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139 Cards in this Set
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Body of facts , principles , and theories relating to raising and using money by individuals , businesses , and governments |
Finance |
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Referred to as managerial finance , corporate finance , and business finance , is a decision making process concerned with planning , acquiring and utilizing funds in a manner that achieves the firm's desired goals . |
Financial management |
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The goal of financial management |
Make money and add value for the owners |
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Primarily concerned with acquisition , financing and management of assets of business concern in order to maximize the wealth of the firm for its owners |
Financial management |
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Requires funds needed by the firm and invest those funds and profitable ventures that will maximize the firm's wealth , as well as , generating returns to the business concern |
Finance manager |
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Finance manager is expected to analyze the business firm in determine the following |
The total fund requirements of the firm The assets or resources to be acquired The best pattern of financing the assets |
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Three major types of financial decisions |
Investment decisions Financing decisions Dividend decision |
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Those which determine how scarce or limited resources in terms of funds of the business firms are committed to projects |
Investment decision |
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Assert that the mix of debt and equity chosen to finance investment should maximize the value of investments made |
Financing decision |
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Should be considered when selecting the debt equity mix or capital structure decision |
Principle of financial leverage or trading |
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Concerned with the determination of quantum of profits to be distributed to the owners , the frequency of such payments and the amounts to be retained by the firm |
Dividend decisions |
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Treated as primordial |
Finance function |
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Financial health of the form depends on its ability to generate sufficient amounts of cash |
Cash flow |
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Considers the amount of cash flows expected to be generated for the benefit of owners |
Risk-return perception |
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The timing of this cash flows and the risk attach these cash flows |
Time value of money |
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Major functions in an enterprise |
Marketing and production |
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Distinct and separate function rather than simply an extension of accounting function |
Finance function |
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Teaches us to seek the best allocation of resources |
Economic theory |
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Changes in supply , demand , and prices |
Firm related micro factors |
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General and overall economical factors |
Macro factors |
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Relate specifically to the control of production costs , when a key element is to hold costs down to so that prices can be set at competitive level |
Supply considerations |
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Focuses on the optimal operating strategies based on the economic data of individuals and firms |
Microeconomics |
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Looks at the economy as a whole in which a particular business concern is operating and provides insight into policies by which economic activity is controlled |
Macroeconomics |
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Permeates the entire business organization by providing guidance to the firm strategic and day-to-day decisions |
Finance |
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Objectives of a firm |
The goal of a company to be a leader in technology in the industry to achieve
to achieve profits through a high-level manufacturing efficiency To achieve a high degree of customer satisfaction |
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Long range in scope and has its focus on the organization as a whole |
Strategic planning |
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Based on an objective and comprehensive assessment of the present situation of the organization and the setting of targets to be achieved in the context of an intelligent and knowledgeable anticipation of changes in the environment |
Strategic planning |
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Involves financial planning , financial forecasting , provision of finance and formulation of finance policies which should lead to the firm's survival and success |
Strategic financial planning |
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Reflect how it plans to achieve its goals and objectives |
Strategic or business plan |
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Should align with the company's strategic planning |
Financial policy |
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needed to counter the uncertain an imperfect market conditions and highly competitive business environment |
Strategic financial planning |
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Requires the deployment of firm's resources for achieving the corporate strategic objectives |
Financial policy |
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Provide insight into the success of a company's strategic plan |
Historical financial statements |
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Hold that the only appropriate goal is to maximize shareholder or owner's wealth |
Owner's perspective |
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Emphasizes social responsibility over profitability |
Stakeholders' perspective |
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18th century economy stand one of the first and well-known proponent of this viewpoint |
Adam Smith |
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Adam smith argued that in this , and individual pursuing his own interests and also to promote the good of his community |
Capitalism |
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Made by providing to shareholders with the target attainable combination of dividends per share and share price appreciation |
Wealth |
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Responsibilities to achieve the financial objectives |
Investing Financing Operating |
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The amount of pesos invested in current and fixed assets |
Asset mix |
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Return greater than a minimum acceptable return |
Hurdle rate |
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Asserts the mix of debt and equity chosen to finance investments should maximize the value of investments made |
Financing objective |
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Refers to a firm short term asset and its short-term liabilities |
Working capital |
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Examples of working capital |
Accounts payable , short-term loans , inventory , receivables , cash , marketable securities and its management |
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Exert a sizeable adverse impact on human welfare |
