Sources and Uses of Funds Financing Quiz

Financing Methods

• Borrowing money from lenders without giving up ownership is known as debt financing.
• Suppliers Credit refers to the credit extended by suppliers to a business for the purchase of goods or services.
• Selling company stock to investors in exchange for ownership interests is a method of raising capital called equity financing.

Short-Term Financing

• Personal funds advanced by a stockholder to a company are called loans from shareholders.
• The annual interest rate for 2/10 (2% discount if paid within 10 days) with a due date of 60 days is 36% (2% / 10 * 365).

Credit Cards and Cooperatives

• A characteristic of credit cards is that they offer a short-term loan with a fee.
• Credit cooperatives provide their members with loans at a lower interest rate.

Short-Term Financing Sources

• The most available source of short-term financing is a bank overdraft.

Risks and Costs

• A risk associated with borrowing regardless of the source of funds is the risk of default.
• The cost (interest) comparison of informal lending sources like 5/6 is very high.

Internally Generated Funds and Equity Investors

• Internally generated funds refer to profits reinvested in the business.
• Equity investors are owners who share the risk and profit of the business.

Lending Companies and Debt Investments

• Lending companies have a fixed return on their investment.
• Debt investments involve an investor loaning money to an entity that borrows the funds.

Financial Statement Analysis

• The primary purpose of financial statement analysis is to assess a company's financial performance.
• Profitability refers to a company's ability to generate earnings.
• The financial ratio of interest to stock market investors is the Earnings Per Share (EPS).

Financial Ratios and Return on Equity

• If a business does not pay its obligations on time, it may face bankruptcy.
• Financial statement analysis can be used by investors, creditors, and other stakeholders for investment and credit decisions.
• The most important goal of businesses is to maximize shareholder value.
• Return on Equity (ROE) measures a company's net income as a percentage of shareholder equity.
• Gross Profit Margin is computed by dividing gross profit by sales.
• The Acid-Test Ratio or Quick Asset Ratio measures a company's ability to pay its short-term liabilities.
• The formula for computing Current Ratio is current assets divided by current liabilities.
• Operating Profit Margin measures a company's profitability from its operations.
• Net Profit Margin considers both operating and non-operating income.

Liquidity Ratios and Budgeting

• Liquidity ratios measure a company's ability to pay its short-term obligations.
• Improving Gross Profit Margin can be achieved by increasing sales, reducing cost of goods sold, or a combination of both.
• Return on Assets (ROA) measures a company's net income as a percentage of its total assets.
• The Current Ratio measures a company's ability to satisfy its short-term obligations as they come due.
• The primary purpose of budgeting is to plan and control financial resources.
• The master budget of a company comprises the operational budget, financial budget, and cash budget.
• The operational budget reflects the income-generating activities of a firm.
• The sales budget outlines the projected sales of a company.
• The cash budget outlines the projected cash inflows and outflows of a company.
• The first step in preparing the budget is to prepare a sales forecast.
• The production budget calculates the quantity of goods or services to be produced.
• The sales budget influences other components of the master budget, such as the production budget and cash budget.
• The main purpose of the operating budget is to plan and control the operational activities of a firm.
• A more accurate sales forecast leads to a more accurate budget and better decision-making.