FINANCIAL MANAGEMENT 2019

i) Funds are financial resources in the form of:

d) All of these

ii) The sum of short term and long term sources of finance is known as:
b) Both of these

iii) The decisions of investing in long term or fixed assets on the basis of
cost-benefit analysis or risk-return analysis are known as:
c) Capital budgeting decision

iv) The decisions relating to the use of profit or income of an entity or

organization are known as:
b) Dividend decisions

v) The concept that the value of a rupee to be received in the future is

less than the value of a rupee on hand today is named as what:
b) Time value of money

vi) The method of converting the amount of cash and cash equivalents
value in the present is known as:
c) Discounting
vii) The decisions which are concerned with the allocation of funds to
short-term investment proposals are known as:
b) Working Capital decisions
viii) Through leverage analysis, the financial manager measures the
relationship between:
d) Cost, sales revenue, and earnings

Write short notes: (Any 2)

a. Financial forecasting
ANS. Financial forecasting is the process of estimating or predicting
future financial outcomes and performance of a business or
organization. It involves analyzing historical financial data, market
trends, and other relevant information to make projections about
future revenues, expenses, profits, cash flows, and other financial
metrics.

Financial forecasting is important for several reasons. It helps

businesses in making informed decisions regarding budgeting,
resource allocation, investment planning, and strategic decision-
making. It also assists in setting realistic financial goals and
objectives, identifying potential risks and opportunities, and
evaluating the financial feasibility of projects or initiatives.

There are different methods and techniques used for financial

forecasting, including
1. Historical Data Analysis: This involves analyzing past financial data
and trends to identify patterns and extrapolate them into the future.

2. Trend Analysis: It focuses on identifying and analyzing long-term

trends in financial variables such as sales, expenses, or profitability.

3. Ratio Analysis: It involves calculating and analyzing various

financial ratios to assess the financial health and performance of a
business and make projections based on those ratios.

4. Regression Analysis: This statistical technique examines the

relationship between dependent and independent variables to
forecast future financial outcomes.

5. Time Series Analysis: It uses statistical methods to analyze

historical data and identify patterns, seasonality, and trends to
forecast future financial values.

6. Scenario Analysis: It involves creating different scenarios based on

different assumptions and factors to assess the potential impact on
financial outcomes.

Financial forecasting should be based on reliable data, accurate

assumptions, and careful analysis. It is important to regularly review
and update forecasts as new information becomes available and to
adjust them based on actual results to improve accuracy over time.
b) Factoring
Factoring, also known as accounts receivable financing or invoice
factoring, is a financial service provided by specialized companies
known as factors. Factoring involves selling accounts receivable
(invoices) to a factor at a discount in exchange for immediate cash.
The factor then assumes the responsibility of collecting the
outstanding payments from the customers.

Factoring is commonly used by businesses to improve cash flow and

access working capital. Instead of waiting for customers to pay their
invoices, the business can receive a portion of the invoice amount
upfront from the factor. The factor typically advances a certain
percentage of the invoice value, often around 70-90%, and the
remaining balance (minus fees) is paid to the business once the
customer pays the invoice in full.

The main benefits of factoring include:

1. Improved Cash Flow: Factoring provides businesses with

immediate cash, allowing them to cover expenses, pay suppliers, and
invest in growth initiatives without waiting for customer payments.

2. Outsourcing Accounts Receivable Management: By selling the

invoices to a factor, the business transfers the responsibility of
collecting payments to the factor. This can save time and resources
spent on accounts receivable management.
3. Reduced Risk of Bad Debts: Factors often perform credit checks on
the customers before purchasing the invoices. This helps minimize
the risk of non-payment and bad debts for the business.

4. Flexible Financing: Factoring is typically based on the

creditworthiness of the customers rather than the business itself.
This makes it a viable financing option for businesses with limited
credit history or poor credit ratings.

5. Quick and Simple Process: Compared to traditional financing

options, factoring usually involves a simpler and quicker approval
process. The funds can be accessed within a few days, providing
businesses with immediate liquidity.

