ACFI201 - WEEK 1

  1. Need for Accrual Accounting
    • 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.
  2. Problems with Profit Maximisation Goal
    • Variable definition of Profit
    • Does not consider the differing levels of risk between competing alternative investments
    • Does not consider the TVM
  3. Determinants of Share Price
    • Amount of expected cash flows
    • Timing of expected cash flows
    • Risk of expected cash flows
  4. Advantages of a Sole Proprietorship
    • Ease of Formation
    • Subject to few regulations
    • No corporate income tax
    • Profit is taxed only once as personal income
  5. Disadvantages of a Sole Proprietorship
    • Limited Life
    • Unlimited Liability
    • Difficult to Raise Capital to support growth
  6. Advantages of a Corporation
    • 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
  7. Disadvantages of a corporation
    • Double taxation (in the states)
    • Cost of setup and report filing
    • Penalty for officers if not compiled with the act
  8. Agency Problem: Stockholders and Management
    • 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
  9. Agency Problem:Stockholders and Creditors
    • 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.
  10. Agency Relationship
    Occurs when one or more individuals (the principals) hire another individual(the agent) to perform a decision making role.
  11. Advantages of Shareholder Wealth Maximisation Goal
    • 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
  12. Economic Value Added
    Differences between after tax profit and totla anual cost of capital
  13. 8  Elements of  a cash budget
    • 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.
Card Set
ACFI201 - WEEK 1
week 1