1)Explain the objectives of financial management, interphase between finance and

other functions.

Finance is the study of money management, the acquiring of funds (cash) and the directing of
these funds to meet particular objectives. Good financial management helps businesses to
maximize returns while simultaneously minimizing risks.

Financial management is an integral part of overall management and not merely a staff function.
It is not only confined to fund raising operations but extends beyond it to cover utilisation of
funds and monitoring its uses. These functions influence the operations of other crucial
functional areas of the firm such as production, marketing and human resources. Hence,
decisions in regard to financial matters must be taken after giving thoughtful consideration to
interests of various business activities. Finance manager has to see things as a part of a whole
and make financial decisions within the framework of overall corporate objectives and policies.

Let us discuss in greater detail the reasons why knowledge of the financial implications of their
decisions is important for the non-finance managers. One common factor among all managers is
that they use resources and since resources are obtained in exchange for money, they are in
effect making the investment decision and in the process of ensuring that the investment is
effectively utilized they are also performing the control function.

Marketing-Finance Interface

There are many decisions, which the Marketing Manager takes which have a significant location,
etc. In all these matters assessment of financial implications is inescapable impact on the
profitability of the firm. For example, he should have a clear understanding of the impact the
credit extended to the customers is going to have on the profits of the company. Otherwise in
his eagerness to meet the sales targets he is liable to extend liberal terms of credit, which is likely
to put the profit plans out of gear. Similarly, he should weigh the benefits of keeping a large
inventory of finished goods in anticipation of sales against the costs of maintaining that
inventory. Other key decisions of the Marketing Manager, which have financial implications, are:

1. Pricing
2. Product promotion and advertisement
3. Choice of product mix
4. Distribution policy.

Production-Finance Interface

As we all know in any manufacturing firm, the Production Manager controls a major part of the
investment in the form of equipment, materials and men. He should so organize his department
that the equipments under his control are used most productively, the inventory of work-in-
process or unfinished goods and stores and spares is optimized and the idle time and work
stoppages are minimized. If the production manager can achieve this, he would be holding the
cost of the output under control and thereby help in maximizing profits. He has to appreciate the
fact that whereas the price at which the output can be sold is largely determined by factors
external to the firm like competition, government regulations, etc. the cost of production is more
amenable to his control. Similarly, he would have to make decisions regarding make or buy, buy
or lease etc. for which he has to evaluate the financial implications before arriving at a decision.

Top Management-Finance Interface

The top management, which is interested in ensuring that the firm’s long-term goals are met,
finds it convenient to use the financial statements as a means for keeping itself informed of the
overall effectiveness of the organization. We have so far briefly reviewed the interface of finance
with the non-finance functional disciplines like production, marketing etc. Besides these, the
finance function also has a strong linkage with the functions of the top management. Strategic
planning and management control are two important functions of the top management.
Finance function provides the basic inputs needed for undertaking these activities.

Economics – Finance Interface

The field of finance is closely related to economics. Financial managers must understand the
economic framework and be alert to the consequences of varying levels of economic activity and
changes in economic policy. They must also be able to use economic theories as guidelines for
efficient business operation. The primary economic principle used in managerial finance is
marginal analysis, the principle that financial decisions should be made and actions taken only
when the added benefits exceed the added costs. Nearly all-financial decisions ultimately come
down to an assessment of their marginal benefits and marginal costs.

Accounting – Finance Interface

The firm’s finance (treasurer) and accounting (controller) activities are typically within the control
of the financial vice president (CFO). These functions are closely related and generally overlap;
indeed, managerial finance and accounting are often not easily distinguishable. In small firms the
controller often carries out the finance function, and in large firms many accountants are closely
involved in various finance activities. However, there are two basic differences between finance
and accounting; one relates to the emphasis on cash flows and the other to decision making.

2)Explain the Indian Financial Systems.

Indian financial markets are sub-divided broadly into money markets (that deal in short-term
funds) and capital markets (that deal in long-term funds).

Structurally, money market comprises both organised and unorganised sectors.

Unorganised sector is normally made up of indigenous money lenders and bankers who do not
follow formal lines of business.
Their businesses are informal and thus independent of the Reserve Bank of India or banks for
any fund support. This sector is shrinking but, during the period of economic reforms launched
after 1991, the activities of these institutions have become a matter of serious concern and
anxiety.

The organised component of money market consists of the RBI, commercial banks and
cooperative banks. The RBI is the head of the financial institutions as well as the monetary
authority of the country.

The second most important component of the organised money market is the commercial
banks. The first commercial bank in this country—Bank of Bengal—was set up in 1806 in
Kolkata. In addition to this Presidency Bank of Kolkata, two other Presidency Banks were
established in 1840 in Mumbai and in 1843 in Chennai. Integrating these three commercial
banks or Presidency Banks, the Imperial Bank of India was formed in 1921.

This Imperial Bank was nationalised in 1955 and then came to be known as the State Bank of
India. Its seven subsidiary banks were nationalised in 1956. However, Indira Gandhi
nationalised 14 commercial banks—having deposits of Rs. 50 crore and above—in 1969.
Another 6 private banks were nationalised in 1980. At present, the number of public sector
banks is 27.

