Skip to ContentGo to accessibility pageKeyboard shortcuts menu
OpenStax Logo

Menu
Table of contents
  1. Preface
  2. 1 Introduction to Finance
    1. Why It Matters
    2. 1.1 What Is Finance?
    3. 1.2 The Role of Finance in an Organization
    4. 1.3 Importance of Data and Technology
    5. 1.4 Careers in Finance
    6. 1.5 Markets and Participants
    7. 1.6 Microeconomic and Macroeconomic Matters
    8. 1.7 Financial Instruments
    9. 1.8 Concepts of Time and Value
    10. Summary
    11. Key Terms
    12. Multiple Choice
    13. Review Questions
    14. Video Activity
  3. 2 Corporate Structure and Governance
    1. Why It Matters
    2. 2.1 Business Structures
    3. 2.2 Relationship between Shareholders and Company Management
    4. 2.3 Role of the Board of Directors
    5. 2.4 Agency Issues: Shareholders and Corporate Boards
    6. 2.5 Interacting with Investors, Intermediaries, and Other Market Participants
    7. 2.6 Companies in Domestic and Global Markets
    8. Summary
    9. Key Terms
    10. CFA Institute
    11. Multiple Choice
    12. Review Questions
    13. Video Activity
  4. 3 Economic Foundations: Money and Rates
    1. Why It Matters
    2. 3.1 Microeconomics
    3. 3.2 Macroeconomics
    4. 3.3 Business Cycles and Economic Activity
    5. 3.4 Interest Rates
    6. 3.5 Foreign Exchange Rates
    7. 3.6 Sources and Characteristics of Economic Data
    8. Summary
    9. Key Terms
    10. CFA Institute
    11. Multiple Choice
    12. Review Questions
    13. Problems
    14. Video Activity
  5. 4 Accrual Accounting Process
    1. Why It Matters
    2. 4.1 Cash versus Accrual Accounting
    3. 4.2 Economic Basis for Accrual Accounting
    4. 4.3 How Does a Company Recognize a Sale and an Expense?
    5. 4.4 When Should a Company Capitalize or Expense an Item?
    6. 4.5 What Is “Profit” versus “Loss” for the Company?
    7. Summary
    8. Key Terms
    9. Multiple Choice
    10. Review Questions
    11. Problems
    12. Video Activity
  6. 5 Financial Statements
    1. Why It Matters
    2. 5.1 The Income Statement
    3. 5.2 The Balance Sheet
    4. 5.3 The Relationship between the Balance Sheet and the Income Statement
    5. 5.4 The Statement of Owner’s Equity
    6. 5.5 The Statement of Cash Flows
    7. 5.6 Operating Cash Flow and Free Cash Flow to the Firm (FCFF)
    8. 5.7 Common-Size Statements
    9. 5.8 Reporting Financial Activity
    10. Summary
    11. Key Terms
    12. CFA Institute
    13. Multiple Choice
    14. Review Questions
    15. Problems
    16. Video Activity
  7. 6 Measures of Financial Health
    1. Why It Matters
    2. 6.1 Ratios: Condensing Information into Smaller Pieces
    3. 6.2 Operating Efficiency Ratios
    4. 6.3 Liquidity Ratios
    5. 6.4 Solvency Ratios
    6. 6.5 Market Value Ratios
    7. 6.6 Profitability Ratios and the DuPont Method
    8. Summary
    9. Key Terms
    10. CFA Institute
    11. Multiple Choice
    12. Review Questions
    13. Problems
    14. Video Activity
  8. 7 Time Value of Money I: Single Payment Value
    1. Why It Matters
    2. 7.1 Now versus Later Concepts
    3. 7.2 Time Value of Money (TVM) Basics
    4. 7.3 Methods for Solving Time Value of Money Problems
    5. 7.4 Applications of TVM in Finance
    6. Summary
    7. Key Terms
    8. CFA Institute
    9. Multiple Choice
    10. Review Questions
    11. Problems
    12. Video Activity
  9. 8 Time Value of Money II: Equal Multiple Payments
    1. Why It Matters
    2. 8.1 Perpetuities
    3. 8.2 Annuities
    4. 8.3 Loan Amortization
    5. 8.4 Stated versus Effective Rates
    6. 8.5 Equal Payments with a Financial Calculator and Excel
    7. Summary
    8. Key Terms
    9. CFA Institute
    10. Multiple Choice
    11. Problems
    12. Video Activity
  10. 9 Time Value of Money III: Unequal Multiple Payment Values
    1. Why It Matters
    2. 9.1 Timing of Cash Flows
    3. 9.2 Unequal Payments Using a Financial Calculator or Microsoft Excel
    4. Summary
    5. Key Terms
    6. CFA Institute
    7. Multiple Choice
    8. Review Questions
    9. Problems
    10. Video Activity
  11. 10 Bonds and Bond Valuation
    1. Why It Matters
    2. 10.1 Characteristics of Bonds
    3. 10.2 Bond Valuation
    4. 10.3 Using the Yield Curve
    5. 10.4 Risks of Interest Rates and Default
