Financial Management – Topic 1: Introduction to Finance and the Financial System

Vocabulary flashcards cover key terms and definitions from Topic 1, including finance fundamentals, legal structures, managerial goals, activities of financial managers, and core functions of the financial system.

Finance

The science and art of managing money, involving decisions on spending, saving, investing, and raising funds.

Financial Services

Area of finance focused on designing and delivering advice and financial products to individuals, businesses, and governments.

Managerial Finance

Discipline concerned with the duties of a firm’s financial manager, including planning, budgeting, and financing operations.

Sole Proprietorship

A business owned and operated for profit by one person who has unlimited liability.

Partnership

A profit-seeking business owned by two or more people who share unlimited liability.

Corporation

A legal entity separate from its owners, possessing many of the rights of an individual and offering limited liability to shareholders.

Unlimited Liability

Legal concept whereby business owners are personally responsible for all business debts and obligations.

Limited Liability

Legal protection whereby shareholders cannot lose more than the amount they invested in the corporation.

Shareholder Wealth Maximization

Primary goal of the firm that directs managers to undertake actions expected to increase the company’s share price.

Profit Maximization

Objective of earning the highest possible accounting profits, often criticized for ignoring timing, cash flows, and risk.

Stakeholder

Any group with an economic link to a firm—such as employees, customers, suppliers, creditors, and owners.

Business Ethics

Standards of conduct or moral judgment that apply to individuals engaged in commerce.

Chief Financial Officer (CFO)

Senior executive responsible for a company’s financial planning, fundraising, and overall financial management.

Investment Decision

Choice regarding the types of assets a firm should hold, typically reflected on the left side of the balance sheet.

Financing Decision

Choice regarding how a firm raises the money to pay for assets, reflected on the right side of the balance sheet.

Current Asset

Short-term asset such as cash, inventory, or accounts receivable expected to be converted to cash within a year.

Non-current Asset

Long-term asset like machinery, buildings, or vehicles used in operations for more than one year.

Current Liability

Obligation such as accounts payable or dividends payable due within one year.

Non-current Liability

Long-term obligation such as bank loans or bonds that matures beyond one year.

Money

Medium of exchange that facilitates trade, solves divisibility problems, and serves as a store of value.

Financial Instrument

Claim issued by a borrower acknowledging a financial obligation and promising specified future cash flows to the holder.

Surplus Unit

Economic agent (saver) that provides funds to the financial system for lending or investment.

Deficit Unit

Economic agent (borrower) that requires funds from the financial system for consumption or capital investment.

Financial System

Network of financial institutions, markets, and instruments that facilitates the flow of funds between savers and borrowers.

Return (Yield)

Total financial compensation from an investment expressed as a percentage of the amount invested.

Risk

Probability that the actual return on an investment will differ from the expected return.

Liquidity

Ability to sell an asset quickly at current market prices with minimal transaction costs.

Time-Pattern of Cash Flows

Schedule indicating when an investor expects to receive cash flows from an asset.

Portfolio Restructuring

Reallocation of assets and liabilities to achieve desired levels of return, risk, liquidity, and cash-flow timing.

Monetary Policy

Actions by a central bank aimed at influencing interest rates and other economic outcomes, primarily targeting inflation.

Double Coincidence of Wants

Condition in barter requiring each party to have exactly what the other desires, resolved in modern economies by money and financial instruments.