Module 1 Flashcards
What is the most critical resource required to venture into a new project or business?
Capital
Why is finance considered the starting point for any business?
It is necessary for the successful implementation and functioning of the project
According to Guthumann and Dougall, how can business finance be broadly defined?
As the activity concerned with planning, raising, controlling, and administering the funds used in the business
How does Wheeler define financial management?
As the business activity concerned with the acquisition and conservation of capital funds in meeting financial needs and overall objectives
What is the focus of financial management according to Howard and Upton?
The application of planning and control functions to the finance functions
True or False: Financial management is an integral part of overall management.
True
Fill in the blank: Financial management involves the application of general management principles to _______.
Financial resources of the enterprise
What are the two major parts into which finance can be classified?
Public Finance and Private Finance
List the components of Public Finance.
- Government Institutions
- State Governments
- Local Self-governments
- Central Government
List the components of Private Finance.
- Personal Finance
- Business Finance
- Finance of Non-profit Organizations
What is Public Finance?
Concerns requirements, estimations, receipts, revenue, and disbursement of Governments such as Central Government, State Government, Local Self-governments, and Semi-Government financial matters.
Public finance is essential for understanding how government finances operate and the impact on the economy.
What does Private Finance include?
Individuals, Firms, Business or Corporate financial activities undertaken to meet financial requirements.
Private finance focuses on the financial decisions made by non-governmental entities.
Define Personal Finance.
Deals with the needs an individual has in his/her daily life to manage their personal finances.
Personal finance encompasses budgeting, saving, investing, and planning for future financial needs.
Why is efficient utilization of funds important in financial management?
Funds available at one’s disposal is limited, hence efficient utilization is important.
Efficient fund management ensures that resources are allocated optimally to meet various financial needs.
What does financial management study?
Principles, practices, and problems of profit-making engaged in the field of industry, trade, and commerce.
This study helps organizations maximize profits while managing risks.
List the classifications of Business Finance.
• Sole-proprietary finance
• Partnership firms’ finance
• Company or Corporation finance
Each classification has its own regulatory framework and financial needs.
How do the financial needs of a sole proprietary concern differ from a partnership firm?
The financial needs and the nature of operation are different for each type of business.
This difference affects how they secure funding and manage finances.
Fill in the blank: The principles of financial management can also be applied to _______ requirements.
[individual]
Individuals can use financial management principles to make informed decisions about their finances.
True or False: Financial management is only applicable to large corporations.
False
Financial management principles can be applied to individuals and businesses of all sizes.
What is the primary role of the finance function in an organization?
The finance function helps a business in various ways, including financial planning, decision-making, and resource allocation.
The need for funds is continuous, requiring coordination with all business functions.
What are the key aspects of financial planning?
Financial planning forecasts financial needs and examines sources available to raise funds.
It is important for both short and long-term needs.
List the importance of financial management.
- Financial planning
- Identifying potential areas for fund usage
- Taking sound financial decisions
- Applying financial controls
- Increasing wealth of shareholders
- Mobilizing savings
These points highlight the multifaceted role of financial management.
What is the focus of the Traditional Approach to Finance?
The Traditional Approach focuses on the procurement of funds only and emphasizes long-term funds.
It ignores effective utilization and day-to-day financial problems.
How does the Modern Approach to Finance differ from the Traditional Approach?
The Modern Approach emphasizes both raising funds and their effective utilization, considering costs and returns.
It takes an analytical approach to financial problems.
What are the three basic management decisions within the scope of finance?
- Investment decisions
- Finance decisions
- Dividend decisions
These decisions are crucial in the financial management process.
Fill in the blank: The Traditional Approach to finance was prevalent during the _______.
[1920s and 1930s]
True or False: The Modern Approach to Finance ignores the cost of raising funds.
False
What does financial control aim to maintain and improve?
Profitability
Financial control is essential for ensuring that an organization meets its financial goals.
What is a key consequence of the Traditional Approach’s myopic outlook?
It led to the advent of the Modern Approach.
The limitations of the Traditional Approach highlighted the need for a broader perspective in financial management.
What does financial management cover?
Financial planning, raising funds, allocation of funds, financial control
What is the main objective of every economic activity?
