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Module1_Lesson1.1 (1)

The document provides an overview of finance as a field of study, highlighting its goals, key activities, and relationship with other disciplines. It discusses the basic forms of business organizations, areas of specialization and employment in finance, and the importance of ethical conduct in achieving financial goals. Additionally, it emphasizes the distinction between maximizing profit and shareholder wealth, introducing concepts like Economic Value Added (EVA) and stakeholder relationships.

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christinecabahit88
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2 views

Module1_Lesson1.1 (1)

The document provides an overview of finance as a field of study, highlighting its goals, key activities, and relationship with other disciplines. It discusses the basic forms of business organizations, areas of specialization and employment in finance, and the importance of ethical conduct in achieving financial goals. Additionally, it emphasizes the distinction between maximizing profit and shareholder wealth, introducing concepts like Economic Value Added (EVA) and stakeholder relationships.

Uploaded by

christinecabahit88
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Module 1:

The Field of Finance


Lesson 1.1: Overview of Finance
Learning Objectives
1. Describe finance as a field of study as well as
the goals and key activities of finance.
2. Relate finance with the other field of studies.

3. Review the basic forms of business


organizations.
What is Finance?

Finance – is the art and science of


managing money.
What is Finance?
• At the macro level, finance is the study of financial
institutions and financial markets and how they operate
within the Philippine financial system.
• At the micro level, finance is the study of financial
planning, asset management, and fund raising for
businesses and financial institutions.
• Financial management can be described in brief using
the following balance sheet.
What is Finance?

Assets: Liabilities & Equity:


Current Assets Current Liabilities
Cash & M.S. Accounts payable
Accounts receivable Notes Payable
Inventory Total Current Liabilities
Working Total Current Assets Long-Term Liabilities
Fixed Assets: Total Liabilities
Working
Capital
Gross fixed assets Equity: Capital
Less: Accumulated dep. Common Stock
Goodw ill Paid-in-capital
Other long-term assets Retained Earnings
Investment Total Fixed Assets Total Equity
Financing
Decisions Total Assets Total Liabilities & Equity
Decisions
What is Finance?
• A well-developed financial system is the hallmark
and essential characteristic of any modern developed
nation.
• Financial markets, financial intermediaries, and
financial management are the important components.
• Financial markets and financial intermediaries
facilitate the flow of funds from borrowers to savers.
• Financial management involves the efficient use of
financial resources in the production of goods.
Areas of Specialization in Finance

• Financial Markets
– Markets of users and savers of funds.
• Financial Services
– Design and delivery of financial advice and
products to individuals, businesses, government.
• Managerial Finance
– Financial management of business firms.
Areas of Employment in Finance
• Financial Analyst
• Capital budgeting analyst/manager
• Project finance manager
• Cash manager
• Credit analyst/manager
• Pension fund manager
Basic Forms of Business
Organization
• Sole Proprietorship
– Owned by one person, operated for personal profit.
• Partnerships
– Owned by two or more people, operated for joint
profit.
• Corporations
– “Legal entity”, owned by individuals, operated for
joint profit.
Sole Proprietorship
STRENGTHS: WEAKNESSES:
• Low organizational cost • Unlimited liability
• Income taxed once as • Limited funding
personal income • Proprietor must be all
• Independence • Difficult to develop staff
• Secrecy career opportunities
• Ease of dissolution • Lack of continuity on
death of proprietor
Partnerships
STRENGTHS: WEAKNESSES:
• Improved funding • Unlimited liability to
sources all partners
• Increased managerial • Partnership dissolved
talent
upon death of partner
• Income split by
partnership contract, • Difficult to liquidate
taxed as personal or transfer ownership
income
Corporations
STRENGTHS: WEAKNESSES:
• Owners’ liability limited • Higher tax rates
• Large capitalization • Expensive organization
possible, greater funding • Greater government
• Ownership readily regulation
transferable • When publicly traded,
• Indefinite life lacks secrecy
• Professional management
Relationship to Economics
Fundamental Economic Principle:
• Marginal Analysis
– Financial decisions should be made and actions
taken only when the added benefits exceed the
added costs.
Relationship to Accounting
• Cash Flows
– Accrual Basis: recognizes sales revenue and
expenses incurred to make sale at time of sale.
– Cash Basis: recognizes revenues and expenses
as they occur.
Accounting vs. Financial Views
Accounting View Financial View
(Accrual Basis) (Cash Basis)
Income Statement Cash Flow Statement
XYZ, Inc. XYZ, Inc.
For year ended 12/21 For year ended 12/21

Sales revenue P200,000 Cash inflow P 0


Less: Costs 160,000 Less: Cash outflow 160,000
Net Profit P 40,000 Net cash flow (P160,000)
Financial Manager–Key Activities

Financial Analysis & Planning

Balance Sheet
Current Current
Making Assets Liabilities Making
Investment _______________ _______________ Financing
Decisions Fixed Long-Term Funds Decisions
Assets (Debt & Equity)
Should Firms Maximize Profit?
• Corporations commonly define profit as
“Earnings per Share” (EPS).
– A measure of total earnings divided by total
number of ownership shares.
• EPS ignores critical factors of
– the timing of the returns.
– cash flows available to common shareholders.
– risk factors facing the firm.
Or Should Firms Maximize
Shareholder Wealth?
• Evaluating Shareholder Wealth addresses
factors of timing, cash flows and risk
ignored by the EPS.
• Therefore, Maximizing Shareholder
Wealth is a more comprehensive goal for
the firm, its managers and employees.
• This can be explored through “economic
valued added” and a focus on stakeholders.
Economic Value Added – EVA®

• EVA measures whether an investment


contributes to shareholder wealth.
• EVA is calculated by subtracting cost of
funds used from after-tax operating profits.
• While popular, EVA is essentially derived
from the concept of “net present value.”
What about Stakeholders?
• Stakeholders include groups that have direct
economic links to the firm.
• Stakeholders include not only owners, but
also employees, customers, suppliers, and
creditors.
• Maintaining positive stakeholder
relationships helps maximize long-term
benefits to shareholders.
Importance of Ethics
The standards of conduct or moral judgment:
• Honesty, trustworthiness, fair dealing are
foundations of sustainable business relations:
– With customers,
– With suppliers,
– With creditors,
– With employees,
– With owners.
• Ethical behaviour is necessary to achieve the goal
of maximizing shareholder wealth.

1-21
Financial Goals of a Company
• Maximize sales. • Maximize return on
• Maximize cash flow. sales, investment,
• Maximize market equity.
share. • Ensure earnings
• Maximize profit. stability.
• Minimize costs. • Achieve target goals
for sales, profits,
market share or return.

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