Introduction to Finance and Investment
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Questions and Answers

What is the primary focus of management accounting?

  • External financial reporting
  • Stock market analysis
  • Tax compliance and reporting
  • Internal operating activities of the company (correct)

    • Which decision involves determining how a company should raise finance?

  • Capital budgeting decision
  • Financing decision (correct)
  • Operational decision
  • Investment decision

    • What role does a CFO typically play in a company?

  • Market analysis for investment opportunities
  • Directing daily cash management
  • Deciding on company investments (correct)
  • Maintaining stakeholder relationships

    • Which of the following best describes capital budgeting?

    <p>Determining what real assets a firm should invest in</p> Signup and view all the answers

    What constitutes working capital?

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

    Why is capital budgeting considered important for a business?

    <p>It helps prevent costly investment mistakes</p> Signup and view all the answers

    In the context of finance, what do projections of revenues exceed costs result in?

    <p>Profits for shareholders</p> Signup and view all the answers

    What kind of decisions might complicate capital budgeting analysis?

    <p>Existence of multiple profitable projects</p> Signup and view all the answers

    Which of the following is NOT one of the governance outcomes identified by King IV?

    <p>Financial stability</p> Signup and view all the answers

    Which global governance trend involves assessing the performance of boards and directors?

    <p>Evaluation of board and directors’ performance</p> Signup and view all the answers

    What is a key feature of corporate governance as per King IV?

    <p>Alternative dispute resolution</p> Signup and view all the answers

    Which of these does NOT relate to director’s responsibilities during corporate transitions such as mergers?

    <p>Director's performance evaluation</p> Signup and view all the answers

    What governance outcome is focused on ensuring that an organization maintains its trustworthiness?

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

    What is the main objective of financial management?

    <p>Maximize the value of an enterprise for its stakeholders</p> Signup and view all the answers

    What defines the role of a financial manager within an enterprise?

    <p>Managing and overseeing financial resources</p> Signup and view all the answers

    What is one important aspect of the agency problem?

    <p>It creates a misalignment of interests between shareholders and managers</p> Signup and view all the answers

    How can the forms of ownership in an organization change?

    <p>Through mergers, acquisitions, or selling shares</p> Signup and view all the answers

    What distinguishes financial accounting from management accounting?

    <p>Financial accounting is primarily for stakeholders outside the organization</p> Signup and view all the answers

    Which of the following is a key consideration in the investment decision?

    <p>Evaluating risk vs. profit of projects</p> Signup and view all the answers

    What is emphasized in sustainable wealth creation for a firm?

    <p>Balancing financial and non-financial objectives</p> Signup and view all the answers

    What does the concept of 'value chain' emphasize for a company?

    <p>Identifying activities that provide a competitive edge</p> Signup and view all the answers

    Which factor affects the changing competitive environment of an enterprise?

    <p>Innovation and technological advancement</p> Signup and view all the answers

    Which of the following is NOT one of Porter's Five Forces?

    <p>Threat of global warming</p> Signup and view all the answers

    What does 'triple bottom line' reporting include?

    <p>Financial, social, and environmental performance</p> Signup and view all the answers

    Which is a characteristic of management accounting compared to financial accounting?

    <p>Focuses on future information for decision making</p> Signup and view all the answers

    What is a financial objective often monitored by companies?

    <p>Net profit percentage</p> Signup and view all the answers

    Why is management accounting considered optional?

    <p>Information is only produced if beneficial</p> Signup and view all the answers

    What is considered the most important asset of a company?

    <p>Its good name</p> Signup and view all the answers

    What distinguishes financial accounting from management accounting?

    <p>Preparation for the entire entity</p> Signup and view all the answers

    What is one goal of environmental and social governance (ESG)?

    <p>Act as a steward of the environment</p> Signup and view all the answers

    What is a primary concern of agency theory?

    <p>Conflicts of interest between owners and managers</p> Signup and view all the answers

    In the context of agency theory, which factor can help align managers' interests with those of shareholders?

    <p>Job security</p> Signup and view all the answers

    According to shareholder theory, what is the primary duty of managers?

    <p>To maximize shareholder returns</p> Signup and view all the answers

    What did Milton Friedman assert regarding the social responsibility of business?

