Chapters 1 and 2 - The Role of Managerial Finance and The Market Environment

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Module 1
Chapters 1 and 2
The Role of
Managerial
Finance and the
Market
Environment
Chapter 1
The Role of
Managerial
Finance
Hospitality Financial Challenges
A multi-faceted industry
Low profitability
Fluctuating sales volume
Labor intensive
Capital intensive
Reliance on discretionary incomes
Copyright 2015 Pearson Education, Inc. All rights reserved.
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What is Accounting?
Accounting as the language of business
Accounting standards and principles
Uniform systems of accounts
Financial statements
Income statement
Balance sheet
Statement of cash flow
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Management reports
Daily revenue report

Daily payroll cost report
Rooms revenue forecast
Food and beverage menu abstract
Accounts receivable aging schedule
Accounting system
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Types of Accounting
Financial Accounting
Focuses on financial
statements
Must present:
financial condition of
the company
operating results
Managerial
Accounting
Provide timely
operating results
Focuses on:
Revenues and expenses
Maximizing operating
performance
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Accounting Standards
Develop Standards
Financial Accounting Standards Board (FASB)

Securities and Exchange Commission (SEC)
Govern all accounting and financial reporting
Generally Accepted Accounting Principles (GAAP)
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Accounting Principles
Cost Principle
All transactions must be recorded at cost
Full Disclosure Principle

Events that could impact a companys financial
position should be reflected on financial
statements or footnotes
Revenue Recognition Principle

Revenues should be recorded in the month they
are earned
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Accounting Principles cont.

Matching Principle
All expenses incurred in generating a revenue
should be recorded in the period the revenue is
earned
Monetary Unit Principle

Only transactions that can be expressed in terms
of money can be shown on a companys financial
statements
Economic Entity Principle

Separates the dealings of a business from the
private dealings of its owners
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Accounting Principles cont.

Going Concern Principle
Requires businesses to assume they will continue
to operate long into the foreseeable future
Time Period Principle

The company must set specific time periods for
measuring its financial results
Materiality Principle
Significant revenues or expenses should have
thier own account on the income statement
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Financial Statements
Purpose of financial statements
Provide stakeholders a foundation for evaluating the
financial health of a firm
creditors
employees
management
stockholders
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Provide stakeholders a foundation for evaluating the
financial health of a firm.
customers
general Public
regulators
suppliers
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Evaluate a firms internal environment
efficiency
effectiveness
risk level
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Evaluate a firms interaction with the external environment
corporate citizenship
social responsibility
assessment of the external environment
response to the external environment
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Provide information about the performance of the firm
stakeholders want to compare actual vs. potential
performance
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Financial Statements and Accounting

Principles
GAAP
Generally Accepted Accounting Principles (GAAP)
accounting rules and standards that public companies must
adhere to when they prepare financial statements and reports
established by the Financial Accounting Standards Board
(FASB) and authorized by the Securities and Exchange
Commission (SEC)
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Principles
International GAAP
Uniform accounting rules and procedures promoted by the
International Accounting Standards Board
Firms in the European Union are moving toward a
European GAAP
Economic and political pressure is building in the United
States and Europe to develop a unified accounting system
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Principles
GAAP
Guidelines, not rules
Firms have discretion about how their financial information is
presented.
No two firms are required to have identical statements.
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Principles
GAAP
Guidelines, not rules.
Alternative terms on financial statements
balance sheet, statement of financial condition
income statement, statement of operations, profit and loss
statement
cost-of-goods-sold, cost-of -sales, cost-of-revenue, cost-ofservices-sold
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Principles
Five Important Accounting Principles
1.
Assumption of Arms Length Transaction
2.
Parties involved in an economic transaction arrive at a

decision independently and rationally.
Cost Principle
Asset values are recorded at the cost for which they

were acquired.
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Principles
3.
Realization Principle
4.
Revenue is recognized when a transaction is completed,

although cash may be received earlier or later.
Matching Principle
Revenue is matched with the expense incurred to

generate it.
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Principles
5.
Going Concern Assumption

