12 Questions
Which of the following is NOT a tool used in financial decision-making?
Biology
What does the study of capital markets and capital market theory focus on?
The pricing of risky assets and the structure of interest rates
What are the three main areas of finance?
Capital markets, financial management, and investment management
What is the primary concern of financial managers within organizations?
Investment decisions and financing decisions
What are the three components of the financial system of an economy?
Financial markets, financial intermediaries, and financial regulators
What is the definition of finance provided in the text?
The application of economic principles to decision-making involving the allocation of money under conditions of uncertainty
Which of the following is NOT a goal of business finance?
Maximizing sales revenue
What is the main purpose of a Statement of Financial Position (Balance Sheet)?
To report on a company's assets, liabilities, and ownership equity at a given point in time
Which of the following is NOT a category of business finance?
Nonprofit organization finance
What is the primary purpose of a Statement of Cash Flows?
To report on a company's cash flow activities, particularly its operating, investing, and financing activities
Which of the following is NOT a type of asset listed in the text?
Goodwill assets
What is the primary focus of public finance?
The revenue and expenditure patterns of the government and their effects on the economy
Study Notes
Finance Definition and Scope
- Finance is the application of economic principles to decision-making that involves the allocation of money under conditions of uncertainty.
- It provides a platform for funds to be transferred from those who have them to those who need them.
Tools Used in Financial Decision-Making
- Economics
- Financial accounting
- Mathematics
- Probability theory
- Statistical theory
- Psychology
Areas of Finance
- Capital markets and capital market theory
- Financial management
- Investment management
Capital Markets and Capital Market Theory
- Focuses on the study of the financial system, the structure of interest rates, and the pricing of risky assets.
- The financial system consists of three components:
- Financial markets
- Financial intermediaries
- Financial regulators
Financial Management
- Also called business finance or corporate finance
- Concerned with financial decision-making within a business entity
- Financial managers are primarily concerned with investment decisions and financing decisions within organizations
Categories of Finance
- Public Finance:
- Deals with the revenue and expenditure patterns of the government and their effects on the economy
- Private Finance:
- A. Personal Finance:
- Concerned with managing one's own personal money affairs
- B. Finance of Non-profit Organizations:
- Includes private undertakings such as charity, religion, and some private educational institutions
- A. Personal Finance:
Business Finance
- Refers to the provision of money for commercial use
- Concerned with the effective use of funds, covering financial management of private profit-seeking concerns
- Three categories of business finance:
- Small business finance
- Corporation finance
- Multinational business finance
Goals of Business Finance
- Maximizing profit
- Maximizing profitability
- Maximizing profit subject to cash constraint
- Maximizing Net Present Worth
- Seeking an Optimum Position Along a risk-return frontier
Financial Statements
- Basic financial statements:
- Statement of Financial Position (Balance Sheet)
- Statement of Income (Profit and Loss Statement)
- Statement of Cash Flows
- Balance Sheet:
- Statement produced periodically, showing an organization's assets, liabilities, and ownership equity
- Assets:
- Classified as:
- Current Assets
- Trade Investments
- Fixed Assets
- Intangible Assets
- Classified as:
- Current Assets:
- Composed of cash, bank deposits, and other items readily convertible into cash
- Includes accounts receivable, stocks, work-in-process, and marketable securities
Explore the application of economic principles to decision-making in finance, involving the allocation of money under uncertainty. Learn about tools such as economics, financial accounting, mathematics, probability theory, statistical theory, and psychology. Delve into the three key areas of finance: capital markets, corporate finance, and investments.
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