Finance and Financial Management Basics

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Questions and Answers

What is Finance?

Finance is the science and art of managing money.

Which statement best describes the primary goal of financial management?

Increasing revenue

Expanding market share

Minimizing costs

Maximizing shareholder's wealth (correct)

What does capital structure refer to?

Capital structure refers to how much of a company's assets are financed by debt and how much is financed by equity.

The Board of Directors is responsible for approving the company's marketing strategies.

False Signup and view all the answers

What are the responsibilities of the President (CEO)?

The responsibilities include overseeing company operations and ensuring board strategies are implemented. Signup and view all the answers

Which of the following is NOT a responsibility of the VP for Administration?

Formulating marketing strategies Signup and view all the answers

What does the VP for Production need to ensure?

The VP for Production must ensure that production meets customer demands. Signup and view all the answers

What type of decisions involve financing long-term investments?

Financing Decisions Signup and view all the answers

According to Cayanan (2017), maximizing the value of __________ wealth is the main goal of a business entity.

shareholder's Signup and view all the answers

In the context of financial decision making, what is the primary goal of a business entity?

Maximizing shareholder wealth. Signup and view all the answers

Which of the following is NOT a direct responsibility of the VP for Production?

Developing a marketing strategy to increase product sales. Signup and view all the answers

How does a company's capital structure directly influence its financial decisions?

It determines the mix of debt and equity used to finance operations and investments. Signup and view all the answers

The VP for Administration plays a crucial role in coordinating which three key departments?

Administration, Finance, and Marketing. Signup and view all the answers

What is the primary goal of capital budgeting analysis in long-term investments?

To minimize the risk of financial failure. Signup and view all the answers

Which of the following aspects directly contribute to a company's cost competitiveness?

Identifying and securing cost-effective raw material suppliers. Signup and view all the answers

What is the key function of financial reporting and disclosure in a business entity?

To provide stakeholders with transparent and accurate financial information. Signup and view all the answers

What is the primary function of budgeting and forecasting in a business entity?

To plan and allocate financial resources for future operations. Signup and view all the answers

Which of the following is NOT a key aspect of operating decisions in financial management?

Evaluating the feasibility of new product development. Signup and view all the answers

What is the primary relationship between shareholder wealth maximization and financial decision making?

Financial decisions are made to ensure shareholder wealth maximization is a primary objective. Signup and view all the answers

Study Notes

Definition of Finance

Finance is the science and art of managing money, which involves lessening risks that can lead to financial loss.
Finance is an activity concerned with planning, developing, managing, administering, and increasing capital used for business purposes.
Finance comes from the Latin "finis", which means end or finish, and affects individuals, businesses, organizations, and states.

Financial Management

Financial management concerns making decisions that maximize shareholder wealth.
The main goal of a business entity is to maximize shareholder wealth.
Financial decisions made by managers affect the market's perception of the company and influence the share price.

Organizational Structure

The organizational structure plays a huge role in managing financial aspects of a business.
Each position in the structure has a contribution to making decisions that affect the whole organization.

Roles and Responsibilities in Financial Management

Board of Directors:
- Highest policy-making body in a corporation.
- Ensures the corporation operates in the best interest of stockholders.
- Responsibilities: setting policies, approving strategies, goals, and budgets, appointing top management, and determining compensation.
President (Chief Executive Officer):
- Approves financial statements and disclosures.
- Oversees company operations and ensures strategy implementation.
- Performs all areas of management: planning, organizing, staffing, directing, and controlling.
- Represents the company in professional, social, and civic activities.
VP for Marketing:
- Formulates marketing strategies and plans.
- Directs and coordinates company sales.
- Performs market and competitor analysis.
- Analyzes and evaluates marketing methods.
- Conducts or directs research for new marketing opportunities.
VP for Production:
- Ensures production meets customer demands.
- Identifies production technology/process that minimizes production cost.
- Develops a production plan that maximizes utilization of production facilities.
- Identifies adequate and cheap raw material suppliers.
VP for Administration:
- Coordinates functions of administration, finance, and marketing departments.
- Assists in hiring employees and payroll preparation.
- Provides assistance in payment of vendors and collection of receivables.
- Determines the location and maximum amount of office space needed.

Financial Decisions

Financing decisions: deciding how to finance long-term investments and working capital.
Investing decisions: minimizing the probability of failure through capital budgeting analysis.
Operating decisions: dealing with daily operations and financing working capital accounts.
Dividend policies: deciding whether to distribute profits or retain them.

Financial Management Function

The financial management function affects the whole organization, and every financial decision made has an impact on the financial aspects of the business.

Roles of Individuals in Financial Management

Board of Directors

Considered as the highest policy-making body in a corporation
Responsible for:
- Setting policies on investments, capital structure, and dividend policies
- Approving company strategies, goals, and budgets
- Appointing and removing top management members, including the president
- Determining top management's compensation
- Approving financial statement disclosures

President (Chief Executive Officer)

Responsible for:
- Approving financial statement disclosures
- Overseeing company operations and implementing board-approved strategies
- Performing all areas of management: planning, organizing, staffing, directing, and controlling
- Representing the company in professional, social, and civic activities

VP for Marketing

Responsible for:
- Formulating marketing strategies and plans
- Directing and coordinating company sales
- Performing market and competitor analysis
- Analyzing and evaluating the effectiveness and cost of marketing methods applied
- Conducting research to identify new marketing opportunities
- Promoting good relationships with customers and distributors

VP for Production

Responsible for:
- Ensuring production meets customer demands
- Identifying production technology/process that minimizes production cost and makes the company cost-competitive
- Coming up with a production plan that maximizes the utilization of the company's production facilities
- Identifying adequate and cheap raw material suppliers

VP for Administration

Responsible for:
- Coordinating the functions of administration, finance, and marketing departments
- Assisting other departments in hiring employees
- Providing assistance in payroll preparation, payment of vendors, and collection of receivables
- Determining the location and the maximum amount of office space needed by the company
- Identifying means, processes, or systems that will minimize the operating costs of the company

Financial Management Decisions

Financing decisions: making decisions on how to finance long-term investments and working capital
Investing decisions: making decisions on long-term investments supported by capital budgeting analysis
Operating decisions: dealing with the daily operations of the company, especially on how to finance working capital accounts such as accounts receivable and inventories

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Description

Learn the fundamentals of finance and financial management, including the science and art of managing money, risk management, and maximizing business capital.