Deck 19: Recognizing the Basics of Financial Management

Question 1

What is the movement of money into and out of an organization called?

A) capitalization
B) cash flow
C) budgeting
D) credit

Answer 1

B

Question 2

At the beginning of the fiscal year, ABC Inc. creates a budget that details material, labour, and other costs as well as projected revenue. This information appears on which type of budget?

A) cash budget
B) research and development budget
C) operating budget
D) capital budget

Answer 2

C

Question 3

Which of the following is NOT a type of budget used by corporations in their financial planning process?

A) cash budget
B) capital budget
C) equity budget
D) capital budget

Answer 3

C

Question 4

An assisted living facility in your town is currently at capacity. The company that operates it decides to expand and build an additional wing on to the building that will house 20 more residents. Which of the following does this represent for the company?

A) positive cash flow
B) seasonality
C) negative cash flow cycle
D) long-term investment

Question 5

All of the following would be considered proper financial management during both good and bad times EXCEPT which one?

A) investing all excess cash in long-term securities
B) planning for sufficient financing when needed
C) making sure that funds are available to meet tax deadlines
D) paying bills promptly

Question 6

An amusement park operates daily from Victoria Day to Labour Day. In addition, the park is open Fridays, Saturdays, and Sundays throughout May and September. The park finds that the revenue produced from weekend-only operations in May and September is not enough to cover the expenses they incur in those months. Which of the following circumstances requires the amusement park to seek outside financing to cover its short-term cash shortages?

A) cash shortfall due to growth
B) long-term financing
C) seasonal cash flows
D) a positive cash-flow cycle

Question 7

Abbott Laboratories, a worldwide health care company, looks to invest $50 million in new technologies for diagnostic instrument systems. This investment into research and development would appear in which of Abbot's budgets?

A) cash budget
B) capital budget
C) operating budget
D) zero-balance budget

Question 8

Eric's responsibility at his company is overseeing all the activities concerned with obtaining money and using it effectively. What is Eric's role?

A) investment adviser
B) financial manager
C) financial planner
D) accountant

Question 9

Each of the following causes a cash flow problem EXCEPT which one?

A) slow-paying customers
B) a large proportion of credit sales
C) customers who pay early
D) unexpected slow selling seasons

Question 10

With respect to cash flow, a firm ideally should have which of the following?

A) a constant need for short-term financing
B) a need for short-term financing only two to three times a year
C) more cash flowing out than in, because this represents growth
D) enough money coming into the firm to cover the expenses in that period

Question 11

Which of the following is a statement that projects income and/or expenditures over a specified future period?

A) capital budget
B) balance sheet
C) statement of cash flows
D) operating budget

Question 12

Karissa's lawn care business has become more successful than she had ever imagined, and she finds it necessary to hire an employee who will be responsible for ensuring that the company has sufficient funds to operate, managing those funds effectively, and securing additional funds if and when needed. As such, Karissa's new employee will be responsible for which of the following?

A) strategic planning
B) accounting
C) monetary policy
D) financial management

Question 13

Last year, Boeing secured long-term financing in order to expand its facilities. To identify the timing of its cash flow, Boeing will include the loan payments on which of its budgets?

A) cash
B) financial
C) capital
D) operating

Question 14

Which of the following is a tool that managers use to estimate major expenditures for assets, expansion of facilities, and mergers and acquisitions?

A) cash budget
B) capital budget
C) equity budget
D) revenue forecast

Question 15

Joe's Plumbing purchases a vanity, toilet, shower enclosure, faucets, and plumbing supplies for a major bathroom renovation job. Joe has to pay the supplier but does not expect to be paid by the customer until he has completed the job. This is an example of which of the following?

A) debt-capital needs
B) trade credit
C) equity financing
D) negative cash flow

Question 16

What are all of the activities concerned with obtaining money and using it effectively called?