    6. 10.5 Using Spreadsheets to Solve Bond Problems
    7. Summary
    8. Key Terms
    9. CFA Institute
    10. Multiple Choice
    11. Review Questions
    12. Problems
    13. Video Activity
  12. 11 Stocks and Stock Valuation
    1. Why It Matters
    2. 11.1 Multiple Approaches to Stock Valuation
    3. 11.2 Dividend Discount Models (DDMs)
    4. 11.3 Discounted Cash Flow (DCF) Model
    5. 11.4 Preferred Stock
    6. 11.5 Efficient Markets
    7. Summary
    8. Key Terms
    9. CFA Institute
    10. Multiple Choice
    11. Review Questions
    12. Problems
    13. Video Activity
  13. 12 Historical Performance of US Markets
    1. Why It Matters
    2. 12.1 Overview of US Financial Markets
    3. 12.2 Historical Picture of Inflation
    4. 12.3 Historical Picture of Returns to Bonds
    5. 12.4 Historical Picture of Returns to Stocks
    6. Summary
    7. Key Terms
    8. Multiple Choice
    9. Review Questions
    10. Video Activity
  14. 13 Statistical Analysis in Finance
    1. Why It Matters
    2. 13.1 Measures of Center
    3. 13.2 Measures of Spread
    4. 13.3 Measures of Position
    5. 13.4 Statistical Distributions
    6. 13.5 Probability Distributions
    7. 13.6 Data Visualization and Graphical Displays
    8. 13.7 The R Statistical Analysis Tool
    9. Summary
    10. Key Terms
    11. CFA Institute
    12. Multiple Choice
    13. Review Questions
    14. Problems
    15. Video Activity
  15. 14 Regression Analysis in Finance
    1. Why It Matters
    2. 14.1 Correlation Analysis
    3. 14.2 Linear Regression Analysis
    4. 14.3 Best-Fit Linear Model
    5. 14.4 Regression Applications in Finance
    6. 14.5 Predictions and Prediction Intervals
    7. 14.6 Use of R Statistical Analysis Tool for Regression Analysis
    8. Summary
    9. Key Terms
    10. Multiple Choice
    11. Review Questions
    12. Problems
    13. Video Activity
  16. 15 How to Think about Investing
    1. Why It Matters
    2. 15.1 Risk and Return to an Individual Asset
    3. 15.2 Risk and Return to Multiple Assets
    4. 15.3 The Capital Asset Pricing Model (CAPM)
    5. 15.4 Applications in Performance Measurement
    6. 15.5 Using Excel to Make Investment Decisions
    7. Summary
    8. Key Terms
    9. CFA Institute
    10. Multiple Choice
    11. Review Questions
    12. Problems
    13. Video Activity
  17. 16 How Companies Think about Investing
    1. Why It Matters
    2. 16.1 Payback Period Method
    3. 16.2 Net Present Value (NPV) Method
    4. 16.3 Internal Rate of Return (IRR) Method
    5. 16.4 Alternative Methods
    6. 16.5 Choosing between Projects
    7. 16.6 Using Excel to Make Company Investment Decisions
    8. Summary
    9. Key Terms
    10. CFA Institute
    11. Multiple Choice
    12. Review Questions
    13. Problems
    14. Video Activity
  18. 17 How Firms Raise Capital
    1. Why It Matters
    2. 17.1 The Concept of Capital Structure
    3. 17.2 The Costs of Debt and Equity Capital
    4. 17.3 Calculating the Weighted Average Cost of Capital
    5. 17.4 Capital Structure Choices
    6. 17.5 Optimal Capital Structure
    7. 17.6 Alternative Sources of Funds
    8. Summary
    9. Key Terms
    10. CFA Institute
    11. Multiple Choice
    12. Review Questions
    13. Problems
    14. Video Activity
  19. 18 Financial Forecasting
    1. Why It Matters
    2. 18.1 The Importance of Forecasting
    3. 18.2 Forecasting Sales
    4. 18.3 Pro Forma Financials
    5. 18.4 Generating the Complete Forecast
    6. 18.5 Forecasting Cash Flow and Assessing the Value of Growth
    7. 18.6 Using Excel to Create the Long-Term Forecast
    8. Summary
    9. Key Terms
    10. Multiple Choice
    11. Review Questions
    12. Problems
    13. Video Activity
  20. 19 The Importance of Trade Credit and Working Capital in Planning
    1. Why It Matters
    2. 19.1 What Is Working Capital?
    3. 19.2 What Is Trade Credit?
    4. 19.3 Cash Management
    5. 19.4 Receivables Management
    6. 19.5 Inventory Management
    7. 19.6 Using Excel to Create the Short-Term Plan
    8. Summary
    9. Key Terms
    10. Multiple Choice
    11. Review Questions
    12. Video Activity
  21. 20 Risk Management and the Financial Manager
    1. Why It Matters
    2. 20.1 The Importance of Risk Management
    3. 20.2 Commodity Price Risk
