This is the easy peasy lemon squeezy introduction to a mammoth topic.
Balance Sheet comprises of
- Current Assets which have short life span e.g. inventory.
- Current Liabilities
- Long Term Debt
- Fixed Assets will last a long time e.g. machinery and equipment.
- Shareholders Equity
For investing in assets financing is required, debt (loan agreements) or equity shares are the means to achieve the same.
Debt is also classified as long term / short term liabilities.
ST : short lived, current liability, must be repaid within a year
LT: can be repaid beyond one year
Shareholders’ equity is the difference between the assets and the debt of the firm. Residual claim on the firm’s assets.
Capital Budgeting the process of making and managing expenditure on long lived assets.
Capital Expenditure is supported by the firm’s Capital Structure which represents firms financing from current and long term debt and equity.
Current Assets minus Current Liabilities is Net Working Capital. This is a concept of short term finance.
Financial affairs are associated with vice president or the CFO of the firm. Treasurer and Controller report to the CFO.
Treasurer handles cash flows,capital expenditures plans and financial plans. Controller handles accounting function which includes taxes, cost and financial accounting and information systems.
CFO is also known as Vice President (Finance)/Director(Finance)/ President(Finance).
Controller – Head of Accounts
Treasurer – Finance Head / Finance Controller.
In small firms a company secretary does a three in one.
The Corporate Firm
The basis problem of the firms is how to raise cash.
Corporate form of business .i.e. Corporation is the standard method for solving issues encountered in raising large amounts of cash.
Sole Proprietorship is a business owned by one person. All the profit and loss is yours.
- Cheapest business to start
- All taxes as sole individual income
- Unlimited liability
- Life is limited by the sole proprietor
- Equity money can be raised is limited to proprietor’s personal wealth
Two or more people
Partnership agreement can be oral agreement or a formal document. Each partner is liable for all debts.
Limited partnership requires at least one general partner. Limited partners permit the liability of some partners to be limited to the amount of cash each has contributed.
- Partnerships are in-expensive to setup
- Managing rights are with the general partners. Majority vote is required for major decisions.
- Partnerships cease to exist with the death or withdrawal of the general partner, dissolution is required to proceed.
- Limited partners can sell their interest in the partnership
- Income from a partnership is taxed as personal income
- It is difficult for a partnership to raise large amount of cash. It is limited to the contributions or ability of the partners.
Partnerships and Proprietorship.
- offer unlimited liability
- limited cash raising abilities
- limited life of the enterprise
- difficulty in transferring ownership