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What is Finance?
•Finance can be defined as the science and art of managing money.

•At the personal level, finance is concerned with individuals’ decisions about how much of their
earnings they spend, how much they save, and how they invest their savings.
•In a business context, finance involves the same types of decisions: how firms raise money from
investors, how firms invest money in an attempt to earn a profit, and how they decide whether to
reinvest profits in the business or distribute them back to investors.
Career Opportunities in Finance: Financial Services
•Financial Services is the area of finance concerned with the design and delivery of advice and
financial products to individuals, businesses, and governments.
•Career opportunities include banking, personal financial planning, investments, real estate, and
insurance.
Career Opportunities in Finance: Managerial Finance
•Managerial finance is concerned with the duties of the financial manager working in a
business.
•Financial managers administer the financial affairs of all types of businesses—private and
public, large and small, profit-seeking and not-for-profit.
•They perform such varied tasks as developing a financial plan or budget, extending credit to
customers, evaluating proposed large expenditures, and raising money to fund the firm’s
operations.
Career Opportunities in Finance: Managerial Finance (cont.)
• The recent global financial crisis and subsequent responses by governmental regulators,
increased global competition, and rapid technological change also increase the
importance and complexity of the financial manager’s duties.
• Increasing globalization has increased demand for financial experts who can manage cash
flows in different currencies and protect against the risks that naturally arise from
international transactions.
• The recent global financial crisis and subsequent responses by governmental regulators,
increased global competition, and rapid technological change also increase the
importance and complexity of the financial manager’s duties.
• Increasing globalization has increased demand for financial experts who can manage cash
flows in different currencies and protect against the risks that naturally arise from
international transactions.
Focus on Practice
Professional Certifications in Finance:
 Chartered Financial Analyst (CFA) – Offered by the CFA Institute, the CFA program is a
graduate-level course of study focused primarily on the investments side of finance.
 Certified Treasury Professional (CTP) – The CTP program requires students to pass a
single exam that is focused on the knowledge and skills needed for those working in a
corporate treasury department.
 Certified Financial Planner (CFP) – To obtain CFP status, students must pass a ten-hour
exam covering a wide range of topics related to personal financial planning.
Focus on Practice (cont.)
Professional Certifications in Finance:
 American Academy of Financial Management (AAFM) – The AAFM administers a host
of certification programs for financial professionals in a wide range of fields. Their
certifications include the Charter Portfolio Manager, Chartered Asset Manager, Certified
Risk Analyst, Certified Cost Accountant, Certified Credit Analyst, and many other
programs.
 Professional Certifications in Accounting – Most professionals in the field of managerial
finance need to know a great deal about accounting to succeed in their jobs. Professional
certifications in accounting include the Certified Public Accountant (CPA), Certified
Management Accountant (CMA), Certified Internal Auditor (CIA), and many programs.
Legal Forms of Business Organization
• A sole proprietorship is a business owned by one person and operated for his or her own
profit.
• A partnership is a business owned by two or more people and operated for profit.
• A corporation is an entity created by law. Corporations have the legal powers of an
individual in that it can sue and be sued, make and be party to contracts, and acquire
property in its own name.
Table 1.1 Strengths and Weaknesses of the

Common Legal Forms of Business
Organization
Goal of the Firm:
Maximize Profit?
Which Investment is Preferred?
Profit maximization may not lead to the highest possible share price for at least three reasons:
1. Timing is important—the receipt of funds sooner rather than later is preferred
2. Profits do not necessarily result in cash flows available to stockholders
3. Profit maximization fails to account for risk
Goal of the Firm:
What About Stakeholders?
• Stakeholders are groups such as employees, customers, suppliers, creditors, owners, and
others who have a direct economic link to the firm.
• A firm with a stakeholder focus consciously avoids actions that would prove detrimental
to stakeholders. The goal is not to maximize stakeholder well-being but to preserve it.
• Such a view is considered to be "socially responsible."
The Role of Business Ethics
• Business ethics are the standards of conduct or moral judgment that apply to persons
engaged in commerce.
• Violations of these standards in finance involve a variety of actions: “creative
accounting,” earnings management, misleading financial forecasts, insider trading, fraud,
excessive executive compensation, options backdating, bribery, and kickbacks.
• Negative publicity often leads to negative impacts on a firm
The Role of Business Ethics: Considering Ethics
Robert A. Cooke, a noted ethicist, suggests that the following questions be used to assess the
ethical viability of a proposed action:
– Is the action arbitrary or capricious? Does the action unfairly single out an
individual or group?
– Does the action affect the morals, or legal rights of any individual or group?
– Does the action conform to accepted moral standards?
– Are there alternative courses of action that are less likely to cause actual or
potential harm?
The Role of Business Ethics:
Ethics and Share Price
Ethics programs seek to:
– reduce litigation and judgment costs
– maintain a positive corporate image
– build shareholder confidence
– gain the loyalty and respect of all stakeholders
The expected result of such programs is to positively affect the firm’s share price.
Focus on Ethics
Will Google Live Up to Its Motto?
– In January 2010, Google announced that the Gmail accounts of Chinese human-
rights activists and a number of technology, financial, and defense companies had
been hacked.
– The company threatened to pull out of China unless an agreement on uncensored
search results could be reached.
– Is the goal of maximization of shareholder wealth necessarily ethical or unethical?
– How can Google justify its actions in the short run to its long run investors?
Managerial Finance Function
• The size and importance of the managerial finance function depends on the size of the
firm.
• In small firms, the finance function is generally performed by the accounting department.
• As a firm grows, the finance function typically evolves into a separate department linked
directly to the company president or CEO through the chief financial officer (CFO) (see
Figure 1.1)
Managerial Finance Function: Relationship to Economics
• The field of finance is closely related to economics.
• Financial managers must understand the economic framework and be alert to the
consequences of varying levels of economic activity and changes in economic policy.
• They must also be able to use economic theories as guidelines for efficient business
operation.
• Marginal cost–benefit analysis is the economic principle that states that financial
decisions should be made and actions taken only when the added benefits exceed the
added costs
• Marginal cost-benefit analysis can be illustrated using the following simple example.
• Nord Department Stores is applying marginal-cost benefit analysis to decide whether to
replace a computer:
Managerial Finance Function: Relationship to Accounting
• The firm’s finance and accounting activities are closely-related and generally overlap.
• In small firms accountants often carry out the finance function, and in large firms
financial analysts often help compile accounting information.
• One major difference in perspective and emphasis between finance and accounting is that
accountants generally use the accrual method while in finance, the focus is on cash flows.
• Whether a firm earns a profit or experiences a loss, it must have a sufficient flow of cash
to meet its obligations as they come due.
• The significance of this difference can be illustrated using the following simple example.
• The Nassau Corporation experienced the following activity last year:
Sales $100,000 (1 yacht sold, 100% still uncollected)
Costs $ 80,000 (all paid in full under supplier terms)
Now contrast the differences in performance under the accounting method (accrual basis) versus
the financial view (cash basis):
Income Statement Summary
Accrual basis Cash basis
Sales $100,000 $ 0
Less: Costs (80,000) (80,000)
Net Profit/(Loss) $ 20,000 $(80,000)
Finance and accounting also differ with respect to decision-making:
– Accountants devote most of their attention to the collection and presentation of
financial data.
– Financial managers evaluate the accounting statements, develop additional data,
and make decisions on the basis of their assessment of the associated returns and
risks.
Personal Finance Example BATAS 32

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What is Finance?

•Finance can be defined as the science and art of managing money.

Table 1.1 Strengths and Weaknesses of the

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