Fm concept testing


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Fm concept testing

  1. 1. Financial Management = managerial activity which is concerned with the planning andcontrolling of the firm’s financial resources.2) Business finance = business activity which is concerned with the acquisition andconservation of capital funds in meeting financial needs and overall objectives ofbusiness enterprises.3) Finance function = management of funds, raising and using them effectively. 2 typesare executive finance function and incidental finance function4) Executive finance function = requires administrative skill in planning and executioneg – determining allocation of funds, sources of funds, establishing asset management5) Incidental finance function = covers routine work, mainly clerical in nature that isnecessary to carry into effect the financial decisions at executive level. Eg – supervisionof cash receipts and disbursements, record-keeping6) Investment decisions = allocation of funds and includes capital budgeting andworking capital management. Relates to the selection of assets in which funds are to beinvested7) Financing decisions = decisions regarding the process of raising funds which areavailable through commercial banks, financial institutions, primary market Dividend decisions = decided on the basis of the present earnings, growth rate andopportunities for expansion and diversification. It should be aimed to maximize thewealth of the shareholders9) Profit maximization = actions that increase profits should be undertaken and thosethat decrease profits are to be avoided under this approach10) Wealth maximization = it is value maximization and under this approach, theinvestment, financing and dividend decisions are directed towards maximization ofshareholders wealth11) Business risk/investment risk = associated with the fluctuations in a firm’s earnings.The more the variations in the earnings streams, the greater the business risk faced by thefirm12) Systematic/undiversifiable risk = associated with the fluctuations in the firm’searnings due to social, economic and political changes which cannot be avoided. It arisesdue to inflation, money supply, level of government spending, level of rainfall13) Unsystematic/diversifiable risk = refers to that portion of the risk which is causeddue to factors unique to a firm or an industry. It is change in the price of stock of aparticular firm or industry. Eg- if a price of material increases due to customs or exciseduty, the price of product also increases and the share prices fall14) Credit/default risk = possibility that if a company is ill-managed resulting in lowerearning or losses, then the equity shareholders and debenture-holders can loose the loanprincipal amount15) Interest rate risk = risk due to the increase in the bank interest rates or decrease inthe interest rates on deposits16) Inflation risk = arises due to change in the purchasing power of money due toinflation. It is a systematic risk and affects all types of investments17) Liquidity risk = risk of inability to pay the obligations or assets on time18) Market risk = caused by the influence of macro-economic factors such as foreignexchange rate fluctuation, trade deficits, employment level, industrial and agriculturalproduction
  2. 2. 19) Political risk = any change in political stability or fiscal policies like taxation laws,custom and excise duties affect the market value of securities20) Financial risk = connected to the capital structure decision of the firm and dependson the leverage of the firm’s capital structure21) Marketability risk = arises as certain companies may fail to get their stocks listed ingood stock exchanges22) Management risk = arises due to bad management decisions and involves wrongcalculations of the intrinsic value of investment23) Industry risk = arises due to risk factors like change in taxation policies, licensingpolicies of the government, RIM support, technology levels24) Ratio analysis = process of comparison of one figure against another which makes aratio and it helps in finding the strengths and weaknesses of the operations of theorganization25) Current ratio = measures the short term solvency of the business by comparing thecurrent assets with the current liabilities26) Quick ratio = immediate solvency of the business position of the company andindicates very short term financial strength, soundness and solvency of a concern27) Stock working capital ratio = expresses the relationship between closing stock andworking capital28) Proprietary ratio or equity ratio or net worth ratio = measures the relationshipbetween funds invested in the business by the owners with the total funds invested in thebusiness29) Capital gearing ratio = explains the relationship between fixed term capital andloans carrying fixed rate of dividend/interest30) Debt-equity ratio = measures the debt and owned funds of a company31) Gross profit ratio = reflects the operating efficiency and pricing policies of thebusiness32) Operating profit ratio = indicates the relationship between operating net profits tosales and also indicates the profitability of the business after meeting all operating costs33) Net profit ratio = indicates the efficiency of financing operations