Global warming |
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Reduce the costs of reaching a choose an environment goal , but the programs provide little help in choosing the right goal |
Market like schemes |
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Financial manager makes decisions involving |
Analysis and planning Acquisition of fundsUtilization of funds Utilization of funds |
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Top officer of a firm in financial management function |
Vice president of finance or some other chief financial officer |
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He coordinates the activities of the treasurer and the controller |
Vice president of finance |
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Handles cost and financial accounting , tax payments , and management information systems |
The controller's office |
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Responsible for managing the firm's cash and credit , it's financial planning , and it's a capital expenditure |
Treasurer's office |
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Deals with the design and production of a product |
Manufacturing |
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Involves the selling , promotion , and distribution of a product |
Marketing |
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Concerned with all the of the monetary aspects of the business |
Finance |
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The process of monitoring managers and aligning their incentives with shareholders goals |
Corporate governance |
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The monitors inside a public firm |
Board of directors |
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They are appointed to represent shareholders interest |
Board of directors |
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Evaluates management , and can also design compensation contracts to tie management salaries to firm performance |
Ceo |
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Monitors outside the firm |
Auditors Analysts Investment banks Credit rating agencies |
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Examine the firm's accounting systems and comment on whether financial statements fairly represent the firm's financial position |
External auditors |
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Keep track of the firm's performance , conduct their own evaluations of the company's business activities , and report to the investment community |
Investment analyst |
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Help firms access capital markets , also monitor performance |
Investment bank |
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Examine a firm's financial strength for its debt holders |
Credit analysts |
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Monitors business activities through the securities and exchange commission , bureau of internal revenue , bangko sentral ng pilipinas |
Government |
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It is where each year a company puts a specified amount of money into an account that belongs of the employee |
Defined contribution |
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Commonly manage other people's money |
Finance professionals |
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Strong emphasis on ethical behavior and ethics training and standards are provided by professional associations such as: |
Finance executives of the philippines (FINEX) Bankers association of the philippines Investment professional |
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Business owned by single person who has complete control over business decision |
Sole proprietorship |
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Advantages of sole proprietorship |
Ease of entry and exit Full ownership and control Tax savings Few government regulations |
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Major disadvantages of the proprietorship |
Unlimited liability Limitations in raising capitalLack Lack of continuity |
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A legal arrangement in which two or more persons agree to contribute capital or services in the business and divide the profits or losses that may be derived therefrom |
Partnership |
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A formal partnership may be established using a written contract known as |
Partnership agreement |
Filed with the securities and exchange commission |
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One in which each partner has unlimited liability for the debts incurred by the business |
General partnership |
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May usually managed the firm and may enter into contractual obligations on the firm's behalf |
General partner |
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One containing one or more general partners and one or more limited partners |
Limited partnership |
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Advantages of a partnership |
Ease of formation Additional sources of capital Management base Tax implication |
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Disadvantages of partnership |
Unlimited liability Lack of continuity Difficulty of transferring ownership Limitations in raising capital |
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Artificial being created by law and is a legal entity separate and the distinct from its owners |
Corporation |
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There are authorized to act in the corporation's behalf |
Board of directors |
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They do not directly manage the firm |
Shareholders |
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The incorporation process is initiated by filing |
Articles of incorporation |
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Articles of incorporation include: |
Incorporators Name of the corporation Purpose of the corporation Capital stock Authorized shares |
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Ownership of stock is evidenced by a: |
Stock certificate |
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Rules that govern the internal management of the company established by the board of directors and approved by the shareholders |
Corporate bylaws |
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Advantages of a corporation |
Limited liability Unlimited life Easy in transferring ownership Ability to raise capital |
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Disadvantages of corporation |
Time and cost of formation RegulationTaxes Taxes |
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Four important business trends |
Increased globalization of business Ever improving the information technology Corporate governance Outsourcing |
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Relates to the way the top managers operate and interface with stakeholders |
Corporate governance |
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Huge pools of capital |
Hedge fund Private equity groups or venture capitalist |
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Occurs when domestic for men vest and produced goods in foreign countries or when these firms just rely on imports rather than the domestic plans and produced these goods domestically |
Outsourcing |
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Serves the need of different users |
Financial statements |
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Provide crucial input for strategic planning |
Financial statements |
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Important objectives of financial statements |
