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Unformatted text preview: BUSINESS FINAL EXAM REVIEW / FINANCE / Introduction Financial management is composed of: o Accounting – designed to provide information o Finance – makes decisions about the acquisition, disposition, and management of capital with the help of accounting information Ultimate objective is to maximize shareholders‟ wealth Goals: Viability – short term liquidity and long term stability Profitability o Risk/Return trade-off amongst the two Finance department responsibilities: o Determining financial resources required Budgeting (disposition) o Obtaining financial resources required Financing (acquisition) o Managing the financial resources effectively Working capital (management) Investing activities Balance Sheet Perspective: o Assets are the investing component and equities make up the financing o Short Term – working capital management Liquidity Working Capital Cycle Cash Budgeting o Long Term – capital budgeting (assets) Amount and mix Operating leverage CVP o Long Term – capital structure (equities) Stability Financial Leverage EBIT analysis Budgeting 3 step process: o Forecasting financial needs Short Term – cash flow statement Long Term o Developing budgets to meet those needs Master budget Operating Budget Capital Budget Cash Budget o Establishing financial control Deviations from the budget Advantages: o Compels managers to plan o Establishes goals or standards against which actual performance can be measured – facilitates control o By clarifying goals and providing a yardstick for performance – source of motivation o Promotes communication and coordination among subunits of the organization – systems approach Abuses: o Means to reward waste and penalize thrift – if over budget, money is wasted and more is granted; if under budget, penalizes thrift and reduce amount allocated o Individuals subjected to guidelines, not consulted o Evaluate device – perceived as threat o Convenient scapegoat or lost opportunities Cash Budgeting Management of cash flows and the working capital cycle Format: o Beginning Cash Balance o + Receipts o Total Cash Available o – Disbursements o Cash Excess (Deficiency) o Minimum Cash Balance Desired o Borrowing required/Surplus/Repayment o Ending Cash Balance Worksheet is based on historical measures of amounts and timing of cash flows in working capital cycle 3 possibilities: o Deficiency – borrow for deficiency + minimum cash balance Ending Cash Balance = minimum required o Excess > Minimum – surplus available to repay borrowing If repayment is made – Ending Cash Balance = minimum required If repayment is not made – Ending Cash Balance = total excess o Excess < Minimum – borrow to equal minimum cash balance Ending Cash Balance = minimum required EBIT Analysis Earnings Before Interest and Tax To determine the best mix of debt and equity in the firm‟s capital structure...
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This note was uploaded on 04/05/2010 for the course BUS 121 taught by Professor L during the Spring '10 term at Wilfred Laurier University .

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