Cash Flow

Chapter 1: The Role and Environment of Managerial Finance

• Finance

o The art and science of managing money.

• Common Stock

o The purest and most basic form of corporate ownership.

• Dividends

o Periodic distributions of earnings to the stockholders of a firm.

• Accrual Basis

o In preparation of financial statements, recognizes revenue at the time of sale and recognizes expenses when they incurred.

• Cash Basis

o Recognizes revenues and expenses only with respect to actual inflows and outflows of cash.

HINT: The primary emphasis of accounting is on accrual methods; the primary emphasis of financial management is on cash flow methods.

GOAL OF THE FIRM

• Maximize Value of the Firm

• Earnings per Share (EPS)

o The amount earned during the period on behalf of each outstanding share of common stock, calculated by dividing the period’s total earnings available for the firm’s common stockholders by the number of shares of common stock outstanding.

• Timing

o The receipt of funds sooner rather than later is preferred.

• Cash Flows

o Profits do not necessarily result in cash flows available to the stockholders.

• Risk

o The chance that actual outcomes may differ from those expected.

o Investors who seek to avoid risk will always require a bigger return for taking bigger risks.

FINANCIAL INSTITUTIONS AND MARKETS

• Financial Institutions

o An intermediary that channels the savings of individuals, businesses, and governments into loans or investments.

o Make the process very efficient by becoming intermediaries between savers and users.

▪ Key Suppliers and Key Demanders of funds

← Individuals

← Businesses

←...