    4. 20.3 Exchange Rates and Risk
    5. 20.4 Interest Rate Risk
    6. Summary
    7. Key Terms
    8. CFA Institute
    9. Multiple Choice
    10. Review Questions
    11. Problems
    12. Video Activity
  22. Index
agency theory
a principle that is used to explain and resolve issues in the relationship between business principals and their agents, most commonly between shareholders (principals) and company executives (agents)
agent
a person who acts on behalf of another person or group
annual meeting
a meeting of the general membership and shareholders of a corporation; also known as an annual general meeting (AGM)
annual report
a document describing a public corporation’s operations and financial condition that must be provided to shareholders once per year; also known as Securities and Exchange Commission (SEC) Form 10-K
articles of incorporation
a set of formal documents filed with a government body to legally document the creation of a corporation
board of directors (BOD)
a group of people who jointly supervise the activities of an organization
C corporation
a legal structure for a corporation in which the owners, or shareholders, are taxed separately from the entity
close (closely held) corporation
a company that has only a limited number of shareholders
conference call
a meeting or presentation conducted via telephone or internet to relay company information to all interested parties, including institutional and individual investors, as well as buy-and-sell side analysts; also known as an earnings conference call
corporate governance
the system of rules, practices, and processes by which a firm is directed and controlled
corporation
a legal entity that is separate and distinct from its owners
domestic corporation (in state)
a corporation incorporated under the laws of the country or state in which it does business
Electronic Data Gathering, Analysis, and Retrieval system (EDGAR)
the primary system for collecting and indexing documents submitted by companies and others under the Securities Act of 1933, the Securities Exchange Act of 1934, the Trust Indenture Act of 1939, and the Investment Company Act of 1940
ESG
environmental, social, and governance (ESG) standards for a company’s operations that socially conscious investors use to screen potential investments
foreign corporation (out of state or out of country)
an existing corporation that conducts business in a state or jurisdiction other than where it was originally incorporated
Generally Accepted Accounting Principles (GAAP)
a common set of accounting principles, standards, and procedures issued by the Financial Accounting Standards Board (FASB)
global markets
economies or markets that are multinational in nature, spanning several different countries or jurisdictions
hybrid form of business
a limited liability company (LLC) or limited liability partnership (LLP) that combines the characteristics of a corporation with those of a sole proprietorship or partnership
International Financial Reporting Standards (IFRS)
accounting standards used by international corporations, issued by the IFRS Foundation and the International Accounting Standards Board
investor
a person or an entity, such as a firm or mutual fund, that invests capital with the expectation of receiving financial returns
investor relations (IR)
a strategic management responsibility that is capable of integrating finance, communication, marketing, and securities law compliance to enable the most effective two-way communication between a company and the financial community or other constituencies, which ultimately contributes to a company’s securities achieving fair valuation
limited liability corporation (LLC)
a US-specific form of a private limited company; a business structure that can combine the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation
limited liability partnership (LLP)
a partnership in which some or all partners have limited liabilities; can exhibit elements of both partnerships and corporations
non-stock corporation
a corporation that does not have owners represented by shares of stock but typically has members who are the functional equivalent of stockholders in a stock corporation (having the right to vote, etc.); describes the vast majority of not-for-profit corporations