A) financial management
B) long-term financing
C) accounting
D) budgeting

Question 17

All of the following would be reflected in a company's operating budget EXCEPT which one?

A) changes to revenue resulting from a new marketing campaign
B) the cost of replacing obsolete manufacturing capacity
C) projected revenue and expense growth rates for the upcoming period
D) changes to expenses resulting from changing material and/or labour costs

Question 18

Which of the following does Todd create when he develops a plan for obtaining and using the money necessary for his company to implement its goals?

A) financing agreement
B) capital budget
C) financial plan
D) operational plan

Question 19

Jennifer runs a ski store in Banff, Alberta. She buys all her skis for the season in the fall but doesn't receive any money until she sells the skis, which is usually a few months later. The suppliers of the skis will extend the time she needs to pay for the skis to 90 days. What is the term to describe what her suppliers are offering Jennifer?

A) extended credit
B) trade credit
C) supplier credit
D) line of credit

Question 20

Which of the following would reflect the cost of acquiring a new company?

A) capital budget
B) operating budget
C) income statement
D) balance sheet

Question 21

The finance manager advises the CEO, "We've got a short-term cash-flow problem. We can draw on our line of credit, and the interest rate is only 2.5%. If we sell our accounts receivable, it'll cost us 3%. I recommend drawing on our line of credit." Which consideration in evaluating financing options does this illustrate?

A) amount of financing
B) external factors
C) term of financing
D) cost of financing

Question 22

As Whole Foods considers equity financing, it thinks about the influence that it may have on company operations. Which of the following is an advantage of equity financing in relation to this key consideration?

A) higher interest rates increase the cost of financing
B) it can be either short or long term
C) it does not need to be repaid, which provides financial flexibility for the company
D) interest expenses can be deducted from company profits, lowering the company's tax liabilities

Question 23

Hiromi has invented a nanogel that can heal burns more quickly than conventional wound dressings. She is seeking an investor to further develop and market her product. She offers an interested investor a 30% share of her company in return for a $600,000 investment. How much does Hiromi feel her company is worth?

A) $2,000,000
B) $20,000,000
C) $18,000,000
D) $1,800,000

Question 24

You would like to start a small photography business. You own a nice camera, but you need to purchase some additional equipment in order to get your business started. You approach your parents and offer them 10% equity in your business for a $2300 investment. Given these numbers, what do you feel your company valuation is?

A) $4370
B) $43,000
C) $23,000
D) $17,500

Question 25

Which of the following are funds obtained through loans or the issuance of corporate bonds?

A) collateral
B) equity capital
C) factor proceeds
D) debt financing

Question 26

Before seeking financing, Mattel Toy Company needs to be sure that obtaining a long-term loan to expand production facilities will allow it to increase production, sales, and gain market share from Hasbro. Which key consideration for choosing a form of financing does this example illustrate?

A) external factors
B) term of financing
C) amount of financing
D) cost of financing

Question 27

For a corporation such as Bell Canada, what are the two primary advantages of equity financing?

A) Ownership is spread among many individuals, and no interest payments are required.
B) Investors pay top dollar for stock issues, and the corporation has higher ongoing expenses.
C) Interest payments are less than debt financing, and principal does not have to be repaid.
D) There is no obligation to pay dividends or to repay the money obtained from the sale of stock.

Question 28

Tyson Foods considers a loan to cover the purchase of a new piece of equipment. Typically Tyson finances these types of purchases over 10 years. What is Tyson's key consideration in determining which type of financing to obtain?

A) the influence on company operations
B) the amount of financing needed
C) the term of financing
D) the cost of financing

Question 29

Royal Caribbean Cruises would like to add an additional ship to its fleet. A new ship will cost $1.4 billion to build. Royal Caribbean plans to use cash and a long-term loan to finance the production of the new ship. However, the current interest rate on a $900 million loan is 5%, which Royal Caribbean feels is high. Which key consideration for choosing a form of financing does this example illustrate?

