Fundamentals of Finance and Financial Management Flashcards
The different definition of finance
As verb: To provide funding
Noun: is a field in business and economics.
Economist: Finance is the allocation of scarce resources which include money.
Business: It is the function or area which is responsible for managing the aspect of the operations that deals with money matters. It is concerned not only with the allocation of funds but also with the sources of such funds.
What is Financial Management
-It covers the planning, organizing, leading, and controlling of all financial activities of an organization.
-Financial management puts emphasis on managing the funds of an organization in order to create value for the firm by minimizing risks (cost and expenses) and maximizing returns (sales and profit).
Two Branches of Finance
-Public Finance
-Private Finance
What is Public finance?
Covers management of public funds, national budget, and tools for fiscal policy such as government expenditure and taxation.
Examples of Public Expenditure
Construction of public roads, public market, and other infrastructure projects that are intended for public use.
What is Private finance
Everything that pertains to personal financial planning, including coming up with a budget that matches one’s short and long term needs, creating a savings plan for contingencies, and investing infinancial products such as retirement plan and insurance.
What is Corporate Finance (Business Finance)
-Is primarily concerned with the management of all the financial activities of an enterprise or a business organization.
-Ultimate goal of corporate finance is to maximize shareholder value through sound financial planning.
What are the different areas of operation in an organization
-Research and Development
-Employee relations
-Marketing promotion
-Marketing promotion
-Expansion
-Meeting Contingencies
-Government agencies
-Asset management
-Information system
The Creation of new products or for improvements that need to be made on existing products.
Research and Development
The Office of Human Resources will rely on the Finance Department for data on how much the organization can spend on wages, benefits, training and skills development, and company activities.
Employee relations
Finance will help ? by determining the optimal amount that should be spent on marketing activities such as advertising and promotion.
Marketing Promotion
Is in charge of capital budgeting
Expansion
Finance can help the organization by including in the budget provisions for these risks. Such an approach also minimizes the disruption in the way the business operates when one or more of these contingencies occur.
Meeting contingencies
It is responsible for determining how much taxes are due, the licenses and permits that need to be processed and paid to continue the firm’s operations, and even the training of employees on the treatment of sales tax and discounts given to customers.
Government Agencies
Is tasked to include in the master budget plan the disposal, sales, or acquisition of fixed assets such as machinery and equipment or the construction of a new plant or facility.
Asset management
Is the decrease in the value of certain types of assets (e.g., buildings, machineries, or equipment) over their useful life.
Depreciation
To make sound financial decisions, finance managers rely on information supplied to them by the different department heads, including the accounting supervisor.
Information systems
What is Financial Institution?
Is an organization that handles financial transactions for individuals, groups, and other organizations - profit, nonprofit, private, or government owned.
Financial institutions can either be?
-Depository
-Non-Depository
What is Depository Institution
As the name implies, manages money that is deposited by individuals and organizations.
Examples of Depository institution
Banks, credit unions, and savings and loan associations.
What is Non-depository institution
Does not handle deposits. Instead, it serves as an intermediary between savers and demanders of funds, or individuals, households, and other business that need additional funds to support their personal needs or business operations.
Example of Non-depository Institution
- Insurance companies
- Pension Funds
- Securities
- Brokerage firms
- Mutual funds
Financial institutions are also referred to as
Financial Intermediaries
- Because at times they facilitate the flow of funds between the savers and demanders of funds in an economy or a financial system.
What are the Types of Financial Institutions
- Commercial Banks
- Savings and loans banks
- Credit Unions
- Investment banks
- Insurance companies
- Brokerage
- Investment companies
Accept deposits from individuals and organizations that have excess funds and provide loans to those who want to borrow money. Traditionally, savings and loans are the main services that ? Provide to their customers.
Commercial Banks
They are also referred to as S&L or thrift banks. Unlike in commercial banks, the bulk of the financial transactions of S&L are dedicated to residential mortgages.
Savings and Loans banks
Are usually an offshoot ( or are associated with an offshoot) of cooperatives. The way they operate is similar to an S&L. The interest rates offered by credit unions on savings accounts are generally higher or lower on certain types of loans compared to what most banks will offer.
- However, they are not open to the general public. Because of the association with cooperatives, only members are serviced by them.
Credit Unions
They perform the task of an intermediary which facilitates the transactions of individuals and institutions in investing. For instance, investment banks may facilitate the buying and selling of stocks.
Investment Banks
Provide individuals and organizations a way on how to manage risk. They operate on the principle of pooling of risks wherein premiums are collected from clients. In exchange, these clients are protected from unexpected events like fire, flood, earthquakes, and in some cases, lawsuits, illnesses, disabilities, and other related losses.
Insurance Companies
Is a financial institution that earns through commissions. It facilitate the buying and selling of capital securities such as bonds and equities
Brokerage
Are corporations wherein individuals and other organizations invest in investment portfolios that are managed by professionals who keep track of market trends and the performance of different financial products or instruments.
Investments companies
What is Financial instrument
Is a document that signifies a legal or binding agreement between two parties. Financial products are signified by instruments when individuals and organizations alike deal with each other in completing financial transactions, thus the use of organizations alike deal with each other in completing financial transactions, thus the use of the term financial instruments.
Most Common Financial Instruments
- Savings
- Loans
- Bonds
- Security
- Treasury bills
- Insurance products
- Mutual funds
Is the most common type of financial product that is offered to customers.
It could be just a regular account, one where the depositor is issued a passbook and/or an ATM card, or on a more long-term basis such as a time deposit where the depositor is issued a time deposit certificate.
Savings
What do banks do with the deposits. They ? them to individuals and organizations who need funds. The interest rate that banks charge on the loans in higher than what they pay to the depositors.
Loans
- Is a loan granted to other organizations by individuals and organizations with excess funds.
