Name: Lê Thị Luyện

Student’s ID: 2113520014

Review Questions

1. How is finance related to the disciplines of accounting and economics?

Financial management is essentially a combination of accounting and economics.

→ financial managers use accounting information—balance sheets, income statements,
and so on—to analyze, plan, and allocate financial resources for business firms.
→ financial managers use economic principles to guide them in making financial
decisions that are in the best interest of the firm.
In other words, finance is an applied area of economics that relies on accounting for input.

2. List and describe the three career opportunities in the field of finance.

Finance has three main career paths: financial management, financial markets and
institutions, and investments.
- Financial management: involves managing the finances of a business. Financial managers:
people who manage a business firm's finances—perform a number of tasks. They analyze
and forecast a firm's finances; assess risk, evaluate investment opportunities, decide when
and where to find money sources and how much money to raise, and decide how much
money to return to the firm's investors.
- Financial markets and institutions: Bankers, stockbrokers,... focus on the flow of money
through financial institutions and the markets in which financial assets are exchanged. They
track the impact of interest rates on the flow of that money.
- Investment: People who work in the field of investments locate, select, and manage
income-producing assets. For instance, security analysts and mutual fund managers both
operate in the investment field.

3. Describe the duties of the financial manager in a business firm.

Financial managers measure the firm's performance, determine what the financial
consequences will be if the firm maintains its present course or changes it, and recommend
how the firm should use its assets. Financial managers also locate external financing sources
and recommend the most beneficial mix of financing sources, and they determine the
financial expectations of the firm's owners.
All financial managers must be able to communicate, analyze, and make decisions based
on information from many sources. To do this, they need to be able to analyze financial
statements, forecast and plan, and determine the effect of size, risk, and timing of cash flows.

4. What is the basic goal of a business?

The primary financial goal of the business firm is to maximize the wealth of the firm's
owners. Wealth, in turn, refers to value. If a group of people owns a business firm, the
contribution that firm makes to that group's wealth is determined by the market value of that
firm.

5. List and explain the three financial factors that influence the value of a business.

The three factors that affect the value of a firm's stock price are cash flow, timing, and risk.
- The Importance of Cash Flow: In business, cash is what pays the bills. It is also what the
firm receives in exchange for its products and services. Cash is therefore of ultimate
importance, and the expectation that the firm will generate cash in the future is one of the
factors that gives the firm its value.
- The Effect of Timing on Cash Flows: Owners and potential investors look at when firms
can expect to receive cash and when they can expect to pay out cash. All other factors being
equal, the sooner companies expect to receive cash and the later they expect to pay out cash,
the more valuable the firm and the higher its stock price will be.
- The Influence of Risk: Risk affects value because the less certain owners and investors are
about a firm's expected future cash flows, the lower they will value the company. The more
certain owners and investors are about a firm's expected future cash flows, the higher they
will value the company. In short, companies whose expected future cash flows are doubtful
will have lower values than companies whose expected future cash flows are virtually certain.

6. Explain why accounting profits and cash flows are not the same thing.

Cash flow is the money that flows in and out of your business throughout a given period,
while profit is whatever remains from your revenue after costs are deducted.
Stock value depends on future cash flows, their timing, and their riskiness.
Profit calculations do not consider these three factors. Profit, as defined in accounting, is
simply the difference between sales revenue and expenses. It is true that more profits are
generally better than less profits, but when the pursuit of short-term profits adversely affects
the size of future cash flows, their timing, or their riskiness, then these profit maximization
efforts are detrimental to the firm.
7. What is an agent? What are the responsibilities of an agent?

An agent (đại lý) is a person who has the implied or actual authority to act on behalf of
another. The owners whom the agents represent are the principals. Agents have a legal and
ethical responsibility to make decisions that further the interests of the principals.

8. Describe how society's interests can influence financial managers.

Sometimes the interests of a business firm's owners are not the same as the interests of
society. For instance, the cost of properly disposing of toxic waste can be so high that
companies may be tempted to simply dump their waste in nearby rivers. In doing so, the
companies can keep costs low and profits high, and drive their stock prices higher (if they are
not caught). However, many people suffer from the polluted environment. This is why we
have environmental and other similar laws:
So that society's best interests take precedence over the interests of individual company
owners. When businesses take a long-term view, the interests of the owners and society often
coincide. When companies encourage recycling, sponsor programs for disadvantaged young
people, run media campaigns promoting the responsible use of alcohol, and contribute money
to worthwhile civic causes (Corporate social responsibility, or CSR), the goodwill generated
as a result of these activities causes long-term increases in the firm's sales and cash flows,
which translate into additional wealth for the firm's owners.

9. Briefly define the terms proprietorship, partnership, and corporation.

- A proprietorship (doanh nghiệp tư nhân) is a business owned by one person.

→ The owner receives all the profits and takes all the risks
- Partnership: Two or more people who join together to form a business. This can be done
on an informal basis without a written partnership agreement, or a contract can spell out the
rights and responsibilities of each partner.
- Corporations are legal entities separate from their owners. To form a corporation, the
owners specify the governing rules for the running of the business in a contract known as the
articles of incorporation. They submit the articles to the government of the state in which the
corporation is formed, and the state issues a charter that creates the separate legal entity.
→ A limited liability company (công ty TNHH) is a hybrid between a partnership and a
corporation. Profits and losses pass through to the members. Members generally enjoy
limited liability.

10. Compare and contrast the potential liability of owners of proprietorships, partnerships
(general partners), and corporations.

- The sole proprietor: has unlimited liability for matters relating to the business. This means
that the sole proprietor is responsible for all the obligations of the business, even if those
obligations exceed the amount the proprietor has invested in the business.
- Partnership: Each partner in a partnership is usually liable for the activities of the
partnership as a whole. Even if there are a hundred partners, each one is technically
responsible for all the debts of the partnership. (If ninety-nine partners declare personal
bankruptcy, the hundredth partner still is responsible for all the partnership's debts.)
- A corporation is a legal entity that is liable for its own activities. Stockholders, the
corporation's owners, have limited liability for the corporation's activities. They cannot lose
more than the amount they paid to buy the corporation’s stock.

End-of-Chapter Problems

1. An accountant prepares financial statements while a financial analyst interprets them.

2. A financial manager’s role in a publicly traded company is to make financial decisions so

as to best serve the principal stockholders.
a. The value of the firm would go down due to the increase in the amount of time it takes to
receive the cash inflows.
b. The value of the firm would go up due to the increase in expected cash inflows.
c. If expected future cash flows do not change the value of the firm would go down due to the
increased riskiness of the firm.

4. This practice obviously takes advantage of people who are in a difficult financial situation.
This transaction is voluntary, however, and high risk loans have high interest rates.

5. LLCs have a small number of members like partnerships and each of these members is
likely to have an active voice in the company like a partnership. The LLC is taxed like a
partnership. Unlike a partnership, and more like a corporation, the owners generally enjoy
limited liability.