Exam 18: Financial Management

Businesses match their long-term capital needs to:

Corporations that issue debenture bonds are required to provide collateral.

Financial management is more important for a large firm than it is for a small firm.

If a firm sells shares of stock, it is financing with ________

If a company secures a three-year bank loan, this is considered __________

Businesses acquire long-term financing from two major sources:

__________ represent a favorable source of meeting long-term financing needs because there are no interest payments, dividends, or underwriting fees required when using this source

Typically, only highly regarded customers with financial stability receive ___________

Karen, a financial manager with Bigbux Incorporated, regularly compares actual revenues and expenses against their projected values. After identifying areas with significant deviations from planned values, she investigates to find the cause of these variances. Karen's activities represent the steps involved in the preparation of Bigbux's capital budget.

One of the most common ways for a firm to fail financially is poor control over cash flow.

Mark manages credit and collections at Polly Parrot Pet Supplies, Inc. He is responsible for accounts receivable and accounts payable. These activities suggest that his job is in financial management.

If a firm earns 10% return on funds they borrowed at 15% interest, the owners of the firm realize a benefit from using leverage.

Allison Robards, owner of Backstreet Books, an eclectic bookstore near a large university, is seeking additional financing for books and CDs that she plans to buy and sell in the same fiscal year. Even though it will be a sizeable investment in inventory, Allison is seeking short-term financing.

Mini-Case Tishian's Funeral Home has been in business for over 80 years. Throughout its history, the firm has been a family-run operation. Today, the business is managed by Mort Tishian, a grandson of the founder. Unfortunately, Mort Tishian's tenure has been plagued with problems neither his father nor grandfather before him experienced. The reason is simple: the funeral business is undergoing rapid change. Small, family-owned funeral homes are losing ground to a new type of competitor, a large national network service that resembles a franchise system. More and more families "in their time of need" are choosing the new, highly promoted competitors instead of the traditional small family-operated funeral homes. This trend has required a response from organizations like Tishian's Funeral Home. Bigger and better facilities are needed to remain competitive. All of this puts more pressure on the family owners to be more active in the financial side of the business. Mort summed it up best when he said, "Grandpa told people, 'You pay me when you can, I ain't goin' nowheres.'" His creditors did the same with him. Today, it's a different game. Cash flow is key, and obtaining funds is no simple task. Additionally, creditors want their money now, not later. Banks are also more demanding. "Heck, Grandpa knew all the bankers he dealt with personally. I see new faces every time I go to the bank. If things don't get better, I suspect after eighty years of service, Tishian's Funeral Home will have its own funeral." -To raise the funds for the major improvements needed at the funeral home, Mort has talked to two investors about incorporating his business and selling them shares of stock in the company. Mort is considering the use of:

The duties and responsibilities of a financial manager are virtually identical to the duties and responsibilities of an accountant.

Arborview Plant Science Company has invented a drought resistant grass seed that only needs watering three times each year. In order to expand distribution worldwide, the company whose product produces lush green foliage needs a large amount of funding-fast! The handful of seed scientists that own the company decide to offer shares of stock to general investors. This first-time offering is a(n):

Mini-Case Tishian's Funeral Home has been in business for over 80 years. Throughout its history, the firm has been a family-run operation. Today, the business is managed by Mort Tishian, a grandson of the founder. Unfortunately, Mort Tishian's tenure has been plagued with problems neither his father nor grandfather before him experienced. The reason is simple: the funeral business is undergoing rapid change. Small, family-owned funeral homes are losing ground to a new type of competitor, a large national network service that resembles a franchise system. More and more families "in their time of need" are choosing the new, highly promoted competitors instead of the traditional small family-operated funeral homes. This trend has required a response from organizations like Tishian's Funeral Home. Bigger and better facilities are needed to remain competitive. All of this puts more pressure on the family owners to be more active in the financial side of the business. Mort summed it up best when he said, "Grandpa told people, 'You pay me when you can, I ain't goin' nowheres.'" His creditors did the same with him. Today, it's a different game. Cash flow is key, and obtaining funds is no simple task. Additionally, creditors want their money now, not later. Banks are also more demanding. "Heck, Grandpa knew all the bankers he dealt with personally. I see new faces every time I go to the bank. If things don't get better, I suspect after eighty years of service, Tishian's Funeral Home will have its own funeral." -Mort approached the chief lending officer at First Virginia Bank about obtaining a $75,000 loan. The banker said she would approve the loan provided that the funeral home's building was pledged as collateral. The banker was offering a(n):

Managing a firm's resources so that it can meet its goals and objectives is the goal of financial accounting.

Since commercial finance companies offer loans to higher-risk customers than commercial banks, the interest rates they charge are usually ________ than rates charged by banks

Commercial finance companies normally charge lower rates on short-term loans than those charged by commercial banks.