VIII.

FINANCIAL MANAGEMENT

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 FINANCIAL MANAGEMENT

“IT TAKES MONEY TO MAKE MONEY” .

“CAPITAL” MEANS THE CASH MONEY AND CREDIT

REQUIRED TO START AND OPERATE A BUSINESS.

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 FINANCIAL MANAGEMENT
TYPES OF CAPITAL :
EQUITY CAPITAL :CAPITAL RAISED FROM THE OWNERS OF
THE BUSINESS.

BORROWED CAPITAL :CAPITAL OBTAINED FROM OUTSIDE

SOURCES TO PAY BACK WITH AN INTEREST AT SOME FUTURE DATE.
FIXED CAPITAL :ASSETS LIKE BUILDINGS, MACHINERY,
ETC.

WORKING CAPITAL : FUNDS TO COVER THE PURCHASE OF

(İşletme sermayesi) MATERIAL, PAYMENT OF WAGES etc.
BETWEEN SALES OF PRODUCTS

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 FINANCIAL MANAGEMENT

FINANCIAL MANAGEMENT INVOLVES TWO PRIMARY

FUNCTIONS IN COMPANIES :
1. RECORDING, MONITORING, CONTROLLING AND PRESENTING
OF FINANCIAL CONSEQUENCES OF PAST AND CURRENT
OPERATIONS. (mevcut ve geçmişteki operasyonların finansal sonuçlarının
sunulması, kontrol edilmesi, ve monitör edilmesi )

2. ACQUIRING FUNDS TO MEET CURRENT AND FUTURE NEEDS.

(Mevcut ve gelecekteki ihtiyaçları karşılamak için kaynak yaratmak)

THE FIRST ACTIVITY IS CALLED ACCOUNTING (muhasebe) AND

THE SECOND ACTIVITY IS CALLED FINANCE MANAGEMENT
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 ACCOUNTING

1. ACCOUNTING :

ACCOUNTING IS A COMPREHENSIVE SYSTEM FOR

COLLECTING, ANALYZING AND COMMUNICATING FINANCIAL
INFORMATION.
(Muhasebe, finansal bilginin toplanması, analiz edilmesi ve paylaşılması için kurulmuş
kapsamlı bir sistemdir)

IT IS BASED ON RECORD KEEPING OF FINANCIAL

OUTCOMES OF BUSINESS TRANSACTIONS.
[Ticari işlemlerin) finansal sonuçlarının kayıt altına alınması şeklinde uygulanır.]

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 ACCOUNTING

THE PRIMARY PURPOSES OF ACCOUNTING ARE :

– TO SUMMARIZE THE RESULTS OF A FIRM’S TRANSACTIONS
(ticari işlemleri) AND

– TO PREPARE MANAGEMENT REPORTS AND ACCOUNTING

STATEMENTS (muhasebe beyanları)

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 ACCOUNTING

ALTHOUGH IT IS NOT NECESSARY TO KNOW THE DETAILS

INVOLVED IN ACCOUNTING,
A KNOWLEDGE OF BASIC PRINCIPLES IS AN INVALUABLE
AID TO THE ENGINEERS.

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 ACCOUNTING
BUSINESS
TRANSACTIONS

JOURNAL

LEDGER

INCOME STATEMENT BALANCE SHEET

JOURNAL (defter) IS A BOOK IN WHICH THE ORIGINAL RECORD OF

TRANSACTIONS (ticari işlemler) ARE LISTED DAILY.

LEDGER (defterikebir) IS A GROUP OF ACCOUNTS GIVING CONDENSED

AND CLASSIFIED INFORMATION FROM THE JOURNAL
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 ACCOUNTING
29 eylülde Perfect Posters Firması Eye Poppers Perfect Posters Firması Journal’i,
Firmasına bir ürün satmış ve karşılığında 245 245$’lık çek 3 Ekimde tahsil edilmiş.
$’lık çek almış RECORD IN JOURNAL
RECORD

GİREN ÇIKAN

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 ACCOUNTING

GİREN ÇIKAN GİREN ÇIKAN

GİRİŞLER ÇIKIŞLAR GİRİŞLER ÇIKIŞLAR

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 ACCOUNTING

IN A MANUFACTURING CONCERN ACCOUNTING ACTIVITIES

ARE DIVIDED INTO TWO PARTS :
1. FINANCIAL ACCOUNTING WHICH IS

“RECORDING HISTORICAL FINANCIAL DATA AND

SUMMARISING THEM PERIODICALLY TO EXTERNAL USERS
(SHAREHOLDERS AND GENERAL PUBLIC) ”.