Assume a company will continue to operate for the predictable
future.
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Principles
Annual Report
Summarizes the overall performance of a firm for the most
recent fiscal year
Information
the company, its products, its activities, and its future
summary of financial performance for the most recent year
audited financial statements, five-year summary of financial
data
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Uniform Systems of Accounts

Uniform System of Accounts for the Lodging
Industry
Uniform System of Accounts for Restaurants
Uniform System of Financial Reporting for Clubs
Other systems:
Timeshare
Condominium
Health, racquet, and sports clubs
Spas
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What is Finance?
Finance can be defined as the science and art of
managing money.
At the personal level, finance is concerned with
individuals decisions about:
how much of their earnings they spend
how much they save
how they invest their savings
In a business context, finance involves:

how firms raise money from investors
how firms invest money in an attempt to earn a profit
how firms decide whether to reinvest profits in the
business or distribute them back to investors.
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Career Opportunities in Finance: Financial

Services
Financial Services is the area of finance
concerned with the design and delivery of advice
and financial products to individuals, businesses,
and governments.
Career opportunities include:
Banking
Hospitality
personal financial planning
Investments
real estate
insurance
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Career Opportunities in Finance:

Managerial Finance
Managerial finance is concerned with the duties
of the financial manager working in a business.
Financial managers administer the financial
affairs of all types of businessesprivate and
public, large and small, profit-seeking and not-forprofit. Tasks include:
developing a financial plan or budget

extending credit to customers
evaluating proposed large expenditures
raising money to fund the firms operations.
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Career Opportunities in Finance:

Managerial Finance (cont.)
The recent global financial crisis and subsequent
responses by governmental regulators, increased
global competition, and rapid technological change
also increase the importance and complexity of the
financial managers duties.
Increasing globalization has increased demand for
financial experts who can manage cash flows in
different currencies and protect against the risks
that naturally arise from international transactions.
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Legal Forms of Business Organization

A sole proprietorship is a business owned by one
person and operated for his or her own profit.
A partnership is a business owned by two or more
people and operated for profit.
A corporation is an entity created by law.
Corporations have the legal powers of an individual
in that it can sue and be sued, make and be party
to contracts, and acquire property in its own name.
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Table 1.1 Strengths and Weaknesses of the

Common Legal Forms of Business Organization
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Matter of Fact
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Figure 1.1 Corporate Organization
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Table 1.2 Career Opportunities in

Managerial Finance
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Goal of the Firm:

Maximize Shareholder Wealth
Decision rule for managers: only take actions that
are expected to increase the share price.
Figure 1.2 Share Price Maximization
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Goal of the Firm:

Maximize Profit?
Which Investment is Preferred?
Profit maximization may not lead to the highest possible share

price for at least three reasons:
1.
2.
3.
Timing is importantthe receipt of funds sooner rather than

later is preferred
Profits do not necessarily result in cash flows available to
stockholders
Profit maximization fails to account for risk
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Goal of the Firm:

What About Stakeholders?
Stakeholders are groups such as employees,
customers, suppliers, creditors, owners, and others
who have a direct economic link to the firm.
A firm with a stakeholder focus consciously avoids
actions that would prove detrimental to
stakeholders. The goal is not to maximize
stakeholder well-being but to preserve it.
Such a view is considered to be "socially
responsible."
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The Role of Business Ethics

Business ethics are the standards of conduct or
moral judgment that apply to persons engaged in
commerce.
Violations of these standards in finance involve a
variety of actions: creative accounting, earnings
management, misleading financial forecasts, insider
trading, fraud, excessive executive compensation,
options backdating, bribery, and kickbacks.
Negative publicity often leads to negative impacts
on a firm
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The Role of Business Ethics: Considering

Ethics
Robert A. Cooke, a noted ethicist, suggests that
the following questions be used to assess the
ethical viability of a proposed action:
Is the action arbitrary or capricious? Does the action
unfairly single out an individual or group?
Does the action affect the morals, or legal rights of any
individual or group?
Does the action conform to accepted moral standards?
Are there alternative courses of action that are less likely
to cause actual or potential harm?
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The Role of Business Ethics:

