Finance and Financial Management

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Questions and Answers

What is the primary function of finance in a business?

To acquire and manage funds for the firm (correct)

To oversee production and operations

To manage a firm's human resources

To develop marketing strategies

What is the role of financial managers in a firm?

To make production decisions

To manage a firm's supply chain

To examine financial data and recommend strategies for improving financial performance (correct)

To develop marketing campaigns

What is a common reason for a firm's financial failure?

Not enough capital (correct)

Inadequate production capacity

Inadequate marketing

Poor management of human resources

What is the purpose of financial planning?

To analyze short-term and long-term money flows Signup and view all the answers

What is the third step in financial activities?

Establishing financial controls Signup and view all the answers

What is a cash flow forecast used for?

To predict a firm's cash inflows and outflows Signup and view all the answers

What is the primary purpose of a long-term forecast?

To predict revenues, costs, and expenses for a period longer than one year Signup and view all the answers

What is the main difference between a secured loan and an unsecured loan?

The collateral required for the loan Signup and view all the answers

What is the primary purpose of a budget?

To guide financial operations and expected financial needs Signup and view all the answers

What is the primary purpose of financial control?

To periodically compare actual revenues, costs, and expenses with a budget Signup and view all the answers

What is the primary purpose of capital expenditures?

To make major investments in either tangible long-term assets or intangible assets Signup and view all the answers

What is the primary purpose of trade credit?

To buy goods and services now and pay for them later Signup and view all the answers

What is a promissory note?

An agreement with a promise to pay a supplier a specific sum of money at a definite time Signup and view all the answers

What is the primary advantage of debt financing through loans?

The loan interest is tax-deductible Signup and view all the answers

What is venture capital?

Money invested in new or emerging companies with great profit potential Signup and view all the answers

What is the principle that governs the relationship between risk and return on investments?

The greater the risk, the higher the return Signup and view all the answers

Study Notes

Finance and Financial Management

Finance function in a business involves acquiring and managing funds within the firm
Financial management involves managing a firm's resources to meet its goals and objectives
Financial managers examine financial data and recommend strategies for improving financial performance

Financial Manager's Activities

Obtaining funds
Effectively controlling the use of funds
Auditing
Managing taxes
Advising top management on financial matters
Collecting funds (credit management)
Controlling funds (funds management)
Budgeting
Planning

Reasons for Financial Failure

Not enough capital
Poor control over cash flow
Inadequate expense control (overspending)

Financial Planning

Involves analyzing short-term and long-term money flows to and from the company
3 key steps:
- Forecasting firm's short-term and long-term financial needs
- Developing budgets to meet those needs
- Establishing financial controls to see if the company is achieving its goals

Forecasting

Short-term forecast: predicts revenues, costs, and expenses for a period of one year or less
Cash flow forecast: predicts cash inflows and outflows in future periods
Long-term forecast: predicts revenues, costs, and expenses for a period longer than one year

Budgeting

Sets forth management's expectations and allocates the use of specific resources throughout the firm
Depends on balance sheet, income statement, statement of cash flows, and short-term and long-term financial forecasts
Guides financial operations and expected financial needs

Financial Control

A process in which a firm periodically compares its actual revenues, costs, and expenses with its budget
Key needs for operational funds in a firm include:
- Managing day-by-day needs of the business
- Controlling credit operations
- Acquiring needed inventory
- Making capital expenditures

Alternative Sources of Funds

Debt financing: funds raised through various forms of borrowing that must be repaid
Equity financing: money raised from within the firm, from operations or through the sale of ownership in the firm (stock or venture capital)
Short-term financing: funds needed for a year or less
Long-term financing: funds needed for more than a year
Trade credit: the practice of buying goods and services now and paying for them later

Loans and Financing

Promissory note: a written agreement with a promise to pay a supplier a specific sum of money at a definite time
Secured loan: backed by collateral
Unsecured loan: doesn't require any collateral
Long-term financing loans generally come due within 3 to 7 years but may extend to 15 or 20 years
Term-loan agreement: a promissory note that requires the borrower to repay the loan in specified installments
Risk/return trade-off: the principle that the greater the risk a lender takes in making a loan, the higher the interest rate required

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Description

This quiz covers the basics of finance, including acquiring and managing funds, preparing budgets, and financial planning. It also explores the role of financial managers in examining financial data and recommending strategies for improvement.