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BASIC FINANCE: FUNDAMENTAL CONCEPTS AND TOOLS OF BUSINESSFINANCE

Finance may be defined as the study of the acquisition and investment of cash for thepurpose of enhancing value and wealth.

Categories of Finance

1. Public Finance is that category of general finance, deals with the revenue andexpenditure patterns of the government and their various effects on theeconomy.

2. Private Finance this category deals with the area of general finance notclassified under public finance. It is subdivided into the following :2.1Personal finance;2.2The finance of non-profit organizations; and2.3Business finance

Definition of Business Finance- Refers to the provision of money for commercial use

- It also concerned with the effective use of funds.

- Defined as the procurement and administration of funds with the view of

achieving the objectives of the business.

Business Finance concerned with three aspects :1. Small business finance;2. Corporation finance; and3. Multinational business finance

THE GOALS OF BUSINESS FINANCE are variously expressed as follows :

1. Maximizing profit2. Maximizing profitability;3. Maximizing profit subject to cash constraint;4. Maximizing net present worth; and5. Seeking an optimum position along a risk-return frontier

THE FINANCIAL STATEMENT

Financial Statements are those that present financial information to various interestedparties. There are various types of financial statements, but only two of them areimportant from the point of view of business finance. These are : 1) the balancesheet/statement of financial position and 2) the profit and loss statement

Balance Sheet-is the statement produced periodically, normally at the end of a financial year, showingan organizations assets, liabilities and the interest of the owners.

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Assets shows everything that the firm owns and which has monetary value. Assetsare classified into four items and are presented in the balance sheet in order of howquick they can be converted into cash. The classifications are as follows ;

1. Current Assets composed of cash, bank deposits, and other items readily

convertible into cash like accounts receivable, stocks and work-in-process , andmarketable securities;2. Trade Investments composed of investments in subsidiary or associated

companies3. Fixed Assets show firms ownership of property like land, buildings, plan and

machinery, equipment, vehicles, furniture and fixtures, all valued at cost lessdepreciation written off;

4. Intangible Assets items present goodwill, patents, copyright which areattributed to the firm

Liabilities section of the balance sheet shows the profile of the debts of the company.

They classified into several items and are presented first and referred to as currentliabilities. Long-term liabilities are those which are payable after one year. The followingare common liability terms:

1. Accounts Payable. These are usually composed of debts payable within a fewdays, weeks or months

2. Loans and Notes Payable . These are debts evidenced by promissory notes andoftentimes backed up collaterals

3. Advances from Customers- Customers sometimes required to makedownpayment before orders are processed

4. Accrued Expenses These represent obligations, which have been incurred butnot yet paid.

5. Mortgage Payable This comprises borrowings and other sources of funds6. Bonds Payable- When a large amount of long-term debt is sought by the firm

from a large number of creditors, bonds are usually issued.

Net Worth- section of the balance sheet shows the interest of the owner or owners inthe company.

The Income Statement-represents the revenues realized from the sale of commodities and services producedby the company, as well as the costs and expenses incurred in connection with therealization of said revenues.- It is also referred to as profit and loss statement.