Management and Accounting Info Chapter 15
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Questions and Answers

What impact does relevant information have on decision-making in businesses?

  • It leads to better intelligence and consequently better decisions. (correct)
  • It complicates the decision-making process.
  • It helps to reduce the need for market research.
  • It has no significant effect on the outcomes of decisions.

What is the relationship between the amount of information and the risk of decision-making?

  • A high amount of information decreases the likelihood of poor decisions. (correct)
  • Information quantity does not affect decision outcomes.
  • A low amount of information guarantees successful decisions.
  • More information always results in lower risks.

How is data defined in the context of management and accounting information?

  • Data consists of measurements that can be used for analysis. (correct)
  • Data is irrelevant numerical or verbal descriptions.
  • Data is information presented for a specific purpose.
  • Data only includes financial figures.

Why is better intelligence particularly important for businesses?

<p>It provides a competitive edge and improves profits. (D)</p> Signup and view all the answers

What is a characteristic of information in the context of managerial decision-making?

<p>Information should be organized in a way that makes it useful for specific purposes. (A)</p> Signup and view all the answers

What is the cost of goods sold for Comer, INC. if it had $200,000 in goods available for sale and an ending inventory of $40,000?

<p>$160,000 (A)</p> Signup and view all the answers

In which section of the statement of cash flows would the cash received from sales of Coke and juices appear?

<p>Operating (D)</p> Signup and view all the answers

Which of the following is NOT considered a section of the income statement of a business?

<p>Liabilities (B)</p> Signup and view all the answers

What is the primary purpose of zero-base budgeting as inferred from Larry Patterson's situation?

<p>To justify all expenses from scratch (D)</p> Signup and view all the answers

What type of capital is represented by the contributions made by Drew and Tammy to start their cake-decorating business?

<p>Equity capital (A)</p> Signup and view all the answers

What does a high current ratio signify for a firm?

<p>The firm can pay its current liabilities (C)</p> Signup and view all the answers

Which method is the quickest way to improve inventory turnover?

<p>Order merchandise in smaller quantities (B)</p> Signup and view all the answers

What is the formula used to calculate the average value of inventory?

<p>(Beginning inventory + Ending inventory) / 2 (C)</p> Signup and view all the answers

Which financial management activity is necessary to maintain a firm’s credit rating?

<p>Paying bills promptly (C)</p> Signup and view all the answers

Which title is typically associated with finance management?

<p>Financial Planner (C)</p> Signup and view all the answers

What characterizes short-term financing?

<p>Funds used for less than one year (D)</p> Signup and view all the answers

What is 'cash flow' in the context of financial management?

<p>The movement of money into and out of an organization (C)</p> Signup and view all the answers

What does the inventory turnover ratio indicate?

<p>How quickly a firm sells its inventory (B)</p> Signup and view all the answers

Which of the following is a reason why businesses might file for bankruptcy?

<p>The economy and other external factors (A)</p> Signup and view all the answers

Which of these actions can help improve a firm's current ratio?

<p>Repaying current liabilities (A)</p> Signup and view all the answers

Which type of short-term financing typically carries no finance charge?

<p>Trade credit (C)</p> Signup and view all the answers

What is a common reason lenders prefer finished goods over raw materials as collateral?

<p>Finished goods are easier to sell. (A)</p> Signup and view all the answers

Which statement accurately compares a loan secured by receivables and factoring?

<p>Factoring typically offers higher costs than loans secured by receivables. (B)</p> Signup and view all the answers

What advantage does a commercial paper have compared to a secured loan?

<p>Typically a higher credit rating is required for issuance. (D)</p> Signup and view all the answers

In the context of initial public offerings (IPO), what does the primary market refer to?

<p>A market where new securities are sold directly from the issuer. (B)</p> Signup and view all the answers

What distinguishes a secured loan from other types of financing options?

<p>Collateral is necessary, typically in the form of inventory or receivables. (C)</p> Signup and view all the answers

What is the primary source of profit for a factoring firm?

<p>The difference between the face value and the purchase price. (A)</p> Signup and view all the answers

Which of the following businesses is likely to utilize commercial paper for financing?

<p>A large corporation with a high credit rating. (B)</p> Signup and view all the answers

What is the process of apportioning the cost of a fixed asset over its useful period called?

