Big Picture A

ACC 222- Financial Management

Department of Accounting Education

UM Tagum College
 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Big Picture A
Week 1–3: Unit Learning Outcomes (ULO): At the end of the unit, you are
expected to:
a. Describe the nature, purpose and scope of financial management.
b. Explain briefly the three major types of decisions that the finance manager
makes.
c. Describe the primary financial objectives of a business firm and the
responsibilities of financial manager in achieving its objectives.
d. Describe the role of financial manager in achieving the primary goal of the firm.

Big Picture in Focus: ULOa. Describe the nature, purpose and scope of financial
management.

Metalanguage
In this section, the most essential terms relevant to the study of financial
management and to demonstrate ULOa will be operationally defined to establish a
common frame of reference as to how the texts work in your chosen field or career.
You will encounter these terms as we go through the study of financial
management. Please refer to these definitions in case you will encounter difficulty in
the in understanding financial management concepts.
1. Financial Management. It is a decision making process concerned
with planning, acquiring, and utilizing funds in a manner that
achieves the firm’s desired goal.
2. Finance. It is a body of facts, principles, and theories relating to
raising and using money by individuals, businesses, and
governments.

Essential Knowledge

To perform the aforesaid big picture (unit learning outcomes), you need to fully
understand the following essential knowledge laid down in the succeeding pages.
Please note that you are not limited to exclusively refer to these resources. Thus,
you are expected to utilize other books, research articles and other resources that
are available in the university’s library e.g. ebrary, search.proquest.com etc., and
even online tutorial websites.
Financial management also referred to as managerial finance, corporate finance
and business finance. It is described as the process for and analysis of making
financial decisions in the business context. Financial management is part of a larger
discipline called finance. Finance concerns financial management of both profit-
oriented businesses and government.

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Goals of Financial Management

Thegoal of financial management of every organization varies. For example, if you
confine yourself the profit-oriented business, your goal as a financial manager is to
make money and add value for the owners. But this idea is a little vague and more
precise definition is needed in order to have an objective basis for making and
evaluating financial decisions. As a financial manager in a business enterprise, he
must act in the owner’s best interest by making decisions that increase the value of
the firm or the value of the stock. The appropriate goal for financial manager is to
maximize the shareholder’s wealth through maximization of the current value per
share of the existing stock or ownership in a business firm.

Scope of Financial Management

The scope of financial management through the function of financial managers are
the following:
1. Procurement of short-term as well as long-term funds from financial institution.
2. Mobilization of funds through financial instruments such as equity shares,
preference shares, debentures, bonds, notes and so forth.
3. Compliance with legal and regulatory provisions relating to funds
procurement, use and distribution as well as coordination of the finance
function with accounting function.

Self-Help: You can also refer to the sources below to help you further

*Cabrera, E. B. (2016). Financial management: Principles and application (Vol. 1).

Manila: GIC Enterprises & Co., Inc.
*Brigham, E., & Houston, J.(2013). Fundamentals of financial management (13th
ed.). Singapore: Cengage Learning Asia Pte Ltd.

Let’s Check
Questions:
1. What is the financial management?
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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

2. What is finance?
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3. Enumerate the scope of Financial Management.
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c.________________________________________________________________.

4. What is the primary goal of financial management?

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5. What conflicts may arise between managers and stockholders?

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Let’s analyze
Questions:
1. If a company’s Board of director wants management to maximize
shareholder’s wealth, should the CEO’s compensation be set a fixed
amount, or should the compensation depend on how well the firm performs?
If it is to be based on performance, how should performance be measured?
Would it be easier to measure the performance by the growth rate reported
profits, or the growth rate in stock’s intrinsic value? Which would be better
performance measure? Why?
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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

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2. Should stockholder wealth maximization be thought of as a long-term or

short term goal? For example, if one action increases a firm’s stock price
form current level of P1,000 to P2,000 in 6 months and then to P3,000 in 5
years but another action keeps the stock at P1,000 for several years but then
increases it to P4,000 in 5 years, which action would be better? Think of
some corporate actions that have these general tendencies.
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In a Nutshell
1. Explain the shareholder’s wealth maximization goal of the firm and how it can be
measured. Make an argument for why it is better goal than maximizing profit.
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Q&A List

Do you have any question for clarification? Write them here.