Ethics and Share Price
Ethics programs seek to:
reduce litigation and judgment costs

maintain a positive corporate image
build shareholder confidence
gain the loyalty and respect of all stakeholders
The expected result of such programs is to

positively affect the firms share price.
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Focus on Ethics
The Case of Google Glass
Computer that users wear like a pair of eyeglasses has
raised concerns over privacy.
2004 Owners Manual states that Googles ultimate goal
is to develop services that significantly improve the lives
of as many people as possible.
Corporate motto Dont Be Evil conveys willingness to do
the right thing at the expense of short-term profits.
Share price has increased 700% from 2004 to 2013.
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Managerial Finance Function

The size and importance of the managerial finance
function depends on the size of the firm.
In small firms, the finance function is generally
performed by the accounting department.
As a firm grows, the finance function typically
evolves into a separate department linked directly
to the company president or CEO through the chief
financial officer (CFO) (see Figure 1.1).
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Figure 1.1 Corporate Organization
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Managerial Finance Function:

Relationship to Economics
The field of finance is closely related to economics.
Financial managers must understand the economic
framework and be alert to the consequences of
varying levels of economic activity and changes in
economic policy.
They must also be able to use economic theories as
guidelines for efficient business operation.
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Relationship to Economics (cont.)
Marginal costbenefit analysis is the economic
principle that states that financial decisions should
be made and actions taken only when the added
benefits exceed the added costs
Marginal cost-benefit analysis can be illustrated
using the following simple example.
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Relationship to Economics (cont.)
Nord Department Stores is applying marginal-cost
benefit analysis to decide whether to replace a
computer:
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Relationship to Accounting
The firms finance and accounting activities are
closely-related and generally overlap.
In small firms accountants often carry out the
finance function, and in large firms financial
analysts often help compile accounting information.
One major difference in perspective and emphasis
between finance and accounting is that accountants
generally use the accrual method while in finance,
the focus is on cash flows.
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Relationship to Accounting (cont.)
Whether a firm earns a profit or experiences a loss,
it must have a sufficient flow of cash to meet its
obligations as they come due.
The significance of this difference can be illustrated
using the following simple example.
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The Nassau Corporation experienced the following
activity last year:
Sales: $100,000 (1 yacht sold, 100% still uncollected)

Costs:$80,000 (all paid in full under supplier terms)
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Now contrast the differences in performance under
the accounting method (accrual basis) versus the
financial view (cash basis):
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Personal Finance Example
Net cash flow = -$215!
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Finance and accounting also differ with respect to
decision-making:
Accountants devote most of their attention to the collection
and presentation of financial data.
Financial managers evaluate the accounting statements,
develop additional data, and make decisions on the basis
of their assessment of the associated returns and risks.
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Figure 1.3
Financial Activities
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Governance and Agency:

Corporate Governance
Corporate governance refers to the rules,
processes, and laws by which companies are
operated, controlled, and regulated.
It defines the rights and responsibilities of the
corporate participants such as the shareholders,
board of directors, officers and managers, and
other stakeholders, as well as the rules and
procedures for making corporate decisions.
The structure of corporate governance was
previously described in Figure 1.1.
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Individual versus Institutional Investors
Individual investors are investors who own relatively
small quantities of shares so as to meet personal
investment goals.
Institutional investors are investment professionals,
such as banks, insurance companies, mutual funds, and
pension funds, that are paid to manage and hold large
quantities of securities on behalf of others.
Unlike individual investors, institutional investors often
monitor and directly influence a firms corporate
governance by exerting pressure on management to
perform or communicating their concerns to the firms
board.
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Government Regulation
Government regulation generally shapes the
corporate governance of all firms.
During the recent decade, corporate governance
has received increased attention due to several
high-profile corporate scandals involving abuse of
corporate power and, in some cases, alleged
criminal activity by corporate officers.
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Government Regulation
The Sarbanes-Oxley Act of 2002:
established an oversight board to monitor the accounting
industry;
tightened audit regulations and controls;
toughened penalties against executives who commit corporate
fraud;
strengthened accounting disclosure requirements and ethical
guidelines for corporate officers;
established corporate board structure and membership
guidelines;
established guidelines with regard to analyst conflicts of
interest;
mandated instant disclosure of stock sales by corporate
executives;
increased securities regulation authority and budgets for
auditors and investigators.
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The Agency Issue
A principal-agent relationship is an arrangement
in which an agent acts on the behalf of a principal.
For example, shareholders of a company
(principals) elect management (agents) to act on
their behalf.
Agency problems arise when managers place
personal goals ahead of the goals of shareholders.
Agency costs arise from agency problems that are
borne by shareholders and represent a loss of
shareholder wealth.
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The Agency Issue:

Management Compensation Plans
In addition to the roles played by corporate boards,
institutional investors, and government regulations,
corporate governance can be strengthened by
ensuring that managers interests are aligned with
those of shareholders.
A common approach is to structure management
compensation to correspond with firm performance.
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The Agency Issue:

Management Compensation Plans
Incentive plans are management compensation
plans that tie management compensation to share
price; one example involves the granting of stock
options.
Performance plans tie management
compensation to measures such as EPS or growth
in EPS. Performance shares and/or cash bonuses
are used as compensation under these plans.
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Matter of FactForbes.com
CEO Performance vs. Pay
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The Agency Issue: The Threat of Takeover

When a firms internal corporate governance
structure is unable to keep agency problems in
check, it is likely that rival managers will try to gain
control of the firm.
The threat of takeover by another firm, which
believes it can enhance the troubled firms value by
restructuring its management, operations, and
financing, can provide a strong source of external
corporate governance.
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Chapter 2
The Financial
Market
Environment
Financial Institutions & Markets

Firms that require funds from external sources can
obtain them in three ways:
1. through a financial institution
2. through financial markets
3. through private placements
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Financial Institutions & Markets:

Financial Institutions
Financial institutions are intermediaries that
channel the savings of individuals, businesses, and
governments into loans or investments.
The key suppliers and demanders of funds are
individuals, businesses, and governments.
In general, individuals are net suppliers of funds,
while businesses and governments are net
demanders of funds.
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Commercial Banks, Investment Banks,

and the Shadow Banking System
Commercial banks are institutions that:
provide savers with a secure place to invest their funds
offer loans to individual and business borrowers
Investment banks are institutions that:

assist companies in raising capital
advise firms on major transactions such as mergers or
financial restructurings
engage in trading and market making activities
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Commercial Banks, Investment Banks,

and the Shadow Banking System (cont.)
The Glass-Steagall Act was an act of Congress in
1933 that created the federal deposit insurance
program and separated the activities of commercial
and investment banks. It was repealed it 1999 by
Congress.
The shadow banking system describes a group of
institutions that:
engage in lending activities, much like traditional banks
but do not accept deposits
are not subject to the same regulations as traditional
banks
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Matter of Fact
Consolidation in the U.S. Banking Industry:
The U.S. banking industry has been going through a long
period of consolidation.
According to the FDIC, the number of commercial banks in
the United States declined from 11,463 in 1992 to 6,048 in
2013, a decline of 47%.
The decline is concentrated among small, community
banks, which larger institutions have been acquiring at a
rapid pace.
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Financial Markets
Financial markets are forums in which suppliers of
funds and demanders of funds can transact business
directly.
Transactions in short term marketable securities take
place in the money market while transactions in longterm securities take place in the capital market.
A private placement involves the sale of a new
security directly to an investor or group of investors.
Most firms, however, raise money through a public
offering of securities, which is the sale of either
bonds or stocks to the general public.
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Financial Markets (cont.)
The primary market is the financial market in
which securities are initially issued; the only market
in which the issuer is directly involved in the
transaction.
Secondary markets are financial markets in which
preowned securities (those that are not new issues)
are traded.
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Figure 2.1
Flow of Funds
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The Money Market

The money market is created by a financial
relationship between suppliers and demanders of
short-term funds.
Most money market transactions are made in
marketable securities which are short-term debt
instruments, such as:
U.S. Treasury bills issues by the federal government
commercial paper issued by businesses
negotiable certificates of deposit issued by financial
institutions
Investors generally consider marketable securities

to be among the least risky investments available.
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The Money Market (cont.)