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 ACCOUNTING

2. COST ACCOUNTING (maliyet muhasebesi) WHICH IS

“GENERATING REPORTS TO SHOW THE PERFORMANCES

OF INDIVIDUAL PRODUCTS, INDIVIDUAL DEPARTMENTS OR
SHOPS TO THE INTERNAL USERS OF THE ORGANIZATION”.

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 ACCOUNTING

– FINANCIAL ACCOUNTING IS “HISTORICAL” IN NATURE

– COST ACCOUNTING IS “FORWARD LOOKING” IN

NATURE

FINANCE DEPARTMENTS USUALLY HAVE TWO SEPARATE

DEPARTMENTS FOR THESE ACTIVITIES.

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 ACCOUNTING

1.1. FINANCIAL ACCOUNTING

FINANCIAL ACCOUNTING ,

DEALS WITH THE BUSINESS AS A WHOLE AND

DOES NOT PROVIDE INFORMATION BASED ON

DEPARTMENTS OR PRODUCTS.

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 ACCOUNTING

FA PRACTICES ARE REGULATED.

IN THIS WAY USERS

CAN COMPARE INFORMATION FROM DIFFERENT

COMPANIES OR FROM THE SAME COMPANY AT DIFFERENT
TIMES.

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 ACCOUNTING

AT THE END OF A DESIGNATED ACCOUNTING PERIOD, FA

DEPARTMENTS PRODUCE 2 FINANCIAL STATEMENTS :
– BALANCE SHEETS (BİLANÇO) TO SHOW CURRENT FINANCIAL
STATUS OF THE BUSINESS,

and

– PROFIT AND LOSS (INCOME) STATEMENTS (GELİR TABLOSU) TO

SHOW THE AMOUNT OF PROFIT OR LOSS INCURRED
DURING THE PERIOD IN QUESTION.

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 ACCOUNTING

THEY ARE OF INTEREST TO THE

MANAGERS,
OWNERS,
CREDITORS,
EMPLOYEES AND
TO ALMOST ANYONE THAT HAS AN INTEREST IN THE
COMPANY.

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 ACCOUNTING

BALANCE SHEET BALANCE SHEET

AS OF 1 APRIL 2004 AS OF 31 MAY 2004

INCOME STATEMENT
FOR THE PERIOD 1 APRIL - 31 MAY 2004

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 ACCOUNTING
1. BALANCE SHEETS :
THE FORMAT OF BALANCE SHEET CONSIST OF A T , WITH THE
ASSETS ON LEFT HAND SIDE, LIABILITIES AND OWNERSHIP AT RIGHT
ASSETS LIABILITIES
OWNERSHIP

ASSETS ARE WHAT THE COMPANY OWNS AS CASH ON HAND,

ACCOUNTS RECEIVABLE, INVENTORIES, INVESTMENTS, LAND,
MACHINERY ETC.

THE RIGHT HAND SIDE CONTAINS OUTSIDERS' (LENDERS + OWNERS)

CLAIMS ON THE ASSETS OF THE ENTITY.

ASSETS = LIABILITIES + EQUITY 19

 ACCOUNTING
ASSETS :
THERE ARE GENERALLY 3 GROUPS OF ASSETS :

1. CURRENT ASSETS : CASH OR CLAIMS ON OUTSIDERS THAT CAN

Cari Aktifler BE CONVERTED TO CASH IN LESS THAN ONE
YEAR.