Profit maximization
Why is profit considered essential for a business?
It is necessary for survival and efficiency
What does profitability measure in a business?
Efficiency and economic prosperity
How do changing economic conditions affect businesses?
They impact survival and profitability
What is one source of finance for businesses?
Retained earnings from profits
What are profits essential for besides growth?
Paying employees fairly and providing returns to investors
How does profit maximization relate to social goals?
It maximizes socio-economic welfare
What is a criticism of the term profit?
It is vague and lacks a precise definition
What is one difference between short-term and long-term profits?
They are understood differently by different parties
How does the concept of time value of money relate to profit maximization?
It ignores the timing and magnitude of earnings
Fill in the blank: The term profit before tax is different from _______.
profit after tax
True or False: Operating profit is the same as profit available to shareholders.
False
What concept does the traditional approach to financial management ignore?
The concept of time value of money
It treats earnings in different periods equally, failing to recognize that cash earned today is more valuable than cash earned in the future.
How does the traditional approach view earnings earned in different time periods?
It treats them equally
This approach does not consider the timing of earnings.
What is a key factor that the traditional approach to financial management does not consider regarding earnings?
The risk of prospective streams of earning
Projects may have different levels of risk, affecting their market value.
If two firms have the same expected earnings per share (EPS), what might affect their market value?
The riskiness of their earning streams
A riskier earning stream will lead to a lower market value for its shares.
What effect does the traditional approach overlook concerning dividend policy?
The effect of dividend policy on the market price of shares
EPS as the only objective may lead firms to avoid paying dividends.
What is the primary objective of the wealth maximization approach?
Maximizing the wealth of shareholders
This involves increasing earnings per share and maximizing the net present worth of the company.
Wealth maximization is also known as what?
Value maximization or net present worth maximization
It is a universally accepted concept in business.
How is a shareholder’s current wealth in a firm calculated?
No. of shares X Current stock price
Symbolically represented as Wo = NPo.
What does wealth represent in the context of financial management?
The difference between gross present worth and the investment required
Gross present worth involves the capitalized value of expected benefits.
What is the Wealth Maximization approach concerned with?
The amount of cash flow generated by a course of action
It focuses on cash flow rather than profits.
What criteria should a course of action meet to create wealth?
It should have a net present worth above zero
This indicates that it creates wealth.
What rationale supports the concept of Wealth Maximization?
It serves the interests of suppliers of capital, employees, management, and society
This broad support highlights its importance in financial management.
What concept does the traditional approach to financial management ignore?
The concept of time value of money
It treats earnings in different periods equally, failing to recognize that cash earned today is more valuable than cash earned in the future.
How does the traditional approach view earnings earned in different time periods?
It treats them equally
This approach does not consider the timing of earnings.
What is a key factor that the traditional approach to financial management does not consider regarding earnings?
The risk of prospective streams of earning
Projects may have different levels of risk, affecting their market value.
If two firms have the same expected earnings per share (EPS), what might affect their market value?
The riskiness of their earning streams
A riskier earning stream will lead to a lower market value for its shares.
What effect does the traditional approach overlook concerning dividend policy?
The effect of dividend policy on the market price of shares
EPS as the only objective may lead firms to avoid paying dividends.
What is the primary objective of the wealth maximization approach?
Maximizing the wealth of shareholders
This involves increasing earnings per share and maximizing the net present worth of the company.
Wealth maximization is also known as what?
Value maximization or net present worth maximization
It is a universally accepted concept in business.
How is a shareholder’s current wealth in a firm calculated?
No. of shares X Current stock price
Symbolically represented as Wo = NPo.
What does wealth represent in the context of financial management?
The difference between gross present worth and the investment required
Gross present worth involves the capitalized value of expected benefits.
What is the Wealth Maximization approach concerned with?
The amount of cash flow generated by a course of action
It focuses on cash flow rather than profits.
What criteria should a course of action meet to create wealth?
It should have a net present worth above zero
This indicates that it creates wealth.
What rationale supports the concept of Wealth Maximization?
It serves the interests of suppliers of capital, employees, management, and society
This broad support highlights its importance in financial management.