    <p>The main objective is to meet shareholders' objectives</p> Signup and view all the answers

    What is NOT a focus of financial reporting regulation?

    <p>Detailed breakdown of employee salaries</p> Signup and view all the answers

    Which organization is responsible for setting international financial reporting standards?

    <p>International Accounting Standards Board (IASB)</p> Signup and view all the answers

    What is a key responsibility of boards of directors in corporate governance?

    <p>To set the company's strategic aims</p> Signup and view all the answers

    Which principle is NOT part of the main principles of corporate governance?

    <p>Promotion of high executive salaries</p> Signup and view all the answers

    What is the significance of the King IV Code in South Africa?

    <p>It provides a framework for best practices in corporate governance</p> Signup and view all the answers

    Study Notes

    Introduction to Finance and Investment

    • Financial management aims to maximize enterprise value for stakeholders.
    • Financial managers play a crucial role within the organization, making strategic decisions related to finance and investment.
    • Corporate finance is interconnected with accounting and market economics.

    Organizational Forms and Objectives

    • Different organizational forms exist (e.g., sole proprietorships, partnerships, corporations).
    • Ownership structures can evolve over time, impacting the firm's objectives.
    • Balancing financial and non-financial objectives is essential for sustainable wealth creation and shareholder value maximization.

    Agency Theory and the Decision-Making Process

    • Agency problem arises from conflicts between owners and managers, leading to agency costs.
    • Differentiation between financial reporting (external) and management accounting (internal) is significant.
    • Management requires various types of information throughout the decision-making process.

    Financial Resources and Investment Decisions

    • Finance involves assessing which sources (equity, debt) to obtain and understanding associated risks and costs.
    • Investment decisions focus on which assets or projects to fund based on potential profitability.

    Roles in Corporate Finance

    • The CFO is responsible for investment decisions, while the treasurer manages cash flow and secures new capital.
    • Capital budgeting is critical to avoid costly investment mistakes.

    Competitive Environment and Strategy

    • Porter’s Five Forces model analyzes competitive advantage via customer bargaining power, threat of new entrants/substitutes, supplier bargaining power, and rivalry.

    Financial vs Non-Financial Objectives

    • Emphasis on sustainability and "triple bottom line" reporting includes financial, social, and environmental performance.
    • Financial goals include net profit percentage and return on investments, while non-financial goals focus on market share and employee satisfaction.

    Financial and Management Accounting

    • Financial accounting adheres to statutory requirements and presents standardized financial statements.
    • Management accounting provides tailored information to aid decision-making and performance evaluation.

    Environmental and Social Governance (ESG)

    • ESG goals ensure companies act as stewards of the environment and manage stakeholder relationships while promoting social responsibility.

    The Agency Problem

    • Agency theory highlights the principal-agent relationship and conflicts of interest that can arise.
    • Job security and incentive-based remuneration can align managers' interests with those of shareholders.

    Responsibilities of Principals and Agents

    • Shareholder theory prioritizes maximizing shareholder returns, while stakeholder theory seeks to balance various interests.
    • Milton Friedman emphasized the profit maximization principle.

    Ethical Considerations in Finance

    • Agents must act ethically in line with principals' priorities, with codes of conduct guiding corporate behavior.

    Regulation and Corporate Governance

    • Reliable financial reports provide insights into a company's performance and position.
    • Corporate governance frameworks dictate how companies are directed, with boards of directors overseeing management and strategic decisions.

    The King IV Code

    • The King IV Code enhances corporate governance standards in South Africa, requiring companies to comply with ethical practices and transparency.
    • Key outcomes of King IV include promoting ethical culture and effective control within organizations.
    • King IV embraces trends such as alternative dispute resolution, risk-based auditing, and enhanced oversight of board performance.

    Homework and Revision

    • Engage with comprehensive study materials and exercises to solidify understanding of financial management principles.

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    LA 1 Key Principles of Finance and Investment PDF

    Description

    This quiz covers the fundamentals of financial management, including its definition and objectives, as well as the role of financial managers. Understand how corporate finance interacts with accounting and the broader economic environment. Perfect for those looking to grasp key concepts in finance and investment.

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