FIN2601 - Financial Management STUDY GUIDE WITH SUMMARIZED NOTES.

FIN2601 - Financial Management. Managerial finance ... 1. involves tasks such as budgeting, financial forecasting, cash management and funds procurement. 2. involves the design and delivery of advice and financial products. 3. recognises funds on an accrual basis. 4. devotes most of its attention to the collection and presentation of financial data. (2) The primary emphasis of the financial manager is the use of ... 1. accrued earnings. 2. cash flow. 3. organograms. 4. profit incentives. (3) Which of the following should be the primary goal pursued by financial manager of a firm? 1. Maximise net income (profits). 2. Maximise net worth or book value. 3. Maximise dividends paid to ordinary shareholders. 4. Maximise the market value of the firm’s stock. (4) Which one of the following is not a key activity of the financial manager? 1. making financing decisions. 2. financial analysis and planning. 3. managerial financial accounting. 4. making investment decisions. (5) Which of the following is typically the major factor in limiting the growth of a sole proprietorship? 1. The organisation of such firms tends to become extremely complicated over time. 2. It is extremely difficult to transfer control of such a firm to a new owner if the present owner dies or wishes to sell the firm. 3. The amount of money that can be raised by the firm is limited by the fact that the single owner must make good on all debts. 4. Investors have a great deal of control over the day-today running of the firm, leading to confusion when conflicts in direction arise. FIN2601/MO001/4/2017 5 (6) Which one of the following is the advantage of both a close corporation and company? 1. The owners have unlimited liability, which guarantees that they cannot lose more than they invested. 2. The owners have limited liability, which guarantees that they cannot lose more than they invested. 3. The shareholders have unlimited liability and total wealth can be taken to satisfy debts. 4. The shareholders enjoy unlimited liability, meaning that they are not personally liable for the firm’s debts. (7) Which of the following statements concerning agency problems is most correct? 1. Regardless of economic conditions, if a firm's share price falls during the year, this indicates that the firm's managers must not be acting in the best interests of the shareholders. 2. One method of controlling agency problems is to engage in the taking of poison pills. 3. One of the best means to control agency problems is to require the managers and other important decision makers of the firm to also be owners of the firm. 4. Agency problems probably would not exist if the important decisions of a firm were made by persons who have no vested interests, such as ownership, in the firm. (8) Agency costs include all of the following except ... 1. bonding and structuring expenses. 2. cost of goods sold. 3. monitoring expenditures. 4. opportunity costs. (9) A basic distinction between a primary and secondary market is that … 1. proceeds from sales in the primary market go to the current owner of a security, while proceeds in a secondary market go to the original owner. 2. primary markets involve direct dealings with regional exchanges. 3. only new securities are sold in the primary market, while only outstanding (issued) securities are sold in the secondary market. 4. primary markets deal exclusively in debentures, while secondary markets deal primarily in ordinary shares (10) Under the assumption of efficient capital markets, … 1. the price adjustment needs to be changed. 2. the individuals in the market are assumed to act dependently. 3. the current share price is the best estimate of the firm’s true value. 6 4. the price adjustment to new information is slow, allowing some investors to earn abnormal profits. FEEDBACK ABOUT THE SELF-ASSESSMENT Question 1 Answer 1 Question 2 Answer 2 Question 3 Answer 4 Question 4 Answer 3 Question 5 Answer 3 Question 6 Answer 2 Question 7 Answer 3 Question 8 Answer 2 Question 9 Answer 3 Question 10 Answer 3 ACTIVITY 1. Use the internet to study the following concepts in the South African context:  financial markets and operation (the Johannesburg Stock Exchange)  business forms 2. Complete the scheduled online tests/quizzes on chapter 1 on the MyFinanceLab subject website. FIN2601/MO001/4/2017 7 KEY CONCEPTS  The scope of financial management  Financing, investment and dividend decisions  The agency problem  Business forms  Primary activities of a financial manager  Goal of the firm  Corporate governance  Economic value added (EVA)  Ethics  Primary market  Secondary market  Capital market  Debt capital  Bond  Stock  Public offering  Capital gains  London Interbank Offered Rate (LIBOR)  Market interest rates  Nominal or quoted interest rate SUMMARY This study unit provided an overview of financial management and its role in maximising the value of a firm’s ordinary share. The study unit looked at the role of the financial manager. It also examined the interlinkage between finance and other key line functions in an organisation. This study unit also discussed agency relationships, conflicts that may arise between shareholders and managers and between shareholders and the providers of debt. The study unit also examined the operating environment of the firm. 8 CHECKLIST Did you read the entire chapter in order to get an overall impression of the content? Have you completed the activity? Have you completed the assessment? Have you studied the contents of this chapter? Have you achieved the learning outcomes? Would you be able to meet the stated assessment criteria? Have you discussed any challenges with this study unit with fellow students (personally or via the discussion forum on myUnisa), your tutor or lecturer? Did you establish whether any additional resources are available from myUnisa? FIN2601/MO001/4/2017 9 Study Unit 2: Financial statements and analysis TUTORIAL MATTER Study chapter 3 in your prescribed book. CONTENTS Tutorial matter Learning outcomes Assessment criteria Overview Self-assessment Feedback about the self-assessment Activity Key concepts Summary Checklist LEARNING OUTCOMES After working through this study unit you should be able to  review the contents of key financial statements  understand who uses financial ratios and why  discuss the relationship