Finance and Its Relationship to Economics and Accounting

X. Fill in the blanks with the most appropriate words from the list.

1. analysis 2. finance 3. related 4. flows 5. data 6. accounting

7. financial 8. supplementary 9. guide 10. insolvency 11. benefits 12. evaluates

Since every business operates within the economy, the field of finance is closely.... to that of economics. The financial manager needs to be alert to the effects of variations in economic activity and changes in economic policies. He must also be able to use economic theory as a.... to operating efficiency of the firm. Examples of this include price theory, supply-and-demand and profit-maximizing strategies. In his daily working, the financial manager makes frequent use of marginal analysis, the economic principle that financial decisions should be made only when added.... exceed added costs. A basic knowledge of micro-economics is therefore desirable.

The functions of finance and accounting are closely related and may at times overlap. Consequently the firm's finance and accounting activities are typically within the control of the CFO. Nevertheless, there are two quite basic differences between.... and accounting: one pertains to the method of funds recognition, and the other is related to decision making.

The function of the accountant is to develop and provide management with.... for measuring the firm's performance, assessing its financial position, and paying taxes. By working according to standardized principles accepted within the profession, the accountant prepares.... statements. One of these principles is called the accrual method. It recognizes income at the point of sale and recognizes expenses when incurred. On this basis, taxes are paid and a good overall view of the firm's performance can be gained. On the other hand, the financial manager must worry about the firm's solvency, i.e. having adequate funds on hand to satisfy operational needs. He therefore places primary emphasis on cash...., the intake and outgo of cash. This is referred to as the cash method of recognizing income and expenses only when actual cash inflows and outgoes occur. The example shows that accrual accounting does not adequately describe a firm's circumstances. Consequently a financial manager must use supplementary statements to gain insight. Knowledge about cash flows enables him to avoid.....Accountants are of course aware of the significance of cash flows, but their emphasis must be placed on the accrual method, whereas the financial manager relies on cash flow methods as well.

The essential difference between finance and accounting lies in the area of decision making. While the accountant works on the collection and presentation of financial data, the financial manager.... the accountant's statements, prepares supplementary data, and analyzes the totality of this material. On this basis he makes decisions about actions to be taken by the firm. The primary focus of.... is therefore distinctly different from that of finance. The accountant provides data and statements about the firm's past, present and projected future operations. The financial manager uses these data together with.... material in his decision-making process. The financial manager thereby moves closer to the activity of the general manager.

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