FINMAN reviewer

• Financial Management


  Planning, organizing, directing and controlling the financial activities such as procurement and utilization of funds of the enterprise. Applying general management principles to financial resources of the enterprise.
• Scope/Elements of Financial Management

  • Investment decisions (capital budgeting and working capital decisions)
  • Financial decisions (raising finance from various resources)
  • Dividend decision (net profit distribution)
• Functions of Financial Management

  1. Estimation of capital requirements

  2. Determination of capital composition

  3. Choice of sources of funds

  4. Investment of funds

  5. Disposal of surplus (dividend declaration and retained profits)

  6. Management of cash

  7. Financial controls
• Income Statement


  Also known as statement of operations, profit and loss statement, and statement of earnings. Summarizes a company's revenues, expenses, gains, losses, and the resulting net income.
• Balance Sheet


  Displays the company's total assets, and how these assets are financed, through either debt or equity. Based on the fundamental equation: Assets = Liabilities + Equity.
• Items reported in the Balance Sheet

  • Current Assets (cash and equivalents, accounts receivable, inventory)
  • Non-Current Assets (plant, property, and equipment, intangible assets)
  • Current Liabilities (accounts payable, current debt/notes payable, current portion of long-term debt)
  • Non-Current Liabilities (bonds payable, long-term debt)
  • Shareholders' Equity (share capital, retained earnings)
• Cash Flow Statement


  Reports the cash generated and spent during a specific period of time. Bridges the income statement and balance sheet by showing how money moved in and out of the business.
• Sections of the Cash Flow Statement

  • Operating Activities
  • Investing Activities
  • Financing Activities
• Investment decisions 


  It includes investment in fixed assets called as capital budgeting. Investment in current assets are also part of investment decisions called as working capital decisions.
• Financial decisions


  They relate to the raising of finance from various resources which will cement upon decision on type of source, period of financing, cost of financing and the returns thereby.
• Break-even analysis


  Calculating and examining the margin of safety for an entity based on the revenues collected and associated costs
• Break-even point


  The number of units or amount of sales where the entity neither loses nor gains as a result of its operation. It is also considered a measure of the margin of safety
• Break-even analysis


  • Determines what level of sales are necessary to cover the company's total fixed costs
  • Gives a seller significant insight into selling capabilities
• Break-even analysis


  1. Analyzing different price levels relating to various levels of demand

  2. Calculating the break-even point
• Variable cost


  A corporate expense that changes in proportion to how much a company produces or sells
• Fixed cost


  A cost that does not change with an increase or decrease in the number of goods or services produced or sold
• Contribution margin


  The incremental money generated for each product/unit sold after deducting the variable portion of the firm's costs
• Net profit (2)

  Dividend for shareholders

  Returned profit
• Dividend for shareholders


  Dividend and the rate of it has to be decided.
• Returned profit 


  Amount of retained profits has to be finalized which will depend upon expansion and diversification plans of the enterprise.
• Dividend decision


  The finance manager as to take decision with regards to the net profit distribution.
• Items reported in the income statement

  Revenue

  Expenses

  Net income
• Estimation of capital requirements


  A finance manager has to make estimation with regards to capital requirements of the company. This will depend upon expected costs and profits and future programmes and policies of a concern. Estimations have to be made in an adequate manner which increases earning capacity of enterprise.
• Financial controls


  The finance manager has not only to plan, procure and utilize the funds but he also has to exercise control over finances. This can be done through many techniques like ratio analysis, financial forecasting, cost and profit control, etc.
• Management of cash: 


  Finance manager has to make decisions with regards to cash management. Cash is required for many purposes like payment of wages and salaries, payment of electricity and water bills, payment to creditors, meeting current liabilities, maintainance of enough stock, purchase of raw materials, etc.
• Disposal of surplus: 


  The net profits decision have to be made by the finance manager. This can be done in two ways:

  1. Dividend declaration - It includes identifying the rate of dividends and other benefits like bonus.
  2. Retained profits - The volume has to be decided which will depend upon expansional, innovational, diversification plans of the company
• Investment of funds: 


  The finance manager has to decide to allocate funds into profitable ventures so that there is safety on investment and regular returns is possible.
• Determination of capital composition: 


  Once the estimation have been made, the capital structure have to be decided. This involves short- term and long-term debt equity analysis. This will depend upon the proportion of equity capital a company is possessing and additional funds which have to be raised from outside parties.
• Choice of sources of funds: 


  For additional funds to be procured, a company has many choices like

  1. Issue of shares and debentures
  2. Loans to be taken from banks and financial institutions
  3. Public deposits to be drawn like in form of bonds.
• 3 sections of the statement of cash flows

  Operating activities

  Investing activities

  Financing activities
• Operating activities 


  The principal revenue-generating activities of an organization and other activities that are not investing or financing; any cash flows from current assets and current liabilities
• Investing activities 


  Any cash flows from the acquisition and disposal of long-term assets and other investments not included in cash equivalents
• Financing activities


  Any cash flows that result in changes in the size and composition of the contributed equity capital or borrowings of the entity (i.e., bonds, stock, dividends)
• Financial statement notes


  Supplemental notes added to the published financial statements of a company to explain the numbers and accounting policies
• Purpose of financial statement notes


  • Help different types of users, such as financial analysts and investors, to interpret all the numbers added in the financial statements
• Common items in notes to the financial statements

  • Basis of presentation
  • Accounting policies
  • Depreciation of assets
  • Valuation of inventory
  • Subsequent events
  • Intangible assets
  • Consolidation of financial statements
  • Employee benefits
  • Contingent liability
• Basis of presentation


  The first section in the financial statement notes that explains the basis of preparing and presenting the key financial statements
• Accounting policies


  The section that provides information on the accounting policies adopted by the management in preparing the financial statements
• Purpose of disclosing accounting policies

  • Helps users interpret and understand the financial statements better
• Depreciation


  Reduction in the value of an asset over time due to normal wear and tear