Corporate Finance

Pre-mid Assignment II
Semester: VI
Section: A

Submitted by: Jannat Irfan

Sahira Ashraf

Submitted to: Ms. Anam Tariq

Date of Submission: 3 – 3 – 2020

QUESTION 1

What are the major differences between accounting and finance with respect to emphasis
on cash flows and decision making?

In general, accounting is the terminology used for recording transactions. The process of
recording transactions of any business comprises of summarizing, analyzing and reporting those
transactions. Whereas finance is the study of money. The study is dependent on two procedures,
how it is acquire? And how it is spend? In finance various activities are performed, from
budgeting, lending, investing to saving and forecasting. Also under finance there are three
branches, personal, corporate, and public. This job could be performed by any finance major
graduate.

To prepare and examine financial records trial balance, income statement and balance sheet, are
the most useful ways, through which companies assures the transparency and minimize the risk
of default. Normally the job is performed by accountants. This shows the connection between
accounting and finance. Accounting is an essential part of finance. In accounting the essential
information is generated and that information is composed in financial forms (balance sheet,
income statement).

This connection leads to the major difference between accounting and finance, where one is
associated with the treatment of funds, the other is associated with decision making.

On the grounds of cash flows, accounting is dependent on two major principles accrued and
incurred. This concept in accounting says that income and expenses must me acknowledged in
accounting period to which they relate, and not on cash basis. In depth, the concept suggests that
revenue should be recognized at the point of sale and not when it is collected. Same is the case
with expenses. Expenses should be recognized when they are incurred and not when they come
due or paid.

In case of decision making, accounting gives the reason for decision making. In accounting the
goal is to collect transactions, and on regularly basis the data has to be improved. Most
importantly accounting is related with past, present and future tendency of the company.
Whereas, in finance the responsibility is to manage and control the operations of the company,
along with that decision making is the major aspect of finance. In short, finance starts when
accounting ends.

QUESTION 2

“All managers in the firm, regardless of their job descriptions, work with financial
personnel to justify labor power requirements, taking care of shareholders rights, negotiate
operating budgets and deal with financial performance appraisals”. Provide your opinion
on this statement. Moreover, what other roles financial managers have to perform in
respect to maximizing firm’s profit.

Managers are the one who is a person responsible for controlling or administering an
organization or group of staff. A successful manager is a person who managers or who is in
charge of something, a manager can effectively control the various departments in the company,
they are also good at guiding the people who work for them. Mangers often have to make
decisions about the companies.

A manager is usually responsible for,

1. Panning
2. organizing
3. leading
4. co-coordinating
5. controlling

Despite the managers have to carry out the above functions it is mandatory that they effectively
work with the financial personnel which justifies the labor power requirements, they take care of
the shareholders rights as well as they negotiate the operating budgets and they also deal with the
financial performance.

It is vital that the manager stays alert and monitors the various other functions which directly or
indirectly relate to their daily tasks or even their own department.
Financial management is the art and science of managing a firm’s money so that it can meet its
goals; this is performed by both financial department and financial personnel. To fulfill their
responsibilities it is recommended for both the parties to work closely with each other in order to
generate the beneficial outcomes. For example, in a company, its sales representatives and credit
and collection policies, both affect the ability of sales.

It is one of the duties of financial managers to keep a track on company’s cash flows, for
example how the money is flowing into and out of the premises. Tracking is also important
because revenue is the only source of funding company’s operations and as per the accounting
rule the revenue is incurred but the company received the actual money later, so to meet the
accrued expenses financial managers have to find alternatives ways in order to meet liability so
to secure the image of company.

How financial managers play role in maximizing firms profit.

A financial manager has a very challenging and a complex role in the organization, they crucially
analyze the financial data which has been conducted and prepared by the accountants they, have
to evaluate and monitor the firm’s financial status, they also generate the financial plans which
include cash flow statements. It’s important that the financial manager plays a successful role as
it has a huge impact on the business

A financial manager will track day-to-day operational data such as cash collections and
payments to ensure that the company has enough cash to meet its obligations. Over a longer time
prospect, the manager will thoroughly study whether and when the company should open a new
manufacturing facility. The manager will also suggest the most appropriate way to finance the
project, raise the funds, and then monitor the project’s implementation and operation.

1. Financial planning:

The financial manager is responsible of doing the financial planning, they prepare the plans and
they also predict the outcomes and the resources which they need to invest, the financial
planning also includes monitors and recording the expense, sales and the sales which the firm is
required to generate to gain a breakeven.
 2. Investment (spending money):

The financial manager is required or responsible to spend money, they invest funds into projects
and sources which will in return provide the organization with a high return and would benefit
the organization in the long run.

3. Financing (raising money):

While the financial manager is responsible of spending money, in return they are also
responsible of generating the money, this is the inflows which the business gets, its vital that an
organization continuously obtains funds which would further allow them to carry on with their
operations and investments.

QUESTION 3

“Financial managers must understand the economic framework and be alert to the
consequences of varying levels of economic activity and changes in economic policy.”
Explain this statement in context with finance and economics relationship.

Financial managers are mostly hired by banking and finance, healthcare, and insurance
industries. In general, they are required to perform monitoring accounts, preparing reports,
reviewing reports and forecasting finances. Other than these financial managers must understand
the economic frameworkand be alert to the consequences of varying levels of economic activity
and changes in economic policy.

Understanding economic framework is linked with two things, first finance and second
economics. In order to perform their duties, financial managers are required to grasp the
concepts of economic theories. That knowledge could act as guideline for managers to perform
their duties in a more effective manner. Because managers are responsible for decision making,
so they should have enough knowledge about market conditions, economic activities and the
policies. This comprehension is achieved through the concept of marginal cost benefit analysis.
This analysis helps providing managers ample amount of information about relevant
measurement of costs and benefits at a specific level of production and consumption. Insight of
this information allows managers to make decisions and take actions only when the added
benefits exceed the added costs. Now here comes the important part of the question, where it was
quoted that “managers must understand”, to get the idea about the economy and its structure it’s
important that managers should know about marginal cost and marginal benefit separately,
because at times the curves of both the concept have to drawn up separately in order to
understand the different effect that a even policy is producing or might produce in future.
Marginal cost is the additional cost the company incur to produce one more unit, whereas
marginal benefit is the gain the company receive for doing anything one more time. And when
producing one more unit exceeds the additional cost of producing that item, the curves intersect
and indicate that the company will continue to make profit. Overall, this concept suggest that
increase in production and to keep increasing the production level until it reaches to its
maximum point, the company will reach to its profit maximizing level. And here with this
revelation, the marginal revenue equals with the marginal cost.

In terms of finance, at personal level finance is related with individuals’ decisions about how
much of their earnings they spend, save, and invest. Because the managers have to perform a
variety of tasks and administer the financial affairs as well, that’s why understanding of
economic framework is necessary. The major reason behind this statement is that directly or
indirectly economy and its prevailing conditions continuously affect the operation of the
businesses and so does their decisions. With changing economic conditions and the
understanding of those circumstances, businesses get ideas about how much flow of cash they
should hold in order to meet their obligations when they come due.