Questions and Answers
What is the main difference between profit maximization and wealth maximization?
Why might profit maximization not lead to the highest possible share price?
What issue can arise, even when a firm is profitable?
In the context of long-term and short-term strategies, which concept accounts for both?
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What is an essential factor that wealth maximization incorporates, which profit maximization overlooks?
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How does increased risk typically affect a firm's share price?
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What is the main concern of social responsibility for an organization?
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Which of the following is NOT considered a basic element of social responsibility?
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How should socially responsible companies frame their policies?
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Which of the following best describes the relationship between profit maximization and social responsibility?
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What is a significant advantage of cooperatives regarding member voting rights?
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Which of the following is not considered a disadvantage of cooperatives?
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What does finance primarily study in relation to economic resources?
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What is one consequence of the restrictions placed by the Cooperative Code?
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What is a primary economic principle emphasized in managerial finance?
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What method do accountants primarily use for recognizing revenues and expenses?
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What is a primary responsibility of the financial manager?
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Which of the following activities is NOT typically associated with a treasurer's role?
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What do investment decisions in finance primarily concern?
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Which type of decisions does a finance manager make regarding obtaining necessary funds?
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What is a key advantage of partnerships compared to sole proprietorships?
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What disadvantage related to partnerships involves the stability of the business?
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Which characteristic distinguishes a corporation from a partnership?
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What is a significant disadvantage faced by corporations that affects their profitability?
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In terms of ownership, what is a defining requirement for cooperatives?
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Which of the following is an advantage of forming a corporation?
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What is a common disadvantage associated with partnerships?
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What legal power is unique to corporations compared to other business structures?
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Study Notes
Accounting Profit
- Defined as net income after deducting direct costs and expenses from total revenue.
Profit Maximization vs Wealth Maximization
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Profit Maximization:
- Ignores the time value of money.
- Does not consider uncertainty of future earnings.
- Fails to differentiate between short-term and long-term profits.
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Wealth Maximization:
- Considers the time value of money.
- Accounts for risk factors affecting future earnings.
- Incorporates strategies for both short-term and long-term profit optimization.
Investment Analysis
- Investment A totals P 28.00 over three years with earnings of P 14.00, P 10.00, and P 4.00.
- Investment B totals P 30.00 with earnings of P 6.00, P 10.00, and P 14.00.
- Investment choice isn't clear-cut; profit maximization may not yield the highest share price due to factors like timing, cash flow availability, and risk assessment.
Timing and Cash Flow
- Receiving funds sooner is preferred; timing affects project profitability and valuation.
- It is possible for a profitable firm to experience cash flow issues due to mismatched expense and revenue timing.
Risk Consideration
- Profits do not equate to guaranteed cash flows; cash is essential for business operation.
- Risk affects share prices inversely, necessitating a balance between risk and return in financial strategies.
Social Responsibility
- Social responsibility extends beyond profit maximization to encompass ethical and societal commitments.
- Businesses are encouraged to promote societal well-being while minimizing negative impacts.
Elements of Social Responsibility
- Entity: Can be an organization or individual.
- Social Awareness: Recognizes responsibilities to the environment and society.
- Goals: Businesses aim to thrive and maximize profit while contributing positively to society.
Business Structures
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Partnerships:
- Advantages include shared talents and easier capital raising.
- Disadvantages involve unlimited liability and potential for internal disagreements.
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Corporations:
- Legally recognized, can own property, and engage in contracts.
- Advantages include limited liability and perpetual existence;
- Disadvantages involve regulatory burdens and double taxation on profits.
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Cooperatives:
- Owned collectively, requiring a minimum of 15 members, and formed under specific laws.
- Advantages include tax exemptions and ease of formation;
- Disadvantages include management challenges and restrictions on profit distribution.
Differences Between Finance and Accounting
- Finance emphasizes cash flows and actual inflows/outflows; accounting relies on accrual methods.
- Financial managers focus on cash timing, while accountants recognize revenues and expenses based on transactions, not cash flow timing.
Role of Financial Managers
- Administer finances across business types, manage cash, secure financing, oversee pension plans, and mitigate risks.
- Responsible for investment decisions (asset efficiency) and financing decisions (optimal funding combinations).
Key Financial Managerial Activities
- Investment Decisions: Focus on asset structure and efficiency.
- Financing Decisions: Manage short and long-term financing strategies, optimizing costs associated with funding.
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Description
Explore the key concepts of accounting profit, profit maximization versus wealth maximization, and the intricacies of investment analysis. This quiz will help you understand the importance of timing and cash flow in making investment decisions, as well as the differences between strategies for achieving short-term and long-term financial goals.
