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Summary Finance I IBS I Year 2
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SCM / FinanceFinance PowerPoint 1
Finance: defined as the management of money and includes activities like investing,
borrowing, lending, budgeting, saving, and forecasting
Corporate finance: includes the tools and analysis utilized to prioritize and
distribute financial resources
Financial Services: the area of finance concerned with the design and delivery of advice and
financial products to individuals, businesses, and governments
Certified Financial Planner are concerned with individuals decisions about:
• How much of their earnings they spend
• How much they save
• How they invest their savings
• Provide advice and best options – managing money on an individual level
Balance sheet – business finance – investment / financing decisions
Legal Forms of Business Organization
• Sole proprietorship is a business owned by one person and operated for his or her
own profit. (ZZP)
• Partnership: a business owned by two or more people and operated for profit. (VOF)
• Corporation: 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.
HUIZE ADRIAAN 1
, SCM / Finance
Decision rule for managers: only take actions that are expected to increase the share price
New Land Rover expenses are 50,000, sales revenue is 80,000, but revenue is uncollected
Accounting perspective: 80,000 – 50,000 = 30,000 profit
Finance manager perspective: 0 – 50,000 = 50,000 loss
Business ethics: the study of appropriate business policies and practices regarding
potentially controversial subjects
• “creative accounting,” earnings management, misleading financial forecasts, insider
trading, fraud, excessive executive compensation, options backdating, bribery, and
kickbacks.
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
Negative publicity often leads to negative impacts on a firm
The Relationship Between Institutions and Markets
• Financial markets are forums in which suppliers of funds and demanders of funds
can transact business directly
• In the Money market transactions in the short-term
• In the capital market transactions in long-term
• A private placement involves the sale of a new security directly to an investor or
group of investors
• Public offer (IPO): Most firms, however, raise money through the sale of either
bonds or stocks to the general public
Issuing Common Stock
• Initial Public Offering (IPO): The first public sale of a firm’s stock, typically made
apidly growing companies that either require additional capital to continue growing
• Prospectus: a paper that describes the key aspects of the issue, the issuer, and its
management and financial position
• Red Herring: A preliminary (voorlopig) prospectus available during the waiting
period between the registration statement’s filing with the SEC
• Quiet Period: Period during which the law places restrictions on what company
officials may say about the company
• Roadshow: A series of presentations to potential investors around the country,
providing investors with information about the new issue
Disadvantages of a public offering
• Going public is an expensive, time-consuming process
• Going public is selling ownership of a part of your company to strangers
• Loss of Management Control
• Increased Regulatory Oversight
• Enhanced Reporting Requirements
HUIZE ADRIAAN 2
, SCM / Finance
Subsidiary Characterization and Functional Currency
For a multinational company based outside the United States, its foreign subsidiaries’ type of
operations will determine the translation method the firm will use
For U.S. based MNCs, the determining factor is the functional currency of each subsidiary
(The currency the subsidiary primarily generates and expends cash before f/s are submitted
to the parent company for consolidation).
Current rate method: a standard method of currency translation that utilizes the current
market exchange rate
Temporal method: (also known as the historical method) converts the currency of a foreign
subsidiary into the currency of the parent company. This technique of foreign currency
translation is used when the local currency of the subsidiary is not the same as the currency
of the parent company.
PowerPoint 2
Net working capital the difference between a company's current assets, such as cash,
accounts receivable (customers' unpaid bills) and inventories of raw materials and finished
goods, and its current liabilities, such as accounts payable
Tradeoff Between Profitability and Risk
• A tradeoff exists between a firm’s profitability and its risk
• The risk of becoming insolvent is the probability that a firm will be unable to pay its
bills as they come due
Ratio Change in ratio Effect on profit Effect on risk
Current assets Increase Decrease Decrease
Total assets Decrease Increase Increase
Current liabilities Increase Increase Increase
Total assets Decrease Decrease Decrease
HUIZE ADRIAAN 3
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