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Finance
– art and science of handling
– behind most everything we see each day
– divide into two areas:
(1) Investments and financial markets
(2) Financial management of companies
However, the banking system, a third sector of the financial
world, is generally covered in an economic course on “Money
and Banking” or “Financial Institutions”
Financial Assets
Real asset – an object or thing (car, house, factory) which
have value because they provide services (transportation,
shelter, production).
Financial asset – legal documents, pieces of paper whose
values come from the fact that they give their owners claim to
certain future cash flows.
Stock ownership – means that the holder of a share
owns a piece of the company that issued the stock.
(Two sources of cash: dividends and eventually
selling price of the share)
Bond – signifies debt relationship. “Buying bonds =
lending money” A bondholder is a lender and entitled
to interest on the amount lent and the repayment of
the principal at the end of loan period.
Notes:
* Financial asset is also known as security.
* Financial assets buyer is also called as investor.
*A mutual fund combines the contributions of many
investors and employs a professional manager to select
securities that match particular set of goals.
* Securities are financial assets that can be traded among
investors. Hence stocks and bonds are securities while savings
accounts are not.
Financial Markets – framework or organization in which
people can buy and sell securities.
Stock Market – centered in several places around
the country called stock exchanges.
Stock Broker – is a person who is licensed to help
investors buy and sell securities for a commission.
* Bond markets operate similarly.
Finance – involves raising money to acquire assets.
Finance assets – by borrowing, selling stocks, or using money
that had been previously earned/
Lease financed – assets which were acquired through leasing
Company financed – company’s money is raised for
expansion
Debt financed – to the extent the money is borrowed
Equity financed – to the extent it comes from selling stock
The field of finance was narrowly limited to activity
within financial markets. Today, the perspective has expanded
in two directions:
1. Notion of risk in investing and with how investors put
together groups of securities called portfolios, to minimize
that risk.
2. Deep involvement of managers in decisions related to the
company.
Financial Management
– is the management and control of money and money-related
operations with businesses
– refers to the financial input that goes into general business
decisions
– finance department generally has an oversight responsibility
for the effective management of money other departments
spend
Chief Financial Officer (CFO)
– executive in charge of the finance department
– The title vice president of finance is sometimes used instead
of CFO
– keeps records, pays employees and suppliers, receiving
customer payments, borrowing money, purchasing assets,
selling stocks and paying dividends
(Accounting function is usually part of the finance dep’t)
Notes:
* Investors buy securities for the future cash flows that come
from owning them. Those cash flows depend on the issuing
companies’ financial performance.
* The price investors are willing to pay for securities depend
on their expectations about how well the issuing companies
are likely to do in the future in terms of profit.
* The link between company management and investors
comes from this relationship between price and expected
results. Everything they do is being watched by the market and
influences the investors’ perceptions of likely future
performance and risk.
Accounting – system of record keeping designed to portray a
firm’s operations to the world in a fair and unbiased way
Treasury department – most of the raising money, analyzing
results and handling relationships with outsiders are functions
of TD
Finance department – normally consists of both the
accounting department headed by the controller and the
treasury department headed by the treasurer
(Treasury functions – finance, Controller functions –
accounting)
*CROSSOVERING IS POSSIBLE
In finance, “CASH IS KING”!
Also, say you acquire an asset, in accounting, everything will
be depicted such as the acquisition cost, subsequent cost,
depreciation every year, tax, impairment loss, etc. but in
finance department they are only interested in only two things:
the cash outflow needed for acquisition and the annual tax
saving generated by the depreciation deduction.
Language of Finance – accounting
This implies that all finance professionals need some
knowledge of accounting.
Financial Theory – is a body of thought that is studied and
continually developed by highly trained experts, usually
professors. Finance is like economics.
Major disadvantage of proprietors is that
they use their homes as collateral for start-
up loans. They must have enough collateral
to guarantee a loan.
The Corporate Form
– not easy to start, because it must go through the legal process
of incorporation and register with the state, probably using a
lawyer to file the papers.
– corporation is a separate legal entity subject to a corporate
tax. What’s left over after the corporate tax is paid belongs to
the corporation.
– corporation is taxed twice: first, the corporate rates and
individual rates
– major disadvantage of corporation is the tax
– the corporation can raise money the way a sole proprietor
can’t – by offering stock to investors.
A certain percentage of share can influence over how
it is run.
– ease of raising money thru selling stock
Limited Liability
– stockholder cannot be held liable for the corporate debts or
for damages it may do to others