A) amount of financing
B) external factors
C) cost of financing
D) term of financing

Question 30

Liza is evaluating two different investment opportunities. One investment appears to be speculative and uncertain, but the potential rewards are substantial. The other investment seems much more predictable, but the potential payoff is low. Which of the following do you suggest she consider in reaching her decision?

A) the risk-return ratio
B) entrepreneurial analysis
C) capital allocation
D) the acid-test ratio

Question 31

Which of the following is one of the advantages of debt financing versus equity financing?

A) interest does not have to be paid unless the company is profitable
B) interest expenses can be deducted from company profits, thereby lowering the company's tax liability
C) company profits can be distributed to bondholders in lieu of interest payments
D) the funds do not need to be repaid, thus providing financial flexibility for the company

Question 32

Brian needs major financing for the educational software company he has founded. He is offering an equity stake of 5% in exchange for an investment of $500,000. At what amount is Brian valuing his business?

A) $5,000,000
B) $25,000,000
C) $2,500,000
D) $10,000,000

Question 33

Which of the following involves borrowed funds that will be repaid within one year or less?

A) long-term financing
B) open credit
C) current capital
D) short-term financing

Question 34

According to the risk-return ratio, which of the following statements is correct?

A) Decisions involving higher risk should yield higher returns.
B) Decisions involving lower risk should yield higher returns.
C) Decisions involving more risk should yield fewer returns.
D) Decisions involving high risk should yield more predictable returns.

Question 35

Adelaide appears on Dragons' Den and asks the investors for $120,000 in return for a 15% stake in her company. Jim Treliving really likes her product but offers her $120,000 in return for a 25% stake in her company. What is Jim's probable reasoning for this offer?

A) Adelaide has underestimated the amount of sales and revenue she will generate with her product.
B) Adelaide's company is worth much more than she is valuing it at.
C) Adelaide is valuing her company too high.
D) In order to invest in Adelaide's company, he would require a bigger share.

Question 36

A disadvantage of which type of financing is that external forces like economic conditions affect the level of interest rates?

A) equity
B) term
C) interest
D) debt

Question 37

What is it called when a company takes delivery of goods but pays for them at a later time?

A) collateral
B) trade credit
C) a term loan agreement
D) a charge account

Question 38

Disadvantages of debt financing over equity financing include all of the following EXCEPT which one?

A) the debt must be repaid regardless of the profitability of the company
B) the company must make interest payments to bondholders regardless of the profitability of the company
C) unfavourable economic conditions can affect the level of interest rates
D) major bondholders can exert significant pressure on company management

Question 39

When considering the cost of financing, that there is no interest cost for most common forms of stock is one benefit of which type of financing?

A) debt
B) interest
C) equity
D) term

Question 40

Which ratio is based on the principle that a high-risk investment should generate higher financial returns for a business and more conservative decisions often generate lesser returns?

A) risk-return
B) price earnings
C) quick return
D) current

Question 41

Which of the following is a major source of short-term financing that is interest free, usually requires no collateral, and is involved in some form in 70-90% of all transactions between businesses?

A) line of credit
B) secured loan
C) unsecured loan
D) trade credit

Question 42

What is the most common form of short-term financing?

A) trade credit
B) factoring
C) sale of stock
D) bank loans

Question 43

Lockheed Martin purchased raw materials to produce Black Hawk helicopters. Their payment term is 30 days. Which of the following has Lockheed utilized?

A) commercial paper
B) line of credit
C) secured loan
D) trade credit

Question 44

Rami has a long-standing relationship with his banker. When his company needs a short-term loan, he is able to obtain a loan at prime rate and does not have to put up any collateral for the loan. What type of financing has Rami obtained?

A) unsecured loan
B) secured loan
C) promissory note
D) trade credit

Question 45

Which form of short-term financing is similar to a credit card in that you have a maximum credit limit you can borrow against at any time and you pay interest only on the amount of funds you have used?

