Cpcu 540 Ch.1

Determining value and making decisions regarding money and credit.

Involves a company's investing and finance decisions.

E.g. If a company needs money, what's the best way to raise it, or raise capital. Should they sell stock, issue debt?

Represents the reporting of financial transactions.

Involves creation of financial statements.

Relates to finance in the accounting supports decision making.

Executives can identify debt/equity financing.

Agents/brokers can identify potential loss exposures of the company.

Claim reps can ascertain possibility of moral hazard or calculate settlement.

Underwriters can assess financial stability of the company.

Maximize shareholder wealth.

Providing for transparency of financial reporting.

Conducting operations ethically.

Involves maximization of stock value.

Focuses on best use of the company's resources.

Recognizes effects of risk on the value of the company's stock.

(Not to be confused with maximizing company profits)

Accomplished by providing accurate and timely information.

Board of directors must create financial transparency for shareholders.

Applies only to publicly traded companies.

Federal law governing corporate directors.

Addresses investor protection, internal controls and penalties.

Creates regulatory organization that regulates public accounting firms.

Requires principal officers to certify that they have reviewed the financial reports.

Subjects officers to criminal penalties.

A code of ethics that govern ethical conduct in the workplace.

Identifies corporate values.

Ethics can be unclear, some is governed by law e.g. Sarbanes-Oxley which requires a corporation to disclose whether it has adopted a code of ethics applicable to principal officers.

Company's financial manager is typically the chief financial officer. Primary responsibility is determining financial strength.

Responsible for activities of the treasurer and controller.

Primary responsibilities include budgeting and capital management.

Primary responsibilities include financial reporting and accounting.

Structured according to the company's requirements.

Acquire, invest, and manage resources.

Provide financial information to shareholders.

Working capital management.

Capital structure management.

Capital budgeting.

Accounting.

Focuses on short-term needs of company.

Allows a business to meet its day-to-day financial obligations.

Mainly involved cash management.

Current assets (cash, inventory, accounts receivable and securities) - Current liabilities (debts due within 1yr.)

Involves receipt and payment of cash and the following:

Whether to pay cash or borrow.

How cash should be invested.

How much inventory should be carried.

Whether to extend customer credit.

Focuses on long-term needs.

Mix of long-term debt and equity.

When there's a change in capital structure it doesn't change the value of the company, only the value to stockholders.

Whether to borrow or issue stock.

Vehicles to be used to raise capital.

Focus on recording and reporting financial data.

Includes financial reporting, taxes, and bookkeeping.

Often overlap between individuals performing accounting and finance activities.

Financial reports can be used by finance dept. to determine capital needs.

Standards used in financial statement preparation that include both basic financial reporting objectives, as well as detailed rules.

FASB (Financial Accounting Standards Board) maintains GAAP standards.

FASB standards are recognized by SEC and the AICPA.

GAAP

Assumes that a business entity will continue indefinitely. Assets will be valued higher than a company that's going out of business.

GAAP

Many assets must be reported at historical cost, not current value.

GAAP

Revenue must be recorded when services rendered or goods are sold.

GAAP

Expenses incurred in generating revenues must be matched against revenue. E.g. a warehouse that's purchased that will incur revenue, the expense will be recorded over a period of time.

GAAP

Record revenue when cash is received. May result in the mismatching of revenue and expenses.

GAAP

Report revenue when earned. More frequently used.

GAAP

Allows accountants to ignore GAAP for items that are immaterial. Materiality is relative.

Same reporting principles must be used by a company in each reporting period.

Assets and income cannot be overstated.

Developed by International Accounting Standards Boards.

Has principles-based standards.

Both IASB and FASB frameworks are in the process of being updated and converged to create a single set of standards that can be used domestically and internationally.

IFRS is principle-based and has far less guidance than GAAP. IFRS has more room for interpretation whereas GAAP is rules based.

Under IFRS, property and equipment must be reported at fair value. Under GAAP it's historical cost.

Financial statements for both must be prepared under the accrual method of accounting.

Both require reporting of certain assets at fair market value: equity securities, debt securities, and intangible assets.