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Chapter 3 Fundamental Concepts and Tools of Business Finance
Basic Concepts Finance •
Study of the acquisition and investment of cash for the purpose of enhancing value and wealth.
Categories of Finance •
Public Finance – Finance – gener general al finance which deals with revenue and expenditure patterns of the government and their various effects on the economy.
Basic Concepts Categories of Finance •
Private Finance – Finance – area of general finance not classified under public finance. •
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Personal Finance – Finance – concerned with fundmentals of managing one’s own personal money and affairs. Finance of Non-Profit Organizations – Organizations – includes private undertakings such as charity, religion, and some private educational institutions.
Business Finance •
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•
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Business Finance – Finance – refers to the provision of money for commercial use. Also concerned with the effective use of funds. Covers the financial management of private-profit seeking concerns in the business of service, trade, manufacturing, manuf acturing, mining, public utilities, and financing May be concerned with the following 3 Aspects: 1.
Smal alll business finance
2.
Corporation fi finance
3.
Mult Mu ltin inat atio iona nall Bu Busi sine ness ss fi fina nanc nce e
Goals of Business Finance 1. Ma Maxi ximi mizi zing ng pr prof ofit it 2. Ma Maxi ximi mizi zing ng pr profi ofita tabi bilit lity y 3. Maxim Maximizi izing ng pr profit ofit sub subjec jectt to to cash cash constraint 4. Ma Maxi ximi mizi zing ng net net pres presen entt wort worth h 5. Seek Seeking ing an opt optim imum um posit position ion alon along ga risk-return frontier
Goals of Business Finance Maximizing Profit •
Means realizing the highest possible peso or dollar income.
Maximizing Profitability •
Means obtaining a higher rate of return on its investment
Goals of Business Finance Maximizing Profit Subject to Cash Constraint •
Maximizing profits while at the same time maintaining a cash balance that can take care of cash requirements anytime.
Goals of Business Finance Maximizing Net Present Worth Worth •
•
Maximizing the current value of the company to its owners. Net present worth of a compan company y is equal to the value now of the firm plus values arising in the future.
Goals of Business Finance Maximizing Net Present Worth Worth •
Time Value of Money – Money – money increases in value with the passing of time.
Goals of Business Finance Seeking an Optimum O ptimum Position Along a Risk-return Frontier •
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A firm can set a goal of achieving the best possible combination of risk and return. Return on investment is investment is the net income generated by the use of investments or the net worth. When expressed in percentage percent age it is called the Rate of Return.
Goals of Business Finance Seeking an Optimum O ptimum Position Along a Risk-return Frontier •
Risk is Risk is the uncertainty as to loss.
The Financial Statement Balance Sheet Assets Current Assets Trade Investments Fixed Assets Intangible Assets
The Financial Statement Balance Sheet Liabilities Accounts Payable Loans and Notes Payable Advances from customers Accrued Expenses Mortgage Expenses Bonds Payable
The Financial Statement Balance Sheet Net Worth Capital Stock Common Preferred Paid-in Surplus
The Financial Statement Income Statemen Statementt
Revenues
Expenses Cost of Goods Manufactured and Sold
Operating ting Expenses Opera Other Expenses
Other Income
Net Profit or Net Loss
The Financial Statement Budget •
Budget is defined as an estimate of income and expenditures for a future period. Sales Budget
Materials and Purchases Budget Production Budget
Significance of Financial Statements and Budgets •
Persons interested in knowing the financial standing of the firm: 1.
Owners – anticipat anticipated ed financial benefits
2.
Management – effectiv effective e planning and control contr ol of the activities of the firm
3.
Creditors – if the firm is credit worthy
4.
Government – for tax and regulatory purposes
5.
Prospective Investors – prote protection ction of their investments and earnings
Annual Reports •
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A report sent annually to the stockholders Contains Conta ins the following: 1. Balance Sheet 2. Profit and Lo Loss St Statement 3. Auditor’s report 4. Chairman’s report
Next Meeting Readings Continuation of Chapter 3, 4 and 5
