ASSIGNMENT No. 1
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Q.1 a. Compare and contrast the roles that a firm’s treasurer and controller have in the operation of the firm.
Treasurers and controllers both serve important financial functions within a company, but their responsibilities are quite different. Financial controllers head the accounting department, in a way, since they supervise the accountants and manage the books of the company. They make sure that the financial reports are done in a timely and proper manner for the management’s review.
Treasurers, on the other hand, are essentially financial advisors to their management. They look into the economic atmosphere of the industry and advise management on the proper way to handle possible economic changes.
Role of controller
A controller is in charge of the company’s accountants. They are the highest in the food chain, as far as accounting goes. A financial controller is in charge of supervising the preparation of financial reports and presenting them to management. In some governmental organizations, a controller is also known as a financial comptroller.
A controller reports to the chief financial officer (if the company has one), formulates policies for the company and oversees the audit, budget and accounting departments in their company.
The primary responsibility of the financial controller is producing and presenting timely reports. These reports form the basis of the management’s decisions and economic predictions. They are also tasked with explaining to the management what the various items of the financial statements mean and, in some ways, offering advice following the reports that they present.
Controllers are also responsible for the company’s compliance with the law regarding taxes and other financial matters. They will be the ones who are directly presenting compliance documents and filing tax returns.
A controller should hold a degree, majoring in finance, economics, or business. They should also be a licensed CPA, ideally with at least five years of experience as an accountant. This will ensure they have been exposed to creating financial statements and have the expertise necessary to perform in such an important role.
ROLE OF A TREASURER
While the controller is in charge of the accounting department, the treasurer oversees the finance department. In some companies, controllers can be referred to as the vice president of finance. Their main responsibility is to help their company grow its funds and invest the money they have wisely.
The treasurer is the person who helps the company grow its revenue. He or she builds and nurtures relationships with banks and investment companies so that they know where the best place is to invest the company’s money.
Because treasurers are involved in growing the company’s investments, they will manage relationships with shareholders. They do this by effectively communicating the company’s goals and plans for achieving its fiscal targets.
The treasurer, being the person best suited to explain the company’s financial position, is tasked with communicating with potential and current investors. It is up to the treasurer to explain how the company is doing financially and how it plans to remain profitable and beneficial to its investment.
The treasurer ensures that the company’s resources are invested in the most profitable ventures by performing and maintaining healthy relationships with investment banks.
Just like the controller, treasurers should have a degree in finance, accounting, economics, or a business-related course. They need to be excellent communicators, seeing as they will constantly be interacting with people in the banking and corporate sectors.
Beyond similar educational backgrounds, as noted above, both the controller and treasurer need to clearly understand financial statements. They will be expected to advise management on the way forward when matters arise affecting their respective departments.
But where the treasurer advises, the controller presents facts. The controller is more involved in the presentation of financial statements, while the treasurer takes over to decide how to handle the money.
The treasurer builds relationships with investment banks to agree on the best ventures to grow the company’s funds, while the controller discusses the best interest for loans. The controller is more involved in the expenditure of company’s resources than they are in building reserves.
- What is the primary economic principle used in managerial finance?
Managerial Finance is essentially a combination of economy and accounting. First, finance managers utilized accounting information, cash flows, etc., for planning and distrbution of finance resources of the company. Secondly, managers use economic principles as a guide for financial decision making that favor the interest of the organization. In other words, finance constitutes an area applied in economics that is supported by accounting information. Since finance reflexes what adds value to a company, finance managers constitute important individuals for the majority of business. Financial managers measure the development of the company, they determine the financial consequences, the tendencies and recommend on how to use the assets of the organization for the wellbeing and survival of the business in the long run. At the same time financial managers seek for the best external financial institutions and recommend the best combination of financial resources for the shareholders of the company / organization.
In today´s world it is imperative to have the means and tools needed to be competitive; there must be a vision that there are no borders in order to make a business successful and to guarantee its survival in the long run. Decision making based on different scenarios must be done in order to assure the right use of the assets on the company. Managerial finance is the branch of finance that concerns itself with the managerial significance of finance techniques. It is focused on assessment rather than technique.
The difference between a managerial and a technical approach can be seen in the questions one might ask of annual reports. One concerned with technique would be primarily interested in measurement. The objective of financial statements is to provide information about the financial strength, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions. Financial statements should be understandable, relevant, reliable and comparable. Reported assets, liabilities and equity are directly related to an organization’s financial position. Reported income and expenses are directly related to an organization’s financial performance
Managerial finance helps with business decision-making as it directly influences profits, losses, cash flow and revenue generation in an organization. It contributes to a company’s overall growth significantly. The four key fundamentals of managerial finance are:
- Capital structure: organizations employ managerial finance as an integral business function to determine three factors that influence business operations which are:
- Which capital type is best suited for funding an endeavour – equity, debt or both;
- Amount of capital required;
- Event or time when the capital will be required.