Questions/Issues Answers

1.

2.

3.

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

4.

5.

Keyword Index

Financial management
Financial management goals
Financial manager

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Big Picture in Focus: ULOb. Explain briefly the three major

types of decisions that the finance manager makes.

Metalanguage
For you to demonstrate ULOb, you will need to have an operational understanding
of the following terms below. Please note that you will also be required to refer to
the previous definitions found in ULOa section.

Investment Decision. A decision which determines how scarce resources I terms

of funds of a business firms are committed to projects or investment opportunities.
Financing Decision. A decision to choose which capital structure (a mix of debt
and equity) to finance investments should maximize the value of investments
made.
Dividend Decision. A decisions which is concerned with the proper determination
of quantum profits to be distributed to the owners, the frequency of such
payments and the amounts to be retained by the firm.
Essential Knowledge
To perform the aforesaid big picture (unit learning outcomes), you need to fully
understand the following essential knowledge laid down in the succeeding pages.
Please note that you are not limited to exclusively refer to these resources. Thus,
you are expected to utilize other books, research articles and other resources that
are available in the university’s library e.g. ebrary, search.proquest.com etc., and
even online tutorial websites.
The three major types of decision that the financial manager makes are the
following:
1. Investment Decision
2. Financing Decision
3. Dividend Decision

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

All these three decisions aim to maximize the shareholder’s wealth through the
maximization of the firm’s wealth.
Investment Decision
Generally, the firm should select only those capital investment proposals whose net
present value is positive and the rate of return exceeding the marginal cost of
capital. It should also consider the profitability of each project proposal that
contribute to the overall profitability of the firm and lead to the creation of wealth.

Financing Decision
The financing decision should consider the cost of finance available in different
forms and risk attached to it. The principle of financial leverage or trading of equity
should be considered when selecting the debt-equity mix or capital structure
decision. In this decision, the firm must choose which debt and which equity to be
choose in financing the project to arrive the optimal capital structure, which
composed of debt and equity.
Dividend Decision
The dividend distribution policies and retention of profits will have ultimate effect on
the firm’s wealth. If the firm retains the dividend distribution or just make a
conservative payments shows that the firm is giving an emphasis on growth of the
company, but this decision could adversely affect the share prices because
investors have different perception as to dividend policies. Intelligent or long term
investors do not want high dividend distribution because the prefer retention for
future growth. But rational investors or short –term investors prefer to have regular
dividend distribution because for them when there’s high dividend distribution the
company is operating well. The big challenge of the companies’ financial
management is to have a dividend policies that would maintain or increase its
current share prices.

Self-Help: You can also refer to the sources below to help you further
*Cabrera, E. B. (2016). Financial management: Principles and application (Vol. 1).
Manila: GIC Enterprises & Co., Inc.
*Brigham, E., & Houston, J.(2013). Fundamentals of financial management (13th
ed.). Singapore: Cengage Learning Asia Pte Ltd.
Let’s Check
1. Based on your own understanding, explain briefly what is investment decision.

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

__________________________________________________________________
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2. Based on your own understanding, explain briefly what is financing decision.

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3. Based on your own understanding, explain briefly what is dividend decision.

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Lets Analyze
1. Miguel Enterprise recently made a large investment to upgrade its
technology. While these improvements won’t have much effect on
performance in the short run, they are expected to reduce future costs
significantly. What effect will this investment have on Miguel Enterprise’s
earnings per share this year? What effect might this investment have on the
company’s intrinsic value and stock price?
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In A Nutshell
Based on your understanding about the three major decisions, for each decision,
give an example of a transaction that is relevant to each decision.
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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
____________________________________________________________.
Q&A List

Do you have any question for clarification? Write them here.

Questions/Issues Answers

1.

2.

3.

4.

5.

Keyword Index

Financial decisions
Investment decisions
Financing decisions

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Big Picture in Focus: ULOc. Describe the primary financial

objectives of a business firm.

