Week 1 Project


Three Capitals of Finance

The �eld of �nance contains four interrelated areas: �nancial management (corporate �nance), �nancial markets and institutions, international �nancial management, and investments.

Within those four areas, we focus upon three elements of capital: working capital, capital budgeting, and capital structure.

Capital management is also known as operations. The �nancial statements associated with it are the balance sheet, income statement, and statement of cash �ows. All current assets and current liabilities from sales to EBIT operating activities are associated with capital management.

Capital budgeting is also known as planning and investing. The balance sheet and the statement of cash �ows are the �nancial statements associated with this type of capital management. Long-term or �xed assets and investing activities are the accounts associated with capital budgeting.

Capital structure is also known as �nancing. The �nancial statements associated with it are the balance sheet, income statement, statement of cash �ows, and retained earnings or equity. Long-term liabilities and equity from EBIT to net income �nancing activities are associated with capital structure.

The �nancial statements show the company's operations and results in �nancial terms. Accountants create these �nancial statements each accounting period to present the current results of company operations. These �nancial statements are used internally and externally.

These are the four primary �nancial statements:

Income statement: describes a company's revenues and expenses along with the resulting net income or loss over a period. (Net income occurs when revenues exceed expenses. Net loss occurs when expenses exceed revenues.)

Balance sheet: describes a company's �nancial position (types and amounts of assets, liabilities, and equity) at a point in time.

Statement of cash �ows: identi�es cash in�ows (receipts) and cash out�ows (payments) over a de�ned period of time.

Statement of stockholders' equity: explains changes in equity from net income (or loss) and from owner investment and withdrawals over a de�ned period of time.