Mae Salve Sofia O.

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BSA 2A
Financial Management 101

Module 1 Nature, Purpose, and Scope of Financial Management

1. What is the difference in perspective between finance and accounting?

Financial management is a separate management area. In many
organizations, accounting and finance functions are intertwined and the finance
function is often considered as part of the functions of the accountant. Financial
management is however, something more than an art of accounting and
bookkeeping. Accounting function discharges the function of systematic recording
of transactions relating of the firm's activities in the books of accounts and
summarizing the same for the financial statements. Finance is a broad term that
describes activities associated with banking, leverage or debt, credit, capital
markets, money, and investments. Basically, finance represents money
management and the process of acquiring needed funds. Finance also encompasses
the oversight, creation, and study of money, banking, credit, investments, assets,
and liabilities that make up financial systems.

2. Explain the shareholder wealth maximation goal of the firm and how it can
be measured. Make an argument why it is a better goal than maximizing
profit.
Shareholder wealth is the appropriate goal of a business firm in a
capitalist society, whereby there is private ownership of goods and services
by individuals. Those individuals own the means of production by the
business to make money. The profits from the businesses in the economy
accrue to the individuals.When business managers try to maximize the
wealth of their firm, they are actually trying to increase the company's stock
price. As the stock price increases, the value of the firm increases, as well as
the shareholders' wealth. It is a better goal than maximizing profit for the
reasons that:
 ● It takes care of the shareholder’s interest, lender’s or creditor’s
interest, employees or workers interest.
● It focuses on achieving the long term goals of the organization.
● It takes into account the time value of money.
● It considers risk factor.
● It maintains the market price of shares of the organization.
● It recognizes the value of regular payments of dividends.
● It also ensures fair return to the shareholders building up
reserves for growth and expansion, ensuring financial discipline
of management. Wealth maximization involves the strategy for
making sound financial investments decisions which also
considers the risk factors.
● The main motive of wealth maximization is to improve the
market value of its shares where as concern of profit
maximization is to make large amount of profit.
● Wealth maximization involves the consideration of risks and
uncertainty whereas profit maximization ignores all such
factors.
● Wealth maximization involves the recognition of time pattern
of return and time value of money

3. Name and describe three (3) corporate stakeholders

The three (3) corporate stakeholders are:

#1 Customers

Many would argue that businesses exist to serve their customers. Customers
are actually stakeholders of a business, in that they are impacted by the
quality of service/products and their value. For example, passengers
traveling on an airplane literally have their lives in the company’s hands
when flying with the airline.

#2 Investors
 Investors include both shareholders and debtholders. Shareholders invest
capital in the business and expect to earn a certain rate of return on that
invested capital. Investors are commonly concerned with the concept of
shareholder value. Lumped in with this group are all other providers of
capital, such as lenders and potential acquirers. All shareholders are
inherently stakeholders, but stakeholders are not inherently shareholders.

#3 Creditor

Creditors lend money to businesses, and they couls also have a secured
interest in the company's worth. Creditors get paid back from the sale of
products or services at your business. In the event of a business shutdown,
creditors get paid before stockholders. Creditors can include banks,
suppliers, and bondholders.

4. What conflict of interest can arise between managers and stakeholders?

While stockholders and business managers are primarily
concerned with the profit performance of the business in which they are
shareholders, they have inherent conflict of interests. The conflicts between
stockholders and the managers of a business include the following:

● The more money that managers make in wages and benefits, the less
stockholders see in bottom-line net income. Stockholders obviously
want the best managers for the job, but they don’t want to pay any
more than they have to. In many corporations, top-level managers, for
all practical purposes, set their own salaries and compensation
packages.
● A public business corporation establishes a compensation committee
consisting of outside directors that sets the salaries, incentive bonuses,
and other forms of compensation of the top-level executives of the
organization. An outside director is one who has no management
position in the business and who, therefore, should be more objective
and should not be beholden to the chief executive of the business.
● This is good in theory, but it doesn’t work out that well in practice —
mainly because the top-level executive of a large public business
 typically has the dominant voice in selecting the persons to serve on
its board of directors. Being a director of a large public corporation is
a prestigious position, to say nothing of the annual fees that are
substantial at most corporations.
● The question of who should control the business — managers, who
are hired for their competence and are intimately familiar with the
business, or stockholders, who may have no experience relevant to
running this business but whose money makes the business tick —
can be tough to answer.
● In ideal situations, the two sides respect each other’s contributions to
the business and use this tension constructively. Of course, the real
world is far from ideal, and in some companies, managers control the
board of directors rather than the other way around

