Topic 1 - Introduction to financial management

Question 1

What is Financial Management?

Answer 1

Financial Management: How we use economic information within businesses to make good business decisions that make a profit for an organisation or business to maximise shareholder values.

Question 2

What stats/process are used in Financial Management to inform good business decisions?(5)

Answer 2

• Profitability
• Expenses
• Investments
• Cash
• Funding activities through credit or loans

Question 3

What is Accounting?

Answer 3

Accounting: is the process of identifying, measuring, recording, and communicating economic information to assist a range of users to make decisions.

Question 4

What is Finance?

Answer 4

Finance: a function that examines how companies source funding and informs how that money is invested

Question 5

What are the main areas of finance?(2) and what are their focuses?(3)(3)

Answer 5

1. Investments/Asset Pricing:
   - What are assets/securities worth?
   - How risky are they?
   - How to form portfolios?
2. Corporate Finance:
   - Which projects to invest in?
   - How to finance operations?
   - How to pay out earnings?

Question 6

What is Financial Management?

Answer 6

Financial management: is to maximise shareholder value through appropriate resource utilization and decision-making

Question 7

Why is finance important an important part of financial management?

Answer 7

Helps organisations decisions on what to spend, where to spend and when to spend.

Question 8

Who uses financial information(2) + provide 2 examples

Answer 8

Internal Users(within the company):

• Board of directors: determine performance of managers, and inform decisions
• Managers: understand profitability of different divisions

External Users(outside the company)

• Shareholder’s: Prospect of future dividends
• Banks: Determine credit rating

Question 9

What does a Balance Sheet do?(3)

Answer 9

• Shows the financial position of an enterprise at a particular point in time
• Shows an entities Assets, Liabilities, Equity
• Shows how all controlled resources are financed by either liability or Equity

Question 10

What does a Income Statement do?(2)

Answer 10

o Financial performance of an enterprise over a period of time.
o It shows all revenues earned and expenses incurred over a period of time

Question 11

What does a Cash Flow statement do?(1)

Answer 11

o Measures cash inflows and outflows over a period of time

Question 12

What is Financial position?

Answer 12

o Financial position: Enterprise’s set of financial resources and obligations at a point in time

Question 13

What is Financial Performance?

Answer 13

o How effective an entity is at generating at profit from operations over a period of time

Question 14

What accounting system are each of the Financial statements using?

Answer 14

Balance Sheet: Accrual
Income statement: Accrual
Cash Flow Statement: Cash

Question 15

What is Cash Accounting

Answer 15

o Recognises the impact of transactions when cash is received or paid

Question 16

What is Accrual Accounting

Answer 16

Recognises the impact of transactions when the transactions(economically meaningful event) happens.