25 Important Introduction to Finance Questions and Answers [Note with PDF]

The first chapter of our finance learning course is “Introduction to Finance.” In this article, we’ll learn the 25 most important introduction to finance questions and their answers.

It will assist you in quickly grasping the important introduction to finance terms and their definitions.

You can quickly prepare for finance courses and any competitive tests, such as school and college exams, vivas, job interviews, and so on, by reading this post.

So let’s get started…

Introduction to Finance Questions and Answers:

The 25 important Introduction to Finance Questions and Answers are as follows:

Question 01: What is Finance?

Answer: The management of funds is fundamental to finance. Finance develops plans and executes operations to decide how much money should be raised from which sources and where and how that money should be invested to maximize the project’s return.

Various forms of funds are required to make and purchase goods for the organization, such as purchasing machinery, purchasing raw materials, and paying labor wages, among other things. These are how funds are put to use.

Businesses must collect funds in a structured manner according to the fund’s requirements to maintain an uninterrupted manufacturing process.

The term “finance” refers to the process of collecting and utilizing funds.

Question 02: What are the Functions of Finance?

Answer: The top 4 functions of finance are as follows:

  1. Collection of Fund
  2. Capital Budgeting Decisions
  3. Short-term asset management
  4. Distribution of fund

Question 03: Why is Finance the Main Driving Force of a Company?

Answer: Without trade and commerce, no country’s economy could exist. Various financial activities centered on business and trade are developed within the country.

Businesses require a large amount of capital to conduct such financial activities. Starting from the ground up, a new business organization requires a large sum of money to expand its production, distribution, marketing, employment, and business activities.

And it is for this reason that businesses rely on financing to provide adequate capital. That is why finance is referred to as a company’s main driving force.

Question 04: What are the different Types of Finance?

Answer: The different types of finance are as follows:

  1. Private Finance:
  2. Personal Finance
  3. Business Finance
  4. Non-Business Finance
  5. International Finance
  6. Government Finance

Question 05: What is Personal Finance?

Answer: Personal finance is the financing of a person to carry out their day-to-day activities.

They can finance this through their income, relatives, or by taking out a commercial bank loan.

An essential part of the economic process is personal financing or family financing. Money is more limited than needed. One or more people in the family can take part in earning money.

So little money is used in the family to bring maximum satisfaction to all the family members.

If the money collected is more than the current consumption, savings are formed, and this saved money can be invested. More consumption can put the family in debt once again.

Question 06: What is Business Finance?

Answer: Business finance is an essential sort of finance. Business finance is the finance of business entities to carry out business activities to make a profit.

Businesses can do this type of financing from internal or external sources.

Business is the combination of production and distribution of goods and services to make a profit. And the financing that is done for the performance of all the business organization functions is called business financing.

In other words, business finance is the formulation of business financing policies and plans, the application of techniques to perform organizational and regulatory functions, and the review of the financial functions of a business.

Question 07: What is Non-Business Finance?

Answer: Non-Business finance refers to all the financial functions that non-profit organizations perform, including collecting, using, controlling, and coordinating the funds they need.

Some institutions or organizations in our society are involved in the welfare of humanity or assist the poor and disadvantaged.

Non-profit organizations are not created for the aim of producing a profit but rather to promote social welfare.

Different non-profit organizations include educational institutions, hospitals, libraries, orphanages, welfare societies, women’s societies, Red Cross and Red Crescent Society, etc.

These organizations receive funding from a variety of sources. This money is used to fund the organization’s different development projects.

Question 08: What is International Finance?

Answer: The international finance system plays a vital role in facilitating the efficient and smooth conduct of personal and institutional business transactions between the two countries during international trade.

There are usually two types of currency in circulation in any two countries of the world. As a result, international financing is needed when money is exchanged between two different currency countries to sell and purchase goods and services.

The topic of international finance includes the export and import industries. Thus, the financing system that deals with the import and export sectors and the import and export trade deficit management is referred to as international finance.

