Chapter 18

Question 1

accounts payable

Answer 1

A purchase for which a buyer has not yet paid the seller, p. 549

Question 2

accounts receivable

Answer 2

Sales for which a company has not yet been paid, p. 547

Question 3

bonds

Answer 3

Long-term debt obligations (liabilities) issued by corporations and governments

Question 4

budgets

Answer 4

Formal written forecasts of revenues and expenses that set spending limits based on operational forecasts; include cash budgets, capital budgets, and operating budgets

Question 5

business interruption insurance

Answer 5

Covers costs such as rental of temporary facilities, wage and salary payments to employees, payments for leased equipment, fixed payments, and profits that would have been earned during that period

Question 6

Canada Pension Plan

Answer 6

Insurance that provides retirement, disability, death, and health benefits

Question 7

capital budgeting

Answer 7

The process of analyzing long-term projects and selecting those that offer the best returns while maximizing the company’s value

Question 8

capital budgets

Answer 8

Budgets that forecast a company’s outlays for fixed assets (plant and equipment), typically covering a period of several years

Question 9

capital expenditures

Answer 9

Investments in long-lived assets, such as land, buildings, machinery, and equipment, that are expected to provide benefits extending beyond one year

Question 10

cash budgets

Answer 10

Budgets that forecast a company’s cash inflows and outflows and help the company plan for cash surpluses and shortages

Question 11

cash flows

Answer 11

The inflows and outflows of cash for a company

Question 12

cash management

Answer 12

The process of making sure that a company has enough cash on hand to pay bills as they are due and to meet unexpected expenses

Question 13

commercial paper

Answer 13

Unsecured short-term debtan IOUissued by a financially strong corporation

Question 14

common shares

Answer 14

A security that represents an ownership interest in a corporation

Question 15

deductibles

Answer 15

The amounts that the insured must pay before insurance benefits begin

Question 16

dividends

Answer 16

Payments to shareholders from a corporation’s profits

Question 17

employment insurance

Answer 17

Payment of benefits to laid-off workers while they seek new jobs

Question 18

enterprise risk management (ERM

Answer 18

A company-wide, strategic approach to identifying, monitoring, and managing all elements of a company’s risk

Question 19

factoring

Answer 19

A form of short-term financing in which a company sells its accounts receivable outright, at a discount, to a factor

Question 20

financial management

Answer 20

The art and science of managing a company’s money so that it can meet its goals

Question 21

financial risk

Answer 21

The chance that a company will be unable to make scheduled interest and principal payments on its debt

Question 22

insurable interest

Answer 22

An insurance applicant’s chance of loss if a particular peril occurs

Question 23

insurable risk

Answer 23

A risk that an insurance company will cover. It must meet certain criteria

Question 24

insurance

Answer 24

The promise of compensation for certain financial losses

Question 25

insurance policy

Answer 25

A written agreement that defines what the insurance covers and the risks that the insurance company will bear for the insured party

Question 26

key person life insurance

Answer 26

A term insurance policy that names the company as beneficiary

Question 27

law of large numbers

Answer 27

Insurance companies’ predictions of the likelihood that a peril will occur; used to calculate premiums

Question 28

line of credit

Answer 28

An agreement between a bank and a business or person that specifies the maximum amount of short-term borrowing the bank will make available to that business or person

Question 29

long-term forecasts

Answer 29

Projections of a company’s activities and the funding for those activities over a period that is longer than a year, typically 2 to 10 years

Question 30

marketable securities

Answer 30

Short-term investments that are easily converted into cash

Question 31

mortgage loan

Answer 31

A long-term loan made against real estate as collateral

Question 32

operating budgets

Answer 32

Budgets that combine sales forecasts with estimates of production costs and operating expenses to forecast profits

Question 33

peril

Answer 33

hazard or a source of danger

Question 34

preferred shares

Answer 34

Equity securities for which the dividend amount is set at the time the shares are issued

Question 35

professional liability insurance

Answer 35

Insurance designed to protect top corporate management, who have been the target of malpractice lawsuits

Question 36

provincial health care

Answer 36

Health insurance programs provided by the provinces

Question 37

retained earnings

Answer 37

Profits that have been reinvested in a company

Question 38

return

Answer 38

The opportunity for profit

Question 39

revolving credit agreement (or revolving line of credit

Answer 39

A line of credit that allows the borrower to have access to funds again once it has been repaid

Question 40

risk

Answer 40

The potential for loss or the chance that an investment will not achieve the expected level of return

Question 41

risk management

Answer 41

The process of identifying and evaluating risks and selecting and managing techniques to adapt to risk exposures

Question 42

riskreturn trade-off

Answer 42

A basic principle in finance that holds that the higher the risk, the greater the return required

Question 43

secured loans

Answer 43

Loans for which the borrower is required to pledge specific assets as collateral, or security

Question 44

share or stock dividends

Answer 44

Payments to shareholders in the form of more shares; can replace or supplement cash dividends

Question 45

short-term forecasts

Answer 45

Projections of revenues, costs of goods, and operating expenses over a one-year period

Question 46

speculative risk

Answer 46

The chance of either loss or gain, without insurance against the possible loss

Question 47

term loan

Answer 47

business loan with an initial maturity of more than one year; can be unsecured or secured

Question 48

theft insurance

Answer 48

broad insurance coverage that protects businesses against losses from an act of stealing

Question 49

trade credit

Answer 49

The extension of credit by the seller to the buyer between the time the buyer receives the goods or services and when it pays for them

Question 50

underwriting

Answer 50

review process of all insurance applications and the selection of those who meet the standards

Question 51

unsecured loans

Answer 51

Loans for which the borrower does not have to pledge specific assets as security

Question 52

workers’ compensation

Answer 52

Payments to cover the expenses of job-related injuries and diseases, including medical costs, rehabilitation, and job retraining if necessary