Effective Decision Making Methods and Tools in 2018/2019

Decision Decision- -making: methods making: methods and and tools tools Martina Dal Molin mdalmolin@liuc.it AY 2018/2019

Agenda Agenda The Income Statement: features The Income Statement: by nature and by destination The Cash Flow Statement: features The Cash Flow Statement: direct and indirect method 2

THE INCOME STATEMENT THE INCOME STATEMENT

The The Income Income Statement: Statement: features features (1/4) (1/4) It synthetizes the economic flows of the company during a year It is written following the accrual accounting principle: oRevenues all the revenues related to the effective production and alienation of services or goods oCosts all the costs of resources actually used to produce goods and services provided It represents the operating profit as: Revenues of the period costs of the period (revenues costs = assests liabilities equity) 4

The The Income Income Statement: Statement: features features (2/4) (2/4) Minimum content of the Income Statement: oRevenues oFinancial income oBorrowing costs oRevenues related to joint ventures oIncome tax oProfit or loss These items could be presented following two different logics oBy nature oBy destination 5

Income Statement BY NATURE Income Statement BY DESTINATION Revenues Revenues Other operating income Costs of sales Changes in inventories and WIP GROSS PROFIT Raw materials and consumables used Other operating income Cost of personnel/employee benefits expenses Distribution costs Depreciation and variation of value of non current activities Administrative costs Other operating costs/expenses Other operating costs/expenses OPERATING PROFIT OPERATING PROFIT Revenues from joint venture and controlled companies Revenues from joint venture and controlled companies Financial income from investment/Investment revenues Financial income from investment/Investment revenues Other revenues and losses Other revenues and losses GROSS PROFIT GROSS PROFIT Taxes Taxes NET PROFIT NET PROFIT Net profit from discontinuing operation Net profit from discontinuing operation ANNUAL NET PROFIT ANNUAL NET PROFIT EARNING PER SHARE EARNING PER SHARE 6

The Income Statement: by nature and by The Income Statement: by nature and by destination destination INCOME STATEMENT BY NATURE INCOME STATEMENT BY DESTINATION Revenues Other revenues Changes in inventories and WIP VALUE of the PRODUCTION Revenues Use/Consumption of raw materials Costs of personnel Depreciation and changes in value of non current activities Other operating costs COST of the PRODUCTION Cost of sales 7

Income Statement BY NATURE Revenues + Other Revenues + Changes in inventories and WIP -Use/Consumption of raw materials -cost of personnel +/- depriaction and variation of value of non current activities - Other operating costs OPERATING INCOME CONTINUING OPERATIONS +/- Revenues from joint venture and controlled companies + Financial income from investment - Borrowing costs GROSS PROFIT DISCONTINUING OPERATIONS - Taxes NET PROFIT +/- Net profit from discontinuing operation ANNUAL NET PROFIT 8 PROFIT BY SHARES

Income Statement BY DESTINATION Revenues -Cost of sales GROSS PROFIT + Other revenues - Costs related to production - Administrative costs - Other operating cots OPERATING INCOME CONTINUING OPERATIONS +/- Revenues from joint venture and controlled companies + Financial income from investment - Borrowing costs GROSS PROFIT - Taxes NET PROFIT DISCONTINUING OPERATIONS +/- Net profit from discontinuing operation ANNUAL NET PROFIT PROFIT BY SHARES 9

The The Income Income Statement by NATURE Statement by NATURE The Income statement by nature dinstinguishes between: The value of production = operating revenues + changes in inventories and WIP The cost of production = the cost of every resource that were necessary for the production of goods realized and services provided 10

Operating revenues Operating revenues The item refers to the revenues related to: oSale of goods oProvision of services Related to the characteristic activity of the company 11

Other Other operating operating revenues revenues The item refers to the revenues related to the operating activity of the company, but NOT related to its characteristic activity Some example: oRent for buildings oCapital gains for the sale of material and immaterial goods oRoyalties 12

Other Other operating operating revenues revenues: capital : capital gains gains The item includes the positive difference (+) related to the sale of material and immaterial (tangible and intangible) activity Example: oThe company A sales an equipment at a price of 600 k to the company B and the fair value of the equipment is 500k ????? 13

