Chapter 1 Financial Manager and The Firm Flashcards
What is a stake holder?
Someone other than an owner who has a claim on the cash flows of the firm
Working Capital Management
Determining how day-to-day financial matters should be managed so that the firm can pay its bills, and how surplus cash should be invested.
Residual Cash Flows
the cash remaining after a firm has paid operating expenses and what it owes creditors and in taxes; can be distributed to the owners as a cash dividend or by repurchasing some shares, or reinvested in the business
Bankruptcy
legally declaring inability of an individual or a company to pay its creditors
What are the three fundemental decisions in financial management?
- Capital Budgeting Decisions
- Financing Decisions
- Working Capital Management Decisions
What do capital budgeting decisions adress?
Which productive assets the firm should purchase and how much money the firm can afford to spend.
How do capital budgeting decsions dictate the success or failure of a business?
Capital assets generate most of the cash flows for the firm.
Capital assets are long term in nature.
What do financing decisions determine for a business?
How a firm raises cash to pay for their investments.
What is a tax deductible?
is a deduction that lowers a person’s tax liability by lowering their taxable income. Deductions are typically expenses that the taxpayer incurs during the year that can be applied against or subtracted from their gross income in order to figure out how much tax is owed.
How do financing decisions affect the firm?
It will affect the taxes the firm pays and the probability of the firm going bankrupt.
Net Working Capital
The difference between the firms total current assets and its total current liabilities.
What are working capital management decisions?
Management of firms current assets.
What are the treasurers duties in a firm?
The treasurer looks after the collection and disbursement of cash, investing excess cash so that it earns interest, raising new capital, handling foreign exchange transactions, and overseeing the firm’s pension fund managers. The treasurer also assists the CFO in handling important Wall Street relationships, such as those with investment bankers and credit rating agencies.
What are the duties of the risk manager?
The risk manager monitors and manages the firm’s risk exposure in financial and commodity markets and the firm’s relationships with insurance providers.
What are the duties of the controller?
The controller is really the firm’s chief accounting officer. The controller’s staff prepares the financial statements, maintains the firm’s financial and cost accounting systems, prepares the taxes, and works closely with the firm’s external auditors.
What are the duties of an internal auditor?
The internal auditor is responsible for identifying and assessing major risks facing the firm and performing audits in areas where the firm might incur substantial losses. The internal auditor reports to the board of directors as well as the CFO.
What are external auditors and what role do they play with a firm?
A licensed certified public accounting firm CPA firm that provides an independent annual audit of the firm’s financial statements.
What is the audit committee and what role do they play with a firm?
A powerful subcommittee of the board of directors, has the responsibility of overseeing the accounting function and the preparation of the firm’s financial statements. In addition, the audit committee oversees or, if necessary, conducts investigations of significant fraud, theft, or malfeasance in the firm, especially if it is suspected that senior managers in the firm may be involved.
What is the compliance and ethics directors three programs it must oversee?
(1) a compliance program that ensures that the firm complies with federal and state laws and regulations,
(2) an ethics program that promotes ethical conduct among executives and other employees, and
(3) a compliance hotline, which must include a whistleblower program.
What are the three contributing factors affecting value of public companies stock?
(1) the size of the expected cash flows,
(2) the timing of the cash flows, and
(3) the riskiness of the cash flows.
Agency Costs
Agency costs are the costs incurred because of conflicts of interest between a principal and an agent.
What measures do companies take to make sure interests of management and stock holders align?
(1) board of directors,
(2) management compensation,
(3) managerial labor market,
(4) other managers,
(5) large stockholders,
(6) the takeover market, and
(7) the legal and regulatory environment.
What type of management compensation plans exist to incentivize managers into acting for the best interest of stockholders?
(1) a base salary,
(2) a bonus based on accounting performance, and
(3) some compensation that is tied to the firm’s stock price.
Information Asymmetry
exists when one party in a business transaction has information that is unavailable to the other parties in the transaction.
