Chapter 19: Recognizing the Basics of Financial Management

Question 1

consists of all activities related to generating and raising money and using it effectively

Answer 1

financial management

Question 2

must ensure that funds are available when needed, that they are obtained at the lowest possible cost, and that they are used efficiently

Answer 2

financial manager

Question 3

profits of the company that are distributed to the shareholders

Answer 3

dividends

Question 4

• money that is typically used to fund projects that are long-term in nature (more than 1 year)
• can seem “unreal”

Answer 4

long-term financing

Question 5

money raised that will have to be repaid within 1 year

Answer 5

short-term financing

Question 6

the movement of money into and out of an organization

Answer 6

cash flow

Question 7

a short-term financing source where a company takes delivery of goods but pays for them at a later time

Answer 7

trade credit

Question 8

even profitable companies can experience short-term cash shortages due to

Answer 8

1. negative cash flow cycle

2. seasonality of revenues

Question 9

a plan for obtaining and using the money needed to implement an organization’s strategic and operational plans

Answer 9

financial plan

Question 10

a budget of expected revenue and expenses from ongoing operations

Answer 10

operating budget

Question 11

a budget of expected investments in new assets (factories, equipment, etc.)

Answer 11

capital budget

Question 12

is essentially a projected income statement

Answer 12

operating budget

Question 13

used to create a projected balance sheet

Answer 13

capital budget

Question 14

a business can raise external funds by:

Answer 14

1. borrowing money

2. selling a portion of the company to investors

Question 15

an estimate of cash receipts and expenditures over a specified time period

Answer 15

cash budget

Question 16

2 basic funding options

Answer 16

1. debt financing

2. equity financing

Question 17

5 key factors impacting the financing choice

Answer 17

amount, term, cost, influence on company operations and external forces

Question 18

1. financing of all sizes
2. both short and long term
3. depends on interest rate. The higher the interest rate, the higher the debt servicing cost
4. debt must be repaid
5. economic conditions affect the level of interest rates and availability

Answer 18

Dept financing

Question 19

1. usually for raising larger amounts
2. long term
3. management can elect how to distribute profits
4. does not need to be repaid
5. economic conditions can affect the availability

Answer 19

equity financing

Question 20

potential investors would want to know at a minimum

Answer 20

net worth and earnings

Question 21

pledge of specific assets by the borrower to the lender that becomes the lender’s if the borrower defaults on the repayment of the loan

Answer 21

collateral

Question 22

short-term loans from a bank or financing company that are not secured by collateral

Answer 22

unsecured loans

Question 23

a flexible borrowing option between a financial institution and its customers that allow customers to access funds at any time

Answer 23

line of credit

Question 24

short-term loans from a bank that are secured by collateral

Answer 24

secured loans

Question 25

short-term financing options all fall under the category of

Answer 25

debt financing

Question 26

short-term financing is usually easier to obtain than long-term financing for 3 reasons:

Answer 26

1. shorter repayment period = less risk of default
2. the $ amounts are usually lower
3. a close working relationship exists between short-term borrower and lender

Question 27

a company seeking short-term financing has 3 common options

Answer 27

trade credit, unsecured loans or secured loans

Question 28

3 primary forms of long-term financing are

Answer 28

long-term loans, corporate bonds, and shares

Question 29

a loan made by a bank or other financial institutions that must be repaid with interest

Answer 29

long-term loan

Question 30

long-term debt obligations issued by corporations that promise to make payments over a specified period

Answer 30

corporate loans

Question 31

a form of ownership in a company that can be sold to investors as a type of long-term financing

Answer 31

company stock (shares)

Question 32

shares are sold directly to large institutional investors

Answer 32

private placement

Question 33

where organizations raise large pool of money for private investors, and invest in companies that have the potential to become large/sucesful

Answer 33

venture capital

Question 34

a corporation’s first sale of common shares to the general public

Answer 34

initial public offering (IPO)

Question 35

an organization that assists corporations in raising funds

Answer 35

investment banker