The international equivalent of the domestic (U.S.)
money market is the Eurocurrency market.
The Eurocurrency market is a market for short-term
bank deposits denominated in U.S. dollars or other
marketable currencies.
The Eurocurrency market has grown rapidly mainly
because it is unregulated and because it meets the
needs of international borrowers and lenders.
Nearly all Eurodollar deposits are time deposits.
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The Capital Market

The capital market is a market that enables
suppliers and demanders of long-term funds to
make transactions.
The key capital market securities are bonds (longterm debt) and both common and preferred stock
(equity, or ownership).
Bonds are long-term debt instruments used by businesses
and government to raise large sums of money, generally
from a diverse group of lenders.
Common stock are units of ownership interest or equity
in a corporation.
Preferred stock is a special form of ownership that has
features of both a bond and common stock.
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The Capital Market

Lakeview Industries, a major microprocessor
manufacturer, has issued a 9 percent coupon interest
rate, 20-year bond with a $1,000 par value that pays
interest semiannually.
Investors who buy this bond receive the contractual right
to $90 annual interest (9% coupon interest rate $1,000
par value) distributed as $45 at the end of each 6 months
(1/2 $90) for 20 years.
Investors are also entitled to the $1,000 par value at the
end of year 20.
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Focus on Practice
Berkshire Hathaway Can Buffett Be Replaced?
Since the early 1980s, Berkshire Hathaways Class A
common stock price has climbed from $285/share to
$114,000/share.
The company is led by Chairman Warren Buffett (83) and
Vice-Chairman Charlie Munger (89).
The share price of BRKA has never been split. Why might
the company refuse to split its shares to make them more
affordable to average investors?
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Broker Markets and Dealer Markets

Broker markets are securities exchanges on which
the two sides of a transaction, the buyer and seller,
are brought together to trade securities.
Trading takes place on centralized trading floors of national
exchanges, such as NYSE Euronext, as well as regional
exchanges.
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Broker Markets and Dealer Markets

(cont.)
Dealer markets, such as Nasdaq, are markets in
which the buyer and seller are not brought together
directly but instead have their orders executed by
securities dealers that make markets in the given
security.
The dealer market has no centralized trading floors.
Instead, it is made up of a large number of market makers
who are linked together via a mass-telecommunications
network.
As compensation for executing orders, market

makers make money on the spread (bid price ask
price).
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Matter of Fact
According to the World Federation of Exchanges, in
2012:
1.
2.
3.
4.
NYSE Euronext is the largest stock market in the world, as

measured by the total market value of securities listed on that
market. NYSE Euronext has listed securities worth more than
$14.1 trillion in the U.S. and $2.1 trillion in Europe.
The second largest exchange is Nasdaq, with listed securities
valued at $4.6 trillion.
The Tokyo Stock Exchange has securities valued at $3.5 trillion.
The fourth largest exchange, the London Stock Exchange, has
securities valued at $3.3 trillion.
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International Capital Markets

In the Eurobond market, corporations and
governments typically issue bonds denominated in
dollars and sell them to investors located outside
the United States.
The foreign bond market is a market for bonds
issued by a foreign corporation or government that
is denominated in the investors home currency
and sold in the investors home market.
The international equity market allows
corporations to sell blocks of shares to investors in
a number of different countries simultaneously.
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The Role of Capital Markets

From a firms perspective, the role of capital
markets is to be a liquid market where firms can
interact with investors in order to obtain valuable
external financing resources.
From investors perspectives, the role of capital
markets is to be an efficient market that allocates
funds to their most productive uses.
An efficient market allocates funds to their most
productive uses as a result of competition among
wealth-maximizing investors and determines and
publicizes prices that are believed to be close to
their true value.
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The Role of Capital Markets (cont.)

