FINANCIAL MANAGEMENT

INTERNAL ASSIGNMENT

BY: SARGUNA DURAI D

INSTITUTE FOR TECHNOLOGY & MANAGEMENT

BATCH: II
1. What is financial management?

Financial management is about planning income and expenditure, and making

decisions that will enable you to survive financially. Financial management is
concerned with the duties of the financial manager of the firm. Financial management
can be broken into three major decisions as functions of finance,
a. Investment decision: It is related to the selection of assets in which the funds will be
invested by the firm.
The assets fall into two category, i) Long term assets which yield a return over a
period of time in future which is known as capital budgeting and ii) Short term or
current assets defined as those assets which in the normal course of business are
convertible into cash without diminution in value usually within a year which is known
as working capital management.
b. Financing decision: The concern of the financing decision is with the financing mix or
capital structure (refers to the proportion of debt i.e., fixed interest source of financing
and equity capital i.e., variable dividend securities/source of funds). The financing
decision of a firm related to the choice of the proportion of these sources to finance
the investment requirements. A proper balance between debt and equity to ensure a
trade-off between risk and return to share holder is necessary.
c. Dividend policy decision: The dividend decision should be analyzed in relation to the
financing decision of firm. Two alternatives are available in dealing with the profits of a
firm, i) they can be distributed to the shareholders in the form of dividends and ii) they
can be retained in the business itself.

2. What are the three uniform accounting standards?

Three accounting standards are,

a. US GAAP – United States General Accounting Accepted Principles
b. IAS – International Accounting Standard
c. AS –Accounting Standard of India

3. What do you understand by the term financial ratio?

Financial ratio analysis is the calculation and comparison of ratios which are derived
from the information in a company's financial statements. It can also be stated as
systematic use of ratios to interpret or assess the performance and status of the firm.
The term ratio refers to the numerical or quantitative relationship between two items
or variables. It can be expressed as percentage, fraction or proportion of numbers.

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4. What is intercompany and intra company analysis?

Intercompany analysis is the comparison of different firm’s financial ratios at the same
point of time. It also involves comparison of a firm’s ratio to those of others in its
industry or to industry average.
Intra company analysis involves evaluation of financial performance over a period of
time using financial ratio analysis. It’s also known as trend ratio.

5. What are the time horizons under which finance is raised by a company?

The company can raise finance based on time factor under two heads,
a. Long term funds: Under long term funds the funds will be repaid only after a period of
12 months. These are raised to manage the capital expenses of the firm. These funds
are raised and invested in long term fixed assets.
b. Short term funds: Under short term funds the funds sourced are repaid to the creditors
within 12 months. It is raised to manage the working capital expenses of the firm.
These funds are raised and invested in current assets.

6. What do you understand by liquidity and solvency?

Liquidity means the ability of firm to satisfy its short term obligation using short term
assets as they become due within a period not exceeding one year.
Solvency means the firm’s ability to meet their long term obligations which are more
than 12 months as they become due.

7. What are the prudential policies of financial management?

The prudent policies of financial management are,

a. To ensure that funds for long term purposes are met only out of long term sources
b. A portion of long term funds are used for short term purposes and
c. The funds raised from short term sources are used only for short term purposes

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8. What are the important grouping of ratios used for financial analysis?

Ratios can be classified into five categories,

a. Liquidity ratios which give a picture of a company's short term financial situation or
solvency.
b. Solvency ratios which give a picture of a company's ability to generate cash flow and
pay it financial obligations.
c. Capital structure/leverage ratios which shows the extent that debt is used in a
company's capital structure.
d. Profitability ratios which use margin analysis and show the return on sales and capital
employed.
e. Operational ratios which use turnover measures to show how efficient a company is in
its operations and use of assets.

9. What is the importance of operating profit in financial analysis?

Operating profit, or operating income as it is sometimes called, is the total pre-tax

profit a business generated from its operations. It is what is available to the owners
before a few other items need to be paid such as preferred stock dividends and income
taxes.
The operating margin is important in financial analysis because it is another
measurement of management’s efficiency. It compares the quality of a company’s
activity to its competitors. A business that has a higher operating margin than others in
the industry is generally doing better as long as the gains didn't come by piling on debt
or taking highly risky speculations with shareholders' money.

10.What do you understand by the term “operating cycle”?

The operating cycle firm of the firm refers to the length of time required to complete
the following sequence of events,
a. Conversion of cash into inventory
b. Inventory into receivable
c. Receivables into cash

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11.Differentiate between the following.

a. Gross working capital: It means the total current assets which represent the proportion
of investment that circulates from one form to another in the ordinary conduct of
business.
b. Net working capital: It’s the difference between current assets and current liabilities or
alternatively the portion of current assets financed with long term funds.
c. Working capital gap: It’s the difference between current assets and current liabilities
after bank finance.

12.What are the three important assets under working capital management?

The three important assets under working capital management are,

a. Cash
b. Inventory
c. Receivables

13.What is system approach? Where is it used? Briefly explain the same.

System approach is a study of productive system and distributive system of handling

stock in any organisation.
Productive system can be defined as the process by which, the inputs are finally made
in to finished goods. It involves study of,
a. Conversion process
b. Line balancing
It also involves the study of pattern of raw material stocking, time and efficiency of
production process, and plugging time loss observed, if any. System approach helps
the company for managing inventory as it takes in to account the stocking of inventory
at various stages.
Distributive system can be defined as the process by which the finished goods reach
the ultimate buyers. It involves the study of,
a. Storage in the factory
b. Storage in ware house
c. Storage with the distributor
d. Storage with the retailer

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14.What are the various costs involved in inventory holding?

