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Understanding Business Chapter 18: Financial Management

Q – What shows a firm’s spending plans on fixed assets such as large equipment?
Capital budget
Q – An effective budget requires:
accurate forecasts
Q – As a finance manager at AllSports Communication, Charlie worries about the firm’s borrowing requirements for the upcoming year. He knows the benefits of estimating AllSports’ cash disbursements and short-term investment expectations. Facing these concerns, a(n) _____ budget would provide Charlie with valuable information by providing a good estimation of whether the firm will need to do short-term borrowing. Why? 7pts
cash budget; a budget that estimates cash inflows and outflows (during a particular period like a month or a quarter) and helps managers anticipate borrowing needs, debt repayment, operating expenses, and short-term investments, and is often the last budget prepared.
Q – The concept, ¨time is money¨ indicates:
a dollar received today is worth more than a dollar received a year from today.
Q – Acquiring funds thru borrowing represents:
debt financing
Q – The business function that is responsible for acquiring funds for the firm and managing funds within the firm is called
finance
Q – Tristan is the financial manager of a small company. While sales are steady, customers are taking longer to pay, and he has had increasing difficulty obtaining short-term loans to finance the day-to-day operations of the company. Tristan’s company is facing a(n)
cash flow problem
Q – An example of undercapitalization would be
insufficient funds to pay operational expenses
Q – Undercapitalization, poor control over cash flow, and inadequate expense control and three reasons firms:
fail
Q – what is the major role of financial managers?
they examine financial data and recommend strategies for improving the financial performance of the firm
Q – How does finance differ from accounting? long explanation, then summed up one. I think you should know them both
WHY? Finance is the act of acquiring and managing funds for the firm. This process includes planning, auditing, managing taxes, advising top management on financial matters, collecting funds, controlling funds, obtaining funds, and budgets. Accounting is the preparation and recording of data and financial statements that others inside and outside the firm use to make decisions; SUMMED UP (Quiz answer) Financing is acquiring and managing funds for the firm and accounting is preparing information in a way that is meaningful to others;
Q – It is especially important for small firms to have good financial management b/c:
small firms typically do not have adequate money for a financial cushion
Q – What is not typically a job of a financial manager? why?
ordering supplies for production; Since finance has such a huge definition (that’s probably worth learning), financial managers serve many roles, but ordering supplies for production is usually not one of them.
Q – Financial managers follow a step-by-step process of financial management… t/f
not true
Q – When financial managers refer to the ¨time is money,¨ they mean that …. and why?
money earning interest increases in value over time; Time value of money is the concept that money available at the present time is worth more than the same amount in the future due to its potential earning capacity (interest)
Q – A firm that purchases a long-term asset such as a manufacturing facility is making a(n)
capital expenditure
Q – The two primary forms of financing and equity financing and _____
debt financing
Q – Peter wants to open a new manufacturing facility in Western Canada. Instead of securing bank loans to finance this venture, he sells shares of stock in his company. This is known as:
equity financing
Q – What kind of financing would the following situation require? – Madeleine’s Fashions plans to add inventory in its retail store just before the holiday season.
short-term financing
Financial planning involves: (3 steps)
1. Forecasting short-term and long-term needs
2. Developing an overall budget to meet the short-term and long-term financial needs
3. Establishing financial controls
(Elements of financial planning, **DO NOT let this confuse the financial planning steps***) A financial plan is to ____ & ____, leading into the Operating (master) budget) which is to ___ ___ & ___. Then _____ leads back to the financial plan, starting the financial plan all over again
short-term forecasting; long-term forecasting; capital budget; cash budget; financial control; feedback;…**DO NOT let this confuse the financial planning steps***)
What do financial controls allow managers to see?
how the company is meeting its fiscal objectives and achieving milestones
A short-term forecast allows a company to predict the short-term ___, ___, and _____ during the next week, month or year.
revenues, costs, and expenses
A short-term forecast is not only a prediction of sales but rather …
other costs associated with doing business
A tool that may be used to provide additional information about the flow of money into and out of the company is the …
cash flow forecast
A _____ can be used as a base for a company’s strategic plans.
long-term forecast
How far in the future can long-term forecast provide projections?