2. FIXED ASSETS : ITEMS LIKE LAND, BUILDINGS, MACHINERY.

DEPRECIATION IS USED TO SPREAD THE
COST OF AN ASSET OVER THE YEARS OF ITS
USEFUL LIFE

3. INTANGIBLE ASSETS: ITEMS LIKE COPYRIGTHS, PATENTS ETC.

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(Fiziksel olmayan)
 ACCOUNTING
LIABILITIES :
COMMONLY LIABILITIES ARE SHOWN AS “CURRENT” AND
“OTHERS”:
– CURRENT LIABILITIES ARE ACCOUNTS PAYABLE AND
SHORT TERM CREDITS THAT ARE EXPECTED TO BE
DISCHARGED IN LESS THAN A YEAR.
– “OTHERS” ARE LONG TERM LIABILITIES SUCH AS
CREDITS OR BONDS (TAHVİL) NOT DUE WITHIN THE
NEXT FISCAL (mali) YEAR.

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 ACCOUNTING
EQUITY :
IT REPRESENTS THE WORTH OF THE OWNERSHIP OF THE
COMPANY.
AS PROFITS ARE MADE, THEY ARE EITHER PAID AS
DIVIDENTS TO OWNERS OR ALLOWED TO STAY IN THE
BUSINESS.
IN THE LATTER CASE THE EQUITY IS INCREASED JUST AS IF
THE OWNERS HAD INVESTED MORE MONEY.

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 ACCOUNTING
ASSUME COMPANY X FORMED IN JANUARY 1, 2004 WITH 5
MILLION DOLLAR PAID CAPITAL.

BALANCE SHEET, COMPANY X

AS OF JANUARY 1, 2004
CASH : . . . . . . . . $ 5.000.000 CAPITAL : . . . . . . . . . $ 5.000.000

TOTAL ASSETS : $ 5.000.000 TOTAL EQUITIES . . . $ 5.000.000

ASSUME FOLLOWING HAPPENED IN JANUARY FOR COMPANY X :

1. A BUILDING WAS BOUGHT FOR $ 7 MILLION, $ 2 MILLION BY

CASH, $ 5 MILLION BY BANK CREDIT.
2. EQUIPMENT WORTH $ 300.000 ACQUIRED BY CASH.
3. RAW MATERIAL WORTH $ 200.000 BOUGHT BY CREDIT.
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 ACCOUNTING

BALANCE SHEET, COMPANY X

AS OF JANUARY 31, 2004

CASH : $ 2.700.000 ACCOUNT PAYABLE : $ 200.000

INVENTORIES : 200.000 CREDIT : 5.000.000

CURRENT ASSETS : $ 2.900.000 LIABILITES : $ 5.200.000

EQUIPMENT : 300.000
BUILDING : 7.000.000 CAPITAL : 5.000.000

FIXED ASSETS : $ 7.300.000 EQUITIES : $ 5.000.000

TOTAL ASSETS :$ 10.200.000

TOTAL LIABILITIES: $10.200.000

AND EQUITIES

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 ACCOUNTING
2. INCOME STATEMENT
IT IS ALSO CALLED ‘PROFIT AND LOSS STATEMENT’.

THE INCOME STATEMENT SUMMARIZES THE OPERATIONS

OF THE COMPANY FOR A PERIOD OF TIME.

IT COVERS THE TRANSACTIONS OF REVENUES AND

EXPENSES IN A COMPANY DURING A PERIOD.

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 ACCOUNTING

REVENUES CAN BE FROM THE SALE OF PRODUCTS OR

SERVICES, OR FROM OTHER SOURCES.
OTHER SOURCES INCLUDE
– THE SALE OF OLD, USED EQUIPMENT,
– THE SALE OF SCRAP,
– INTEREST GAINED

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 ACCOUNTING
EXPENSES CAN BE IN THE FORM OF
– CASH (PURCHASES OF RAW MATERIAL, LABOR COSTS,
ADMINISTRATIVE COSTS ETC.) AND

– NONCASH (DEPRECIATION) EXPENSES.