The capital structure of an organization is key to its growth and can be acquired either through equity shares or other financial instruments such as cash and bond. The primary objective of the cash management function is to ensure that an organization has adequate resources to meet the company’s financial obligations. For a firm to run smoothly and churn profits, it is essential that the cash flow is uninterrupted. In the event of a cash deficit, business operations might get stalled and this may adversely influence the credibility of the organization. Hence, it is important that financial obligations are met within the stipulated time.
Plan and forecast: organizations depend on managerial finance to implement planning strategies. These strategies are used to predict: Monthly, quarterly and yearly budgets;
- Expected revenue generation;
- Future expenses
- Expected profits
While devising strategies, financial management professionals must be prepared for unprecedented events. If the aforementioned parameters don’t yield predicted results, the strategies must be modified to suit the current situation.
- Financial reporting: financial reporting is a crucial component of managerial finance, as it significantly contributes to business decision-making. Organizations rely on financial reports for precise and detailed information about the current situation of the organization. These reports must be easy to understand and should vividly reflect how a particular parameter affects business operations and functioning.
- Variety: A financial management course provides students with a diverse set of career paths, despite the course’s small focus. Managerial finance professionals can opt for a job in the public as well as the private sector.
- Rising demand: as the need for efficient financial management increases, so does the demand for managerial finance professionals. Employers today prefer employing candidates with a sound academic background and a degree in financial studies.
- Well-paid: professionals who decide to take up finance roles are paid well, especially if they have the right kind of experience and expertise. As advertised on com, the average salary of an account manager is about £26,880 per annum.
- Professional and personal growth: taking up a finance role requires you to undertake a wide range of activities such as contributing to financial and business decision making and building strategies for revenue. This will significantly contribute to your professional as well as personal growth, giving you a broader perspective of how to handle business situations.
Q.2 a. What is the purpose of financial markets? How can this purpose be accomplished efficiently? Financial markets help to finance the economy
Financial markets allows companies to finance themselves by raising capital, either by issuing bonds (debt securities) or shares (titles of property). This allows them to finance business growth and their projects, by having access to long-term finance, rather than short term finance such as bank loans. For investors (whether individual savers, institutions, banks, etc.), financial markets offer the opportunity to invest capital in exchange for a return called a “dividend”, and the prospect of added value if their assets appreciate. In summary, financial markets put companies that need money in contact with players who have funds to invest Financial markets are thus a real means of financing the economyThere are two types of market: the primary market, which is the part that deals with issuing and listing shares. It is also referred to using the term, initial public offering (IPO). This is where financial markets enable companies to finance themselves. Once these shares are in circulation, they can be negotiated on a daily basis on the “secondary” market. This is how several billion euros worth of exchanges take place daily on the London stock market, some investors sell shares and others buy them.
Financial markets help to finance States
States tax investors on the revenues obtained from their investments in financial markets, either through tax on financial transactions (FTTs) or tax on dividends and capital gains. Although some investments offer tax benefits, investors using simple securities accounts are taxed at a relatively high level on their profits, namely at their income tax rate..
Financial markets help to provide liquidity
Financial markets are places where supply meets demand, and therefore they offer a significant level of liquidity. They are the reference markets for international investors to invest their capital: each day buyers and sellers throughout the world carry out their transactions. It is this high level of liquidity which benefits both companies and States, because it is an indispensable means of funding, offering extensive output.
Financial markets, a protective instrument
Financial markets allow all investors in the market to protect themselves against a multitude of risks (currency risk, interest rate risk, risk of price reductions, etc.), in particular through derivatives. For example, businesses use currency SWAPs to protect themselves against exchange risks, or interest rate SWAPs to protect themselves against the interest rate risk. Other derivatives such as futures, options or forward contracts are used as part of risk management, whether it is banks managing their exposure or companies protecting themselves against the price variations in the raw materials they need for their business (oil for an airline for example).
Financial markets, a communication tool
Multinationals now use financial markets as a communication tool, especially through advertising effects. Although the majority of market players use financial markets for the traditional function of raising funds, large global companies such as Google and Facebook use them to impress the competition. Indeed, Facebook’s initial public entry offering created a lot of talk, a story that certainly made even the most hesitant about new communication techniques aware of this company’s strength. The respective takeovers of Tumblr and Instagram by Yahoo and Facebook, for overvalued prices, was primarily a communication strategy to impress market players and spread their financial power.
Financial markets may also enable medium-sized companies to make themselves known internationally through IPOs. In addition, a publicly traded company is subject to a number of tax obligations, regulations, etc. which reassure investors and customers by making the company more trustworthy.
