Chapter 18 Flashcards
financial management
the art and science of managing a company’s money so that it can meet its goals
cash flows
the inflows and outflows of cash for a company
return
the opportunity for profit
risk
the potential for loss or the chance that an investment will not achieve the expected level of return
risk-return trade-off
a basic principle in finance that holds that the higher the risk, the greater the return required
short-term forecasts
projections of revenues, costs of goods, and operating expenses over a one-year period
long-term forecasts
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
budgets
formal written forecasts of revenues and expenses that set spending limits based on operational forecasts; include cash budgets, capital budgets, and operating budgets
cash budgets
budgets that forecast a company’s cash inflows and outflows and help the company plan for cash surpluses and shortages
capital budgets
budgets that forecast a company’s outlays for fixed assets (plant and equipment), typically covering a period of several years
operating budgets
budgets that combine sales forecasts with estimates of production costs and operating expenses to forecast profits
cash management
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
commercial paper
unsecured short-term debt - an IOU - issued by a financially strong corporation
marketable securities
short-term investments that are easily converted into cash
accounts receivable
sales for which a company has not yet been paid
capital expenditures
investments in long-lived assets, such as land, buildings, machinery, and equipment, that are expected to provide benefits extending beyond one year
capital budgeting
the process of analyzing long-term projects and selecting those that offer the best returns while maximizing the company’s value
unsecured loans
loans for which the borrower does not have to pledge specific assets as security
trade credit
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
accounts payable
a purchase for which a buyer has not yet paid the seller
line of credit
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
revolving credit agreement
a line of credit that allows the borrower to have access to funds again once it has been repaid
secured loans
loans for which the borrower is required to pledge specific assets as collateral, or security
factoring
a form of short-term financing in which a company sells its accounts receivable outright, at a discount, to a factor
financial risk
the chance that a company will be unable to make scheduled interest and principal payments on its debt
term loan
a business loan with an initial maturity of more than one year; can be unsecured or secured
bonds
long-term debt obligations (liabilities) issued by corporations and governments
mortgage loan
a long-term loan made against real estate as collateral
common shares
a security that represents an ownership interest in a corporation
dividends
payments to shareholders from a corporation’s profits
share or stock dividends
payments to shareholders in the form of more shares; can replace or supplement cash dividends
retained earnings
profits that have been reinvested in a company
preferred shares
equity securities for which the dividend amount is set at the time the shares are issues
risk management
the process of identifying and evaluating risks and selecting and managing techniques to adapt to risk exposures
peril
a hazard or source of danger
speculative risk
the chance of either loss or gain, without insurance against the possible loss
insurance
the promise of compensation for certain financial losses
insurance policy
a written agreement that defines what the insurance covers and the risks that the insurance company will bear for the insured party
underwriting
a review process of all insurance applications and the selection of those who meet the standards
insurable interest
an insurance applicant’s chance of loss if a particular peril occurs
insurable risk
a risk that an insurance company will cover.
It must meet certain criteria
law of large numbers
insurance companies’ prediction of the likelihood that a peril will occur; used to calculate premiums
deductibles
the amounts that an insurance company must pay before insurance benefits begin
employment insurance
payment of benefits to laid-off workers while they seek new jobs
workers’ compensation
payments to cover the expenses of job-related injuries and diseases, including medical costs, rehabilitation, and job retraining if necessary
Canadian Pension Plan
insurance that provides retirement, disability, death, and health benefits
provincial health care
health insurance programs provided by the provinces
key person life insurance
a term insurance policy that names the company as beneficiary
business interruption insurance
covers the 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
theft insurance
a broad insurance coverage that protects businesses against losses from an act of stealing
professional liability insurance
insurance designed to protect top corporate management, who have been the target of malpractice lawsuits
enterprise risk management (ERM)
a company-wide, strategic approach to identifying, monitoring, and managing all elements of a company’s risk