OTHER TERMS USED IN INCOME STATEMENTS ARE :

– TAX : INCOME TAX IS A CERTAIN PERCENT OF PROFIT
– DIVIDENDS: PAYMENT TO THE SHAREHOLDERS
– RETAINED INCOME: WHAT STAYS IN THE COMPANY AS A FUND

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 ACCOUNTING
INCOME STATEMENT
REVENUES ……………………. A

WHICH ARE THE SALES, OTHER INCOMES

EXPENSES …………………… B

WHICH ARE THE OPERATING EXPENSES, ADM. COSTS, DEPRECIATION

INCOME BEFORE TAX ……… C = (A-B)

TAX ……………………………… D

NET INCOME OR NET PROFIT AFTER TAX … E = (C-D)

DIVIDENDS …………………….. F (CERTAIN % OF E)
RETAINED INCOME ………….. E-F
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 ACCOUNTING

ASSUME FOLLOWING HAPPENED IN THE COMPANY X IN FEBRUARY :

1. RECEIPT FROM SALES : $ 380.000 2. RAW MATERIAL USED : $ 114.000

3. SALARIES PAID : $ 208.000 4. INTEREST ON MORTGAGE (ipotek) : $ 40.000

INCOME STATEMENT (1-28 FEBRUARY 2004)

REVENUE :
SALES …………………………………………………………………………………………... $ 380.000
EXPENSES :
COST OF GOODS SOLD : $ 114.000
SALARIES : 208.000
INTEREST : 40.000
$ 362.000

INCOME $ 18.000 29
 ACCOUNTING
SO CASH IS : 2.700.000 + [ 380.000 - ( 208.000 + 40.000 ) ] = $ 2.832.000
INVENTORIES IS : 200.000 - 114.000 = $ 86.000
NEW BALANCE SHEET IS :
BALANCE SHEET, COMPANY X
AS OF FEBRUARY 28, 2004

CASH : $ 2.832.000 ACCOUNTS PAYABLE : $ 200.000

INVENTORIES : 86.000 CREDIT : 5.000.000

CURRENT ASSETS : $ 2.918.000 LIABILITES : $ 5.200.000

EQUIPMENT : 300.000 CAPITAL : 5.000.000

BUILDING : 7.000.000 RETAINED INCOME : 18.000

FIXED ASSETS : $ 7.300.000 EQUITIES : $ 5.018.000

TOTAL ASSETS : $ 10.218.000 TOTAL LIAB.+ EQU. : $ 10.218.000

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 ACCOUNTING

ANALYZING FINANCIAL STATEMENTS :

SOME OF THE RELATIONSHIPS FROM THE BALANCE SHEET
and INCOME STATEMENT ARE USED AS
INDICATORS OF FINANCIAL HEALTH AND
GOOD MANAGEMENT.
THEY ARE KNOWN AS “FINANCIAL RATIOS”.

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 ACCOUNTING

MOSTLY USED RATIOS ARE AS FOLLOWS :

 LIQUIDITY RATIOS :

CURRENT ASSETS
CURRENT RATIO =
CURRENT LIABILITIES

CURRENT ASSETS – INVENTORIES

QUICK RATIO (ACID TEST) :
CURRENT LIABILITIES

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 ACCOUNTING
 PROFITABILITY RATIO
NET PROFIT
ON SALES :
SALES
PROFIT AFTER TAXES
ON EQUITY :
EQUITY
 ACTIVITY RATIOS
SALES
ASSETS TURNOVER :
TOTAL ASSETS
SALES
INVENTORY TURNOVER :
INVENTORY
 LEVERAGE RATIOS
TOTAL DEBT
DEBT TO TOTAL ASSETS :
TOTAL ASSETS 33
 ACCOUNTING

BALANCE SHEETS AND INCOME STATEMENTS DO NOT

REVEAL
–HOW PROFITABLE ONE PRODUCT IS VERSUS
ANOTHER, OR
–WHETHER ONE PLANT OR DIVISION PRODUCES MORE
EFFICIENTLY THAN ANOTHER.

