CPA – Financial Management Revision Kit (Question And Answer)

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TOPIC 1

OVERVIEW OF FINANCIAL MANAGEMENT

 QUESTION 1

December 2025 Question One A

The relationship between shareholders and management is one of the agency relationships widely studied in finance because the actions of managers more often than not conflict with those of shareholders.

 

Required:

With reference to the above statement, evaluate FOUR causes of these conflict. (4 marks)

 

MASOMO MSINGI ANSWER

  • Incentive problems: Managers have fixed salaries and may have no incentive to work hard and maximize shareholders’ wealth. Because their reward is fixed regardless of the profits they make, they may maximize leisure and work less, which is against the interest of the shareholders.
  • Consumption of perquisites: Perquisites refer to high salaries and generous fringe benefits that directors might award themselves. This constitutes directors’ remuneration, which reduces the dividends paid to ordinary shareholders. Therefore, the consumption of perquisites is against the interest of shareholders since it reduces their wealth.
  • Different risk-profile: Shareholders usually prefer high-risk, high-return investments since they are diversified; the collapse of one firm may have an insignificant effect on their overall wealth. Managers, on the other hand, prefer low-risk, low-return investments due to a personal fear of losing their jobs if projects collapse. This difference is a source of conflict since shareholders will forgo profits when low-return projects are undertaken.
  • Different evaluation Horizons: Managers might undertake projects that are profitable in the short run. Shareholders evaluate investments in a long-run horizon consistent with the going concern aspects of the firm. Conflict occurs where management pursues short-term profitability while shareholders prefer long-term profitability.

 

QUESTION 2

August 2025 Question One A

  • Explain FOUR functions of a finance manager in an organisation. (4 marks)
  • Highlight FOUR mechanisms that might be used to ensure that managers act in the best interest of the shareholders. (4 marks)

 

MASOMO MSINGI ANSWER

  • Functions of a finance manager in an organisation.
  • Financial analysis and planning: This is the determination of proper amount of funds to employ in the firms designing the size of the firm and its rate of growth
  • Investment decisions: The efficient allocation of funds to specific assets
  • Financing and capital structure decisions: Raising of funds on as favourable terms as possible that is determining the composition of liabilities.
  • Management of financial resources such as working capital
  • Risk management: This is the protection of assets by insurance or by hedging.

 

Mechanisms used to ensure that managers act in the best interest of the shareholders.

  • Golden parachutes or severance contracts
  • Performance based stock options
  • Threat of firing
  • Threat of takeover

QUESTION 3

April 2025 Question One A

Examine THREE overlaps and THREE conflicts that could arise as firms strive to achieve various financial and non-financial objectives.                  (6 marks)

 

MASOMO MSINGI ANSWER

Overlaps – occurs if attainment of one objective leads to attainment of another objective (s) example:

  • Increased customer satisfaction can result in profit maximization
  • Increased investment in corporate social responsibility (CSR) can lead to profit maximization
  • Firms’ increased responsibility to other stakeholders such as suppliers, government employees among other can result in profit mazimization

 

Conflicts – occurs if attachment of one objective deters or hinders the attainment of another objective (s) example:

  • Increased customer satisfaction achievable at the expense of profit maximization
  • Increased investment in CSR achievable at the expense of profit maximization
  • Firm’s increased responsibility to other stakeholders achievable at the expense of profit maximization
  • Making non – optimal financing and investment decisions hence deterring the attainment of value maximization

 

QUESTION 4

December 2024 Question Four A

Highlight FOUR limitations of profit maximisation goal of a firm.                 (4 marks)

 

MASOMO MSINGI ANSWER

  • It does not consider the time value of money
  • It does not consider the fact that there are risks or uncertainties in business and therefore no guarantee that profit will be maximized at all time
  • Ignore plight (welfare of other stakeholders) that is profits can be maximized at the expense of welfare of other stakeholders
  • It a is a short – term objective unlike value maximization which is a long objective
  • This objective only relates to profit making organisations. It does not relate to non – profit making organizations
  • It is ambiguous since it does not specify which profit is to be maximized that is whether is operating profit, profit before tax, short term profit, long term profit among others
  • This is not the primary objectives which companies try to achieve in a corporate set up.

 

QUESTION 5

August 2024 Question One B

The principles that govern all ethical behaviour for finance managers in practice and in business helps them to navigate the complexity of their work.

Required:

In reference to the above statement, explain THREE fundamental principles of ethical behaviour.              (6 marks)

 

MASOMO MSINGI ANSWER

  1. Integrity: To be straight forward and honest in all professional and business relationships, integrity also means that the finance manager must not knowingly be associated with misleading information.
  2. Objectivity: Not to compromise professional or business judgements because of bias, conflict of interest or undue influence of others. In undertaking his duties, the finance manager must also be and appear to be independent
  3. Professional competence and due care: To attain and maintain professional knowledge and skill at the level required to ensure that a client or employing organization receives competent professional service, based on current technical and professional standards and relevant legislation and act diligently and in accordance with applicable technical and professional standards
  4. Confidentiality: To respect the confidentiality of information acquired as a result of professional and business relationships. Confidential information must not be disclosed outside the organization without authority, unless there is a duty to disclose or disclosure is in the public interest and permitted by law.
  5. Professional behavior: To comply with all relevant laws and regulations and avoid any conduct that the finance manager knows or should know might discredit the profession

 

QUESTION 6

April 2024 Question One A

In relation to agency theory:

  • Highlight THREE types of conflicts between shareholders and government.

(3 marks)

  • Propose THREE solutions to the conflicts identified in (a) (i) above.       (3 marks)

 

MASOMO MSINGI ANSWER

  • Types of conflicts between shareholders and government.

