Introduction To Financial Management-Full

INTRODUCTION TO
FINANCIAL MANAGEMENT
A. Finance and Business
B. Nature, Objectives and Scope of

Financial Management
Learning Goals
Why this chapter matters
to you?
Why this chapter matters
to you?
Student
Life
Professional
Life
Personal Life
Define finance and the
managerial finance
function. What is Finance?
Describe the
legal forms of
business
organization.
Describe the goal

of the firm, and
explain why
maximizing the
value of the firm
Finance can be defined as the
is an appropriate
goal for a science and art of managing
business.
money.
Describe how the
managerial finance
function is related to
economics and
accounting.
Identify the primary

activities of the
financial manager.
SPEND SAVE INVEST
Define and discuss
the principles of
financial
management
managerial finance
function.
FINANCIAL
Describe the
legal forms of
business
SERVICES
organization.
Describe the goal

The area of finance
of the firm, and
explain why
maximizing the
concerned with the
value of the firm
is an appropriate
goal for a
design and delivery of
advice and financial
business.
products to individuals,
Describe how the
managerial finance
economics and
accounting.
businesses, and
activities of the
financial manager.
governments.
Define and discuss

the principles of
financial
management
Define finance and the FINANCIAL
managerial finance
function.
SERVICES
The area of finance
concerned with the
Describe the
legal forms of
business
design and delivery of

organization.
Describe the goal

of the firm, and
explain why
maximizing the
advice and financial
products to individuals,
value of the firm
is an appropriate
goal for a
business.
businesses, and
Describe how the
MANAGERIAL
managerial finance
function is related to governments.
economics and
accounting. FINANCE
Concerns the duties of
the financial manager
activities of the
financial manager.
Define and discuss in a business.

the principles of
financial
management
managerial finance Administer the financial affairs of all types of
function. businesses—private and public, large and small,
profit seeking and not for profit
Describe the
legal forms of
business
organization.
Describe the goal

of the firm, and
explain why
maximizing the
value of the firm
is an appropriate
goal for a
business.
Evaluating proposed Extending credit to

customers
Describe how the
managerial finance
large expenditures
economics and
accounting.

activities of the
financial manager.
Define and discuss

the principles of
FINANCIAL MANAGER
financial
management
Raising money to fund the

Developing financial plan
firm’s operations
managerial finance
function. Why Study Managerial
Describe the
legal forms of
business
Finance?
organization.
Describe the goal

of the firm, and
explain why
maximizing the
value of the firm
is an appropriate
goal for a
business.
Describe how the

managerial finance
economics and
accounting.
Identify the
primary activities
of the financial
manager.
Define and discuss

the principles of
financial
management
Define finance
and the
managerial
LEGAL FORMS OF BUSINESS
finance
function. ORGANIZATION
Describe the legal
forms of business
organization.
Describe the goal
of the firm, and
explain why
maximizing the
value of the firm
is an appropriate
goal for a
business.
Describe how the

managerial finance
economics and
accounting.
Identify the
primary activities
of the financial
manager.
Define and discuss

the principles of
financial
management
Define finance
and the
managerial
finance
Describe the legal
forms of business
organization.
Describe the goal
Strength
of the firm, and
explain why s
maximizing the
value of the firm
is an appropriate
goal for a
business.
Describe how the

managerial finance
economics and
accounting.
Identify the
primary activities
of the financial
manager.
Define and discuss

the principles of
financial
management
Define finance
and the
managerial
finance
Describe the legal
forms of business
organization.
Describe the goal
of the firm, and
explain why
maximizing the
value of the firm
is an appropriate
goal for a
business.
Describe how the

managerial finance
economics and
accounting. Weaknesse
Identify the
primary activities
s
of the financial
manager.
Define and discuss

the principles of
financial
management
Define finance
and the
managerial
finance
Describe the legal
forms of business
organization.
Describe the goal
Strength
of the firm, and
explain why s
maximizing the
value of the firm
is an appropriate
goal for a
business.
Describe how the

managerial finance
economics and
accounting.
Identify the
primary activities
of the financial
manager.
Define and discuss

the principles of
financial
management
Define finance
and the
managerial
finance
Describe the legal
forms of business
organization.
Describe the goal
of the firm, and
explain why
maximizing the
value of the firm
is an appropriate
goal for a
business.
Describe how the

