FIN2601 SUMMARISED EXAM NOTES 2023
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Study unit 1
THE ROLE AND ENVIRONMENT OF MANAGERIALFINANCE
Define the functions of a finance manager
A financial manager actively manages the financial affairs of any type of business, whether
fina...
A financial manager actively manages the financial affairs of any type of business, whether
financial or nonfinancial, private or public, large or small, profit-seeking or not-for-profit.
Discuss the legal forms of business organisation
Sole Proprietorships
Owned by one person for own profit.
Has unlimited liability
Partnerships
Owned by two or more people and operated for profit
Established by a written contract known as articles of partnership
All partners have unlimited liability
Corporations
An artificial being created by law.
Called a ―legal entity,‖ a corporation has the powers of an individual.
The owners of a corporation are its stockholders
Other Limited Liability Organisations
The most popular are limited partnership (LPs),S Corporations (S corps),limited
liability corporations (LLCs), and limited liability partnerships (LLPs).
Owners enjoy limited liability, and they typically have fewer than 100 owners.
Describe the managerial finance function and its relationship to economics and
accounting
The size and importance of the managerial finance function depend on the size of the firm.
In small firms, the finance function is generally performed by the accounting department. As
a firm grows, the finance function typically evolves into a separate department linked
directly to the company president or CEO through the chief financial officer (CFO).
Reporting to the CFO are the treasurer and the controller.
Treasurer (the chief financial manager)
Is commonly responsible for handling financial activities, such as:
‒ financial planning and fund raising,
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, FIN2601 NOTES
‒ making capital expenditure decisions,
‒ managing cash,
‒ managing credit activities,
‒ managing the pension fund, and
‒ Managing foreign exchange.
External focus
Controller (the chief accountant)
Typically handles the accounting activities, such as
‒ corporate accounting,
‒ tax management,
‒ financial accounting and
‒ Cost accounting.
Internal focus
Relationship to economics
The primary economic principle used in managerial finance is marginal cost-benefit
analysis, the principle that financial decisions should be made and actions taken only when
the added benefits exceed the added costs.
Relationship to accounting
There are two basic differences between finance and accounting:
‒ Emphasis on cash flow
‒ Decision making.
Emphasis on cash flows
‒ The accountant operates on an accrual basis
‒ The financial manager, operates on a cash basis
Decision making
‒ Accountants collect and present financial data.
‒ Financial managers evaluate the accounting statements, develop additional data,
and make decisions on the basis of their assessment of the associated return and
risks.
Explain the goal of the enterprise and finance-related concepts such ascorporate
governance and the agency problem
MAXIMISE PROFIT
Corporations commonly measure profits in terms of earnings per share (EPS).
Cash flows available to shareholders will be a priority for a firm with a goal of profit
maximisation.
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