5. For each type of financial management decision, give an example of a

business transaction that would be relevant.
Financial Management Decisions – Three Major Decisions in
Financial Management. The Financial Management can be broken down in
to three major decisions or functions of finance. They are: (i) the investment
decision, (ii) the financing decision and (iii) the dividend policy decision.
Business transactions are: (i) Investing transactions include acquisitions of
other long-term assets, such as intangible resources (patents, for example),
rental real estate, and research projects in the development stage. For
example, a business could invest in a sports franchise, such as the Oakland
Raiders, (ii) Selling goods to a customer for cash. Selling goods to a
customer on credit. Paying wages to employees. Obtaining a loan from a
lender, (iii) When a company generates a profit and accumulates retained
earnings, those earnings can be either reinvested in the business or paid out
to shareholders as a dividend. The annual dividend per share divided by the
share price is the dividend yield.
Module 2 Relationship of Financial Objectives to Organizational
Study and Objectives

1. Suppose you were the financial manager of a non-profit business (hospital,

school etc.). What kinds of goals do you think would be appropriate?
People vary in a lot of ways, and that includes how they would
handle a job such as a financial manager of a non-profit business. If it was to
be me, here are the goals that I would do and believe that are appropriate:
● Timely dissemination of monthly, quarterly and annual financial
information to internal and external stakeholders is a significant goal
of financial management. It ensures that financial information is
prepared in accordance with accounting principles and International
Finance Reporting Standards.
● Planning Goals of Financial Management. Financial plans and
forecasts aim at facilitating efficiency in the current and future
activities of the business. The planning process seeks to match the
organization’s operational and investment activities to its overall cash
flow capabilities. Current and future cash flow projections determine
the scope of short-term and long-term plans of the business. This goal
ensures sufficient funds are sourced in good time and allocated to
different business activities. Financial planning also ensures the
business engages in profitable long-term investments. For example,
capital budgeting analyzes the financial viability and profitability of
long-term assets prior to procuring such assets.
● Managing Risks. Risk management is one of the very important goals
of business finance because it touches on one of the soft underbellies
of the business enterprise. Financial management prescribes the
appropriate contingency measures for both operational and strategic
risks. Insurance and automated financial management systems help
business owners and employees to prevent or reduce the risks from
theft, fraud and embezzlement. Internal and external auditing
processes also enhance the detection of fraud and other forms of
financial malpractices.
 ● Exerting Controls. The financial management function exerts internal
controls over financial resources. As such, the primary objective of
financial managers is the efficient use and allocation of resources
across the organization, reports the London School of Business and
Finance. Putting internal controls in place, such as who can accept and
deposit money or award supplier contracts, enhances scrutiny of
financial transactions to prevent business owners or employees from
violating financial principles or undermining transparency. The goal
of enhancing internal financial controls is pursued through oversight
by the senior financial management staff and internal auditors. Failure
to exert internal financial controls could spell unprecedented
consequences for the business
2. If a company's board of directors want management to maximize
shareholders wealth, should the CEO's compensation be set as a fixed
amount, or should it depend on how well the firm performs? If it is based to
be based on performance, how should performance be measured? Would it
be easier to measure the performance by growth rate in reported profits or
growth rate in the stocks value?
The CEO's pay ought to be remain as fixed, before expanding the
remuneration of the CEO's we should initially center and guarantee the
development of the company after that we base the pay on how well the firm
performs. It will be more simple in the event that we measure the
presentation by the development rate in the stock's worth in such a case that
the company's stocks will develop, it is additionally a sign that the
company's stocks are in high demand, it means they trust the company and it
will support the company's image.
3. What are some actions that stockholders can take to ensure that
management's and stockholder's interest are aligned?
One of the actions that stockholders can take to ensure that
managements and stockholder’s interest are alligned is Reasonable
compensation package of course they need to follow this action to avoid
doubt or suspicion of false information between those two. The other one is
direct intervention by shareholders this is an important action in order to
align their interest. Face to face interaction is a must to avoid
miscommunication within the group. So that stockholder’s can reach
 proposals even if the managements opposes the proposal but still the votes
can be heard by the top management. Third one is the threat of takeover.
Stockholders are afraid of stocks being undervalued it means that their
investments failed and if stocks are being undervalued then corporate raiders
will see it to be a bargain and will attemptto capture the firm in a hostile
takeover. If the raid is successful, the target’s executives will
almostcertainly be fired. This situation gives managers a strong incentive to
take actions to maximize theirstock’s price. This will benefit both of the
party and will align their interest, Executives will keep their jobs and
shareholder’s stocks will grow.

4. FA Enterprises recently made a large investment to upgrade its technology.

While these improvements won’t have much effect on performance in the
short run, they are expected to reduce future costs significantly. What effect
will this investment have on FA Enterprises’ earnings per share this year?
What effect might this investment have on the company’s intrinsic value and
stock price?
It is normal that the impact of this investment will diminish
and there is no possibility that the FA Enterprises' earnings per share will
increase this year on the grounds that the of that enormous venture won’t
have much effect on performance in short run but maybe the large
investment might click on the long run. But this year it will not work. The
effect of this investment might lower their stock values so that they can get
potential investors to invest in their company to recover the money that they
use on that huge investment their stocks might fluctuate because of this and
be right on track again, only if the technology that they invest will have a
huge effect on performance in the long run. They will experience the rise
and fall or vice versa of the stocks that is the effect of the investment have
on the company’s intrinsic value and stock value

