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Finance 1 - exam preparation summary
Summary of the theory for FIN1 exam
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Financial ManagementChapter 1 – Businesses and their role in the economy
Consumers and Manufacturers
Production organizations – businesses which manufacture products and services and sell
them to consumers at a certain price
Economy – deals with questions connected to the ways in which people strive to optimize
their ‘prosperity’: how can the supply of products and services be optimized using minimum
resources?
Economics – studies the relationship between consumers and businesses and the mutual
interactions between businesses
o Microeconomics - the study of individuals, households and firms' behavior in
decision making and allocation of resources, generally applies to markets of goods
and services and deals with individual and economic issues
o Macroeconomics - the branch of economics that studies the behavior and
performance of an economy as a whole, focuses on the aggregate changes in the
economy such as unemployment, growth rate, gross domestic product and inflation
o Business economics – focuses on economic behavior in a production organization
(production as physical goods, but also trade and services)
A company is a production
organization
Resources are combined and
transformed into products during
a production process
Operates between two markets:
the supplier market (where
resources are obtained) and the
retail market (where
manufactured goods or services
are sold)
Fixed asset - fixed asset is a long-term tangible piece of property that a firm owns and uses in
its operations to generate income (e.g. for brewery: a building, boilers for brewing, trucks,
computers etc.)
o Used for more than one year
Raw materials - materials or substances used in the primary production or manufacturing of
goods (e.g.for brewery: water, hops)
Capital = raw materials + fixed assets
A company seeks to maximize its profit
‘Value creation’ – the sales of the produced goods and services need to outweigh the price
paid for the production factors (labor, raw material, fixed assets) at the supplier market
The level of profit depends on:
o Efficiency – cost-effectiveness of the production process (a given quantity is
produced at minimum costs
, o Effectiveness – ability to meet target objectives of the production process/the extent
to which end products meet customer requirements (the end product is appreciated
by customers, and customers are willing to pay for it)
Business Activities
Classification of companies based on the nature of the transformation process:
o Agriculture and mining
o Industry (create a physical product that didn’t yet exist before)
Job production – production is customized, tailored to customer
requirements
Mass production – a single type of product is produced in large quantities
Batch-job production process – every customer gets a particular individual
product, but costs are saved by producing the components in larger
quantities
Batch-mass production process – a variety of models of the standard product
are produced
o Trade (do not produce new product)
o Services
Legal forms of businesses
Legal entity = osobowość prawna
o with -> independent party in legal agreements
o without -> the agreement is made in the name of the owner
Sole proprietorship – a company is not a legal entity and is the property of one individual
Partnership – several owners and no legal entity
o Limited partners (silent partners) – own the business, because they invested capital,
but don’t control it
o General partners – both owners and in control (in a limited partnership)
Joint-share companies – a legal entity with limited liability
o LLC – limited liability company
o Corporation
LLC Corporation
Registered shares Bearer shares, which can easily change legal owners
Blocking clause into the articles of association, putting
Cannot restrict the sale of shares
restrictions on selling shares
No required minimum capital The creation of a corporation requires an initial
, minimum capital
o Cooperative – acts on behalf of its members
Production cooperative – the members are suppliers of raw material for the
production process
Purchasing cooperative – members buy their supplies from the cooperative
Cooperative bank – lends money to its members
Value Added Tax (VAT)
A tax raised on consumptive expenditures, which means that the end user of a product or
service pays the tax; included in the paid price
In the EU: for delivery of products and services – at least 15%; for a limited number of
specified products and services, member states can apply one or two reduced rates of at
least 5%
Does not play role on the income statement
Exemptions e.g. banks, insurance, medical services
o The company is not liable for value added tax on the product or service they provide
o The company cannot reclaim value added tax they pay to suppliers
Export: products will be subject for value added tax in the country of destination
Types of cooperation between companies
Merges and takeovers
o Acquirer and acquiree operate in the same industry
o Acquirer and acquiree operate at consecutive levels of the supply chain (vertical
integration)
o Acquirer and acquiree operate at the same level of different supply chains
(horizontal integration)
o Acquirer and acquiree operate at different levels and in different supply chains
(conglomerates)
Franchising – single entrepreneur joining a chain and using certain facilities offered by that
chain, such as purchasing, marketing and store layout
Cartels – agreements between manufacturers, which are designed to restrict competition
Chapter 2 – Financial management disciplines and
positions
Financial management disciplines
Finance
Accounting – providing the company with mainly financial information
o Management accounting – information provided to internal management to support
management in the decision-making process
o Financial accounting – the external financial reporting system, with information
provided by company management to external stakeholders
Corporate finance
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