Financial Management I
TTh 18:30-20:00/ST 222
Domingo, Dennimar O.
3rd year/BSBA-Marketing Management
Money. An officially-issued legal tender generally consisting of currency and coin. Money is
the circulating medium of exchange as defined by a government. Money is often
synonymous with cash, including negotiable instruments such as checks. Each country has
its own money, or currency, that is used as a medium of exchange within that country
(some countries share a type of currency, such as the euro used by the European Union).
The currency of one country can be exchanged for the currency of another via a currency
exchange. The current exchange rate determines how much of one currency must be used
to purchase a specified amount of the other currency.
Money is any good that is widely used and accepted in transactions
involving the transfer of goods and services from one person to another. Economists
differentiate among three different types of money: commodity money, fiat money, and
bank money. Commodity money is a good whose value serves as the value of money. Gold
coins are an example of commodity money. In most countries, commodity money has been
replaced with fiat money. Fiat money is a good, the value of which is less than the value it
represents as money. Dollar bills are an example of fiat money because their value as slips
of printed paper is less than their value as money. Bank money consists of the book
credit that banks extend to their depositors. Transactions made using checks drawn on
deposits held at banks involve the use of bank money.
Credit. The amount of money available to be borrowed by an individual or a company is
referred to as credit because it must be paid back to the lender at some point in the future.
For example, when you make a purchase at your local mall with your VISA card it is
considered a form of credit because you are buying goods with the understanding that
you'll need to pay for them later.
An agreement between a buyer and a seller in which the buyer receives the
good or service in advance and makes payment later, often over time and usually with
interest. For example, a buyer may purchase a computer on credit for $600 and pay $100
per month over several months with interest. One of the most common ways of buying on
credit is to use a credit card, but many companies have their own credit schemes. A steady
flow of credit in an economy is considered important for financial health.
Cash transactions are any type of financial transaction where cash is used to settle a
transaction on the same date that it takes place. Transactions of this type occur in retail
settings as well as with the acquisition of investments. This method is different from a
credit transaction, where the process of payment may be implemented on the actual date
that the transaction takes place, but does not complete or settle until some specific point in
In investment settings, a cash transaction makes it possible to settle the
purchase or sale of an asset on the same date that the transaction is initiated. With other
forms of payment, the transaction may not be settled for anywhere from a few days to
several months. A true cash transaction requires that all matters related to the transaction,
including payment and delivery, are completed on the trade date, and not postponed to
some future settlement date. For example, with a forward contract, the assets purchased are
delivered at some future point, at which time the investor pays the agreed upon price. With
a cash transaction, the purchased asset is delivered immediately, payment is rendered, and
both buyer and seller consider the transaction completed.
The cash transaction is simple and straightforward, it is not necessarily the
most effective investment strategy in all situations. Forward contracts can be very lucrative
investments, since they allow the buyer the opportunity to purchase securities at a rate that
may be sufficiently lower than the market value that prevails on the agreed upon settlement
date. Assuming that the investor had accurately projected the upward movement of the
security, the credit purchase may be lower than the cost of purchasing the shares and
settling the debt obligation on the date that the deal was initiated.
Credit Card Transactions. The use of credit card by consumer to purchase goods or services.
The purchase price of goods or services is sent through a processor for authorization; if the
amount is approved it is automatically submitted to the seller. The amount is listed on the
consumer's credit card statement and must be repaid. A transaction may also refer to a
credit made to the consumer's credit card account, such as when a good or service is
returned for a refund.