1. Property and capital structure of the firm Each business needs tangible and intangible resources: buildings, machines, material, means of transport, etc., which are together called „properties“ and each item „asset“. To get these properties, each company needs some sources - so called „capital“ (internal or external). Capital resources are called liabilities. One of the main aim of business activities is to keep assets and financial stability, which we understand as an ability to make and to keep a balanced relationship between assets and used capital.

2. Balance sheet - provides information about the enterprise´s financial conditions and operations, - is important for financial analysis and control, - is important for financial analysis and control, - is a financial picture of the enterprise at the close of business on a particular date (end of a month, a quarter, a year).

3. Balance sheet ASSETSLIABILITIES A. Long-term assets A. Internal capital A.a) Long-term intangible assets A.a) Basic capital A.b) Long-term tangible assets A.b) Capital funds A.c) Financial investment A.c) Funds from profit A.d) Economic result B. Current Assets B. External capital (sources) B.a) Inventories B.a) Reserves B.b) Bank accounts B.b) Long-term debts B.c) Cash (money) B.c) Short-term debts B.d) Demands B.d) Bank loans B.e) Short-term stocks and bonds ∑ Total assets = ∑ Total liabilities

4. I. A S S E T S

5. A) Long-term assets In the balance sheet it is called „fixed assets“. It is the equity, which is used in the firm longer than 1 year. There are 3 basic groups: a) intangible, b) tangible, c) financial assets.

6. A.a) Long-term intangible assets - the price of individual asset is higher than 60 000 CZK and the period for using is longer than one year. Examples: things like copyrights, patents, intellectual property, and goodwill, software, technical and other business knowledge …

7. A.b) Long-term tangible assets a)land, buildings, art work, collections b)personal chattels - equipment (machines, means of transport … i. e. moveable assets, when their price is higher than 40 000 CZK and the period of usability is longer than 1 year.) Long term tangible assets are not used at once, but there is some depreciation every year (exceptions are land, art work and collections) and according to this principle is the value of the asset transferred to the costs of the firm.

8. A.c) Financial investment a)Financial participations and shares in other firms, which the company holds longer than 1 year. b) Investment stock and bonds as shares, debt securities, treasury notes, termed deposits with the maturity longer than 1 year. c) Given loans with the maturity longer than 1 year.

9. Valuation of long-term properties a) Purchase price = price of acquisition + costs connected with the acquisition, b) Prime costs – for the assets, made in own activity c) Price of procurement – the price for the financial assets d) Replacement price – price for gifts, presents – valuation of these things by expert Entrance price is:

10. Depreciation in Czech accounting The allocation of the cost of an asset over a period of time for accounting and tax purposes. The allocation of the cost of an asset over a period of time for accounting and tax purposes.allocationassetaccountingtaxallocationassetaccountingtax Assets over a purchase price of CZK 40 000 cannot be directly expensed and must be depreciated. The annual depreciation rate allowed by law is tax deductible. Assets over a purchase price of CZK 40 000 cannot be directly expensed and must be depreciated. The annual depreciation rate allowed by law is tax deductible.

11. The Czech Income Taxes Act includes a definition of tangible fixed assets and the Czech Accounting Act defines intangible fixed assets. Tangibles are those assets whose input price is over CZK 40 000 and whose expected operational and technical life exceeds 1 year (buildings, moveable assets). Tangible fixed assets are divided into „6“ categories for depreciation purposes. Intangible assets comprise industrial know-how and copyrights, software, technical and other business knowledge, etc.

12. Depreciation categories Depreciation category Minimum depreciation period (in years) 1 buses, computers and office equipment, measuring and control devices, etc. 3 1a motor vehicles (except motocycles), road motor vehicles of category N1 4 2 machinery and equipment, lorries, tractors, objects of indrustrial property, ownership rights and technical know-how 5 3 metal structures, motors, metal products, machinery and equipment for the metal industry, ships, lifts, electric engines, etc. 10 4 gas and oil pipe-lines, water mains, pillars, chimneys 20 5 buildings, bridges, roads, tunnels, water works, cableways 30 6 buildings of hotels, museums, stores, libraries, schools 50

13. Depreciation of long-term tangible properties (assets) 1)Accounting depreciation – about this depreciation can decide the firm itself,considering the depreciation of the asset during the common using according to time or performance. 2)Tax depreciation – maximum amount of depreciation, given by the Law of Income Tax. There are 2 possibilities – equal depreciation – straight line method for each year or faster depreciation – accelerated tax depreciation.