<p>Depreciation (C)</p> Signup and view all the answers

Which of the following is NOT considered a current liability?

<p>Long-term loans (C)</p> Signup and view all the answers

Which term refers to assets that do not have a physical presence but hold value?

<p>Intangible assets (B)</p> Signup and view all the answers

What is calculated as revenues minus costs of goods sold and operating expenses?

<p>Net income (B)</p> Signup and view all the answers

Which of the following best describes retained earnings?

<p>Profits not distributed to stockholders (A)</p> Signup and view all the answers

What is the equation for calculating net sales?

<p>Net sales = Gross sales - Sales deductions (D)</p> Signup and view all the answers

Which section of the statement of cash flows includes the purchase and sale of equipment?

<p>Cash flows from investing activities (B)</p> Signup and view all the answers

What does the current ratio measure?

<p>The liquidity of a firm (B)</p> Signup and view all the answers

What does gross profit represent?

<p>Revenues minus cost of goods sold (D)</p> Signup and view all the answers

Which type of expenses are related to a firm’s marketing activities?

<p>Selling expenses (D)</p> Signup and view all the answers

What reflects the relationship between two elements of a firm's financial statements?

<p>Financial ratio (A)</p> Signup and view all the answers

What is a common indicator that revenues exceed expenses?

<p>Net income (D)</p> Signup and view all the answers

What determines a firm’s ability to pay dividends?

<p>Statement of cash flows (B)</p> Signup and view all the answers

What is the primary purpose of the Sarbanes-Oxley Act?

<p>To ensure accuracy of corporate financial information (D)</p> Signup and view all the answers

Which of the following is NOT a key component of the Sarbanes-Oxley Act?

<p>Mandatory audits of all private companies (A)</p> Signup and view all the answers

Which type of accounting focuses on providing financial statements for external use?

<p>Financial accounting (A)</p> Signup and view all the answers

What does the accounting equation Assets = Liabilities + Owners' Equity represent?

<p>The financial position of a business (D)</p> Signup and view all the answers

In which order are current assets listed on the balance sheet?

<p>From most liquid to least liquid (C)</p> Signup and view all the answers

What is the maximum imprisonment duration for accountants who intentionally destroy financial documents under the Sarbanes-Oxley Act?

<p>20 years (B)</p> Signup and view all the answers

Which asset type is categorized as a fixed asset?

<p>Equipment (C)</p> Signup and view all the answers

What is the main role of managerial accounting?

<p>To assist management in decision-making (A)</p> Signup and view all the answers

What must a balance sheet demonstrate?

<p>Assets must equal liabilities plus owners' equity (A)</p> Signup and view all the answers

Which of the following describes private accountants?

<p>They are employed by a specific organization (B)</p> Signup and view all the answers

What do auditors need to do under the Sarbanes-Oxley Act regarding financial documents?

<p>Maintain financial documents for seven years (A)</p> Signup and view all the answers

What is a significant risk faced by employees when a company files for bankruptcy due to fraudulent accounting?

<p>Loss of their jobs and investments (D)</p> Signup and view all the answers

Which accounting type helps not-for-profit organizations track donations?

<p>Not-for-profit accounting (C)</p> Signup and view all the answers

What does liquidity refer to in accounting?

<p>The ease of converting assets into cash (C)</p> Signup and view all the answers

What is the primary purpose of sales revenues for a business after goods are shipped?

<p>To repay short-term financing (B)</p> Signup and view all the answers

Which of the following is considered long-term financing?

<p>Debt capital with repayment period over years (C)</p> Signup and view all the answers

What does the risk-return ratio indicate?

<p>Higher risks should yield higher returns (B)</p> Signup and view all the answers

What is the first step in financial planning?

<p>Establish organizational goals and objectives (C)</p> Signup and view all the answers

In zero-base budgeting, what is required for every expense?

<p>Every expense must be justified (B)</p> Signup and view all the answers

Which document serves as a guarantee for paying a seller a specified amount?

<p>Letter of credit (C)</p> Signup and view all the answers

What is the defining feature of a line of credit?

<p>Approved in advance of need (A)</p> Signup and view all the answers

What does a cash budget primarily estimate?

