Chapter 1 Vocabulary Flashcards: Introduction to Financial Management

Vocabulary flashcards covering key terms and concepts from Chapter 1: Introduction to Financial Management.

Financial management

The planning, directing, and controlling of a firm's monetary resources to achieve its goals, including decisions about investments, financing, and working capital.

Chief Financial Officer (CFO)

The senior financial manager in a firm who leads financial planning, capital budgeting, and overall financial strategy.

Treasurer

Oversees cash management, credit management, capital expenditures, and financial planning.

Controller

Oversees taxes, cost accounting, financial accounting, and data processing.

Capital budgeting

Decisions about which long-term investments or projects the business should undertake.

Capital structure

How a firm finances its assets, i.e., the mix of debt and equity used.

Working capital management

Management of a firm's day-to-day financial activities and short-term assets and liabilities.

Sole proprietorship

A business owned by one person; easy to start, taxed as personal income, unlimited liability, limited life, and transfer of ownership can be difficult.

Partnership

A business owned by two or more persons; advantages include more capital and easier start; disadvantages include unlimited liability and potential dissolution on partner changes.

Corporation

A legal entity distinct from owners with limited liability, unlimited life, separation of ownership and management, easy transfer of ownership, and easier capital formation; disadvantages include agency problems and double taxation.

LLC (Limited liability company)

A business form offering limited liability with flexible management and tax options.

Agency problem

Conflict of interest between principals (owners) and agents (managers) in a firm.

Primary market

The market where new securities are issued and sold for the first time.

Secondary market

The market where existing securities are traded among investors after issue.

Dealer market

A market where dealers hold inventories and trade over-the-counter, rather than on a centralized exchange.

Auction market

A market with a centralized exchange where buyers and sellers are matched to execute trades (e.g., NYSE).

Listed securities

Securities traded on an organized exchange.

Over-the-counter (OTC)

Securities traded outside formal exchanges through a network of dealers.

International finance

A field focusing on financial management across borders, including exchange rates and political risk.

Fintech

The use of technology—internet, mobile devices, software, and cloud services—to provide financial services.

Financial assets

Investments such as stocks and bonds; value depends on risk versus return and asset allocation.

Risk–return trade-off

Higher expected returns typically require taking on higher risk; investors balance potential reward against risk.

Asset allocation

The process of distributing investments among different asset classes to balance risk and return.

Goal of financial management

To maximize the current value per share of the company’s existing stock and/or maximize the market value of the owners’ equity.

Market value per share

The price of one share reflecting the market's assessment of the company's value.

Market value of owners’ equity

The total market value of shareholders’ equity; effectively the company’s market capitalization.

Sarbanes–Oxley Act (SOX)

A 2002 law intended to strengthen protection against accounting fraud and financial malpractice; compliance is costly and has influenced corporate behavior.

Corporate control

The governance mechanisms, including the threat of a takeover, that influence how management acts.

Agency costs

Costs arising from the need to align incentives between principals and agents and to monitor and control management.