ST PAULS UNIVERSITY
FINANCE
LESSON ONE
07/May/2013
, LESSON 1
INTRODUCTION OF FINANCE
Finance is the study of how individuals, institutions, governments and businesses acquire, spend and manage
money and other financial assets. It has its origin in economics and accounting.
Understanding finance is important to all students regardless of the discipline or area of study because nearly all
businesses and economics decisions have implications.
The field of finance is closely related to economics and accounting, and financial managers need to understand the
relationships between these fields.
Economics provides a structure for decision making in such areas as risk analysis, pricing theory through supply
and demand relationships, comparative return analysis, and many other important areas. Economics also provides
the broad picture of the economic environment in which corporations must continually make decisions.
A financial manager must understand the institutional structure of the Federal Reserve System, the commercial
banking system, and the interrelationships between the various sectors of the economy.
Economic variables, such as gross domestic product, industrial production, disposable income, unemployment,
inflation, interest rates, and taxes (to name a few), must fit into the financial manager’s decision model and be
applied correctly. These terms will be presented throughout the text and integrated into the financial process.
Accounting is sometimes said to be the language of finance because it provides financial data through income
statements, balance sheets, and the statement of cash flows.
The financial manager must know how to interpret and use these statements in allocating the firm’s financial
resources to generate the best return possible in the long run. Finance links economic theory with the numbers of
accounting, and all corporate managers—whether in production, sales, research, marketing, management, or long
run strategic planning—must know what it means to assess the financial performance of the firm.
Many students approaching the field of finance for the first time might wonder what career opportunities exist.
For those who develop the necessary skills and training, jobs include corporate financial officer, banker,
stockbroker, financial analyst, portfolio manager, investment banker, financial consultant, or personal financial
planner. As the student progresses through the text, he or she will become increasingly familiar with the important
role of the various participants in the financial decision-making process.
A financial manager addresses such varied issues as decisions on plant location, the raising of capital, or simply
how to get the highest return on x million dollars between 5 o’clock this afternoon and 8 o’clock tomorrow
morning.
Why study finance
Knowledge of the basics of finance should help you:
1. Make informed economic decision. The operation of the financial system and the performance of the
economy are influenced by policy makers
2. To make informed personal and business investment decision. An understanding of finance should
help you better understand how institutions, government units or businesses you work for finance its
operations
At personal level, the understanding will enable you to better manage your financial resources and
provide the basis for making decisions for accumulations of wealth over time. For example, the decision
2
, to spend or consume now (for new cloths or dinner at a fancy restaurant) rather than save or invest (for
spending or consuming more in the future) is an everyday decision that we all face.
Finance therefore is a branch of economics concerned with resource allocation as well as resource
management, acquisition and investment. Generally, finance deals with matters related to money and the
markets. It addresses the ways in which individuals, business entities and other organizations allocate and
use monetary resources over time.
Six principles of finance
1. Money has a time value
2. Higher returns are expected for taking on more risks
3. Diversification of investment can reduce risks
4. Financial markets are efficient in pricing securities
5. Manager and shareholders objectives may differ
6. Reputation matters
The financial environment encompasses the financial systems, institutions or intermediaries, financial markets,
business firms, individuals and global interactions that contribute to an efficient economy. Financial institutions are
organizations or intermediaries that help the financial system operate efficiently and transfer funds from savers
and investors to individuals, businesses and governments that seek to spend or invest the fund in physical assets
(inventories, buildings, equipments). Financial markets are physical locations or electronics forum that facilitates
the flow of funds among investors, businesses and government.
Financial management
Financial management is that managerial activity which is concerned with the planning and controlling of the firm’s
financial resources. It has no unique body of knowledge of its own, and draws heavily on economics for its
theoretical concepts even today. The subject of financial management is of immense interest to both academicians
and practicing managers.
It is of great interest to academicians because the subject is still developing, and there are still certain areas where
controversies exist for which no unanimous solutions have been reached yet.Practicing managers are interested in
this subject because among the most crucial decisions of the firm are those which relate to finance, and an
understanding of the theory of financial management provides them with conceptual and analytical insight to
make these decisions skillfully.
CORPORATE GOVERNORS
The corporation is governed by the board of directors, led by the chairman of the board. In most companies the
chairman of the board is also the CEO or Chief Executive Officer of the company. During the three-year stock
market collapse of 2000–2002, many companies went bankrupt due to mismanagement or in some cases, financial
statements that did not accurately reflect the financial condition of the firm because of deception and outright
fraud. Companies such as WorldCom reported over $9 billion of incorrect or fraudulent financial entries on their
income statements.
