MGTA02H3 Chapter Notes - Chapter 10: Creative Accounting, Dividend Yield, Asset Turnover
University Of Toronto Scarborough (UTSC) Date: March 19, 2018
Course: MGTA02 (Winter)
Professor: Chris Bovaird
Shahriyar Safavi
Week 10 – Managing Capital: The Function of Finance
Terminology
1. Financial Management: Planning, Organising, leading and controlling the finding and
using of capital.
2. Chief Financial Officer (CFO): The senior manager responsible for overseeing the
financial management of the entire organisation.
3. Budget: A forecast estimate of the cost of the plans and projects that the organisation
wants to carry out in the coming period.
4. Budget Deficit: When the cost of an organisation’s business’ plans and projects exceeds
its inflows.
5. Budget Surplus: When an organisation’s inflows exceed the cost of its plans and
projects.
6. Investment Appraisal: The assessment of the attractiveness of competing investment
opportunities.
7. Payback Period: The time in which the cash generated by a project is expected to
exceed the initial outflow.
8. Risk of Return: The range of possible returns from an investment, it doesn’t preform
exactly according to the forecaster’s assumptions.
9. Capital Structure: The combination of the debt and equity capital that a business
chooses to use in order to finance its operations and growth.
10. Dilution: A decrease in the proportion owned by existing partners or shareholders, after
new investors put capital into a business.
11. Investor Relations: Communicating the company’s financial results, strategy and plans
to everyone with an interest in a business activities.
12. Finance Control: Establishing a standard, measuring performance, and taking action to
improve or regulate the raising and spending of capital.
13. Net Present Value (NPV): The value in the present of a sum of money, in contrast to
some future value it will have when it has been invested at compound interest.
14. Accounting Rate of Return (ARR): ARR calculates the return, generated from net income
of the proposed capital investment. The ARR is a percentage return.
Manager’s Responsibilities
1. Decision Making
Planning: Settings goals and objectives
Directing: Overseeing day to day operations
Controlling: Evaluating results of operations
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Organizational Structure
Steps In The Planning Process
Preparing The Pro Forma Financial Statement
1. Identify the factors that will affect the pro forma statements
Opportunities and Threats: External Factors
Strengths and Weaknesses: Internal Factors
2. Forecast the sales for the period
The usual starting point is to forecast sales for the period
Producing a reliable sales forecast involves understanding the
competitive environment and deciding upon a particular approach to
forecasting.
Subjective Approach: This approach normally relies on the views of the
sales force or sales managers
Objective Approach: This approach relies on statistical techniques or, in
the case of very large businesses (such as multinational automobile
manufacturers), econometric models
3. Forecast the remaining elements of the financial statements
Once the level of sales has been estimated, the items appearing in the
cash budget, income statement, statement of retained earnings, and
balance sheet will be forecast
4. Prepare the pro forma financial statements
Steps In The Financial Process
Calculating Ratios: Horizontal Analysis & Vertical Analysis
Financial ratios based on current or past performance are often used to help predict the future.
Interpretation depends on judgment and opinion of analyst.
1. Horizontal analysis: Compares financial statements between two or more years .
•Reduction in the cash balance
•Major expansion in the elements of working capital
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•Expansion of property, plant and equipment
•Apparent debt capacity
•Lower profit
2. Vertical Analysis: Compares results at different companies is within one year.
•Calculates the percentage of each account to total assets.
Finance
1. The main factors affecting the value of money over time:
•Interest Lost: opportunity cost
•Risk: things may not turn out as expected
•Inflation: the loss of purchasing power of money over time
2. Three Factors Influencing the Required Returns from Investors
•Interest Forgone
•Risk Premium
•Inflation
Financial Ratio Classification Equations
Net Present Value (NPV): The value in the present of a sum of money, in contrast to some
future value it will have when it has been invested at compound interest.
C0 = Initial Investment
r = Rate of discount
Cn = Cash flow
T = Year/Time
1. Profitability: The following ratios may be used to evaluate the profitability of the
business.
Return On Equity: Compares the amount of profit for the period available to the
owners, with the owners’ average stake in the business during that same period.
=
Return On Capital Employed: This ratio expresses the relationship between the
earnings before interest and taxes generated during a period and the average long-
term capital invested in the business during that period.
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MGTA02H3 Full Course Notes
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Document Summary
University of toronto scarborough (utsc) date: march 19, 2018. Week 10 managing capital: the function of finance. Identify the factors that will affect the pro forma statements. Strengths and weaknesses: internal factors: forecast the sales for the period. The usual starting point is to forecast sales for the period. Producing a reliable sales forecast involves understanding the competitive environment and deciding upon a particular approach to forecasting. Subjective approach: this approach normally relies on the views of the sales force or sales managers. Objective approach: this approach relies on statistical techniques or, in the case of very large businesses (such as multinational automobile manufacturers), econometric models: forecast the remaining elements of the financial statements. Once the level of sales has been estimated, the items appearing in the cash budget, income statement, statement of retained earnings, and balance sheet will be forecast: prepare the pro forma financial statements.
