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Net cash flow $ 0
80,000 ($80,000) In an accounting sense Nassau Corporation is profitable, but in terms of
actual cash flow it is a financial failure. Its lack of cash flow resulted from the
uncollected account receivable of $100,000. Without adequate cash inflows to
meet its obligations, the firm will not survive, regardless of its level of profits.
Hint The primary emphasis
of accounting is on accrual
methods; the primary emphasis
of financial management is on
cash flow methods. As the example shows, accrual accounting data do not fully describe the circumstances of a firm. Thus the financial manager must look beyond financial
statements to obtain insight into existing or developing problems. Of course,
accountants are well aware of the importance of cash flows, and financial managers use and understand accrual-based financial statements. Nevertheless, the
financial manager, by concentrating on cash flows, should be able to avoid insolvency and achieve the firm’s financial goals. Decision Making
The second major difference between finance and accounting has to do with decision making. Accountants devote most of their attention to the collection and
presentation of financial data. Financial managers evaluate the accounting statements, develop additional data, and make decisions on the basis of their assessment of the associated returns and risks. Of course, this does not mean that
accountants never make decisions or that financial managers never gather data.
Rather, the primary focuses of accounting and finance are distinctly different. Primary Activities of the Financial Manager
In addition to ongoing involvement in financial analysis and planning, the financial manager’s primary activities are making investment decisions and making
financing decisions. Investment decisions determine both the mix and the type of CHAPTER 1 The Role and Environment of Managerial Finance FIGURE 1.2 13 Balance Sheet Financial Activities
Primary activities of the
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This document was uploaded on 01/19/2014.
- Fall '13