Bonds
When an investor has a security, this means that he or she has a financial instrument signifying ownership of stocks of a publicly traded company, or a bond issued by a government agency.
Security
The government may also issue financial instruments or securities to the public. Often referred to as ?, yield no interest but are sold at a discount. The earnings on ? are minimal as the risk level is very low.
Treasury bills
Almost everything can be insured-homes, vehicles, businesses, and many more. People also buy insurance coverage for illnesses, injuries, accidents, and disabilities. Life Insurance provides financial protection to surviving loved ones upon passing of the policyholder.
Insurance Products
Are based on the pooling of funds from different investors. the funds are then invested into different financial products such as securities, stock, and bonds. ? Is managed by a fund manager employed by a mutual fund company.
Mutual funds
What is Financial Markets
Is a means for the buying and selling of stocks, bonds, and other financial instruments.
What is Money Markets
- are where transactions involving short-term debt securities take place.
- Some examples of money market securities include treasury bills, commercial paper, and negotiable certificates of deposit issued by governments, businesses, and other financial institutions.
What is Stocks
are shares of a corporation sold to investors while bonds are, in essence, money loaned.
What is Capital Markets
are where transactions involving long-term debt securities, or those maturing in more than one year, take place. The buying and selling of stocks issued by corporations also take place in capital markets.
Capital market transactions may be classified according to type of issue as:
- Primary Market
- Secondary Market
It covers all new issues of capital securities. For example, issuance of new bonds or a company’s initial public offering (IPO) are primary market transactions.
Primary Market
It covers trade of previously issued securities. The buy and sell of outstanding shares through the stock exchange is an example.
Secondary Market
What are the Qualities of Finance Professional?
- Competence
- Integrity
- Analytical thinking
- Ability to think strategically
- Leader ship
Finance professionals are expected to have the qualifications to handle their jobs. Some finance positions require technical expertise and the ability to understand and stay abreast of new techniques, tools, and regulations related to finance.
Competence
They should be able to interpret and analyze financial data and use findings to understand and solve problems.
In fact, being ? is what sets finance professionals apart from those who can simply prepare reports.
Analytical thinking
Refers to the quality of being honest and having strong moral standards or principles.
Finance professionals are expected to do what is right even no one is watching.
Integrity
Entails having the ability to come up with plans that are in line with the firm’s vision, mission, and objectives. Finance mangers should also possess the ability to determine priorities and identify potential risk and opportunities.
Ability to think strategically
Means teaching, sharing knowledge, motivating other employees to meet or exceed standards, and encouraging everyone to meet targets.
Leadership
What is Financial Statement?
Is a record that gives a picture or description of how an individual, a business, or an organization looks in terms of financial health. Financial statements summarize all the financial activities within a specified period of time.
The three most commonly prepared financial statements in business organizations are:
- The statement of financial position ( Balance Sheet)
- Statement of comprehensive income ( Income Statement )
- Statement of Cash Flows
What is GAAP?
Generally Accepted Accounting Principles
- is a standard practice for business in presenting financial statements to maintain the continuity of information and uniformity of presentation across international borders.
Is a practical rule in accounting which dictates that strict adherence to the GAAP is not required when the items are not significant enough to affect the evaluation decision and fairness of the financial statements.
Materiality
Requires proper accounting for all transactions. The amount that should be reflected on record should be the actual amount involved in the transaction that took place.
Faithfull representation
Means relevance of information should prioritized over format in the presentation of financial information.
Substance over form
Means that when decisions makers have to choose between alternatives, the alternative that has the least effect on equity should be chosen. In other words, it is preferred that gains be understated and losses be overstated rather than the reverse.
Conservatism
Means that if financial information is to be useful, it needs to be comprehensive and reported in an easy-to-understand manner.
Understandability
Means that information about a reporting entity is more useful if it can be compared with similar information about other entities and with similar information about the same entity for another period or another date.
It may be made within an entity or across entities, with comparable information presenting both similarities and dissimilarities.
Comparability
Also known as horizontal comparability or intra comparability - is the quality of information that allows comparisons within a single entity from one accounting period to the next.
Comparability within Entity
Also known as inter comparability or dimensional comparability - is the quality of information that allows comparisons between two or more entities engaged in the same industry.
Comparability across entities
Requires that accounting methods and principles used by the firm should be uniform from one accounting period to another.
Consistency
Means that users of financial statements, all knowledgeable but independent from one another, are able to arrive at a consensus that a financial record is a faithful representation.
Financial information is ? when there is enough evidence so that different users of financial report, for instance, will arrive at the same conclusion.
Verifiability
Means that financial information should be made available to the users in a timely manner.
Timeliness
Means that the benefit gained by a firm from the information should outweigh the cost associated with obtaining the information.
Cost constraint
What is Internal stakeholders
are directly involved in the management or operation of the business
What are the internal Stakeholders
- Employees
- Stock Holders
- Top Management
- Department managers
- Board of directors
- Labor unions
They are concerned with the way things are run in the organization from policies and procedure, hiring and retention, to compensation and benefits, which is their most important concern.
Employees
Are those who bought shares of stocks of a publicly traded corporation.
Stockholders
Members of the top management team are employees as well, but from the financial management perspective, they are most concerned with the quality of financial data that are made available to them.
Top management
This is a group of individuals who were elected by the stockholders to represent them. the board of directors usually consists of highly qualified, very experienced people in the field or industry.
Board of Directors
Is an organization of employees whose mission is to represent the employees in negotiations with employers.
Labor Union
What is external stakeholder?
Is someone who is not directly involved in the business but, in one way or another, has a stake on how the business is managed or how it is performing.
What are the external stakeholders
- Customers
- Suppliers
- Government
- Competitors
- Financial institutions
- Potential investors