Conflicts between shareholders and government can arise from:

  1. Regulatory compliance: Differing interpretations of regulations can lead to disputes over compliance requirements
  2. Taxation: Disagreements may occur regarding tax rates, incentives, or the implementation of tax policies
  3. Environmental Regulations: Conflicts may arise over environmental standards and their impact on business operations and profitability.
  4. Corporate Governance: Differences in opinions on corporate governance practices and transparency can lead to conflicts.
  5. Political influence: Shareholders may clash with government officials over political interference in business decisions or favoritism towards competitors

 

Solutions to the conflicts identified above.

To address conflicts between shareholders and government, consider these solutions

  1. Dialogue and Negotiations: Establish open communication channels between shareholders and government representatives to discuss concerns and find mutually beneficial solutions through negotiations and compromise
  2. Mediation or Arbitration: Utilize neutral third – party mediators or arbitrators to facilitate discussions and help resolve disputes in a fair and impartial manner, avoiding escalation and legal battles.
  3. Regulatory Reforms: Collaborate with government bodies to review and update regulations, ensuring they are clear, fair and conducive to both business growth and public interest, thereby reducing ambiguity and conflicts.
  4. Corporate social responsibility (CSR) initiatives: Implement CSR programs that address societal concerns and align with government priorities, demonstrating a commitment to responsible business practices and building trust with regulators and the public.
  5. Transparency and compliance: Enhance transparency in corporate governance practices and ensure strict adherence to regulatory requirements, fostering trust and credibility with the government stakeholders and minimizing the likelihood of conflicts.

 

QUESTION 7

December 2023 Question One A

Explain FOUR corporate objectives that may conflict with the financial objective of a firm.                                  (8 marks)

MASOMO MSINGI ANSWER

Corporate objectives that may conflict with financial objectives of a company

Several corporate objectives can potentially conflict with a company’s financial objectives, creating tension between short-term gains and long-term sustainability. Here are some key examples:

Short-term vs. Long-term Focus:

  • Profit maximization: Prioritizing immediate profits might involve cutting costs on quality, research, or employee training, jeopardizing long-term competitiveness and brand reputation.
  • Stock price manipulation: Engaging in short-term strategies to boost stock prices, like share buybacks or aggressive marketing, might divert resources from long-term investments and sustainable growth.

Social and Environmental Responsibility:

  • Environmental sustainability: Implementing eco-friendly practices or reducing emissions might increase costs in the short term, potentially impacting profits.
  • Social responsibility: Investing in ethical sourcing, fair labor practices, or community development programs might raise expenses and reduce immediate financial returns.

Stakeholder Interests:

  • Employee satisfaction: Providing higher wages, benefits, or training can increase costs and reduce short-term profits.
  • Customer satisfaction: Prioritizing customer satisfaction through better service, warranties, or refunds might impact profits in the short term.

Strategic Growth:

  • Market share expansion: Aggressive marketing campaigns or acquisitions to gain market share can be expensive and might not yield immediate financial returns.
  • Innovation and research: Investing in research and development for future products or technologies might not show immediate financial benefits but is crucial for long-term growth and competitiveness.

Ethical Considerations:

  • Bribery and corruption: Engaging in unethical practices for short-term gains can damage reputation, lead to legal issues, and ultimately harm financial stability.
  • Tax avoidance: Aggressive tax strategies might save money in the short term but could result in penalties, reputational damage, and long-term financial risks.

 

QUESTION 8

August 2023 Question One A

Outline FOUR limitations of profit maximisation as a financial goal of a firm.   (4 marks)

 

MASOMO MSINGI ANSWER

Limitations of profit maximisation

The profit maximization goal is the idea that a business should make as much profit as possible. This is a common goal for businesses, but it has some limitations. Here are some of the limitations of profit maximization:

  • Definition of Profit – The precise meaning of the profit maximization objective is unclear. The definition of the term profit is ambiguous. Does it mean short or long-term, before or after tax, total or net profit? It is not clear.
  • Time Value of Money – The profit maximization objective does not distinguish between returns received at different times. It does not consider the time value of money; it values benefits received today and benefits received after a period as the same.
  • Profit maximization can also lead to the production of too many of a particular product that is of no use. This will create wastage destroying the raw materials and stuffing the landfills. Therefore, producing efficiently is more acceptable than maximizing the profit only.
  • Profit maximization has also been termed to be vague, and it ignores the risks and returns in a positive manner. The idea of profit maximization is not self-sustaining in nature and it is not built to target a market. That is why it does not consider the risks and returns as commonly as it should.
  • Ignores the Risk – A decision solely based on the profit maximization model would decide in favor of profits. In the pursuit of profits, the risk involved is ignored, which may prove unaffordable at times simply because higher risks directly question the survival of a business. Between projects A and B, project A may be more profitable; however, if it is substantially more riskier, project B may be preferable.
  • Long-Term Sustainable Goals – Profit maximization might be one of the top goals of financial management but this type of practice doesn’t imply that short-term profit increases will help produce long-term sustainable goals for the company. While profit maximization in financial management has the potential to bring in extra money in the short-term, long-term earning could be drastically diminished.
  • Product Quality- Another limitation of profit maximization in financial management is the potential to decrease product quality. Earning higher profits might be one of the goals of financial management but cutting corners, using lower quality materials, and sacrificing company values to earn a higher profit will affect the reputation of the company and potentially lose customers.

Financial Management Revision Kit Hard Copy (Printed and Bound)

SAMPLE WORK

Complete copy of CPA FINANCIAL MANAGEMENT Revision Kit is available in SOFT copy (Reading using our MASOMO MSINGI PUBLISHERS APP) 

Phone: 0728 776 317

Email: [email protected]

 

MASOMO MSINGI PUBLISHERS APP – Click to download and access all our materials in PDF

 

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