<p>Cash receipts and expenditures (C)</p> Signup and view all the answers

Which type of short-term financing is most commonly used by sellers?

<p>Trade credit (D)</p> Signup and view all the answers

What is required for obtaining an unsecured banking loan?

<p>Solid working relationship with the lender (A)</p> Signup and view all the answers

What does the term 'prime interest rates' refer to?

<p>The lowest rate charged by banks to borrowers with excellent credit (A)</p> Signup and view all the answers

What defines commercial paper?

<p>A short-term promissory note issued by a corporation (C)</p> Signup and view all the answers

What is the role of automated clearinghouses (ACHs)?

<p>To reduce paper checks by processing various transactions electronically (A)</p> Signup and view all the answers

What is a primary characteristic of a promissory note?

<p>It is legally binding and enforceable (D)</p> Signup and view all the answers

What is the main advantage of selling stock for a corporation?

<p>The obligation to repay investors is minimal (D)</p> Signup and view all the answers

Which of the following correctly describes common stock?

<p>Owners have voting rights and lower claims on assets (A)</p> Signup and view all the answers

Which of the following is a characteristic of preferred stock?

<p>Owners have the first right to dividends (B)</p> Signup and view all the answers

What is venture capital primarily used for?

<p>Funding small firms with potential for growth (B)</p> Signup and view all the answers

What differentiates an angel investor from a venture capitalist?

<p>Angel investors prioritize helping startups over profits (A)</p> Signup and view all the answers

What best describes financial leverage?

<p>Employing borrowed funds to enhance returns (B)</p> Signup and view all the answers

What is a corporate bond?

<p>A pledge by a corporation to repay borrowed money with interest (D)</p> Signup and view all the answers

Which of the following statements about debenture bonds is true?

<p>They rely solely on the issuing corporation's reputation (A)</p> Signup and view all the answers

How does a sinking fund function?

<p>It accumulates funds to repay bonds at maturity (D)</p> Signup and view all the answers

What is the primary distinguishing feature of a convertible bond?

<p>It can be exchanged for stock (B)</p> Signup and view all the answers

What financial attribute typically influences the interest rate of a corporate bond?

<p>The corporation's ability to pay interest (B)</p> Signup and view all the answers

What is the typical repayment period for long-term loans?

<p>5-10 years (B)</p> Signup and view all the answers

In which market do secondary market transactions typically occur?

<p>Primarily through securities exchanges and OTC (C)</p> Signup and view all the answers

Which factor affects the interest rate of a corporate bond?

<p>The financial stability of the company (C)</p> Signup and view all the answers

What is the primary purpose of a decision-support system (DSS)?

<p>To provide relevant data for decision-making (D)</p> Signup and view all the answers

Which software application is primarily used for creating professional reports and publications combining text and graphics?

<p>Desktop publishing (B)</p> Signup and view all the answers

What does the management information system (MIS) primarily do?

<p>Distributes timely and useful information (D)</p> Signup and view all the answers

Which of the following is NOT one of the functions performed by a management information system (MIS)?

<p>Conducts audits (C)</p> Signup and view all the answers

Which area of management requires information about employees and their respective attributes?

<p>Human resources (B)</p> Signup and view all the answers

What is a primary role of accounting in a business?

<p>To systematically collect and report financial information (B)</p> Signup and view all the answers

What do generally accepted accounting principles (GAAP) provide?

<p>Standards for financial reporting and accounting (A)</p> Signup and view all the answers

Which of the following describes an expert system?

<p>A system that uses rules to provide recommendations (C)</p> Signup and view all the answers

What is the significance of conducting an audit?

<p>To assess the fairness of financial statements (C)</p> Signup and view all the answers

Which function does NOT belong to the five functions of a management information system?

<p>Audits financial practices (B)</p> Signup and view all the answers

What aspect of business does marketing require detailed information about?

<p>Products and services offered by competitors (A)</p> Signup and view all the answers

What is the overall goal of knowledge management (KM) within an organization?

<p>To facilitate data sharing and use (A)</p> Signup and view all the answers

Which type of software helps in recording routine financial transactions?

<p>Accounting software (D)</p> Signup and view all the answers

What is the purpose of the information collected by the finance department?

