Chapter 1 Textbook Flashcards by Kellyn Smith

What are the 5 basic areas of finance?

Corporate Finance
Investments
Financial Institutions
International Finance
FinTech

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Which area of finance deal with financial assets such as stocks and bonds?

Investments

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Which area of finance deals with these questions?
1) What determines the price of a financial asset, such as a share of stock?
2) What are the potentials risks and rewards associated with investing in financial assets?
3) What is the best mixture of financial assets to hold?

Investments

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Which area of finance offers job opportunities as stock brokers, financial advisors, portfolio managers, and security analysis

Investments

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Businesses that deal primarily in financial matters are known as

Financial Institutions

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Which are of finance is widely known for being banks and insurance companies?

Financial Institutions

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Careers in this area of finance generally involve international aspects of corporate finance, investments, or financial institutions this is known as?

International Finance

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The combination of technology and finance is called

Fintech

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Which term is broad for a company that uses the internet, mobile phones, software, and/ or cloud services to provide financial services

FinTech

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Which area of finance needs to be familiar with exchange rates and political risks

International Finance

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Why is it important to study finance in marketing?

understand budgets
use it in marketing research
understanding how to market financial products

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Why is it important to study finance in accounting

for the dual accounting and finance function
in order to prepare financial statements

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Why is it important to study finance in management

teaches how to think strategically
for job performance
profitability

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Why is it important to study finance in personal finance

to know how to budget
for retirement planning
college planning
day-to-day cash flow issues

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Questions like
1) What long-term investments should you take on?
2) Where will get the long term financing to pay fro your investments?
3) How will you manage your everyday financial activities such as collecting from customers and paying suppliers?
all describe what type of finance?

Business Finance

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T/F- The financial management function is usually associated with a top officer of the firm called chief financial officer (CFO)

True

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Cash managers
Credit managers
Capital Expenditures
Financial Planners all report to which financial component of a corporation?

Treasurer

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Tax managers
Cost accounting managers
Financial Accounting Managers
Data processing managers
all report to which financial component of a corporation?

Controller

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The treasure and controller all report to which corporation management?

Vice President of Finance (CFO)

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The vice president of marketing, CFO, and vice president of production all report to which form of corporate management?

President and Chief Operations Officer (COO)

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The process of planning and managing a firm’s long-term investments is known as

Capital Budgeting

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T/F- In capital budgeting, the financial manager tries to identify investment opportunities that are worth more to the firm than they cost to acquire

True

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T/F- Whenever we evaluate a business decision, the size, timing, and risk of the cash flows will be, by far, the most important thing a firm considers

True

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What are the three financial management decisions?

Capital Budgeting
Capital Structure
Working Capital Management

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What is the first question the firm's long term investments must determine?

Capital Budgeting

What is the second question the firm must ask in order to obtain financing it needs to support its long term investments?

Capital Structure

The mixture of long term debt and equity the firm uses to finance its operations is known as

Capital Structure

During the capital structure area, the financial manager has two main concerns. What are they?

1) How much should the firm borrow? 2) What are the least expensive sources of funds for the firm?

T/F- In addition to the capital structure area, the financial manager has to decide exactly where and how to raise money

True

What is the third question the firm's financial management team asks for short term assets such as inventory, and its short-term liabilities, such as money owed to suppliers

Working Capital Management

What term refers to a firm's short-term assets, such as inventory, and its short term liabilities, such as money owed to suppliers is known as

Working Capital Management

What are the 4 questions that must be answered concerning working capital management?

1) How much cash and inventory should we keep on hand? 2) Should we sell on credit to our customers 3) How will we obtain any needed short-term financing? 4) If we borrow int eh short term, how and where should we do it?

A business owned by a single individual is known as

Sole Proprietorship

Which type of business is the easiest to start and is the least regulated form of organization?

Sole Proprietorship

T/F- There are more sole proprietorships than any other type of business, and many businesses that later become large corporations start out as small proprietorships

True

What long term investments or projects should the business take on is a question for which financial management decision group?

Capital Budgeting

1) How should we pay our assets? 2) Should we use debt or equity? is a question for which financial management decision group?

Capital Structure

How do we manage the day-to-day finances of the firm? is a question for which financial management decision group?

Working Capital Management

What are the three major forms of business organizations in the United States?

Sole Proprietorship Partnership - General - Limited Corporation - S-Corp - LLC

How are sole proprietorships taxed?

Once as a personal income

T/F- the single owner of a sole proprietorship keeps all of the profits

True

The following disadvantages are linked to which business organization? - Limited to life of the owner - Equity of capital is limited to the owner's personal wealth - Owner has unlimited liability (all) - Difficult to sell ownership interest b/c it requires the sale of the entire business to a new owner - Difficult to exploit new opportunities due to lack of funds

Sole Proprietorship

A business formed by two or more or more individuals or entities is known as

Partnership

What type of partnership has all partners share in gains or losses, and all have unlimited liability for all partnership debts, not just some particular share

General Partnership

The way partnership gains and losses are divided is described in the

Partnership Agreement

T/F- the Partnership agreement can be an informal oral agreement such as" let's start a lawn mowing business," or a lengthy formal written document

True

What kind of partnership has one or more general partners that run the business and have unlimited liability for all debts, BUT there will be one or more limited partners who do not actively participate in the business where their liability is limited to the amount that partner contributes to the partnership

Limited Partnership

Which form of organization is common in real estate ventures?

