Instructions: Identify whether the statement written below is TRUE or FALSE. 1. Financial Management is that specialized activity which is responsible for obtaining and effectively utilizing the funds for the efficient functioning of the business and, therefore, it includes financial planning, financial administration, and financial control. 2. The goal of the firm should be to maximize earning per share. 3. Maximizing the price of a share of the firm's common stock is the equivalent of maximizing the wealth of the firm's present owners. 4. Financial Accounting is the process of planning, directing, organizing, controlling, and monitoring the monetary resources of the company in order to achieve its objectives or goals. 5. Profit maximization does not consider the discount rate which reflects the risks of capitalization and the time value of money unlike market value maximization. 6. The role of financial managers are to decide on its investing, financing and operating activities.
Answer (1)
Let's evaluate each statement one by one:
Financial Management : This statement is TRUE. Financial Management does involve obtaining and utilizing funds effectively for a business's efficient functioning. It includes aspects like financial planning, financial administration, and financial control, all of which contribute to the optimal management of financial resources.
Goal of the Firm : This statement is FALSE. While maximizing earnings per share (EPS) might seem desirable, the ultimate goal of a firm typically is to maximize shareholder wealth. This is often achieved through strategies that may not directly increase EPS but increase the company's long-term value.
Maximizing Share Price : This statement is TRUE. By maximizing the price of a firm's common stock, effectively, the wealth of the firm's present owners, i.e., the shareholders, is maximized. This aligns with the primary goal of shareholder wealth maximization.
Financial Accounting : This statement is FALSE. Financial accounting primarily involves recording, summarizing, and reporting the transactions resulting from business operations over a period of time. These processes do not typically involve planning, directing, or organizing monetary resources, which are more aligned with management accounting.
Profit Maximization : This statement is TRUE. Profit maximization does not necessarily take into account the time value of money or the risks involved, unlike market value maximization, which does consider these factors.
Role of Financial Managers : This statement is TRUE. Financial managers are responsible for decisions related to investing, financing, and operating activities. These roles are critical in steering the company towards achieving its financial objectives.
These responses should help clarify the nuances of financial management and accounting within a business context.
