IIBM Institute of Business Management

Financial Management

Registration. No: D20/10/DL17165

Name : Thandapani.P

Course : Master Program in Business Administration

Course Learning Access Duration – 2 Year

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Section A: Objective Type & Short Questions

Part one:

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I.Investment is the…

Answer: c) Employment of funds on assets to earn returns

II.Financial Management is mainly concerned with...

Answer: a) All aspects of acquiring and utilizing financial resources for firms activities

III.The Primary goal of the financial management is…..

Answer: c. To maximize the wealth of owners

IV.In his traditional role the finance Manager is responsible for

Answer:b.Arrangement of financial resources

V.Market Value of the shares are decided by

Answer:b. The investment market

VI.The only feasible purpose of financial management is

Answer:a. Wealth maximization

VII.Financial management process deals with

Answer:b. Financing decisions

Answer: d. All of the above

IX.Finance Function comprises

Answer: d. Procurement & effective use of funds

X.Financial management mainly focuses on

Answer: d. All elements of acquiring and using means of financial resources for financial activities

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Part Two

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1.What Is The Financial Management Reform?

Answer :

The Financial Management Reform is the new policy framework that had been adopted by the FIGI Government
to improve performance and accountability.Public Finance Management (PFM) ReformFundamental goal of
public finance management is effective use of available public resources. To achieve this goal fiscal policy is
directed towards strategic allocation of public finance; this implies effective direction of public finances to the
state’s priorities and creation of long-term stable funding package to finance these priorities.Transition from
annual to long-term planning is crucial for increasing effectiveness of the public finance management. This
change will facilitate long-term planning and reliable financing of medium-term public priorities.Improvement of
the public finance management implies transition to outcome-oriented budgeting process; this means that
budgetary resources will be allocated to finance activities to be implemented within the program framework and
to achieve goals set in the program framework.One of the central parts of the state finance management is
development of effective accountability system that will evaluate real results achieved within the fiscal policy and
compare them with planned (expected) results.Effective public finance management serves the improvement of
macroeconomic stability of the country.

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2. Why was The FMR Introduced?

Answer :

The framework has been introduced following public concern over Government’s in efficiencies and wastage as
reflected in numerous Auditor-General Reports as well as reports by international agencies on public expenditure
practices in FIJI. These reports have highlighted the need for Government to seriously address its resource
allocation and financial management processes.

3. What Changes Will The Fmr Introduce?

The FMR will strengthen and modernize the management of Government finances to:

* better align government policy priorities with budget resources;

* adopt a performance focus;

* provide more effective control over public spending;

* strengthen accountability and transparency in financial management.

The FMR will strengthen and modernize the management of Government finances to:obetter align government
policy priorities with budget resources;oadopt a performance focus;oprovide more effective control over public
spending;ostrengthen accountability and transparency in financial management

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4.What Is Financial Management Information System (FMIS)?

Answer :

FMIS is financial management software that transforms financial data into information that is useful for decision-
making. Government is in the process of acquiring a FMIS for the Whole of Government. This will replace the
current General Ledger System.

Financial Management Information Systems (FMIS) support the automation and integration of public financial
management processes including budget formulation, execution (e.g. commitment control, cash/debt
management, treasury operations), accounting, and reporting. FMIS solutions can significantly improve the
efficiency and equity of government operations, and offer a great potential for increasing participation,
transparency and accountability. Whenever FMIS and other PFM information systems (for example, e-
procurement, payroll, debt management) are linked with a central data warehouse (DW) to record and report all
daily financial transactions, offering reliable consolidated platforms can be referred to as integrated FMIS (or
IFMIS). The World Bank is a leading provider of financing and technical assistance for FMIS development.

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SECTION B: CASELETS

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Caselet:1

1.Describe briefly the legal rights and privilages of common stockholders.

Answer:

Common stockholders refer to the owners of a company and are entitled to rights and privileges. These rights and
privileges are;
Preemptive right: This is a privilege given to the company's existing shareholders to purchase a specified number
of the company's shares before the stocks are given to the outsiders. This right is provided in the company's by-
laws or charter and the shareholders can purchase the new shares on a pro-rate basis.

Voting rights: Common stockholders have a right to attend the annual general meeting to cast their votes or use a
proxy. A proxy refers to a legal document which gives one-person authority to represent another person and cast
a vote.

Control of the firm: Since common shareholders are the owners of the business, they control the firm through
their right to elect the board of directors of a company, that then appoints the management.