Changes Changes in in inventories inventories and WIP and WIP The item refers to the different value of the final and the initial inventories The difference depends from: oVariation in the physical quantity oDifferent value of the inventories 14

Use/ Use/Consumption Consumption of of raw raw materials materials The item refers to the cost related to: oPurchase of raw materials during the year oVariation of inventories of raw materials Variation of inventories of raw materials, i.e. the difference of the value between initial and final inventories: oPositive difference = the company has used inventories for its productive process oNegative difference = the company has stored inventories for its future productive process 15

Costs Costs of of personnel personnel The item refers to the costs related to: oSalaries oSocial securities contributions 16

Depretiacion Depretiacion and current current activities activities and variation variation of of value value of non of non The item refers to the economic value related to: oDepreciation (-) oVariation of value of non current activities (+/-) 17

Other Other operating operating costs costs The item refers to the economic value related to: oProcessing costs, direct and overhead oMaintenance costs oCosts related to distribution oCost related to the use third parties goods oUnrealized loss related to the sale of tangible and intangible goods 18

Income Statement BY NATURE Revenues + Other Revenues + Changes in inventories and WIP -Use/Consumption of raw materials -cost of personnel +/- depriaction and variation of value of non current activities - Other operating costs OPERATING PROFIT +/- Revenues from joint venture and controlled companies + Financial income from investment - Borrowing costs GROSS PROFIT Economic result of the company related to the typical company s activity - Taxes NET PROFIT +/- Net profit from discontinuing operation ANNUAL NET PROFIT PROFIT BY SHARES 19

Revenues Revenues from joint from joint ventures companies companies ventures and and controlled controlled The item refers to the economic value (+/-) related to revenues or losses with respect to joint ventures or controlled companies 20

Financial Financial income income The item includes: oFinancial income related to cash oFinancial income related to financial credits oProfit related to financial activities (e.g. controlled companies) 21

Borrowing Borrowing costs costs The item includes: oBorrowing costs related to every financing activity oLosses related to financial activities oNegative variation of value 22

Income Statement BY NATURE Revenues + Other Revenues + Changes in inventories and WIP -Use/Consumption of raw materials -cost of personnel +/- depriaction and variation of value of non current activities - Other operating costs OPERATING INCOME Economic result of the company related to the typical company s activity that also comprehends the company sfinancial activity +/- Revenues from joint venture and controlled companies + Financial income from investment - Borrowing costs GROSS PROFIT - Taxes NET PROFIT +/- Net profit from discontinuing operation ANNUAL NET PROFIT PROFIT BY SHARES 23

Income Statement BY NATURE Revenues + Other Revenues + Changes in inventories and WIP -Use/Consumption of raw materials -cost of personnel +/- depriaction and variation of value of non current activities - Other operating costs OPERATING INCOME Economic result of the company related to the typical company s activity that also comprehends the company sfinancial and fiscal activity +/- Revenues from joint venture and controlled companies + Financial income from investment - Borrowing costs GROSS PROFIT - Taxes NET PROFIT +/- Net profit from discontinuing operation ANNUAL NET PROFIT PROFIT BY SHARES 24

Income Statement BY NATURE Revenues + Other Revenues + Changes in inventories and WIP -Use/Consumption of raw materials -cost of personnel +/- depriaction and variation of value of non current activities - Other operating costs OPERATING INCOME = Profit of the Liability of the BS +/- Revenues from joint venture and controlled companies + Financial income from investment - Borrowing costs GROSS PROFIT - Taxes NET PROFIT +/- Net profit from discontinuing operation ANNUAL NET PROFIT PROFIT BY SHARES 25

Income Statement BY NATURE Revenues + Other Revenues + Changes in inventories and WIP -Use/Consumption of raw materials -cost of personnel +/- depriaction and variation of value of non current activities - Other operating costs OPERATING INCOME +/- Revenues from joint venture and controlled companies + Financial income from investment - Borrowing costs GROSS PROFIT - Taxes NET PROFIT +/- Net profit from discontinuing operation ANNUAL NET PROFIT PROFIT BY SHARES 26

