Basic Key Points Flashcards
The three main areas of finance:
Financial Institutions, financial markets, and financial management.
The two main drivers of finance
time value of money and risk
Since the value of assets changes over time, finance seeks
to ensure the change is beneficial for the organization or individual.
Financial professionals generally operate in an environment of uncertainty where
they must make forecasts about future events.
Finance is…
the study of how to optimally allocate assets
Finance is fundamentally a..
forward-looking field, concerned with what an asset will be worth in the future.
Economics is
the social science that analyzes the production, distribution, and consumption of goods and services.
Accounting is
the process of communicating financial information about a business. Accounting is fundamentally a backward-looking field.
Leverage is
the use of borrowed funds with a contractually determined return to increase the ability of a business to invest and earn an expected higher return (usually at high risk).
Maximizing shareholder value can be done over the long-term or the short-term, so the job of the finance department is to determine
how best to do both. Sometimes, the goals may appear to contradict each other.
The finance department is devoted to the task of figuring out how to allocate assets for the overarching goal of maximizing shareholder value. They must ensure
that the right assets are in the right place at the right time.
The finance department must also manage the company’s liabilities so that
all projects are financed in an optimal way without taking on too much risk.
Financial managers perform
data analysis and advise senior managers on profit -maximizing ideas.
The role of the financial manager, particularly in business, is
changing in response to technological advances that have significantly reduced the amount of time it takes to produce financial reports.
Types of financial managers include
controllers, treasurers, credit managers, cash managers, risk managers and insurance managers.
Net present value is
the present value of a project or an investment decision determined by summing the discounted incoming and outgoing future cash flows resulting from the decision.
Financial managers produce
financial reports, direct investment activities, and develop strategies and plans for the long-term financial goals of their organization.
The primary goal of both investment and financing decisions is to
maximize shareholder value.
Investment decisions revolve around how to best allocate capital to
maximize their value.
Financing decisions revolve around how to
pay for investments and expenses.
Which concept describes the underlying driver behind all finance?
Time
Which answer gives a definition of finance?
The study of fund management and asset allocation over time
Which answer best summarizes how the fields of accounting, finance, and economics relate to each other?
Accounting is backwards looking, finance projects forward, and economics studies cause and effect.
Which answer does not represent how finance is used in organizations?
To maximize short-term profit. (finance focuses on cash flow, not profit)
Which factor is not something a corporation must consider when making an investment decision?
Whether you can accurately calculate the guaranteed return on the investment
