A Theory

Question 1

What is financial management?

Answer 1

The management of activities associated with acquiring and using short- and long-term financial resources

Question 2

What does an increase in dividends reduce?

Answer 2

Reduce the level of retained cash and increase the need for external finance (the financing decision) to fund capital investment projects (the investment decision)

Question 3

What does an increase in asset expenditure increase??

Answer 3

The need for finance (the financing decision)

Question 4

How can financial accounting influence financial management?

Answer 4

Directors of quoted companies need to consider the effect of investment decisions on key financial ratios such as return on capital employed

Question 5

How can managemen accounting influence financial management?

Answer 5

Analysis of costs into fixed and variable elements may assist financial management decisions

Question 6

What are profit goals (corporate objectives)

Answer 6

Objectives which lead directly to increased profits

Question 7

What are surrogate profit goals (corporate objectives)

Answer 7

Objectives which lead indirectly to increased profits

Question 8

What are constraints on profit (corporate objectives)

Answer 8

Objectives restricting profit

Question 9

What are dysfunctional goals (corporate objectives)

Answer 9

Objectives which do not provide a benefit even in the long run

Question 10

Maximising shareholder wealth (finance)

Answer 10

The company that provides the highest returns for its investors will find it easiest to raise new finance and grow

Question 11

Maximising shareholder wealth (takeovers)

Answer 11

Companies that fail to provide adequate returns may become targets for hostile takeover

Question 12

Criticism of maximising shareholder wealth (social)

Answer 12

It ignores social needs like health, education, police and so on

Question 13

Criticism of maximising shareholder wealth (imperfections)

Answer 13

It ignores market imperfections − it might not be in the public interest to allow monopolies to maximise returns as this may cause high consumer prices

Question 14

Why is it hard to maximise TSR?

Answer 14

A listed company’s share price is often influenced more by overall stock market conditions than its own performance

Question 15

Why is profit maximisation and EPS not a reliable proxy for shareholder wealth maximisation? (cash)

Answer 15

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

Question 16

Why is profit maximisation and EPS not a reliable proxy for shareholder wealth maximisation? (reporting)

Answer 16

Excessive pressure to maximise profits can lead to data manipulation and, in extreme cases, fraudulent financial reporting.

Question 17

Why is EPS not a reliable proxy for shareholder wealth maximisation? (boosted)

Answer 17

EPS can be cosmetically boosted by undertaking a share consolidation

Question 18

What is meant by economy?

Answer 18

Securing resources as economically as possible, that is minimising the input costs of the organisation

Question 19

What is meant by efficiency?

Answer 19

Employing resources as efficiently as possible within the organisation, that is maximising the output/input ratio

Question 20

What is meant by effectveness?

Answer 20

Using resources as effectively as possible to meet the organisation’s objectives

Question 21

How can performance be measured in non-profit organisations (comparison)

Answer 21

Comparisons to other similar bodies (e.g. for the public sector) or against historical results

Question 22

How can performance be measured in non-profit organisations (subjective)

Answer 22

Using judgments by experts, accepting that measurement must, to some extent, be subjective

Question 23

Agent’s responsibility when shareholders are the principal and directors are the agent?

Answer 23

Generate maximum return for shareholders

Question 24

Agent’s responsibility when directors are the principal and employees are the agent?

Answer 24

Work to maximum efficiency

Question 25

Agent's responsibility when loan creditors are the principal and shareholders are the agent?

Answer 25

Minimise risk from uses of borrowed funds

Question 26

Equity shareholders objective?

Answer 26

Maximum wealth

Question 27

Directors objective?

Answer 27

Renumeration, power and esteem

Question 28

Employees objective?

Answer 28

Pay and conditions, job security

Question 29

Loan creditors objective?

Answer 29

Security, cash flow, long-term prospects

Question 30

Trade creditors objective?

Answer 30

Short-term cash flow

Question 31

Community objective?

Answer 31

Environmental issues, community support

Question 32

What personal objectives do directors have?

Answer 32

Maximising bonus payments Empire building

Question 33

What can directors sometimes be guilty of (creative)

Answer 33

Use creative accounting, which can flatter the accounts

Question 34

What can directors sometimes be guilty of (takeover)

Answer 34

Reject takeover offers, with the directors' protecting their jobs rather than acting in the shareholders’ interests

Question 35

Encouraging goal congruence between directors and shareholders (activism)

Answer 35

Increased shareholder activism

Question 36

Encouraging goal congruence between directors and shareholders (governance)

Answer 36

Improved corporate governance

Question 37

Encouraging goal congruence between directors and shareholders (long-term incentive plans)

Answer 37

Paying a bonus to directors if the company's performance over several years is good when benchmarked against competitors

Question 38

Good governance (board)

Answer 38

Every company should be headed by an effective board which should lead and control the company

Question 39

Good governance (balance)

Answer 39

The board should have a balance of executive and independent non-executive directors

Question 40

Good governance (renumeration)

Answer 40

No director should be involved in setting their remuneration

Question 41

Good governance (internal control)

Answer 41

The board should maintain a solid system of internal control to safeguard shareholders' investment and the company's assets