Question 09: What is Government Finance?

Answer: Government finance refers to the funds collected by the government. The government can raise funds from both within and beyond the country.

Because the government can never be declared bankrupt, the term “bankruptcy” is not used to describe government funding.

Government finance refers to the funding provided by the federal government and municipal governments.

The amount of money that the government receives from various sources for the smooth operation of the central government’s or local government’s activities is referred to as government financing.

In its broadest sense, government financing refers to all financial functions performed by the government, including the collection, utilization, control, and coordination of monies.

The government’s funds are used for social welfare. The government establishes the expenditure sectors first and then collects funds from a variety of sources. If necessary, the government can borrow money from outside the country to fund this.

Question 10: What is the Importance of Business Finance?

Answer: The top seven (7) importance of business finance is as follows:

  1. Assist a business owner in gathering the necessary funds at the appropriate time and putting them to good use in a planned manner.
  2. A well-thought-out financial plan and management aid in the efficient use of funds through sound investment decisions.
  3. Suppose a business person has adequate financial management skills. In that case, he may quickly obtain the necessary funds at the right moment from a less expensive source and earn sufficient return by operating his firm by investing it in a good project.
  4. It is also essential for the country’s overall economic development.
  5. A business must incur various types of current expenses to make money. Finance is required to cover these expenses.
  6. Significant money is required for business development and expansion. Business financing manages this money.
  7. Doing business entails dealing with a variety of unexpected risks, which necessitates additional funding.

Question 11: What are the 3 Principles of Finance?

Answer: The 3 principles of finance are as follows:

  1. Principles of Liquidity and Profitability
  2. Principles of Risk and Return
  3. Principles of Portfolio diversification

Question 12: What is the Liquidity and Profitability Principle?

Answer: Liquidity refers to the ability to pay short-term liabilities. The more cash an organization has, the more liquid it is. If the liquidity is higher, the investment will be lower.

 If the investment is less, then the profit will be less. Similarly, if liquidity is kept low, the investment will be higher, resulting in higher profits.

Therefore, the organization should have such an amount of liquidity that the ability to pay liabilities is exemplary and the profit is high.

A business person can keep all of the cash earned from daily sales to purchase raw materials or other related expenses, or he can keep a portion of it for buying raw materials and deposit the rest in a bank account from which he can earn interest or profit after a certain period.

In this case, the businessman must decide how much of his earned money should be kept on hand to cover immediate demands.

If the businessman has a large quantity of cash to cover everyday expenses, this will reduce his bank income.

Furthermore, suppose a considerable sum of cash is deposited in a bank. In that case, the business may experience financial difficulties, causing everyday operations to be disrupted.

As a result, businesspeople must manage their finances so that they can strike a balance between liquidity and investment.

It means that, just as one side business needs cash reserves to cover daily costs, the other side business needs cash to make a profit.

The link between cash and liquidity is inverse. Excessive cash reduces profitability, whereas excessive investment for the sake of high profit creates a financial crunch.

One of the cornerstones of finance is to maintain a balance between liquidity and profitability.

Question 13: What is the Risk and Return Principle?

Answer: Risk is the possibility that the actual profit will be less than the expected profit from any investment project.

Therefore, according to this principle, when making financial decisions, the financial manager has to adjust the risk with the expected profit because most financial decisions are made between risk and uncertainty.

There is a positive relationship between risk and profit. When risk increases, profit increases, and when risk decreases, profit decreases.

An investor has to take extra risks to make a profit. Generally, the rate of return on investment in private securities is higher than that of government securities. At the same time, the amount of risk is higher when investing in private securities than public securities.

That is, the higher the risk, the higher the profit. The extra profit that an investor earns by taking additional risks is called a risk premium.

Question 14: What is the Portfolio Diversification Principle?

Answer: A portfolio is a proportional investment in multiple profitable projects or assets without investing in a specific project or asset.

