Finance Effects Economy - Essay Example

A finance student studies a bachelor degree in business administration with a major in finance. The purpose of this paper is to discuss and describe the history of finance, how it affects the economy, and areas of specialization in finance. The field of finance as we know it today began in the 1950’s. When finance education started it was often part of the curriculum of economics or a part of business administration. Today the focus of the finance major is integrated as part of a business administration education.

The majority of undergraduate finance degrees in the U.S. are part of a business curriculum, but at the graduate level finance is often taught based on the economic approach (Miller). One of the primary focuses of a finance education is to teach students how to make better decisions. Finance professionals are supposed to be able to maximize shareholders wealth (Besley & Brigham). The finance field is often referred to as the cousin of accounting due to the fact that a lot of the concepts and data used in finance come from accounting information.

Many small companies integrate the accounting and finance departments. Two extremely important financial concepts in finance, risk and return, were first introduced to the general public by Harry Markowitz in 1952 in his publication Portfolio Selection published in the Journal of Finance. The work finance people perform in an organization is very important. For instance once the accountant completes the accounting cycle and prepares the financial statements the finance people can analyze the information to determine the financial performance of the company.

The four major financial statements are the income statement, balance sheet, statement of retained earnings, and statement of cash flow. The income statement measures the profitability of a company, while the balance sheet illustrates the financial condition of a company at a specific point in time. The statement of cash flow is composed of three sections: operating, financing, and investments. The financial statements for the entire fiscal year are included within the contents of the annual report.

Public companies also release quarterly financial statements to comply with the regulations of the Security and Exchange Commission (SEC). Three financial analysis the can be used to analyze the financial statements are ratio analysis, vertical analysis, and horizontal analysis. Ratio analysis is a tool that is often used by finance professionals. The five categories of ratio analysis are liquidity, solvency, profitability, activity, and coverage ratios (AccountingExplained). Horizontal analysis can be used to compare the different items or elements of the financial statements against the performance of the previous accounting period.

The objective of vertical analysis is to report each amount or item in the financial statement as a percentage of another item. When performing vertical analysis on an income statement all the items of the statement are typically compared against the sales total of the company. The discipline of finance can also be used for other analytical purposes. Financial managers often have to evaluate the firm’s valuation and the valuation of other companies that the firm might invest in. A financial model to evaluate the risk of a