Scope and Objectives of Financial Management – CA Inter FM Study Material is designed strictly as per the latest syllabus and exam pattern.
Scope and Objectives of Financial Management – CA Inter FM Study Material
Theory Questions
Question 1.
Elucidate the responsibilities of Chief Financial Officer. (4 Marks Nov. 2011)
Answer:
One of the key person of an organisation is chief financial officer, he plays vital role in management, and his main responsibilities are:
- Financial analysis and planning: CFO estimates requirement of amount of funds to be invested in the business, size of business firm and growth of organisation.
- Investment decisions: CFO decides which asset should be purchased and which should not be.
- Financial and capital structure decisions: CFO arranges funds from various sources with consideration of cost, risk and control.
- CFO manages short term financial resources like: short term loan, over-draft, creditors etc.
- Risk Management: It is the responsibility of CFO that business assets should be risk free.
Question 2.
“The profit maximization is not an operationally feasible criterion.” Comment on it. (4 Marks May 2012)
Answer:
“The profit maximisation is not an operationally feasible criterion.” A company cannot follow profit maximisation as its sole objective. Profit maximisation is a short term objective. When a company focus on profit maximisation it starts to ignore maximizing the owner’s economic welfare. It cannot work towards economic efficiency and might be unethical.
Following are the limitations of profit maximisation approach:
- Profit is vague term: What is the meaning of profit? Is it short term profit or long term profit? Is it PAT or PBT? Term profit is not clear so company goal to maximise profit is also vague.
- Timing of Return is ignored: Profit maximisation criteria ignores concept of time value of money. If we receives any amount today then it differs from amount receivable at future date.
- It avoids the risk factor: If any organisation wants to earn higher profit then it has to accept higher degree of risk and in case of adverse situation stakeholders will suffer higher losses even in worst situation bankruptcy.
- It’s as an objective is not ethical In today’s world corporate social responsibility is very famous term which means apart from government of any country, corporates are also responsible for welfare of country’s people. When company wants to maximize its profit, company don’t take any step toward CSR even most of the time company take unethical steps.
Question 3.
Discuss the conflicts in profit verses wealth maximization principle of the firm or Distinguish between Profit maximisation and Wealth maximisation objective of the firm. (4 Marks Nov. 2012, May 2015, May 2017)
Answer:
The main two objectives of any business firm are:
A. The maximisation of firm’s profit.
B. The maximisation of firm’s wealth.
Since every business firm is established to earn profit, therefore profit maximization is as an implied objective of a business firm. To maximise profit, management may take decision which are unethical and risky. Many times results of management decisions leads to financial distress and in worst situation bankruptcy and fails to provide higher profit and growth.
Market price of share indicates value or wealth of a firm. Market price of share of any company is based on various factor like: timely payment of dividend, product or service quality, goodwill of company, CRS activities, research and development steps taken by company, present and future expected income and growth of company, timing of earning and risk associated with business etc.
The value maximisation objective of a firm is superior to its profit maximisation objective due to following reasons.
1. Business firm considers all future cash flows, dividends, earning per share, risk of a decision etc. for wealth maximisation whereas business firm does not consider the effect of EPS, dividend paid or any other returns to shareholders or the wealth of the shareholder under profit maximisation objective.
2. To maximise the shareholders wealth firm may pay regular dividends whereas a firm with the objective of profit maximisation may prefer to retain earning instead of dividend payment.
3. Shareholders of any company always prefer increase in value of shares over increase in EPS.
4. Market price of share is based on expectations of shareholders, timing of return, goodwill of company, CSR activities, product and service quality, risk associated with projects, debt equity ratio, timely distribution of income and timing of return etc.
5. The main objective of any firm is wealth maximisation and profit is a part of the wealth maximisation strategy.
Question 4.
Discuss emerging issues affecting the future role of Chief Financial Officer (CFO) or List the emerging issues (any four) affecting the future role of CFO. (4 Marks May 2014, Nov. 2016)
Answer:
Future role of Chief Financial Officer (CFO) is affected by the following major emerging issues:
- Regulation: CFOs have to look after personally in day by day increasing regulatory requirements.
- Globalisation: Globalisation creates new financial challenges in front of CFOs. Now CFOs has to develop a finance function to perform effectively on the global stage.
- Technology.-Nowadays technology is evolving very fast, and CFOs require to reconfigure finance processes and drive business insight through large data and analytics.
- Risk: Changing nature of the risks, requiring more efficient risk man-agement approaches. CFOs have a role to play in ensuring safeguard of assets.
- Transformation: CFOs have to transform their finance functions to provide a better service to the business without additional cost.
- Stakeholder Management: CFOs become the representative of business firm and responsible to handle stakeholder management and maintain principle agent relationship.
