Financial Management Purpose Flashcards

1
Q

What is financial management?

A

Use of financial resources to achieve key objectives

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2
Q

Main financial objective of a business?

A

Profit maximisation

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3
Q

What is a financing decision?

A

Mainly focuses on how much debt a firm uses

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4
Q

What is an investing decision?

A

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

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5
Q

What is a dividend decision?

A

Whether or not to return surplus cash to shareholders.

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6
Q

Issues with profit?

A

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

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7
Q

How does dividend decision relate to shareholder wealth?

A

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

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8
Q

What is risk management?

A

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

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9
Q

Issues with profit?

A

Historic
Does not measure liquidity or risk
Accounting policies manipulate it

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10
Q

What are distributable profits after?

A

Interest, tax and preference dividends

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11
Q

How do shareholders get wealthy?

A

Dividends received
Market value of shares

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12
Q

Market share corporate objective?

A

Certain level of market share are critical to be effective

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13
Q

Social responsibility corporate objective?

A

Environmental concerns

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14
Q

Survival corporate objective

A

In recession, short-term survival is needed

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15
Q

An example of an agent?

A

Managers acting on behalf of business owners

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16
Q

Why neglect risk management is an agency problem?

A

Greater focus on profit

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17
Q

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

A

Cutting back on investments to meet short-term targets

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18
Q

Why minimise dividend payments is an agency problem?

A

Frees up funds to use in business

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19
Q

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

A

Damages shareholder wealth

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20
Q

Corporate governance?

A

Rules and processes by which behaviour is directed

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21
Q

Goal congruence?

A

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

22
Q

Renumeration incentives

A

PRP
Share options

23
Q

What is PRP?

A

Pay or bonuses are usually related to size of profits

24
Q

What is share options?

A

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

25
Most important stakeholders
Shareholders
26
Examples of debt ratios?
Gearing Interest cover
27
Value for money characteristics?
Economy Efficiency Effectiveness
28
Financial accounts purpose
Details performance of organisation over defined period
29
Management accounts purpose
Aid management to control activities
30
Financial accounts legality
Must prepare financial accounts
31
Management accounts legality
No legal requirement to prepare management accounts
32
Financial accounts format
Law and accounting standards
33
Management accounts format
Entirely at management discretion
34
Financial accounts scope
Historic
35
Management accounts scope
Historical and future
36
Why is management accounting different from financial accounting?
Forward looking Directly used for decision making Has no set format
37
The types of financial management?
Financing Investing Dividends
38
Issue with an increase in dividends?
Will reduce the level of retained cash and increase the need for external finance (financing) for investment projects
39
Issue with an increase in capital expenditure (investing decision)?
Increases the need for finance and if internal source, reduces dividend
40
What is a quoted company?
A company which publishes financial statements. ROCE is important
41
Variance analysis use in management accounting?
May help control costs of new projects
42
What can a company do with profits?
Either pays it out as dividends Or reinvests future growth in business
43
TSR advantage (growing finance)
Hhighest returns for its investors will find it easiest to raise new finance and grow in the future
44
TSR advantage (custoemrs)
Those that are providing customers with what they require
45
TSR advantage (risk of takeover)
May become targets for hostile takeovers
46
TSR disadvantage (market imperfections)
Might not be in the public interest to allow monopolies to maximise return
47
TSR disadvantage (social needs)
It ignores social needs
48
TSR disadvantage (stakeholders)
It ignores stakeholders
49
issue with profit maximisation (market)?
Share price is often influenced more by overall stock market conditions than the company's individual performance
50
issue with profit reliabiltiy (equity)?
Value of the company's equity is more closely connected with its cash generation than accrual-based accounting profits
51
issue with profit reliabiltiy (manipulation)?
Profit is at risk of manipulation