Providing information for economic decisions Providing information about financial position Providing information about performance of an enterprise Providing information about changes in financial position |
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Useful in predicting future borrowing needs and how future profits and cash flows will be distributed among those with an interest in that enterprise |
Information about financial structure |
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Useful in predicting the ability of the enterprise to meet the financial commitments as fall do |
Information about Liquidity and solvency |
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The availability of cash in the near future after taking account of financial commitment |
Liquidity |
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Availability of cash over the longer term commitment commitment as they fall due |
Solvency |
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They use financial statements to raise financing for the company , to meet disclosure requirements and to serve as a basis for executive remuneration and bonuses |
Management |
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Financial statements are Used by these parties to decide whether to buy or sell equity shares |
Investors and analysts |
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They use information to monitor and adjust their contractual requirements and environment with a business firm |
Creditors and suppliers |
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Need information to evaluate managerial performance and to help make leadership decision |
Shareholders and directors |
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They need financial information to monitor the business firms compliance with laws |
Regulatory and tax agencies |
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The use plan shall statements to evaluate a company's ability to provide products and services as agreed and to assess the company's reliability and staying power |
Customers |
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They would wish to estimate the firm's perfect ability to assess the fairness of returns on mutual transactions and strategic alliances |
Potential strategic partners |
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The audited annual report includes four financial statements: |
Statement of financial position Statement of comprehensive income Statement of stockholders equity Statement of cash flows |
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Constraints on relevant and reliable information |
Timeliness Balance between benefit and cost Balance between qualitative characteristics True fairview or fair presentation |
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Reports on a company's financial position at a point in time |
Statement of financial position |
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Report on performance over a period of time |
Statement of comprehensive income Statement of stockholders' equity Statement of cash flows |
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The linkages between four financial statements are called: |
Articulation |
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Updated each period and reflect cumulative income that has not yet been distributed to shareholders |
Retained earnings |
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Measures the change in company values measured in accordance with financial reporting standards |
Income statement |
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Reports a company's financial position at a point in time company the company's resources , what the company owns and also the sources of assets financing |
Statement of financial position |
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Two ways a company can finance its assets |
Owner financing Non owner financing |
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It can raise money from shareholders |
owner financing |
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It can also raise money from banks or other creditors and suppliers |
Non owner financing |
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Owner claims on assets |
Equity |
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Non-owner claims |
Liability |
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Accounting equation |
Assets = liabilities + owners equity |
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Basic relation |
Investing = financing |
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These are presented by the company's assets . These assets are financed by a combination of non owner financing and owner financing |
Investing activities |
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Includes resources contributed to the company by its owner along with any profit retained by the company |
Owner financing |
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Borrowed money |
Non owner financing |
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Entails a legal obligation to repay amounts owed |
Borrowed money |
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These assets turnover that is , they are used and then replaced throughout the year |
Working capital |
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Difference between current assets minus current liabilities |
Net working capital |
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Difference between current assets and non interest bearing current liabilities |
Net operating working capital |
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Reports on a company's performance over a period of time and lists amounts for revenues , expenses and other comprehensive income |
Statement of comprehensive income |
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Revenues less cost of goods sold |
Gross profit |
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These activities extend from input markets involving suppliers of materials and labor to a company's output markets involving customers of products and services |
Operating activities |
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Generate revenues to customers . And they also generate some expenses such as marketing and distributing products and services to customers |
Output markets |
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Generate most expenses such as inventory , salaries , materials & logistics |
Input market |
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Arises when revenues exceed expenses |
Net income |
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Occurs when expenses exceed revenues |
Loss |
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Reports on changes and key types of equity over a period of time |
Statement of stockholders' equity |
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Represents the cash that the company received from the sale of stock to stockholders , less any funds expended for the repurchase of stock |
Contributed capital |
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Represent the cumulative total amount of income that the company has earned and that has been retained in the business and not distributed to shareholders in the form of dividends |
Retained earnings |
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Retained Earnings formula |
Ending retained earnings = beginning retained earnings + net income - dividends |
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Reports the change in a company's cash balance over a period of time |
Statement of cash flows |
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The statement reports on cash inflows and outflows from operating , investing and financing activities over a period of time |
Statement of cash flows |
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