Deck 13: The Financing Business Process

Question 1

The financing business process provides the capital resources an enterprise needs to fund all aspects of its operations.

Answer 1

True

Question 2

The only mechanism by which enterprises acquire cash is debt financing.

Answer 2

False

Question 3

With debt financing, an enterprise borrows cash from one or more external business partners for a specified time period and with the agreement that the enterprise will pay a specified interest rate in addition to the principal balance.

Answer 3

True

Question 4

At the value system level, the financing process is the point of contact between an enterprise and its employees.

Question 5

At the value chain level, cash is typically made available by the financing process to the revenue process.

Question 6

Sufficient cash availability enables enterprises to purchase in quantity to obtain more favorable prices and to take advantage of cash discounts.

Question 7

Cash is both the resource acquired and the resource given in the financing process.

Question 8

In most enterprise systems, cash is represented as a type-level entity because it is normally not possible or practical to specifically identify each coin and piece of currency stored by the company at any given time.

Question 9

The only attribute that typically needs to be captured regarding a cash requisition event is the dollar amount of cash identified as needed.

Question 10

New data entered as a result of a cash requisition event are typically entered into the cash requisition table and in the table that implements the proposition relationship between the cash requisition event and the cash resource.

Question 11

In equity financing, the mutual commitment event is typically called a loan agreement and is represented by a promissory note or bond certificate.

Question 12

Shares of stock are guarantees of future cash flows to the shareholders that own them.

Question 13

Once dividends are declared, the enterprise is required by law to actually pay the dividends

Question 14

A stock certificate is used to represent one type of commitment event in the financing cycle.

Question 15

The primary economic increment event in the financing process is the stock issuance event.

Question 16

Cash disbursements are economic decrement events that decrease the enterprise's cash balance.

Question 17

The financing process is in essence a special case of the acquisition/payment cycle.

Question 18

The outstanding principal balance of a loan on a specified date is an example of a Stockflow relationship query in the financing process.

Question 19

To answer the question "Into which cash account was a cash receipt deposited?" one should examine the Duality relationship in the financing process.

Question 20

Cash disbursements made via electronic funds transfer are typically stored as part of a different entity set than are cash disbursements made via paper checks.

Question 21

From which other business process(es) is cash typically made available to the financing business process?

A) Acquisition/Payment
B) Payroll
C) Manufacturing
D) Sales/Collection
E) Cash is usually not made available to the financing process by any other business process.

Question 22

Examine the following diagram. What are the most appropriate labels to put on the arrows labeled A, B, and C?

A)

B)

C)

D)

E)

Question 23

Examine the following diagram. What type of event must be included inside the Financing Process circle to correspond to the resource represented by arrow A?

A) A Cash Receipt event
B) A Dividend Declaration event
C) A Loan event
D) A Cash Disbursement event
E) A Stock Issuance event

Question 24

By what financing mechanisms may cash be received?

A) Loan agreements as evidenced by promissory notes
B) Bond financing as evidenced by bond certificates
C) Equity financing as evidenced by stock certificates
D) Debt financing as evidenced by promissory notes or bond certificates
E) All of the above

Question 25

Selling shares of an enterprise's common stock, borrowing money from a bank, and declaring and paying dividends are examples of some of the more general activities in which business cycle?

A) Sales/Collection
B) Acquisition/Payment
C) Conversion
D) Financing
E) None of the above

Question 26

At the value system level, the financing process is the point of contact between the enterprise and its

A) Customers
B) Suppliers
C) Employees
D) Investors/Creditors
E) Own manufacturing process

Question 27

In which type of event in the financing process is a proposal made?

A) Instigation
B) Mutual Commitment
C) Economic Increment
D) Economic Decrement
E) Economic Reversal

Question 28

In the financing process, which type of event indicates the enterprise and an external partner have reached an agreement?

A) Instigation
B) Mutual Commitment
C) Economic Increment
D) Economic Decrement
E) Economic Reversal

Question 29

Which attribute of a cash resource entity is usually a volatile derivable attribute?

A) Cash account identifier
B) Cash account name
C) Cash account type
D) Cash account location
E) Cash account balance

Question 30

In the financing process, the identification of need for cash is usually labeled as

A) Cash requisition
B) Cash commitment
C) Cash receipt
D) Cash disbursement
E) Cash monitoring

Question 31

Which of the following most likely represents a mutual commitment event in a debt financing process?