It's important to note that factoring is not a loan, as the business is

selling an asset (invoices) rather than borrowing money. The cost of
factoring includes a discount fee or factor's fee, which is based on
factors such as the creditworthiness of the customers, invoice
volume, and payment terms.
c) Operating cycle.
The operating cycle, also known as the cash conversion cycle, is a
financial metric that measures the time it takes for a company to
convert its investments in inventory and other resources into cash
through the sale of goods or services. It represents the period from
when a company pays for raw materials or inventory until it collects
cash from the sale of the finished goods.
The operating cycle consists of three key components:

1. Inventory Conversion Period: This represents the time it takes for a

company to convert its raw materials into finished goods ready for
sale. It includes activities such as purchasing, production, and
holding inventory.

2. Accounts Receivable Collection Period: This refers to the time it

takes for a company to collect cash from its customers after the sale
of goods or services. It includes activities such as issuing invoices,
credit terms, and collection efforts.

3. Accounts Payable Payment Period: This represents the time it

takes for a company to pay its suppliers for the purchases of raw
materials or inventory. It includes activities such as credit terms,
payment terms, and supplier relationships.

The operating cycle is calculated by adding the inventory conversion

period and the accounts receivable collection period and then
subtracting the accounts payable payment period. The formula for
the operating cycle is as follows:

Operating Cycle = Inventory Conversion Period + Accounts Receivable

Collection Period - Accounts Payable Payment Period
A shorter operating cycle indicates that a company is able to convert
its investments into cash more quickly, which is generally desirable as
it improves liquidity and working capital management. However, it's
important to note that the optimal length of the operating cycle
varies depending on the industry, business model, and specific
circumstances of the company.

Monitoring and managing the operating cycle is crucial for

businesses to maintain a healthy cash flow position. By effectively
managing inventory levels, optimizing accounts receivable collection,
and negotiating favorable payment terms with suppliers, a company
can reduce its operating cycle and enhance its cash conversion
efficiency.
d) Trading on equity.
Trading on equity, also known as financial leverage, refers to the
practice of using borrowed funds or debt to finance investments or
operations in a business with the expectation of generating higher
returns for shareholders. It involves utilizing debt or other fixed-cost
financing to amplify the returns on equity investment.

The concept of trading on equity revolves around the idea that the
cost of debt is usually lower than the potential return on equity. By
employing debt financing, a company can increase its earnings per
share (EPS) and return on equity (ROE) if the return generated from
the borrowed funds exceeds the cost of borrowing.
The basic principle behind trading on equity is that a company can
generate higher profits by using debt to finance its operations or
investments, as long as the return on the investment is higher than
the interest cost of the debt. This can lead to increased shareholder
wealth and improved financial performance.

There are various methods through which companies can trade on

equity, including:

1. Issuing Bonds or Corporate Debt: A company can raise funds by

issuing bonds or other forms of debt securities to investors. The
proceeds from the debt issuance can be used to finance projects or
investments that are expected to generate higher returns.

2. Bank Loans: Companies can obtain loans from banks or financial

institutions to finance their operations or investments. These loans
can be secured by company assets or issued as unsecured loans
based on the company's creditworthiness.

3. Financial Leverage through Equity Financing: Companies can also

increase their financial leverage by issuing additional equity shares.
The funds raised through equity financing can be used to generate
higher returns on investment and increase shareholder wealth.

It's important to note that while trading on equity can enhance

returns when things go well, it also carries increased financial risk. If
 the return on the investment is lower than the cost of debt or if the
company faces financial difficulties, the burden of debt can become a
significant challenge. Excessive reliance on debt can lead to financial
distress, higher interest costs, and potential bankruptcy if the
company fails to generate sufficient returns to cover its debt
obligations.

Therefore, trading on equity should be carefully managed, taking into

consideration the company's financial position, risk appetite, and the
potential impact on the overall capital structure and financial
stability of the business. Prudent financial management and
evaluation of risk-return trade-offs are essential to ensure the
benefits of trading on equity outweigh the associated risks.

