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Slides.pptx introduction to corporate finance
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- 2. Book Keeping VsAccounting: Book keeping is the process of recording of the business transactions, their classification into different books of accounts and summarizing them. Accounting is the process of recording business transactions, their classification into different books of accounts, summarizing them and preparation of financial statements of the business.
- 3. Types of Accounting 1. FinancialAccounting – Used to keeps track of a business’s financial transactions. 2. Cost Accounting – Used to deal with cost of production of the business. 3. Management Accounting – Use the data of financial and cost accounting for management decision making. 4. Tax Accounting - Used to deal with tax related financial aspects of the businesses 5. Government Accounting - Used to keeps track of a government’s financial transactions.
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- 5. Steps of Accounting Cycle 1. Transactions– An economic event with a third party that is recorded in an organization's accounting system. 2. General Journal – General journal is a daybook or journal which is used to record transactions. 3. Ledgers - A general ledger account is an account or record used to sort, store and summarize a company's transactions. 4. Trial balance - A trial balance is a bookkeeping worksheet in which the balance of all ledgers are compiled into debit and credit account column totals that are equal.
- 6. 5. Preparation ofFinancial Statements: a. Income Statement – tells financial performance of the business during a specific time period. b. Balance Sheet – tells financial position of the business on a particular date c. Cash Flow Statement – tells the liquidity position of the company d. Notes to the Accounts – gives details about accounts.
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- 8. 1. Sole Proprietorship: Definitions:According to Meigs, Partnership Corporation “A sole proprietorship is an unincorporated business owned and controlled by one person.” According to Prof Hynes, “Sole Proprietorship is that form of business which has a single owner, who has the total responsibility of the business, who runs the business and also bears the risk on the failure of business.”
- 9. Characteristic s: • Sole Ownership •Unlimited Liability • Limited Work Area • Sole Right on Capital • Sole Management • No Legal Formalities • Free to Select his Business • Willful Commencement and Closure
- 10. Advantages • Less paperworkto get started. • Easier processes and fewer requirements for business taxes. • Fewer registration fees. • More straightforward banking. • Simplified business ownership.
- 11. Disadvantag es: • No liabilityprotection. • It’s harder to get financing and business credit. • It’s harder to sell your business.
- 12. 2. Partnership (Firm): •Definitions: According to Partnership Act 1932, “Partnership is a relationship among specific persons who have agreed to share the profit of business carried on by all or any one of them acting for all.” • According to Meigs, “A partnership is an unincorporated business owned and controlled by two or more partners.” Certificate required for registration – Partnership Deed
- 13. Characteristics: • Existence of an agreement •Existence of business • Sharing of profits • Agency relationship • Membership • Nature of liability • Fusion of ownership and control • Non- transferabili ty of interest • Registration of firm
- 14. Advantage s: • Less formalwith fewer legal obligations • Easy to get started • Sharing the burden • Access to knowledge, skills, experience and contacts • Better decision- making • Privacy • Ownership and control are combined • More partners, more capital • Prospective partners • Easy access to profits
- 15. Disadvantag es: • The businesshas no independent legal status • Unlimited liability • Perceived lack of prestige • Limited access to capital • Potential for differences and conflict • Slower, more difficult decision making • Profits must be shared • Personally demanding • Taxation • Limits on business development
- 16. Types of Partnerships: •General Categories: 1) General Partnership (A general partnership is a business arrangement between two or more people who agree to share profits and losses ) 2) Limited Liability Partnership (L.L.P) – Limited Liability Partnership Act 2017. a business structure that combines aspects of a partnership and a corporation. It's a separate legal entity from its partners, so the partners' personal assets are protected from the business's debts. 3) Partnership at Will 1. The partnership can be dissolved by any partner at any time. 2. There is no fixed term or duration for the partnership. 3. The partnership can be terminated without notice or penalty. 4) Particular Partnership Temporary and Project related (Dissolve when project will complete).
- 17. Types of Partners: • Active/ManagingPartner (Is responsible for making key decisions and overseeing the operations of the partnership) • Sleeping Partner (dormant partner) Typically provides financial support or investment to the partnership • Nominal Partner – no real interest, only lend name in business ( Allows their name to be used as a partner in a business) • Partner in Profits only • Minor Partner (less than 18) • Secret Partner (1. Is not publicly disclosed or acknowledged as a partner. Remains hidden or unknown to outsiders, including customers, suppliers, and other stakeholders.) • Outgoing partner – voluntarily retires without dissolving the partnership • Limited partner (limited liability, meaning their personal assets are protected in case the business incurs debts or liabilities). • Sub-Partner – the agent of the partner
- 18. 3. Corporation (CompaniesOrdinance 1984) Definitions: According to Meigs, “A corporation is a legal entity, having an existence separate and distinct from that of its owners.” A general definition, “A company is a separate legal entity/person in the eye of law which can buy any property, sell property, open an account, enters into an agreement with any other entity and has unlimited life.” Documents Required for registration: Memorandum of association (powers and duties), Articles of association (rules and regulations). Certificates – Certificate of Incorporation, Certificate of Commencement of Business
- 19. Characteristics • Voluntary Association •Incorporation • Artificial person • Separate Entity • Perpetual Existence • Common Seal • Transferability of Shares • Limited Liability • Diffused Ownership • Separation of Ownership from Management
- 20. Advantages: • Limited Liability •Perpetual Existence • Professional Management • Expansion Potential • Transferability of Shares • Diffusion of Risk
- 21. Disadvantag es: • Lack ofSecrecy • Restrictions • Complicated and time-consuming decision-making processes • Lack of Personal Interest
- 22. Types of Corporations/Companies: •PUBLIC LIMITED COMPANY • PRIVATE LIMITED COMPANY • COMPANY LIMITED BY SHARES • COMPANY LIMITED BY GUARANTEE • UNLIMITED COMPANY • SINGLE MEMBER COMPANY
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- 24. 1. What isFinancial Management? CONCERNS WITH THE: • ACQUISITION • FINANCING • MANAGEMENT OF ASSETS
- 25. 2. Three main decisions: a. InvestmentDecisions i. What is the optimal firm size? ii. What specific assets should be acquired? b. Financing Decisions i. What is the best type of financing? ii. What is the best financing mix? c. Assets Management Decisions i. How do we manage existing assets efficiently? ii. Greater emphasis on current asset management than fixed asset management.
- 26. 3. What isthe Goal of the Firm? A. PROFIT MAXIMIZATION B. VALUE CREATION
- 27. 4. Agency Theory: Agent &Principle - Management acts as an agent for the owners (shareholders) of the firm. Agency Conflict – When there is a clash of interest between agent and principle. Agency Cost – The cost incurred to resolve the agency conflicts.
- 28. 5. Corporate Social Responsibility Wealth maximizationdoes not preclude the firm from being socially responsible at the corporate level. 6. Corporate Governance a. Represents the system by which corporations are managed and controlled. b. Includes shareholders, board of directors, and senior management.
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