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MGTA02H3 Study Guide - Final Guide: External Auditor, Internal Audit, Investor Relations

Course Code
Arif Toor
Study Guide

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Final Exam Notes (Week 10-12)
Wednesday, April 8, 2020 11:10 AM
Managerial VS Financial Accounting
Issue Managerial Financial
Primary Users Internal External
Purpose of
Plan, Direct, Control, Decide Users make investing and lending decisions
Primary Accounting
Internal Reports useful to
General Purpose Financial Statements
What is included? Defined by Management Determined by GAAP
Underlying Basis of
Internal and External Transactions,
focus on future
Based on historical transactions with external parties
Emphasis Data must be relevant Data must be reliable and objective
Business Unit Segments of the business Company as a whole
Preparation Depends on management needs Annually and Quarterly
Verification Internal audit External audit
No requirement SEC requires publicly traded companies to issue
audited financial statements
Impact on employee
Careful consideration Adequacy of disclosure
Financing the Enterprise
Finance: the function of business that involves locating, collecting, packaging, and redistributing capital
Financial management: planning, organising, leading and controlling the finding and using of capital.
Without capital a business can’t buy/rent office space, can’t purchase officer equipment, machinery and supplies,
cant pay its employees.
Chief Financial Officer (CFO) - senior manager responsible for overseeing the financial management of the entire
Finance owes its existence to two simple assumptions:
1. There are people who have ideas & ambitions, plans and projects that they would undertake – if only they had the
2. There are people who have capital but, for the time being, have no immediate need or desire to spend it
What Do Financial Managers do?
Budgeting, Investment Appraisal, Capital Raising, Investor Relations, Financial Control
Why Business Needs Finance?
Because they absorb capital. A business must spend money before it can make money

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Must hire workers, rent offices, purchase office equipment, and then begin production.
Can take time before a business can break-even. Until then, must rely on the money from owner or borrowed money
Break-Even Analysis
Breakeven (B/E) Analysis: sales = costs
Often useful to determine the breakeven point for a particular product line
The breakeven point can be determined as dollars of sales, but often helpful to divide the sales by the selling price to
obtain the number of units the company must sell to break even
Breakeven analysis is especially useful in determining whether a new product for the company might be successful
Financial Planning - Budgeting
Budget: forecast estimate of the cost of the plans and projects that the organisation wants to carry out in the coming period
(derived from old French word purse)
Finance Ministers announce the government’s plans and spending priorities: money for schools, hospitals, etc.
Business doesn’t have the power to set taxes, unlike the government.
It is intended to force a business’ managers to consider what their various plans and projects will cost.  
Budget Deficit: when the cost of an organisation’s business’ plans and projects exceeds its inflows.
Must do two things if reached this stage:
1. Borrow money
2. Or cut back on some of its plans. 
Budget Surplus: when an organisation’s inflows exceed the cost of its plans and projects
A business with a budget surplus can build up its cash balance, repay some of its outstanding debt, or reward owners
Investment Appraisal
Businesses are faced with investment opportunities routinely. These might include:
Develop a new product
Expand into a new geographic market

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Expand capacity to better serve an existing market o Buy a competitor, a supplier or distributor
Investment appraisal: assessment of the attractiveness of competing investment opportunities.
Some of fundamental considerations for a major investment will be:
Size, Length, Return, Risk.
1. Size of Investment: Even the largest business has finite amount of capital. The first question will be “How much
will it cost?”
Ex. Parents can afford to either send you to uni or buy a car, but can’t do both
2. Length of Investment: An investor may be willing to invest in a project if the returns are expected in the near
Ex: 4 years in uni for degree you expect a well-paying job after. Consider you would take 7 years for your degree and
once youre done the jobs you hoped to get when you started may no longer exist. The greater the time of investment
the greater the risk
Because of this, finance managers appraise the length of time until an investment starts to generate return
Payback Period: The time in which the cash generated by a project is expected to exceed the initial outflow
Investments with a shorter payback period are often preferred because they involve fewer unanticipated
changes in the business environment
Return on Investment: Return on investment compares the profits or benefits from the investment against the capital
was put at risk.
Ex. You work towards getting a uni degree by paying $10 000 a year for costs but after 40 years your investment
will be high.
3. Risk of Return: range of possible returns from an investment, if it doesn’t perform exactly according to the
forecaster’s assumptions.
Financial managers must make forecasts about the profit that will come from an individual project or investment.
These forecasts are often presented using several scenarios, which show a variety of possible outcomes
Scenario Analysis
This “Scenario analysis” typically consists of:
Base or expected case: The investment performs largely as expected
Best or optimistic case: One or two things go better than expected
Worst or pessimistic case: One or two things go worse than expected
Financial Organization - Capital Raising
Capital Structure
To raise capital, businesses have a variety of options
A sole proprietor can take on a partner or incorporate
A partnership can look for additional general partners, or limited partners
Also, by borrowing.
Capital Structure: combination of the debt and equity capital that a business chose to use in order to finance its operations
and growth
Equity Financing
For the growing business, an obvious source of capital is the existing owners. The owners of a business can choose to invest
more or have someone else invest in the company.
+: new investors bring capital, skills, ideas and contacts.
-: new capital dilutes the ownership of the existing owners.
Dilution: decrease in the proportion owned by existing partners or shareholders, after new investors put capital into a
Ex. Company might start off with 3 investors: A–30(30%), B–30(30%), C–40(40%). If the company expands its business,
but can’t afford to put more money into the business themselves, they can invite new investors: A–30(25%), B–
30(25%), C – 40 (33.3%), D – 20 (16.7%)
Equity Financing – Disadvantages
People who start a business (entrepreneurs), tend to be independent -> aren’t comfortable sharing decision making ->
irreconcilable disagreements with other investors
Ex. Steve Jobs and co-founder of Apple Steve Wozniak had to raise more capital by selling the shares -> Jobs got fired -
> returned 12 years later.
Debt Finance – Advantages
1. Business won’t need to dig deeper into finding ways to get money
a. By choosing to borrow rather than look to the owners for capital, a business can grow, without changing its existing
2. A borrower’s only duty is to make the required loan payment back on time with the interest added on
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