Metalanguage
For you to demonstrate ULOc, you will need to have an operational understanding
of the following terms below. Please note that you will also be required to refer to
the previous definitions found in ULOa and ULOb section to understand further
ULOc.
Strategic Financial Planning. Involves financial planning, financial forecasting,
provisions of finance and formulation of finance policies which lead the firms’
survival and success.
Strategic or Business Plan. This reflects how it plans to achieve its goals and
objective.
Asset Mix. Refers to the amount of pesos invested in current and fix assets.
Hurdle Rate. The minimum acceptable rate of return.
Working Capital. Refers to the firm’s short-term assets and short-term liabilities.

Essential Knowledege
As the firm is driven towards meeting its goals, the firm must undergo first its
strategic financial planning. The company must make strategic or business plan to
help achieve its success. The company’s strategic plan helps analyse the company’s
short-term and long term financial objectives.

SHORT-TERM AND LONG-TERM FINANCIAL OBJECTIVES

Short and Medium Term
 Maximization of return on capital employed or return on investment
 Growth in earnings per share and price/earnings ratio through maximization of
net income or profit and adoption of optimum level of leverage.
 Minimization of finance charges.
 Efficient procurement and utilization of short-term, medium-term, and long-
term funds.

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Long-Term
 Growth in the market value of the equity share through maximization the firm’s
market share and sustained growth in dividend shareholders.
 Survival and sustained growth of the firm.

Responsibilities to achieve the financial objectives

Investing
The finance manager is responsible for determining how scarce resources or
funds are committed to projects. The finance manager must allocate the funds wisely
within the firm. This responsibility requires both asset mix and type of assets to hold.
The investment decision should aim at investments in assets only when they are
expected to earn a return greater than the hurdle rate.
The following areas are examples of investing decisions of a financial manager:
a. Evaluation and selection of capital investment proposal.
b. Determination of the total amount of funds that a firm can commit for
investment.
c. Prioritization of investment alternatives.
d. Funds allocation and its rationing.
e. Determination of the levels of investments in working capital.
f. Determination of fixed assets to be required.
g. Asset replacement decision.
h. Purchase or lease decision.
i. Restructuring, reorganization, mergers and acquisitions.
j. Securities analysis and portfolio management.

Financing
The finance manager is concerned with the ways in which the firm obtains
and manages the financing it needs to support its investments. The financing
objectives asserts that the mix of debts and equity chosen to finance investments
should maximize the value of investments made.
In fund raising decisions, the finance manager should keep in view how and where to
raise money, determination of the debt-equity mix, impact of interest, and inflation
rates on the firm and so forth.

The finance manager will be involved in the following finance decisions:

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

a. Determination of financing pattern of short-term, medium-term and long-term

funds requirements.
b. Determination of the best capital structure or mixture of debt and equity
financing.
c. Procurement of funds through the issuance of financial instruments such as
equity shares, preference shares, bonds, long-term notes and so forth.
d. Arrangement with bankers, suppliers, and creditors for its working capital,
medium term and other funds requirement.
e. Evaluation of alternative sources of funds.

Operating
This area responsibility of finance manager concerns with working capital
management. Managing the firm’s working capital is a day-to-day responsibility that
ensures that the firm has sufficient resources to continue its operations and avoid
costly interruptions.
Some issues that may have to be resolved in relation to managing the firm’s working
apital are:
a. The level of cash, securities and inventory that should be kept on hand.
b. The credit policy.
c. Source of short-term financing.
d. Financing purchases of goods.

Self-Help: You can also refer to the sources below to help you further
*Cabrera, E. B. (2016). Financial management: Principles and application (Vol. 1).
Manila: GIC Enterprises & Co., Inc.
*Brigham, E., & Houston, J.(2013). Fundamentals of financial management (13th
ed.). Singapore: Cengage Learning Asia Pte Ltd.

Let’s Check
Questions
1. Explain how the financial managers meet their objectives through establishing a
strategic financial planning.
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2. Based on your own understanding, how strategic plan helps to achieve the firm’s
objectives.