Right to share assets and income: The common shareholders have right to share the earnings of a company on
per-share basis. In the same way, in the event of liquidation, the common shareholders have the right claim any

assets which remains after other obligations are settled. Thus, they are the residual claimants of the assets and
income of the firm.

Rights and responsibilities of shareholders

After paying for their shares, shareholders have the right to:

(1).vote at the shareholders' meeting (if their shares have a right to vote)

(2).receive a share of the profits (dividends) of the corporation

(3).receive a share of the property of the corporation when the corporation is dissolved

(4).be notified about shareholders' meetings and attend them

(5).elect and dismiss directors

(6).approve by-laws and by-law changes

(7).appoint the auditor of the corporation (or waive the requirement for an auditor)

(8).examine and copy corporate records, financial statements and directors' reports

(9).receive the corporation's financial statements at least 21 days before each annual meeting

(10).approve major or fundamental changes (such as those affecting a corporation's structure or business
activities).

The shareholders' liability in a corporation is limited to the amount they paid for their shares; shareholders are
usually not liable for the corporation's debts.

Right to sit on the board: A very common shareholder agreement provision for a small corporation is one that
gives all the shareholders the right to sit on the board of directors or nominate a representative for that purpose.
Each shareholder agrees in the document to vote his or her shares in such a way that each one is represented on
the board, thus ensuring all shareholders an equal measure of control.
Higher shareholder approval than the CBCA: Shareholder agreements can provide that certain significant
decisions require a higher level of shareholder approval than is set out in the CBCA. For example, an agreement
might provide that a decision to sell the business must be approved

unanimously by all shareholders, whereas the CBCA requires only a special resolution (approval by two thirds of
shareholders).

Future obligations: Shareholder agreements can set rules directing how the future obligations of the corporation
will be shared or divided. For instance, each shareholder invests a minimal amount to get the business going,

looking to bank loans or other credit for growth. The shareholders could agree that, when other means of raising
funds are not available, each shareholder will contribute more funds to the corporation on a pro rata basis. This
means simply that the extent of a shareholder's obligation to fund the corporation would be determined by the

extent of that shareholder's ownership interest (the percentage of shares held) in the corporation. So, three
equal partners starting a corporation (with equal shares held by each) might sign a shareholder agreement that
each will be responsible to fund one third of any future obligations of the company through the purchase of more
shares.

Future purchase of shares: Other rules often found in shareholder agreements govern the future purchase of
shares in a corporation when no funding is needed. In such a case, the shareholders could agree to maintain the
same percentage of holdings among themselves. Three equal partners could agree that no shares in the
corporation will be issued without the consent of all shareholders/directors. Without such an agreement, two
shareholders/directors could issue shares by an ordinary or special resolution (because they control two thirds of
the votes) to themselves without including or requiring the permission of the third shareholder/director.

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Caselet:2

1.What do you think of the budgeting process?

Answer:

Preparing the base for the budget according to funding:

The first step in preparing a budget is to identify the budget goals and how they will be achieved. Factors such as
the business’s socio-economic surroundings, sales trends, etc. have to be taken into consideration for setting the
goals. Also, these goals have to be set according to the economic resources available to the company. A budget
will be of no use without proper funding.

Creating a cost buffer:

The next step in a budget is to scrutinize the costing for the business. Also, evaluating factors that can affect input
costs during the budget period has to be done. Revision of the compensation plans of the employees takes place
every year in most of the companies. Proper provisions should be created for variations in these costs and
compensation plans to make the budget realistic and achievable.
Preparation of revenue and expenditure budgets:

The next important step is to prepare different types of subsidiary budgets for the organization. Proper and
realistic forecasts for the different types of budgets such as sales, production, cash, purchase, labor and
overheads, selling, general and administrative expenses have to be made. A realistic plan for the sources of
revenue is the need for the budget period. Planning of expenditure should be accordingly as the company cannot
spend more than what it earns. Thus, the revenue target decides and dictates the expected quantum of expenses
to achieve these revenue targets.

Budgeting Process
Incorporating departmental budgets:

Smaller departments prepare their own budget in many companies. In such cases, their collection and
integration, along with the master budget, is a pre-requisite.

Incorporating bonuses:

Most of the companies have the policy of declaring bonuses for their employees at the end of the financial year
as per its financial results. Many may declare mid-year bonuses in case of exceptional performances. Such
expenses can become significant in the case of big companies. Hence, due provisions have to be made in the
budget for such unplanned giveaways.