managerial finance
economics and
Identify the
primary activities
s
of the financial
manager.
Define and discuss

the principles of
financial
management
Define finance
and the
managerial
finance
Describe the legal
forms of business
organization.
Describe the goal
Strength
of the firm, and
explain why s
maximizing the
value of the firm
is an appropriate
goal for a
business.
Describe how the

managerial finance
economics and
accounting.
Identify the
primary activities
of the financial
manager.
Define and discuss

the principles of
financial
management
Define finance
and the
managerial
finance
Describe the legal
forms of business
organization.
Describe the goal
of the firm, and
explain why
maximizing the
value of the firm
is an appropriate
goal for a
business.
Describe how the

managerial finance
economics and
Identify the
primary activities
s
of the financial
manager.
Define and discuss

the principles of
financial
management
Define finance
and the
managerial
finance
ORGANIZATION
function.
Describe the legal

forms of business
organization.
Describe the goal
of the firm, and
explain why
maximizing the
value of the firm
is an appropriate
goal for a
business.
Describe how the

managerial finance
economics and
accounting.
Identify the
primary activities
of the financial
manager.
Define and discuss

the principles of
financial
management
Define finance
and the
managerial
finance
function. LEGAL FORMS OF BUSINESS
Describe the legal ORGANIZATION
forms of business
organization.
Describe the goal
of the firm, and
explain why
maximizing the
value of the firm
is an appropriate
Other Limited Liability Organizations

goal for a
business.
Describe how the

managerial finance
economics and
accounting.
• Limited partnership (LP),
Identify the • S corporation (S corp),
Limited Liability Company (LLC)
primary activities
of the financial
manager.
•
Define and discuss • Limited Liability Partnership (LLP)
the principles of
financial
management
Review Questions
1. Finance can be defined as the science and art of
____________.
a. Managing Finances
b. Arranging Money
c. Managing Money
d. Arranging Finances
Review Questions
Finance can be defined as the science and art of
____________.
a. Managing Finances
b. Arranging Money
c. Managing Money
d. Arranging Finances
Review Questions
2. It is the area of finance concerned with the

design and delivery of advice and financial
products to individuals, businesses, and
governments.
a. Finance Services
b. Managerial Finance
c. Financial Managers
d. Finance
Review Questions
2. It is the area of finance concerned with the
design and delivery of advice and financial
products to individuals, businesses, and
governments.
a. Finance Services
b. Managerial Finance
c. Financial Managers
d. Finance
Review Questions
3. What are the three most common

legal forms of business organization?
Review Questions
1. Sole Proprietorship
2. Partnership
3. Corporation
Define finance
and the
managerial
Goal of the
Firm
finance
function.
Describe
Maximize
the legal
forms of
business
organization
Shareholders
.
Describe the goal of the firm,

and explain why maximizing
the value of the firm is an
Wealth
appropriate goal for a
business.
Describe how the

managerial finance
economics and The simplest and best measure of
stockholder wealth is the firm’s
accounting.
Identify the
primary activities
of the financial
manager. share price
Define and discuss
the principles of
financial
management
This goal translates into a straightforward decision rule for

managers—only take actions that are expected to increase the
share price.
Define finance
and the
managerial
Goal of the
Firm
finance
function.
Describe
the legal
forms of
business
organization
.

business.
Describe how the

managerial finance
economics and
accounting.

activities of the
financial manager.
Define and discuss

the principles of
financial
management
Define finance
and the
managerial
Goal of the
Firm
finance
function.
Describe
the legal
forms of
business
organization
.

Maximize
Maximize
Shareholders
business.
Profit
Describe how the
managerial finance
economics and
Wealth
accounting.

activities of the
financial manager.
Define and discuss

the principles of
financial
management
Define finance
and the
managerial
Goal of the
Firm
finance
function.
Describe
the legal
forms of
business
organization
.

Maximize
Maximize
Shareholders
business.
Profit
Describe how the
managerial finance
economics and
Wealth
accounting.

activities of the
financial manager.
best measure of stockholder wealth is

the firm’s share price
Define and discuss
the principles of
financial
management
Define finance
and the
managerial
Goal of the
Firm
finance
function.
Describe
the legal
forms of
business
organization
.

