Chapter 1: The Role of Managerial Finance Flashcards
finance
The science and art of
managing money.
financial services
The area of finance concerned
with the design and delivery of
advice and financial products
to individuals, businesses, and
governments.
managerial finance
Concerns the duties of the
financial manager in a
business.
financial manager
Actively manages the financial
affairs of all types of
businesses, whether private or
public, large or small, profit
seeking or not for profit.
sole proprietorship
A business owned by one
person and operated for his or
her own profit.
unlimited liability
The condition of a sole
proprietorship (or general
partnership), giving creditors
the right to make claims
against the owner’s personal
assets to recover debts owed
by the business.
partnership
A business owned by two or
more people and operated for
profit.
articles of partnership
The written contract used to
formally establish a business
partnership.
corporation
An entity created by law. has the legal powers of
an individual in that it can sue and be sued, make and be party to contracts, and
acquire property in its own name
stockholders
The owners of a corporation,
whose ownership, or equity,
takes the form of either
common stock or preferred
stock.
limited liability
A legal provision that limits
stockholders’ liability for a
corporation’s debt to the
amount they initially invested in
the firm by purchasing stock.
common stock
The purest and most basic form
of corporate ownership.
dividends
Periodic distributions of
cash to the stockholders of
a firm.
board of directors
Group elected by the firm’s
stockholders and typically
responsible for approving
strategic goals and plans,
setting general policy, guiding
corporate affairs, and
approving major expenditures
president or chief executive
officer (CEO)
Corporate official responsible
for managing the firm’s day-to
day operations and carrying
out the policies established by
the board of directors.
risk averse
Requiring compensation to
bear risk.
stakeholders
Groups such as employees,
customers, suppliers, creditors,
owners, and others who have
a direct economic link to the
firm
earnings per share (EPS)
The amount earned during the
period on behalf of each
outstanding share of common
stock, calculated by dividing
the period’s total earnings
available for the firm’s
common stockholders by the
number of shares of common
stock outstanding.
risk
The chance that actual
outcomes may differ from those
expected
business ethics
Groups such as employees,
customers, suppliers, creditors,
owners, and others who have
a direct economic link to the
firm
treasurer
The firm’s chief financial
manager, who manages the
firm’s cash, oversees its
pension plans, and manages
key risks.
controller
The firm’s chief accountant,
who is responsible for the
firm’s accounting activities,
such as corporate accounting,
tax management, financial
accounting, and cost
accounting.
marginal cost–benefit
analysis
Economic principle that states
that financial decisions should
be made and actions taken
only when the added benefits
exceed the added costs.
cash basis
Recognizes revenues and
expenses only with respect to
actual inflows and outflows of
cash
foreign exchange manager
The manager responsible for
managing and monitoring the
firm’s exposure to loss from
currency fluctuations.
accrual basis
In preparation of financial
statements, recognizes revenue
at the time of sale and
recognizes expenses when they
are incurred.
individual investor
Investors who own relatively
small quantities of shares so as
to meet personal investment
goals.
corporate governance
The rules, processes, and laws
by which companies are
operated, controlled, and
regulated.
institutional investors
Investment professionals, 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.
principal–agent relationship
An arrangement in which an
agent acts on the behalf of a
principal. For example,
shareholders of a company
(principals) elect management
(agents) to act on their behalf.
agency problems
Problems that arise when
managers place personal goals
ahead of the goals of
shareholders.
incentive plans
Management compensation
plans that tie management
compensation to share price;
one example involves the
granting of stock options
agency costs
Costs arising from agency
problems that are borne by
shareholders and represent a
loss of shareholder wealth.
stock options
Options extended by the firm
that allow management to
benefit from increases in stock
prices over time
performance plans
Plans that tie management
compensation to measures
such as EPS or growth in EPS.
Performance shares and/or
cash bonuses are used as
compensation under these
plans.
performance shares
Shares of stock given to
management for meeting
stated performance goals
cash bonuses
Cash paid to management for
achieving certain performance
goals.