Portfolio diversification can help businesses reduce risk because businesses can reconcile one project’s success or failure with others project success or failure.

This principle aims to limit risk, which means that investing more money in a project is frequently risky.

However, you might mitigate the risk if you invest in numerous profitable projects at a proportional rate.

On the other hand, the overall profit also increases. Portfolio diversification is the only way to reduce avoidable risks, such as business risks. In 1952, Harry Marquis discovered the portfolio theory.

Question 15: What are the Top 2 Functions of a Financial Manager?

Answer: The top two (2) functions of a financial manager are:

  1. Financial or Income Decision: The process of collecting funds is referred to as an income decision. The breadth of this decision includes deciding on alternate funding sources and making financial plans after weighing the benefits and drawbacks of each.
  2. Expenditure or Investment Decision: A manufacturer’s machine purchase decision is an investment decision. In the case of a food store, the purchase of furniture or a refrigerator is likewise an investment decision. A manufacturing company might make this type of decision when purchasing production machines or building a plant.

Question 16: What is the Evolution of Finance?

Answer: The stages of financial evolution can be identified as follows:

Pre-1930 Decade: At this time, a movement of unification among American corporations began.

The 1930s: The unification movement failed to gain traction in the United States. Many of the companies that merged in the previous decade went bankrupt in the following decade.

The 1940s: At this time, the main focus was on the need for liquidity. Finance was in charge of this task by assuring a well-planned cash flow and creating a cash flow budget.

The 1950s: Finance was involved in evaluating the best suitable investment project utilizing various mathematical calculations during this decade.

The 1960s: This was the beginning of modern Finance. Finance began prioritizing the capital market. Because shareholders are the owners of a corporation, maximizing their property or the market price of their shares became the primary goal of Finance at the time.

The 1970s: This decade saw the beginning of the era of computerized activities. This computerized system not only impacted manufacturing procedures but also affected business finance.

The 1980s: Finance evolves in a new outlook by modifying its primary functions to expand the business and survive in a competitive market system. Finance’s key job was the efficient distribution of capital across the company’s alternative initiatives and the calculation and analysis of these projects’ income.

The 1990s and the Birth of Modern Finance: This decade saw the birth of the World Trade Organization. Export and import barriers began to fall over the world. It is the first time that Finance has attained international status.

Question 17: What is Profit Maximization?

Answer: Any business that usually produces goods or services necessary for society makes a profit by selling them. The financial manager makes the appropriate decisions while keeping this profit in mind.

Profit usually refers to the difference between the selling price and the buying price. Profit maximization means maximizing the amount of profit.

Any business organization usually makes a profit by distributing the goods or services necessary for society.

Profit maximization means that an organization will produce a maximum amount with a certain amount of raw material or produce a certain amount with a minimum amount of raw material.

In other words, the increase in earnings per share is called profit maximization.

Question 18: What Exactly is the Logic behind Profit Maximization?

Answer: The exact logic behind the profit maximization is as follows:

  1. Profit maximization in financial decision-making is a measure of a company’s or firm’s efficiency.
  2. Profit maximization is only attainable through the effective and efficient utilization of economic resources. As a result, profit can be realized by eliminating resource waste.
  3. Investors are interested in fresh investments when profits are substantial. And when investment grows, so does output, giving consumers the chance to acquire lower-cost goods, resulting in greater social welfare.

Question 19: What are the Top 5 Criticisms about Profit Maximization?

Answer: The following are the top five (5) criticisms of the profit maximization concept:

  1. The concept of profit maximization is unclear.
  2. The goal of profit maximization is not to consider the time value of money.
  3. The concept of maximizing profits does not take into account the risk of future income from investment.
  4. The concept of profit maximization does not consider all of a business organization’s inflows and outflows.
  5. The concept of profit maximization enriches the path of narrow interest protection.

Question 20: What is Wealth Maximization?