Provision for capital expenditure:

A company may plan to incur a capital expenditure or invest in a fixed asset during the budget period. These
expenses are quite heavy and considerable by nature. Hence, after consultation from the top management, their
inclusion should be done in the budget.

Changes in the budget model and review:

After finalizing all the above steps, a review of the assumptions as per the budget model should be done. Also, a
thorough review of the entire budget is essential. If there is a need for any changes in the budget, it can be done
now.

Approval and implementation:

The budget will then go to the top management for approval. They will check if it is proper. Makers will make any
changes as per need. In case everything is fine with the budget, they will give the go-ahead for implementation.

Budgetary controls:

The implementation of the budget is not the last step in the budgetary process. The setting of proper budgetary
controls comes next. This is necessary for the comparison of the actual performance with the provisions and
estimates of the budget. Continuous reporting of variances has to be done. The management can take corrective
actions accordingly.

Importance of budgets

Proper funding according to targets

A budget sets targets for revenues and expenditure and helps to keep a check on both of them. Also, the
management can channelize funding in the right direction as per the budget provisions. The formulation of
proper strategies becomes possible as per the budget provisions. The management can also decide whether to go
for capital expenditure or not as per the availability of financial resources looking at the budget.

Helps to set priorities

A budget helps to channelize resources across various departments as per the top management’s priorities and
goals. They are in the best position to decide which department should get the maximum chunk of the budget
allocation to grow. For example, there are times when the top management will feel that the products of the
company have become obsolete and hence, are losing out to the competition. Hence, they may prefer to allocate
a bigger portion of the budget to the research and development department to develop new and better products.
This will help the company get back on track and again be ahead of the competition.

Controlled expenditure with better harmony

A budget helps to control wasteful expenditure in an organization. Because resources are scarce with any
company. Hence, their allocation in the best possible manner is necessary for maximum returns. The budget
guides the best possible utilization and allocation of resources. Moreover, it helps to maintain harmony between

various departments of the business. Each department has a pre-determined share of the budget allocated to it.
And it helps to take care of any daily arguments between them because of resource allocation.

2.What Kind of control procedure should the auditor recommed?

Answer:

Internal controls are policies and procedures put in place to ensure the continued reliability of accounting
systems. Accuracy and reliability are paramount in the accounting world. Without accurate accounting records,
managers cannot make fully informed financial decisions, and financial reports can contain errors. Internal
control procedures in accounting can be broken into seven categories, each designed to prevent fraud and
identify errors before they become problems.

Tip

The seven internal control procedures are separation of duties, access controls, physical audits, standardized
documentation, trial balances, periodic reconciliations, and approval authority.

Separation of Duties

Separation of duties involves splitting responsibility for bookkeeping, deposits, reporting and auditing. The further
duties are separated, the less chance any single employee has of committing fraudulent acts. For small businesses
with only a few accounting employees, sharing responsibilities between two or more people or requiring critical
tasks to be reviewed by co-workers can serve the same purpose.

Accounting System Access Controls

Controlling access to different parts of an accounting system via passwords, lockouts and electronic access logs
can keep unauthorized users out of the system while providing a way to audit the usage of the system to identify
the source of errors or discrepancies. Robust access tracking can also serve to deter attempts at fraudulent access
in the first place.

Physical Audits of Assets

Physical audits include hand-counting cash and any physical assets tracked in the accounting system, such as
inventory, materials and tools. Physical counting can reveal well-hidden discrepancies in account balances by
bypassing electronic records altogether. Counting cash in sales outlets can be done daily or even several times
per day. Larger projects, such as hand counting inventory, should be performed less frequently, perhaps on an
annual or quarterly basis.

Standardized Financial Documentation

Standardizing documents used for financial transactions, such as invoices, internal materials requests, inventory
receipts and travel expense reports, can help to maintain consistency in record keeping over time. Using standard
document formats can make it easier to review past records when searching for the source of a discrepancy in
the system. A lack of standardization can cause items to be overlooked or misinterpreted in such a review.

Daily or Weekly Trial Balances

Using a double-entry accounting system adds reliability by ensuring that the books are always balanced. Even so,
it is still possible for errors to bring a double-entry system out of balance at any given time. Calculating daily or
weekly trial balances can provide regular insight into the state of the system, allowing you to discover and
investigate discrepancies as early as possible.