Maximize
Maximize
Shareholders
business.
Profit
Describe how the
managerial finance
economics and
Wealth
accounting.

activities of the
financial manager. Earnings per Share
Define and discuss

the principles of
 The amount earned during the period on behalf of
financial
management each outstanding share of common stock,
 Calculated by dividing the period’s total earnings
available for the firm’s common stockholders by
the number of shares of common stock
outstanding.
Define finance
and the
Goal of the Firm
managerial
finance
function.
Describe
the legal
Maximize
forms of Shareholders Maximize Profit
business
organization Wealth
.

business.
Describe how the

managerial finance
economics and
accounting.

activities of the
financial manager.
Define and discuss

the principles of
financial
management
Define finance
and the
Goal of the Firm
managerial
finance
function.
Describe
the legal
Maximize
business
organization Wealth
.

business.
Describe how the

managerial finance
economics and
accounting.

activities of the
financial manager.
Short run Long run

Define and discuss
the principles of
TIMING
financial
management
The receipt of funds sooner rather than later is preferred

Define finance
and the
Goal of the Firm
managerial
finance
function.
Describe
the legal
Maximize
business
organization Wealth
.

business.
Describe how the

managerial finance
economics and
accounting.

activities of the
financial manager.
Cash Flow Profit

Define and discuss
the principles of
Cash Flows
financial
management
Only when earnings increases are accompanied by

increased future cash flows is a higher stock price
expected.
Define finance
and the
Goal of the Firm
managerial
finance
function.
Describe
the legal
Maximize
business
organization Wealth
.

business.
Describe how the

managerial finance
economics and
accounting.

activities of the
financial manager.
Low,
Fluctuating
Define and discuss
the principles of
Risk reliable
financial
management
-the chance that actual outcomes may differ from those

expected.
RISK AVERSE—that is, they must be compensated for
bearing risk.
Define finance
Goal of the
and the
managerial Firm
finance
function.
Describe
the legal
forms of
business
organization
.

business.
Describe how the

managerial finance
economics and
Cash flow and risk affect share price differently:

accounting.

activities of the
financial manager.
Define and discuss

the principles of Holding risk fixed, higher cash flow is generally
associated with a higher share price. In contrast,
financial
management
holding cash flow fixed, higher risk tends to

result in a lower share price because the
stockholders do not like risk.
Define finance
Goal of the
and the
managerial Firm
finance
function.
Describe
the legal
What about Stakeholders?
forms of
business
organization Employees Investors
.

appropriate goal for a Suppliers
business. Customer
Describe how the
managerial finance
economics and
Creditors
accounting.
Governmen
activities of the
t
financial manager.
Define and discuss

the principles of
financial
management
“SOCIAL RESPONSIBILITY”
It is expected to provide long-run benefit to

shareholders by maintaining positive relationships
with stakeholders.
Define finance
and the
managerial Goal of the
finance
function. Firm THE ROLE OF BUSINESS
Describe
the legal
ETHICS
forms of
business
organization
.

business.
BUSINESS
Describe how the
managerial finance
ETHICS
Standards of conduct or moral judgment that

economics and
accounting.

activities of the
apply to persons engaged in commerce.
financial manager.
Define and discuss

the principles of
financial
management
Define finance
and the
finance
Describe
the legal
ETHICS
forms of
business
organization
VIOLATION
.

the value of the firm is an earnings S
appropriate goal for a manageme
business.
nt Insider
Describe how the trading
managerial finance
economics and
accounting. fraud Options
backdating
activities of the
financial manager.
Excessive
executive
Define and discuss
Misleading
the principles of
compensation
financial
management financial
forecasts
briber
y kickback
s
Define finance
and the
finance
Describe
the legal
ETHICS
forms of
business
organization
. Considering
Describe the goal of the firm, Ethics
appropriate goal for a Robert A. Cooke, a noted ethicist, suggests that the
business.
following questions be used to assess the ethical
Describe how the
managerial finance
viability of a proposed action.
economics and
accounting.