FINACIAL MANAGEMENT 2021

Q1. SOLVE ANY FIVE

a) EPS (Earnings Per Share):

EPS, or Earnings Per Share, is a financial metric that indicates the
profitability of a company on a per-share basis. It is calculated by
dividing the net earnings or profits of a company by the total number
of outstanding shares. EPS is commonly used by investors, analysts,
and shareholders to assess a company's profitability and compare it
with other companies in the same industry
b) Time Value of Money:
The time value of money is a fundamental concept in finance that
recognizes the notion that a dollar today is worth more than a dollar
in the future. It is based on the principle that money has potential
earning capacity and can be invested or earn interest over time. The
time value of money is considered when evaluating investment
opportunities, determining the present value of future cash flows, or
calculating the cost of borrowing or lending.

c) Trend Analysis:
Trend analysis is a technique used to identify and analyze patterns or
trends in financial data over time. It involves reviewing historical data
and looking for consistent upward or downward movements in key
financial variables such as revenue, expenses, or profitability. Trend
analysis helps identify growth or decline patterns, assess the
effectiveness of business strategies, and make informed forecasts or
projections.

d) Preference Shares:
Preference shares, also known as preferred shares, are a class of
shares issued by a company that generally provides certain
preferential rights and privileges to shareholders. These rights may
include priority in receiving dividends, preference in the distribution
of assets during liquidation, and voting rights on specific matters.
Preference shares often have a fixed dividend rate or a specified
dividend formula, which distinguishes them from common shares.
e) Payback Period:
The payback period is a financial metric used to evaluate the time
required to recover the initial investment or cost of a project. It
represents the length of time it takes for the cash inflows from the
project to equal the initial cash outflow. The payback period is often
used to assess the risk or liquidity of an investment and is a simple
measure of the time it takes to recoup the investment.

f) Bonus Shares:
Bonus shares, also known as scrip dividends or capitalization issues,
are additional shares issued by a company to its existing
shareholders without any additional cost. Bonus shares are
distributed as a form of reward or dividend to shareholders and are
typically issued by capitalizing the company's retained earnings or
reserves. Bonus shares increase the number of outstanding shares
without affecting the proportional ownership of existing
shareholders.

g) Operating Cycle:
The operating cycle, also known as the cash conversion cycle, is a
financial metric that measures the time it takes for a company to
convert its investments in inventory and other resources into cash
through the sale of goods or services. It represents the period from
when a company pays for raw materials or inventory until it collects
cash from the sale of the finished goods. The operating cycle consists
of the inventory conversion period, accounts receivable collection
period, and accounts payable payment period. It helps assess the
efficiency of working capital management and cash flow generation
in a business.
Q2) Attempt any two :
a) Differentiate between-Profit maximisation & wealth
maximisation
Profit maximization and wealth maximization are two distinct
objectives pursued by businesses. Let's differentiate between them:

1. Objective:
- Profit Maximization: Profit maximization focuses on maximizing the
absolute amount of profit or net income earned by a company within
a given period. It aims to generate the highest possible profit, often
in the short term.
- Wealth Maximization: Wealth maximization seeks to increase the
long-term value and wealth of the shareholders or owners of the
company. It emphasizes maximizing the market value of the
company's shares, considering both capital appreciation and
dividend income.

2. Time Horizon:
- Profit Maximization: Profit maximization typically has a short-term
outlook, emphasizing immediate profitability. It focuses on
maximizing profits in the current accounting period.
- Wealth Maximization: Wealth maximization takes a long-term
perspective, considering the sustained growth and value of the
company over an extended period. It aims to generate consistent
returns and sustainable wealth creation.

3. Focus:
- Profit Maximization: Profit maximization concentrates primarily on
the financial performance of a company, with a strong emphasis on
revenue generation, cost reduction, and profit margin improvement.
- Wealth Maximization: Wealth maximization considers a broader
range of factors, including financial performance, risk management,
strategic decision-making, and the overall well-being of shareholders.

4. Consideration of Risk:
- Profit Maximization: Profit maximization does not explicitly
consider the level of risk associated with business operations or
investment decisions. It focuses solely on achieving higher profits.
- Wealth Maximization: Wealth maximization takes into account the
risk-return trade-off. It seeks to balance risk and return, ensuring that
investment decisions maximize shareholder wealth while considering
the associated risks.

