Financial Management Chapter 3

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Questions and Answers

What is a crucial consideration when making long-term investment decisions?

Capital budgeting techniques (correct)

Taxation of employees

Market share analysis

Employee satisfaction

Which factor does NOT influence the decision to declare a dividend?

Share market prices

Trend of earnings

Cash flow situation

Employee bonus structure (correct)

What is a primary objective of asset management policies?

Efficient management of inventories and cash (correct)

Enhancing brand reputation

Maximizing employee turnover

Increasing market shares

Which of the following is NOT typically considered in the balance between cash needs and shareholder returns?

Investment in employee training Signup and view all the answers

How should long-term funds be allocated for investment purposes?

After thorough analysis of capital budgeting and uncertainties Signup and view all the answers

Which of the following is NOT a consideration for dividend decisions?

Diversification of portfolio Signup and view all the answers

What impacts the requirement of funds for future growth in financial management?

Future business opportunities and projects Signup and view all the answers

What does effective asset management include?

Management of trade creditors and cash Signup and view all the answers

What is the primary function of finance in an organization?

Procurement of funds and their optimum utilization Signup and view all the answers

Which of the following is NOT a function of a financial controller?

Evaluating long-term investments Signup and view all the answers

What is the role of a treasurer in a firm?

Custodian and manager of cash resources Signup and view all the answers

Which statement best describes financial management?

It involves managing and financing resources effectively. Signup and view all the answers

Which of the following is a key assignment of a financial executive?

Obtaining funds at the lowest capital cost Signup and view all the answers

What aspect of financial management involves long-term asset management?

Capital budgeting process Signup and view all the answers

Which of the following resources is NOT typically considered a financial resource?

Human resources Signup and view all the answers

What does effective financial management primarily aim to achieve?

Efficient use of funds and optimal sourcing of additional funds Signup and view all the answers

Which of the following are included in current assets?

Cash and short-term investments Signup and view all the answers

What does fixed assets typically include?

Vehicles and machinery Signup and view all the answers

Which of the following is classified as a long-term liability?

Debentures Signup and view all the answers

What is included in miscellaneous assets?

Preliminary expenses Signup and view all the answers

Which of the following accurately describes reserves on a balance sheet?

They consist of free reserves and surplus Signup and view all the answers

What are intangible assets primarily composed of?

Patents, copyrights, and trademarks Signup and view all the answers

Which of the following would be classified as current liabilities?

Outstanding advances from customers Signup and view all the answers

What is share capital categorized as on a balance sheet?

The paid-up portion of share capital Signup and view all the answers

What type of transactions are recorded in a cash book?

All cash and cheque transactions Signup and view all the answers

What is the basis for making entries in the sales book?

Invoices/bills addressed to customers Signup and view all the answers

When are adjustments recorded using debit and credit notes?

For cancellations and reductions of purchases or sales Signup and view all the answers

Why is a journal used in accounting?

For transactions that cannot be recorded in other books Signup and view all the answers

What must happen after recording transactions in the book of prime entry?

They have to be posted to the ledger Signup and view all the answers

Which of the following is NOT a book of prime entry?

Trial balance Signup and view all the answers

What information does each account in the ledger represent?

A summarized record of transactions for that specific account Signup and view all the answers

What is one of the primary purposes of internal reporting of financial statements?

To motivate to achieve better performance Signup and view all the answers

How often should ledger accounts be balanced?

At least once a year Signup and view all the answers

Which of the following is NOT a segment included in the income and expenditure statement?

Personal income tax Signup and view all the answers

In a balance sheet, where are liabilities recorded?

On the left side Signup and view all the answers

What must the total of the liabilities equal to in a balance sheet?

Total assets Signup and view all the answers

Which group is primarily served by external reporting of profit and loss account?

Shareholders Signup and view all the answers

What does the balance sheet NOT provide information about?

Revenue generation Signup and view all the answers

What does the equation 'Owner’s fund + Borrowed fund = Total assets' represent?

Balance sheet equation Signup and view all the answers

Which of the following is true regarding assets?

They are used to earn profit. Signup and view all the answers

Study Notes

Financial Management Overview

Finance refers to the money resources available to governments, firms, or individuals, along with managing these resources.
Financial management involves acquiring, managing, and financing resources with an emphasis on efficient fund usage and identifying favorable funding sources.

Accounting vs. Finance

Accounting provides a systematic way to collect, summarize, analyze, and report financial information for various stakeholders.
Finance focuses on procuring funds and their optimal utilization, with responsibilities including assessment of capital requirements, securing funding, and ensuring effective fund use.

Role of Financial Controller

Designs and operates accounting systems.
Prepares financial statements and reports.
Establishes systems and procedures for financial processes.
Supervises internal and external audits.
Manages cost control, budgeting, forecasting, and reporting to top management.

Role of Treasurer

Manages the firm's cash and near-cash resources.
Handles credit reviews and receivables collection policies.
Maintains relationships with banks and financial institutions.

Key Functions of Financial Management

Executive Functions: Invests in long-term assets and secures financing from internal and capital markets.
Investment Decisions: Involves careful evaluation and capital budgeting to determine appropriate project funding, including scrutiny of asset management policies.
Dividend Decisions: Considers earnings trends, market conditions, future funding needs, and shareholder tax positions when declaring dividends.

Reporting Financial Performance

Internal Reporting: Facilitates decision-making, performance appraisals, motivation improvement, coordination, and future planning.
External Reporting: Involves presenting financial statements to shareholders, banks, tax authorities, and government entities.

Income and Expenditure Statements

Shows a summary of income and expenses during a specified period.
Components include sales, non-sales income, manufacturing costs, administrative costs, selling and distribution costs, finance costs, and non-operating costs.

Balance Sheet Fundamentals

Reveals a company’s assets and liabilities; assets listed on the right, liabilities on the left.
Total assets must equal total liabilities to depict accurate financial positioning.
Equations include:
- Total liabilities = Total assets
- Owner’s funds + Borrowed funds = Total assets

Asset Classification

Current Assets: Cash, short-term investments, receivables, inventories, prepayments, and advances.
Fixed Assets: Land, machinery, furniture, recorded at written down value.
Miscellaneous Assets: Include deferred expenses and accumulated losses.
Intangible Assets: Such as goodwill and intellectual property.

Liability Classification

Current Liabilities: Include trade creditors, short-term loans, advances from customers, and proposed dividends.
Long-Term Liabilities: Comprise debentures, long-term loans, and convertible bonds.
Reserves: Various reserves including capital, general, and surplus.
Share Capital: Constitutes the paid-up portion of equity and preference shares.

Record Keeping

Companies must maintain books of accounts to track money received and spent, assets, and transactions.
Cash Books: Document all cash transactions and balances.
Sales/Purchase Books: Record sales and purchases based on invoices.
Debit/Credit Note Registers: Manage adjustments due to returns or discounts.
Journals: Capture transactions not covered in other books, including adjustments and closing entries.
Ledger: Summarizes transactions from all primary entry books, documenting dual aspects for clarity on accounts.

Accounting Procedures

Record transactions in primary entry books.
Post entries from primary books to the ledger.
Balance ledger accounts periodically, ensuring accounts reflect accurate financial status.

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Description

This quiz delves into the fundamental concepts of financial management as outlined in Chapter 3. It covers the acquisition, management, and financing of resources, emphasizing the importance of understanding money resources in various contexts. Prepare to test your knowledge of key financial principles and their applications.