FIN2601 notes
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Study unit 1
THE ROLE AND ENVIRONMENT OF MANAGERIAL FINANCE
Define the functions of a finance manager
A financial manager actively manages the financial affairs of any type of business, whethe
or nonfinancial, private or public, large or small, profit-seeking or not-for-profit.
Discuss the legal forms of business organisation
Sole Proprietorships
• Owned by one person for own profit.
• Has unlimited liability
Partnerships
• Owned by two or more people and operated for profit
• articlesas
Established by a written contract known of partnership
• All partners have unlimited liability
Corporations
• An artificial being created by law.
• Called alegal
“ entity ,” a corporation has the powers of an individual.
• The owners of a corporation are its stockholders
Other Limited Liability Organisations
• The most popular limited
are partnership (LPs), S Corporations (S corps), limited liability
corporations (LLCs) , andlimited liability partnerships (LLPs).
• Owners enjoy limited liability, and they typically have fewer than 100 owners.
Page1 of30
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Describe the managerial finance function and its relationship to economics and accounting
The size and importance of the managerial finance function depend on the size of the firm
firms, the finance function is generally performed by the accounting department. As a firm
the finance function typically evolves into a separate department linked directly to the com
president or CEO through the chief financial officer (CFO).
Reporting to the CFO are the treasurer and the controller.
Treasurer (the chief financial manager)
Is commonly responsible for handling financial activities, such as:
‒ financial planning and fund raising,
‒ making capital expenditure decisions,
‒ managing cash,
‒ managing credit activities,
‒ managing the pension fund, and
‒ Managing foreign exchange.
External focus
Controller (the chief accountant)
Typically handles the accounting activities, such as
‒ corporate accounting,
‒ tax management,
‒ financial accounting and
‒ Cost accounting.
Internal focus
Relationship to economics
The primary economic principle used in managerial marginal
financecost-benefit
is analysis , the
principle that financial decisions should be made and actions taken only when the added b
exceed the added costs.
Relationship to accounting
There are two basic differences between finance and accounting:
‒ Emphasis on cash flow
‒ Decision making.
Page2 of30
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Emphasis on cash flows
‒ Theaccountant operates on accrual
an basis
‒ Thefinancial manager , operates on a cash basis
Decision making
‒ Accountants collect and present financial data.
‒ Financial managers evaluate the accounting statements, develop additional data, and m
decisions on the basis of their assessment of the associated return and risks.
Explain the goal of the enterprise and finance-related concepts such as corporate governance and
the agency problem
MAXIMISE PROFIT
• Corporations commonly measure profits in terms of earnings per share (EPS).
• Cash flows available to shareholders will be a priority for a firm with a goal of profit
maximisation.
MAXIMISE SHAREHOLDER WEALTH
• The goal of the firm is to maximise the wealth of the owners as evidenced by stock p
• Financial managers should accept only those actions that are expected to increase s
price.
What about stakeholders?
• Stakeholders are groups such as employees, customers, suppliers, creditors, owners
others who have a direct economic link to the firm.
CORPORATE GOVERNANCE
• The system used to direct and control a corporation by defining the rights and
responsibilities of the key corporate participants.
Individual versus institutional investors
• Both individual and institutional investors hold the stock of most companies, but the
institutional investors tend to have much greater influence on corporate governance
individuals.
THE AGENCY ISSUE
An agency problem results when managers, as agents for owners, place personal goals ah
corporate goals.
Page3 of30
, lOMoARcPSD|8641514
http://wikistudent.ws
Study unit 1
THE ROLE AND ENVIRONMENT OF MANAGERIAL FINANCE
Define the functions of a finance manager
A financial manager actively manages the financial affairs of any type of business, whethe
or nonfinancial, private or public, large or small, profit-seeking or not-for-profit.
Discuss the legal forms of business organisation
Sole Proprietorships
• Owned by one person for own profit.
• Has unlimited liability
Partnerships
• Owned by two or more people and operated for profit
• articlesas
Established by a written contract known of partnership
• All partners have unlimited liability
Corporations
• An artificial being created by law.
• Called alegal
“ entity ,” a corporation has the powers of an individual.
• The owners of a corporation are its stockholders
Other Limited Liability Organisations
• The most popular limited
are partnership (LPs), S Corporations (S corps), limited liability
corporations (LLCs) , andlimited liability partnerships (LLPs).
• Owners enjoy limited liability, and they typically have fewer than 100 owners.
Page1 of30
, lOMoARcPSD|8641514
http://wikistudent.ws
Describe the managerial finance function and its relationship to economics and accounting
The size and importance of the managerial finance function depend on the size of the firm
firms, the finance function is generally performed by the accounting department. As a firm
the finance function typically evolves into a separate department linked directly to the com
president or CEO through the chief financial officer (CFO).
Reporting to the CFO are the treasurer and the controller.
Treasurer (the chief financial manager)
Is commonly responsible for handling financial activities, such as:
‒ financial planning and fund raising,
‒ making capital expenditure decisions,
‒ managing cash,
‒ managing credit activities,
‒ managing the pension fund, and
‒ Managing foreign exchange.
External focus
Controller (the chief accountant)
Typically handles the accounting activities, such as
‒ corporate accounting,
‒ tax management,
‒ financial accounting and
‒ Cost accounting.
Internal focus
Relationship to economics
The primary economic principle used in managerial marginal
financecost-benefit
is analysis , the
principle that financial decisions should be made and actions taken only when the added b
exceed the added costs.
Relationship to accounting
There are two basic differences between finance and accounting:
‒ Emphasis on cash flow
‒ Decision making.
Page2 of30
, lOMoARcPSD|8641514
http://wikistudent.ws
Emphasis on cash flows
‒ Theaccountant operates on accrual
an basis
‒ Thefinancial manager , operates on a cash basis
Decision making
‒ Accountants collect and present financial data.
‒ Financial managers evaluate the accounting statements, develop additional data, and m
decisions on the basis of their assessment of the associated return and risks.
Explain the goal of the enterprise and finance-related concepts such as corporate governance and
the agency problem
MAXIMISE PROFIT
• Corporations commonly measure profits in terms of earnings per share (EPS).
• Cash flows available to shareholders will be a priority for a firm with a goal of profit
maximisation.
MAXIMISE SHAREHOLDER WEALTH
• The goal of the firm is to maximise the wealth of the owners as evidenced by stock p
• Financial managers should accept only those actions that are expected to increase s
price.
What about stakeholders?
• Stakeholders are groups such as employees, customers, suppliers, creditors, owners
others who have a direct economic link to the firm.
CORPORATE GOVERNANCE
• The system used to direct and control a corporation by defining the rights and
responsibilities of the key corporate participants.
Individual versus institutional investors
• Both individual and institutional investors hold the stock of most companies, but the
institutional investors tend to have much greater influence on corporate governance
individuals.
THE AGENCY ISSUE
An agency problem results when managers, as agents for owners, place personal goals ah
corporate goals.
Page3 of30