<p>To measure the company's financial health (B)</p> Signup and view all the answers

Flashcards

Relevant information

Information that is helpful for making decisions, and leads to better outcomes.

Risk in decision-making

The potential for making bad decisions, often due to insufficient information.

Information level

The amount of information available to someone making a decision.

Data

Raw, unprocessed facts or figures, like numbers or words.

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Information

Data that has been organized and made useful for a specific purpose.

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Managerial Accounting

Provides managers and employees with information for financial, investing, marketing, and operating decisions.

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Financial Accounting

Creates financial statements and reports for external parties like investors.

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Cost Accounting

Determines the cost of creating specific products or services.

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Tax Accounting

Plans tax strategies and prepares tax returns for individuals or organizations.

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Government Accounting

Provides accounting services to government entities.

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Not-for-Profit Accounting

Helps non-profit organizations track donations and expenses.

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Private Accountant

Employed by a specific organization.

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Public Accountant

Works on a fee basis for clients, often self-employed or part of an accounting firm.

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CPA (Certified Public Accountant)

A certified professional who has met state requirements and passed a rigorous accounting examination.

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Accounting Equation

The foundation of accounting, representing the relationship between assets, liabilities, and owners' equity.

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Double-Entry Bookkeeping

A system where every financial transaction is recorded twice, ensuring the accounting equation remains balanced.

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Balance Sheet (Statement of Financial Position)

A summary of a firm's financial position at a specific point in time, showcasing assets, liabilities, and owners' equity.

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Liquidity

The ease with which an asset can be converted into cash.

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Current Assets

Assets that can be quickly converted to cash or used within one year.

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Fixed Assets

Assets that will be held or used for more than one year.

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Current Ratio

A financial ratio that measures a company's ability to pay its short-term obligations using its current assets. It is calculated by dividing current assets by current liabilities.

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Inventory Turnover

A financial ratio that indicates how efficiently a company is managing its inventory. It's calculated by dividing the cost of goods sold by the average inventory value.

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Cash Flow

The movement of money into and out of a business, encompassing both incoming revenue and outgoing expenses.

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Short-term Financing

Short-term financing is borrowed money that needs to be repaid within one year or less.

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Speculative Production

The time delay between the actual production of goods and when those goods are finally sold.

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Financial Management

All the activities related to getting and using money effectively within a business.

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Business Bankruptcy

The act of a company formally declaring its inability to pay its debts, often leading to legal proceedings for debt restructuring or liquidation.

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Certificate of Deposit (CD)

A certificate of deposit (CD) is a time deposit where money is placed in a bank for a specific period at a fixed interest rate.

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Depreciation

The process of spreading the cost of a fixed asset over its useful life.

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Government Securities

Government securities are debt instruments issued by a government to raise funds. They are considered low-risk investments.

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Intangible Assets

Assets that have value but don't physically exist, like patents or trademarks.

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Current Liabilities

Debts that are due within a year.

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Marketable Securities

Marketable securities are short-term, highly liquid investments that can be easily bought and sold on the market.

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Long-Term Liabilities

Debts that are due in more than a year.

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Owners' Equity

The value of the business owned by its owners.

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Retained Earnings

The portion of profits that are not distributed to shareholders.

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Income Statement

A summary of a company's revenues and expenses over a period.

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Gross Sales

The total dollar amount of all goods and services sold during a period.

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Net Sales

The actual amount a company receives for its sales after deductions.

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Cost of Goods Sold

The cost of making the products the company sells.

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Gross Profit

The difference between net sales and the cost of goods sold.

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Operating Expenses

All expenses other than the cost of goods sold.

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Net Income

The difference between a company's revenues and expenses, showing whether the company made a profit or loss.

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Statement of Cash Flows

A statement that shows how a company's cash flow changes over a period.

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Long-term financing

Money that will be used for longer than one year.

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Risk-return ratio

A ratio based on the principle that a high-risk decision should generate higher financial returns for a business and more conservative decisions often generate lower returns.

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Financial plan

A plan for obtaining and using the money needed to implement an organization's goals and objectives.

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Objective

A specific statement detailing what an organization intends to accomplish over a shorter period of time.

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Budget

A financial statement that projects income, expenditures, or both over a specified future period.