5-10 years
A long-term forecasts allows top management to _____ where income is coming from as well as its future _____ potential
envision; profit
The second step of Financial Planning is to develop an overall ____ to meet short-term and long-term financial needs.
budget
(Step 2 of Financial Planning: Working with the budget process) A ______ highlights the spending plans for major purchases
a capital budget
(Step 2 of Financial Planning: Working with the budget process) a ____ estimates cash inflows and outflows
a cash budget
(Step 2 of Financial Planning: Working with the budget process) an ______ or ______ ties together the firm’s other budgets
an operating aka master budget
The third step of Financial Planning is establishing _____ ____, which is the process of reviewing actual versus budgeted revenues and costs
financial controls
(Step 3 establishing financial controls) Why is financial control so important?
it guarantees that the various departments and managers within a company will actually follow the budget
(Step 3 establishing financial controls) what is the function of financial controls?
compare actual revenues, costs, and expenses with the projected ones in the budget.
What are the four key areas of financial needs? And what usually should be the primary source for these funds and when it’s not, what typically causes it to not be? Why?
1. managing day-to-day needs of the business
2. controlling credit operations
3. acquiring needed inventory
4. making capital expenditures
; sales; capital expenditures; the funds will have to be drawn from a lending institution
Because of the time value of money, businesses should keep cash invested for ___ ___ ___ ___ to maximize investment potential
as long as possible
What are examples of a company’s day to day operational costs?
employee salaries, supplies that people buy (like if its a coffee shop, cups and lids), rent and utilities
Why is adequate inventory important?
to meet customer needs
Inventory policies are need to … 3pts
finance purchases; ensure products are available; and maximize profits
What makes capital expenditures so important?
every business, big or small, will eventually have to confront them.
What are capital expenditures?
major investments in either tangible long-term assets such as land, buildings, and equipment or intangible assets such as patents, trademarks, and copyrights
Why might one resort to making a capital expenditure? 3pts
to make future expansion; increasing production capabilities or levels of output
What are four alternative sources of funding to raise?
debt financing; equity financing; short term financing; long-term financing
Through which means can companies raise capital?
debt financing & equity financing
Summed up, what is debt financing?
borrowing money
Summed up, what is equity financing?
selling ownership of the company thru shares of stock or by earning profits
Equity financing uses funds raised _____ (from _____) or through selling ownership (selling _____) to provide a company with an influx of cash
internally; operations; stock
A firm borrowing from an outside lender and borrowing cash on a short- or long-term basis is called
debt financing
short-term financing should be used for what kind of needs?
short-term needs
___________ financing should be used for projects or equipment that will be utilized over a period of longer than one year, usual up to ten years
long-term financing
What are some sources of short term funds (or short term financing)? 6 possible points
family and friends; taking advantage of trade credit; using commercial banks to obtain different forms of short-term loans; factoring accounts receivable; selling commercial paper; utilizing credit cards
Companies can sell commercial paper on their _____ ______
receivable
What are 5 different forms of short-term loans?
secured loan; unsecured loan; line of credit; revolving credit agreement; loans from commercial finance companies
Q – A loan backed by collateral is called a(n)
secured loan
Q – If a firm is financially sound and has a long-standing relationship with a bank, the bank may extend unsecured short-term loans to the firm. This type of arrangement is called a(n)
long of credit
Q – Patrick’s lawn care business needs quick cash to purchase a new commercial lawn mower. Instead of getting a loan, he sells his accounts receivable for cash. This type of financing is know as ____
factoring
Q – While best used as a last resort, many small businesses in need of short-term financing use
credit cards
Q – When a company has a long-standing relationship with its suppliers and purchases large quantities, it usually has 30-45 days to pay for the purchase. This arrangement is called
trade credit
Q – The two primary types of long-term financing are
debt financing and equity financing
Q – The ¨IOU¨ that is issued by a coporation or government to raise needed funds, promising to repay the principal amount by a certain date along with a certain rate of interest, is called
a bod
Q – Even while the economy experienced a relatively harsh recession, TEVECOM reported $130 million in net income. At the company’s board of directors meeting it was decided that TEVECOM would distribute $50 million in dividends to its stockholders. The remaining $80 million became …..