Periodic Reconciliations in Accounting Systems

Occasional accounting reconciliations can ensure that balances in your accounting system match up with balances
in accounts held by other entities, including banks, suppliers and credit customers. For example, a bank
reconciliation involves comparing cash balances and records of deposits and receipts between your accounting
system and bank statements. Differences between these types of complementary accounts can reveal errors or
discrepancies in your own accounts, or the errors may originate with the other entities.

Approval Authority Requirements

Requiring specific managers to authorize certain types of transactions can add a layer of responsibility to
accounting records by proving that transactions have been seen, analyzed and approved by appropriate
authorities. Requiring approval for large payments and expenses can prevent unscrupulous employees from
making large fraudulent transactions with company funds, for example.

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SECTION C: APPLIED THEORY

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1.Differentiate Between Financial Management And Financial Accounting?

Answer :

Though financial management and financial accounting are closely related, still they differ in the treatment of
funds and also with regards to decision - making.

Treatment of Funds: In accounting, the measurement of funds is based on the accrual principle. The accrual
based accounting data do not reflect fully the financial conditions of the organization. An organization which has
earned profit (sales less expenses) may said to be profitable in the accounting sense but it may not be able to
meet its current obligations due to shortage of liquidity as a result of say, uncollectble receivables. Whereas, the

treatment of funds, in financial management is based on cash flows. The revenues are recognized only when cash
is actually received (i.e. cash inflow) and expenses are recognized on actual payment (i.e. cash outflow).

Thus, cash flow based returns help financial managers to avoid insolvency and achieve desired financial goals.

Decision-making: The chief focus of an accountant is to collect data and present the data while the financial
manager’s primary responsibility relates to financial planning, controlling and decision- making. Thus, in a way it
can be stated that financial management begins where financial accounting ends.

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2.Explain Briefly the Limitations of Financial Ratios?

Answer:

The limitations of financial ratios are listed below:

* Diversified product lines: Many businesses operate a large number of divisions in quite different
industries. In such cases, ratios calculated on the basis of aggregate data cannot be used for inter-firm
comparisons.

* Financial data are badly distorted by inflation: Historical cost values may be substantially different from
true values. Such distortions of financial data are also carried in the financial ratios. Information used in the
analysis is based on real past results that are released by the company. Therefore, ratio analysis metrics do not
necessarily represent future company performance.

* Seasonal factors may also influence financial data.

* To give a good shape to the popularly used financial ratios (like current ratio, debt- equity ratios, etc.):
The business may make some year-end adjustments. Such window dressing can change the character of financial
ratios which would be different had there been no such change.

* Differences in accounting policies and accounting period: It can make the accounting data of two firms
non-comparable as also the accounting ratios.

* There is no standard set of ratios against which a firm’s ratios can be compared: Sometimes a firm’s
ratios are compared with the industry average. But if a firm desires to be above the average, then industry
average becomes a low standard. On the other hand, for a below average firm, industry averages become too
high a standard to achieve.

Inflationary effects: Financial statements are released periodically and, therefore, there are time
differences between each release. If inflation has occurred in between periods, then real prices are not reflected
in the financial statements. Thus, the numbers across different periods are not comparable until they are
adjusted for inflation
 Changes in accounting policies: If the company has changed its accounting policies and procedures, this
may significantly affect financial reporting. In this case, the key financial metrics utilized in ratio analysis are
altered and the financial results recorded after the change are not comparable to the results recorded prior to

the change. It is up to the analyst to be up to date with changes to accounting policies. Changes made are
generally found in the notes to the financial statements section.

Operational changes: A company may significantly change its operational structure, anything from their
supply chain strategy to the product that they are selling. When significant operational changes occur, the
comparison of financial metrics before and after the operational change may lead to misleading conclusions
about the company’s performance and future prospects.

Seasonal effects: An analyst should be aware of seasonal factors that could potentially result in
limitations of ratio analysis. The inability to adjust the ratio analysis to the seasonality effects may lead to false
interpretations of the results from the analysis.

Manipulation of financial statements: Ratio analysis is based on information that is reported by the
company in its financial statements. This information may be manipulated by the company’s management to
report a better result than its actual performance. Hence, ratio analysis may not accurately reflect the true nature
of the business, as the misrepresentation of information is not detected by simple analysis. It is important that an
analyst is aware of these possible manipulations and always complete extensive due diligence before reaching
any conclusions.

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