1. Is the action arbitrary or capricious? Does it unfairly
activities of the
financial manager. single out an individual or group?
Define and discuss

the principles of
2. Does the action violate the moral or legal rights of
financial
management any individual or group?
3. Does the action conform to accepted moral

standards?
4. Are there alternative courses of action that are less
likely to cause actual or potential harm?
Define finance
and the
finance
Describe
the legal
ETHICS
forms of
business
organization
.
Describe the goal of the firm, Effective ethics

the value of the firm is an program
business.
Describe how the maintain a positive

managerial finance
economics and
corporate image
accounting.
gain the loyalty,

activities of the
reduce potential commitment, and
financial manager.
litigation and respect of the
judgment costs firm’s stakeholders
Define and discuss
the principles of
financial
management
Enhanced
Corporate
Value
Review Questions
1. What is the goal of the firm?
a. To maximize profit
b. To maximize shareholders wealth
c. To maximize costs
d. To have effective ethics program
Review Questions
1. What is the goal of the firm?
a. To maximize profit
b. To maximize shareholders wealth
c. To maximize costs
d. To have effective ethics program
Review Questions
2. For what three basic reasons is profit
maximization inconsistent with wealth
maximization?
a. Timing, Cash flows, Risk

b. Timing, Accruals, Risk
c. Timing, Profits, Risk averse
d. Timing, Returns, business ethics
Review Questions
2. For what three basic reasons is profit
maximization inconsistent with wealth
maximization?
a. Timing, Cash flows, Risk

b. Timing, Accruals, Risk
c. Timing, Profits, Risk averse
d. Timing, Returns, business ethics
Review Questions
3. ___________are the standards of conduct or

moral judgment that apply to persons engaged in
commerce.
Review Questions
3. Business Ethics are the standards of conduct

or moral judgment that apply to persons engaged
in commerce.
Define finance
and the
managerial
finance
function.
Describe
the legal
forms of
business
organization
.
Describe the goal of

the firm, and explain
why maximizing the
value of the firm is
an appropriate goal
for a business.
Describe how the managerial

finance function is related to
economics and accounting.

activities of the financial
manager.
Define and discuss the

principles of financial
management
Define finance
and the
managerial
finance
function. Managerial Finance Function
Describe
the legal
forms of
business
organization
.

why maximizing the
an appropriate goal
for a business.
Finance Economics

economics and accounting. Financial managers must:
• understand the economic framework
• be alert to the consequences of varying levels of
manager.

economic activity and changes in economic policy
• be able to use economic theories as guidelines for
management
efficient business operation.

Define finance
and the
managerial
finance
Describe
the legal
forms of
business
organization
.

why maximizing the
an appropriate goal
for a business.
Finance Economics


Marginal cost-
manager. benefit
analysis
The principle that financial decisions
should be made and actions taken only
management
when the added benefits exceed the

added costs.
Define finance
and the
Marginal cost-
managerial
finance benefit
function.
analysis
Describe
the legal
forms of
business
organization
.

why maximizing the
an appropriate goal
for a business.


manager.
Next page
management
Define finance
and the
Marginal cost-
managerial
finance benefit
function.
analysis
Describe
the legal
forms of
business
organization
.

why maximizing the
an appropriate goal
for a business.


manager.

management
Define finance
and the
managerial
finance
Describe
the legal
forms of
business
organization
.

why maximizing the
an appropriate goal
for a business.
Finance Accounting

Cash Flows & Decision Making


manager.

management
Define finance
and the
managerial
finance
Describe
the legal
forms of
business
organization
.

why maximizing the
an appropriate goal
for a business.
Finance Accounting

economics and accounting. Cash Flows & Decision Making
CASH BASIS ACCRUAL BASIS

manager.
Recognizes revenues and In preparation of financial

expenses only with respect to statements, recognizes revenue
management
actual inflows and outflows of at the time of sale and

cash. recognizes expenses when they
are incurred.
Cash Flows
Define finance
and the
managerial
finance
function.
Describe
the legal
forms of
business
organization
.

why maximizing the
an appropriate goal
for a business.


manager.

management
Cash Flows
Define finance
and the
managerial
finance
function.
Generally, individuals plan, monitor, and assess their financial
Describe
the legal activities using cash flows over a given period, typically a month or a
forms of
business year. Ann Bach projects her cash flows during October 2012 as
organization
. follows:
why maximizing the
an appropriate goal
for a business.


manager.

management
Ann subtracts her total outflows of $4,835 from her total inflows of
$4,620 and finds that her net cash flow for October will be –$215.
Define finance
and the
managerial
finance
Describe
the legal
forms of
business
organization
.

why maximizing the
an appropriate goal
for a business.
Finance Accounting
Cash Flows & Decision Making


manager. • Evaluate the accounting • Collection and presentation
statements of financial data
• develop additional data
management
• make decisions on the basis

of their assessment of the
associated returns and risks
Define finance
and the
managerial
finance
Primary Activities of the Financial Manager
function.
Describe
the legal
forms of
business
organization
.