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Cash budget

A financial statement that estimates cash receipts and cash expenditures over a specific period.

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Zero-base budgeting

A budgeting approach in which every expense in every budget must be justified.

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Equity capital

Money received from the owners or from the sale of shares of ownership in a business.

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Debt capital

Borrowed money obtained through loans of various types.

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Line of credit

A loan that is approved before the money is actually needed.

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Collateral

Real estate or property pledged as security for a loan.

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Debit card

A card that electronically subtracts the amount of a customer's purchase from her or his bank account at the moment the purchase is made.

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Unsecured financing

Financing that is not backed.

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Trade credit

A type of short-term financing extended by a seller who does not require immediate payment after delivery of merchandise.

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What is a Database?

A collection of data and information stored in one location, used for decision making by people throughout an organization.

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What is Knowledge Management?

A firm's systematic procedures for creating, using, and sharing vital data and information.

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What is a Decision-Support System (DSS)?

Software programs designed to provide relevant data and information to help employees make informed decisions.

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What is an Expert System?

A computer program that uses AI to mimic human thinking, analyzing information to provide recommendations or suggest actions.

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What are Business Application Software?

Business software applications that improve employee decision-making and productivity.

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What is a Management Information System (MIS)?

A system that delivers essential information to managers and employees, helping them perform their jobs effectively.

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What is Accounting?

The process of systematically collecting, analyzing, and reporting financial information.

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What is an Audit?

An examination of a company's financial statements and accounting practices, ensuring they comply with generally accepted accounting principles.

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What are Generally Accepted Accounting Principles (GAAPs)?

A set of guidelines and practices for U.S. companies reporting financial information.

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What is Finance in terms of Information Requirements?

The area of management focused on ensuring managers, employees, suppliers, investors, and government agencies have the information needed to assess the firm's financial health.

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What is Operations in terms of Information Requirements?

The area of management concerned with current and future sales, inventory levels, and resource availability for production.

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What is Marketing in terms of Information Requirements?

The area of management focused on gathering detailed information about a company's products and services, as well as those offered by competitors.

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What is Human Resources in terms of Information Requirements?

The area of management responsible for everything related to a firm's employees.

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What is Administration in terms of Information Requirements?

The area of management responsible for the overall management of the organization.

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What are the Five MIS Functions?

The five core functions of every MIS: collects data, stores data, updates data, processes data into information, and presents information to users.

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Factoring Accounts Receivable

An arrangement where a firm sells its accounts receivable to a specialist company, called a factor, at a discount. The factor then collects the full amount from the customers.

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Inventory-Secured Loan

A loan secured by inventory, meaning the lender can claim the inventory if the borrower defaults on the loan. Finished goods are typically preferred as collateral over raw materials or work in process.

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Factor (Finance)

A firm that buys accounts receivable from other companies at a discounted price and then collects the full amount from the customers. They make a profit from the difference between the purchase price and the face value of the receivable.

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Accounts Receivable (AR)

Money owed to a company by its customers for goods or services delivered. They can be used as collateral for loans.

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Initial Public Offering (IPO)

The first time a company sells its shares to the public, raising capital from investors in the primary market. This is a way for companies to become publicly traded.

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Primary Market (Finance)

The market where investors purchase financial securities directly from the issuer, like new stock or bonds, and not through trading on the stock market.

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Investment Banking Firm

A financial institution that helps companies raise capital by selling securities to investors. They underwrite new issues of stocks, bonds, etc.

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Unsecured Bank Loan

A short-term loan based on a promise to pay, typically unsecured but requires legal documents. It's a common way for businesses to borrow for working capital needs.

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What are current liabilities?

Current liabilities are obligations due within one year, such as salaries payable, accounts payable, and taxes payable.

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What is inventory turnover?

Inventory turnover measures how quickly a company sells and replaces its inventory. It's calculated by dividing the cost of goods sold by the average inventory.

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Where does cash from sales appear on the statement of cash flows?

Operating activities on the statement of cash flows include cash received from customers for goods or services provided and cash paid for operating expenses.

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What is equity capital?

Equity capital is funding provided by the owners of a business, typically through investments. In this case, Drew and Tammy contributed their own money to start their cake-decorating business.

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What is zero-base budgeting?

