M2: Intro to Accounting & Finance Flashcards
What are some examples of careers in accounting inside an organization?
- Controller,
2. Accounting clerk/ technician, etc.
What are some examples of careers in finance inside an organization?
- CFO,
- Treasurer,
- Finance analyst,
- Director of finance, etc.
What are some examples of careers in finance outside an organization?
- Investment banker,
- Financial advisor,
- Portfolio manager,
- Investment analyst,
- Traders, etc.
What are some examples of careers in accounting outside an organization?
- Auditor,
- Forensic accountant,
- Tax accountant, etc.
What is an example of the hierarchy of a typical medium/large organization?
- Board of Directors
- Chief executive officer oversees: 2a. Vice Presidents
2b. Chief Financial Officer oversees: i. Controller ii. Treasurer iii. Internal auditor - i. Controller oversees Managerial accountants, financial accountants, etc.
Will smaller organizations have a need for the same roles and organizational structure as bigger organizations?
No.
Ex: they wouldn’t need internal auditors or a board of directors.
What positions are referred to as financial managers?
- CFO
- Controller
- Treasurer
What is a CFO responsible for?
- Strategic management of accounting and finance functions
- Deciding accounting policies and internal controls
- Protecting the company’s financial information & collaborating on technology decisions (upgrading systems, network security, etc.)
- Managing relationships with auditors and investors
- CFO’s typically have several years of management and a professional background in finance, economics, etc.
What are accounting policies?
The ways we report income on our financial statements.
What are internal controls?
Controls to keep the company’s information safe and make sure people are doing things in the company’s best interest.
Ex: Need boss password to access smt.
What is a controller typically responsible for?
- Preparing financial statements (main responsibility)
- Supervising the accounting team
- Providing management team with information relevant to the decision making process
- Ensuring timely filling of corporate tax returns
- Controllers typically have a Bcom in accounting/finance, along with a CPA or MBA, and will often have experience as an auditor.
Why is it the controller’s responsibility to provide management team with information relevant to the decision making process?
Because a controller has a lot of access to info bc they have access to the whole accounting system. Controller can gather this info and organize it to provide it to a person who’s making a decision.
What is a treasurer typically responsible for?
- Cash management (makes sure there is enough money to pay people and deciding who to pay first) and contributes budget planning (how much money do we need for next year and how much are we going to make)
- Researching and analyzing alternative sources of financing (borrowing from banks, or companies, or shareholders…)
- Establishing/maintaining relationships with banks
- Treasurers typically have a Bcom in accounting/finance, along with a CFA or MBA, and may have experience as an auditor
What are the decisions the financial managers make?
- Financing decisions
- Investment decisions
- Product pricing
What are financing decisions?
Where/how should the organization obtain financing? For example, should we borrow money from the bank or issue new shares?
What are investment decisions?
- How should the organization invest their cash? For example, should we buy a new building to expand operating capacity or purchase technology to upgrade an existing building?
- How many units need to be sold before breaking even on an investment? Is it reasonable?
What is product pricing?
How should products be priced to ensure the organization earns a sufficient profit? For example, should we increase the price of our products?
What are the 2 forms of organization of a business?
- Sole Proprietorship
2. Corporation
What is a sole proprietorship?
An individual who opens a business and owns assets personally and earns business income directly so pays tax on income as it’s earned. Anything that happens to the business falls under the responsibility of the individual.
What is a Corporation?
A corporation is its own legal entity separate from the individual who owns it. The owners can be shareholders of the corporation. The corporation itself earns business income and owns assets. Corporation pays dividends to shareholders, so individual only receives cash/pays tax when a dividend is distributed
What is a public corporation?
In order to buy a share of a company, the company has to be public. A public corporation is one where its shares are traded in public markets (such as the Toronto Stock Exchange in Canada and the New York Stock Exchange in the US).
Who represents the shareholders in large public corporations?
Large public corporations may have hundreds of thousands of shareholders, who are represented by a board of directors.