Answer: The concept of wealth maximization was successful there because the profit-maximization goal failed to overcome the firm’s weaknesses.

The term “wealth maximization” refers to the goal of increasing shareholder wealth. The share is the shareholders’ wealth, and wealth maximization is the process of increasing the share’s market value.

As a result, the most acceptable and proper business objective is to maximize the firm’s or shareholders’ wealth.

In other words, the purpose of maximizing wealth is to increase the net current value of the firm. The difference between the sum of the current value of an investment and the sum of the income’s current value is considered wealth.

Wealth usually means money, financial assets, movable and immovable property. Wealth in business finance refers to the difference between the current value of cash inflows and cash outflows or costs. Wealth maximization refers to net asset maximization.

Question 21: Why should Wealth Maximization be the Firm’s Main Goal?

Answer: Wealth maximization should be the main goal of the firm for the following reasons:

  1. The concept of wealth maximization calculates the net current value of an expected investment by considering the time value of money.
  2. The concept of wealth maximization is well understood.
  3. It takes into account the possibility of not receiving the expected funds in the future.
  4. Dividends should be paid following the concept of wealth maximization from the perspective of shareholders and companies.
  5. It focuses on the stock market price.
  6. It takes into account all types of cash flows in all projects.
  7. The primary goal of wealth maximization is to keep the stock market price stable.

Question 22: What Role does Finance Play in Social responsibility?

Answer: Businesses exist to make a profit, but they also contribute to social and economic development.

The primary goal of financial management is to increase the total assets of shareholders by increasing the market value of their shares.

This goal exemplifies financial management’s social responsibility. Financial management fulfills such social responsibilities by maximizing shareholder assets; similarly, the financial manager ensures that the organization’s management is not at risk.

One of the social responsibilities of financial management is to protect the interests of consumers from all walks of life.

The ultimate goal of financial management is customer satisfaction.

Question 23: What are the Top 5 Differences between Wealth and Profit Maximization?

Answer: The top five differences between wealth and profit maximization are as follows:

  1. Wealth is defined as the difference between the current value of current income and current expenses. The main objective of the business organization is to maximize these resources. Profit, on the other hand, is the difference between the purchase and selling prices. The primary goal of a business organization is to maximize profits.
  2. Wealth maximization considers the time value of money. In contrast, profit maximization does not take into account the time value of money.
  3. Wealth maximization considers the risk, whereas profit maximization does not consider the risk.
  4. Wealth maximization considers all cash flows from the project. In contrast, profit maximization does not take into account all cash flows from the project.
  5. Wealth maximization considers the market price of the stock. In contrast, profit maximization does not consider the market price of the stock.

Question 24: What is the Difference between Business Financing and Government Financing?

Answer: The top five (5) differences between business financing and government financing are as follows:

  1. The money that is raised and then invested for use is called business financing. On the other hand, the money collected and distributed for the needs of the state is called government financing.
  2. The main purpose of business financing is to make a profit, while the main purpose of government financing is to ensure socio-economic welfare.
  3. The scope of business financing is small, while the scope of government financing is wide.
  4. It is not compulsory to prepare a budget for business financing; on the other hand, it is compulsory to prepare a budget with government financing.
  5. In the case of business financing, income is understood and then spent is made. In the case of government financing, expenditure is understood, and then income is made.

Question 25: What is Money Market and Financial Market?

Answer: The money market is the market in which short-term financial assets are bought and sold. Commercial papers, promissory notes, treasury bills, and other government securities are typically bought and sold in the money market.

The financial market is the market in which short-term and long-term financial assets are bought and sold.

Financial markets are used to raise both short-term and long-term capital. Stocks, bonds, commercial paper, and so on are examples of the financial market.

I hope that by the end of this post, you have a good understanding of the “Introduction to Finance” chapter. If you have any doubts or questions, don’t hesitate to contact us or leave a comment so that we can respond soon.

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