Zero-base budgeting starts from scratch each year, requiring managers to justify every expense. This helps prevent budget padding by forcing managers to prioritize and defend each expense.

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Stock Financing

Money raised by selling ownership shares of a company to investors.

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Secondary Market

A market where existing stocks and bonds are traded between investors.

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Securities Exchange

A marketplace where brokers gather to buy and sell securities.

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Over-the-Counter (OTC) Market

A network of dealers who buy and sell securities not listed on a securities exchange.

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Common Stock

Stock that grants voting rights to owners but has lower claims on profits and assets compared to other stock types.

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Preferred Stock

Stock that usually doesn't provide voting rights but has priority over common stock in receiving dividends and assets.

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Venture Capital

Money invested in promising early-stage companies with the potential to grow rapidly.

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Angel Investor

An individual investor who provides financial support to startups and entrepreneurs.

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Private Placement

Direct sale of securities to a select group of investors, like insurance companies or pension funds.

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Financial Leverage

Using borrowed funds to potentially increase the return on owners' equity.

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Term Loan

A promissory note requiring regular payments to repay borrowed funds.

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Corporate Bond

A written pledge by a corporation to repay a specific amount of money with interest.

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Debenture Bond

A type of corporate bond not secured by specific assets, backed only by the company's reputation.

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Study Notes

Chapter 15: Using Management and Accounting Information

  • Information and Risk: Relevant information leads to better decisions, improving a firm's competitiveness and profitability. A high amount of information allows for better decisions, while a low amount increases the risk of poor decisions.

  • Data vs. Information: Data are numerical or verbal descriptions from measurements (e.g., wage levels, prices). Information presents data in a useful form (e.g., wage gap graphs). Databases store data and information for organizational decision-making. Knowledge management (KM) manages data and information generation, use, and sharing.

  • Making Smart Decisions: Decision support systems (DSS) use software to provide data and information for better decisions. Expert systems use AI to mimic human thinking, applying rules to user-provided information to suggest actions.

  • Business Application Software: Various software enhances employee decision-making and productivity. Examples include word processing, desktop publishing, accounting, database management, graphics, and spreadsheets.

  • Management Information System (MIS): An MIS provides timely and useful information to managers and employees from internal and external sources, directly accessible by employees and managers in the organization. The MIS is a system integrated with databases to organize, summarize, and calculate data.

  • Firm's Information Requirements: A firm's management is organized into five areas (finance, operations, marketing, human resources, administration), each requiring specific information to effectively manage its area. MISs need to cater to these specific needs.

  • MIS Functions: An MIS collects, stores, updates, processes, and presents information.

  • Accounting: Accounting collects, analyzes, and reports financial information, used for past analysis and future decisions. Public accounting firms conduct audits to improve accounting accuracy.

  • Audit and GAAP: Audits examine financial statements and accounting practices. Generally Accepted Accounting Principles (GAAP) provide guidelines for financial reporting. When an accountant believes financial statements are fair and meet GAAP, a specific statement is issued.

  • Accounting Fraud and Reform: Corporate accounting problems have raised concerns about fraudulent and unethical practices. The Sarbanes-Oxley Act aims to improve accuracy and prevent future accounting scandals.

  • Sarbanes-Oxley Act: Key components include a public company accounting oversight board, certification requirements for financial officers, limitations on non-audit services for accounting firms, document retention, enhanced penalties for violations, and lead auditing firm changes.

  • Types of Accounting: Managerial accounting provides information for internal decision-making. Financial accounting generates financial statements for external parties. Cost accounting determines product costs. Tax accounting plans tax strategies. Government accounting supports governmental agencies. Not-for-profit accounting serves not-for-profit organizations.

  • Accountants: Private accountants work for specific organizations, while public accountants work on a fee basis for clients. Certified Public Accountants (CPAs) have met state requirements and passed an examination.

  • Accounting Equation: Assets = Liabilities + Owners' Equity. Assets are resources, liabilities are debts, and owners' equity is the difference. Double-entry bookkeeping maintains this balance.

  • Financial Statements: Financial transactions are summarized into financial statements, reported in an annual report to stakeholders.

Chapter 16: Mastering Financial Management

  • Business Bankruptcies: Nation's economic conditions and other factors affect business bankruptcies.

