Professional Documents
Culture Documents
Lecture # 01
Introduction to Finance
By: Faisal Dhedhi
Organizing a Business
SOLE PROPRIETOR: Sole owner of a business which has no partners and
no shareholders. The proprietor is personally liable for all the firm’s
obligations.
PARTNERSHIP: Business owned by two or more persons who are
personally responsible for all its liabilities.
Limited Partner: Member of a limited partnership not personally liable for the
debts of the partnership.
General Partner: Member of a partnership with unlimited liability for the
debts of the parternship.
CORPORATION: Business owned by stockholders who are not personally
liable for the business’s liabilities.
LIMITED LIABILITY: The owners of the corporation are not personally
responsible for its obligations.
To summarize, the corporation is a distinct, permanent legal entity. Its
advantages are limited liability and the ease with which ownership and
management can be separated. These advantages are especially
important for large firms. The disadvantage of corporate organization
is double taxation.
Hybrid form of Business Organization
Businesses do not always fit into these neat categories. Some
are hybrids of the three basic types: proprietorships,
partnerships, and corporations. In many states a firm can also
be set up as a limited liability partnership (LLP) or, equivalently,
a limited liability company (LLC). These are partnerships in
which all partners have limited liability. This form of
business organization combines the tax ad-vantage
of partnership with the limited liability advantage of
incorporation. However, it still does not suit the
largest firms, for which widespread share ownership
and separation of ownership and management are
essential. Another variation on the theme is the
professional corporation (PC), which is commonly
used by doctors, lawyers, and accountants. In this
case, the business has limited liability, but the
professionals can still be sued personally for
malpractice, even if the malpractice occurs in their
role as employees of the corporation.
Self-Test 1:
Which form of business organization might best suit the following?
a) A consulting firm with several senior consultants and support staff.
b) A house painting company owned and operated by a college student
who hires some friends for occasional help.
c) A paper goods company with sales of $100 million and 2,000
employees.
Characteristics of Business Organization:
The Role of Financial manager:
The treasurer is usually the person most directly responsible for looking after
the firm’s cash, raising new capital, and maintaining relationships with banks
and other investors who hold the firm’s securities.
Larger corporations usually also have a controller, who prepares the financial
statements, manages the firm’s internal accounting, and looks after its tax
affairs.
The largest firms usually appoint a chief financial officer (CFO) to oversee
both the treasurer’s and the controller’s work. The CFO is deeply involved in
financial policymaking and corporate planning. Often he or she will have
general responsibilities beyond strictly financial issues.
Goals of the Corporation:
SHAREHOLDERS WANT MANAGERS TO MAXIMIZE MARKET VALUE: A
smart and effective financial manager makes decisions which increase the
current value of the company’s shares and the wealth of its stockholders. That
increased wealth can then be put to whatever purposes the shareholders want.
They can give their money to charity or spend it in glitzy night clubs; they can
save it or spend it now. Whatever their personal tastes or objectives, they can
all do more when their shares are worthmore.
profit maximization is not a well-defined corporate objective. Here are three
reasons:
1. “Maximizing profits” leaves open the question of “which year’s profits?” The
company may be able to increase current profits by cutting back on
maintenance or staff training, but shareholders may not welcome this if profits
are damaged in future years.
2. A company may be able to increase future profits by cutting this year’s dividend
and investing the freed-up cash in the firm. That is not in the shareholders’ best
interest if the company earns only a very low rate of return on the extra
investment.
3. Different accountants may calculate profits in different ways. So you may find
that a decision that improves profits using one set of accounting rules may
reduce them using another.
The Accounting Cycle
Journal
Entry
Periodical
Adjustments
Business Environment, Accounting and Financial Statements