Chapter 1 Flashcards
The science and art of managing money.
Finance
Careers in finance typically fall into one of two broad categories:
Financial services and managerial finance.
The area of finance concerned with the design and delivery of advice and financial products to individuals, businesses and governments.
Financial services
Concerned with the duties of the financial manager working in a business.
Managerial finance
Administers the financial affairs of all types of businesses: private and public, profit seeking and not for profit.
Financial managers.
The three most common legal forms of business organizations
Sole proprietorship, partnership, corporation.
Business owned by one person who operates it for his or her own profit.
Sole proprietorship
Liabilities of the business are the entrepreneurs responsibility and that creditors can make claims against the entrepreneurs personal assets if the business fails to pay its debts.
Unlimited liability
Consists of two or more owners doing business together for profit. Account for 8% of all businesses.
Partnership
Written contract used to formally establish a business partnership.
Articles of partnership.
Entity created by law.
Corporation
Although only ___% of all US businesses are incorporated, the largest businesses nearly always are; corporates account for roughly ___% of total business revenues.
20; 80
The owners of a corporation, whose ownership, or equity, takes the form of common stock or less frequently, preferred stock.
Stockholders
Legal provision that limits stockholders liability for a corporations debt to the amount they initially invested in the firm by purchasing stock.
Limited liability
The purest and most basic form of corporate ownership.
Common stock
Periodic distributions of cash to the stockholders of a firm.
Dividends.
Stockholders are sometimes referred to as _____ _______, meaning that stockholders are paid last, after employees, suppliers, tax authorities, and lenders receive what they are owned.
Residual claimants.
Group elected by the firms stockholders and typically responsible for approving strategic goals and plans, setting general policy, guiding corporate affairs, and approving major expenditures.
Board of directors
Corporate official responsible for managing the firms day to day operations and carrying out the policies established by the board of directors.
President or CEO
Partnership in which one or more partners have limited liability as long as at least one partner (the general partner) has unlimited liability. The limited partners are passive investors that can’t take role in firms management.
Limited partnership
A tax-reporting entity that allows certain corporations with 100 or fewer stockholders to choose to be taxed as partnerships. It’s stockholders receive the organizational benefits of a corporation and the tax advantages of a partnership.
S corporation
Permitted in most states, gives its owners limited liability and taxation as a partnership. Can own more than 80% of another corporation, and corporations, partnerships can own these shares.
LLC
Partners are liable for their own acts of malpractice, but not for those of other partners. Taxed as a partnership and is frequently used by legal and accounting professionals.
LLP
Finance teaches that managers primary goal should be to maximize __________
The wealth of the firms owners, the stockholders.
Key variables that managers must consider when making business decisions are ___ and ____
Return (cash flows) and risk.
Amount earned during the period on behalf of each outstanding share of common stock, calculated by dividing the periods total earnings available for the firms common stockholders by the number of shares of common stock outstanding.
Earnings per share
The chance that actual outcomes may differ from those expected.
Risk
Requiring compensation to bear risk.
Risk averse
Groups such as employees, customers, suppliers, creditors, owners and others who have a direct economic link to the firm.
Stakeholders
Standards of conduct or moral judgement that apply to a persons engaged in commerce.
Business ethics
The firms financial manager, who manages the firms cash, oversees its pension plans, and manages key risks.
Treasurer.
The firms chief accountant, who is responsible for the firms accounting activities, such as corporate accounting, tax management, financial accounting, and cost accounting.
Controller
The manager responsible for managing and monitoring the firms exposure to loss from currency fluctuations.
Foreign exchange manager.
Primary economic principle in finance, states that financial decisions should be made and actions taken only when the added benefits exceed the added costs.
Marginal cost-benefit analysis
Two differences between finance and accounting:
Emphasis on cash flows and decision making.
In preparation of financial statements, recognizes revenue at the time of the sale and recognizes expenses when they are incurred.
Accrual basis
Recognizes revenues and expenses only with respect to actual inflows and outflows of cash.
Cash basis
Refers to the rules, processes, and laws by which companies are operated, controlled, and regulated.
Corporate governance
Investors who own relatively small quantities of shares so as to meet personal investment goals.
Individual investors
Investment professional such as banks, insurance companies, mutual funds, and pension funds that are paid to manage and hold large quantities of securities on behalf of others.
Institutional investors
An act aimed at eliminating corporate disclosure and conflict of interest problems.
Sarbanes-Oxley Act
Arrangement in which an agent acts in behalf of a principal. For example, shareholders of a company elect management to act on their behalf.
Principal-agent relationship
Problems that arise when managers place personal goals ahead of the goals of shareholders.
Agency problems
Costs arising from agency problems that are borne by shareholders and represent a loss of shareholder wealth.
Agency costs
Compensation that corresponds with firm performance.
Structure management compensation
Management compensations plans that tie management compensation to share price; one example involves the granting of stock options.
Incentive plans
Options extended by the firm that allow management to benefit from increases in stock prices over time.
Stock options
Plans that tie management compensation to measures such as EPS or growth in EPS. Performance shares, cash bonuses or both are used as compensation under these plans.
Performance plans
Shares of stock given to management for meeting stated performance goals.
Performance shares.
Cash paid to management for achieving certain performance goals.
Cash bonuses.
