Bachelor of Business Administration (Part III) Assignment 2024-25

Programme Name: BBA (Part III)

Paper Code – BBA 13

(Financial Management)

Section-A

(Very Short Answer Type Questions)

Note: Answer all questions. As per the nature of the question you delimit your answer

in one word, one sentence or maximum up to 30 words. Each question carries 1 mark.

6x1=06

1. (i) What is Financial Management.?

Financial management is the business function concerned with planning, organizing, controlling, and
monitoring an organization’s financial resources. Broadly, anything having to do with profitability,
expenses, cash, or credit falls under the purview of financial management.

(ii) Define Cost of Capital.

Cost of capital is the minimum rate of return or profit a company must earn before generating value.
It’s calculated by a business’s accounting department to determine financial risk and whether an
investment is justified. (ii) Define Dividend Policy.

(iv) Define Capital Budget.

Capital budgeting is the process of evaluating and selecting long-term investment projects or capital
expenditures. It involves analyzing the potential profitability of projects to determine which ones are
worth pursuing and allocating financial resources accordingly. Capital budgeting decisions are crucial
for businesses as they involve significant financial commitments and can impact the company's
future growth and profitability.

(v) Analysis of Liquidity

Liquidity analysis examines a company's ability to pay off its short-term debts and obligations. It
provides insight into the company's financial health by analyzing its liquid assets available to cover
current liabilities.

(vi) Bank Finance

A bank is a financial institution licensed to receive deposits and make loans. There are several types
of banks including retail, commercial, and investment banks. In most countries, banks are regulated
by the national government or central bank.

Section-B

(Short Answer Questions)

Note: Answer any four questions. Each answer should not exceed 100 words. Each

question carries 3 marks. 4X3=12

2. Discuss the utility of Financial Management.

Importance of Financial Management

There is a huge importance of financial management in any organization or business’s finance

management to sets the goals, creates the policies, specifies the processes, puts programmes in
place, and allots the budgets for all financial activities. It is feasible to guarantee that the business
will always have access to enough cash through efficient finance management procedures.

Let’s explain the importance of financial management in below mentioned pointers.

 Financial Planning and Strategizing:

Financial planning is important for finance management. It determines each monetary requirement
related to business concerns. In later stages of a company’s finance management life cycle, financial
planning colleagues must also act promptly and appropriately rather than worrying. Financial
planning appears to be a vital aspect of corporate concern. Normally, a company’s financial planning
receives the majority of the credit for its corporate success.

 Safeguarding / Protecting Funds:

Finance management is essential for accomplishing business objectives and safeguarding finances. To
ensure that a business runs well, it is important to assess the areas where finances are needed and
properly distribute them. Investing too much in one project can harm other corporate activities since
they frequently lack funding. Importance of financial management in an organization is to protect
money and make good investments.

 Economic Growth and Stability:

The economy’s growth will be ensured by prudent financial planning. You will gradually increase the
amount of wealth you create, which will aid in your financial development. Importance of financial
management include protecting finance towards achieving business goals. Economic growth is the
only way to guarantee your financial stability, and the only way to do so is through sound finance
management.

 Decision-making:

Once a financial decision has been taken in accordance with a company concern, it cannot be
changed. So, money that has already been spent cannot be recovered for bad decisions. The entire
business activity may be impacted by a financial decision due to the fact that it instantly interacts
with all corporate departments.

 Controlling:

A financial manager can ensure that every department is working within the budget and the finances
are well managed for intended purchases.

3. Define analysis of Financial Statement.

Financial Statement Analysis refers to the process of reviewing and analyzing a company’s financial
statements. It is primarily done to make better financial decisions and devise plans for the company
to earn more income in the future. Financial Analysis meaning as well as procedure is important both
for the accounting exam point of view as well as for practical purposes.

o Different types of financial statements are the income statement, statement of cash
flow, balance sheet, notes to accounts, statement of changes in equity, and so on.

o A few common types of financial statements analysis are Horizontal Analysis, Vertical
Analysis, Liquidity Analysis, Profitability Analysis, Variance Analysis, Valuation
Analysis, and Scenario and Sensitivity Analysis.

o Comparison, analysis, and rearrangement, and interpretation of data are the major
steps involved in financial statement analysis.

o The activity of analysis of financial statements is primarily done to measure the

company’s profitability and evaluate its operational efficiency.

4. Explain the limitation of financial ratios.

Limitations of Ratio Analysis

While ratios are very important tools of financial analysis, they d have some limitations, such as

 The firm can make some year-end changes to their financial statements, to improve their
ratios. Then the ratios end up being nothing but window dressing.

 Ratios ignore the price level changes due to inflation. Many ratios are calculated using
historical costs, and they overlook the changes in price level between the periods. This does
not reflect the correct financial situation.