A) factoring
B) line of credit
C) trade credit
D) equity financing

Question 46

Sandra has a dog boarding and grooming business. She purchases grooming supplies and dog food from a supplier and takes delivery; however, she has 30 days within which to pay the supplier's invoice. This is an example of which of the following?

A) line of credit
B) negative cash flow
C) a promissory note
D) trade credit

Question 47

As a way to cover their short-term financial needs, Smith & Welling CPAs have access to a fixed amount of funds from their bank they can borrow as needed. Which of the following does this exemplify?

A) trade credit
B) line of credit
C) promissory note
D) commercial paper

Question 48

What is short-term financing NOT backed by collateral called?

A) unsecured financing
B) unprotected financing
C) debt capital
D) trade credit

Question 49

Kevin received unsecured financing from a bank for his plumbing business. This means that Kevin did NOT have to provide the bank with which of the following?

A) reasons for the loan
B) application forms
C) collateral
D) credit reports

Question 50

Which of the following are loans from banks and financing companies that are protected by collateral such as inventory or accounts receivable balances?

A) secured loans
B) equity financing
C) a line of credit
D) trade credit

Question 51

Banks and other financial institutions offer short-term loans not secured by collateral at interest rates that vary based on which of the following?

A) the type of business
B) the owner's personal wealth
C) the business's credit rating
D) the state of the economy

Question 52

In which type of sales arrangement does a seller allow a buyer 30 to 60 days to pay for a purchase?

A) a bank loan
B) trade credit
C) a promissory note
D) factoring

Question 53

Thom has a culinary supply business. He orders pots and pans from a manufacturer and takes delivery. However, he has up to 10 days to pay the invoice without interest or penalty. This is an example of which of the following?

A) commercial paper
B) trade credit
C) equity financing
D) line of credit

Question 54

Companies often look at short-term debt financing because it is usually easier to obtain than long-term debt financing for three reasons. Which of the following is NOT one of the three reasons?

A) For the lender, the shorter repayment period means less risk of default.
B) Short-term loans look better on the balance sheet than long-term loans.
C) The dollar amounts are usually lower than those of long-term loans.
D) A close working relationship normally exists between the short-term borrower and the lender.

Question 55

MCB Company experienced a significant increase in sales as a result of its new promotional campaign. Yesterday, however, it realized that because most of those sales were on credit, it did not have enough money in the bank to pay this month's bills. MCB can take care of this situation temporarily by doing which of the following?

A) obtaining long-term financing
B) selling commercial drafts
C) issuing shares
D) obtaining short-term financing

Question 56

In order to obtain a short-term loan from the bank, Dillon Foods must pledge its inventory as security. In this scenario, the inventory serves as which of the following for the loan?

A) collateral
B) equity
C) trade credit
D) securitization

Question 57

Vikram and Rupi decide to start a new restaurant. They obtain a loan from the bank, but the bank insists that they pledge the equipment owned by the restaurant as security for the repayment of the loan. Which of the following does this exemplify?

A) securitization
B) amortization
C) collateral
D) working capital

Question 58

Tidewater Distributors has an arrangement with its bank in which it has access to a fixed amount of funds to use as needed, and the company has to make monthly payments along with interest based on the outstanding amount of the loan. What type of financing does Tidewater Distributors use?

A) commercial paper
B) line of credit
C) factoring
D) trade credit

Question 59

Which of the following is NOT a characteristic of short-term financing?

A) the amounts are usually smaller than obtained through long-term sources
B) it is easier to obtain than long-term financing
C) it must be repaid within three years
D) there is less risk of nonpayment to the lender

Question 60

Which of the following is the lowest rate charged by banks for short-term loans?

A) prime
B) discount
C) customary
D) nominal

Question 61

What does Taye mean when he says that the software company he and his college roommate started is going to "go public"?