5. Stakeholder Perspective:
- Profit Maximization: Profit maximization may prioritize the interests
of shareholders but may not consider the interests of other
stakeholders, such as employees, customers, or the community.
- Wealth Maximization: Wealth maximization recognizes the interests
of various stakeholders. It aims to create sustainable value for
shareholders while considering the well-being of other stakeholders
and maintaining ethical business practices.

In summary, profit maximization focuses on short-term profits,

whereas wealth maximization takes a long-term view and aims to
increase the overall value and wealth of the company and its
shareholders. Wealth maximization considers a broader range of
factors, including risk management and stakeholder interests,
beyond solely financial performance.
b) Enlist & discuss in brief "Duties of a Finance manager".
The duties of a finance manager can vary depending on the
organization and industry. However, here are some common
responsibilities and duties associated with the role:

1. Financial Planning and Analysis:

Finance managers are responsible for developing and implementing
financial plans, budgets, and forecasts. They analyze financial data,
identify trends, and provide insights to support strategic decision-
making. They collaborate with other departments to ensure financial
objectives align with overall business goals.

2. Financial Reporting:
Finance managers oversee the preparation and presentation of
financial statements, including income statements, balance sheets,
and cash flow statements. They ensure compliance with accounting
standards and regulatory requirements. They also communicate
financial results to stakeholders, such as senior management, board
of directors, and investors.

3. Risk Management:
Finance managers assess and manage financial risks faced by the
organization. They identify potential risks, develop risk mitigation
strategies, and implement controls to minimize exposure to financial
risks. They monitor market conditions, interest rates, and other
factors that may impact the organization's financial stability.

4. Cash Flow Management:

Finance managers manage cash flow to ensure the organization has
sufficient liquidity to meet its financial obligations. They develop cash
flow forecasts, monitor cash inflows and outflows, and implement
strategies to optimize working capital management. They may
negotiate credit terms with suppliers, manage accounts receivable
and accounts payable, and oversee cash management activities.

5. Capital Budgeting and Investment Analysis:

Finance managers evaluate investment opportunities, assess the
financial feasibility of projects, and make recommendations on
capital expenditures. They conduct financial analysis, perform cost-
benefit analysis, and evaluate the risk-return profile of potential
investments. They also assess the performance of existing
investments and provide recommendations for portfolio
optimization.
6. Financial Compliance and Governance:
Finance managers ensure compliance with financial regulations,
laws, and internal policies. They establish and monitor internal
controls to safeguard assets, prevent fraud, and maintain accurate
financial records. They may liaise with auditors, regulatory
authorities, and external stakeholders to ensure compliance and
transparency.

7. Financial Strategy and Decision Support:

Finance managers play a crucial role in developing financial strategies
and providing decision support to senior management. They analyze
financial data, conduct financial modeling, and provide insights on
business performance, profitability, and growth opportunities. They
participate in strategic planning, mergers and acquisitions, and other
business initiatives.

8. Team Management and Leadership:

Finance managers often lead finance teams and provide guidance,
mentorship, and supervision to finance staff. They foster a
collaborative and high-performance culture within the finance
department. They may also engage in talent acquisition,
performance management, and professional development of finance
team members.
It's important to note that the duties of a finance manager can vary
depending on the size and complexity of the organization. In some
cases, finance managers may have additional responsibilities such as
treasury management, tax planning, investor relations, or financial
systems implementation.
c) Compare funds flow statement with cash flow statement.
The funds flow statement and the cash flow statement are both
important financial statements that provide insights into a company's
cash position and cash flow activities. However, there are some key
differences between the two:

1. Focus:
- Funds Flow Statement: The funds flow statement focuses on
changes in a company's financial position, particularly the sources
and uses of funds. It analyzes the movement of funds between
different categories, such as working capital, fixed assets, long-term
debt, and equity. It provides information about the changes in the
company's financial structure and helps assess its financial health.
- Cash Flow Statement: The cash flow statement focuses specifically
on the inflows and outflows of cash during a specified period. It
tracks the cash generated or consumed by operating activities,
investing activities, and financing activities. It provides information
about the company's ability to generate cash, meet its financial
obligations, and fund investments or expansion.

