Chapter 18

Question 1

financial management

Answer 1

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

Question 2

cash flows

Answer 2

the inflows and outflows of cash for a company

Question 3

return

Answer 3

the opportunity for profit

Question 4

risk

Answer 4

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

Question 5

risk-return trade-off

Answer 5

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

Question 6

short-term forecasts

Answer 6

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

Question 7

long-term forecasts

Answer 7

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 8

budgets

Answer 8

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

Question 9

cash budgets

Answer 9

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

Question 10

capital budgets

Answer 10

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

Question 11

operating budgets

Answer 11

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

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 debt - an IOU - issued by a financially strong corporation

Question 14

marketable securities

Answer 14

short-term investments that are easily converted into cash

Question 15

accounts receivable

Answer 15

sales for which a company has not yet been paid

Question 16

capital expenditures

Answer 16

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

Question 17

capital budgeting

Answer 17

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

Question 18

unsecured loans

Answer 18

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

Question 19

trade credit

Answer 19

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 20

accounts payable

Answer 20

a purchase for which a buyer has not yet paid the seller

Question 21

line of credit

Answer 21

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 22

revolving credit agreement

Answer 22

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

Question 23

secured loans

Answer 23

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

Question 24

factoring

Answer 24

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

Question 25

financial risk

Answer 25

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

Question 26

term loan

Answer 26

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

Question 27

bonds

Answer 27

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

Question 28

mortgage loan

Answer 28

a long-term loan made against real estate as collateral

Question 29

common shares

Answer 29

a security that represents an ownership interest in a corporation

Question 30

dividends

Answer 30

payments to shareholders from a corporation’s profits

Question 31

share or stock dividends

Answer 31

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

Question 32

retained earnings

Answer 32

profits that have been reinvested in a company

Question 33

preferred shares

Answer 33

equity securities for which the dividend amount is set at the time the shares are issues

Question 34

risk management

Answer 34

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

Question 35

peril

Answer 35

a hazard or source of danger

Question 36

speculative risk

Answer 36

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

Question 37

insurance

Answer 37

the promise of compensation for certain financial losses

Question 38

insurance policy

Answer 38

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

Question 39

underwriting

Answer 39

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

Question 40

insurable interest

Answer 40

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

Question 41

insurable risk

Answer 41

a risk that an insurance company will cover.

It must meet certain criteria

Question 42

law of large numbers

Answer 42

insurance companies’ prediction of the likelihood that a peril will occur; used to calculate premiums

Question 43

deductibles

Answer 43

the amounts that an insurance company must pay before insurance benefits begin

Question 44

employment insurance

Answer 44

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

Question 45

workers’ compensation

Answer 45

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

Question 46

Canadian Pension Plan

Answer 46

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

Question 47

provincial health care

Answer 47

health insurance programs provided by the provinces

Question 48

key person life insurance

Answer 48

a term insurance policy that names the company as beneficiary

Question 49

business interruption insurance

Answer 49

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

Question 50

theft insurance

Answer 50

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

Question 51

professional liability insurance

Answer 51

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

Question 52

enterprise risk management (ERM)

Answer 52

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