Understanding Business Chapter 18

Question 1

Finance

Answer 1

The function in a business that acquires funds for the firm and manages those funds within the firm.

Question 2

Financial Management

Answer 2

The job of managing a firm’s resources so it can meet its goals and objectives.

Question 3

Financial Managers

Answer 3

Managers who examine financial data prepared by accountants and recommend strategies for improving the financial performance of the firm.

Question 4

Short-term forecast

Answer 4

Forecast that predicts revenues. costs. and expenses for a period of one year or less.

Question 5

Cash Flow Forecast

Answer 5

Forecast that predicts the cash inflows and outflows in future periods. usually months or quarters.

Question 6

Long-term Forecast

Answer 6

Forecast that predicts revenues. costs. and expenses for a period longer that 1 year. and sometimes as far as 5 or 10 years into the future.

Question 7

Budget

Answer 7

A financial plan that sets forth management’s expectations and. on the basis of those expectations. allocates the use of specific resources throughout the firm.

Question 8

Capital Budget

Answer 8

A budget that highlights a firm’s spending plans for major asset purchases that ofter require large sums of money.

Question 9

Cash Budget

Answer 9

A budget that estimates cash inflows and outflows during a particular period like a month or a quarter.

Question 10

Operating (or master) Budget

Answer 10

The budget that ties together the firm’s other budgets and summarizes its proposed financial activities.

Question 11

Financial Control

Answer 11

A process in which a firm periodically compares its actual revenues. costs. and expenses with its budget.

Question 12

Capital Expenditures

Answer 12

Major investments in either tangible long-term assets such as land. buildings. and equipment or intangible assets such as patents. trademarks. and copyrights.

Question 13

Debt Financing

Answer 13

Funds raised through various forms of borrowing that must be repaid.

Question 14

Equity Financing

Answer 14

Money raised from within the firm. from operations or through the sale of ownership in the firm (stock or venture capital).

Question 15

Short-term Financing

Answer 15

Funds needed for a year or less.

Question 16

Long-term Financing

Answer 16

Funds needed for more than a year (usually 2 to 10 years).

Question 17

Trade Credit

Answer 17

The practice of buying goods and services now and paying for them later.

Question 18

Promissory Note

Answer 18

A written contract with a promise to pay a supplier a specific sum of money at a definite time.

Question 19

Secured Loan

Answer 19

A loan backed by collateral. something valuable such as property.

Question 20

Unsecured Loan

Answer 20

A loan that doesn’t require any collateral.

Question 21

Line of Credit

Answer 21

A given amount of unsecured short-term funds a bank will lend to a business. provided the funds are readily available.

Question 22

Revolving Credit Agreement

Answer 22

A line of credit that’s guaranteed but usually comes with a fee.

Question 23

Commercial Finance Companies

Answer 23

Organizations that make short-term loans to borrows who offer tangible assets as collateral.

Question 24

Factoring

Answer 24

The process of selling accounts receivable for cash.

Question 25

Commercial Paper

Answer 25

Unsecured promissory notes of $100.000 and up that mature (come due) in 270 days or less.

Question 26

Term-loan Agreement

Answer 26

A promissory note that requires the borrower to repay the loan in specified installments.

Question 27

Risk/Return Trade-off

Answer 27

The principle that the greater the risk a lender takes in making a loan. the higher the interest rate required.

Question 28

Indenture Terms

Answer 28

The terms of agreement in a bond issue.

Question 29

Secured Bond

Answer 29

A bond issued with some form of collateral.

Question 30

Unsecured Bond

Answer 30

A bond backed only by the reputation of the issuer. also called a debenture bond.

Question 31

Venture Capital

Answer 31

Money that is invested in new or emerging companines that are perceived as having great profit potential.

Question 32

Leverage

Answer 32

Raising needed funds through borrowing to increase a firm’s rate of return.

Question 33

Cost of Capital

Answer 33

The rate of return a company must earn in order to meet the demands of its lenders and expectations of its equity holders.