Advocates of behavioral finance, an emerging
field that blends ideas from finance and psychology,
argue that stock prices and prices of other
securities can deviate from their true values for
extended periods.
Examples of the principle that stock prices
sometimes can be wildly inaccurate measures of
value include:
the huge run up and subsequent collapse of the prices of
Internet stocks in the late 1990s
the failure of markets to accurately assess the risk of
mortgage-backed securities in the more recent financial
crisis
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The Financial Crisis: Financial Institutions

and Real Estate Finance
Securitization is the process of pooling mortgages
or other types of loans and then selling claims or
securities against that pool in a secondary market.
Mortgage-backed securities represent claims on
the cash flows generated by a pool of mortgages
and can be purchased by individual investors,
pension funds, mutual funds, or virtually any other
investor.
A primary risk associated with mortgage-back
securities is that homeowners may not be able to,
or may choose not to, repay their loans.
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The Financial Crisis: Falling Home Prices

and Delinquent Mortgages
Rising home prices between 1987 and 2006 kept
mortgage default rate low.
Lenders relaxed standards for borrowers and
created subprime mortgages.
As housing prices fell from 2006 to 2009, many
borrowers had trouble making payments, but were
unable to refinance.
As a result, there was a sharp increase in the
number of delinquencies and foreclosures.
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The Financial Crisis: Falling Home Prices

and Delinquent Mortgages
Figure 2.2 Housing Values
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The Financial Crisis: Crisis of Confidence

in Banks
The price of bank stocks fell 81% between January
2008 and March 2009.
Number of bank failures 2007 - 2011
180
160
140
120
100
80
60
40
20
0
2007
2008
2009
2010
2011
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The Financial Crisis: Crisis of

Confidence in Banks
Figure 2.3 Bank Stock Values
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The Financial Crisis: Spillover Effects and

the Great Recession
As banks came under intense financial pressure in
2008, they tightened their lending standards and
dramatically reduced the quantity of loans they
made.
Corporations found that they could no longer raise
money in the money market, or could only do so at
extraordinarily high rates.
As a consequence, businesses began to hoard cash
and cut back on expenditures, and economic
activity contracted.
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Regulation of Financial Institutions and Markets:

Regulations Governing Financial Institutions
The Glass-Steagall Act (1933) established the
Federal Deposit Insurance Corporation (FDIC)
which provides insurance for deposits at banks and
monitors banks to ensure their safety and
soundness.
The Glass-Steagall Act also prohibited institutions
that took deposits from engaging in activities such
as securities underwriting and trading, thereby
effectively separating commercial banks from
investment banks.
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Regulations Governing Financial Institutions
The Gramm-Leach-Bliley Act (1999) allows
business combinations (e.g. mergers) between
commercial banks, investment banks, and
insurance companies, and thus permits these
institutions to compete in markets that prior
regulations prohibited them from entering.
Congress passed the Dodd-Frank Wall Street
Reform and Consumer Protection Act in 2010, but it
has not been fully implemented.
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Regulations Governing Financial Markets
The Securities Act of 1933 regulates the sale of
securities to the public via the primary market.
Requires sellers of new securities to provide extensive
disclosures to the potential buyers of those securities.
The Securities Exchange Act of 1934 regulates

the trading of securities such as stocks and bonds
in the secondary market.
Created the Securities Exchange Commission, which is
the primary government agency responsible for enforcing
federal securities laws.
Requires ongoing disclosure by companies whose securities
trade in secondary markets (e.g., 10-Q, 10-K).
Imposes limits on the extent to which insiders can trade
in their firms securities.
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Business Taxes
Both individuals and businesses must pay taxes on
income.
The income of sole proprietorships and partnerships
is taxed as the income of the individual owners,
whereas corporate income is subject to corporate
taxes.
Both individuals and businesses can earn two types
of incomeordinary income and capital gains
income.
Under current law, tax treatment of ordinary
income and capital gains income change frequently
due frequently changing tax laws.
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Table 2.1
Corporate Tax Rate Schedule
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Business Taxes:
Ordinary Income
Ordinary income is earned through the sale of a
firms goods or services and is taxed at the rates
depicted in Table 2.1 on the previous slide.
Example
Webster Manufacturing Inc. has before-tax earnings of $250,000.
Tax = $22,500 + [0.39 ($250,000 $100,000)]
Tax = $22,500 + (0.39 $150,000)
Tax = $22,500 + $58,500 = $80,750
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Business Taxation: Marginal versus