3
FINANCE
LESSON ONE
07/May/2013
, LESSON 1
INTRODUCTION OF FINANCE
Finance is the study of how individuals, institutions, governments and businesses acquire, spend and manage
money and other financial assets. It has its origin in economics and accounting.
Understanding finance is important to all students regardless of the discipline or area of study because nearly all
businesses and economics decisions have implications.
The field of finance is closely related to economics and accounting, and financial managers need to understand the
relationships between these fields.
Economics provides a structure for decision making in such areas as risk analysis, pricing theory through supply
and demand relationships, comparative return analysis, and many other important areas. Economics also provides
the broad picture of the economic environment in which corporations must continually make decisions.
A financial manager must understand the institutional structure of the Federal Reserve System, the commercial
banking system, and the interrelationships between the various sectors of the economy.
Economic variables, such as gross domestic product, industrial production, disposable income, unemployment,
inflation, interest rates, and taxes (to name a few), must fit into the financial manager’s decision model and be
applied correctly. These terms will be presented throughout the text and integrated into the financial process.
Accounting is sometimes said to be the language of finance because it provides financial data through income
statements, balance sheets, and the statement of cash flows.
The financial manager must know how to interpret and use these statements in allocating the firm’s financial
resources to generate the best return possible in the long run. Finance links economic theory with the numbers of
accounting, and all corporate managers—whether in production, sales, research, marketing, management, or long
run strategic planning—must know what it means to assess the financial performance of the firm.
Many students approaching the field of finance for the first time might wonder what career opportunities exist.
For those who develop the necessary skills and training, jobs include corporate financial officer, banker,
stockbroker, financial analyst, portfolio manager, investment banker, financial consultant, or personal financial
planner. As the student progresses through the text, he or she will become increasingly familiar with the important
role of the various participants in the financial decision-making process.
A financial manager addresses such varied issues as decisions on plant location, the raising of capital, or simply
how to get the highest return on x million dollars between 5 o’clock this afternoon and 8 o’clock tomorrow
morning.
Why study finance
Knowledge of the basics of finance should help you:
1. Make informed economic decision. The operation of the financial system and the performance of the
economy are influenced by policy makers
2. To make informed personal and business investment decision. An understanding of finance should
help you better understand how institutions, government units or businesses you work for finance its
operations
At personal level, the understanding will enable you to better manage your financial resources and
provide the basis for making decisions for accumulations of wealth over time. For example, the decision
2
, to spend or consume now (for new cloths or dinner at a fancy restaurant) rather than save or invest (for
spending or consuming more in the future) is an everyday decision that we all face.
Finance therefore is a branch of economics concerned with resource allocation as well as resource
management, acquisition and investment. Generally, finance deals with matters related to money and the
markets. It addresses the ways in which individuals, business entities and other organizations allocate and
use monetary resources over time.
Six principles of finance
1. Money has a time value
2. Higher returns are expected for taking on more risks
3. Diversification of investment can reduce risks
4. Financial markets are efficient in pricing securities
5. Manager and shareholders objectives may differ
6. Reputation matters
The financial environment encompasses the financial systems, institutions or intermediaries, financial markets,
business firms, individuals and global interactions that contribute to an efficient economy. Financial institutions are
organizations or intermediaries that help the financial system operate efficiently and transfer funds from savers
and investors to individuals, businesses and governments that seek to spend or invest the fund in physical assets
(inventories, buildings, equipments). Financial markets are physical locations or electronics forum that facilitates
the flow of funds among investors, businesses and government.
Financial management
Financial management is that managerial activity which is concerned with the planning and controlling of the firm’s
financial resources. It has no unique body of knowledge of its own, and draws heavily on economics for its
theoretical concepts even today. The subject of financial management is of immense interest to both academicians
and practicing managers.
It is of great interest to academicians because the subject is still developing, and there are still certain areas where
controversies exist for which no unanimous solutions have been reached yet.Practicing managers are interested in
this subject because among the most crucial decisions of the firm are those which relate to finance, and an
understanding of the theory of financial management provides them with conceptual and analytical insight to
make these decisions skillfully.
CORPORATE GOVERNORS
The corporation is governed by the board of directors, led by the chairman of the board. In most companies the
chairman of the board is also the CEO or Chief Executive Officer of the company. During the three-year stock
market collapse of 2000–2002, many companies went bankrupt due to mismanagement or in some cases, financial
statements that did not accurately reflect the financial condition of the firm because of deception and outright
fraud. Companies such as WorldCom reported over $9 billion of incorrect or fraudulent financial entries on their
income statements.
3
