FINANCIAL MANAGEMENT PART 1

1. Foundations Chapter 1

6. Figure 1.1: Simplified Financial System

17. Figure 1.2: Finance Department Organization

19. The Importance of Cash Flow Q: Example: In 1999 we purchased a $1,000 asset that will be depreciated over five years using straight-line depreciation. Explain how that asset will be viewed from both an accounting and finance viewpoint. A: Accounting: The initial cost of the asset of $1,000 will be reflected on the books as will the $200 annual depreciation. Finance: We are interested in the $1,000 cash outflow and the taxes saved from the depreciation deduction—not the depreciation itself. Example

22. Figure 1.3: The Influence of Accounting, Economics and Financial Theory on Financial Management

26. The Corporate Form—Example Q: Hazel Gilroy owns a business that earns $100,000 before taxes. She wants to take the earnings home and spend them on herself. Assume a simplified tax system in which the relevant rates are 34% for corporations and 30% for individuals on the entire amounts subject to those taxes. Compare the total tax bills under the sole proprietorship and corporate forms of organization. A: Under the corporate form the $100,000 is first subject to a 34% corporate tax of $34,000, leaving earnings of $66,000. If Hazel were to take these earnings she would have to declare them as a dividend and pay personal taxes at 30%, or $19,800. In a sole proprietorship the $100,000 is taxed only once at the personal rate of 30%, for a total tax bill of $30,000. The difference in taxes of $23,800 is significant. Example