UNIT 1: FINANCIAL MANAGEMENT – NATURE AND SCOPE

QUESTION BANK ANSWER

1. Write a short note on business finance.

Answer: Business finance can be broadly defined as the activity concerned with
planning, raising, controlling and administering of funds used in the business.
It encompasses finance of sole proprietary organizations, partnership firms and
corporate organizations. No doubt, the aforesaid organizations have different
characteristics, features, distinct regulations and rules. And financial problems
faced by them vary depending upon the nature of business and scale of operations.
However, it should be remembered that the same principles of finance are
applicable to large and small organizations, proprietary and non-proprietary
organizations.

2. Differentiate between equity share and preference share.

Answer:

3. What do you understand by bill discounting?

 Answer: Bill Discounting is a discount/fee which a bank takes from a seller to
release funds before the credit period ends. This bill is then presented to seller's
customer and full amount is collected. Bill Discounting is mostly applicable in
scenarios when a buyer buys goods from the seller and the payment is to be made
through letter of credit.

4. Explain short term financing.

Answer: Funds which are required for a period not exceeding one year are called
short-term sources. Trade credit, loans from commercial banks and commercial
papers are the examples of the sources that provide funds for short duration.
Wholesalers and manufacturers with a major portion of their assets used in
inventories or receivables also require a large number of funds for a short period.

5. How are bonds beneficial?

Answer:
 Stability – Bonds are long-term investment tools that accrue assured returns in
comparison to other investment options.
 Indentures – Bonds grant a legal guarantee that binds borrowers to return the
principal amount to the creditors in due time. They serve as financial contracts
which contain details such as the par value, coupon rates, tenure, and credit
ratings.
 Portfolio diversification reduces the possibility of short-term losses due to
increased allocation of investment funds to fixed-income resources instead of
solely depending on equities.

6. What are the features of bonds?

Answer:
 Face value implies the price of a single unit of a bond issued by an enterprise.
Principal, nominal, or par value is used alternatively to refer to the price of bonds.
 Bond interest rates are also called coupon rates as per the tradition of claiming
interests on paper bonds in the form of coupons.
 Tenure or term refers to the period after which bonds mature. These are financial
debt contracts between issuers and investors.
 The credit quality of a bond refers to the creditors’ consensus on the performance
of a company’s assets in the long-term. It is determined by the degree of
confidence that investors have in an organisation’s bonds.
 Bonds are tradable in the secondary market. The ownership can thus shift among
various investors within a given tenure.
7. Explain the concept of retained earnings.
Answer: Retained earnings are the profits that a company has earned to date, less
any dividends or other distributions paid to investors. This amount is adjusted
whenever there is an entry to the accounting records that impacts a revenue or
expense account. A large retained earnings balance implies a financially healthy
organization.

The formula for ending retained earnings is:

Beginning retained earnings + Profits/losses - Dividends = Ending retained
earnings

8. What is lease and hire purchase?

Answer:
LEASE:Lease is a financial contract between the business customer (user/lessee)
and the equipment supplier (normally owner/lessor) for using a particular
asset/equipment over a period of time against the periodic payments called “Lease
rentals”.The lease generally involves two parties i.e. the lessor (owner) and the
lessee (user). Under this arrangement, the lessor transfers the right to use to the
lessee in return of the lease rentals agreed upon. A lease agreement can be made
flexible enough to meet the financial requirements of both the parties.
HIRE: Hire Purchase is a kind of installment purchase where the businessman
(hirer) agrees to pay the cost of the equipment in different installments over a
period of time.This installment covers the principal amount and the interest cost
towards the purchase of an asset for the period the asset is utilized.

9. Write down the differences between long term and short term loans.
Answer:
10. What are debentures?
Answer: Debentures are a debt instrument used by companies and government to
issue the loan. Debentures are also known as a bond which companies use when
they need to borrow the money at a fixed rate of interest for its expansion. There
are four types of debentures: Secured and Unsecured; Registered and Bearer;
Convertible and Non-Convertible; and First and Second.

11. Explain the types of preference shares.

Answer: Types of preference shares:
 Cumulative and Non-Cumulative: The preference shares that have the right
to collect unpaid dividends in the future years, in case the same is not paid
during a year are known as cumulative preference shares. Non-cumulative
shares, the dividend is not accumulated if it is not paid in a particular year.
 Participating and Non-Participating: Preference shares which have a right
to participate in the extra surplus of a company shares which after dividend at
a certain rate has been paid on equity shares are called participating preference
shares. These non-participating preference shares do not enjoy such rights of
participation in the profits of the company.
 Convertible and Non-Convertible: Preference shares that can be converted
into equity shares within a specified period of time are known as convertible
preference shares. Non-convertible shares are such that cannot be converted
into equity shares. intervals say six months or one year.
12. List down the sources of borrowed funds.
Answer:
 Debentures
 Loans from banks
 Loans from financial institutions
 Public deposits
 Lease financing

13. What are the objectives of financial management?

Answer:
i. To ensure regular and adequate supply of funds to the concern.
ii. To ensure adequate returns to the shareholders which will depend upon the
earning capacity, market price of the share, expectations of the
shareholders.
iii. To ensure optimum funds utilization. Once the funds are procured, they
should be utilized in maximum possible way at least cost.
iv. To ensure safety on investment, i.e. funds should be invested in safe
ventures so that adequate rate of return can be achieved.
v. To plan a sound capital structure-There should be sound and fair
composition of capital so that a balance is maintained between debt and
equity capital.
14. Define finance.
Answer: According to Howard and Upton, “finance may be defined as that
administrative area or set of administrative functions in an organization which
relates with the arrangement of each and credit so that the organization may have
the means to carry out the objectives as satisfactorily as possible.”

15. What is meant by financial management?

Answer: The Financial Management means planning, organizing, directing and
controlling the investment, financing, and dividend decisions so as to help the
business achieve its objectives.
To facilitate the same it makes use of statistical, mathematical and economic tools.
It means applying general management principles to financial resources of the
enterprise.