What are the 2 types of corporayions?
- Public corporations
2. Private corporations
What is a private corporation?
A private corporation is one who’s shares are not traded on a stock exchange. Typically the shares of the company will be owned by a few people (managers, investors, employees, etc.) – so referred to as closely held.
Many companies will start as private corporations and then go public (though an initial public offering, IPO) to raise additional funds to continue growing.
What are the advantages for incorporation? (explain)
- Limited liability: Anything that happens in the corporation doesn’t affect individual personally.
Ex: if company cant pay back a loan and goes bankrupt, you get to protect your personal assets. - Potential to defer taxes & other tax advantages: Deferring taxes: If i earn income inside a corp. the taxes are typically lower than what individuals pay. So there’s a saving compared to having a sole proprietorship.
- Easy to shift ownership of a corporation from one person to another: by selling shares
- Access to funds (capital): By having a corp. to have the option to sell shares to the public to make more money. In a sole proprietorship i have no shares to share because its just me.
- Perpetual life: In a sole proprietorship the company dies with you. But in incorporation it can last forever ex: Hudson’s Bay.
What are the disadvantages for incorporation? (explain)
- Maintenance costs, such as legal and tax filling costs: The amt of money that it costs depends on the size of ur company.
- Any losses incurred by the business are “stuck” inside the corporation: If ur corp. has losses, you can’t use them to reduce ur other sources of income taxes (in a tax perspective).
- In certain situations, loss of oversight by shareholders (see – Agency problem): harder to manage & as there’s more they have less of a voice.
What is an example of a common business life cycle?
- Sole proprietorship
- Private corporation
- Public corporation
Should we always incorporate a business? Is there a best time to incorporate?
It depends on the situation: size of business, how much money we have, profitability, etc.
If ur a small business having losses, it would be better to stay in a sole proprietorship bc it saves you taxes. An exception is if ur doing smt rly risky (you’ll get sued), to protect urself you create a corporation.
Even if you’re not making a lot of money, you can go public if you have a really good idea and need ppl to invest to develop ur idea (ex: tech company). Later down the line the company will become profitable.
Typically best time to incorporate is when you start become profitable and prove you can have investors.
Should a business always go public?
Yes we get access to funds, but are there any disadvantages?
A business shouldn’t automatically go public because by going public you have to give shares (give away a piece of the ownership of the company) in order to get the money you need fro investments. In order to make decisions you have to consult with the shareholders. Also, as a public company you have to share your information to the public legally (not only to shareholders). Some companies like to stay small and maintain control.
What is the primary goal of a corporation?
To make profit and to maximize value for their shareholders. (Companies who are more profitable have higher stock prices).
It is important for companies to have other goals that give back.
What is the agency problem?
An agency problem arises when managers, who are agents for the stockholders, are tempted to act in their own interests rather than maximizing value.
This can sometimes lead to unethical behaviour, which never leads to maximizing value.
Why do agency problems tend to arise?
- The shareholders cannot see what the managers are doing on a day to day basis, they only see what the company is required to disclose.
- The managers are often compensated based on company performance (salary, bonus, stock options).
The have access to all of the company information and are responsible for the day to day decision making.
Because of this, managers can be tempted to make decisions to make company profitable in the current year but not in the future (short-term management). Also, to make decisions that are not ethical because the harder thing or more ethical thing is more expensive. If they don’t make the company as much money then they don’t get as much compensation.
What is a stock option?
You get the option to buy shares at that company when it reaches a certain price (at a discounted price). This incentivized the employees of the company to work hard to make the share prices go up.
Give an example of an agency problem.
September 2015: Reports that VW has been installing “defeat-device” software in their diesel cars to beat American emission standards.
Although this was a decision made by few people, the implications were very widespread:
Millions in penalties worldwide
Environmental impact
Significant decline in company value that impacts all shareholders.
The managers were thinking about how to increase their profit in the present, but not about the future implications. They weren’t thinking in the best interests of the company or the shareholders.