14. Methods of depreciation For tangible assets a company can use:  straight-line depreciation  accelerated tax depreciation

15. a) Straight line depreciation ANNUAL DEPRECIATION RATE (%) ANNUAL DEPRECIATION = PURCHASE PRICE * 100

16. Depreciation rate/year Depreciation Categories Straight-line depreciation Annual Depreciation Rates (%) first yearsubsequent years for increased purchase price 1 1a 20 14.2 40 28.6 33.3 25.0 21122.2520 35.510.510 42.155.155 51.41.43.43.43.43.4 61.022.022

17. b) Accelerated depreciation The accelerated depreciation method applies a series of “coefficients” to the purchase price of the asset. The depreciation is calculated as follows: in the first year the depreciation is the purchase price divided by the coefficient, in subsequent years the depreciation is twice the residual value, divided by the appropriate coefficient less the number of years for which depreciation has been claimed.

18. Depreciation Accelerated Depreciation Accelerated depreciation methods are popular for writing-off equipment that might be replaced before the end of its useful life since the equipment might be obsolete (e.g. computers). An accelerated depreciation is a method, which allows faster write-offs than the straight line method.depreciation

19. Coeficients for accelerated depreciation Depreciation Categories Accelerated depreciation Coefficients for accelerated depreciation K first year (K1) subsequent years (K2) for increased purchase price (K3) 1 1a 3434 4545 3434 2565 3101010101010 4202120 5303130 65051515050

20. Accelerated depreciation Note: Annual depreciation = 2 * (purchase price – depreciations) / K2 – (N-1) PURCHASE PRICE ANNUAL DEPRECIATION (1 ST YEAR) = K1 2 * RESIDUAL VALUE ANNUAL DEPRECIATION = K2 – (N – 1)

21. Rules for depreciation - Amounts of computed depreciation shall be rounded up to the next whole Czech crown. - Once the subject has elected to use a method for a particular asset this method may not be changed during the useful life of such asset. - Sum of depreciations (acummulated depreciation) = on the left side of the balance sheet with negative mark - We make depreciations until 100 % of the purchase price. There are not depreciated: land, art work and collection.

22. Technical appreciation Examples: expenses to building corrections and extensions, reconstruction and modernization of the property, additional equipment of cars … and its price is higher than 40 000 CZK per annum. Reconstruction – the consequence of them is a change of the purpose or a change of the technical parameters. Modernization – is an enlargement of facilities or usebility of the property. Technical appreciation increases the entrance price, let us say residual value of the property and it must be depreciated.

23. B) Current Assets It is an asset, which form changes in other form: MONEY → MATERIAL → UNFINISHED PRODUCTION → FINISHED PRODUCTION → BANK ACCOUNTS → MONEY In the firm, there are two basic forms of assets: a) Material form (inventories), b) Form of money (bank accounts, cash (money), short- term stocks and bonds, demands).

24. B.a) Inventories Inventory 1) Purchased Inventory I. Purchased material a) raw material (basic material), b) spare parts, c) wrappings. II. Stocked material (goods) Inventory 2) Inventory of self-production a) unfinished production, b) half-finished products of self-production, c) finished production, d) animals.

25. Valuation of inventories Stock (inventory) is valued at cost for raw materials and goods purchased for resale. Cost includes expenses incurred to bring the goods to their present state and location, i.e. costs include freight and customs duties where applicable. Czech legislation specifically provides these methods: 1) weighted arithmetical average of purchase prices 2) FIFO methods to valuate stock but 3) LIFO 4) replacement-cost method cannot be used.

26. Valuation of inventories 1)Method FIFO – ( first in, first out) – material, which came to the stock as first, leaves as first and is valueted by the price of the oldest material. 2)Method LIFO – a method of valuing your inventory that assumes any inventory you sold was from the last inventory you purchased (= last in, first out). It is prohibited in the Czech Republic. 3) Weighted arithmetical average of purchase prices – under the weighted average approach, both inventory and the cost of goods sold are based upon the average cost of all units bought during the period.

