Week 1 ProjectSandy4tx
Finance is the study of the allocation of scarce resources. It includes elements of economic costs and bene�ts. The resources we study include �nancial capital and economic capital.
Finance is dynamic because time is an important element. Financial decision-making uses signi�cant commitments of resources, since decisions are being made about the future. Finance involves management— information, risk, and uncertainty vary to complicate decisions on adding value to the �rm. The planning, organization, leading, and controlling results affect a �rm’s objective of maximizing shareholder wealth.
Finance starts with �nancial accounting—the system of �nancial accounting (accrual accounting) and scorecards of �nancial statements (i.e., the balance sheet, the income statement, and the statement of cash �ows). Tracking and timing of revenue, expenses, earnings, and cash �ow are essential in accounting.
The accounting equation is:
Total Assets (TA) = Total Liabilities (TL) plus Owner’s Equity (OE)
Assets are what we use to create value, and they are �nanced by liabilities and equity. In the balance sheet the right-hand side balances with the left-hand side of the equation. The accounts (current assets, long-term assets, current liabilities, long-term liabilities, and equity) are measured as stock variables—a measure of the amount of each item at a point in time.
Two key aspect of a balance sheet are:
1. The balance sheet is a picture of the �rm as of one point in time. It does not provide information for any period of time.
2. The ordering of the accounts is according to decreasing liquidity (ease of conversion to cash).