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Lecture 9

AFM131 Lecture Notes - Lecture 9: Debenture, Tax Deduction, Retained Earnings

Accounting & Financial Management
Course Code
Manhhung David Nguyen Ha

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Module 9 Financial Management Chapter 17 Notes ARBUS101
The Role of Finance and Financial Managers
o Finance The function in a business that acquires funds for the firm
and manages them within the firm
o Finance Activities Preparing budgets, completing cash flow analysis,
and planning for the expenditure of funds on assets such as plant,
equipment, and machinery
o Financial Management The job of managing a firm’s resources to
meet its goals and objectives
o Financial Managers Managers who examine the financial data
prepared by accountants and recommend strategies for improving the
financial performance of the firm Auditing, Planning, Budgeting,
Obtaining Funds, Controlling Funds, Collecting Funds, Advising top
management on financial matters, and Managing Taxes
o The Value of Understanding Finance
Undercapitalization (Insufficient funds to run a business)
Poor control over cash flow
Inadequate expense control
Financial Planning
o Analyzing short-term and long-term money flows to and from a firm
objective to optimize the firm’s profitability and make the best use of
its money
Forecasting Short-Term and Long-Term Financial Needs
Short-Term Forecast Forecast that predicts revenues,
costs, and expenses for a period of one year or less
Cash Flow Forecast Forecast that predicts the cash
inflows and outflows in future periods, usually months
or quarters
Long-Term Forecast Forecast that predicts revenues,
costs, and expenses for a period longer than one year,
and sometimes as far as five or ten years into the future
Working with the Budget Process
Budget A financial plan that sets forth management’s
expectations, and, on the basis of those expectations,
allocates the use of specific resources throughout the
o Capital Budget A budget that highlights a firm’s
spending plans for major asset purchases that
often require large sums of money, like property,
buildings, and equipment
o Cash Budget A budget that estimates a firm’s
cash inflows and outflows during a particular
period (monthly or quarterly)
o Operating (Master) Budget The budget that ties
together all of a firm’s other budgets and
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summarizes the business’s proposed financial
Establish Financial Controls
Financial Control A process in which a firm
periodically compares its actual revenues, costs, and
expenses with its projected ones identify variances to
the financial plan and allow them to take corrective
action if necessary also provide feedback to help
reveal accounts, departments, and people varying from
the financial plan make adjustments
The Need for Operating Funds
o Managing Day-to-Day Needs of a Business
Must ensure funds are available to meet daily cash needs
without compromising the firm’s opportunities to invest
money for its future Money has time-value
o Controlling Credit Operations
o Acquiring Needed Inventory
Just-in-Time Inventory
Inventory Turnover Ratio
o Making Capital Expenditures
Capital Expenditures Major investments in either tangible
long-term assets, such as land, buildings, and equipment, or
intangible assets, such as patents, trademarks, and copyrights
o Alternative Sources of Funding
Debt-Financing Funds raised through various forms of
borrowing that must be repaid
Equity-Financing Funds raised from operations within the
firm or through the sale of ownership in the firm
Short-Term Financing Borrowed funds that are needed for
one year or less
Long-Term Financing Borrowed funds that are needed for a
period more than one year
Obtaining Short-Term Financing
o Trade-Credit The practice of buying goods and services now and
paying for them later most widely used source, least expensive, and
most convenient
o Promissory Note A written contract with a promise to pay
o Family and Friends Agree to specific loan terms, put the agreement
in writing, and arrange for repayment in the same way they would for
a bank loan help keep relationships intact
o Commercial Banks
o Forms of Short-Term Loans
Secured Loan A loan backed by collateral, something valuable
such as property
Unsecured Loan A loan that does not require any collateral
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