2. Basis of Analysis:
- Funds Flow Statement: The funds flow statement is based on the
concept of funds, which includes both cash and non-cash items. It
considers changes in working capital, non-current assets, long-term
debt, and equity. It helps analyze the overall movement of funds
within the company and provides insights into how funds have been
sourced and utilized.
- Cash Flow Statement: The cash flow statement is based solely on
cash transactions. It focuses on actual cash inflows and outflows
from operating, investing, and financing activities. It provides a more
direct assessment of the company's cash position and cash flow
dynamics.

3. Purpose:
- Funds Flow Statement: The funds flow statement helps analyze the
company's financial structure, capital allocation, and capital
management. It is useful for assessing the sources of funds and how
they have been deployed. It provides insights into the company's
investment decisions, financing strategies, and changes in working
capital.
- Cash Flow Statement: The cash flow statement is primarily used to
evaluate the company's liquidity, cash generation, and cash flow
management. It helps assess the company's ability to meet short-
term obligations, fund growth, and generate free cash flow. It is
important for assessing the company's cash position, cash flow
patterns, and ability to withstand financial shocks.

4. Coverage:
 - Funds Flow Statement: The funds flow statement covers a broader
range of financial activities, including changes in working capital,
non-current assets, and long-term financing. It provides a holistic
view of the company's financial structure and changes in its overall
financial position.
- Cash Flow Statement: The cash flow statement focuses specifically
on cash inflows and outflows from operating, investing, and
financing activities. It provides a more detailed and specific analysis
of the company's cash movements.

In summary, while both the funds flow statement and the cash flow
statement provide insights into a company's financial activities, they
have different focuses and purposes. The funds flow statement
analyzes changes in the company's financial structure and funds
movement, while the cash flow statement focuses on actual cash
flows and provides a more direct assessment of the company's cash
position and cash flow dynamics.
d) Discuss in brief : "Common size statements."
Common size statements, also known as vertical analysis, are
financial statements that express each line item as a percentage of a
base value. This technique allows for easy comparison and analysis of
financial data over time or across different companies or industries.
Common size statements provide insights into the composition and
relative significance of different components within a financial
statement.
Common size statements can be created for various financial
statements, including the income statement, balance sheet, and cash
flow statement. Here's a brief discussion of common size statements for
each of these financial statements:

1. Common Size Income Statement:

In a common size income statement, each line item is expressed as a
percentage of the total revenue or sales. This allows for the analysis
of the relative importance of different expense categories and the
overall profitability of a company. It helps identify trends in expenses,
such as changes in the cost of goods sold, operating expenses, and
net income margin, over time.

2. Common Size Balance Sheet:

In a common size balance sheet, each line item is presented as a
percentage of the total assets. This allows for the evaluation of the
composition of a company's assets and liabilities. It helps identify the
relative proportions of different asset categories, such as current
assets, property, plant, and equipment, and intangible assets. For
liabilities and equity, it provides insights into the proportion of
different sources of financing, such as debt and equity.

3. Common Size Cash Flow Statement:

In a common size cash flow statement, each line item is expressed as
a percentage of the net cash provided or used by operating activities.
This allows for the analysis of the cash flow patterns and the relative
significance of different cash flow components, such as operating
cash flow, investing cash flow, and financing cash flow.
Benefits of Common Size Statements:
- Comparison: Common size statements enable easy comparison of
financial data across different periods, companies, or industries. This
helps identify trends, patterns, and differences in the financial
performance and structure of entities.
- Highlighting Key Areas: By expressing line items as percentages,
common size statements draw attention to significant areas of a
financial statement. It helps identify areas of concern or areas that
require further analysis or improvement.
- Ratio Analysis: Common size statements provide a foundation for
calculating and analyzing financial ratios. Ratios derived from
common size statements help evaluate performance, efficiency,
liquidity, and other aspects of a company's financial health.

Overall, common size statements provide a standardized format for

analyzing financial statements, allowing for better comparison and
understanding of financial data. They help identify trends, patterns,
and areas of focus, aiding in decision-making and financial analysis.