week 1 Flashcards
(46 cards)
What is the key difference between finance and accounting?
Accounting tracks past money flows; finance focuses on future decisions and how money can generate more wealth.
Why does money flow from individuals to businesses in finance?
To improve individual financial futures and expand businesses, increasing economic productivity and wealth.
What is a Type 1 individual in finance?
Someone with no extra money and no business ideas, but may contribute through labor.
What is a Type 2 individual in finance?
Someone with extra money but no business ideas.
What is a Type 3 individual in finance?
An entrepreneur with business ideas but no funding.
What is a Type 4 individual in finance?
Someone with both extra money and viable business ideas (e.g. Elon Musk with SpaceX).
What are retained earnings?
Earnings that are reinvested into the company rather than paid out as dividends.
What are dividends?
Payments made to stock investors from a company’s profits.
What are the four subareas of finance?
Investment, Financial Management, Financial Institutions and Markets, International Finance.
What decisions are made under investment in finance?
What securities to buy, from which firms, expected return, and timing/certainty of cash flows.
What does financial management involve?
Using investor or retained cash, organizing the firm, raising capital, minimizing taxes, selecting projects, repaying investors.
Who is the CFO?
The Chief Financial Officer, responsible for financial management of a firm.
What is a bond?
A loan from an investor to a company, where the company pays interest and returns the principal at maturity.
What are short-term bonds?
Bonds maturing in 1–3 years, e.g., treasury bills.
What are medium-term bonds?
Bonds maturing in 4–10 years, e.g., treasury notes.
What are long-term bonds?
Bonds maturing in 10+ years, e.g., treasury bonds (30 years).
What is the relationship between bond term and interest rate?
Longer-term bonds generally offer higher interest rates.
What do financial institutions and markets do?
Facilitate capital flow between investors and businesses (e.g., from Type 2 to Type 3).
What is international finance?
Applying financial theory globally, considering currency risks, political risks, and legal differences.
What is a sole proprietorship?
A business owned by one person.
What are the advantages of a sole proprietorship?
Easy to start, all profits go to owner, less paperwork.
What are the disadvantages of a sole proprietorship?
Unlimited liability and limited access to capital.
What is a general partnership?
A business owned by 2–20 people.
What are the advantages of a general partnership?
Easy to start, profits go to partners directly.
