Capital budgeting describes the process of making and managing expenditures on long-lived assets. Capital structure represents the proportions of the firm’s financing from current and long-term debt and equity. Net working capital is defined as current assets minus current liabilities. Short-term cash flow problems come from the mismatching of cash inflows and outflows. This is the subject of short-term finance. The Financial Manager: The treasurer is responsible for handling cash flows, managing capital expenditure decisions, and making financial plans.
The controller handles the accounting function, which includes taxes, cost and financial accounting, and information systems. 1. 2 The Corporate Firm The Sole proprietorship 1. The cheapest business to form. No formal charter is required. Few government regulations. 2. Pays no corporate income taxes. All profits are taxed as individual income. 3. Unlimited liability. No distinction is made between personal and business assets. 4. The life of the sole proprietorship is limited by the life of the sole proprietor. 5. The equity money is limited to the proprietor’s personal wealth. The Partnership 1.
Partnerships are usually inexpensive and easy to form. 2. Unlimited liability for general partnerships but usually limited liability for limited partners. 3. Terminated when a general partner dies or withdraws (but this is not so for a limited partner).
The Essay on Limited Liability Partnership (LLP)
Fred and Ginger are general partners in a business. They decide to purchase a building for the partnership. Ginger will put up the money for the building, and Fred will complete the remodeling. While inspecting the building, Fred is informed that the building is packed full of asbestos. He fails to tell Ginger of the presence of the substance. They buy the building and go into business. During the ...
4. Difficult to raise large amounts of cash. Equity contributions are usually limited to a partner’s ability and desire to contribute to the partnership. 5. Income from a partnership is taxed as personal income to the partners. 6. Management control resides with the general partners. The main advantage to a sole proprietorship or partnership is the cost of getting started.
Afterward, the disadvantages are unlimited liability, limited life of the enterprise, and difficulty of transferring ownership. These three disadvantages lead to (4) difficulty in raising cash. The Corporation 1. No limit to the transferability of ownership (shares of stock).
Unlimited life. The shareholders’ liability is limited to the amount invested in the ownership shares. The major advantages of the corporate form of business organization are Limited liability, ease of ownership transfer, and perpetual succession. These give the corporation an enhanced ability to raise cash.
However, one great disadvantage to incorporation is double taxation for shareholders. The federal government taxes corporate income in addition to the personal income tax that shareholders pay on dividend income. 1. 3 The Importance of Cash Flows The firm should 1. Try to buy assets that generate more cash than they cost. 2. Sell bonds and stocks and other financial instruments that raise more cash than they cost. Identification of Cash Flows – (1) Accounting Profit versus Cash Flows, (2) Timing of Cash Flows, (3) Risk of Cash Flows 1. 4 The Goal of Financial Management
The goal of financial management is to maximize the current value per share of the existing stock. Maximize the value of the existing owners’ equity. 1. 5 The Agency Problem and Control of the Corporation Agency problem is the possibility of a conflict of interest between the principal and the agent causing agency cost. Managerial Compensation is usually tied to financial performance in general and often to share value in particular. For example, managers are frequently given the option to buy stock at a bargain price. Control of the firm ultimately rests with stockholders.
The Term Paper on Cash Flow Income Accounting Value
Accounting In Perfect And Complete Markets Essay, Accounting In Perfect And Complete Markets Accounting in Perfect and Complete Markets Introduction This note represents a preliminary step in the study of accounting. Accounting serves many purposes, and it is not easy to decide where to begin; we begin by exploring the relationship between accounting numbers and the value of a firm and its assets. ...
They elect the board of directors, who, in turn, hire and fire management. Stakeholders are who other than a stockholder or creditor who potentially has a claim on the cash flows of the firm. Such groups will also attempt to exert control over the firm, perhaps to the detriment of the owners. 1. 6 Regulation Companies are required disclose all relevant information to investors and potential investors. Disclosure of relevant information by corporations is intended to put all investors on a level information playing field and, thereby to reduce conflicts of interest.