Average Tax Rates
A firms marginal tax rate represents the rate at
which additional income is taxed.
The average tax rate is the firms taxes divided by
taxable income.
Example
What are Webster Manufacturings marginal and average tax rates?
Marginal Tax Rate
= 39%
Average Tax Rate
= $80,750/$250,000 = 32.3%
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Business Taxation:
Interest and Dividend Income
For corporations only, 70% of all dividend income
received from an investment in the stock of another
corporation in which the firm has less than 20%
ownership is excluded from taxation.
This exclusion moderates the effect of double
taxation, which occurs when after-tax corporate
earnings are distributed as cash dividends to
stockholders, who then must pay personal taxes on
the dividend amount.
Unlike dividend income, all interest income received
is fully taxed.
1-95
Business Taxation:
Tax-Deductible Expenses
In calculating taxes, corporations may deduct
operating expenses and interest expense but not
dividends paid.
This creates a built-in tax advantage for using debt
financing as the following example will
demonstrate.
Example
Two companies, Debt Co. and No Debt Co., both expect in
the coming year to have EBIT of $200,000. During the
year, Debt Co. will have to pay $30,000 in interest
expenses. No Debt Co. has no debt and will pay not
interest expenses.
1-96
32
7/31/2014
Business Taxation:
Tax-Deductible Expenses (cont.)
1-97
Business Taxation:
Tax-Deductible Expenses (cont.)
As the example shows, the use of debt financing
can increase cash flow and EPS, and decrease taxes
paid.
The tax deductibility of interest and other certain
expenses reduces their actual (after-tax) cost to
the profitable firm.
It is the non-deductibility of dividends paid that
results in double taxation under the corporate form
of organization.
1-98
Business Taxation: Capital Gains

A capital gain is the amount by which the sale
price of an asset exceeds the assets purchase
price.
For corporations, capital gains are added to
ordinary income and taxed like ordinary income at
the firms marginal tax rate.
Example
Ross Company has just sold for $150,000 and asset that
was purchased 2 years ago for $125,000. Because the
asset was sold for more than its initial purchase price,
there is a capital gain of $25,000 ($150,000 - $125,000).
1-99
33

Chapters 1 and 2 - The Role of Managerial Finance and The Market Environment

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7/31/2014

Hospitality Financial Challenges

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Daily revenue report

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Financial Accounting Standards Board (FASB)

Govern all accounting and financial reporting

Generally Accepted Accounting Principles (GAAP)

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Full Disclosure Principle

Revenue Recognition Principle

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Accounting Principles cont.

Monetary Unit Principle

Economic Entity Principle

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Accounting Principles cont.

Time Period Principle

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Financial Statements and Accounting

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Financial Statements and Accounting

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Financial Statements and Accounting

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Financial Statements and Accounting

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Financial Statements and Accounting

Assumption of Arms Length Transaction

Parties involved in an economic transaction arrive at a

Asset values are recorded at the cost for which they

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Financial Statements and Accounting

Revenue is recognized when a transaction is completed,

Revenue is matched with the expense incurred to

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Financial Statements and Accounting

Going Concern Assumption

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Financial Statements and Accounting

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Uniform Systems of Accounts

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In a business context, finance involves:

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Career Opportunities in Finance: Financial

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Career Opportunities in Finance:

developing a financial plan or budget

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Career Opportunities in Finance:

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Legal Forms of Business Organization

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Table 1.1 Strengths and Weaknesses of the

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