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 ACCOUNTING

FOR MANAGEMENT, DETAILS OF EFFICIENCY AND COSTS

ALSO ARE IMPORTANT.

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 ACCOUNTING

MANAGEMENT MUST KNOW AT ANY POINT DURING THE

YEAR “THE APPROXIMATE POSITION OF THE COSTS AND
PROFITS” RELATED TO
– PRODUCTS

– DEPARTMENTS OR SHOPS

– PROJECTS

THIS FUNCTION OF THE COMPANY IS CALLED COST

CONTROL AND IT IS ACHIEVED BY COST ACCOUNTING.

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 ACCOUNTING
2. COST ACCOUNTING
UNLIKE THE FINANCIAL ACCOUNTING COST ACCOUNTING
PRACTICES ARE NOT REGULATED.

COST ACCOUNTING PROVIDES DATA FOR

– COST DETERMINATION,
– COST FOR PRICING AND
– COST FOR MANAGERIAL DECION MAKING.

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 ACCOUNTING

TO ACHIEVE COST CONTROL, COSTS MUST BE BROKEN

DOWN AND RECORDED ON A PER UNIT BASIS .

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 ACCOUNTING
THERE ARE THREE BASIC COST ELEMENTS :
1. DIRECT MATERIAL COST :
IT IS THE COST OF THE MATERIAL DIRECTLY USED IN THE PRODUCT.
2. DIRECT LABOUR COST :
IT IS THE COST OF THE LABOUR DIRECTLY USED IN THE PRODUCT.
3. OVERHEAD :
THESE ARE DEFINED AS ALL MANUFACTURING COSTS OTHER THAN
DIRECT MATERIAL AND DIRECT LABOUR.
(INDIRECT MATERIAL COSTS LIKE CLEANING RAGS, OILS USED FOR
MACHINERY ETC).
(INDIRECT LABOURS LIKE MAINTENANCE, CLEANING, CLERICAL WORK)
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 ACCOUNTING

DIRECT MATERIAL AND DIRECT LABOUR ARE CALCULATED

FROM RECORDS KEPT BY PRODUCTION PEOPLE ON SHOP
FLOOR (üretim holü).
MATERIALS AND LABOUR USED FOR EACH PRODUCTION LOT
(üretim partisi) ARE RECORDED UNDER A WORK/JOB ORDER (iş emri)

NUMBER ISSUED BY THE ACCOUNTANCY DEPARTMENT.

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 ACCOUNTING

TO CALCULATE COSTS PER UNIT, OVERHEAD COST HAVE TO

BE DISTRIBUTED ACCORDING TO A KEY FACTOR TO BE
DETERMINED BY EACH COMPANY.

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 ACCOUNTING
THE TOTAL OVERHEAD COSTS ARE DISTRIBUTED TO EACH
PRODUCT ACCORDING TO A KEY LIKE :
– NUMBER OF EMPLOYEES

– DIRECT LABOUR COST

– DIRECT LABOUR HOURS

– DIRECT MATERIAL COST

– MACHINE HOURS

– FLOOR AREA

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 ACCOUNTING
FOR EXAMPLE :

IF TOTAL OVERHEAD IS $ 20 000, AND

IF WE WANT TO DISTRIBUTE THIS TO PRODUCTS ACCORDING TO

THE DIRECT LABOUR HOURS WHICH IS

400 HOURS FOR PRODUCT A AND

600 HOURS FOR PRODUCT B

THEN THE OVERHEAD COSTS TO EACH PRODUCT SHALL BE

FOR PRODUCT A, 20 000 X(400 / 1000)

FOR PRODUCT B, 20 000 (600 / 1000)

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 ACCOUNTING

THERE ARE DIFFERENT TYPES OF OVERHEAD COSTS :

– MANUFACTURING EXPENSES LIKE RENT, HEAT,
ELECTRICITY, WATER, INDIRECT LABOUR AND MATERIAL
– GENERAL EXPENSES LIKE ENGINEERING, PURCHASING,
DEPRECIATION
– SALES EXPENSES LIKE ADVERTISEMENT, SHIPPING COSTS

