Chapter 1 - Role Of The Financial Manager

Question 1

Role of the Financial manager

Answer 1

Primary focus is the acquisition, financing and management of assets to maximize shareholder wealth.

Responsible financial planning(forecasts and budgets): This enables financial managers to

• assess business’s available funds and future funding requirements
• assess key areas of the business that influences sales and profit growth
• assess capital requirements
• assess business’ future resource demands

Question 2

Financial forecast

Answer 2

Here a financial manager will use historical financial data to predict what will happen in the next few months.

These are prepared 3 times a year and concern the financial expectations of the current financial year.

Forecast 1 - prepared 3 months into the year
Forecast 2 - prepared 6 months into the year
Forecast 3 - prepared 9 months into the year

Question 3

Define A budget

Answer 3

A financial plan of the financial year immediately following the current year

• prepared annually in the last quarter of the financial year preceding budget period

Question 4

Define financial control

Answer 4

The financial manager compares and contrasts financial information by comparing actual performance against prior year, forecast and budgeted information and by using ratio analysis

Question 5

Investment decisions

Answer 5

A financial manager needs to determine the

Short term investments:
by employing working capital management policies to ensure money is available to meet working capital.

Medium to long term investments: assessing projects using capital investment tools to allow planned investments in non current assets

Key investment decisions include:

Taking on new projects
Embarking on research and development
Investing or selling property, plant or equipment

Question 6

Define Agency Relationship Problem

Answer 6

When the objectives of the FM don’t align with the objectives of the business

Asymmetrical information is present because FM have much more info than shareholders

The FM might place their own personal obj above that of the business, posing a risk to the creation of shareholder wealth

Question 7

Ethical standards and codes

Answer 7

These insure the business is run in a professional effective manner

Question 8

Key differences between profit maximization and shareholder wealth maximization:

Answer 8

Timing of returns

Cash flows

Risk