cash disbursements - All outlays of cash by the firm during a given financial period. The most
common cash disbursements are:

Cash purchases Fixed-asset outlays

Payments of accounts payable Interest payments
Rent (and lease) payments Cash dividend payments
Wages and salaries Principal payments (loans)
Tax payments Repurchases or retirements of stock

Net cash flow - The difference between the firm’s cash receipts and its cash disbursements in
each period.
Ending cash - The sum of the firm’s beginning cash and its net cash flow for the period.

Required total financing - Amount of funds needed by the firm if the ending cash for the period
is less than the desired minimum cash balance; typically represented by notes payable.

Excess cash balance - The (excess) amount available for investment by the firm if the period’s
ending cash is greater than the desired minimum cash balance; assumed to be invested in
marketable securities.

Two Ways of Coping with Uncertainty in the Cash Budget

1. Scenario Analysis
 Prepare several cash budgets—based on pessimistic, most likely, and optimistic
 Use of several cash budgets, based on differing scenarios
2. Simulation
 Simulating the occurrence of sales and other uncertain events, the firm can develop a
probability distribution of its ending cash flows for each month.


Pro forma statements - Projected or forecast income statements and balance sheets.

Two inputs required for preparing pro forma statements:

1. Financial statements for the preceding year
2. Sales forecast for the coming year.


Percent-of-sales method - A simple method for developing the pro forma income statement; it
forecasts sales and then expresses the various income statement items as percentages of projected

Considering Types of Costs and Expenses

Percent-of-sales method assumes that all costs are variable which generally tends to understate
profits when sales are increasing and overstate profits when sales are decreasing. The best way to adjust
for the presence of fixed costs when preparing a pro forma income statement is to break the firm’s
historical costs and expenses into fixed and variable components.


Judgmental approach - A simplified approach for preparing the pro forma balance sheet under
which the firm estimates the values of certain balance sheet accounts and uses its external
financing as a balancing, or “plug,” figure.
External financing required (“plug” figure) - Under the judgmental approach for developing a
pro forma balance sheet, the amount of external financing needed to bring the statement into
balance. It can be either a positive or a negative value.
(Reported by Gilbertson Tinio)

I. Introduction

One of the greatest discovery in the world of finance is the time value of money. Most financial
decisions involve situations in which someone makes a payment at one point in time and receives
money later. Money paid or received at two different points in time are different, and this
difference is dealt with using time value of money (TVM) analysis.

The principles of time value analysis have many applications, including retirement planning, loan
payment schedules, and decisions to invest (or not) in new equipment. In fact, of all the concepts
used in finance, none is more important than the time value of money.

The TVM is the concept according to which a sum of money owned in the present has a greater
value than the value of the same sum received at a moment in the future. Thus, it is taken into
account the opportunity of the one presently owning the sum of money to invest it and to obtain
future gains such as interest or profit. The techniques used in order to make possible comparing
and calculating the time value of money include: Compounding, Discounting, Capitalization,

II. Discussion

Time lines
An analysis of time value of money starts with Time lines as this helps to visualize what’s
happening in the particular scenario. It is a graphical representation used to show the timing of
cash flows. A sample of a time line is shown below:

Definition of terms
We must define relevant terms before setting up a time line and show how calculation is

PV = Present value, or beginning amount.

FV = Future value, or ending amount. It is also called as maturity or final value.
CF = Cash flows, which can be positive or negative.
I = Interest rate earned per year.
INT = Interest earned during the year
N = Number of periods involved in the analysis.
Approaches in solving time value of money problems
We can use four different approaches in solving time value problems.
1. Step-by-Step Approach
A period by period computation of time value problems. This step-by-step approach is
useful because it shows exactly what is happening. However, this approach is time-
consuming, especially if the number of years is large and you are using a calculator rather
than Excel, so streamlined procedures have been developed.
2. Formula Approach
This approach involves formulas which considers period in compounding and/or
discounting. This approach is like step-by-step approach but is much convenient as it
solves problem in one computation.