A) Stock issuance
B) Dividend declaration
C) Loan contract
D) Cash receipt
E) Cash requisition

Question 32

Which of the following types of data should typically be captured for a stock issuance?

A) Interest rate
B) Maturity date
C) Par value
D) Repayment schedule
E) Unpaid principal

Question 33

Examine the entity pairs presented. Which pair is most likely to be linked together in a financing cycle proposition relationship?

A) Cash and Cash receipt
B) Cash and Dividend declaration
C) Cash and Loan agreement
D) Cash and Cash requisition
E) Cash and Cashier

Question 34

Examine the entity pairs presented. Which pair is most likely to be linked together in a financing cycle duality relationship?

A) Sale and Cash receipt
B) Cash requisition and Loan agreement
C) Loan agreement and Cash receipt
D) Dividend declaration and Stock issuance
E) Cash receipt and Cash disbursement

Question 35

Examine the entity pairs presented. Which pair is most likely to be linked together in a financing cycle stockflow relationship?

A) Stock issuance and Cash receipt
B) Cash and Cash disbursement
C) Acquisition and Inventory
D) Cash requisition and Cash
E) Dividend declaration and Cash

Question 36

A financial officer of KayGee Corporation approves the sale of one million shares of $2 par value stock to obtain cash for the purchase of property on which to build a new manufacturing facility. Over the course of a week, all one million shares of stock were issued to stockholders for $27.50 per share. A cashier processed the cash received from each stockholder. Which of the following best summarizes the internal and external agents associated with the events as described?

A)
B)
C)
D)
E)

Question 37

Which financing cycle scenario is a reasonable description of the following conceptual model?

A) A short-term line of credit at a local bank is established so that each time the enterprise's checking account balance is less than $100, cash of $1,000 is automatically deposited into the account. Repayment of each $1,000 transfer is due within 30 days, with an interest rate of 8%. The line of credit is a commitment event, the cash deposit is an economic increment event. Repayment of the line of credit is an economic decrement event.
B) An enterprise offers installment sales whereby the customer pays for merchandise over the course of six months. The sale contract is a commitment event, the cash receipts from the customer are economic increment events and the sale of the merchandise is an economic decrement event.
C) An enterprise borrows $20,000 cash and uses it to purchase land. The promissory note terms require the principal and interest to be repaid monthly according to an amortization schedule that reflects 8% interest. The loan is a commitment event, the receipt of the $20,000 cash is an economic increment event, and the monthly payments of principal and interest are economic decrement events.
D) An enterprise sells shares of its own common stock for $350,000. The sale agreement is a commitment event, the cash receipt is an economic increment event, and the stock issuance is an economic decrement event.
E) An enterprise accepts merchandise from individuals on consignment and displays that merchandise in its storefront. When the merchandise is sold, the enterprise keeps 20% of the selling price and remits 80% of the proceeds to the merchandise owner. The consignment agreement is a commitment event, the sale and cash receipt are economic increment events and the cash disbursement is an economic decrement event.

Question 38

Which financing cycle scenario is a reasonable description of the following conceptual model?

A) A short-term line of credit at a local bank is established so that each time the enterprise's checking account balance is less than $100, cash of $1,000 is automatically deposited into the account. Repayment of each $1,000 transfer is due within 30 days, with an interest rate of 8%. The line of credit is a commitment event, the cash deposit is both an economic increment event and a commitment event. Repayment of the line of credit is an economic decrement event.
B) An enterprise offers installment sales whereby the customer pays for merchandise over the course of six months. The sale contract is a commitment event, the customer statements sent each month are commitment events, the cash receipts from the customer are economic increment events and the sale of the merchandise is an economic decrement event.
C) An enterprise borrows $20,000 cash and uses it to purchase land. The promissory note terms require the principal and interest to be repaid monthly according to an amortization schedule that reflects 8% interest. The loan is a commitment event, the receipt of the $20,000 cash is an economic increment event, the monthly payment of interest is a commitment event, and the monthly payment of principal is an economic decrement event.
D) An enterprise sells 10,000 shares of its own common stock for $350,000. A year later, the enterprise declares dividends of $2 per share for a total of $20,000. The stock issuance is a commitment event, the cash receipt is an economic increment event, the dividend declaration is a commitment event, and the dividend payment is an economic decrement event.
E) An enterprise accepts merchandise from individuals on consignment and displays that merchandise in its storefront. When the merchandise is sold, the enterprise keeps 20% of the selling price and remits 80% of the proceeds to the merchandise owner. The consignment agreement is a commitment event, the sale is a commitment event, the cash receipt is an economic increment event and the cash disbursement is an economic decrement event.

