Financial Management Purpose

Question 1

What is financial management?

Answer 1

Use of financial resources to achieve key objectives

Question 2

Main financial objective of a business?

Answer 2

Profit maximisation

Question 3

What is a financing decision?

Answer 3

Mainly focuses on how much debt a firm uses

Question 4

What is an investing decision?

Answer 4

Involves deciding whether or not to invest in projects (how beneficial they are to investors)

Question 5

What is a dividend decision?

Answer 5

Whether or not to return surplus cash to shareholders.

Question 6

Issues with profit?

Answer 6

Historic and not future-oriented
Does not measure liquidity and risk
Can be manipulated

Question 7

How does dividend decision relate to shareholder wealth?

Answer 7

How much a firm has spent on investments and how much finance must be raised externally

Question 8

What is risk management?

Answer 8

What type of finance to raise, how to ivnest it, and whether dividend can be paid

Question 9

Issues with profit?

Answer 9

Historic
Does not measure liquidity or risk
Accounting policies manipulate it

Question 10

What are distributable profits after?

Answer 10

Interest, tax and preference dividends

Question 11

How do shareholders get wealthy?

Answer 11

Dividends received
Market value of shares

Question 12

Market share corporate objective?

Answer 12

Certain level of market share are critical to be effective

Question 13

Social responsibility corporate objective?

Answer 13

Environmental concerns

Question 14

Survival corporate objective

Answer 14

In recession, short-term survival is needed

Question 15

An example of an agent?

Answer 15

Managers acting on behalf of business owners

Question 16

Why neglect risk management is an agency problem?

Answer 16

Greater focus on profit

Question 17

Why importance of short-term profits is an agency problem?

Answer 17

Cutting back on investments to meet short-term targets

Question 18

Why minimise dividend payments is an agency problem?

Answer 18

Frees up funds to use in business

Question 19

Why boost pay and perks for bosses is an agency problem?

Answer 19

Damages shareholder wealth

Question 20

Corporate governance?

Answer 20

Rules and processes by which behaviour is directed

Question 21

Goal congruence?

Answer 21

Alignment between objectives of agents acting within an organisation and organisation as a whole

Question 22

Renumeration incentives

Answer 22

PRP
Share options

Question 23

What is PRP?

Answer 23

Pay or bonuses are usually related to size of profits

Question 24

What is share options?

Answer 24

Selected employees are given a number of share options, where holder has a choice to subscribe

Question 25

Most important stakeholders

Answer 25

Shareholders

Question 26

Examples of debt ratios?

Answer 26

Gearing
Interest cover

Question 27

Value for money characteristics?

Answer 27

Economy
Efficiency
Effectiveness

Question 28

Financial accounts purpose

Answer 28

Details performance of organisation over defined period

Question 29

Management accounts purpose

Answer 29

Aid management to control activities

Question 30

Financial accounts legality

Answer 30

Must prepare financial accounts

Question 31

Management accounts legality

Answer 31

No legal requirement to prepare management accounts

Question 32

Financial accounts format

Answer 32

Law and accounting standards

Question 33

Management accounts format

Answer 33

Entirely at management discretion

Question 34

Financial accounts scope

Answer 34

Historic

Question 35

Management accounts scope

Answer 35

Historical and future

Question 36

Why is management accounting different from financial accounting?

Answer 36

Forward looking
Directly used for decision making
Has no set format

Question 37

The types of financial management?

Answer 37

Financing
Investing
Dividends

Question 38

Issue with an increase in dividends?

Answer 38

Will reduce the level of retained cash and increase the need for external finance (financing) for investment projects

Question 39

Issue with an increase in capital expenditure (investing decision)?

Answer 39

Increases the need for finance and if internal source, reduces dividend

Question 40

What is a quoted company?

Answer 40

A company which publishes financial statements. ROCE is important

Question 41

Variance analysis use in management accounting?

Answer 41

May help control costs of new projects

Question 42

What can a company do with profits?

Answer 42

Either pays it out as dividends
Or reinvests future growth in business

Question 43

TSR advantage (growing finance)

Answer 43

Hhighest returns for its investors will find it easiest to raise new finance and grow in the future

Question 44

TSR advantage (custoemrs)

Answer 44

Those that are providing customers with what they require

Question 45

TSR advantage (risk of takeover)

Answer 45

May become targets for hostile takeovers

Question 46

TSR disadvantage (market imperfections)

Answer 46

Might not be in the public interest to allow monopolies to maximise return

Question 47

TSR disadvantage (social needs)

Answer 47

It ignores social needs

Question 48

TSR disadvantage (stakeholders)

Answer 48

It ignores stakeholders

Question 49

issue with profit maximisation (market)?

Answer 49

Share price is often influenced more by overall stock market conditions than the company’s individual performance

Question 50

issue with profit reliabiltiy (equity)?

Answer 50

Value of the company’s equity is more closely connected with its cash generation than accrual-based accounting profits

Question 51

issue with profit reliabiltiy (manipulation)?

Answer 51

Profit is at risk of manipulation