Financial markets are thus a real means of financing the economy. For example, to encourage investors to finance businesses, the French Government, in 1992, created the plan d’épargne en actions (PEA), which offers a more attractive tax regime when there is long-term capital investment in French companies.
There are two types of market: the primary market, which is the part that deals with issuing and listing shares. It is also referred to using the term, initial public offering (IPO). This is where financial markets enable companies to finance themselves. Once these shares are in circulation, they can be negotiated on a daily basis on the “secondary” market. This is how several billion euros worth of exchanges take place daily on the London stock market, some investors sell shares and others buy them.
Financial markets help to finance States
States tax investors on the revenues obtained from their investments in financial markets, either through tax on financial transactions (FTTs) or tax on dividends and capital gains. Although some investments offer tax benefits, investors using simple securities accounts are taxed at a relatively high level on their profits, namely at their income tax rate.
Beyond this tax revenue for the State, financial markets also enable States to finance themselves by issuing government bonds; in France, the Agence France Trésor (AFT) issues and manages the debt, known as Obligation Assimilable du Trésor (OAT). Savers lend money to the State for fixed remuneration, in the form of a coupon, with longer or shorter repayment maturities.
Financial markets help to provide liquidity
Financial markets are places where supply meets demand, and therefore they offer a significant level of liquidity. They are the reference markets for international investors to invest their capital: each day buyers and sellers throughout the world carry out their transactions. It is this high level of liquidity which benefits both companies and States, because it is an indispensable means of funding, offering extensive output.
Financial markets, a protective instrument
Financial markets allow all investors in the market to protect themselves against a multitude of risks (currency risk, interest rate risk, risk of price reductions, etc.), in particular through derivatives. For example, businesses use currency SWAPs to protect themselves against exchange risks, or interest rate SWAPs to protect themselves against the interest rate risk. Other derivatives such as futures, options or forward contracts are used as part of risk management, whether it is banks managing their exposure or companies protecting themselves against the price variations in the raw materials they need for their business (oil for an airline for example).
Financial markets, a communication tool
Multinationals now use financial markets as a communication tool, especially through advertising effects. Although the majority of market players use financial markets for the traditional function of raising funds, large global companies such as Google and Facebook use them to impress the competition. Indeed, Facebook’s initial public entry offering created a lot of talk, a story that certainly made even the most hesitant about new communication techniques aware of this company’s strength. The respective takeovers of Tumblr and Instagram by Yahoo and Facebook, for overvalued prices, was primarily a communication strategy to impress market players and spread their financial power.
Financial markets may also enable medium-sized companies to make themselves known internationally through IPOs. In addition, a publicly traded company is subject to a number of tax obligations, regulations, etc. which reassure investors and customers by making the company more trustworthy.
- Why are the notes to the financial statements important to professional securities analysts?
Financial statement notes are the supplemental notes that are included with the published financial statements of a company. The notes are used to explain the assumptions used to prepare the numbers in the financial statements, as well as the accounting policies adopted by the company. They help different types of users, such as financial analysts and investors, to interpret all the numbers added to the financial statements. When conducting an audit of the financial statements, the auditor conducts a thorough investigation of all the information contained in the financial statements, including the notes to the financial statements. Auditors use the notes to determine if the accounting policies used are appropriate, properly applied, and are reflected in the reported results of the company.
The notes may also provide information on underlying issues relating to the overall financial health of the company. The auditor bases his audit opinion on the financial statement numbers, as well as the notes to the financial statements. Financial statements provide a snapshot of a corporation’s financial health at a particular point in time, giving insight into its performance, operations, cash flow, and overall conditions. Shareholders need financial statements to make informed decisions about their equity investments, especially when it comes time to vote on corporate matters.
There are a variety of tools shareholders have at their disposal to make these equity evaluations. In order to make better decisions, it is important for them to analyze their stocks using a variety of measurements, rather than just a few. Some of the metrics available include profitability ratios, liquidity ratios, debt ratios, efficiency ratios, and price ratios.
Financial statements are the financial records that show a company’s business activity and financial performance. Companies are required to report their financial statements on a quarterly and annual basis by the U.S. Securities and Exchange Commission (SEC). The SEC monitors the markets and companies to ensure that everyone is playing by the same rules and that markets function efficiently. There are specific guidelines that are required by the SEC when issuing financial reports so that investors can analyze and compare one company with another easily.
Financial statements are important to investors because they can provide enormous information about a company’s revenue, expenses, profitability, debt load, and the ability to meet its short-term and long-term financial obligations. There are three major financial statements.
The following are the common items that appear in the notes to the financial statements:
- Basis of presentation
The first section in the financial statement notes explains the basis of preparing and presenting the key financial statements.