 Accounting ratios completely ignore the qualitative aspects of the firm. They only take into
consideration the monetary aspects (quantitative)

 There are no standard definitions of the ratios. So firms may be using different formulas for
the ratios. One such example is Current Ratio, where some firms take into consideration all
current liabilities but others ignore bank overdrafts from current liabilities while calculating
current ratio

 And finally, accounting ratios do not resolve any financial problems of the company. They are
a means to the end, not the actual solution.

5. What is Fund Flow Statement?

A fund flow statement is a statement prepared to analyse the reasons for changes in the financial
position of a company between two balance sheets. It portrays the inflow and outflow of funds i.e.
sources of funds and applications of funds for a particular period.

It is also righteous to say that a fund flow statement is prepared to explain the changes in
the working capital position of a company.

Objectives of fund flow statement

A question arises as to why prepare fund flow Statement when we already prepare profit and
loss and balance sheet. The need here arises because the profit and loss and balance sheet will not
explain the reasons for a change in the financial position.

Profit and loss a/c and balance sheet will give two years figures i.e., current years and previous years.
But it will not explain as to why the movement has happened, let’s say, the extent of use of long-
term funds for a long-term needs and the use of short-term funds for a long term and short term.
Here is why fund flow statement is prepared.

Broadly, a fund flow statement will give us the following two information:

 Sources of funds - From where the funds have come in

 Application of funds - Where these funds have been used

Components of a fund flow statement

A fund flow statement comprises of :

 Sources of funds: It talks about the extent of funds availed from

o Owners

o Outsiders

 Application of funds: It talks about how the funds have been utilized

o Funds deployed in Fixed assets

o Funds deployed in Current assets

6. Discuss the theories of Capital structure in brief.

Section ‘C’

(Long Answer Questions)

Note: Answer any two questions. You have to delimit your each answer maximum up to 400

words. Each question carries 06 marks. 2x6=12

7. Discuss the scope and limitations of Financial Management.

Financial management is an important activity in any organization. It is the process of planning,

organizing, controlling, and monitoring the financial resources with a view to attain organizational
goals and objectives. It is the best approach for controlling the financial activities of an organization
such as procurement of funds, utilization of funds, accounting, payment, risk assessment, and
everything that is related to money management. Read the article below to know the objectives and
scope of financial management.

Objectives of Financial Management

The foremost aim of financial management is to manage the finances of an organization so that
businesses are compliant with necessary rules and regulations and are successful in their field. This
process involves extensive planning and its proper execution. When done precisely, businesses
flourish and profitability increases. This is the primary reason why the finance department, along
with finance or revenue managers, plays a significant role in any organization. Accordingly, the basic
objective of financial management are:

 Ensuring a regular and suitable supply of funds for the organisation.

 To ensure optimum use of funds. Once the funds are procured, they should be used in the
maximum possible way at minimum cost.

 Creation of a stable capital structure. The capital distribution should strike a steady balance
between debt and equity.

 Ensuring the safety of investments. The funds should be invested in safe ventures to
guarantee adequate returns.

 Ensuring adequate returns for the organisation and the shareholders.

Scope of Financial Management

Financial management helps a particular organisation to utilise their finances most profitably. This is
achieved via the following two conducts.

The scope of financial management is divided into two categories:

 Traditional Approach

 Modern Approach

Let us discuss the two approaches in brief.

Traditional Approach

According to this approach,the scope of financial function is restricted to procurement of funds by

the corporate organizations to meet their financial needs.

The term procurement here refers to raising of funds externally as well as the interdependent
aspects of raising funds.

Following Three Things are used for the Procurement of Finance

 Institutional source of finance

 Issuance of financial instruments to collect necessary funds from the capital market.
  Legal and accounting relationship between the business and the source of finance.

According to this approach, finance is not required for the routine events but for the sporadic events
like promotion, reorganization, liquidation, expansion, etc. Managing funds for these things is
considered as the most important feature of financial management. The financial manager in this
approach is not concerned with internal financing rather he has to maintain relationships with
outside parties and financial institutions.

According to this approach, the financial manager is not responsible for the efficient use of funds
whereas he is responsible to get necessary funds on fair terms from the outside parties. The
traditional approach continued till the fifth decade of the 20th century.

Limitation of Traditional Approach

The traditional approach of finance can be considered somewhat narrow because of several reasons.
Following are the primary drawbacks and this approach.

One-sided Approach

This traditional approach gives more attention to the system of procurement and the problems that
might arise during that scenario. It does not offer a system for efficient utilisation of procured funds.
This approach considers the viewpoint of outside parties (like banks, financial institutions, investors)
who provide funds to the business but ignores the internal parties who are responsible to take
financing decisions. Therefore, a one-sided approach is also termed as an outsider-looking approach.

