Study unit 7 The financial function and financial management

Question 1

Stakeholder

Answer 1

The word “stakeholder” refers not only to the owners and/or the shareholders of a business enterprise, but also to the investors of loan capital and, more importantly, the employees of the enterprise.

Question 2

To contribute to the goal of creating wealth, the financial manager must:

Answer 2

• cost effectively obtain the funds needed for the enterprise
• invest those funds in assets that will give the highest possible return
• analyse, plan and control the flow of funds as accurately as possible

Question 3

Balance sheet

Answer 3

There are two major sides: assets on the left, and owner’s equity and liabilities on the right.

Question 4

Assets

Answer 4

Assets refer to the “possessions” of the enterprise while liabilities refer to the “debts”.

Question 5

Equity

Answer 5

Equity refers to the money invested by the owner(s) of the enterprise. Ordinary equity does not have to be paid back to the shareholder at a specified date and no interest on the equity is payable.

Question 6

Fixed assets and Current assets

Answer 6

Fixed assets (also called non-current assets) are long term whereas current assets are more short term.
Typical current assets are cash inventory (stock) and accounts receivable. The expectation is that inventory and accounts receivable will be converted into cash during the next accounting period.

Question 7

Long term liabilities and current liabilities

Answer 7

In the same way there are long-term liabilities and current liabilities, for example a mortgage bond that is usually repaid over 20 years and bank overdrafts that are paid within a year.

Question 8

Shareholders’ funds can be split into

Answer 8

Ordinary share equity and preference share capital.

Question 9

Owners equity

Answer 9

Owners’ equity refers to ordinary shareholding (remember that the ordinary shareholders are the owners of the enterprise), and undistributed profits and reserves. In the balance sheet total assets must always equal equity plus liabilities.

Question 10

Total Cost vs Cost per unit

Answer 10

So to determine the cost per unit you have to divide the total costs by the number of units produced.
If an enterprise’s total cost is R240 000 and it manufactures 80 000 products (units), then the cost per unit will be R240 000 ÷ 80 000 = R3.

Question 11

Fixed Costs

Answer 11

Fixed cost refers to depreciation, interest, salaries, rent, or lease instalments for example, which will not change regardless of the number of units manufactured and sold.

Question 12

Variable cost

Answer 12

Variable cost refers to the costs which will increase with every additional unit manufactured and sold, for example the raw materials that went into the product and the packaging material. It follows that the greater the number of units manufactured, the higher the total variable cost will be.

Question 13

Income State

Answer 13

The income statement indicates the make-up of the profit or loss for the particular period.

Question 14

The long-term objective

Answer 14

The long-term objective of the business should be to increase its value. This will be achieved by investing in assets that add value and by keeping the cost of capital of the business as low as possible.

Question 15

The short-term financial objective

Answer 15

The short-term financial objective should be to ensure the profitability, liquidity and solvency of the business. Financial management is based on the risk-return principle (the higher the risk taken, the higher the expected return), the cost-benefit principle (discussed in section 7.4 below) and the time value of money principle (discussed in section 7.5 below).

Question 16

Why does money changes value?

Answer 16

money changes in value because of interest rates.

Question 17

All you need to know is how to calculate the present and future values.

Answer 17

For examination purposes, the discount factors and future value factors will be given, as will the cash flows at various intervals.

Question 18

Why the balance sheet, income statement and funds flow statement are essential sources of information for the financial manager:

Answer 18

This data will enable him or her to ascertain the performance and financial soundness of the business – particularly the extent to which owner or shareholder wealth is being maximised over the long term.

Question 19

x

Answer 19

The last section of this chapter deals with budgets. Make sure that you understand the differences between the various responsibility centres.

Question 20

x

Answer 20

Finally, make sure that you know the differences between the various types of operating budgets and financial budgets.