2. Accounting policies
The accounting policies section provides information on the accounting policies adopted by management in preparing the financial statements. Disclosing the accounting policies helps users interpret and understand the financial statements better.Some of the disclosures included here are the depreciation method used, how the company values inventory, accounting for intangibles, etc. All the significant accounting policies adopted in the financial statements must be disclosed in the section.
3. Depreciation of assets
Depreciation refers to the reduction in the value of a fixed asset over time due to normal wear and tear. The asset depreciation section provides information on the method adopted by the company when depreciating the assets.
Depending on the depreciation method used, there may be significant fluctuations between the net income in the income statement and the value reported in the balance sheet. Providing information on the depreciation method in the notes informs the users of the differences in net incomes reported in the financial statements.
4. Valuation of inventory
The valuation of inventory note informs users how the company valued its inventory, making it easy for them to compare inventory figures from one period to another or vis-à-vis other competing entities. The section provides information on two main inventory issues, i.e., how inventory amount is stated and the method used to determine inventory cost.
GAAP rules require companies to state their inventory lower of cost or market (LCM). It means that the company will value the inventory at the lowest replacement cost, which can be either the wholesale cost of inventory or the cost of the inventory in the market. To determine inventory cost, GAAP allows three different methods, which include the weighted average, specific identification, and the first-in, first-out (FIFO) method.
5. Subsequent events
Information on any subsequent events can be found also in the financial statement notes section. Subsequent events refer to events that occur after the balance sheet date but before the release of the financial statements. How the company handles the events depends on whether they change the conditions in existence as of the balance sheet date.
Q.3
- Stoney Mason, Inc., has sales of Rs. 6 million, a total asset turnover ratio of 6 for the year, and net profits of Rs. 120,000. What is the company’s or earning power?
ROA = Net Income / Total Assets
ROA = 6000000 / 120000
ROA = 5000%
- Loquat Foods Company is able to borrow at an interest rate of 9 percent for one year. For the year, market participants expect 4 percent inflation.
- What approximately real rate of return does the lander expect? What is the inflation premium embodied in the nominal interest rate?
Nominal rate of return: 9%
Inflation rate: 4%
RRR = (1+n) / (1+i) – 1
RRR = (1+9%) / (1+4%) – 1
RRR = 4.808%
- If inflation proves to be 2 percent for the year, does the lender suffer? Does the borrower suffer? Why?
Nominal rate of return: 9%
Inflation rate: 2%
RRR = (1+n) / (1+i) – 1
RRR = (1+9%) / (1+2%) – 1
RRR = 6.863%
- If inflation proves to be 6 percent, who gains and who loses?
Nominal rate of return: 9%
Inflation rate: 6%
RRR = (1+n) / (1+i) – 1
RRR = (1+9%) / (1+6%) – 1
RRR = 2.830%
Q.4 Future value you have Rs. 1,500 to invest today at 7% interest compounded annually. Find how much you will have accumulated in the account at the end of (1) 3 years, (2) 6 years, and (3) 9 years.
- Use your findings in part a to calculate the amount of interest earned in (1) the first 3 years (years 1 to 3), (2) the second 3 years (years 4 to 6), and (3) the third 3 years (years 7 to 9).
The first 3 years (years 1 to 3)
Invest = 1500
Rate = 7%
FV=PV (1+i)n
FV = 1500(1+0.07)3
FV = 1849.39
The second 3 years (years 4 to 6)
Invest = 1849.39
Rate = 7%
FV=PV (1+i)n
FV = 1849(1+0.07)3
FV = 2279.68
The third 3 years (years 7 to 9)
Invest = 2279.68
Rate = 7%
FV=PV (1+i)n
FV = 2279.68(1+0.07)3
FV = 2810.68
- Compare and contrast your findings in part b. Explain why the amount of interest earned increases in each succeeding 3-year period.
As no. of year increased the amount of interest also increased due to increasing in annually amount.
Q.5 Inflation, future and annual deposits while vacationing in Florida, Johan Kelly saw the vacation home of his dreams. It was listed a sale price of Rs. 200,000. The only catch is that Johan is 40 years old and plans to continue working until he is 65. Still, he believes that prices generally increase at the over-all rate of inflation. Johan’s believes that he can earn 9% annually after taxes on his investments. He is willing to invest a fixed amount at the end of each of the next 25 years to fund the cash purchase of such a house (one that can be purchased today for Rs. 200,000) when he retires?
- Inflation is expected to average 5% a year for the next 25 years. What will Johan’s dream house cost when he retires?
- How much must john invest at the end of each of the next 25 years in order to have the cash purchase price of the house when he retires?
- If john invests at the beginning instead of at the end of each 25 years, how much must he invest each year?
