Economics of enterprises

Financial results of economic activity (revenue and profit)
Effectiveness and Financial diagnostics
Lecture 8
Results and effectiveness
of economic activity

to read
in Ukrainian
Економіка підприємства./ За заг. ред. С.Ф. Покропивного – К.: КНЕУ, 2001. – 528 с.
Економіка підприємства./ За ред. Шегди А.В. – К.: Знання, 2006. – 614 с.
Accounting standard # 3 “Financial results”
in English
http://en.wikipedia.org/wiki/Revenue
http://en.wikipedia.org/wiki/Profit_%28accounting%29
http://en.wikipedia.org/wiki/Income
http://en.wikipedia.org/wiki/Financial_ratio
http://en.wikipedia.org/wiki/Income_statement

Financial results of economic activity.
Part 1 Revenue
Revenue
is the amount of money a company receives in exchange for its goods and services.
is usually listed on the first line of the income statement as revenue, sales, net sales or net revenue.
"Other Revenue" is money a company receives for activities that are not related to its original business.
For example, if a clothing store sells some of its merchandise, that amount is listed under revenue. However, if the store rents a building or leases some machinery, the money received is filed under "other revenue."

Part 2. Profit
Profit
is that money that your business retains after all expenses have been paid and accounts have been settled.
is financial benefit that is realized when the amount of revenue gained from a business activity exceeds the expenses, costs and taxes needed to sustain the activity.
Calculated as:
PROFIT = TOTAL SALES less TOTAL COSTS

Part 2. Profit

Profit formation (Ukrainian Accounting Standards)
Revenue
- VAT
- Excise duty
= Net revenue
- Production costs
= Gross profit

Profit formation (Ukrainian Accounting Standards)
Gross profit
+ other operating revenues
- administrative expenses
- selling expenses
- other operating expenses
= Financial results of operation activity

Profit formation (Ukrainian Accounting Standards)
Financial results of operation activity
+ yield on capital
+ other financial incomes
+ other incomes
- financial losses
- capital losses
- other losses
= Financial results of main activity before taxation

Profit formation (Ukrainian Accounting Standards)
Financial results of main activity before taxation
- income tax
= Financial results of main activity
+/- extraordinary incomes or losses
- taxation of extraordinary incomes
= Net profit / losses

Gross profit equals sales revenue minus costs of good sold (COGS).
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) equals sales revenue minus cost of goods sold and all expenses except for interest, amortization, depreciation and taxes.
Earnings Before Interest and Taxes (EBIT) or Operating profit equals sales revenue minus cost of goods sold and all expenses except for interest and taxes. It is also known as Operating Profit Before Interest and Taxes (OPBIT) or simply Profit Before Interest and Taxes (PBIT).

Earnings Before Tax (EBT) or Net Profit Before Tax equals sales revenue minus cost of goods sold and all expenses except for taxes. It is also known as pre-tax book income (PTBI), net operating income before taxes or simply pre-tax Income.
Earnings After Tax or Net Profit After Tax or Net Income equals sales revenue after deducting all expenses, including taxes.
Income before extraordinary expenses represents the same but before adjusting for extraordinary items.
Earnings After Tax (or Net Profit After Tax) minus payable dividends becomes Retained Earnings.

Functions of profit
Evaluation – characterizes effect of economic activity
Distribution – distribution of income between company and budget
Promotional – a source for promotion
Reproductive – a source for extended reproduction of capital and circulating assets

What influences profit?
Changes in
sales
structure of assortment
prices of goods
prices of raw materials
level of inputs of material and labour resources

2. Financial diagnostics
Economic diagnostics – analysis and evaluation of results of activity of the enterprise based on study of individual results and incomplete information with the purpose of exploration of possible perspectives of development and consequences of current management decisions

Effective economic activity
Enterprise utilizes existing assets effectively
Enterprise pays off its debts in time
Enterprise is profitable

Financial diagnostics (1)
Full-scale financial analysis of results of economic activity of the enterprise
Horizontal – by years
Vertical – internal structure
Financial ratios

Forms of financial statements
balance sheet
income (financial results) statement
cash flow statement
equity capital statement
notes on annual financial accounts

Financial ratios
Operational analysis
Analysis of operational expenses
Analysis of assets management Liquidity analysis
Analysis of long-term solvency
Profitability analysis

Profitability ratios
Gross Profit Margin=
Return on Sales =
Net Profit Margin =

Profitability ratios
Return on equity (ROE) =
Return on assets (ROA) =
Return on capital (ROC)=