Chapter 12 Flashcards
is an important management responsibility that deals with the procurement and administration of funds with the view of achieving the objectives of business
finance function
the determination of fund requirements
- to finance daily operations
- to finance the firm’s credit services
- to finance the purchase of inventory
- to finance the purchase of major assets
money must be made available for the payment for the following
- wages and salaries
- rent
- taxes
- power and light
- marketing expenses
- administrative expenses
the sources of funds
- cash sales
- collection of accounts receivables
- loans and credits
- sale of assets
- ownership contribution
- advances from customers
loans and credits may be classified as
short-term, medium term, or long-term
refers to suppliers extending credit to a buyer for use in manufacturing, processing, or reselling goods for profit
trade creditors
the instruments used in trade credit consists of the following
- open-book credit
- trade acceptance
- promissory notes
unsecured and permits the costumers to pay for goods delivered to him in a specified number of days
open-book credit
a time draft drawn by a seller upon a purchase payable to the seller as payee, and accepted by the purchaser as evidence that the goods shipped are satisfactory and that the price is due and payable
trade acceptance
an unconditional promise in writing made by one person to another , signed by the maker engaging to pay on demand or at a fixed or determinable future time, a certain sum of money to, or to the order of, a specified person or to bearer
promissory note
are institutions which individuals or firms may tap as source of short-term financing
commercial banks
commercial banks grants two types of short-terms loans
- those which require collateral
- those which not require collateral
are those that help business firms in borrowing funds from the money market
commercial paper house
are financial institutions that finance inventory and equipment of almost all types of sizes of business firms
business finance companies
are institutions that buy the accounts receivables of firms, assuming complete accounting and collection responsibilities
factors
are also possible sources of short-term funds
insurance companies
long-term sources of funds are classified as follows
- long-term debts
- commong stocks
- retained earnings
long-term debts are sub-classified into
term loans and bonds
is a commercial or industrial loan from a commercial bank commonly used for plant and equipment working capital or debt repayment
term loan
is a certificate of indebtedness issued by a corporation to a lender
bonds
the third source of long-term funds consists of the issuance of
common stocks
refer to corporate earnings not paid out as dividends
retained earnings
type of bond
- debentures
- mortgage bond
- collateral trust bond
- guaranteed bond
- subordinated debentures
- convertible bonds
- bonds with warrants
- income bonds
determine the best source of financing, schall and haley recommends that the following factors must be considered
- flexibility
- risk
- income
- control
- timing
- other factors like collateral values, flotations costs, speed, and exposure
also called statement of financial position
balance sheet
also called statement of operations
income statement
refers to the uncertainity concerning lose or injury
risk
risks may be classified as either
pure or speculative
is one in which “there is only a chance of loss”
pure risk
one in which there is a chance of either loss or gain
speculative risk
an organized strategy for protecting and conserving assets and people
risk management
is a method of handling risk wherein the management assumes the risk
risk retention
also called self-insurance is a conscious and deliberate assumption of a recognized risk
planned risk retention
exists when management does not recognize that the risk exists and unwisely believes that no loss could occur
unplanned risk retention
refers to making commitments on both sides of a transaction so the rish offset each other
hedging