27. Example of 1 - Principle of FIFO method: Date Movement in the stock Kilograms Price CZK/Kilogram 2. 3. material entry 10015 8. 3. material entry 30012 14.3. 20016 17.3.issue130? Valuation of issue on 17. 3.: (100 x 15) + (30 x 12) = 1 860 Kč

28. Date Movement in the stock Kilo grams Price CZK/Kilo gram Value of the store Average price CZK/Kilogram 2. 3. material entry 10015 1 500 15,00 8. 3. material entry 30012 ( 300 * 12 + 1 500) = 5 100 (5 100/ 100+300) = 12,75 14.3. material entry 20016 8 300 13,83 17.3.issue13013,83 (8 300 – 1 798) = 6 502 13,83 Valuation of issue on 17. 3.: 130 x 13,83 ≈ 1 798 Kč Example of 3 - Principle of Weighted arithmetical average of purchase prices:

29. B. b - e) Forms of money current assets b) Bank accounts c) Cash (money in cash desk) d) Demands (outstanding debts of our customers) e) Short-term stocks and bonds

30. II. L I A B I L I T I E S

31. Capital structure It is a structure of sources of which the enterprise´s property originated. According to the origin of the source we distinguish internal and external capital. The total amount of business capital depends on: size of the enterprise, level of mechanization, automatization and robotization, speed of capital´s turn-over, organization of the sales department. The firm should have just as much capital as it needs. If it has more capital, it is overcapitalized (it does not bring the sufficient rate of return), and vice versa – if it has less capital, it is undercapitalized (some faults may occur in the enterprise run).

32. A) Internal capital It belongs to the firm´s owners. Its share on the total business capital is an indicator of financial certainty (independence) of the enterprise. It consists of these parts: a) basic capital, b) capital funds, c) funds from profit, d) economic result.

33. A.a) Basic capital Ltd., joint-stock company and cooperative must duly create it: - in Ltd. and in cooperative it includes deposits of partners; - in joint-stock company it is a summary of nominal values of issued stocks. min. 200 000 CZK, each partner min. 20 000 CZK Ltd.: min. 200 000 CZK, each partner min. 20 000 CZK min. 2 000 000 CZK without tender of stocks, min. 20 000 000 CZK with tender of stocks Joint-stock company: min. 2 000 000 CZK without tender of stocks, min. 20 000 000 CZK with tender of stocks min. 50 000 CZK Cooperative: min. 50 000 CZK

34. A.b) Capital funds These funds represents „external capital“ (for example – from gifts, grants on acquisition of firm´s property …), which does not have a character of external capital! The most significant item is a share premium (= emissive agio) – it is a positive difference between an emissive course of shares and a nominal value of shares.

35. A.c) Funds from profit They are created: - directly from the law (lawful reserve fund, indivisible fund), or - on the base of self decision (e. g. social fund, fund of awards, etc.) Reserve fund is duly created in Ltd. and in joint-stock company, it is created from the net profit (= profit after taxation) and it is possible to use it only to cover the company´s loss. An indivisible fund performs then the analogical function in the cooperative.

36. A.d) Economic result a) Economic result of current accounting period - a profit or a loss. b) Retained profit of last years - it represents the part of profit which was not divided into the funds or that was not paid out in the form of dividends and it is taken over to another period. c) Outstanding loss of last years - a loss, that was not covered from the reserve fund.

37. B) External (capital) sources External capital represents the debts, that must be liquidated in a certain period. According to the term of expiration we distinguish short-term and long-term external sources. Structure of external sources: a) reserves, b) long-term debts, c) short-term debts, d) bank loans.

38. B.a) Reserves - they serve to cover possible risks (e. g. exchange rate loss) and future expenses (e. g. reparations of tangible assets).

39. B.b) Long – term debts = debts with the term of expiration longer than 1 year - they serve to the financing of long-term assets (issued business bonds, bills of exchange and long-term received advances).

40. B.c) Short – term debts = debts with the term of expiration shorter than 1 year - they serve to the financing of a current company´s run. - we talk about: - supplier credits, - advances received from customers, - accounts payable towards employees, instituions of social security and state (outstanding taxes) …

41. B.d) Bank loans - long-term (term of expiration > 1 year), e. g. investment credit - short-term (term of expiration < 1 year), e. g. operation credit

42. Optimal capital structure = > rate of indebtedness Optimal capital structure of a company = searching of minimum of WACC – Weighted Average Costs on Capital

43. Average costs on capital WACC – weighted average costs on total capital (%) k i – costs on external capital before taxation of a profit (%) T – rate of profit´s taxation (decimal number) k e – costs on internal capital after taxation of a profit (%) B – market value of external capital in CZK V = B + S – total business capital in CZK S – market value of internal capital in CZK

44. Theory of U - curve 30 28 26 24 22 20 18 16 14 12 10 8 6 4 2 0 0 20304050607080 Weighted Average Costs on Capital = WACC indebtedness (%) costs on capital (%) OPTIMUM costs on internal capital k e costs on external capital k i