Introduction to Functional Areas of Management Unit 5
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Questions and Answers

What is the primary function of a financial manager in an organization?

  • To coordinate with other functional departments to achieve organizational goals (correct)
  • To make decisions without considering other departments
  • To focus solely on financial aspects of the business
  • To manage production and marketing functions
  • What is the main purpose of working capital in a business?

  • To purchase fixed assets
  • To obtain current assets and facilitate business operations (correct)
  • To pay off long-term debts
  • To invest in the stock market
  • What is the term for the capital provided by the owners of an enterprise?

  • Own capital or equity (correct)
  • Borrowed capital
  • Trade credit
  • Long-term capital
  • What is the main difference between fixed capital needs and variable capital needs?

    <p>Fixed capital needs are constant, while variable capital needs are occasional</p> Signup and view all the answers

    What is the primary function of the money market?

    <p>To provide short-term loans to businesses</p> Signup and view all the answers

    What is the term for the capital that is made available to an enterprise for a period of between one and five years?

    <p>Medium-term capital</p> Signup and view all the answers

    What is the main purpose of capital in a business?

    <p>To acquire assets and facilitate business operations</p> Signup and view all the answers

    What is the term for the market where the demand and supply of long-term funds are brought together?

    <p>Capital market</p> Signup and view all the answers

    What is trade credit?

    <p>A form of borrowed capital provided by suppliers of stock/raw materials</p> Signup and view all the answers

    What is the relationship between assets and liabilities in a business?

    <p>Assets are used to finance liabilities</p> Signup and view all the answers

    What is the graphical representation of the financial structure of an enterprise?

    <p>Balance Sheet</p> Signup and view all the answers

    What is the term for the claims of persons or institutions that provided the funds for the purchase of assets?

    <p>Liabilities</p> Signup and view all the answers

    What is the category of assets that can be converted into cash within one year?

    <p>Current assets</p> Signup and view all the answers

    What is the term for the use of capital to acquire fixed assets like land and buildings?

    <p>Investment</p> Signup and view all the answers

    What is the term for the ability of the enterprise to make all payments on a continuous basis?

    <p>Liquidity</p> Signup and view all the answers

    What is the term for the ability of the enterprise to meet its debts and satisfy any claims against it?

    <p>Solvency</p> Signup and view all the answers

    What is the ratio between the net income earned during a particular period and the capital used in that period?

    <p>Profitability ratio</p> Signup and view all the answers

    What is the term for the profit earned on the capital invested by the owners of the enterprise?

    <p>Profitability of own capital</p> Signup and view all the answers

    What is the effect of borrowed capital on the profitability of own capital?

    <p>Increases the profitability of own capital</p> Signup and view all the answers

    What is the term for the way in which a firm can attract capital to meet the capital needs of the enterprise?

    <p>Financing</p> Signup and view all the answers

    What is the main purpose of financial management in a business enterprise?

    <p>To ensure the optimal use of assets</p> Signup and view all the answers

    What is the primary concern of the Financial Function in a business enterprise?

    <p>The flow of funds to and from the enterprise</p> Signup and view all the answers

    What are the owners of a business enterprise expecting in return for providing funds?

    <p>Compensation and repayment of funds</p> Signup and view all the answers

    What is the term used to describe the process of determining the capital requirements of a business enterprise?

    <p>Investment decision</p> Signup and view all the answers

    Why is it necessary for a business enterprise to have necessary assets at its disposal?

    <p>To function successfully and generate funds</p> Signup and view all the answers

    What is the primary role of a financial manager in a business enterprise?

    <p>To answer questions related to asset acquisition and financing</p> Signup and view all the answers

    Study Notes

    Introduction to Financial Management

    • Financial management is crucial for a business enterprise to function effectively and survive.
    • Sound principles of financial management must be followed to enable a business to grow.

    Financial Function

    • A business enterprise needs assets, such as land, buildings, machinery, and equipment, to function successfully.
    • These assets require funds, also known as capital, which can be obtained from various sources, including owners and institutions.
    • The financial function is concerned with the flow of funds to and from the enterprise, including:
      • Determining capital requirements (investment decision)
      • Establishing the best way to finance these requirements (financing decision)
      • Recording transactions and reporting on financial matters

    Financial Management

    • The main purpose of financial management is to ensure the effective use of funds to achieve optimal capital structure.
    • Financial management involves answering key questions, such as:
      • What type and quantity of assets should be acquired?
      • How should these assets be financed?
      • What sources should be used to obtain capital?
      • What is the relationship between assets and liabilities, and how does it affect the rest of the firm?
    • Financial management is an important link in top management and requires coordination with other functions, such as production, marketing, and personnel.

    Important Concepts in Financial Management

    • Capital: the funds required to obtain assets, including current assets (inventory) and non-current assets (land, buildings, machinery)
    • Capital requirements: the need for funds to purchase fixed and current assets
    • Money market and capital market:
      • Money market: short-term funds (less than one to three years)
      • Capital market: medium- to long-term funds (more than three years)
    • Financial structure:
      • Assets (possessions): non-current assets (land, buildings, machinery) and current assets (cash, marketable securities, debtors, inventories)
      • Liabilities (claims): long-term funds (shareholder's interest, non-current debt) and short-term funds (current liabilities, trade creditors)
    • Investment: the use of capital to acquire fixed and current assets to generate income
    • Financing: the way a firm attracts capital to meet its capital needs
    • Liquidity: the ability of the enterprise to make payments on a continuous basis
    • Solvency: the ability of the enterprise to meet its debts and satisfy claims against it
    • Profitability: the ratio between net income and capital used to generate that income
    • Financial leverage effect: the influence of borrowed capital on the profitability of own capital

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    Learn about the importance of financial management in business enterprises and understand the sound principles to follow for growth and survival.

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