tailieunhanh - Lecture Financial reporting for managers: A value-creation perspective - Chapter 1

Chapter 1 value creation, financial statements, and the environment of financial reporting. The following will be discussed in this chapter: Value creation and successful management, stakeholders, measures of value creation, fundamental activities involved in managing a business,. | CHAPTER 1 Value Creation, Financial Statements, and the Environment of Financial Reporting Value Creation and Successful Management Financial reports help a firm’s stake- holders assess the value created by the firm’s managers for its owners. Stakeholders Investors Directors Employees Suppliers Regulators Other interested parties Measures of Value Creation Play an important role in management’s attempts to attract capital. Help indicate the extent to which management’s decisions create value. Encourages management to emphasize in value-creation activities. Fundamental Activities Involved in Managing a Business Operating activities – managing the producing and operating assets Investing activities – acquiring (and disposing) of producing assets Financing activities – raising capital by providing a return to capital providers Value Creation Value creation occurs when Operating and investing activities produce a return for shareholders, and The return exceeds . | CHAPTER 1 Value Creation, Financial Statements, and the Environment of Financial Reporting Value Creation and Successful Management Financial reports help a firm’s stake- holders assess the value created by the firm’s managers for its owners. Stakeholders Investors Directors Employees Suppliers Regulators Other interested parties Measures of Value Creation Play an important role in management’s attempts to attract capital. Help indicate the extent to which management’s decisions create value. Encourages management to emphasize in value-creation activities. Fundamental Activities Involved in Managing a Business Operating activities – managing the producing and operating assets Investing activities – acquiring (and disposing) of producing assets Financing activities – raising capital by providing a return to capital providers Value Creation Value creation occurs when Operating and investing activities produce a return for shareholders, and The return exceeds the cost of financing activities Return on Equity (ROE) Net Income Net Investment Provided by Shareholders where Equity Capital + Retained Earnings - Treasury Stock = Net Investment Cost of Equity Risk free rate of return + Risk premium = Cost of equity The Financial Statements Balance Sheet Income Statement Statement of Shareholders’ Equity Statement of Cash Flows Value Creation Shareholder value is created when, over the life of the enterprise, return on equity exceeds the cost of equity capital. Is ROE > Cost of Equity? Dollar Amount of Shareholder Value Created $ Net Income - $ (Avg. Equity Capital x Cost of Equity Capital) = $ Shareholder Value Created The Economic Context of Financial Reporting Providers of capital - debt and equity investors Reporting entities Corporate governance Financial information users and capital markets Debt covenants and management compensation Financial reporting regulations & standards