ADMS 3530 Winter 2012 – Professor Lois King
Lecture 1 – The Firm and the Financial Manager – Jan 03
1.1 Introduction to Finance
- Definition of finance.
- Financial markets & participants.
- Categories of finance.
- Finance versus accounting.
Definition of Finance
- Finance studies and addresses the ways in which individuals, businesses and
organizations raise, allocate and use monetary resources over time, taking into account
the risks entailed in their projects.
- The term finance may incorporate any of the following:
o The management of money and other assets;
o Profiling and managing project risk;
o As a verb, ‘to finance’ is to provide funds for a business.
- The term ‘financial market’ usually means is a mechanism that allows people to easily
buy and sell financial securities (such as stocks and bonds) at low transaction costs and at
Traditional Financial Participants
Lenders Intermediaries Financial Markets Borrowers
Individuals Banks Stock Exchange Individuals
Businesses Insurance Firms Bond Market Businesses
Governments Brokerage Firms Money Market Governments
Pension Funds Foreign Exchange
Mutual Funds Commodities New Financial Participants
- Hedge funds
- Private equity funds
- Venture capital firms
Categories of Finance
- Corporate finance
- Public (government) finance
- Personal finance
- Corporate finance – an area of finance dealing with the financial decisions that
corporations make, and the tools and analysis used to make these decisions.
- Primary goal: to enhance corporate value while reducing the firm’s financial risks.
- Public finance – the field of economics that deals with budgeting the revenues and
expenditures of a public sector entity, usually government.
- Personal finance involves the monetary decisions of an individual or family unit.
- How individuals or families obtain, budget, save and spend monetary resources over
Finance versus Accounting
o Finance: current and future planning (more forward looking).
o Accounting: recording of past transactions.
o Both analyzing assets and liabilities.
1.2 Why Study Finance?
- Finance affects our everyday decisions.
o Using credit cards
o Buying versus leasing a car.
o Mortgage decisions.
o Retirement planning.
- Many of the most interesting and bestpaying jobs in business are in the finance field. 1.3 Types of Business Organizations
- Sole proprietorship
- Hybrid organizations
- The ease of setting up and maintaining the business.
- The potential exposure of personal assets to obligations of the business (degree of
- Taxation issues.
- Requirements for outside financing.
- Succession issues.
- A business owned and operated by one person.
- The owner (proprietor) is personally liable for all the firm’s obligations.
- Owner and business are taxed as one entity.
- The firm has limited life.
- A business owned and operated by two or more people.
- Each partner is jointly and separately responsible for all the liabilities of the partnership.
- Each partner’s share of partnership income is included on his personal tax return.
- Limited life.
- A business organized and taxed as a separate legal entity.
- Shareholders have limited liability.
- Corporations have perpetual lives.
- May have access to capital from outside mark