Introduction to Functional Areas of Management Unit 5

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?

Fixed capital needs are constant, while variable capital needs are occasional Signup and view all the answers

What is the primary function of the money market?

To provide short-term loans to businesses 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?

Medium-term capital Signup and view all the answers

What is the main purpose of capital in a business?

To acquire assets and facilitate business operations 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?

Capital market Signup and view all the answers

What is trade credit?

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

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

Assets are used to finance liabilities Signup and view all the answers

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

Balance Sheet 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?

Liabilities Signup and view all the answers

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

Current assets Signup and view all the answers

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

Investment Signup and view all the answers

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

Liquidity 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?

Solvency 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?

Profitability ratio Signup and view all the answers

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

Profitability of own capital Signup and view all the answers

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

Increases the profitability of own capital 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?

Financing Signup and view all the answers

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

To ensure the optimal use of assets Signup and view all the answers

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

The flow of funds to and from the enterprise Signup and view all the answers

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

Compensation and repayment of funds Signup and view all the answers

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

Investment decision Signup and view all the answers

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

To function successfully and generate funds Signup and view all the answers

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

To answer questions related to asset acquisition and financing 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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Description

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