Financial Management Second Edition

Author: Liu Xingyun
Publisher:
Publish Date: 2002-06-01
Features: This textbook is written for undergraduate or early graduate students, introducing basic concepts and methods in financial management, or providing simple conclusions of important financial theories. By studying this tutorial, students can lay a solid foundation for further studies in financial management.
Chapter 1 Overview of Financial Management
Modern financial management originated in the United States in the 1950s. Over the decades, due to the continuous expansion of economic and financialization trends, as well as the gradual improvement and enrichment of research methods in financial management, financial management theory and methods have made great progress. Under market economy conditions, the level of financial management determines the survival and development of enterprises. However, financial management also varies depending on different forms of business organization.
Section 1 Business Organization Forms
There are three main forms of business organization: sole proprietorship, partnership, and corporation. In the United States, in terms of quantity, approximately 80% of businesses are sole proprietorships, while the rest are partnerships and corporations. However, in terms of turnover, about 80% is generated by corporations, with sole proprietorships and partnerships accounting for only around 20%. Since most business activities are carried out by corporations, this book will focus on analyzing financial management for corporations. However, the basic issues discussed generally apply to both sole proprietorships and partnerships.
I. Sole Proprietorship
A sole proprietorship is a business established by a single investor who is the sole owner. The owner has complete control over the business and is personally liable for its debts. Legally, the business owned by the owner is not a separate entity from their personal affairs, and the owner is fully responsible for the business's debts. From an accounting perspective, a sole proprietorship is an operating entity separate from the owner's personal affairs. The registration process for a sole proprietorship is relatively simple, and it is generally small in scale, often found in small retail stores, farms, service industries, and professions such as lawyers, doctors, and accountants.
Sole proprietorships have several important advantages. They are easy to establish without significant capital investment, do not require formal regulations, and are subject to minimal government oversight. Additionally, although the income of all types of businesses is included in the owner's personal income and is subject to personal income tax regardless of whether it is reinvested or withdrawn, sole proprietorships are exempt from corporate income tax.