  • Financial Management: Financial management involves obtaining and effectively using funds. This includes having adequate funds when needed, keeping costs low, using funds efficiently, and managing expenses effectively.

  • Job Titles in Finance: Finance jobs include CFO, VPs of finance, bank officers, credit officers, financial analysts, financial planners, loan officers, insurance analysts, and investment account executives.

  • Finance Skills: Honest financial professionals need strong financial backgrounds, computer skills, and excellent communication skills.

  • Short-Term Financing: Covers cash flow problems, inventory needs, promotions, speculative production, monthly expenses, and emergencies.

  • Long-Term Financing: Covers business start-up costs, new product development, equipment replacement, mergers, acquisitions, and expansion.

  • Risk-Return Ratio: High-risk decisions should yield higher returns.

  • Financial Planning: Financial plans outline how to obtain and use money to meet organizational goals. Steps are: setting goals, budgeting, and identifying funding sources.

  • Developing a Financial Plan: Establishing goals, objectives, and budgets are steps in creating a financial plan.

  • Budgeting: Budgets estimate income, expenditures, or both over future periods with departmental breakdowns, focusing on cash budgets. Budget approaches include traditional (based on prior year data) and zero-base (every expense justified). Capital budgets cover major asset expenditures.

  • Funding Sources: Key funding sources are sales revenue, equity capital (from owners or shares), debt capital (loans), and proceeds from asset sales.

  • Traditional Banking Services: Savings accounts and checkings are used for businesses. Certificates of deposit (CDs) can improve interest return on excess cash.

  • Business Loans: Short-term loans are repaid within a year and may use revolving credit agreements. Long-term loans are repaid over years using collateral in some instances.

  • Credit and Debit Cards: Credit card transactions can convert sales to cash through bank processing. Debit cards deduct transaction costs directly from bank accounts.

  • Electronic Banking: EFT, ATMs, Automated Clearing Houses (ACHs), and point-of-sale (POS) terminals increase electronic transaction speed and efficiency.

  • International Banking: Letters of credit and banker's acceptances allow for international transaction payments.

  • Sources of Unsecured Short-Term Financing: Trade credit (with sellers extending credit) and promissory notes are common and often have less cost and risk.

  • Unsecured Bank Loans: Prime interest rates for loans are determined by credit rating. Compensating balances may be required. Commercial paper is a short-term promissory note for large corporations.

  • Sources of Secured Short-Term Financing: Loans backed by inventory (finished goods, raw materials, or work-in-process) or receivables (accounts receivable) are two examples. Factoring is when a firm sells its accounts receivable.

  • Selling Stock: IPOs (Initial Public Offerings) are used to raise funds by selling shares to the public through a primary market through investment banking firms. Stocks can be held or traded between investors in secondary markets (securities exchanges or over-the-counters).

  • Stock Advantages: No repayment obligation, no dividend requirements.

  • Retained Earnings: Undistributed profits from corporations, are a form of equity financing.

  • Venture Capital, Angel Investors, and Private Placements: Venture capital funds invest in small, potentially successful firms with equity ownership. Angel investors focus on small business success. Private placements occur when securities are sold to specific investors.

  • Financial Leverage and Debt Financing: Using borrowed funds to boost returns (financial leverage). Small businesses rely on loans; larger companies also issue corporate bonds. Term loan agreements have specific repayment schedules and may involve collateral and minimum working capital requirements.

  • Corporate Bonds: Bonds are corporations' written promises to repay a defined amount with interest over a time. Different types include debenture bonds (backed only by firm reputation), mortgage bonds (backed by assets), and convertible bonds.

  • Bond Indenture and Trustee: A bond indenture details bond issue terms. Trustees act as bondholders' representatives. Serial bonds mature on different dates. A sinking fund pays down bonds periodically.

  • Comparison of Long-Term Financing Methods (Equity/Debt): Common and preferred stock (equity) versus long-term loans and corporate bonds (debt).

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Explore the critical role of management and accounting information in decision-making as highlighted in Chapter 15. Understand the difference between data and information, learn about decision support systems, and discover how software tools enhance organizational productivity. This chapter emphasizes the importance of relevant information for reducing risks and improving competitiveness.

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