Investment Financing
&
Decisions
why maximizing the
Decisions
an appropriate goal
for a business.
• determine what • determine how the

Describe how the
managerial finance
function is related
types of assets the firm raises money

to economics and
accounting.
Identify the primary firm holds to pay for the

activities of the
financial manager. • generally refer to assets in which it
the items that invests
appear on the left- • relate to the items
management
hand side of the on the right-hand

balance sheet side
Define finance
and the
managerial
finance
Primary Activities of the Financial Manager
function.
Describe
the legal
forms of
business
organization
.

why maximizing the
an appropriate goal
for a business.
Describe how the

managerial finance
function is related
to economics and
accounting.

activities of the
financial manager.

management
Review Questions
1. What is the primary economic principle used in
managerial finance?
a. Marginal cost analysis

b. Marginal cost-benefit analysis
c. Maximization of costs-benefit
d. Analysis of benefits
Review Questions
1. What is the primary economic principle used in
managerial finance?
a. Marginal cost analysis

b. Marginal cost-benefit analysis
c. Maximization of costs-benefit
d. Analysis of benefits
Review Questions
2. What are the major differences between
accounting and finance with respect to emphasis on
cash flows?
Review Questions
2. What are the major differences between
accounting and finance with respect to emphasis
on cash flows?
Accrual basis and Cash basis

Review Questions
3. What are the two primary activities of the financial
manager that are related to the firm’s balance sheet?
Review Questions
3. What are the two primary activities of the
financial manager that are related to the firm’s
balance sheet?
Making Investment and Financing

decisions
Define finance
and the
managerial
finance
function.
Describe
the legal
forms of
business
organization
.

why maximizing the
an appropriate goal
for a business.
Describe how the

managerial finance
function is related
to economics and
accounting.

activities of the
financial manager.

management
Define finance
and the
managerial
CORPORATE GOVERNANCE AND
finance
function. AGENCY
Describe
the legal
forms of
business
organization
.

why maximizing the
an appropriate goal
for a business.
The rules, processes, and

Describe how the
managerial finance laws by which companies
are operated, controlled,
function is related
to economics and
accounting.
Rules &
and regulated. Rights &
Identify the Procedures for
primary
activities of the
financial
making Responsibilities of
manager.
Corporate Corporate
decisions participants
management
Define finance
and the
managerial
finance
function.
Describe
the legal
forms of Individual Institutional
business
Investor Investor
organization
. Investors who own Investment professionals, such as
Describe the goal of relatively small quantities of banks, insurance companies, mutual
why maximizing the
value of the firm is shares so as to meet funds, and pension funds, that are paid
to manage and hold large quantities of
an appropriate goal
for a business.
personal investment goals.
securities on behalf of others.
Describe how the
managerial finance  do not typically have
function is related
to economics and sufficient means to  often monitor and
directly influence a
accounting.
directly influence a
Identify the
primary firm’s corporate firm’s corporate
activities of the
financial governance governance
manager.
Board of
Director
principles of financial s
management
Importa
nt
!
Define finance
and the
managerial
Government Regulation
finance
function.
Describe Misdeeds derived from two main types of

the legal
forms of issues:
business
organization
.
(1)false disclosures in financial reporting and
other material information releases
why maximizing the (2)undisclosed conflicts of interest between
an appropriate goal
for a business. corporations and their analysts, auditors,
and attorneys and between corporate
Describe how the
managerial finance
directors, officers, and shareholders.
function is related
to economics and
accounting.
Identify the
primary
activities of the
financial
manager.