- Strategy: CFOs play a greater role in strategy validation and execution, because of increasing environment complexity and quick changing behaviour.
- Reporting: CFOs are responsible to fulfil increasing reporting require-ments.
- Talent and Capability: A person with talent, capability and good behaviour can execute the top finance role.
Question 5.
Briefly explain the three finance function decisions. (4 Marks Nov. 2017, 3 Marks Nov. 2019)
Answer:
Following are the three long term financial function decisions in financial management:
1. Investment decisions (I):
It is related to selection of assets in which long term funds will be employed. Finance manager arranged funds from various sources with consideration of cost, risk and control and invest these funds in various types of business assets. Long term funds are used to purchase fixed assets and also a portion of fixed asset is used to finance permanent current assets. Finance manager use capital bud-geting techniques to evaluate long term investment proposals.
2. Financing decisions (F):
Finance manager arranges funds from various sources with consideration of cost, risk and control. Finance manager chooses capital structure for business firm and try to maintain optimum capital structure. Neither these funds should be over nor less, estimation of requirements of funds and accordingly fulfilment of such requirement covered under financing decisions. Funds are arranged to finance fixed assets and working capital. Financing decisions also require a good knowledge of evaluation of risk associated with finance like: excessive debt may lead situation of financial distress and at worst level bankruptcy.
3. Dividend decisions (D):
Company has two options related to profit available for equity shareholders, first is to distribute profit and second is to retain such profit and reinvest it in business. Dividend decisions are related to balancing between profit distribution and retention of earnings. It is advised to retain profit in business when business is growing i.e. internal rate of return is higher than cost of capital. On the other hand is company retain entire profit then in equity investor may disappoint and market value of shares will decrease. Finance manager has to maintain balancing between distribution of profit and retention of profit to maximise shareholders wealth.
Question 6.
What are the roles of Finance Executive in Modern World? (2 Marks May 2018, 4 Marks Nov. 2020)
Answer:
In today’s world apart from accounting, financial reporting and risk management, the role of chief financial officer is much broader. Finance officer is the face of corporate brand and strategic business partner of the firm. In modern world CEO plays a vital role in budgeting, forecasting, managing merger & acquisitions, profitability analysis, pricing analysis, decisions about outsourcing, overseeing the IT function, overseeing the HR function, strategic planning, regulatory compliance and risk management etc.
Question 7.
What are the two main aspects of the Finance Function? (2 Marks May 2018)
Answer:
Two main aspects of Finance function are:
1. Procurement of Funds:
Finance manager arranges funds from various sources with consideration of cost, risk and control. Finance manager chooses capital structure for business firm and try to maintain optimum capital structure. Neither these funds should be over nor less, estimation of requirements of funds and accordingly fulfilment of such requirement covered under financing decisions.
Funds are arranged to finance fixed assets and working capital. Financing decisions also require a good knowledge of evaluation of risk associated with finance like: excessive debt may lead situation of financial distress and at worst level bankruptcy.
2. Effective Utilization of Funds:
It is related to selection of assets in which long term funds will be employed. Finance manager arranged funds from various sources with consideration of cost, risk and control and invest these funds in various types of business assets. Long term funds are used to purchase fixed assets and also a portion of fixed asset is used to finance permanent current assets.
Finance manager use capital budgeting techniques to evaluate long term investment proposals. The Finance Manager has to keep in mind that funds are not kept idle or there is no improper use of funds. The funds are to be invested in a efficient way such that they generate returns higher than the cost of capital to the firm.
Question 8.
Write two main objectives of financial management. (2 Marks Nov. 2018)
Answer:
Two main objectives of financial management are:
1. Profit Maximisation:
Since every business firm is established to earn profit, therefore profit maximization is as an implied objective of a business firm. To maximise profit, management may take decision which are unethical and risky. Many times results of management decisions leads to financial distress and in worst situation bankruptcy and fails to provide higher profit and growth. Profit maximisation is secondary goal of the company and it helps in wealth maximisation.
2. Wealth or Value Maximisation:
Market price of share indicates value or wealth of a firm. Market price of share of any company is based on various factor like: timely payment of dividend, product or service quality, goodwill of company, CRS activities, research and development steps taken by company, present and future expected income and growth of company, timing of earning and risk associated with business etc. it is the primary goal of the firm.
Question 9.
State four tasks involved to demonstrate the importance of good Financial Management. (4 Marks Jan. 2021)
Answer:
Following are the main task involved to demonstrate the importance of good financial management is to:
- Look after not to over-invest in fixed assets,
- Maintain balancing of cash outflow with cash inflows,
- Maintaining sufficient level of short term working capital,
- Preparation of growing sales budget,
- Set correct pricing for products or services to increase gross profit,
- Look after and control general and administrative expenses, and
- Focusing on tax planning to minimize the taxes.