Chapter 1 Flashcards
Financial Planning Activities
Those activities relating to managing money
Financial Markets
Markets used to transfer financial assets between borrowers and investors
Real assets
Assets that are tangible, such as land, buildings and machinery
Financial assets
Securities issued by a corporation or economic unit for purchase by another individual or corporate investor
Time value of money
The concept that a dollar owned today is worth more than the same dollar would be worth in the future
Risk
The variability of returns resulting from an investment
Securities
Financial instruments used to finance an organisations operations
Financial instruments
Instruments, such as convertible debt or preference shares, that allow funds to be transferred between investors (or lenders) and borrowers
Lender
Person who grants the use of money or any other asset to another for a set period of time and receives income in return
Borrower
An individual, or organisation, who obtains or receives something such as money, temporarily from another individual or organisation, with the intention of repaying it
Finance
The allocation of scarce resources, such as money, over time
Shares
Entitlement to a proportion of the ownership of a company or firm
Bonds
Fixed-interest investments whereby the individual receives a number of payments at fixed intervals until the bond is repaid. They represent the long term debt obligations of a company or government
Invest
To apply or put money to some use in order to defer consumption and receive a return in the future
Return
Gains or losses received from the investment of funds for a given period of time
Company
A legal entity that operates and functions independently from its owners and, as such, is responsible for all debts incurred in the course of business
Asset
A commodity or quality that is useful or valuable
Financial system
A network which operates via a set of financial markets, bringing together investors and borrowers who buy and sell both real and financial assets; includes financial intermediated, individuals, corporations, regulatory bodies and financial service organisations
Market
A network whereby buyers and sellers are able to come together, either physically or through communication channels, to trade goods and/or services
Foreign exchange
The process of converting New Zealand dollars into the currency of another country
Financial institutions
Banks, insurance companies and other organisations that facilitate the flow of funds between investors and borrowers
Investors
Individuals who acquire the financial assets of corporations or other organisations in order to receive compensation for the loan of their funds
Investment
The activity of investing in real and/or financial resources
Accrual
Accrual accounting records cash and credit transactions as they are incurred and not when the cash flows arise
Profit
Excess of income over expenses. Alternatively referred to as net profit, net income or net earnings
Cash flows
The inflow (receipts) and outflow (disbursements) of funds
Monetary policies
The management of a nation’s money supply, and how this relates to interest rates to interest rates, prices and other economic variables
Currency
An exchange medium within a country; that is, money
Marginal analysis
Technique used in managerial finance whereby a proposal is accepted is only when the added benefits exceed the added costs
Shareholder
Any individual or entity owning shares in a company
Stakeholders
Groups such as investors, suppliers, regulators, employees, customers and the public with interests in a firm
Finance company
Finance companies lend the funds they have raised in the markets to people and businesses who need money to finance the purchase of durables, such as equipment, cars and home improvements. They normally charge higher interest rates to compensate for the riskier lending
Financial crises
Major disturbances in financial markets typified by steep declines in asset prices and widespread company failures
Global financial crisis
A worldwide financial crisis that occurs when financial-market participants recognise the risk and over inflated values of financial contracts, leading to a severe contraction in the flow of funds and rapidly declining asset values
Act
A codified decision provided by a legislative body
Prospectus
A document required by law to inform prospective investors in a firm of the details of the security and the firm’s financial position
Dividends
The portion of a company’s net profit paid to its shareholders (owners)
Unlimited liability
The state of being personally liable for all debts and monies owed by a business or organisation
Limited liability
The set of being liable for all debts and monies owed up to a pre-defined amount
Debt
An obligation of one party (the borrower) to repay a specified amount of money to another party (the lender)
Equity
Money, in the form of shares, supplied to a company or organisation by its owners
Liquidation
The process of winding up the assets of an organisation and distributing the funds to creditors and owners
Ethics
The ability to know the difference between right and wrong
Agency problems
Issues that arise when managers, who are hired as agents of a company, work in their own interests rather than in those of the shareholders
Conflicts of interest
Issues that arise when a manager, or director, uses company information to benefit themselves or another organisation
Pure market system
A system in which all scarce resources are freely allocated so that the maximum benefit is received by everyone as a result of the allocation
Efficient market
This market exists when the price of any good (asset) fully reflects all information associated with it
Homogeneous
Something that is of a similar kind of nature
Public goods
Goods or services, such as education, provided by the government for use by members of its society
Externalities
Influences on the activities of an individual or business that are not controlled by the individual or business
Budget
A forecast of expected future income and expenses that will assist the planning and control of an individuals, or organisations, financial management