WITH THE ADDITION OF THESE, COST TAKES DIFFERENT

NAMES.
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 ACCOUNTING 23.03.2023

INTERRELATION BETWEEN PRODUCT COST COMPONENTS :

Selling Price

Profit
Sales
Expense
General
Expense Total Cost
Manufacturing
Expense Manufacturing
Cost
Factory Cost
Direct
Material Prime Cost

Direct
Labour
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 ECONOMICS OF PRODUCTION
FIXED AND VARIABLE COSTS :

MANUFACTURING COSTS MAY ALSO BE CLASSIFIED AS :

– FIXED COSTS : COSTS INDEPENDENT OF PRODUCTION
QUANTITY, (SET UP COSTS, PROGRAMING AND TOOLING
COSTS.

– VARIABLE COSTS: COSTS THAT VARY WITH THE

PRODUCTION QUANTITY (DIRECT MATERIAL and DIRECT
LABOUR) (MACHINING, INSPECTION, ASSEMBLY, AND
TESTING).

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 ACCOUNTING
THERE ARE GENERALLY TWO COST RECORDING METHODS
USED IN MANUFACTURING COMPANIES :
1. JOB ORDER COST METHOD : COSTS ARE COLLECTED DURING
THE MANUFACTURE OF THE PRODUCTS ACCORDING TO JOB
NUMBERS.

2. THE PROCESS COST METHOD : TOTAL MANUFACTURING COST

IS DIVIDED BY THE TOTAL NUMBER OF UNITS PRODUCED
DURING THAT PERIOD. SUITABLE FOR CONTINUOUS
PRODUCTIONS OF THE SAME PRODUCT (THE FLOUR MILLS,
TEXTILE FACTORIES).
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 ACCOUNTING
BUDGETS :

A BUDGET IS A DETAILED “INSIDE STATEMENT” OF

ESTIMATED RECEIPTS AND EXPENDITURES

FOR A PERIOD OF TIME (USUALLY YEARLY).

BUDGETS ARE ALSO USED IN COST CONTROL PURPOSES

AS A COST ACCOUNTING TOOL (bütçeler maliyet kontrolu için bir maliyet

muhasebesi aracı olarak da kullanılabilir) .

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 ACCOUNTING
BUDGETS ARE USEFUL IN FACILITATING YEARLY PLANNING
OF
– SALES,

– PRODUCTION, and

– EXPENDITURES.

WITHIN COMPANIES.

BUDGET FIGURES ARE COMPARED WITH THE ACTUAL

REALISATIONS OF THE OPERATIONS.

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 ACCOUNTING

BY NOTING WHEN BUDGET VALUES FALL OUTSIDE

BUDGET ESTIMATES ,

– THE CAUSES ARE TRACED DOWN AND

– NECEASSARY CORRECTIVE ACTIONS ARE TAKEN BY

THE MANAGEMENT.

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 ACCOUNTING

THE MAKING OF BUDGETS STARTS WITH AN ESTIMATION OF

SALES FOR THE COMING YEAR.

EXPENSES HAVE TO BE WITHIN LIMITS OF THE SALES

REVENUES.

THERE ARE TWO TYPES OF BUDGETS LIKE

– FIXED

AND

– FLEXIBLE BUDGETS
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 FINANCE MANAGEMENT

FINANCING :

ONE OF THE MOST IMPORTANT FUNCTIONS OF THE

FINANCIAL MANAGEMENT IS

“ACQUIRING FUNDS TO MEET CURRENT AND FUTURE

NEEDS”.

