Dual accounting and finance function, preparation of financial statements

Strategic thinking, job performance, profitability

Budgeting, retirement planning, college planning, day-to-day cash flow issues

true or false: corporate finance, investments, financial institutions, international finance are the basic areas of finance

Work with financial assets such as stocks and bonds

Value of financial assets, risk versus return, and asset allocation

Job opportunities

– Stockbroker or financial advisor

– Portfolio manager

– Security analyst

Companies that specialize in financial matters

– Banks—commercial and investment, credit unions, savings and loans

– Insurance companies

– Brokerage firms

An area of specialization within each of the areas discussed so far

May allow you to work in other countries or at least travel on a regular basis

Need to be familiar with exchange rates and political risk

• Need to understand the customs of other countries; speaking a foreign language fluently is also helpful

true or false: The top financial manager within a firm is usually the Chief Financial Officer (CFO).

true or false: controller the oversees cash management, credit management, capital expenditures, and financial planning

true or false: Controller—oversees taxes, cost accounting, financial accounting, and data processing

Advantages

– Easiest to start

– Least regulated

– Single owner keeps all of the profits

– Taxed once as personal income; Pays no corporate income taxes

Disadvantages

– Limited to the owner’s life span

– Equity capital limited to owner’s personal wealth

– Unlimited liability for debts and obligations

– Difficult to sell ownership interest

Advantages

– Two or more owners

– more capital available

– Relatively easy to start

– Income taxed once as personal income

Disadvantages

– Unlimited liability

– Partnership dissolves when one partner dies or wishes to sell

– Difficult to transfer ownership

All partners are fully responsible for liabilities incurred by the partnership.

– One or more partners can have limited liability, restricted to the amount of capital invested in the partnership.

– There must be at least one general partner with unlimited liability.

– Limited partners cannot participate in the management of the business and their names cannot appear in the name of the firm.

Advantages

– Separation of ownership and management

– Transfer of ownership is easy; Easier to raise capital

– Unlimited life; Limited liability

Disadvantages

– Separation of ownership and management (agency problem)

– Double taxation (income taxed at the corporate rate and then dividends taxed at personal rate, while dividends paid are not tax deductible)

true or false: Conflict of interest between managers and shareholders is the Agency Problems

Principal hires an agent to represent its interests

– Stockholders (principals) hire managers (agents) to run the company.

1. Annual meeting and proxy vote

2. Board monitoring– In theory, SHs control managers by attending the annual meeting, proxy fight, electing the BOD– In practice, you might want to just sell the stock

3. Incentive compensation (executive stock, options)

4. Threat of firing

5. The market for corporate control

6. Debt discipline

7. Regulations

Three ways to transfer capital in the economy:

– Direct transfer

– Indirect transfer using the investment banks

– Indirect transfer using the financial intermediary

Firms seeking funds directly sells its securities to savers(investors) who are willing to purchase them in hopes of learning a large return.

true or false: venture capital is a wealthy private investor who provides capital for a business start-up.

true or false: Venture capitalist: an investment firm (or individual investor) that provides money to business start-ups.

true or false: Funding for such ventures are very risky, but carry the potential for high returns

true or false: a direct transfer Investment bank acts as a link between the firm (needing funds) and the investors (with surplus funds)

– Initial public offering (IPO)

• This is the market in which new issues of a securities are sold to initial buyers. For example, Google raised $1.76 billion through sale of shares to public in August 2004.– Seasoned Equity Offering (SEO)

• It refers to sale of additional shares by a company whose shares are already publicly traded. For example, Google raised $4.18 billion in September 2005.

This is the market in which previously issued securities are traded. The issuing corporation does not get any money for stocks traded on the secondary market.

For example, trading among investors today of Google stocks

This is the market for long-term financial securities (maturity greater than one year)

.– Examples: Corporate bonds, common stocks, Treasury bonds, term loans, and financial leases.

are determined by GAAP

GAAP: Generally Accepted Accounting Principles

-procedures for preparing financial statementsThe values shown on the balance sheet.

true value; the price at which the assets, liabilities, or equity can actually be bought or sold

which one matters the most?

comprise assets that are relatively liquid, or expected to be converted into cash within 12 months.

-Cash

– Accounts Receivable (payments due from customers who buy on credit)

– Inventory (raw materials, work in process, and finished goods held for eventual sale)

– Other assets include items such as prepaid expenses (items paid for in advance), e.g. insurance premium, rent

Include assets that will be used for more than one year. Fixed assets typically include:

– Machinery and equipment, buildings, land

– Example: $20,000 truck over a four-year life`

Assets that are neither current assets nor fixed assets. They may include long-term investments and intangible assets such as patents, copyrights, and goodwill

Assets that are neither current assets nor fixed assets. They may include long-term investments and intangible assets such as patents, copyrights, and goodwill.

Money that has been borrowed from a creditor and must be repaid at some predetermined date.

– Accounts payable (Credit extended by suppliers to a firm when it purchases inventories)

– Accrued expenses (Short-term liabilities incurred in the firm’s operations but not yet paid for)

– Short-term notes (Borrowings from a bank or lending institution due and payable within 12 months)

– Other current liabilities (taxes payable or interest payable)

– Accounts payable (Credit extended by suppliers to a firm when it purchases inventories)

– Accrued expenses (Short-term liabilities incurred in the firm’s operations but not yet paid for)

– Short-term notes (Borrowings from a bank or lending institution due and payable within 12 months)

– Other current liabilities (taxes payable or interest payable)

– Accounts payable (Credit extended by suppliers to a firm when it purchases inventories)

– Accrued expenses (Short-term liabilities incurred in the firm’s operations but not yet paid for)– Short-term notes (Borrowings from a bank or lending institution due and payable within 12 months)

– Other current liabilities (taxes payable or interest payable)

– Par value: A per share amount appearing on stock certificates

– Paid-in-capital: Excess received from shareholders over the par value (or stated value) of the stock issued

– Treasury Stock: Stock that have been repurchased by the company.

Cumulative total of all the net income over the life of the firm, less common stock dividends that have been paid out over the years. Note that retained earnings are not equal to hard cash!

true or false: An indication of “financial risk.” Generally, the higher the ratio, the riskier the firm is, as firms have to pay interest on debt regardless of the earnings or cash flow situation.

Money derived from selling the company’s product or service

cogs

Expenses related to marketing and distributing the product or service, general administrative expenses and depreciation expense

the interest paid to creditors

Amount of taxes owed, based upon taxable income

is the principle of recording revenues when earned and expenses when incurred, rather than when cash is received or paid.

-Creditors

– Suppliers

– Customers

– Stockholders

How the firm’s performance is changing through time

Internal and external uses

Compare to similar companies or within industries

– SIC and NAICS codes