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

__________________________________________________________________
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3. Why is it important to classify the objectives into short-term and long-term

objectives?
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Let’s Analyze
1. Evaluate the following statement: Managers should not focus on the current on
the current stock value because doing so will lead to an overemphasis on short-
term profits at the expense of long-term profits.
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In a Nutshell
1. The President of Southern Tagalog Corporation made this statement in the
company’s annual report: “STC’s primary goal is to increase the value of
common stockholders equity”. Later in the report. The following announcement
were made:
a. The company contributed P1.5 million to the symphony orchestra.
b. The company is spending P500 million to open a new plant and
expand operations. No profits will be depressed during this period
versus what they years, so earning will be depressed during this
period versus what they would have been had the decision been
made not to expand.
c. The company holds about half of its assets in the form of government
treasury bonds, and it keeps these funds available for use in
emergencies. In the future, though, STC plans to shift its emergency
funds form treasury bonds to common stocks.
Discuss how STC’s stockholders might view each of these actions and
how the actions might affect the stock price.
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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
____________________________________________________________.
Q&A List

Do you have any question for clarification? Write them here.

Questions/Issues Answers

1.

2.

3.

4.

5.

Keyword Index

Financial objectives
Short term plans

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Big Picture in Focus: ULOd. Describe the role of financial

manager in achieving the primary goal of the firm.

Metalanguage
Theirs is no essential terms to be defined in this ULO. Please proceed
immediately to essential knowledge.

Essential Knowledge
As the firm’s organizational structure becomes complex, it is very important to know
the basic role of the financial managers. Figure d-1 shows the basic role of the
financial manager in the firm’s management.
In striving to maximize the shareholder’s wealth, the financial manager makes
decision involving planning, acquiring, and utilizing funds which involve set of risk-
return trade off. These financial decisions affect the market value of the firms stock
which lead to wealth maximization.
It is responsibility of financial management to allocate funds to current and fixed
asset, to obtain the best mix of financing alternatives, and to develop an appropriate
dividend policy within the context of the firm’s objectives. The daily activities of
financial management include credit management, inventory control, and the
receipt and disbursement of funds.
The appropriate risk-return trade-off must be determined to maximize the market
value of the firm for its shareholders.

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Financial Manager Makes

Decision Involving

Acquisition of
Analyst and Funds
Utilization of funds
Planning

Impact on Risk and

Return

Affect the Market Price

of Common Stock

Lead to Shareholder’s
Wealth Maximization

Figure 1. The financial manager’s role in achieving the firm’s goal.

Self-Help: You can also refer to the sources below to help you further
*Cabrera, E. B. (2016). Financial management: Principles and application (Vol. 1).
Manila: GIC Enterprises & Co., Inc.
*Brigham, E., & Houston, J.(2013). Fundamentals of financial management (13th
ed.). Singapore: Cengage Learning Asia Pte Ltd.

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Let’s Check
Questions
Part I:
1. Give an idea on the how financial managers works in the planning and analysis.
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2. Give an idea how important the role of financial manager is in the acquisition.
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3. Describe how financial managers utilize the resources of the firm in terms of
investments.
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4. In a large corporations, what are the two distinct groups that report to the Chief
Financial Officer? Which group is the focus of corporate finance?
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5. Would our goal of maximizing the value of the equity shares be different if we
were thinking about financial management in a foreign country? Why or why not?
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Let’s Analyze
Critics have charge that compensation in the United States is simply too high and
should be cut back. For example, focusing on large corporations, Ray Irani of

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Occidental Petroleum has been one of the best – compensated CEOs in the US,
earnings about $54.4 million in 2007 alone and %550 million over 2003 – 2007
period. Are such amount excessive? In answering, it might be helpful to recognize
that superstar athletes such as Manny Pacquiao and many other at the top of their
respective fields earns at least as much, if not a great deal more.
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In a Nutshell
Can our goal of maximizing the value of the equity shares conflict with other goals,
such as avoiding unethical or illegal behaviour? In particular, do you think subjects
like customer and employee safety, environment and general good of society fit in
this framework, or are they essentially ignored? Think of some scenarios to illustrate
your answer.
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