and taxmanagement and shows the overall efficiency of the business34) Inventory turnover ratio = indicates the number of times the replacements ofinventory during the given period usually one year. Higher the ratio, the more efficient isthe management of inventory35) Return on investment ratio = measures the overall performance of the companywith regards to the utilization by management of total resources or funds available withthe company. It is also known as the ‘return on capital employed’36) Return on net worth = measures the productivity of the proprietor’s funds. It is alsoknown as ‘return on proprietors’ funds’37) Earning per share = indicates the changes in wealth per shareholder over a period oftime. Higher the ratio, higher the possibility of higher dividends and increase in themarket price of the share38) Receivables turnover ratio = indicates the average credit period enjoyed by debtorsand efficiency of debtor’s management39) Interest coverage ratio = reflects the capacity of a business to pay its interest burden40) Fixed assets turnover ratio = indicates the extent of the utilization of fixed assets
  3. 3. like plant and machinery by the management41) Total assets turnover ratio = indicates how the assets are employed overall42) Price earning ratio = indicates the relationship between market price of a share andthe current earnings per share43) Window dressing = refers to the art of showing the position of an organization at abetter level than the existing one i.e. the true value of assets and liabilities is not shownon the balance sheet44) Financial statements = summarized accounts of the transactions of the organizationfor and at the end of a particular period. It includes Profit and loss a/c, Balance sheet45) Financial statement analysis = systematic and specialized treatment of theinformation found in financial statements so as to derive useful conclusions on theprofitability and solvency of the business entity concerned46) Profitability analysis = users of financial statements may analyse financialstatements to decide past and present profitability of the business47) Liquidity analysis = done by suppliers and money lenders to find out the ability ofthe company to meet its obligations48) Solvency analysis = test the ability of the company to repay debts49) Intra-firm analysis = analysis of performance of the organization over number ofyears50) Inter-firm analysis = comparison of 2 or more organizations in terms of variousfinancial variables51) Standard analysis = one set of financial statements of an organization is analyzed onthe basis of standard set for the firm52) Horizontal analysis = comparison of figures reported in financial statements of 2 ormore consecutive years53) Vertical analysis = comparing figures in the financial statements of a single period54) Comparative financial statements = facilitate comparison of different accountingvariables for drawing useful inferences55) Common size statements = bring out the ratio of each asset or liability to the total ofthe balance sheet and the ratio of each item of expense or revenue to net sales56) Trend percentages = to analyze the trend of data shown in a series of financialstatements of several successive yearsFormulae:-A) Solvency Ratio-1) Current ratio = Current Assets / Current Liabilities2) Liquid/Quick/Acid-test ratio = Quick Assets/Quick Liabilities3) Proprietary Ratio = Proprietor’s funds / total assets * 100B) Capital Structure Ratio –1) Debt Equity Ratio = Debt/Equity or Debt / Debt+ Equity2) Capital gearing ratio = Capital with fixed rate of return / capital not with fixed rate ofreturnC) Turnover (Efficiency) Ratios-1) Inventory turnover ratio = cost of goods sold/ average stock
  4. 4. 2) Inventory velocity = average stock / average daily cost of goods sold3) Debtor’s turnover ratio = credit sales / average (debtors + bills receivables)4) Debtors’ Velocity (DSO) = Debtors + Bills receivables / average daily credit sales5) Working turnover ratio = total sales / average working capitalD) Profitability ratios –i) In relation to sales:1) Gross profit ratio = Gross profit/net sales * 1002) Operating net profit ratio = operating net profit / net sales * 1003) Material consumption ratio = material consumption / net sales * 1004) Conversion cost ratio = labor cost + manufacturing cost / net sales * 1005) Expenses ratio = Each type or item of expenses / net sales * 100ii) In relation to capital employed –1) Return of investments (ROI/ROCE) = Net profit before tax or EBIT / capital employed* 1002) Return on shareholders’ funds = net profit after tax / shareholders’ funds * 1003) Return on equity = net profit after tax and preference dividend / equity share capital orequity + free reservesE) Other ratios-1) Interest coverage ratio = EBIT / interest expense2) Debt – service coverage ratio = EBIT / interest + loan installment3) Earning per share (EPS) = net profit after tax and preference dividend / number ofequity shares4) Dividend per share(DPS) = Equity dividend / number of equity shares5) Dividend payout = DPS / EPS6) Dividend yield = DPS / market price (MPS)7) Price earning ratio = EPS / MPS Interest coverage ratio = EBIT / Interest9) Fixed assets turnover ratio = sales / fixed assetsPosted in Exam Fundas0 Comme