Financial Management

and
Accounting
 Financial Management
and Accounting
Test 1: 05.03.2022, 10:10-11:40 (Handout 1, Handout 2, Handout 3)
Test 2: 19.03.2022, 12:20-13:20
Test 3: 02.04.2022, 12:20-13:20

Assignment (submission) 25.03.2022

Assignment (presentation) 26.03.2022

Computer class (work with Excel):

19.03.2022
02.04.2022

Exam: 06.04.2022

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 Office hours

Thursdays, 16:30-17:30
MS Teams
room 527 (5.floor)

inna.romanova@lu.lv

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 Course Outline

1. Introduction to Financial Accounting

2. Major Financial Statements: Balance Sheet, Income
Statement, Cash Flow Statement
3. Construction of Financial Statements
4. Financial Statement Analysis
5. Introduction to Financial Management
6. Raising Capital. Sources of Financial Capital
7. Cost of Capital. Capital Structure

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 Financial Management

• What should the companies do in order to succeed

in their businesses?

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 Financial Management

• …..
• make good investment decisions and good
financing decisions

One of the most important tasks of

Financial Management

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 The Investment Decision

The Investment (Capital Budgeting) Decision

• starts with the identification of investment
opportunities (capital investment projects)
• identification of promising projects and decision
on how much to invest in each project
• answer: is the project attractive financially?

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 The Investment Decision

In the past  only investments in tangible assets

Now  includes investment in intangible assets (e.g.,
R&D), advertising and marketing of new
products, or acquisition of patents and
trademarks, as well as brand recognition and
acceptance

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 The Investment Decision

Why are these investment decisions important?

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 The Financing Decision

 raise the money that the company needs for its

investments and operations
The company can:
• invite investors to invest in exchange for a share of
future profits (investors receive shares of stock 
equity investors)
• promise to pay back the investors' cash plus a
fixed rate of interest (investors are lenders who
must be repaid  debt investors)
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 The Financing Decision

The choice between debt and equity financing is

often called the capital structure decision

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 Financial Management

• long-term financing decisions

• long-term investment decisions

• short-term financing decisions

• short-term investment decisions

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 Capital Budgeting/Investment or
Financing Decisions?
1. Company decides to spend $2 billion to develop a new
microprocessor.
2. Company borrows €200 million from a Bank.
Company constructs a pipeline to bring natural gas
onshore from a production platform.
3. Company spends €100 million to launch a new brand
of juice in European markets.
4. Company issues new shares to buy a small biotech
company for €10 million.

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 Capital Budgeting/Investment or
Financing Decisions?
1. Company decides to spend $2 billion to develop a new
microprocessor. ID
2. Company borrows €200 million from a Bank. FD
3. Company constructs a pipeline to bring natural gas
onshore from a production platform. ID
4. Company spends €100 million to launch a new brand
of juice in European markets. ID
5. Company issues new shares to buy a small biotech
company for €10 million. ID+FD

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 SUMMARY

The Investment (Capital Budgeting) Decision

 identification of promising projects and decision
on how much to invest in each project
The Financing Decision
 raising the money that the firm needs for its
investments and operations

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 Company’s Assets

Real assets are used to produce the firm's products

and services (tangible assets and intangible assets)

The firm finances its investments in real assets by

issuing financial assets to investors

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 Financial Assets or Real Assets?

1. a patent
2. a mortgage loan taken to pay for a new office
3. new brand of chocolate

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 Financial Assets or Real Assets?

1. a patent RA
2. a mortgage loan taken to pay for a new office FA
3. new brand of chocolate RA

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 Company/Corporation

• public companies: the corporation's shares are

traded in a securities market
• private corporations: the shares are held by small
groups of managers and investors

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 Company/Corporation

• for small corporations, shareholders and

management may be one and the same
• for large corporations, separation of ownership
and management is a practical necessity
• authority has to be delegated  can work only if
the shareholders have a common objective

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 Financial Management

The main financial objective of the company is…?

ST profit max. (~) LT?
LT profit max. (~) finance?
Value max. of the company

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 Financial Management
ST profit max.
-increase sales (price increase; price decrease, cross-selling;
increase the volume of goods sold; increase marketing costs)
-reduce the production costs of goods sold (cheaper raw
materials (quality?))
-increase other income (rent out the office)
-decrease costs (e.g., training of employees)
-outsourcing

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 Financial Management
ST profit max./losses min.
decrease sales

Max.: 1 equipment+1 employee  max.200 kg./day

Currently:
2 equipments+2 employees  volume of production (sales)
300 kg./day
Solution:
Decrease the sales 200 kg./day
1 equipment+1employee  not for the LT

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 Financial Management
LT profit max.
-invest in equipment, employees
-new production line
-new location of the production
-new shops, new markets
-new suppliers
-monitoring of the processes

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 Goals of the Corporation

The financial objective of the corporation is to

maximize current market value

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Financial Markets and Enterprises

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 QUIZ

1. Financial markets are used for trading:

A) both real assets and financial assets
B) the goods and services produced by a firm
C) securities, such as shares
D) the raw materials used in manufacturing

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 QUIZ

1. Financial markets are used for trading:

A) both real assets and financial assets
B) the goods and services produced by a firm
C) securities, such as shares
D) the raw materials used in manufacturing

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 QUIZ

2. Primary markets can be distinguished from

secondary markets in that primary markets sell:
A) lower valued shares
B) previously unsold shares
C) only the shares of large firms
D) shares with greater profit potential

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 QUIZ

2. Primary markets can be distinguished from

secondary markets in that primary markets sell:
A) lower valued shares
B) previously unsold shares
C) only the shares of large firms
D) shares with greater profit potential

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 QUIZ

3. The first time a security is sold it is in the _______

market; subsequent trading of the security is in the
______ market.
A) money; capital
B) capital; money
C) banking; secondary
D) primary; secondary

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 QUIZ

3. The first time a security is sold it is in the _______

market; subsequent trading of the security is in the
______ market.
A) money; capital
B) capital; money
C) banking; secondary
D) primary; secondary

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 QUIZ

4. The money market is the source for ______ financial

assets, while the capital market is the source for
______ financing.
A) investment; liquid
B) short-term; long-term
C) liquid; financial institution
D) long-term; short-term

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 QUIZ

4. The money market is the source for ______ financial

assets, while the capital market is the source for
______ financing.
A) investment; liquid
B) short-term; long-term
C) liquid; financial institution
D) long-term; short-term

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 QUIZ

5. When shareholder X sells its “ABCD” shares to

shareholder B in the secondary market (Stock
Exchange) how much money is received by
“ABCD”?
A) ABCD will receive most of the funds, except for
commissions
B) ABCD will receive nothing
C) ABCD will receive only the commissions on the sale
of stock
D) ABCD will receive a portion of the funds for every
stock traded on the secondary market

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 QUIZ

5. When shareholder X sells its “ABCD” shares to

shareholder B in the secondary market (Stock
Exchange) how much money is received by
“ABCD”?
A) ABCD will receive most of the funds, except for
commissions
B) ABCD will receive nothing
C) ABCD will receive only the commissions on the sale
of stock
D) ABCD will receive a portion of the funds for every
stock traded on the secondary market

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