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Chapter Review

Key Takeaways

  1. Financial management involves the strategic planning and budgeting of short- and long-term funds for current and future needs. This may include activities such as investing, borrowing, lending, budgeting, saving, and forecasting. In most companies, the finance department comprises two divisions—accounting and financial management.
  2. There are three main types of finance: personal finance, corporate finance, and government finance.  In this chapter, we will discuss corporate finance.
  3. Financial managers analyze short-term and long-term money flows to optimize a firm’s profitability and make the best use of its money.
  4. Forecasts predict revenue, costs and expenses for a specific future period. Short-term forecasts would include predictions for the upcoming year, while long-term forecasts would include predictions for a period longer than one year into the future.
  5. A budget is a financial plan that outlines the company’s planned cash flows, expected operating expenses, and anticipated revenues.
  6. The financial budget plans the use of assets and liabilities and results in a projected balance sheet.
  7. The operating budget helps plan future revenue and expenses and results in a projected income statement.
  8. The capital budget considers the company’s long-range plans and outlines the expected financial needs for significant capital purchases such as real estate, manufacturing equipment, plant expansions, or technology.
  9. Financial controls are procedures and policies that monitor and manage financial resources to prevent errors, fraud, and optimize allocation.
  10. Financial controllers are responsible for updating financial controls and overseeing all the accounting activities in an organization.
  11. Equity financing carries no repayment obligation and provides extra working capital that can be used to grow a business.
  12. Debt financing, on the other hand, does not require giving up a portion of ownership.
  13. Sources of Financing. There are many lenders that give out loans and lines of credit such as the Big Five Banks, trust companies, credit unions, online banks, finance companies, insurance companies, brokerage firms, factoring companies, venture capital firms, government financial institutions, granting agencies, and pension funds.
  14. Short-term financing means business financing from short-term sources, which are for less than one year. There are many different types of short-term financing for businesses, including business line of credit, working capital advance, merchant cash advance, equipment financing, bridge loans, and invoice factoring.
  15. Indigenous small businesses are faced with a higher number of financial barriers than their non-Indigenous counterparts.
  16. The main objective of managerial accounting is to assist the management of a company in efficiently performing its functions: planning, organizing, directing, and controlling.
  17. Financial accountants furnish information to individuals and groups both inside and outside the organization in order to help them assess the organization’s financial performance.
  18. In preparing financial statements, financial accountants adhere to a set of standards or guidelines, known as Generally Accepted Accounting Principles (GAAP). GAAP is used mainly by companies headquartered in the U.S., while most other countries follow the International Financial Reporting Standards (IFRS). These multinational standards, which are issued by the International Accounting Standards Board (IASB), differ from US GAAP in a number of important ways.
  19. An income statement shows sales, expenses, and whether or not a profit was made.
  20. A balance sheet shows assets and liabilities, and the amount invested in the business.
  21. To prepare a balance sheet, one must first understand the fundamental accounting equation: Assets = Liabilities + Owner’s Equity
  22. A statement of cash flows or a cash flow statement shows how much cash is coming in and going out. It provides valuable information about a company’s expenses and receipts and allows insights into its future income needs in order to be able to meet its future obligations (expenses and receipts).
  23. Cost of goods sold is the total cost of the goods that you’ve sold.
  24. Operating expenses refer to the costs of operating your business, except for the costs of things that you’ve sold.
  25. Gross profit, also known as gross margin. The difference between gross profit and operating expenses is your net income or profit, which is the proverbial “bottom line.”
  26. Debits increase asset or expense accounts and decrease liability, revenue or equity accounts.
  27. Credits do the reverse of debits; they decrease asset or expense accounts and increase liability, revenue or equity accounts. The individual entries on a balance sheet are referred to as debits and credits.
  28. In Double-entry accounting, every transaction is recorded with a debit and credit in two or more accounts, which categorize different types of financial activities in a company’s general ledger.
  29. A trend analysis is done by collecting data at selected times and then plotting any observed changes over longer periods.
  30. Profitability ratios tell you how much profit is made relative to the amount invested (return on investment) or the amount sold (return on sales).
  31. Liquidity ratios tell you how well-positioned a company is to pay its bills in the near term. Liquidity refers to how quickly an asset can be turned into cash. For example, shares of stock are substantially more liquid than a building or a machine.
  32. Debt ratios look at how much borrowing a company has done in order to finance the operations of the business. The more borrowing, the more risk a company has taken on, and so the less likely it is that new lenders will approve loan applications.
  33. Efficiency ratios tell you how well your assets are being managed.

Download the “Chapter in Review” for
Chapter 10: Financial Management and Accounting [PDF].

End-of-Chapter Exercises

  1. Equity Capital and Preference Capital. Use the Internet to search for the terms, equity capital (common shares) and preference capital (preferred shares). What do they mean?  Would you rather hold preferred shares or common shares? Is there a difference in cost between these two types of shares? How do preference shares affect a company’s finances? Discuss your findings with the class and/or your professor.
  2. Successful Investors. Use the Internet to research some investors who are well-known for their success in investing. Warren Buffett is one of the people we have all heard of. Can you find a few others? What made them successful? Share your findings with the class and/or professor.
  3. Ratios. Identify two public companies operating in different industries. Collect at least three years’ worth of financial statements for the firms. Calculate these financial ratios: profitability, liquidity, and debt.  Prepare a summary and share with your class and/or professor.
  4. Accounting Scandals. Use the Internet to research a recent accounting fraud scandal. What happened? How might this have been stopped? How can companies use better controls to stop accounting fraud? Share your findings with the class and/or teacher.
  5. Debit and Credit App. Download the App, Debit and Credit – Accounting. Practice debiting and crediting coins to learn basic accounting. Play against the world as you learn. How did you do?
  6. Accounting Flashcards App. Download the Accounting Flashcards app, which includes translation for English, Chinese, and Spanish. Learn financial accounting using illustrated flashcards. Topics include accounting standards, equations, terms, ratios, and more. How did you do?
  7. Government Support. Research one or more of the following government agencies and find out what they do: The Business Development Bank of Canada (BDC), the Government’s Export Development Corporation (EDC), the Canada Mortgage and Housing Corporation (CMHC), the Crown-Indigenous Relations and Northern Affairs Canada (CIRNAC), Indigenous Services Canada (ISC), and Futurpreneur Canada.  Who do they support? What do they offer? Do you think you could find help from one of these agencies if you were to start your own business? Share your findings with your class and/or professor.
  8. Bank Loan. Research one of the Big Five Banks and find out what they provide in the way of business loans for a new business. What are the interest rates? Some individuals take out loans to make investments, and then they can deduct the interest they pay on the loan on their taxes.  Do you think this is worth it? Explain. Share your findings with the class and/or professor.

Self-Check Exercise: Financial Management and Accounting Quiz

Check your understanding of this chapter’s concepts by completing this short self-check quiz.

Additional Resources

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