Financial Management

What is the goal of financial management?

Maximize shareholder value

What is a common disadvantage of a corporation?

Double taxation

What are agency problems?

Problems that arise due to potential divergence of interest between managers, shareholders, and creditors

Balance sheet

Measures assets, liability, and equity

As of a specific date

Income statement

Measures performance, like revenue and expenses

Over a period of time

Assets =

Owner’s equity + liabilities

Left hand side must equal

The right hand side

Net working capital is

Current assets - current liabilities

Current assets include:

1. Cash

2. Accounts receivable

3. Inventory

What is one quirk of current assets on a balance sheet?

They go in order of liquidity!

So cash first, which is the most liquid

Then accounts receivable which is the second most liquid

Lastly, inventory —— the least liquid!

What are current liabilities?

1. Accounts payable

2. Notes payable

Important! Remember this for the income statement!

Gross margin =

Sales - cost of goods sold

Important! Remember this for the income statement!

Earnings before interest and taxes is:

Gross margin - depreciation

Important! Remember this for the income statement!

Taxable income is:

EBIT - interest paid

Important! Remember this for the income statement!

Income statement complete equation:

Sales

(cost of goods sold)

Gross margin

(SGA expense)

(Depreciation)

EBIT

(Interest paid)

Taxable Income

(Taxes)

Net income

What happens to net income?

It can either:

1. Dividends paid to shareholders

2. Added to retained earnings

Cash flow from assets formula 1

Cash flow from assets = operating cash flow - net capital spending - changes in NWC

Cash flow from assets formula 2

Cash flow from assets = cash flow to creditors + cash flow to shareholders

What is the formula for operating cash flow?

OCF = EBIT + depreciation - taxes

What. isnet capital spending?

Net capital spending is how much you spend in a year on fixed assets

Net capital spending = difference in fixed assets + depreciation

What is NWC?

Current assets - current liabilities