A) the company is going to issue corporate bonds for sale to investors
B) the company has obtained venture capital
C) shares of the company's stock are being traded on the secondary market
D) the company will be selling shares of its stock on the open market for the first time

Question 62

Which "C" of the 5 C's of credit considers the borrower's assets or the net worth of the borrower?

A) collateral
B) capital
C) conditions
D) capacity

Question 63

Which "C" of the 5 C's of credit would consider the real estate, inventory, equipment or other assets that the borrower can pledge as security for a loan?

A) capacity
B) conditions
C) capital
D) collateral

Question 64

Gavin instructs his stockbroker to purchase 200 shares of Apple for investment in his individual retirement account. In which of the following markets will the stockbroker buy these shares?

A) tertiary
B) secondary
C) exchange
D) primary

Question 65

Slater Co. has an old, outdated manufacturing facility that needs extensive renovation and expansion. Slater does not have the cash available for this renovation/expansion, so it will most likely need which of the following?

A) to use trade credit
B) to obtain an unsecured loan
C) long-term financing
D) a short-term loan

Question 66

During 2011 Sampson Technology sold common shares for the first time on the open market, representing which of the following for the company?

A) preferred stock offering
B) stock dividend
C) initial public offering
D) public stock sale

Question 67

Which of the following are property, inventory, or assets pledged as security for the repayment of a loan?

A) commercialization
B) collateral
C) capital
D) debt equity

Question 68

Which of the following involves the use of borrowed funds that will be used for more than one year?

A) short-term financing
B) equity capital
C) long-term financing
D) secured financing

Question 69

Venture capital firms invest in which of the following?

A) large, successful firms
B) chain retail establishments
C) banks and financial firms
D) small firms that have the potential to be very successful

Question 70

When a company issues an IPO to raise capital, shares of its stock are sold in which of the following markets?

A) institutional
B) primary
C) secondary
D) capital

Question 71

How many times can a corporation's shares be sold in the primary market?

A) twice
B) once
C) quarterly
D) once per year

Question 72

Which of the following would be the most appropriate use of long-term financing?

A) developing new products
B) paying for speculative production
C) paying salaries
D) purchasing inventory for resale

Question 73

ConAgra Foods offer shares of their company stock. This is a form of which of the following?

A) long-term debt financing that is secured
B) short-term equity financing that is unsecured
C) long-term equity financing that is secured
D) short-term debt financing that is secured

Question 74

Which of the following is a corporation's written pledge to repay borrowed funds with interest to investors?

A) trade credit
B) commercial paper
C) a corporate bond
D) a line of credit

Question 75

All of the following are uses of long-term financing EXCEPT which one?

A) replacing obsolete equipment
B) eliminating immediate cash-flow problems
C) beginning a new business
D) executing mergers and expansions

Question 76

Petro Canada seeks to obtain a loan from a commercial bank in order to build an additional oil rig. Which type of financing is this?

A) long-term equity financing that is secured
B) short-term equity financing that is secured
C) long-term debt financing that is unsecured
D) short-term debt financing that is secured

Question 77

Which of the following involves raising funds by selling ownership in the company?

A) equity financing
B) debt equity
C) commercial paper
D) factoring

Question 78

In deciding whether to approve a loan for Grewal Properties, the lender evaluates the company's financial ability to meet its credit obligations and make regular loan payments. Which of the 5 C's of credit does this represent?

A) capital
B) capacity
C) conditions
D) collateral

Question 79

Which of the following are funds received from the sale of shares of ownership in a business?

A) equity capital
B) cash flow
C) debt capital
D) factor proceeds

Question 80

All Star Sporting Goods seeks short-term financing to complete much-needed repairs on its retail store. All Star decides to offer up its inventory as collateral in return for a $20,000 from the bank. Which of the following does this exemplify?

A) trade credit
B) a secured loan
C) a promissory note
D) line of credit