FIN315 8-15

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NOTES: - What is finance? How to manage your money/wealth so that you can sustain your lifestyle. (Personal finance perspective) They have something to start with. - Business perspective how firms raise money from investors, how they raise money to earn a profit. You don't really start from anything, have to start from scratch. - involves the tasks of financial manager in a business. - What is a firm? a business organization that sells goods or services. You can hire people and have more resources. - Firms exist to decrease risk. - Goal of a firm? Main goal is to maximize the wealth of the firm's owners, which is equivalent to maximizing stock price. - A firm can sell stock and maximize profit to help run the business. They want the stock price to keep rising. In order for this to happen the firm needs to continue high business so people will still be involved with them. - Social responsibilities stakeholder theory: means a firm has best interest at heart for ALL those with a stake in the firm/ everyone involved. - When people realize social responsibilities are important or not important, the manager will need to go along with whatever they want to appeal with them. - Social responsibilities and the primary goal of the firm (maximize profit for owners) does not necessarily conflict with each other. - Managing a firm: o Managerial Finance Function Financial Managers' Key Decisions Investment o Capital Budgeting Decisions Financing Decisions o Capital Structure Decisions The money that firms raise to finance their activities. - keeping enough cash on hand for the customers. o Working Capital Decisions Decisions that refer to the management of a firm's short-term resources. - Debt financing- Firm loaning money from bank/ bank does not become owner. You are borrowing money. - Equity Financing- firm sells new stocks to new master's so that they receive additional cash. The firms give shares ("ownership") therefore, they are owned. Those new people now have a say in your company. Balance Sheet both sides are BALANCED! What you spend on investors will determine how you get your assets.
- Current Assets, Fixed Assets : Making Investment Decisions. What the firm is holding to keep the business going - Current Liabilities, Long-Term Funds : Making Financial Decisions. The money the firm raised in order to get the assets. Long-term Funds- break off into long-term liabilities and equity. Finance- how much cash you have to keep your firm going Accounting- has distinct rules. Accrual Basis (Accounting view)- they will recognize money if document is signed. Although money is not received yet, it is a legal document and you recognize you WILL receive that money as income. Doesn't have to be in cash, that's why its accrual. For costs (expenses), it is recognized when incurred, even if no cash is spent right away (ex. Depreciation expense) Cash Basis (Finance View) Recognizes revenue and expenses ONLY with respect to actual inflow and outflow of cash. They do not wait, they go ahead and take it out or add it in as time goes. - Finance people care more about cash Marginal cost benefit analysis- what you have to give and what you have to pay. What you gave up in order to get something. 8/17/23 Organizational forms: - Sole proprietorship o For a single person for their own profit o Unlimited liability- Creditors can make claims against owners personal assets (if you owe) - Partnership o Owned by a couple of people o Need agreements on how their ownership is defined (Articles of Partnership) o Subject to unlimited liability - Corporations o Bigger firms are set as operations o Has it's own legal identity, while the owner has its own o Limited liability- debtholders can make claims against the firm's assets, not the owner 8/22/23 Current assets cash, marketable securities, accounts receivables, inventory Quick (acid test) ratio= (current assets - inventory) / current liabilities. Current assets / current liabilities Inventory turnover= COGS / inventory measures activity (or liquidity) of a firm's inventory - Low turnover can be bad for company. Always higher isn't always better though
Average age of inventory = 365 / inventory turnover number of days for inventory to turn into sales Chapter 4: Depreciation - a portion of the costs of fixed assets charged against annual revenues over time - Firm doesn't pay depreciation - Financial managers care about cash - Modified Accelerated Cost Recovery System (MACRS) o Used to determine the depreciation of assets for tax purposes o Prior to Tax Cuts and Job Acts of 2017, firms were required to depreciate using this o New law allows firms to immediately deduct 100% of the cost of many (not all) types of new assets o Immediate deductions will be phased out gradually over several years, down to 80% in 2023 and eventually go back to normal (0%) in 2027. - For financial reporting purposes- companies use different depreciation methods. Major components of Statement of Cash Flows (3): 1. Cash Flow from Operating Activity - Cash flows directly related to sale and production of the firm's products and services - Ex. Buy inventory, raw materials, allow customers to pay later (payable) 2. Cash Flow from Investment Activities - Cash flows associated with purchase and sale of both fixed assets and equity investments in other firms. Buying to selling fixed assets - Ex. Having machines/equipment/buildings ready 3. Cash Flow from Financing Activities - Result from debt and equity financing transactions - When you start a firm, you need the money first. - Ex. You need to sell stuff to shareholders as equity or get a loan from the bank. Incurrence, repayment of debt, cash inflows from sale of stock, cash outflows to repurchase stock or pay cash dividends. Measuring the Firms Cash Flow - The goal: understand how much cash the firm earns and spends in a year - Starting Point: Net Profits after Taxes (earnings firm makes during the year/ isn't necessarily all cash, can be receivables as well/ will need adjustments) 1 st adjustment Assets Liabilities Increase Cash outflow Cash inflow Decrease Cash inflow Cash outflow
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