Chapter 1: An Overview of Financial Management and the Financial Environment
Finance is the cash flows between capital markets and a company's operations. The flow includes cash raised when a firm sells financial assets in the financial market which is then invested in the firm's projects and used to buy real assets. From these projects, cash is generated and reinvested into other operations and finally returned to the investors. Finance includes three key areas namely financial management, capital markets and investment (Brigham, 2016). Financial management is the corporate finance which deals with the aspect of decision making based on which of the assets should be acquired by a firm based on their profitability (Fazzini, 2018). It also deals with decisions on how a firm should raise the necessary funds to buy the assets but of more importance how the firm will be able to maximize the wealth invested into the projects by the shareholders. Capital markets involves the study of financial market trends such as rates, stocks, bonds, and various marketable securities. Once the securities are identified, they are then studied under investments which also include portfolio theory, analyzing the market trends and the behavior of finance.
In a firm, the main aim is to ensure that they establish a trust with the shareholders by ensuring that the wealth of the shareholders is maximized at all cost. This means that there is less consideration of timing and risk of the cash flows estimation as it can be sometimes misleading or manipulated (Chen, 2018). In most cases the top executives of a firm have their wealth maximized when they engage in risky transactions that could result in short-term profits. Such transaction is known to collapse sooner than later and therefore those who take the risk collect in bulk for a short time. It is therefore keen to note that the main aim of any given firm is to ensure that the capital of the shareholders and investors is maximized which results in the building of trust and long-term partnerships.
There are various forms of business organization involved in the world of finance. Each of these organizations or business relationships have their advantages and disadvantages. The first form of business organization is the proprietorship. It is a form of business organization that is owned by an individual as opposed to a corporation (Brigham, 2016). Some of the advantages include being easy and cheap or rather inexpensive to create since it is subject to far much fewer government regulations and even lower income tax. However, such businesses suffer the predicament of having unlimited personal liability as the owner is meant to accept all mistakes in the company as theirs which causes the business to have less lifetime due to difficulties in raising capital (Fazzini, 2018). However, despite partnership being a company that is owned by two or more people such organizations still suffer the same disadvantages as a proprietorship. Corporations are legal organizations that are created by a state and enjoy the benefits of limited liability, unlimited lifetime for the business, and even have much ease when raising capital (Chen, 2018). However, corporations suffer the disadvantage of being double taxed which means they are taxed at both the corporate and the individual level. When it comes to an understanding the stock market, it is essential to distinguish between the intrinsic value, estimation of the fair value of a stock, and the market price which is the actual price of the stock.
Chapter 2: Financial Statements, Cash Flow, and Taxes
Every fir aims at maximizing their stock value which is usually based on the potential future of the firm's cash flows. These estimations are what investors consider before deciding on the actions to take to increase cash flow. Financial statements which are supposed to be provided to investors by the firms for studying providing the estimations for the cash flow (Brigham, 2016). It is crucial for a firm's manager to keep the financial statements or accounts which assist the manager to know if the actions they are taking are appropriate (Fazzini, 2018). Therefore, financial statements are recorded in paper and writing, which are representations of the value of real assets, which are used to visualize the progress of a firm. All the financial statements of a firm for a given fiscal year are issued to the stockholders annually along with the management's analysis of the past operations of the firm and the future expectations in the annual report (Brigham, 2016). Therefore the report contains the four basic financial statements which include the balance sheet, the income statement, the statement of cash flows, and the statement of retained earnings. They are a report of what has happened to the assets, the capital, and the dividends over a given period of time.
The cash flows that assets attain determine the value of the asset which includes its position in the stock market. It is therefore vital for firms to strive to maximize their cash flows which in turn maximize the investors' wealth (Chen, 2018). The net flow of a business is different from the accounting profits since some of the capital and expenses that are listed in the income statement were not paid for in cash during the financial year. Taxes vary from corporation to corporation based on the income of the corporation with corporations with higher income being taxed more. It is also important to note that despite the corporation tax people are still taxed on a personal level with which the rate also varies based on the amount of income earned. Interest payments are regarded as an expense since borrowers must pay interest as they pay their debts (Fazzini, 2018). For this reason, the interest is deducted when calculating the total taxable income. However, interest earned is taxed as are dividends received and capital gains.
Chapter 3: Analysis of Financial Statements
The process of analyzing a company's financial statements in search of assistance in decision making and understanding of the overall progress of a company is referred to as financial statement analysis. The data that is recorded on the financial statements are analyzed as a way to make it straightforward and much more straightforward and useful to the investors, stockholders, and managers as well as other interested parties (Brigham, 2016). It is in this process that the past and the current state of the firm or project is examined in order to determine the estimated performance of the company (Chen, 2018). There are various techniques that are used to analyze the financial statements. The horizontal analysis examines statements by comparing two or more years of financial data in both the percentage form and dollar form. The vertical analysis involves representing every category of financial data on the balance sheet as a percentage of the total account. Ratio analysis determines the statistical relationship between the data
Brigham, E. F., Ehrhardt, M. C., Nason, R. R., & Gessaroli, J. (2016). Financial Management: Theory and Practice, Canadian Edition. Nelson Education.
Chen, C. W., Collins, D. W., Kravet, T. D., & Mergenthaler, R. D. (2018). Financial statement comparability and the efficiency of acquisition decisions. Contemporary Accounting Research, 35(1), 164-202.
Fazzini, M. (2018). Financial Statement Analysis. In Business Valuation (pp. 39-76). Palgrave Macmillan, Cham.
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