management
Define finance
and the
managerial
Government Regulation
finance
function.
Describe
the legal
forms of
business
organization
.
• established an oversight board to monitor the accounting
industry;
why maximizing the
an appropriate goal
for a business. • tightened audit regulations and controls;
• toughened penalties against executives who commit
Describe how the
managerial finance corporate fraud;
function is related
to economics and
accounting.
• strengthened accounting disclosure requirements and ethical
Identify the
guidelines for corporate officers;
primary
activities of the
• established corporate board structure and membership
financial
manager. guidelines;
• established guidelines with regard to analyst conflicts of
Define and discuss the interest;
management
• mandated instant disclosure of stock sales by corporate
executives;
• increased securities regulation authority and budgets for
auditors and investigators.
Define finance
and the
managerial
THE AGENCY ISSUE
finance
function.
Describe
the legal
forms of
business
organization
.

why maximizing the
managers can be viewed as the agents of the firm’s
an appropriate goal
for a business. shareholders
Describe how the

managerial finance
function is related
to economics and
accounting.
Identify the
primary
activities of the
financial
manager.

management PRINCIPAL–AGENT RELATIONSHIP
An arrangement in which an agent acts on the behalf of a
principal.
Define finance
and the
managerial
THE AGENCY ISSUE
finance
function.
Describe
the legal
forms of
business AGENCY PROBLEMS
organization
.
arise when managers deviate from
the goal of maximization of
shareholder wealth by placing their
why maximizing the
an appropriate goal
for a business.
personal goals ahead of the goals of
shareholders.
Describe how the
managerial finance
function is related
to economics and
accounting.
AGENCY COSTS
costs borne by shareholders due to
Identify the
primary the presence or avoidance of agency
activities of the
financial problems, and in either case represent
manager.
a loss of shareholder wealth.

management
Define finance
and the
managerial
THE AGENCY ISSUE
finance
function.
Describe
the legal
forms of
business
Management Compensation Plans
organization
.

why maximizing the Incentive Performanc
an appropriate goal
for a business. plans e plans
Describe how the tie management tie management compensation

managerial finance
function is related
compensation to share to measures such as EPS or
to economics and
accounting.
price growth in EPS.
Identify the
primary
activities of the
financial
manager.
STOCK OPTIONS
Options extended by the PERFORMANCE Cash Bonuses
firm that allow SHARES Cash paid to
management to benefit Shares of stock given management
management from increases in stock to management for for achieving
prices over time. meeting stated certain
performance goals. performance
goals.
Define finance
and the
managerial
THE AGENCY ISSUE
finance
function.
Describe
the legal
forms of
business
organization
.

why maximizing the
an appropriate goal
for a business.
Describe how the

managerial finance
function is related
to economics and
accounting.
Identify the
primary
activities of the
financial
manager.
The threat of takeover by another firm that believes

Define and discuss the it can enhance the troubled firm’s value by
principles of financial restructuring its management, operations, and
management
financing can provide a strong source of external
corporate governance.

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Introduction To Financial Management-Full

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INTRODUCTION TO

A. Finance and Business

B. Nature, Objectives and Scope of

Describe the goal

Identify the primary

Describe the goal

Define and discuss

design and delivery of

Describe the goal

Define and discuss in a business.

Describe the goal

Evaluating proposed Extending credit to

Identify the primary

Define and discuss

Raising money to fund the

Describe the goal

Describe how the

Define and discuss

Describe how the

Define and discuss

Describe how the

Define and discuss

Describe how the

Define and discuss

Describe how the

Define and discuss

Describe how the

Define and discuss

Describe how the

Define and discuss

Describe how the

Define and discuss

Describe the legal

Describe how the

Define and discuss

Other Limited Liability Organizations

Describe how the

2. It is the area of finance concerned with the

3. What are the three most common

Describe the goal of the firm,

Describe how the

This goal translates into a straightforward decision rule for

Describe the goal of the firm,

Describe how the

Identify the primary

Define and discuss

Describe the goal of the firm,

Identify the primary

Define and discuss

Describe the goal of the firm,

Identify the primary

best measure of stockholder wealth is

Describe the goal of the firm,

Identify the primary

Define and discuss

Describe the goal of the firm,

Describe how the

Identify the primary

Define and discuss

Describe the goal of the firm,

Describe how the

Identify the primary