Balance Sheet - answer✔a specific point in time
Assets = Liabilities + Stockholder's Equity
goes from more liquid assets to less liquid assets (short term to long term)
Long term = investments like property, plant and equipment
3 important questions asked in finance - answer✔What should I invest in? = capital budgeting
Where will we get the long-term financing to pay for the investment? = capital structure (debt
vs equity)
How do we operate day to day? = working capital management
Treasurer - answer✔oversees cash management, credit management, capital expenditures and
financial planning
Controller - answer✔oversees taxes, cost accounting, financial accounting and data processing
How should the firm raise funds for the selected investments? - answer✔current liabilities, long
term debt, shareholder's equity (or Net Position)
A company/firm makes money by issuing bonds (loans) or shares or long term debt (debt vs
equity)
Financial markets - answer✔-grow out of need to allocate money from savers to borrowers
(relies on people with extra cash to invest in bonds or stocks)
-allocation through financial markets should be low cost and convenient
-provide the highest level of satisfaction to market participants on a whole
Firm vs financial markets (global) - answer✔Firms generate cash flow and want to be a cash
generating activity.
-Firms exist inside financial markets, with cash flows going to and from the firm and other
market participants
Financial markets provide capital to firms.
The cash flows from the firm must exceed the cash flows from the financial markets.
long-term (fixed) assets - answer✔-are good for long term investments
3 majors forms of business organizations - answer✔Sole proprietorship, partnership and
corporation
Sole Proprietorship - answer✔Advantages:
•Easiest to start
•Least regulated
•Single owner keeps all the profits
•Taxed once as personal income
Disadvantages:
•Limited to life of owner
•Equity capital limited to owner's personal wealth
•Unlimited liability
•Difficult to sell ownership interest
Partnership - answer✔Advantages:
•Two or more owners
•More capital available
•Relatively easy to start
•Income taxed once as personal income
Disadvantages:
•Unlimited liability
•General partnership
•Limited partnership
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