The three basic categories involved in holding inventory are,

a. Ordering or Acquisition or Set-up cost: It’s the fixed cost to place orders with suppliers
to replenish inventory of raw material is called as ordering or acquisition cost. Apart
from placing orders outside, the various production departments have to acquire
materials from the stores and the any expenditure will also be part of ordering cost.
The cost of acquiring materials consists of clerical costs and costs of stationery thus
called as set-up cost.
b. Carrying cost: It’s the variable costs per unit of holding an item in inventory for a
specified time period. It can classified as costs that arise due to the storing of
inventory and expenses in raising funds (interest on capital) to finance the acquisition
of inventory.
c. Total cost: It is the sum of the ordering costs and carrying costs of inventory.

15.What are the various methods of inventory valuation?

The inventory valuation is carried out in the organization using one of the following
methods,
a. First-in First-out (FIFO)
b. Last-in First-out (LIFO)
c. Average Method,
i. Simple Average Method
ii. Moving Average Method
iii. Weighted Average Method
d. Base stock
e. Adjusted Selling price

*Inventories are valued at cost or market, whichever is lower.

16.What are the two important constituents of receivable management policy?

The credit policy of an organization determines the two important constituents of

receivable management,
a. Credit standards – Basic criteria or minimum requirement for extending credit to a
customer i.e., whether or not to extend credit to a customer.
b. Credit analysis – Involves obtaining credit information and evaluation of credit
application i.e., how much credit to be extended.

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17.What are the two important ratios used for monitoring receivables?

The two most common ratios for accounts receivable are turnover and number of days
in receivables. These ratios are calculated as follows,
a. Accounts Receivable Turnover = Credit Sales / Average Receivable Balance.
Example: Annual credit sales were $ 400,000, beginning balance for accounts
receivable was $ 55,000 and the yearend balance was $ 45,000. The turnover rate is
8, calculated as follows: Average receivable balance is $ 50,000 ($ 55,000 + $ 45,000)
/ 2. The turnover ratio is $ 400,000 / $ 50,000. This indicates that receivables were
converted over into cash 8 times during the year.
b. Number of Days in Receivables = 365 Days in the Year / Turnover Ratio. Using the
same information from above this ratio would be 46 days on average to collect our
accounts receivable for the year.
Two other ratios that can be used are Receivables to Sales and Receivables to Assets.
Referring back to our first example, we would have a Receivable to Sales Ratio of
12.5% ($ 50,000 / $ 400,000).

18.What are the three important steps of monitoring and management of receivables?

The three important steps of monitoring of receivables are,

a. Fix a cover period for receivables
b. Regularly monitor the levels
c. Initiate corrective action
The following methods can adopted to manage receivables,
a. Forecasting of receivables
b. Credit quality migration
c. Bad debt
d. Bad debt reserve
e. Gearing up collection machinery
f. Strategies for recovery

19.What is the rationale for keeping cash balance as low as possible?

The assets are created with a motive to earn income in any company. Cash in hand is
also a current asset that should generate income. Cash being idle in hand will not
generate any revenue. Thus, it needs to be deployed into business to create additional
income. The cash required to manage petty expenses is normally kept in hand and
other will be ideally deployed into business.

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20.What are the three important components of cash management?

The three components of cash management are,

a. Understanding the requirement of cash for short term payment and long term
b. Arranging for generation of funds accordingly keeping in mind the cost of generation of
funds.
c. Segregation of cash flow as priority and non-priority.

21.Which accounting standard deals with cash flow statements? How is cash flow
different from fund flow?

The Institute of Chartered Accountants of India (ICAI) issued the Accounting Standard
(AS) 3 relating to the preparation of cash flow statement for accounting period
commencing on or after April 1, 2001.
A distinction between these two statements may be briefed as under,
a. Cash flow statement is concerned only with the change in cash position while a fund
flow statement is concerned the change in working capital position.
b. Cash flow statement is merely a record of cash receipts and disbursements. It does not
reveal any important change involving the utilization or disposition of resources.
c. Cash is part of working capital and an improvement in cash position results in
improvement in funds position but the reverse is not true.
d. In fund flow statement, net increase or decrease in working capital is recorded while in
cash flow statement, individual item involving cash is taken into account.

22.What are the three parts of cash flow statement?

A cash flow statement is typically divided into three components to see and understand
both the internal and external sources and uses of cash.
a. Operating Cash Flow (Internal): Operating cash flow, often referred to as working
capital, is the cash flow generated from internal operations. It is the cash generated
from sales of the product or service of your business. Because it is generated
internally, it is under your control.
b. Investing Cash Flow (Internal): Investing cash flow is generated internally from non-
operating activities. This component would include investments in plant and equipment
or other fixed assets, nonrecurring gains or losses, or other sources and uses of cash
outside of normal operations.
c. Financing Cash Flow (External): Financing cash flow is the cash to and from external
sources, such as lenders, investors and shareholders. A new loan, the repayment of a
loan, the issuance of stock and the payment of dividend are some of the activities that
would be included in this section of the cash flow statement.

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23.What do you understand by cash flow and liquidity forecasting?

Cash should be deployed in a way that it earns more than the cost of its generation
and the company is in a positions to get cash whenever needed is called as cash flow and
liquidity forecasting.

24.Please explain “cover period”.

25.Name the four methods used for computing working capital requirements.

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