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Questions and Answers
What is the primary function of finance in a business?
What is the primary function of finance in a business?
Which of the following is NOT a responsibility of financial managers?
Which of the following is NOT a responsibility of financial managers?
What is the first step in financial planning?
What is the first step in financial planning?
Which of these is a common reason for a firm's financial failure?
Which of these is a common reason for a firm's financial failure?
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Why is it essential for financial managers to stay informed?
Why is it essential for financial managers to stay informed?
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What does effective control over cash flow help prevent?
What does effective control over cash flow help prevent?
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What type of analysis do financial managers perform?
What type of analysis do financial managers perform?
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Which of the following describes the role of accountants compared to financial managers?
Which of the following describes the role of accountants compared to financial managers?
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What is a characteristic of commercial paper?
What is a characteristic of commercial paper?
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What is the primary advantage of a long-term loan for a business?
What is the primary advantage of a long-term loan for a business?
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Which statement accurately describes secured bonds?
Which statement accurately describes secured bonds?
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What role do venture capitalists typically play in business financing?
What role do venture capitalists typically play in business financing?
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What is a common use of credit cards among small businesses?
What is a common use of credit cards among small businesses?
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What is a key disadvantage of using credit cards for business financing?
What is a key disadvantage of using credit cards for business financing?
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Which of the following is not a form of equity financing?
Which of the following is not a form of equity financing?
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What does the risk/return trade-off imply in debt financing?
What does the risk/return trade-off imply in debt financing?
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What is trade credit?
What is trade credit?
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Which of the following describes short-term financing?
Which of the following describes short-term financing?
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What is a promissory note?
What is a promissory note?
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What is factoring in the context of finance?
What is factoring in the context of finance?
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Which option best describes unsecured loans?
Which option best describes unsecured loans?
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Which of the following is NOT a characteristic of family and friends financing?
Which of the following is NOT a characteristic of family and friends financing?
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What kind of funding does equity financing represent?
What kind of funding does equity financing represent?
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What are the terms '2/10, net 30' associated with?
What are the terms '2/10, net 30' associated with?
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What is the primary focus of a short-term financial forecast?
What is the primary focus of a short-term financial forecast?
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Which statement best describes the relationship between budgets and financial forecasts?
Which statement best describes the relationship between budgets and financial forecasts?
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How often do most companies conduct financial reviews to ensure they meet their budget?
How often do most companies conduct financial reviews to ensure they meet their budget?
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What is a capital expenditure?
What is a capital expenditure?
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What is one of the key needs for operational funds?
What is one of the key needs for operational funds?
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What is the primary purpose of financial control?
What is the primary purpose of financial control?
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Which of the following is NOT a factor in establishing an effective budget?
Which of the following is NOT a factor in establishing an effective budget?
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Which financial statement is least likely to be used when allocating resources in a budget?
Which financial statement is least likely to be used when allocating resources in a budget?
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Study Notes
Chapter 18: Financial Management
- Finance: The function within a business responsible for acquiring and managing funds. Core activities include preparing budgets, analyzing cash flow, and planning for expenditures.
Role of Finance and Financial Managers
- Financial Management: The process of managing a firm's resources to achieve its goals and objectives.
- Financial Managers: Analyze financial data and create strategies to improve financial performance.
- Accountants: Prepare financial reports about the company's health. Financial managers interpret these reports and make recommendations. Financial managers are responsible for obtaining funds and effectively using them.
- Financial Manager Duties (Figure 18.1): Planning, Auditing, Budgeting, Obtaining funds, Controlling funds (Cash management), Managing taxes, Advising top management on financial matters, Collecting funds (Credit management).
The Value of Understanding Finance
- Reasons for Business Failure: Undercapitalization, poor cash flow control, and inadequate expense control are common reasons firms fail financially.
- Financial Management's Role: Financial managers are responsible for paying bills, collecting overdue payments, and staying current with changes in finance (e.g., tax laws).
Financial Planning
- Overview: Analyzing short-term and long-term money flows into and out of the company.
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Key Steps:
- Forecasting short-term and long-term financial needs.
- Creating budgets to meet those needs.
- Establishing financial controls to ensure the company meets its goals.
- Forecasting Financial Needs (Figure 18.7): Short-term forecasts cover one year or less, analyzing revenues, costs, and expenses; cash flow forecasts predict future cash movements (monthly or quarterly). Long-term forecasts are for periods longer than a year, sometimes up to five or ten years.
Working with the Budget Process
- Budgets: Management expectations and resource allocation within the firm. Budgets are linked to the balance sheet, income statement, cash flow statements, and financial forecasts.
- Budget Effectiveness: Accurate forecasts are crucial for effective budgets. Budgets guide financial operations and anticipated needs.
Establishing Financial Controls
- Financial Control: Regularly comparing actual revenues, costs, and expenses against the budget.
- Financial Reviews: Companies typically hold monthly financial reviews to identify variances and take corrective actions.
The Need for Operating Funds
- Key Needs: Managing daily business needs, meeting short-term obligations, controlling credit operations, handling deferred payments and credit cards, acquiring inventory (e.g., Just-in-Time inventory).
- Capital Expenditures: Major investments in tangible long-term assets (land, buildings, equipment) or intangible assets (patents, trademarks, copyrights).
Alternative Sources of Funds
- Equity Financing: Money raised within the firm from operations or through the sale of ownership (stock or venture capital).
- Debt Financing: Funds raised through borrowing; must be repaid. This includes short-term and long-term financing (funds needed for a year or less, and more than a year, respectively).
Obtaining Short-Term Financing
- Trade Credit: Buying goods and services now, paying later. Business often use terms like 2/10, net 30 (2% discount if paid within 10 days, net 30 days for full payment).
- Promissory Note: An agreement to pay a supplier a specific amount at a definite time. Can be sold to a bank at a discount.
- Family and Friends: Short-term financing from family or friends. Important to agree to specific terms, put the agreement in writing, and arrange repayment.
- Commercial Banks: Loans to larger established businesses; secured or unsecured loans based on collateral provided.
- Factoring Accounts Receivable: Selling accounts receivable for cash.
Obtaining Long-Term Financing
- Debt Financing (Borrowing): Long-term loans typically due within 3-7 years, potentially up to 15-20 years; term loan agreement specifying installments. Major advantage is tax-deductible interest. Risk/return trade-off.
- Debt Financing (Issuing Bonds): Like an IOU with a promise to repay the amount borrowed with interest on a specific date; secured bonds use collateral (real estate), unsecured bonds (debentures) depend on the issuer's reputation.
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Equity Financing:
- Selling stock
- Retained earnings
- Venture capital (money invested in new or emerging companies).
Debt vs. Equity Financing (Figure 18.6)
- Debt: Management influence is usually limited; debt has a maturity date; the principal must be repaid; interest is a contractual obligation and tax-deductible.
- Equity: Common stockholders have voting rights; stock has no maturity date; the company isn't required to repay equity itself; the firm doesn't have legal liability to pay dividends but dividends are paid from after-tax income and not deductible.
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Description
Explore the key concepts of financial management in this quiz. Learn about the roles and responsibilities of financial managers, including budgeting, cash flow analysis, and fund management. This quiz will help reinforce your understanding of how financial strategies contribute to a firm's success.
