Chpt 1 Financial Management Function Flashcards
Agency relationship
A description of the relationship between business owners (eg shareholders) and those acting as agents on their behalf (eg managers), expressing the idea that managers act as agents for the owners, using delegated powers to run the company in the owners’ best interests.
Corporate governance
The rules and processes by which the behaviour of a firm is directed.
Cum dividend
Cum dividend or cum div means the purchaser of shares is entitled to receive the next dividend payment.
Ex dividend
Ex dividend or ex div means that the purchaser of shares is not entitled to receive the next dividend payment.
Earnings per share (EPS)
Profits distributable to shareholders/Number of ordinary shares
Economy
Attaining the appropriate quantity and quality of inputs at the lowest cost to achieve a certain level of outputs.
Financial management
The acquisition and deployment of financial resources to achieve key objectives.
Effectiveness
The extent to which declared objectives/goals are met.
Efficiency
The relationship between inputs and outputs.
Goal congruence
The alignment between the objectives of agents acting within an organisation and the objectives of the organisation as a whole.
Stakeholders
Groups or individuals whose interests are affected by the activities of a firm.
Total shareholder return
Dividend + change in share price/Share price at the start of the year
Value for money
This can be defined as getting the best possible combination of services from the least resources, which means maximising the benefits for the lowest possible cost.
Management is responsible for
Improving coordination among employees
Controlling the operations of an organisation
Resource allocation, budgeting, and planning
Financial decisions are divided into THREE main categories, these are:
Financial decisions are mainly divided into three main categories.
These are investment decisions (where to invest surplus funds); financing decisions (how to raise finance); and dividend decisions (whether to distribute profits or retain them for investments).
Divestment decisions are covered under investment and financing decisions (depending on the circumstances).
Lastly, solvency decisions are covered under financing and dividend decisions
financial management is concerned with
It is concerned with finance decisions
It considers risk management
It is concerned with investment decisions
It is concerned with dividend decisions
primary objective of financial management
Create wealth for the shareholders
For the management to control and direct an organisation, ______ must be determined:
Objectives - The process of management starts with setting goals and devising objectives. Creating strategies, planning, budgeting, and finalising benchmarks all come at a later stage.
Calculate dividend yield for a company if total dividends paid in the year were $500,000; the total share price for the company was $20 per share; the total number of ordinary shares was 100,000.
25%
(1) “To calculate dividend yield we have to calculate the dividend per share: Dividend per share = Total dividend / Total number of shares = $500,000 / 100,000 = $5 per share Dividend yield is calculated using the formula: (Dividend paid per share / Share price at the start of the year) x 100 = ($5 / $20) x 100 = 25%”
Secondary objectives are:
Actions that promote achievement of primary objectives
Firms will usually have a number of objectives and these are often characterised as primary objectives (the reason for existence), and secondary objectives (the actions which promote the achievement of the primary objectives). Secondary objectives are objectives set to complement primary objectives.
information to decide on production over the next six months
Management Accounts - Management accounts are prepared to give information on daily operations so short-term decisions can be made. The management accounting timeframe is much shorter, with organisations preparing them on a monthly or annual basis.
which information would financial accounting provide
Annual and prior years’ profitability
Financial accounts give a historical view of the company and are usually prepared annually in accordance with company law. The financial accounts are used by parties external to the organisation, such as government bodies, potential investors and financial institutions. They do not provide detailed information for operational decision-making like management accounts do.
When making financial decisions on the long-term sourcing and controlling of the company’s resources, what must be considered?
The impact of gearing on the company’s value
Decisions on where finance can be sourced must be made. When analysing alternatives, consider the impact of different sources on the company’s gearing and risk.
How can an organisation assess if it is achieving value for money?
Benchmark its results against similar organisations
To assess value for money (VFM) objective the organisation can: (1) Benchmark against other organisations; (2) Use performance indicators to measure if value for money has been achieved; (3) Undertaking an internal value for money audit.