Question 39

Given the following tables, calculate the outstanding principal balance of all loans as of June 30, 2010.

A) $ 725,000
B) $ 800,000
C) $1,725,000
D) $1,800,000
E) $ 75,000

Question 40

Given the following tables, what was the total dollar amount of Dividends Payable as of May 1, 2011?

A) $1,000,000
B) $500,000
C) $100,000
D) $50,000
E) $.50

Question 41

Using the following table, which of the cash disbursements (please list the voucher and check numbers) appear most likely to be payments of dividends? How did you determine this?

Question 42

A substantial portion of most enterprises' cash is used to fund which two business processes?

Question 43

What need triggers activities in the financing process?

Question 44

Describe the details involved in debt financing as a mechanism for acquiring cash.

Question 45

At the value system level, the financing process is the point of contact between the enterprise and which type(s) of external business partners?

Question 46

What document is often prepared after a cash flow budget reveals a forecasted cash shortfall?

Question 47

List at least four attributes of debt financing agreement events that typically should be captured in enterprise databases.

Question 48

List at least four attributes of equity financing agreement events that typically should be captured in enterprise databases.

Question 49

On the date on which an enterprise receives loan proceeds, into which database table(s) should data be added?

Question 50

Given the following relational database tables, calculate the outstanding principal balance of Loan L1 as of May 1, 2010.

Question 51

Describe two different types of commitment events that lead to both cash receipts and cash disbursements in the financing business process. Which type of commitment event is more certainly associated with future cash disbursements, and why?

Question 52

Create a "generic" REA business process level model (without cardinalities) in either grammar or diagram format to represent the financing business process for a privately held company whose only method of financing is via debt. Your model should encompass the entire payroll process, from the identification of need for cash to the repayment of debt.

Question 53

Create a "generic" REA business process level model (without cardinalities) in either grammar or diagram format to represent the financing business process for a publicly held company whose only method of financing is via equity. Your model should encompass the entire payroll process, from the identification of need for cash to the payment of dividends.

Question 54

Optimum Properties (OP) is a privately held real estate investment company that purchases properties, constructs buildings such as shopping centers, movie theaters, and churches, and leases those facilities to retailers, entertainment companies, and church congregations. Often new properties become available at times when OP has insufficient cash on hand and to take advantage of the opportunity OP must borrow money. The chief financial officer (CFO) works closely with the chief executive officer (CEO) to determine whether a potential property investment warrants debt financing. If the CEO determines the property has sufficient potential, the CFO determines the dollar amount of cash needed, obtains preliminary information as to likely financing terms such as interest rate and maturity date, and enters a cash requisition in the enterprise system. The CFO then executes a financing agreement with a lender, thereby committing OP to receive cash and to later repay the cash plus specified interest. OP establishes a separate cash account for each property to aid in tracking cash inflows and outflows associated with each property. However, OP assesses the need for cash on an overall basis, rather than by account, there is no need to track a specific cash account with respect to a cash requisition or a loan agreement.
When loan proceeds are received, OP deposits them into the account established for the related property, where they remain until used for the property purchase. If the purchase falls through, which occasionally happens, the loan principal is repaid immediately from the cash account established for that property; any accrued interest is paid from OP's headquarters cash account. If the purchase proceeds as scheduled, a check for the purchase price is issued from the property cash account to the property owner. As rental revenue is generated from the property, resulting in cash deposits to the property cash account, the loan's principal and interest are gradually repaid.
OP tracks its cash disbursements by voucher number, and its cash receipts by remittance advice number. Less than 30% of the payments OP issues are for loan payments; other checks are written to vendors and employees. Payables clerks process cash disbursements to lenders and vendors; whereas payroll clerks process payments to employees. Cashiers process all types of cash receipts.
Required:
a. Prepare an REA business process level model for OP in ER diagram or grammar format including all relevant entities, relationships, attributes, and participation cardinalities. The following attributes are of interest to OP and should be included in your solution. Do not add or subtract any attributes.
b. Convert your REA business process level model into a set of minimal relational table structures.

Question 55

Examine the following financing cycle table structures selected from an enterprise's database. On the line above each table, write the official REA object type represented by the table (e.g. Economic Increment Event, Commitment Event, Internal Agent, Resource, Duality Relationship, etc.) Note that this is not intended to be a complete database, so some REA objects may be missing.