man. the finance function 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
4 determination of fund requirements
- finance daily operations
- finance the firm’s credit services
- finance the purchase of inventory
- finance the purchase of major assets
6 financing daily operations
- wages and salaries
- rent
- taxes
- power and light
- marketing expenses
- administrative expenses
6 sources of funds
- cash sales
- collection of accounts receivables
- loans and credits
- sale of assets
- ownership contribution
- advances from customers
cash is derived when the firm sells its products or services. SF
cash sales
some engineering firms extend credit to customers. when these are settled, cash is made available. SF
collection of accounts receivables
when other sources of financing are not enough, the firm will have to resort to borrowing. SF
loans and credits
cash is sometimes obtained from the sale of the company’s assets. SF
sale of assets
when cash is not enough, the firm may tap its owners to provide more money. SF
ownership contribution
sometimes customers are required to pay cash advances on orders made. this helps the firm in financing its production activities. SF
advances from customers
are those with repayment schedules of less than one year.
short-term sources of funds
6 supplies of short-term funds
- trade creditors
- commercial banks
- commercial paper houses
- finance companies
- factors
- insurance companies
refer to suppliers extending credit to a buyer for use in manufacturing, processing, or reselling goods for profit. SSTP
trade creditors
3 instrument use in trade credit
- open-book credit
- trade acceptance
- promissory notes
is unsecured and permits the customer to pay for goods delivered to him in a specified number of days.
open-book credit
is 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.
trade acceptance
is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand or at fixed or determinable future time.
promissory note
are institutions which individuals or firms may tap as source of short-term financing.
commercial banks
commercial banks 2 types of loans
- does require collateral
- does not require collateral
are those that help business firms in borrowing funds from the money market.
commercial paper houses
is sold to investors through the commercial paper house.
commercial paper
are financial institution that finance inventory and equipment of almost all types and 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 into 3
- long-term debts
- common stocks
- retained earnings
2 types of long-term debts
- term loans
- bonds
is a commercial or industrial loan from a commercial bank, commonly used for plant and equipment, working capital, or debt repayment.
term loans
have maturities of 2 to 30 years.
term loans
is a certificate of indebtedness issued by a corporation to a lender.
bonds
it is a marketable security that the firm sells to raise funds.
bonds
the third source of long-term funds consists of the issuance. many investors are placing their money in them.
common stocks
can be cheaper and more stable sources of long-term funds
common stocks
refer to corporate earnings not paid out as dividends.
retained earnings
this simply means that whatever earnings that are due to the stockholders of a corporation are reinvested
retained earnings
8 types of bond
- debentures
- mortgage bond
- collateral trust fund
- guaranteed bond
- subordinated debentures
- convertible bonds
- bonds with warrants
- income bonds
feature - no collateral requirement
debentures
feature - secured by real estate
mortgage bond
feature - secured by stocks and bonds owned by the issuing corporation
collateral trust bond
feature - payment of interest or principal is guaranteed by one or more individuals or corporations
guaranteed bond
feature - with an inferior claim over other debts
subordinated debentures
feature - convertible into shares of common stock
convertible bonds
feature - warrants are options which permit the holder to buy stock of the issuing company at a stated price.
bonds with warrants
feature - pays interest only when earned
income bonds
6 best source of financing according to schall and haley
- flexibility
- risk
- income
- control
- timing
- other factors like collateral values, flotation costs, speed, and exposure
3 financial statement
- balance sheet
- income statement
- statement of changes in financial position
also called statement of financial position
balance sheet
also called statement of operations
income statement
2 classification of risk
- pure
- speculative
is one in which there is only a chance of loss. this means that there is no way of making gains.
pure risk
is one in which there is a chance of either loss or gain. this type of risk is not insurable.
speculative risk
is an organized strategy for protecting and conserving assets and people.
risk management
the purpose is to choose intelligently from among all the available methods of dealing with risk in order to secure the economic survival of the firm.
risk management
5 methods of dealing with risk
- risk may be avoided
- risk may be retained
- hazard may be reduced
- losses may be reduced
- risk may be shifted
is a method of handling risk wherein the management assumes the risk.
risk retention
a planned risk retention is also called ————–
self-insurance
is a conscious and deliberate assumption of a recognized risk.
self-insurance
exist when management does not recognize that a risk exists and unwisely believes that no loss could occur.
unplanned risk retention
may be reduced by simply instituting appropriate measures in a variety of business activities.
hazards
refers to making commitments on both sides of a transaction so the risks offset each other.
hedging
is a very important management activity.
financing