In terms of size and business, cooperative banks in India are rather tiny compared to
commercial banks. It is a three-tier banking structure (i) with the State Cooperative Bank
operating in each state as an apex bank, (ii) at the district level, the central cooperative hanks,
and (iii) at the village level, the primary agricultural credit societies. However, long- term loans
beyond five years are given by the Primary Cooperative Agricultural and Rural Development
Banks (PCARDBs).

Although public sector commercial banks is the dominant banking sector, privately- owned
banks are nonetheless important in the liberalised regime. Following the Narasimham
Committee recommendations made in 1991 and in 1998, private banks are now being allowed
to operate. In addition, there are some foreign banks operating in India with little or no
restrictions now.

5)Explain the different sources of cash

Sources of cash can be both internal as well as external. ] Internal Sources : The main internal
source of cash is cash from operations. To find cash from operations, the profit available as per
the Profit & Loss account is to be adjusted for non-cash items, such as depreciation,
amortisation of intangible assets, loss on sale of fixed assets and creation of reserves etc. This is
computed just like computation of ‘funds’ from operations as explained under Funds Flow
Analysis. However, to find out the real cash from operations, adjustments will have to be made
for ‘changes’ in current assets and current liabilities arising on account of operations. When all
transactions are cash transactions, then, Cash from operations = Net Profit. When all
transactions are not cash transactions, then, it involves the following two steps: (i) Computation
of funds(i.e., working capital) from operations as in Funds Flow Analysis. (ii) Adjustments in the
funds so calculated for changes in the current assets (excluding cash) and current liabilities.

The following adjustments have to be made for each of the changes in Current Assets and
Current Liabilities to find out cash from operations.

(a) Where there are credit sales: + Debtors outstanding at the beginning of the accounting year
Cash from operations = Net Profit OR - Debtors outstanding at the end of the accounting year.
To put it in another way, + Decrease in Debtors Cash from operations = Net Profit OR - Increase
in Debtors

(b) Where there are credit purchases: + Decrease in Creditors Cash from operations = Net Profit
OR - Increase in Creditors

(c) Effect of opening and closing stocks: + Decrease in Stock Cash from operations = Net Profit
OR - Increase in Stock

(d) Effect of Outstanding Expenses, Income received in Advance etc. + Increase in o/s expenses
+ Increase in income received in advance Cash from Operations = Net Profit - Decrease in o/s
expenses - Decrease in income received in advance.

(e) Effect of Prepaid Expenses and Outstanding Incomes: + Decrease in prepaid expenses +
Decrease in accrued income Cash from Operations = Net Profit - Increase in prepaid expenses -
Increase in accrued income

The overall effect of factors from (a) to (e) can be summarised as under: + Decrease in Debtors
+ Decrease in Stock + Decrease in Prepaid Expenses + Decrease in Accrued Income + Increase in
Creditors + Increase in Outstanding Expenses Cash from operations = Net Profit - Increase in
Debtors - Increase in Stock - Increase in Prepaid Expenses - Increase in Accrued Income -
Decrease in Creditors - Decrease in Outstanding Expenses

External Sources of Cash : The external sources of cash are: (i) Issue of new shares (ii) Raising of
long-term loans (iii) Purchase of plant and machinery on deferred payment terms (iv) Short-
term borrowings from banks (v) Sale of fixed assets, investments etc

4)What are Inventories? Explain.

Inventory management is the process of ensuring that a company always has the products it
needs on hand and that it keeps costs as low as possible.

Inventories are company assets that are intended for use in the production of goods or services
made for sale, are currently in the production process, or are finished products held for sale in
the ordinary course of business. Inventory also includes goods or services that are
on consignment (subject to return by a retailer) or in transit.

There are three types of inventory: raw materials, work-in-progress, and finished goods. Given
the significant costs and benefits associated with inventory, companies spend considerable
amounts of time calculating what the optimal level of inventory should be at any given time.
Because maximizing profits means minimizing inventory expenses, several inventory-control
models, such as the ABC inventory classification method, the economic order quantity (EOQ)
model, and just-in-time management are intended to answer the question of how much to
order or produce.

Inventory management also means maintaining effective internal controls over inventory,
including safeguarding the inventory from damage or theft, using purchase orders to
track inventory movement, maintaining an inventory ledger, and frequently comparing
physical inventory counts with recorded amounts.

Common inventory accounting methods include "first in, first out" (FIFO), "last in, first out"
(LIFO), and lower of cost or market (LCM). Some industries, such as the retail industry, tailor
these methods to fit their specific circumstances. Public companies must disclose
their inventory accounting methods in the notes accompanying their financial statements.

Inventory management makes its biggest mark on the inventory line item of the balance sheet.
That line item doesn't just reflect the cost of the inventory; it also reflects costs directly or
indirectly incurred in readying an item for sale, including not only the purchase price of that
item but the freight, receiving, unpacking, inspecting, storage, maintenance, insurance, taxes,
and other costs associated with it.