finance 340 exam study guide

Weisbach (1988), Heranlin and Weisbach (1991) examine agency theory and corporate governance .They observed that there is a positives relationship between firm performance and the proportion of outside directors sitting on the board. However, in the works of Forberg (1989), Weisbach (1991), Bhagat and Black (2002) and Sanda

The cash flow statement is composed of cash inflows (receipts) and outflows (expenses). Inflows and outflows are reported for operating, financing, and investing activities.

The operating statement is used to asses’ performance and financial stability. It records the organization’s revenues and how it pays expenses, debts, and taxes. It is the statement that provides net profit/income for the company. The Stanford document presents the beginning and ending year of revenue and in-between it shows us the expense paid out. In 2014 the total expense were more than 2013, however the company made more in operational revenue which turned a profit.

Cash inflow and outflow is a litmus test of a company’s performance during a specific time frame. Cash is the lifeline of the company and the availability or lack of cash is a clear indication of a successful or failing business for most financial analysts, investors and company management. The statement of cash flow is the means used by many to view the cash movement within an organization. According to Epstein (2014), “The purpose of the statement of cash flows is to determine how cash flowed into and out of the company during a certain period of time” (p.156). This management tool can assist executives, financial managers and stock holders identify the organization’s

In accounting, Operating cash flow is a measure of the amount of cash generated by a company’s normal operations.

According to MFRS 107.18, an entity shall report its statement of cash flow by using either:

Disadvantages are the chances of the company plummeting due to poor management, and financial issues is very high (Ferrell, Hirt & Ferrell, 2014). Starting a small business take money to stay afloat and if mi managed for any reason, the company can lose profits and even the ability to stay open. Another disadvantage is lacking the knowledge and skills set is would take to elevate the business in an innovative era. More so, owners are usually charged higher interest rates on funds borrowed based upon their own personal credit determinates, opposed to support from investors who are able to get lower interest rates based upon their determinants.

The "agency problem" generally raises to the conflict of interest between organization and ownership in a corporate enterprise. Owners is primarily focused on maximizing its capital through the business, while management is mainly interested in maximizing and stabilizing its salaries and benefits without suffering or taking a serious risk to them, they always want to be in the safe side and not engage or be in real loss in their financial life.

Cash flow statement is a financial statement that can be used to predict future cash flow, which would help with matters in budgeting. If you are an investor, cash flow will reflect the company’s financial health. The cash flow statement captures both the current operating result and the changes accompanying in the balance sheet. When use as an analytical tool, the statement of cash flows is useful in determining the short-term viability of the company, definitely its ability to pay bills. The more cash that is available for the business operation, the better. However, a negative cash flow could occur from the results of the growth strategy from a company in the form of expanding its operation. Investors can get a clear picture of what some people consider the most important aspect of the company by adjusting earning,

Two relevant control-oriented theories, managerialism and agency, are explored by (Tosi, H., Werner, J. Katz J. and Gomez-Mejia, I., 2000). Managerialism suggests that where control and ownership are separated, conflict of interests can arise between the owner and the manager. Various authors have identified that CEO’s tend to increase the size of the organisation rather than profits despite potential loss to shareholders. This may be because they find it easier, they feel that a bigger company justifies more compensation or growth is less risky than profit improvement. The divergence of interests can be facilitated as shareholders may deal with other companies, it is difficult to control CEO’s and size becomes an easy option to set compensation. Boards may support CEO’s as they may be friends and may benefit themselves if high CEO pay drives that of all directors.

Disadvantages: Disadvantages of a corporation is a business is difficult to set up. The owners do not run the firm, and there are government regulations. It has a difficult and expensive start-up, loss of control, and other regulations. Double taxation, the owner must pay company tax and personal income own tax. Government regulation, and expensive and complex to form.

Nowadays, although 71% of firms are sole proprietorships, only 5% of revenue is derived from them. In fact, 84% of revenues are derived from Corporations (Berk and DeMarzo, 2014; Figure 1.1). Corporations are firms owned by multiple owners called shareholders (Berk and DeMarzo, 2014) but run by managers who make decisions on their behalf. Therefore, a problem arises from the separation between “ownership” and “control” (Jensen and Smith, 1985), the agency problem.

But then the question that arises is what are the agency problems solved by them and why are boards the solution to these problems? The agency problem in any corporation is between the management and the shareholders. And the problem arises because of lack of control of shareholders on the management and the possibility of the management cheating the shareholders. The possible solution to this problem is either providing the management with incentive or strengthening the position of shareholders to tackle the problem on their own. But then the question arises- who provides the management with the incentives and how the shareholders are strengthened. Thus the board can be seen as a bridge or a medium, as suggested by literature, between

The statement of cash flows is being prepared in the firms, as because of it does not include accrual basis items. It is an overview of cash flow from operations, cash flow from investment activities and cash flow from financing activities

Under the shareholder model of corporate governance, majority of large firms are controlled by managers but primarily owned by outside shareholders. Development of agency problem occurred, due to this separation of ownership and control between firm’s managers and owners. Even though internal managers are responsible for business operations, shareholder voting rights provide them with some indirect control over the operations of the firm. Widely distributed ownership in shareholder method offers stronger protection for investors and shareholder democracy.