retained earnings
Q – In order to raise funds, Nickelson.com has decided to sell shares of its stock for the first time to the general public. This is known as a (n) _____ and its acronym is____
initial public offering (IPO)
Q – A(n) ___ is an estimate of the timing and amounts of cash inflows and outflows over a period of time so that financial managers can determine if the firm needs to borrow funds, how much it needs to borrow, and when — and how— it can repay the loan
cash flow forecast
Q -A firm’s spending plans for major purchases, such as manufacturing equipment or buildings, is detailed in the _____ budget
capital
Q – Although Naomi’s business is small, she knows that she still needs to develop an accurate estimate of the costs and expenses needed to run the business. In order to do this, Naomi develops a(n) …… 1pt … Why? 2pts
operating budget; the operating budget shows how much the firm plans to spend on advertising, travel, salaries, rent, and all of the other necessary costs and is often the most detailed and useful budget to companies of all sizes
Q – Most of the customers in Maleki’s printing business pay him at the end of the month. However, his paper supplier demands payment upon delivery. In order to make sure that he has funds available to pay his supplier, Maleki should develop a …
cash budget
Q – Todd McFarlane has chosen not to sell stock in his companies. While selling stock is sometimes an efficient way of raising funds, one of the major disadvantages of having stockholders is they ….. and why is that?
usually have voting rights; common stockholders have voting rights that may alter the way the company is run. Todd McFarlane would probably find such oversight too confining since he now enjoys full control and flexibility
Finance is the act of ____ and ___ funds for the firm. This process includes ___, ___, ___, ___, ___, ___, ___, & ___.
acquiring; managing;…. planning; auditing; managing taxes; advising top management on financial matters; collecting funds; controlling funds; obtaining funds; budgeting
Accounting is the ____ and ____ of data and financial statements that others _____ and _____ the firm use to make decisions.
preparation and recording; inside and outside
Financial control is a process thru which a firm periodically compares its budget to what three items?
revenues, expenses, costs
A firm selling ownership in the company in the form of stock is using ________
equity financing
Financial management primarily involves managing a firm’s:
financial resources
What are the three steps in the financial planning process in order from beginning to end?
1. forecasting the firm’s financial needs
2. developing budgets
3. establishing financial controls
A firm raising funds thru various forms of borrowing with the intent to pay it back is using _____
debt financing
What are three true facts about trade credit?
it is the most widely used source of short-term funds; it is used by large and small businesses; it is usually more convenient than bank loans
What are two thru facts about venture capitalists?
they invest in businesses with high potential; they have assisted many major companies during start-up
The term of the bond (interest, repayment, date, etc) are called
indenture terms
Raising needed funds thru borrowing to increase a firm’s rate of return is called ____
leverage
3 correct statements about pledging include?
as account receivable is paid, the money is forwarded to the lender as repayment of the loan; a firm gets a percentage of accounts receivable pledged as a loan; a firm’s accounts receivable is used a a basis for loan
_________ is the practice of buying goods and services now and paying for them later
trade credit
A loan that does not require collateral is called a(n)
unsecured loan
A line of credit that is guaranteed but usually comes with a fee is called:
revolving credit
When a company allocated the use of specific resources thruout the firm based on a financial plan indicating management’s expectations, then the company is using a(n) _____ as the basis for making decisions.
