Financial Management Chapter 1

Front 1

Define Sole Proprietorship?

Back 1

Small ventures can be owned and managed by
a single individual.

Front 2

Define Sole Partnership?

Back 2

Several people
may join to own and manage a partnership

Front 3

Describe Corporations and its behaviour

Back 3

Almost all large and medium-sized businesses are organized as corporations.
The firm is owned by stockholders who
hold shares in the business.
For many legal purposes, the corporation is considered as a resident
of its state. As a legal “person,” it can borrow or lend money, and it can sue or be
sued. It pays its own taxes (but it cannot vote!).

Front 4

What are public companies?

Back 4

The corporations whose shares are traded over a stock market

Front 5

What are the benefits of making a corporation?

Back 5

By organizing as a corporation, a business can attract a wide variety of investors.
Some may hold only a single share worth a few dollars, cast only a single
vote, and receive a tiny proportion of profits and dividends. Shareholders
may also include giant pension funds and insurance companies whose investment
may run to millions of shares and hundreds of millions of dollars, and who
are entitled to a correspondingly large number of votes and proportion of profits
and dividends.

Front 6

Who are board of directors?

Back 6

The board of directors represents the shareholders. It appoints
top management and is supposed to ensure that managers act in the shareholders’
best interests.
This separation of ownership and management gives corporations permanence.

Front 7

Describe Articles of Incorporation?

Back 7

The Articles of Incorporation
set out
1- The purpose of the business
2- How many shares can be issued
3- The number of directors to be appointed, and so
on.

Front 8

What are the disadvantages of making a corporation?

Back 8

1-Managing a
corporation’s legal machinery and communicating with shareholders can be
time-consuming and costly
2-in the United States there is an important
tax drawback. Because the corporation is a separate legal entity, it is taxed
separately. So corporations pay tax on their profits, and, in addition, shareholders
pay tax on any dividends that they receive from the company.

Front 9

Define real assets?

Back 9

Their are two types of real assets
1- Tangible, such as machinery, factories, and offices;
2-Intangible Assets such as technical expertise, trademarks, and patents

Front 10

Define Financial Assets or Securities?

Back 10

To obtain the necessary money, the corporation sells claims on its real assets
and on the cash those assets will generate. These claims are called financial assets
or securities. For example, if the company borrows money from the bank, the
bank gets a written promise that the money will be repaid with interest. Thus the
bank trades cash for a financial asset. Financial assets include not only bank loans but
also shares of stock, bonds, and a dizzying variety of specialized securities.

Front 11

What is the role of a financial Manager?

Back 11

The financial manager stands between the firm’s operations and the financial (or
capital) markets, where investors hold the financial assets issued by the firm.

Front 12

Describe the role of a treasurer?

Back 12

The treasurer is responsible for looking after the firm’s
cash, raising new capital, and maintaining relationships with banks, stockholders,
and other investors who hold the firm’s securities.

Front 13

Describe the role of a controller?

Back 13

Controller prepares the financial statements, manages
the firm’s internal accounting, and looks after its tax obligations.

Front 14

Differences in the roles of a treasurer and a controller?

Back 14

The treasurer’s main responsibility
is to obtain and manage the firm’s capital, whereas the controller ensures
that the money is used efficiently.

Front 15

What are the duties of a CFO?

Back 15

Larger firms usually appoint a chief financial officer (CFO) to oversee both the
treasurer’s and the controller’s work.
The CFO is deeply involved in financial policy
and corporate planning. Often he or she will have general managerial responsibilities
beyond strictly financial issues and may also be a member of the board of directors.
The controller or CFO is responsible for organizing and supervising the capital
budgeting process. However, major capital investment projects are so closely tied
to plans for product development, production, and marketing that managers from
these areas are inevitably drawn into planning and analyzing the projects.
If the
firm has staff members specializing in corporate planning, they too are naturally
involved in capital budgeting.

Front 16

Describe the role of Board of Directors?

Back 16

Because of the importance of many financial issues, ultimate decisions often rest
by law or by custom with the board of directors.
For example, only the board has
the legal power to declare a dividend or to sanction a public issue of securities.
Boards usually delegate decisions for small or medium-sized investment outlays,
but the authority to approve large investments is almost never delegated.

Front 17

What are the advantages of Separation of ownership and management?

Back 17

1-It allows
share ownership to change without interfering with the operation of the business
2-It
allows the firm to hire professional managers

Front 18

Describe the Principal agent problems?

Back 18

The conflicts between shareholders’ and managers’ objectives create principal–
agent problems.
The shareholders are the principals; the managers are their agents.
Shareholders want management to increase the value of the firm, but managers may
have their own axes to grind or nests to feather. Agency costs are incurred when
(1) managers do not attempt to maximize firm value and (2) shareholders incur costs
to monitor the managers and influence their actions. Of course, there are no costs
when the shareholders are also the managers. That is one of the advantages of a sole
proprietorship. Owner–managers have no conflicts of interest.
The concept of Principal - Agent is not limited to Share Holder and Manaagers but its also applied internally when the senior manager encourage the junior manager to work in the company's interest than Senior Manager acts as a principle and the junior managers act as an agent.