THE CASH FLOW STATEMENT THE CASH FLOW STATEMENT

The Cash Flow Statement: The Cash Flow Statement: features features We do not have a specific model to follow, but there is minimum content The Cash Flow Statement could be written following two different rules: oDirect method oIndirect method It presents the financial flows of a company, distinguished into: oOperating flows oInvestment flows oFinancial flows 28

The Cash Flow Statement: The Cash Flow Statement: direct method method (1/3) (1/3) direct and and indirect indirect Direct method it shows every category of cash receipts and payments Indirect method It shows the final cash by modifying the amount of profit or loss. By using the indirect method we need to consider: oVariation of operating credits and debts oChanges in inventories In general, the indirect method is more used than the indirect one 29

The Cash Flow Statement: The Cash Flow Statement: direct method method (2/3) (2/3) direct and and indirect indirect DIRECT METHOD , , $ INDIRECT METHOD , , $ Operating cash flow Operating cash flow Net operating profit + cash revenues from customers + Depreciation - Cash outflows to suppliers + Changes in credits - Cash outflows to personnel + Changes in inventories ( i f) - Other operating cashoutflows + Changes in debts (i f) - Interests paid - Interest paid Interests - Taxes paid - not paid interests (accrual accountign) Net operating cash flow - Taxes paid Net operating cash flow 30

The Cash Flow Statement: The Cash Flow Statement: direct method method (3/3) (3/3) direct and and indirect indirect DIRECT METHOD , , $ INDIRECT METHOD , , $ Investment activities Investment activities - Property purchase - Property purchase + Property selling + Property selling Net financial cash flow Net financial cash flow Financing activity Financing activity - Dividends - Dividends +/- Debt purchase/repayment +/- Debt purchase/repayment Net cash flow for financing activity Net cash flow for financing activity Increase or decrease of cash or cash equivalent Increase or decrease of cash or cash equivalent Cash or cash equivalent at the beginning of the year Cash or cash equivalent at the beginning of the year Cash or cash equivalent at the end of the year Cash or cash equivalent at the end of the year 31

The Cash Flow Statement: The Cash Flow Statement: Indirect Indirect method method INDIRECT METHOD , , $ Operating cash flow Net operating working capital Depreciation Net operating profit + Depreciation + Changes in credits + Changes in inventories ( i f) Income Statement BY NATURE + Changes in debts (i f) Revenues - Interests paid Other revenues Interests Changes in inventories and WIP Use/Consumption of raw materials - not paid interests (accrual accounting) Cost of personnel - Taxes paid Depreciation and variation of value of non current activities Net operating cash flow Other operating costs 32

The Cash Flow Statement: Direct The Cash Flow Statement: Direct method method DIRECT METHOD , , $ Operating cash flow + cash revenues from customers (receivables) - Cash outflows to suppliers (debt to suppliers) Every category of cash receipts and payment - Cash outflows to personnel - Other operating cashoutflows - Interest paid - Taxes paid Net working capital Net operating cash flow 33

In In both both cases cases . . DIRECT and INDIRECT METHOD , , $ Cash flows related to investment policy Investment activities - Property purchase + Property selling Net financial cash flow Cash flows related to financing policy Financing activity - Dividends +/- Debt purchase/repayment Net cash flow for financing activity Increase or decrease of cash or cash equivalent Cash or cash equivalent at the beginning of the year Cash or cash equivalent at the end of the year 34

To sum up (1/2) To sum up (1/2) 31/12/2018 31/12/2017 Balance Sheet Balance Sheet Income Statement Income Statement Cash-Flow Statement Cash-Flow Statement 35

To sum up (2/2) To sum up (2/2) Balance Sheet: Financial situation of the company in a specific momenti of time Starting point: Balanche sheet of the previous year Assets Equity Liabilities Specific rules double entry method Income Statement: Economic situation of the company at the end of the year New Income Statement every year Minimum content double entry method Cash flow statement Financial flows at the end of the year Support information contained in the BS and IS Any standardized model 36