Limited Partnerships

The following advantages are linked to which type of business organization? - 2+ owners - More capital available for business - Relatively easy to start - has income taxed once as personal

Partnerships

The following disadvantages are linked to which type of business organization? - Unlimited liability - partnership terminates when a general partner wishes to sell or dies -amount of equity that can be raised is limited to the partners' combined wealth - ownership is not easily transferrable b/c a new partnership must be formed

General Partnership

The following disadvantages are linked to which type of business organization? - liability is limited to what you have put in - you are able to sell part of the partnership without it being resolved but it will be difficult - are not able to be too involved with business

Limited Partnership

What are the primary 3 disadvantages of sole proprietorships and partnerships?

1) unlimited liability for business debts on the part of the owners 2) limited life of the business 3) difficulty of transferring ownership

The 3 primary disadvantages add up to a single, central problem:

The ability of such businesses to grow can be seriously limited by an inability to raise cash investment

A legal person distinct from owners and a resident of a state is known as

Corporation

The following advantages are linked to which type of organization? - limited liability - unlimited life - separation of ownership and management - transfer of ownership is easy - easier to raise capital for firm

Corporation

The following disadvantages are linked to which type of organization? - Separation of ownership and management (agency problem) - Double Taxation income taxed at corporate rate and then dividends taxed at personal rate, dividends paid are NOT tax deductible

Corporation

What must be prepared for a corporation to be a business organization?

Articles of Incorporation Bylaws

Which set of documentation for a corporation muse include the corporations name, intended life, business purpose, and number of shares that can be issued is known as the

Articles of Incorporation

Which set of documentation for a corporation are rules describing how the corporation regulates its own existence?

Bylaws

T/F- In large corporations, stockholders and managers are usually separate groups

True

The goal of which entity is to operate and be taxed like a partnership but retain limited liability for owners is known as

LLC

The hybrid of a partnership and corporation is known as

LLC

slide 18?

What should be the goal of a corporation?

Maximize the current value per share of the company's existing stock and to maximize the market value of the existing owners' equity

What is the MAIN goal of financial management

To maximize the current value per share of existing stock

What is the more general financial management goal?

Maximize the market value of the existing owners' equity

Which act is intended to strengthen protection against corporate accounting fraud and financial malpractice?

Sarbanes Oxley Act

Which act requires officers of a public corporation to review and sign the annual financial statements where they must attest the reports do not contain false statements or material omissions that fairly represent the company's financial results

Sarbanes - Oxley Act

T/F- the SOX act is very costly, and in result has led to hundreds of public firms "go dark" so Sox cannot apply to them

True

The relationship between stockholders and management is called

Agency Relationship

What kind of relationship exists whenever someone hires (principal) another (the agent) to represent his or her interest?

Agency Relationship

The possibility of conflict of interest b/w the owners and management of a firm is known as

Agency Problem

When stockholders hire managers to run the company this is an example of what kind of relationship?

Agency Relationship

The owners of the firm wish to take a vestments because the share value will rise, but the management do not because there is the possibility that things will go badly and management jobs will be lost. If management does not take the investment, then the stockholders may lose a valuable opportunity. This is an example of a

Agency Cost

management goals***

Incentives that can be used to align management and stockholder interest where the incentives are carefully structured to insure that they achieve their goal is known as

Managerial Compensation

The threat of a takeover may result in better management of a corporation is known as

Corporate Control

Someone other than a stockholder or creditor who potentially has a claim on the cash flows of the firm is known as a

Stakeholder

FIGURE 1.2**

What type of market refers to the original sale of securities by governments and corporations?

Primary Market

What type of market refers those in which securities are bought and sold after the original sale?

Secondary markets

When the corporation is the seller, and the transaction raises money for the corporation. This is an example of what market?

Primary Market

What are the two types of offerings in the primary market section?

Public offerings Private placements

What term involves selling securities to the general public?

Public Offering

What term involves a negotiated sale involving a specific buyer?

Private Placement

T/F- By law, public offerings of debt and equity must be resisted with the Securities and Exchange Commission (SEC)

True

What type of market transaction requires one owner or creditor selling to another?

Secondar Markets

What are the two kinds of secondary markets?

Auction Market Dealer Market

Which type of secondary market buys and sells from themselves at their own risk?

Dealer Markets

Which type of secondary market has a physical location of where the buying and selling takes place?

Auction Market

Dealer marketsin stocks and long-term debt are called

Over the counter (OTC_

Stocks that trade in an organized exchange or market are said to be?

Listed

T/F- In order to be listed, firms must meet certain minimum criteria concerning, asset size and # of shareholders

True

T/F- The NYSE has the most stringent requirements of the stock markets in the US. They have minimum on earnings, assets, and number and market value of shares outstanding

True

COME BACK TO PG 19 Trading in Corporate Securities to finish