 More Focus On the Financial Issues of Corporate Enterprise:

This approach focuses only on the financial problem of corporate enterprises but the financial
problems of non corporate entities like partnership firms, and sole trade are ignored.

 More Emphasis On Sporadic Events:

Traditional approach considers fund allocation as on the contingencies for sporadic incidents like
business reorganization, incorporations, mergers, consolidation, etc. ignoring This approach ignores
everyday financial problems that a business enterprise might face. Working capital financing
decisions are also kept outside the scope of a traditional approach.

Modern Approach

By the end of the 1950 technology up-gradation, development of strong corporate structure and
increasing competition made it necessary for the management to make optimum use of available
natural resources.
According to this approach, the financial manager considers the broader and analytical point of view.
According to the modern approach, financial management is concerned with both acquisition of
funds and optimum use of available resources. The arrangement of funds is an important component
of the whole finance function.

In this approach, not only sporadic events are considered but also the long term and short term
financial problems are considered. The main components of financial management include financial
planning, evaluation of alternative use of funds, capital budgeting, determination of cost of capital,
determination of the financial standard for the success of the business, management of income, etc.
Therefore, according to this approach, three important decisions are taken by the finance manager.
The three decisions are:

 Investment Decision

 Financing Decision

 Dividend Decision

Let us discuss the three decisions in brief

Investment Decision

This decision is related to the selection of assets in which finds will be invested by the firms. The
asset that is acquired by a firm may be a long term asset or short term asset.

The decision taken to invest the funds in long term assets is known as capital budgeting decision.
Hence, capital budgeting is the process of selecting assets or an investment proposal that yields
return for a long term.

The decision taken to invest the funds in short term assets or current assets is known as working
capital management. The working capital management deals with the management of current assets
that are highly liquid in nature.

Financing Decision

This scope of financial management indicates the possible sources of raising finances from various
resources. They are of 2 different types – Financial planning decisions attempt to estimate the
sources and possible application of accumulated funds. A proper financial planning decision is crucial
to ensure the availability of funds whenever required.Capital structure decisions involve identifying
various sources of funds. It facilitates the selection of the best external sources for short or long-term
financial requirements. The financing decision is related to the procurement of funds required at the
right time. After the decision related to the fund requirement is made then the financial manager has
to select the various options for financing and select the best and cost effective method for financing
so that the business runs smoothly without any unnecessary obstacles such as inadequate funds.

Dividend Decision

It involves decisions taken with regards to net profit distribution. It is divided into two categories –

 Dividend for the shareholders.

 Retained profits (usually depends on a particular company’s expansion and diversification

plans).

The dividend decision is concerned with determining the percentage of profit earned to be paid to
the shareholders as dividend. Here the financial manager makes the decision regarding how much
dividend is to be paid out or how much to retain as retained earnings. Dividend payout decisions are
critical to make so that shareholders and investors are happy and even the firm has enough funds for
the business expansion.

8. What do you understand by Cash Flow Statement? Explain its advantages.

A cash flow statement is a financial statement that exhibits the flow of incoming and outgoing cash in
an enterprise. This statement is used to assess the ability to generate and utilize cash by assessing
business gains from continuous progress and external sources for cash inflow as well as a cash
outflow in terms of payments made and other input charges in the business. In short, a cash flow
statement records the cash flow in a business.

Cash flow statements can be classified into the following categories:

1. Cash Flow Generated from Operating Activities: activities that generate significant revenue

2. Cash Flow from Investing Activities: acquisitions and disposals of long term assets and
investments

3. Cash Flow from Financing Activities: activities that result in changing of size, composition
and borrowing activities of a firm from other sources

Calculate Cash Flow Statements?

A cash flow statement is calculated by using two main methods: direct method and indirect method.
It is important to make adjustments in the net income of a firm by adding or deducting differences in
expenses, revenue, credit transactions and other non-cash things as they are evaluated in the
income statement and balance sheet.

Direct Method
In the direct method of calculation, employee benefits expenses paid, cash received from trade
receivables, etc., are transformed into a cash basis as items are reported on accrual data in the
statement.

Indirect Method

The indirect method of cash flow statement calculation is based on the amount of net profit and loss.
This includes the statements of various operational activities of a firm. It is also calculated on an
accrual basis, thus, taking non-operating items into account such as interest paid, the goodwill that is
written off, depreciation, etc.

Advantages

 A cash flow statement helps a business owner assess net assets.

 It helps in evaluating the cash-generating capability of a firm.

 Aids in planning policies for profit-maximizing.

 Understanding and assessing the cash flow of a firm helps in optimizing profit and
sustainability.

 Helps investors get an idea and judge the risk of investing in the firm.

 Helps creditors understand a firm's resources in terms of liquidity and other assets as well as
plan a budget for the firm's operational budget and other expenses and debts.