Page 8 - DMGT207_MANAGEMENT_OF_FINANCES

Unit 1: Introduction to Financial Management

Notes
Table 1.2: Income Statement and Topics in Financial Management
Net Sales Revenue risk

Cost of goods Sold
Materials and stocks
Wages and Salaries
Other Manufacturing Expenses

Gross Profit Gross profit margin

Operating Expenses
Selling and Administration Expenses
Depreciation Depreciation Policy

Operating Profit

Non-operating surplus/deficit

Earnings before interest and tax Business risk

Interest Financial risk
Profit before tax
Tax Tax planning

Profit after tax Return on equity

Dividends Dividend policy

Retained Earnings

Self Assessment

Fill in the blanks:
1. In the earlier years, financial management was treated synonymously with the
……………… .
2. Financial management broader scope includes efficient use of resources in addition to the
……………… .
3. Current liabilities are associated with ……………… financing policy.
4. ……………… profit margin is obtained by deducting cost of goods sold from net sales.

1.2 Goals/Objectives of Financial Management – Profit
Maximization vs. Wealth Maximization

Traditional Approach – Profit Maximization

It has been traditionally argued that the objective of a company is to earn profit. This means that
the finance manager has to make decision in a manner that the profit is maximised. Each
alternative, therefore, is to be seen as to whether or not it gives maximum profit.
Profit maximization objective gives rise to a number of problems as below:
1. Profit maximization concept should be considered in relation to risks involved. There is a
direct relationship between risk and profit. Many risky propositions yield high profit.

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