between debt and financial leverage  use ratios to analyse a firm’s profitability and its market value  use a summary of financial ratios and the DuPont system of analysis to perform a complete ratio analysis 10 ASSESSMENT CRITERIA Students should be able to construct the various forms of financial statements. They should be able to interpret the financial performance of a firm by merely inspecting the financial statements as well as through the use of ratios. Students should be able to benchmark financial performance and draw comparisons between companies in the same industries. They should understand the limitations of ratio analysis. OVERVIEW This study unit examines four key components of the shareholders’ report: the statement of comprehensive income, statement of financial position, statement of retained earnings, and the statement of cash flows. On the statement of comprehensive income and statement of financial position, the major accounts/balances are reviewed for the student. The rules for consolidating a company’s foreign and domestic financial statements (FASB No. 52) are described. Following the financial statement coverage the study unit covers the evaluation of financial statements using the technique of ratio analysis. Prospective shareholders, creditors, and the firm’s own management use ratio analysis to measure the firm’s operating and financial health. Three types of comparative analysis are defined: cross-sectional analysis, timeseries analysis and combined analysis. The ratios are divided into five basic categories: liquidity, activity, debt, profitability, and market. Each ratio is defined and calculated using the financial statements of the Bartlett Company. A brief explanation of the implications of deviation from industry standard ratios is offered, with a complete (cross-sectional and time-series) ratio analysis of Bartlett Company ending the chapter. The DuPont system of analysis is also integrated into the example. The importance of understanding financial statements is highlighted through discussions of how such knowledge will help the student be a more efficient business manager and more effectively make personal financial decisions. FIN2601/MO001/4/2017 11 SELF-ASSESSMENT (1) The notes to financial performance are an important part of the shareholders’ report because they ... 1. are the primary communication from management to the firm’s owners. 2. provide information on the accounting policies, procedures, calculations and transactions underlying entries in the financial statements. 3. indicate whether the auditors have certified the statements as a fair representation of the financial affairs of the firm. 4. explain to what extent the generally accepted accounting principles (GAAP) were adhered to. (2) Which of the following statements are correct? (a) The financial statements of a firm consist of the income statement, the balance sheet, the statement of retained earnings and the cash budget. (b) The income statement measures the profitability of the firm. (c) The balance statement measures only the value of the assets of the firm. 1. a 2. b 3. a, b 4 b, c (3) A firm has fixed assets worth R900 000 and current assets worth R180 000. The firm owes R440 000 on a mortgage bond and money owed to creditors amounts to R10 000. Owners’ equity equals ... 1. R630 000. 2. R640 000. 3. R1 170 000. 4. R1 180 000. (4) Siyaya Corporation had sales worth R20 000 for the year. The inventory at the beginning of the year was worth R10 000, and at the end of the year it was worth R14 000. The firm purchased goods worth R15 000 during the year. The gross profit equals ... 1. R9 000. 2. R11 000. 3. R14 000. 4. R15 000. 12 (5) The income statement consists of ... 1. assets, liabilities and shareholders’ equity. 2. sales, cost of goods sold and operating expenses. 3. cash flow from operating, financing and investment activities. 4. net income earned, cash dividends paid and change in retained earnings. (6) The ... of a firm is measured by its ability to satisfy its short-term obligations as they become due. 1. activity 2. liquidity 3. debt 4. profitability (7) The three summary ratios basic to the DuPont system of analysis are ... 1. net profit margin, total asset turnover, and return on investment. 2. net profit margin, total asset turnover, and return on equity. 3. net profit margin, total asset turnover and equity multiplier. 4. net profit margin, financial leverage multiplier, and return on equity. (8) A firm with total asset turnover lower than the industry standard may have ... 1. excessive debt. 2. excessive cost of goods sold. 3. insufficient sales. 4. insufficient fixed assets. (9) A firm with sales of R1 000 000, net profit after taxes of R30 000, total assets of R1 500 000 and total liabilities of R750 000 has a return on equity of ... 1. 20 per cent. 2. 15 per cent. 3. 3 per cent. 4. 4 per cent. (10) An increase in financial leverage will result in ... in the return on equity. 1. an increase 2. a decrease 3. no change 4. an undetermined change FIN2601/MO001/4/2017 13 FEEDBACK ABOUT THE SELF-ASSESSMENT Question 1 Answer 2 Question 2 Answer 2 Question 3 Answer 1 Question 4 Answer 1 Question 5 Answer 2 Question 6 Answer 2 Question 7 Answer 3 Question 8 Answer 3 Question 9 Answer 4 Question 10 Answer 1 ACTIVITY  Collect at least five different sets of company financial statements from newspapers or company reports. These must be from the same industry.  Analyse the way they are constructed.  Perform ratio analysis and interpret the results.  Complete the scheduled online tests/quizzes on chapter 2 on the MyFinanceLab subject website. 14 KEY CONCEPTS  Shareholders’ report  Income statement  Balance sheet  Current assets  Retained earnings  Ordinary income  Current liabilities  Statement of cash flows  DuPont system of analysis  Modified DuPont formula  Leverage  Return on equity (ROE)  Price earnings ratio (P/E)  Financial leverage multiplier (FLM)  Cross-sectional analysis  Time series analysis  Net working capital  Quick ratio  Total asset turnover  Common size income statement SUMMARY This study unit examined the key components of the shareholders’ report. This was followed by the use of ratios to interpret the financial statements. The student was also introduced to drawing a comparison in financial performance, whether longitudinal, time series or cross-sectional.