ACFI201 - WEEK 1

• Matches Expenses to Associated Revenues
• Provides more useful information for better predicting cash flows and for evaluating the performance of the firm and its managers.

• Variable definition of Profit
• Does not consider the differing levels of risk between competing alternative investments
• Does not consider the TVM

• Amount of expected cash flows
• Timing of expected cash flows
• Risk of expected cash flows

• Ease of Formation
• Subject to few regulations
• No corporate income tax
• Profit is taxed only once as personal income

• Limited Life
• Unlimited Liability
• Difficult to Raise Capital to support growth

• Advantages to Shareholders
• Limited Liability
• Easy transfer of ownership of shares
• Capacity to contract withe the company
• Advantages to company
• Unlimited Life
• Facility in Raising or increasing capital
• Ease of raising capital -- issue shares to the public
• Availability to use expertise of directors with technical skills

• Double taxation (in the states)
• Cost of setup and report filing
• Penalty for officers if not compiled with the act

• Agent is hired by a principal and given decision making authority
• Abuse: Management may act to maximise their own welfare instead of the owners;
• Managing: Monitor management via audits and tying executive compensation to stock performance

• Abuse: If actions of the borrowing firm become  rsikier than before loan, creditors are exposed to more risk, but risk taking rewards all go to the stockholders
• Managing: Lenders put clauses in loan agreements to prevent this including protective covenants.

Occurs when one or more individuals (the principals) hire another individual(the agent) to perform a decision making role.

• It considers the timing and risk of the expected benefits
• Conceptually possible to determine whether a particular financial decision is consistent with this obejective
• Objective is ipersonal - shareholders can buy and sell as desired

Differences between after tax profit and totla anual cost of capital

• Cash Receipts
• Cash Disbursements
• Net Change in Cash for the Period
• Plus opening cash balance = initial closing cash balance
• Note target cash Balance
• New financing Needed/surplus cash for investing
• Final Closing Cash Balance
• Cumulative Balance of Overdraft, short term investment.