Study Guide: Unit 2 Flashcards
Define finance and subspecialties in finance
finance: to provide or obtain funding for a transaction or undertaking; to back; to support.
Describe the function of finance in various management roles within an organization
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Describe the function of finance in various business scenarios
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Identify underlying financial principles that affect business decisions
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Explain the different forms of business organization: Sole Proprietorship, Partnership, & Corporation
The sole proprietorship is a type of business structure open to businesses run and owned by one entrepreneur.
A large advantage of the sole proprietorship structure is its ease. The sole proprietorship structure does not require filing of articles of incorporation, regular meetings, or election of a board. A sole proprietor also files taxes as personal income.
The other side of this process is the structure’s main disadvantage: there is no separation between the entrepreneur and the business. This means the sole proprietor is personally liable for business losses. Also, if the proprietor dies, the business ceases to exist.
Partnership: an association of two or more people to conduct a business
The partnership is a type of business structure open to businesses run and owned by two or more entrepreneurs.
A large advantage of the partnership structure is its ease, in terms of filing and tax treatment. A general partnership can be started with no special formalities. The partners are taxed individually on their respective shares of the partnership’s profits.
The structure’s main disadvantage is that partnership owners can be personally liable for business losses. The partnership is not a separate entity from the owners/entrepreneurs, unlike a corporation.
Types of partnership beyond the general partnership have developed to mitigate some of the disadvantages of the structure. Limited partnerships and limited liability partnerships are two examples.
Compared to sole proprietorships and partnerships, the corporation is more complicated to found and maintain; this is one of its disadvantages.
The incorporator must file articles of incorporation as well as hold an organizational meeting to elect a board of directors.
The structure also generally requires the maintenance of at least annual reporting, including annual financial statements and other data.
One of the most favorable advantages of the corporate structure is the protection of personal assets of stockholders, directors, and officers. They are limited in liability to the amount they have invested in the corporation.
Also, because the corporation is an entity separate from its owners, ownership is easily transferable. Similarly, the corporation does not cease to exist with the death of shareholders, directors, or officers of the corporation.
Define the principal agent problem
agent: One who acts for, or in place of, another (the principal), by authority; one entrusted with the business of another; a substitute; a deputy; a factor
principal (module 2): One who directs another (the agent) to act on one’s behalf
The principal-agent problem concerns the difficulties in motivating one party (the “agent”), to act on behalf of another (the “principal”). The two parties have different interests and asymmetric information. Moral hazard and conflict of interest may thus arise.
The deviation from the principal’s interest by the agent is called “agency costs.” Agency costs mainly arise due to contracting costs and the divergence of control, separation of ownership and control, and the different objectives (rather than shareholder maximization) of the managers.
Explain the issues related to achieving the financial goals of a firm
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Describe the US Financial System
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Define Financial Institutions and Markets
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Identify Types of Financial Institutions and Market
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Explain types of economic impacts
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