Question

Please explain those terms in detail.

1) Corporate finance

2) Financial statements

3) Taxes and Cash Flows.

Answer 1

1. Corporate finance-

Corporate finance is all aspects of finance related to an organization, such as capital investment, operations, banking and budgeting. The process is intended to maximize the value for shareholders by a combination of short and long term financial planning. In short, any operation or aspect that involves the finances of an organization is part of corporate finance.

he idea behind corporate finance is to give shareholders maximum value for their money. This requires the management to adequately handle all aspects of finance. Whether it is capital funding, budgeting, investing, cash management or operating profit and loss, it is the responsibility of the management to ensure that shareholders get the maximum return on their investments in the form of dividends and increased share prices.

Though the goal remains the same, the exact nature of corporate finance varies from company to company, depending on the niche area in which they operate. Below are some of the general areas of corporate finance:

Capital Structure - the ability of a company to choose the right sources of initial funding for the company. This structure can comprise of equity, debt or a combination of both. Identifying the right combination results in the maximization of a firm's value.

Investments and Valuation - the worth of every project that a company undertakes is mostly measured using the discounted cash flow (DCF) method of valuation, though other methods may also be used at times. This valuation helps to determine if a project is likely to be profitable for the company as well as for the investors. The overall valuation of the organization is also measure and strategies to maximize are evaluated.

Dividend Policy - the set of policies that pertain to the payment of dividends to shareholders. When to issue dividends and for how much are some of the questions answered by this niche area of corporate finance.

Working Capital - managing the working capital is essential for the continued operations of the company; therefore, much time and effort goes into this area.

2. Financial statements-

Financial statements are reports prepared by a company’s management to present the financial performance and position at a point in time. A general-purpose set of financial statements usually includes a balance sheet, income statements, statement of owner’s equity, and statement of cash flows. These statements are prepared to give users outside of the company, like investors and creditors, more information about the company’s financial positions. Publicly traded companies are also required to present these statements along with others to regulator agencies in a timely manner.

Financial statements are the main source of financial information for most decision makers. That is why financial accounting and reporting places such a high emphasis on the accuracy, reliability, and relevance of the information on these financial statements.

Example

The balance sheet a summary of the company position on one day at a certain point in time. The balance sheet lists the assets, liabilities, and owners’ equity on one specific date. In a sense, the balance sheet is a picture of the company on that date. Investors and creditors can use the balance sheet to analyze how companies are funding capital assets and operations as well as current investor information.

The income statement shows the revenue and expenses of the company over a period of time. Most companies issue annual income statement, but quarterly and semi-annual income statements are also common. Users can analyze the income statement to see if companies are operating efficiently and producing enough profit to fund their current operations and growth.

3. Taxes and Cash Flows-

Taxes are included in the calculations for the operating cash flow. Cash flow from operating activities is calculated by adding depreciation to the earnings before income and taxes, and then subtracting the taxes. The operating cash flow indicates the cash a company brings in from ongoing, regular business activities. The operating cash flow can be found on a company's cash flow statement in the financial reporting done annually and quarterly.

The operating cash flow is important when considering whether the company can generate enough positive funds to maintain and grow its operations. If not, the company may require external financing. Shorter turnover rates in inventory and shorter times for receiving funds increase the operational cash flow. Items such as depreciation and taxes are included to adjust the net income, rendering a more accurate financial pictures. Higher taxes and lower depreciation methods adversely impact the operational cash flow.

Investors find it important to look at the cash flow after taxes, which indicates a corporation's ability to pay dividends. The higher the cash flow, the better the company is financially and the better positioned it is to make distributions. Income the company has from outside of its operations is not included in the operational cash flow. Any dividends paid and infrequent long-term expenses are often excluded from this calculation as well.

One-time asset sales are also noted, as they inflate the cash flow numbers during the relevant time period. Investors look at the balance and income statements to gain better knowledge of the overall health of a company.