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 FINANCE MANAGEMENT
 SHORT TERM FINANCING :
- TRADE CREDITS : THE USE OF MATERIALS WITHOUT
IMMEDIATELY PAYING FOR THEM
- NOTES : WRITTEN PROMISE TO PAY LATER
- BANK CREDITS : BORROWING FROM BANKS AND PAYING AN
INTEREST
 LONG TERM FINANCING :
- STOCKS : SELLING STOCKS (HISSE SENEDI)
OWNERS GET SHARE FROM PROFIT
- BONDS : SELLING BONDS (TAHVIL) AND AGREEING TO PAY A
FIXED CHARGE ANNUALLY
- PROFIT INVESTED IN CURRENT ASSETS
- SALES OF FIXED ASSETS
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 FINANCE MANAGEMENT

BORROWED FUNDS:
COMPANIES MAY REQUIRE OUTSIDE FUNDS FOR THEIR
INVESTMENTS OR PRODUCTION EXPENSES.
THEY CAN SELL BONDS OR GET CREDITS FROM BANKS
OR OTHER ORGANIZATIONS.
THEY PAY INTEREST FOR THESE LOANS.

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 FINANCE MANAGEMENT

THE BORROWED FUNDS ARE NOT CONSIDERED AS

INCOME (SO ARE NOT TAXED);
WHEN THEY ARE REPAID, THIS IS NOT CONSIDERED
AS AN EXPENSE (NOT INCLUDED IN YOUR COSTS).
BUT THE INTERESTS PAID ARE CONSIDERED AS
EXPENSE.
SO THE REAL COST OF BORROWING FUNDS CAN BE
FOUND BY DEDUCTING THE TAX AMOUNT.

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 FINANCE MANAGEMENT
EXAMPLE:

IF YOU PAY 30% INCOME TAX, WHAT IS THE COST OF

BORROWING $1,000,000 WITH 10% INTEREST RATE?

INTEREST/ YEAR = 0.1 x 1,000,000 = $100,000 / YEAR

YOU CAN INCLUDE THIS $100,000 INTO YOUR EXPENSES, SO

YOUR TAX WILL DECREASE

0.30 x 100,000 = $30,000 / YEAR

COST OF THE FUND = 100,000 – 30,000 = $70,000 / YEAR

OR 7%

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 FINANCE MANAGEMENT

LOAN REPAYMENT:
THE BORROWED FUNDS CAN BE REPAID BY DIFFERENT
METHODS.
THE MOST COMMON TYPE IS BY CONSTANT PERIODIC
PAYMENTS.

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 FINANCE MANAGEMENT

THE TOTAL PERIODIC PAYMENT IS CONSTANT;

BUT SINCE THE PRINCIPLE BALANCE DECREASES,
– THE INTEREST PORTION OF EACH PAYMENT IS SMALLER THAN
THE PREVIOUS ONE

AND

– THE PRINCIPLE PORTION OF EACH PAYMENT IS LARGER THAN

THE PREVIOUS ONE.

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 FINANCE MANAGEMENT

FROM PROJECTS MANAGEMENT WE REMEMBER THE

FOLLOWING FORMULAS FOR SIMPLE AND COMPOUND
INTERESTS :

•SIMPLE INTEREST : S = P (1 + In)

n: NUMBER OF PERIODS , I : INTEREST PER PERIOD

•COMPOUND INTEREST: S = P (1 + I)n

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 FINANCE MANAGEMENT

– IF WE LOANED “P” AMOUNT OF MONEY

– AT AN INTEREST RATE OF “I”

– TO BE PAID BACK IN “n” YEARS

– AT CONSTANT YEARLY INSTALLMENTS OF “R”,

THEN
THE EQUAL AMOUNTS TO BE PAID BACK EACH YEAR WILL
BE :

R = P/ [{(1 + I)n – 1}/ I(1 + I)n ]

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 FINANCE MANAGEMENT
EXAMPLE:

A LOAN OF $100,000 AT AN INTEREST RATE OF 10% PER YEAR IS

MADE FOR A REPAYMENT PERIOD OF 10 YEARS. DETERMINE THE
CONSTANT PAYMENT PER PERIOD FOR ANNUAL, END-OF-THE-YEAR
PAYMENTS.

R = P / [ { (1 + I)n – 1 } / I (1 + I)n ]

= 100,000 / [ { (1+ 0.1)10 -1 } / 0.1 (0.1 +1)10 ]

= 100,000 / [ 1.59 / 0.259 ]

= $16,289 per year

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