Introduction to Financial Management: Meaning, Scope, Objectives, Functions and Role of CFO Questions

Question 1

Define financial management.

Accepted Answer

Financial management is the process of **planning, raising, investing and controlling funds** to achieve organisational objectives and maximise firm value.

Question 2

State one objective of financial management.

Accepted Answer

One objective is **wealth maximisation** (maximising the market value of the firm/shareholders’ wealth).

Question 3

What is meant by wealth maximisation?

Accepted Answer

Wealth maximisation means increasing **shareholder wealth** by maximising the present value of expected future **cash flows** (reflected in share price).

Question 4

Name any one key decision of financial management.

Accepted Answer

Investment decision (capital budgeting) is one key decision of financial management.

Question 5

Who is a CFO?

Accepted Answer

CFO (Chief Financial Officer) is the top executive responsible for **financial strategy, funding, reporting and risk management**.

Question 6

Financial management is future-oriented.

Accepted Answer

True. Financial management focuses on future **cash flows** and decisions, whereas accounting is mainly past-oriented reporting.

Question 7

Differentiate between profit maximisation and wealth maximisation (any three points).

Accepted Answer

Profit maximisation vs wealth maximisation:

| Basis | Profit maximisation | Wealth maximisation |
|---|---|---|
| Focus | accounting profit | **firm value / share price** |
| Time value | ignored | **considered** |
| Risk | ignored | **considered** |

Hence, wealth maximisation is preferred for long-term value creation.

Question 8

Explain the scope of financial management (any three areas) with a small table.

Accepted Answer

Scope of financial management includes (any three):

| Area | What it covers |
|---|---|
| **Capital budgeting** | long-term investment decisions |
| **Financing** | debt–equity mix, raising funds |
| **Working capital** | cash, inventory, receivables |
| Dividend policy | retention vs payout |

These areas collectively manage funds for value creation.

Question 9

State and explain the key decisions/functions of financial management (any three) using a flow.

Accepted Answer

Key decisions/functions (any three):

- **Investment decision**: selecting projects/assets.
- **Financing decision**: choosing sources and capital structure.
- **Dividend decision**: payout vs retention.
- **Working capital decision**: managing current assets/liabilities.

Flow: Plan funds → Raise funds → **Invest** → Manage **WC** → **Dividend/Retain** → Control

Question 10

Differentiate between financial management and accounting (any three points) using a table.

Accepted Answer

Financial management vs accounting:

| Basis | Accounting | **Financial management** |
|---|---|---|
| Orientation | past-oriented record/report | **future-oriented decisions** |
| Focus | profit & position | **value / wealth maximisation** |
| Tools | statements, ledger, audit | NPV, WACC, cash planning |

Thus, accounting provides information; financial management uses it for decisions.

Question 11

Explain 'working capital decision' and state any two objectives (brief) with a small table.

Accepted Answer

Working capital decision relates to managing **current assets and current liabilities** (cash, inventory, receivables, payables).

Objectives (any two):
- maintain **liquidity** (meet short-term obligations)
- improve **profitability** by efficient current asset use
- ensure smooth operations (no stock-out/cash crunch)

| Focus | Goal |
|---|---|
| **Liquidity** | timely payments |
| **Profitability** | minimise idle funds |

Hence, working capital management balances liquidity and profitability.

Question 12

Explain why wealth maximisation is preferred over profit maximisation (any three reasons) with a small table.

Accepted Answer

Wealth maximisation is preferred because it:

- considers **time value of money** (timing of cash flows)
- considers **risk**/uncertainty in returns
- focuses on **cash flows** and market value, not only accounting profit

| Criteria | Profit maximisation | **Wealth maximisation** |
|---|---|---|
| Time value | ignored | **considered** |
| Risk | ignored | **considered** |
| Base | accounting profit | **cash flows + value** |

Hence, wealth maximisation supports long-term value creation.

Question 13

Explain the role of CFO in a modern organisation (exam-style).

Accepted Answer

### Meaning
The CFO is the senior executive who leads the **finance function** and supports strategic decision-making.

### Key roles
- **Financial planning** and budgeting; forecasting cash flows.
- **Fund raising**: deciding optimal sources (equity/debt) and managing cost.
- **Financial control**: reporting, analysis, performance monitoring.
- **Risk management**: liquidity, interest rate, currency and credit risks.
- **Compliance & governance**: disclosures, audit coordination, regulatory reporting.

| Area | CFO contribution |
|---|---|
| Strategy | capital allocation decisions |
| Control | budgeting + reporting |
| Risk | identify–measure–mitigate |

### Conclusion
Thus, the CFO is a **strategic partner** to the CEO/board, not merely a record-keeper.

Question 14

Explain agency problem and list measures to reduce it (exam-style) with a small table.

Accepted Answer

### Meaning
Agency problem arises due to separation of **ownership and management**. Managers may pursue personal goals instead of **wealth maximisation**.

### Effects
- unnecessary perks/empire building
- short-term profit focus
- risk choices not aligned with owners

### Measures to reduce agency conflict
| Measure | How it helps |
|---|---|
| **Performance-linked pay** | aligns manager incentives |
| **Board/audit committee** | monitoring and control |
| **Disclosure & audit** | transparency and accountability |

### Conclusion
Strong **corporate governance** reduces agency costs and supports shareholder wealth maximisation.

Question 15

Explain risk–return trade-off and show a simple diagram/flow (exam-style).

Accepted Answer

### Meaning
Risk–return trade-off means higher **risk** requires higher expected **return**.

### Why
Investors demand compensation for uncertainty in cash flows.

Simple diagram/flow (draw/write):
Low risk → Low return  
Higher risk → Higher expected return

| Project | Risk | Expected return |
|---|---|---|
| A | Low | Lower |
| B | High | Higher |

### Conclusion
Financial decisions should compare expected returns after considering **risk** and timing of cash flows.

Basis	Profit maximisation	Wealth maximisation
Focus	accounting profit	firm value / share price
Time value	ignored	considered
Risk	ignored	considered

Introduction to Financial Management: Meaning, Scope, Objectives, Functions and Role of CFO

8 more questions to unlock