MGT301 Short Notes

Lecture # 1, 2, 3

What is FM?

FM is the management of financial resources, how to best find and use investments and opportunities in an everchanging and increasingly complex environment financing.

Why should CS majors study FM?

Management Information Systems (MIS) and Information Technology (IT) are just a part of the overall corporate strategy which runs on finances, the major resource. So the computer sciences professionals need to have an understanding of the financial concepts to understand and contribute to the overall corporate strategy. One important area of study is the design, analysis, and construction of financial contracts to meet the needs of enterprises.

Organizational Structure

(Who does the FM work?)

1. Board of director, representative of shareholder or owner of company.
2. CEO : To Him report CFO
3. CFO: Handle financial management in centralize way.

AND 2 primary managers:

4. Treasurer: handle Cash & Investment, Capital Budgeting, Capital Structure and Inventory.
5. Controller: incharge of Accounts, Audit.

Business Legal Entities

• Sole Proprietorship:

It is an unincorporated business owned by one individual

Advantages:

i. It is easily & inexpensively formed. ii. It is subject to few government regulations. iii. Single taxation.

Limitations:

i. It is difficult for a proprietorship to obtain large sums of capital ii. Unlimited personal liability because its effect owner personal assets.

Partnership:

A partnership exists whenever two or more persons associate to conduct a non-corporate business. It could be registered or unregistered.

Advantages:

i. Low cost involved ii. Ease of formation.

Limitations:

i. Unlimited Liability. ii. Limited life of the organization. iii. Difficulty of transferring ownership. iv. Difficulty of raising large amounts of capital

Corporation:

A corporation is a limited company and a separate legal entity registered by the government. It is separate & distinct from its owners & managers. Public Limited (which may be listed on Stock Exchange) Private Limited (Pvt. Ltd.)

Advantages:

i.

Unlimited life:

ii.

Limited Liability:

iii.

Easy transferability of ownership interest:

Ownership interests can be divided into shares of stock, which in turn can be transferred far more easily than can proprietorship & partnership interests.

Limitations:

i. Double Taxation: the earnings of the corporation are taxed at corporate level, and then any earnings paid out as dividends are taxed again as income to the stockholders. ii. Legal Formalities: are more complex and time consuming

Hybrids (Mixed):

Hybrid organizations are specialized types of partnerships, which combine the limited liability advantage of a corporation with the tax advantages of a partnership.

S-Type Corporation: SType corporations are Limited Liability Corporations without double taxation.

LLP:

Limited Liability Partnership (LLP) is also a form of partnership with allows limited liability to the owners and avoids double taxation.

PC:

Personal Corporations (PC) or Professional Corporations are generally formed by professionals to protect them against litigations

Internal Business Environment:

Internal environment of business normally consists of the following. i. Finance ii. Marketing iii. Human Resources iv. Operations (Production, Manufacturing) v. Technology vi. Other Functions (Logistics, Communications)

External Business Environment:

The following business environment factors outside an organization have a profound effect on the functions and operations of an organization. I. Customers ii. Suppliers iii. Competitors iv. Government /Legal Agencies & Regulations v. Macro Economy/Markets: Vi. Technological Revolution

Capital Markets:

These are the markets for the long term debt & corporate stocks. Stock Exchange, Long term bonds

Stock Exchange:

A stock exchange is a place where the listed shares, Term finance certificates (TFC) and national investment trust units (NIT) are exchanged and traded between buyers and sellers.

Money Markets

Money market generally is a market where there is buying and selling of short term liquid debt instruments.

Objective of Economics: is profit maximization; Objective of Financial Management: is to maximize the shareholders wealth in the present terms by using discounting and the net present value techniques Objective of Financial Accounting: The objective of financial accounting is to collect accurate, systematic, and timely financial data and other financial information, and to compile and consolidate it in an organized and systematic way, according to the principles and rules of accounting, for reporting purpose.

Book Value:

Book Value is the value of an asset as shown on the Balance Sheet. It is based on historical cost (or purchase price) and accumulated depreciation. Market value may be defined as the value currently prevailing in the market or the value at which the sellers are ready to sell, and buyers are ready to buy a particular asset. Intrinsic value or the fair value is calculated by summing up the discounted future cash flows.

Liquidation Value:

The liquidation value is the value of an asset in a particular situation, where the company is in the process of wrapping up the business and its assets are valued and sold individually.

Real Assets:

Real assets are tangible assets that have physical characteristics

Securities:

Security, also known as a financial asset, is a piece of paper representing a claim on an asset. i. Direct Securities: Direct securities include stocks and bonds. While valuing direct securities we take into account the cash flows generated by the underlying assets. Discounted Cash Flow (DCF) technique is often used to determine the value of a stock or bond. ii. Indirect Securities: Indirect securities include derivatives, Futures and Options. The securities do not generate any cash flow; however, its value depends on the value of the underlying asset.

Bonds: Internationally, bonds are the most common way for companies to raise funds, shown on the liabilities side of the Balance Sheet. A bond is a long-term debt contract (on paper) issued by the borrower (Issuer of the Bond i.e., a company that wishes to raise funds) to the lenders (bondholders or Investors which may include banks, financial institutions, and private investors).

Stocks (or Shares):

Stocks (or Shares) are paper certificates representing ownership in a business, represented in the equity section of the

balance sheet. It is the most common source of raising funds under Islamic Sarah

Difference between Shares & Bonds:

i. shares are representation of ownership in a company while bonds are not ii. shares last as long as the company lasts where as bonds have limited life iii. return on a bond is predetermined and shares not

Types of Stocks

Common Stock:

Common shareholders receive dividends, or portion of the net income which the management decides.

Preferred Stock:

It is the stock with a predetermined or fixed dividend

The shares and bonds that a company purchases as an investment 4 generate extra income will come on the asset side under the section of marketable securities. Those shares and bonds that the company issues to raise funds will appear on the liability side. If the company has issued equity shares, they will appear under the section of common equity on liability side in the balance sheet.

Finance:

Finance is the science of managing financial resources in an optimal pattern i.e. the best use of available financial sources. Finance consists of three interrelated areas:

1. Money & Capital markets, which deals with securities markets & financial institutions.
2. Investments, which focuses on the decisions of both individual and institutional investors as they choose assets for their investment portfolios.
3. Financial Management, or business finance which involves the actual management of firms

Analysis of Financial Statements:

A company’s financial statements need to be studied for signs of financial strengths and weaknesses and then compared to (or benchmarked against) the industry.

Basic Financial Statements:

There are four basic financial statements that are prepared by the financial accountants for the use of the managers, creditors and investors of the company. These statements are a. Balance Sheet b. P/L or Income Statement c. Cash Flow Statement d. Statement of Retained Earnings (or Shareholders’ Equity Statement)

Assets +Expense = Liabilities + Shareholders’ Equity + Revenue

Left Hand Items increase when debited. Right Hand items increase when credited.

• For every journal entry, the Sum of Debits = the Sum of Credits