HB 311 1st Edition Exam 1 Chapters 1 3 Chapter 1 1 Understand differences between accounting and finance Accounting a system of record keeping designed to portray a firm s operations to the world in a fair and unbiased way Finance the process of decision making related to raising money and analyzing results 2 Understand difference between real and financial asset Real assets Include things such as houses hotels and restaurants whereas financial assets are documents such as stocks and bonds which derive value by giving the owner legal claim to future cash flows Companies issue financial assets to raise money in order to purchase real assets Then real assets are often used to run the business itself 3 What is a financial market and role of stockbrokers A financial market is a place where financial assets are issued by corporations and bought by investors It can also be described as a place where people can buy and sell securities Examples include stock markets also known as secondary markets NYSE AMEX OTC where entire networks of brokers and exchanges are all connected Lastly a primary market is one where securities such as I P O s are sold The other option in financial markets is stockbrokers who are people who are licensed to trade securities for a commission 4 Organizational structure of financial management department and role responsibilities Finance department generally consists of both the accounting department and the treasury department Within the department the controller is in charge of the accounting department and the Treasurer deals with finance activities 5 Cash Flow from perspective of finance and why it is important Finance concentrates on cash flow and where the cash is coming and going In finance this is important because it gives a detailed illustration of the activity of cash in the business 6 Advantage and Disadvantage of sole proprietorship vs corporation Also understand how taxation makes a difference in the two forms The main advantages in starting a business as a sole proprietorship are the ease of starting up and taxes The advantage of taxes comes from being taxed only once as well as being taxed at personal income tax rates The main disadvantage from sole proprietorships comes from raising money If an entrepreneur wants to expand but doesn t have the assets to do so he will look for outside financing in the form of a loan from friends or family Outside of that the other options to raise money come in the form of lenders or loans Lenders run a huge risk by giving out money so most require loans to be fully collateralized and many entrepreneurs have to use their homes as collateral This is the main risk in sole proprietorship The main advantage of starting a corporation is in raising money Instead of having to go to lenders corporations have the added option of selling stock in order to raise capital On the other hand the disadvantages include the time and energy costs to start up a corporation as well as taxes In regards to starting up a corporation there is a legal process that requires money time and energy Lastly corporations get taxed as a separate legal entity called corporate tax Additionally for the owner of the business to get the profits in his or her pockets they have to go through what is called a dividend tax This phenomenon is called double taxation of corporate earnings It is the main financial disadvantage of starting a corporation 7 What is the primary goal of management The primary goal of management is the maximization of shareholder wealth also known as maximizing the price of the company s stock Chapter 2 1 Understand difference between cash flow and income statement Two main differences between cash flow and income statement Accounts Receivable from uncollected payments for products sold and depreciation the prorated of an asset s cost over its service life 2 Understand the meaning and concept of depreciation from an accounting and finance perspective Ability to calculate straight line and accumulated depreciation Straight line depreciation Evenly Prorated depreciation This means that if you depreciate a 10 000 item over 5 years depreciation allocates 2 000 to cost in the income statement in each of the asset s five years of life Accumulated depreciation Total amount of depreciation for a fixed asset that has been charged to expense since the asset was acquired The accumulated depreciation account is an asset account with a credit balance On the balance sheet this would appear as a reduction from the gross amount of fixed assets reported 3 Understand the double entry system of accounting and accounting periods The double entry system has two parts with each side being made to a different account Both sides must balance These two sides are called credits and debits Example If we borrowed 1 000 to buy a machine the entry would involve increasing the asset account and liability account by 1 000 4 Understand clearly all the different parts of an Income statement Reflects a flow of money and how much company has earned over a period of time i Presentation Recorded as Sales Cost and Expense COGS Expenses Depreciation Gross Margin Interest Earnings Before Interest and Tax Net Income ii Refer to pages 31 33 in the book for more information on layout Balance Sheet Lists everything a company owns and everything it owes in a moment in time i Two Sides one side listing assets and other side listing liabilities and equity ii Basic equation Assets liabilities equity iii Refer to pages 33 44 for more information on layout of balance sheet I will ask concept and calculation questions related to these financial statements 5 What is the difference between a municipal bond and corporate bond And calculate effective rate based on impact of tax Corporate vs Municipal i When comparing municipal bonds and corporate bonds an adjustment must be made due to fact that interest on municipal bonds are not taxed ii If rate is the same on both municipal bond Is a better deal after considering taxes iii If rates differ the corporate bond must be adjusted to be after tax Corporate Taxes i Similar to personal taxes In that total income is taxed deductions are charges and expenses and exemptions are not permitted ii Company s Earnings Before Tax EBT represents a corporation s taxable income iii Corporate tax rates do not consistently rise as taxable income rises iv Taxes and Financing Corporate tax system favors debt financing over equity financing Interest payments