Chapter 1
The Role of Accounting and Finance
Chapter Topics
1. Finance in the organization structure of the firm
2. Responsibilities of financial managers
a. Supporting all activities of the firm
b. Developing information flow systems
c. R&D and investment decisions (capital budgeting)
d. Financing sources, forms, and methods
e. Payout policies
f. Corporate governance
g. Complying with new regulatory requirements
h. Contribution to the firm’s ethical reputation
3. Goals of the firm
4. The changing economic and financial environments
5. Organization of this book
6. The Hershey Company
7. Key concepts
1
, Answers to Questions
1.1. The main functions of financial managers are:
To raise funds from external financial sources.
To allocate funds among different uses.
To manage the flow of funds involved in the operation of the enterprise.
To provide for returns to investors and other sources of financing of the firm.
In short, the main functions of financial managers are to plan for, acquire, and utilize funds
to make the maximum contribution to the efficient operation of an organization.
1.2.
a. The argument for the divisional vice president of finance to report to the division
president directly is that the division is a profit center.
b. The argument for the divisional vice president of finance to report directly to the
corporate CFO is that the overall performance of the firm is what really matters.
Optimization for the firm should dominate segment optimization.
1.3. The reason is that all major endeavors have significant financial implications.
1.4. Profit maximization would have to be from a long-run standpoint to be meaningful at all.
However, it would still be deficient in not considering the risk of alternative income streams.
Wealth maximization is a better goal because it takes into account both the stream of income,
or cash flow, over a period of years and the appropriate capitalization factor which reflects the
degree of risk involved.
1.5. One interpretation is that shareholders may seek to maximize their wealth at the expense of
bondholders, so that there could be a difference between firm value maximization and
shareholder wealth maximization. Our emphasis, however, is that there should be no
difference between these goals. We hold that shareholders should seek to maximize their
wealth and the wealth of bondholders as well, so that firm value is maximized at the same
time.
1.6. The conflicts of interest between stockholders and managers have been referred to in the text
as the "agency problem." Managers "control" the firm and may do things in their own self-
interest at the expense of the owners. Four methods are used to resolve the agency problem:
2
The Role of Accounting and Finance
Chapter Topics
1. Finance in the organization structure of the firm
2. Responsibilities of financial managers
a. Supporting all activities of the firm
b. Developing information flow systems
c. R&D and investment decisions (capital budgeting)
d. Financing sources, forms, and methods
e. Payout policies
f. Corporate governance
g. Complying with new regulatory requirements
h. Contribution to the firm’s ethical reputation
3. Goals of the firm
4. The changing economic and financial environments
5. Organization of this book
6. The Hershey Company
7. Key concepts
1
, Answers to Questions
1.1. The main functions of financial managers are:
To raise funds from external financial sources.
To allocate funds among different uses.
To manage the flow of funds involved in the operation of the enterprise.
To provide for returns to investors and other sources of financing of the firm.
In short, the main functions of financial managers are to plan for, acquire, and utilize funds
to make the maximum contribution to the efficient operation of an organization.
1.2.
a. The argument for the divisional vice president of finance to report to the division
president directly is that the division is a profit center.
b. The argument for the divisional vice president of finance to report directly to the
corporate CFO is that the overall performance of the firm is what really matters.
Optimization for the firm should dominate segment optimization.
1.3. The reason is that all major endeavors have significant financial implications.
1.4. Profit maximization would have to be from a long-run standpoint to be meaningful at all.
However, it would still be deficient in not considering the risk of alternative income streams.
Wealth maximization is a better goal because it takes into account both the stream of income,
or cash flow, over a period of years and the appropriate capitalization factor which reflects the
degree of risk involved.
1.5. One interpretation is that shareholders may seek to maximize their wealth at the expense of
bondholders, so that there could be a difference between firm value maximization and
shareholder wealth maximization. Our emphasis, however, is that there should be no
difference between these goals. We hold that shareholders should seek to maximize their
wealth and the wealth of bondholders as well, so that firm value is maximized at the same
time.
1.6. The conflicts of interest between stockholders and managers have been referred to in the text
as the "agency problem." Managers "control" the firm and may do things in their own self-
interest at the expense of the owners. Four methods are used to resolve the agency problem:
2