3. Financial Calculators
Financial calculators were designed specifically to solve time value problems. First, note
that financial calculators have five keys that correspond to the five variables in the basic
time value equations

4. Spreadsheet
Spreadsheets are ideally suited for solving many financial problems, including those
dealing with the time value of money. Spreadsheets are obviously useful for calculations,
but they can also be used like a word processor to create exhibits which includes text,
drawings, and calculations. Brigham used spreadsheet figures to show the four methods
in which is also used in this presentation.
Future Value
The amount to which a cash flow or series of cash flows will grow over a given period when
compounded at a given interest rate (Brigham, 2011). Cabrera said it is the amount of money that
will grow to at some point in the future (Cabrera, 2011).

Compounding: the process of going forward, from PVs to FVs.

Simple Interest: occurs when interest is not earned on interest.
Compound Interest: occurs when interest is earned on prior periods' interest.

Figure below shows, how Brigham computed future value with the given inputs, using the four
Present Value
The value today of a future cash flow or series of cash flows. (Brigham, 2011). For Cabrera, it is
the amount of money today that is equivalent to a given amount to be received or paid in the
future. It is just a reverse of the future value, in a way that instead of compounding the money
forward into the future, we discount it back to the present (Cabrera, 2011).

Discounting: the process of finding PV, the reverse of compounding.

Figure below shows, how Brigham computed present value with the given inputs, using the four

It is a series of equal sized cash flows occurring over equal intervals of time. A series of equal
payment at fixed intervals for a specified number of periods. The two type of annuities are below:
1. Ordinary Annuity - exists when the cash flows occur at the end of each period.

2. Annuity Due - exists when the cash flows occur at the beginning of each period.
Future Value of Ordinary Annuity
It is the future value of a series of equal sized cash flows with the first payment taking place at
the end of the first compounding period. The last payment will not earn any interest since it is
made at the end of the annuity period (Cabrera, 2011)

Figure below shows, how Brigham computed future value of ordinary annuity with the given
inputs, using the four approaches.
Future Value of an Annuity Due
The future value of a series of equal sized cash flows with the first payment taking place at the
beginning of the annuity period (Cabrera, 2011).

Figures below shows how to compute for future value of an annuity due.
Present Value of Ordinary Annuity
The Present Value of a series of equal sized cash flows with the first payment taking place at the
end of the first compounding period. (Cabrera, 2011)

Figure below shows, how Brigham computed present value of ordinary annuity with the given
inputs, using the four approaches.
Present Value of Annuity Due
It is the present value of a series of equal sized cash flows with the first payment taking place at
the beginning of the annuity period (Cabrera, 2011).

Figures below shows how to compute for present value of an annuity due.

A consol, or perpetuity, is simply an annuity whose promised payments extend out forever. Since
the payments go on forever, you can’t apply the step-by-step approach. However, it’s easy to find
the PV of a perpetuity with the following formula:

Uneven, or Irregular, Cash FlowsThe definition of an annuity includes the term constant
payment—in other words, annuities involve a set of identical payments over a given number of
periods. Although many financial decisions do involve constant payments, many others involve
cash flows that are uneven or irregular.
Types of Interest rates

Nominal Interest Rate (Quoted or stated): The contracted, or quoted or stated interest rate. It is also
called annual percentage rate (APR); the periodic rate times the number of periods per year.

Effective Annual Rate: The annual rate of interest actually being earned, as opposed to the quoted
rate. This is the rate that would produce the same future value under annual compounding as
would more frequent compounding at a given nominal rate.

III. Summary and Conclusions

TVM concept stands at the basis of the profitability analyses in financial management. As the PP
represents the period at the end of which the initial investment equals that of the total cash flow
generated by the investment project, we may say that this method is connected to the notion of
investment liquidity. The investment liquidity is greater as the payback period is shorter.

Discounting, as a financial technique, allows the comparison of the revenue obtained at different
moments in time with the initial costs necessary for the implementation of an investment. This
technique is useful in determining the profitable projects.

Damodaran said, Present value remains one of the simplest and most powerful techniques in

finance, providing a wide range of applications in both personal and business decisions. Cash
flow can be moved back to present value terms by discounting and moved forward by
compounding. The discount rate at which the discounting and compounding are done reflect
three factors: (1) the preference for current consumption, (2) expected inflation and (3) the
uncertainty associated with the cash flows being discounted”. (Damodaran, 2016)
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