Module 3 Functions of Financial Management

 1. Distinguish the role of an external auditor from the role of internal auditor.
The role of external auditor is to review the financial information of
the company and reports whatever the auditor finds. The External Auditor is
responsible for investigating financial statements for errors and frauds, performing
audits on operations and reporting findings and providing recommendation. On the
other hand, the role of internal audit is to provide independent assurance that an
organisation's risk management, governance and internal control processes are
operating effectively. To my knowledge, External auditors are not part of the
company, they are like independent auditors for hire, they are the ones who
examine the financial position of the company. In my point of view, companies
hired private external auditors to do the job to avoid bias or to avoid cover ups of
faults, error, and frauds of the company. The External auditors focuses on financial
information apart from Internal auditors job is to ensure that companies follow
proper procedures and function efficiently. They provide assurance on objectives
of the company to add more value and improve the organization’s operations.

2. Distinguish the functions of a controller from the functions of the treasurer.

The functions of a controller are:
● Developing financial strategy, including risk minimisation plans and
opportunity forecasting
● High-level financial reporting and analysis
● Regular budget consolidation
● Cash flow management
● Improving efficiencies and reducing costs across the business
● Stakeholder management
● Debt management and collection
● Preparing company tax and BAS statements
● Ensuring compliance with statutory law and financial regulations
● Developing financial reviews and providing investment advice
● Payroll processing
● Working closely with management or executive teams to share reports
and analysis findings
● Well-developed leadership skills
● Mentoring
 The functions of a treasurer are:
● General financial oversight
● Funding, fundraising and sales
● Financial planning and budgeting
● Financial reporting
● Banking, book keeping and record keeping
● Control of fixed assets and stock

The controller focuses on the activities that needs to be controlled to

ensure the stability of operations of the company. To manage activities that
improve the quality of work in the company while treasurers are the one who
controll the financials of the company they are focus on money in the company
they are the ones who manage the outflow and inflow of cash and they are
responsible for it.

3. Can our goal of maximizing the value of the equity shares conflict with
other goals, such as avoiding unethical or illegal behavior? In particular,
do you think subjects like customer and employee safety, environment and
general good of society fit in this framework, or are they essentially
ignored? Think of some specific scenarios to illustrate your answer.
The goal of maximizing the value of the equity shares doesn’t
conflict with other goals they can still find a way to avoid doing unethical or
illegal behavior by doing it in a slow and steady process and to make sure to
consider the safety, environment and general good of society making sure that they
are not ignored in the process of maximizing the value of the equity. If the
company is not going to have a goal about maximizing the value of the equity they
likely would not be in business for a long period of time. In the process of
maximizing the value the company should have full transparency to reassure the
stockholders, customer, and employee that in this framework will be good for them
and the company. Example scenario. If the retained earning increase and there are
some of new investments in the company, the company should have a meeting and
explain to the shareholders and employees the investment that they made as long as
it will be aligned with corporate views and a report about the retained or the
economy of the stocks with this it will help increase the confident of shareholders
and employees.

Module 4 Forms of Business Organizations

1. Among the three basic forms of ownership, describe the ability of each form
to access capital.
● Sole proprietorship has the ability to control and access the capital on
your own with out the permission of anyone because the owner owns
all the assets of the business and the profit generated by it. The owner
has the full responsibility of the capital.
● Partnership’s access capital depends on the contribution of a partner
or it depends on their agreement on how and who will have the most
access in their partnership capital. Both of them will have to
contribute money or asset to build a capital for their business.
● Corporation capital investment is having enough cash, loans or assets
to fund a company's operations. Banks, investors, financial
institutions, angel investors and venture capitalists are all sources of
capital investment. Just like in partnership the access capital the
members of the corporation contributes.

2. Explain how the founder of a business can eventually lose control of the
firm. How can the founder ensure this will not happen?
The founder of a business can eventually lose control of the firm if
he/she is incompetent leader. When the founder wants the business to grow
quickly, more capital is required. In the early stages of a small fast growing
company, it is equity capital that is available. In other words, the founder
must give up a portion of his/her ownership to other investors. As this
process continues over time, the founder may find that he/she no longer
owns a majority of the firm. There may come a time when enough of these
other owners that own a combined 50+% of the firm come together and
change the leadership of the firm
3. Who owns a corporation? Describe the process whereby the owners control
the firm’s management. What is the main reason that an agency relationship
exists in the corporate form of organization? In this context, what kinds of
problems can arise?
In the corporate form of ownership, the shareholders are the
owners of the firm. The shareholderselect the directors of the corporation,
who in turn appoint the firm's management. This separationof ownership
from control in the corporate form of organization is what causes agency
problemsto exist. Agency relationship exists in the corporate form of
organization because of the separation between the ownership and control.
This separation of ownership from control in the corporate form of
organization is what causes agency problems to exist. Management may act
in its own or someone else's best interests, rather than those of the
shareholders correct.