Chapter 1: Introduction to Financial Management

Practice flashcards covering the core concepts of financial management, business organizations, agency problems, and corporate governance from Chapter 1.

Finance

The management of money and the acquisition of funds, or the process of applying value to things such as shares of stock and home mortgages.

Subareas of Finance

The four main divisions of the field: Investments, Financial Management, Financial Institutions, and International Finance.

Chief Financial Officer (CFO)

The firm's highest-level financial manager who oversees the company treasurer and controller.

Treasurer

The individual responsible for managing cash, credit, financing, corporate investment, and risk management.

Controller

The individual responsible for the firm's accounting function.

Balance Sheet Identity

The accounting equation represented as $Assets \text{ } \text{ } Liabilities + Stockholder's Equity$.

Capital Budgeting

The financial management decision process concerning what long-term investments the firm should choose.

Capital Structure

The financial management decision process concerning how the firm should raise funds for selected investments.

Short-Term Asset Management

The management and financing of the firm's short-term assets.

Corporation

A business form offering limited liability for owners, ease of ownership transfer, and perpetual life, though it pays corporate income tax.

Sole Proprietorship

A business owned by a single individual who has unlimited liability and is taxed on firm profits at individual tax rates.

Limited Liability Company (LLC)

A hybrid business form where profits are passed to owners who pay taxes, while owners retain limited liability.

Goal of Financial Management

The primary objective of the firm, which is to maximize shareholder wealth.

Fiduciary Relationship

A legal responsibility for finance professionals to act in the best interest of their clients.

Joseph Schlitz Brewing Company

A Milwaukee-based firm founded in 1849 that faced failure after cost-cutting measures led to a $1.4 million recall of 10 million bottles of mucus-like beer.

Nikola Motor Company

A zero-emissions vehicle company founded by Trevor Milton, who was indicted for fraud in July 2021.

Agency Relationship

A relationship where a principal (stockholders) hires an agent (managers) to represent their interests.

Agency Problem

A conflict of interest where a manager's personal interests (such as expensive perquisites or empire building) may not align with shareholder goals.

Corporate Governance

The process of monitoring managers and aligning their incentives with shareholder goals.

Inside Monitors

The Board of Directors, responsible for hiring the CEO, evaluating management, and designing compensation plans.

Financial Intermediaries

Entities that facilitate the flow of capital, including commercial banks, investment banks, insurance companies, mutual funds, and pension funds.