FINANCIAL MARKETS OVERVIEW OF BUSINESS FINANCE

LEARNING OBJECTIVES
At the end of this lesson, you should be able to:
 Define finance
 Know the career opportunities in finance
 Understand how finance works in an organization
 Know the relationship of finance to economics and accounting
 Prepare net profit and cash flow for business.

WHAT IS FINANCE?
 Finance can be defined as the art and science of managing money.
 It is concerned with the process, institutions, markets, and instruments involved in
the transfer of money among individuals, businesses, and governments.

MAJOR AREAS AND OPPORTUNITIES IN FINANCE

1. Financial services is the area of finance concerned with the design and delivery of
advice and financial products to individuals, business, and government. It involves a
variety of interesting career opportunities within the areas of banking and related
institutions, personal financial planning, investments, real estate, and insurance.

2. Managerial finance is concerned with the duties of the financial manager in the
business firm. Financial managers actively manage the financial affairs of any type of
businesses-financial and Non financial, private and public, large and small, profit-seeking
and not-for-profit.

ORGANIZATION OF THE FINANCE FUNCTION

As a firm grows, the finance function typically evolves into a separate department linked
directly to the company president or CEO through the chief financial officer (CF0).
Reporting to the CFO are the treasurer and the controller.
Treasurer is the firm's chief financial manage, who manages the firm's cash, oversees its
pension plans, and manages key risks.

The Controller is the firm's chief accountant, who is responsible for the accounting
activities, such as corporate accounting, tax management, accounting, and cost
accounting.

RELATIONSHIP OF FINANCE AND ECONOMICS

The primary economic principle used in managerial finance is marginal analysis, the
principle that financial decisions should be made and actions taken only when the added
benefits exceed the added costs.
RELATIONSHIP OF FINANCE AND ACCOUNTING
 Emphasis on Cash Flows
 The accountant 's primary function is to develop and report data for the preparation
of financial statements in accordance with generally accepted accounting principles
-accrual basis.
 The financial manager, on the other hand, places primary emphasis on cash flows,
the intake and outgo of cash -cash basis. He or she maintains the firm's solvency by
planning the cash flows necessary to satisfy its obligations and to acquire assets
needed to achieve the firm's goals

RELATIONSHIP OF FINANCE AND ACCOUNTING

 Decision Making
 Accountants devote most of their attention to the collection and presentation of
financial data.
 Financial managers evaluate the accounting statements, develop additional data, and
make decisions on the basis of their assessment of the associated returns and risks.
 Of course, this does not mean that accountants never make decisions or that financial
managers never gather data. Rather, the primary focuses of accounting and finance
are distinctly different.

FINANCIAL MARKETS FORMS OF BUSINESS ORGANIZATION

LEARNING OBJECTIVES
After studying this chapter, you should be able to: .
 Differentiate the legal forms of business organizations
 Explain the advantages and disadvantages of each forms of business organizations
 Identify the classification of partnerships and kinds of partners
 Familiarize with the contents of Articles of Incorporation
 Learn how should profit or loss be distributed to partners
 Enumerate the causes of partnership dissolution
 Know the attributes of a corporation
PROPRIETORSHIP
PROPRIETORSHIP is a business owned by a single person who has complete control
over business decisions
 From a legal point of view the owner of proprietorship is not separable from the
business and is personally liable for all debts of the business.
 From an accounting point of view- the business is an entity separate from its
Owner
ADVANTAGES AND DISADVANTAGES OFA PROPRIETORSHIP
DISADVANTAGES
1. Unlimited liability
2. 2. Limitations in raising capital
3. 3. Lack of continuity
ADVANTAGE
1. Ease of entry and exit
2. 2. Full ownership and control
3. 3. Few government regulations
PARTNERSHIP
PARTNERSHIP is a legal arrangement in which two or more persons agree to contribute
capital or services to the business and divide the profits or losses that may be derived
therefrom.
CLASSIFICATIONS OF PARTNERSHIPS
 According to LIABILITY:
 GENERAL PARTNERSHIP- All partners are liable to the extent of their separate
properties
 LIMITED Partnership -one containing one or more general partners and one or
more limited partners. Limited partners are liable only to the extent of their
Contributions.
 According to PURPOSE:
 Commercial or Trading Partnership
 General Professional Partnership
 According to DURATION:
 Partnership with a fixed term or for a particular undertaking
 Partnership at will
CHARACTERISTICS OF A PARTNERSHIP
 Mutual Contribution - there can be no partnership without contribution of
money, property or Industry to a common fund.
 Division of Profits or Losses
 Co-ownership of Contributed Assets-all assets contributed into the partnership
are own the partnership. All partners jointly owns the asset a partner contributes to the
business.
 Mutual Agency-an partner can bind the other partners to a contract if he is acting
within his express or implied authority
 Limited Life-a partnership may be dissolved by the admission, death, insolvency,
incapacity withdrawal of a partner or expiration of the term specified in the partnership
agreement
  Unlimited Liability- all partners (except limited partners) are personally liable
for all debts incurred by the partnership
 Income Taxes-partnerships (except general professional partnerships) are subject
to income tax
KINDS OF PARTNERS
1 General Partner-one who is liable to the extent of his separate property after all the
assets of the partnership has been exhausted.
2 Limited Partner-one who is liable only to the extent of his capital contribution.
3 Capitalist Partner-one who contributes money or property to the common fund of the
partnership.
4 Industrial Partner-one who contributes his knowledge or personal service to the
partnership
5 Managing Partner-one whom the partners has appointed as manager of the partnership
6 Liquidating Partner-one who is designated to wind up or settle the affairs of the
partnership after dissolution
7. Dormant Partner-one who does not take active part in the business of the partnership
and is not know as a partner
8. Silent Partner -one who does not take active part in the business
9. Secret Partner- one who does not take active part in the business.
10 Nominal Partner or partner by estoppel- one who is actually not a partner but who
represents himself as one
ADVANTAGES AND DISADVANTAGES OF A PARTNERSHIP
DISADVANTAGES
1. Unlimited liability
2. Limited life
3. Difficulty of transferring ownership
ADVANTAGES
1. Additional source of capital
2. Broader management base

RULES FOR THE DISTRIBUTION OF PROFITS OR LOSSES TO PARTNERS

In case of PROFITS
1 Divided according to agreement
3. If no agreement:
a) For CAPITALIST PARTNERS-divided according to capital contributions
 b) b) For INDUSTRIAL PARTNERS Such share as may be just and equitable
under the circumstances. provided, that the industrial partner shall receive such share
before the capitalist partners divide the profits.
In case of LOSSES
1Divided according to agreement
2 if no agreement as to losses but there is an agreement as to profits, the losses shall be
distributed according to the profit sharing ratio
3 In the absence of any agreement:
` a) For CAPITALIST PARTNERS-divided according to capital contributions
b) For PURELY INDUSTRIAL PARTNERS-shall not be liable in any loss
ARTICLES OF PARTNERSHIP
A partnership may be constituted orally or in writing. In the latter case, partnership
agreements are embodied in Articles of PArtnershIp. The following essential provisions
moy be contained in the agreement L The partnership name, nature, purpose and location
2 The names, citiz
Kulang