budget
3 true statements about commercial finance:
they make short-term loans; they wants borrowers to offer tangible assets as collateral; they charge higher rates than banks;
Items that may back a secured bond include: 2pts
machinery and equipment; real estate
Finance is the function of acquiring and managing _____
money
3 true statements about factoring information:
the firm that buys the accounts receivable collects the amount due; small businesses often use it for financing in the short term; it is the accounts receivable of a firm sold for a discount
____ are the owners of a public corporation
stockholders
The risk/return trade-off principle means that:
the greater the risk a lender makes in making a loan, the higher the interest rate
The risk/return trade of principle means that the greater/lower the ____ a lender makes in making a loan, the _____ the interest rate
greater; risk; higher
A term-loan agreement is a promissory note that requires the borrower to: 2pts
pay interest on a loan; pay specified amount in installments
The term used for unsecured notes of $100,000 and up that are due in no more than 270 days is ….
commercial paper
Unsecured, short-term funds a bank will lend to a business, provided the funds are readily available, is called ….
line of credit
3 key functions of financial management: ____ funds; managing ______; and controlling ____
collecting; taxes; funds
Profits the company keeps and reinvests in the firm are called:
retained earnings
The three types of main budgets in financial management do NOT include which of the following: (A) cash budget; (B) sales budget; (C) capital budget; (D) operating, or master, budget
(B) sales budget
____ funds are typically needed to manage day-to-day needs of a business as well as acquiring needed inventory
operating
What is the basis behind unsecured and secured loans?
unsecured loans are usually only for the very stable customers; secured loans are backed by collateral
With regard to tax considerations in financing, the fact that dividends are paid from after-tax income is a sign of ________
equity financing
define dividend:
a distribution from the net profits of a company to its shareholders
The two groups the cost of capital (rate of return) must satisfy are: 3pts
stockholders (owners); lenders
Raising needed thru borrowing to increase a firm’s rate of return is called ____
leverage
The rate of return a company must earn in order to meet demands of its lenders and expectations of its equity holders is called the:
cost of capital
With regard to repayment in financing, financing that has no repayment date is a sign of ….
equity financing
3 characteristics of promises included with a bond:
to repay on a certain date; to pay a certain interest rate; to repay the amount owed;
Concerning management influence in financing, having no authority unless special conditions have been agreed on is a sign of _____ financing
debt
The two groups the cost of capital (rate of return) must satisfy are:
stockholders (owners); lenders
When a company is approved for unsecured, short-term funds to be lent from a bank, provided the funds are readily available, the company has applied for a _______
line of credit
Duties of a financial manager do NOT include:
(A) production planning; (B) budgeting; (C) obtaining funds; (D) cash management
(A) production planning
…. are a form of financing where the merchant accepts payment immediately from the bank and the customer agrees to repay the bank.
credit cards
What are three key activities of finance?
planning for major expenditures of funds; performing cash flow analysis; preparing budgets
A financial plan is important to business because it:
greatly increases the firm’s chance of success
Commercial finance companies take ____ risks than banks and charge ___ interest rates
more; higher
a(n) …. summarizes a firm’s spending plans for major asset purchases that often require large sums of money
capital budget
A line of credit that is guaranteed but usually comes with a fee is called a
revolving credit agreement
A firm’s cash budget flow include: 3pts
borrowing needs; short-term investments; operating expenses
A stock price forecast is a part of a firm’s cash flow budget. True/false
false.
3 advantages of using a credit card in small business financing include that it:
saves times and its convenient; provides a line of credit; saves embarrassment form a bank turn down
What are not key activities of finance? 2pts
performing cash flow analysis; creating sales forecasts
Financial managers must understand tax regulations b/c: 2pts
they must consider the tax implications of major decisions; businesses want to minimize taxes
A line of credit that is guaranteed but usually comes with a fee is called …
revolving credit
The 3 needs for operating funds include:
controlling credit operations; making capital expenditures; acquiring needed inventory;
Short-term funds should be used for: 3pts
financing current inventory; cash flow problems; monthly expenses;
The most common source of meeting long-term capital needs it:
retained earnings
When financial managers consider long-term financing, they may ask 3 long-term questions, which are?
what sources of long-term funding (capital) are available, and which will best fit our needs?; what funds do we need to achieve the firm’s long-term goals and objectives?; what are the organization’s long-term goals and objectives?
What wouldn’t be a long-term question that a financial manager would ask regarded long-term financing?
how much long-term funding will be needed to meet the monthly payroll

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