Principles of Finance

Finance

Concerned with decisions about money or more appropriately cash flows.

Is the study of how individuals, institutions, governments and businesses acquire, spend and
manage money and other financial asset

General Areas of Finance:

1. Financial markets and institutions financial institutions, which include banks, insurance
companies, savings and loans and credit unions, are an integrant part of the general financial
services marketplace.

Two Types of Securities:

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Stocks asset own by
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Bonds debts or
Accepting Underwriting obligations of the
deposits and Securities company.
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2. Investmentsloans
this area of finance focuses on the decisions made by businesses and individuals
as they chooses securities for their investors and portfolios.
Investments relates to decisions concerning stocks and bonds include a number of
activities:
Security analysis deals with finding the proper value of individual securities.
Ex. Stocks and Bonds.
Portfolio theory deals with the best way to structure portfolios or baskets of
stocks and bonds.
Market analysis deals with the issue of whether stock and bond markets at
any given time are too high, too low or about right.
3. Financial services refers to functions provided by organizations that deal with the
management of money. Ex. Banks, insurance companies.
4. Management (business) finance deals with decisions that all firms make concerning their
cash flow, including both inflows and outflows.

Non-Finance Areas:

1. Management personal decisions and employee relations, strategic planning and the general
operations of the firm.
2. Marketing remember the 4Ps of marketing: Product, Price, Place and Promotion. These
determine the success of products that are manufactured and sold by the companies.
3. Accounting accountants supply the record-keeping mechanism for showing ownership of the
investments used in the flow of funds for savers and borrowers.
4. Information System to make sound decisions, financial manager rely on accurate information
that is available when needed.
5. Economics economists used supply-and-demand frameworks explain how the prices and
quantities of goods and services are determined in a free-market economic system.

Structure of the Firm:

1. Chief Financial Officer (CFO) who often has the title of vice president of finance, generally
reports to the Presidents. The CFO key subordinates are:
a. Treasurer
Has direct responsibility for managing firms cash and marketable securities.
Planning how the firm is financed and when funds and raised.
Managing risk
Overseeing the corporate pension fund.

*Incorporators founder of company. Corporator successor of incorporators.

*Dividends subprofit of the company to be given to its stakeholders.

2. Controller is responsible for the activities of the accounting and tax departments.
 Principles of Finance

Roles of Financial Managers:

The financial manager is in charge of raising money to pay for the investments. He/She can
either invite investors to put up cash in return for a share of profits or he/she can promise
investors a series of fixed payments.

Types of Business Organization:

1. Proprietorship is an unincorporated business owned by one individual.

The proprietorship has three important advantages:
a. It is easily and inexpensively formed.
b. It is subject to few government regulations.
c. They are subject to lower income taxes than are corporations.

Three important limitations of a proprietorship:

a. Proprietors have unlimited personal liability for the business debts, so they can
lose more than the amount of money they invested in the company.
b. The life of the business is limited to the life of the individual who created it.
c. Proprietorship have difficulty obtaining large sums of capital.

2. Partnership an unincorporated business owned by two or more persons.

Types of partnership:
a. General partnership wherein each partner is personally liable for any of the
debts of the business.
b. Limited partnership wherein limited partners are only liable for the amounts
they have invested in the business.

Advantages of a Partnership:
a. Partnership can be established relatively easily and inexpensively.
b. All of the partners are generally subject to unlimited personal liability.
c. Unlimited liability makes it difficult for partnerships to raise large amounts of
capital.

Partnership Agreement is the contract that emphasizes the rules and policy between the partners in
partnership.

3. Corporation is a legal entity created by a state, separate and distinction from its owners and
managers, having unlimited life, easy transferability of ownership, and limited liability.
Two important documents that are submitted to the SEC;
a. Articles of Incorporation or Corporate Charter.
b. By-laws
Business Ethics a companys attitude and conduct towards its
stakeholders (employees, customers, stockholders and community). Ethical
behavior requires fair and honest treatment of all parties.

Classification of a Corporation:
a. Stock corporation is a business corporation created for the purpose of making a
profit which may be distributed in the form of dividends to the stockholders.

Non-stock corporation are created for the profit but for the public good
and welfare.

b. Domestic corporation is one incorporated under Philippine laws.

Foreign corporation is formed, organized or existing under any laws other

than those of the Philippines.

c. Close corporation is one which is limited to selected persons or a members of a

family.

Open corporation is created to any person who may wish to become a

stockholder.
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d. Public corporation are those formed or organized for the government or the
state.

Private corporation are those formed by individuals other than the public
corporation.

U.S and foreign companies go international for the following major reasons:

1. To seek new markets 4. To seek production efficiency

2. To seek raw materials 5. To avoid political and regulatory
3. To seek new technology hurdles
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