nonprofit (not-for-profit) corporation
a legal entity that has been incorporated under the law of its jurisdiction for purposes other than making profits for its owners or shareholders
partnership
a formal arrangement by two or more parties to manage and operate a business and share its profits and liabilities equally
press release
an official statement delivered to members of the news media for the purpose of making an announcement or otherwise providing information
principal
the person with the highest authority or most important position in a company, organization, institution, or group
professional corporation
a form of corporate entity used by licensed professionals such as attorneys, architects, engineers, public accountants, and physicians, which is regulated by special provisions in many corporation statutes
public benefit corporation
a specific type of Delaware general corporation that is owned by shareholders who expect the company to make a profit and return some of that money to them in the form of dividends
quarterly report
a document describing a public corporation’s operations and financial condition that must be provided to shareholders four times per year; also known as Securities and Exchange Commission (SEC) Form 10-Q
S corporation
a closely held corporation that makes a valid election to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code, which does not require such corporations to pay income taxes and instead taxes owners as individuals
secretaries of state
the state officials who head the agencies responsible for, among other functions, the chartering of businesses (usually including partnerships and corporations) that wish to operate within their state and, in most states, for maintaining all records on business activities within the state; also known as secretaries of the commonwealth in Massachusetts, Pennsylvania, and Virginia
Securities and Exchange Commission (SEC)
a large, independent agency of the United States federal government whose primary purpose is to enforce laws against market manipulation; created following the stock market crash of 1929 to protect investors and the national banking system
shareholder (stockholder)
an individual or institution that legally owns one or more shares of the share capital of a public or private corporation; may be referred to as members of a corporation
sole proprietor (and sole proprietorship)
a form of business that is operated and run by a single individual, known as the sole trader, with no legal distinction between the owner and the business entity
stakeholder
a person with an interest or concern in a business
stock corporation
a for-profit organization that issues shares of stock to shareholders (also known as stockholders) to raise capital, with each share representing partial ownership of the corporation and granting shareholders certain ownership rights to shape company policies
subscriber
an initial shareholder of a company at the time of its incorporation whose name appears on the memorandum of association, a legal document prepared in the formation and registration process of a company to define its relationship with shareholders
Order a print copy

As an Amazon Associate we earn from qualifying purchases.

Citation/Attribution

Want to cite, share, or modify this book? This book uses the Creative Commons Attribution License and you must attribute OpenStax.

Attribution information
  • If you are redistributing all or part of this book in a print format, then you must include on every physical page the following attribution:
    Access for free at https://openstax.org/books/principles-finance/pages/1-why-it-matters
  • If you are redistributing all or part of this book in a digital format, then you must include on every digital page view the following attribution:
    Access for free at https://openstax.org/books/principles-finance/pages/1-why-it-matters
Citation information

© Jun 8, 2023 OpenStax. Textbook content produced by OpenStax is licensed under a Creative Commons Attribution License . The OpenStax name, OpenStax logo, OpenStax book covers, OpenStax CNX name, and OpenStax CNX logo are not subject to the Creative Commons license and may not be reproduced without the prior and express written consent of Rice University.