Notes of a Third year student studying Bachelors of Accounting at the University of the Free State. With this notes that i have compiled, i was able to proudly say that i received a distinction in Managerial Accounting and Financial Management by using this notes. If you are struggling with Financi...
Unit 1 – Introduction (Chapter 1)
Value:
~ Different from profit (can be manipulated by fair value
adjustments)
~ example shareholder’s value lies in their dividends
Ways to create value:
Increase profit
Increase returns
Increase share price; shareholders wealth
• Process of creating value in the organisation.
Financial management • Process concists of planning, organising, directing and
controlling the financial activities of a business.
Manipulation of profits
Management may be able to increase this year’s profits by reducing such costs as advertising research and
development, and replacement of plant and equipment.
Timing
Profit maximization does not directly factor in time value of money
Cash flows
Profits does not always reflect cash flows
Accounting profits and the cost of capital
Profits do not include an adjustment for the cost of equity financing
Risk
Profit maximization ignores the impact of risk on value
Shareholders want management
Focus of financial management on decision- making
Economic value added (EVA)
Operating profit after tax – cost of finance = EVA
, Roles of financial managers
Investment in operating assets: Finance from capital markets:
# Current assets # Debt
# Non- current assets # Equity
Explores investment Explores financing
opportunities & Financial opportunities &
makes investment makes financing
decisions Manager decisions
Financial Assets: Money markets:
The investment in equity shares, The financial markets for short- term
preference shares and bonds. borrowing and lending, provide short
term liquidity with securities such as
treasury bills, commercial paper and
bankers’ acceptances
Financial management decisions
Capital budgeting: Capital structure:
* Involves acquisition and management of non- current assets * Decisions concern the mix of debt and equity that
* Called capital projects or investments. the business uses to fund its activities
* Managers should only invest in value adding non- current assets. * Management of long- term assets
Working- capital management:
* Refers to short term assets of the firm such as inventory, cash, trade payables (payment terms, get
discount/not) and recievables (Discount, interest payment terms).
* Decisions are based on day- to day management of short term assets and liabilities in the business
, Time value of money
Present Value * the value of any investment Risk and return
* enables us to determine the is determined by future cash
flow and timing of cash
* highter risk = higher
value today pf expected
flows. return
future cash flows.
* Cash sooner than later
No arbitrage principle Efficient markets: Portfolio theory:
* Occurs when we buy and sell * Assume all prices fully * Diversify invetsments
same goods in different reflect all avalable
market to take advantage information
Capital asset pricing
Financial analysis:
* price of asset stated in
* analysis of fin statements
required return of asset
Sole proprietorship (one- person business)
Main characteristics:
• Easy entry into the market
Few legal formalities other than obtaining a trading licence.
• Lifespan of the business is limited to the owner’s lifespan
• The owner is also the manager
• The business is not a separate entity from the owner
Partners is fully liable for all debts and has to pay personal tax on the profits of the business.
, Partnership
Main characteristics:
• Maximum of twenty parties
• Easy entry into the market
Oral agreement between the partners is sufficient to start a partnership, but a partnership
agreement is advisable to avoid misunderstandings & disagreements
• The lifespan of the business is limited
If a partner dies or if a new partner joins, a new agreement must be formed.
• The business is not separate from the partners
Owner is fully liable for all debts and has to pay personal tax on the profits of the business.
• Profits and debts are the liability of the partners in proportion to their contribution to capital
The more a partner contributes to the business, the more profits he receives and the more liable he
is.
Companies
1) Non- profit companies
The company’s name must end with NPC
Must be incorporated by 3 or more persons
Non- profit companies are not required with provisions pertaining to:
• Capitalisation of profit companies
• Securities registration and transfer
• Public offerings of company securities
• Takeovers, offers and fundamental transactions
• Rights of shareholders to approve a business rescue plan.
• Dissenting shareholders’ appraisal rights.
2) For profit companies
Types:
• Private company
→ Name has to end with Pty (Ltd)
→ No limit on the number of members
→ Not a public, state owned or personal liabilities company.
→ MOI prohibits company from offering securities public and restrict the transferability of
shares.
• Personal- liability company
→ Name has to end with Inc
→ Directors and past directors are jointly & severely liable for any debts and liabilities
• Public company
→ Name has to end with Ltd
→ Not a state owned, private or personal liability company
→ Minimum number of members is one (was seven)
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