CHAPTER 12

Question 1

It is an important management responsibility that deals with the “procurement and administration of funds with the view of achieving the objectives of business.”

Answer 1

Finance function

Question 2

A process flow of financial function

Answer 2

1. DETERMINATION OF FUND REQUIREMENTS
2. PROCUREMENT OF FUNDS
3. EFFECTIVE AND EFFICIENT USE OF FUNDS

Question 3

THE DETERMINATION OF FUND REQUIREMENTS
Any organization, including the engineering firm, will need funds for the following specific requirements:

Answer 3

1. to finance daily operations
2. to finance the firm’s credit services
3. to finance the purchase of inventory
4. to finance the purchase of major assets

Question 4

The day-to-day operations of the engineering firm will require funds to take care of expenses as they come

Answer 4

Financing Daily Operations

Question 5

Money must be made available for the payment of the following:

Answer 5

1. wages and salaries
2. rent
3. taxes
4. power and light
5. marketing expenses like those for advertising, entertainment, travel expenses, telephone and telegraph, stationery and printing, postage, etc.
6. administrative expenses like those for auditing, legal, services, etc.

Question 6

It is oftentimes unavoidable for firms to extend credit to customers. If the engineering firm manufactures products, sales terms vary from cash to 90-day credit extensions to customers.

Answer 6

Financing the Firm’s Credit Services

Question 7

Raw materials, supplies, and parts are needed to be kept in storage so they will be available when needed. Many firms cannot cope with delays in the availability of the required material inputs in the pro- duction process, so these must be kept ready whenever required

Answer 7

Financing the Purchase of Inventory

Question 8

When top management decides on expansion, there will be a need to make investments in capital assets like land, plant, and equipment.

Answer 8

Financing the Purchase of Major Asset

Question 9

THE SOURCES OF FUNDS

Answer 9

1. Cash sales
2. Collection of Accounts Receivables
3. Loans and Credits
4. Sale of assets
5. Ownership contribution
6. Advances from customers

Question 10

It is derived when the firm sells its products or services.

Answer 10

Cash

Question 11

Some engineering firms extend credit to customers. When these are settled, cash is made available.

Answer 11

Collection of Accounts Receivables

Question 12

When other sources of finan- cing are not enough, the firm will have to resort to borrowing.

Answer 12

Loans and Credits

Question 13

Cash is sometimes obtained from the sale of the company’s assets.

Answer 13

Sale of assets

Question 14

When cash is not enough, the firm may tap its owners to provide more money.

Answer 14

Ownership contribution.

Question 15

Sometimes, customers are required to pay cash advances on orders made. This helps the firm in financing its production activities.

Answer 15

Advances from customers

Question 16

Loans and credits may be classified as

Answer 16

short-term, medium-term, or long-term.

Question 17

These are those with repayment schedules of less than one year

Answer 17

Short-term sources of funds

Question 18

Advantages of Short-Term Credits.

Answer 18

1. They are easier to obtain
2. Short-term financing is often less costly
3. Short-term financing offers flexibility to the borrower.

Question 19

Disadvantages of Short-Term Credits.

Answer 19

1. Short-term credits mature more frequently
2. Short-term debts may, at times, be more costly than long-term debts.

Question 20

Short-term financing is provided by the following:

Answer 20

1. trade creditors
2. commercial banks
3. commercial paper houses
4. finance companies
5. factors, and
6. insurance companies.

Question 21

It refer to suppliers extending credit to a buyer for use in manufacturing, processing, or reselling goods for profit

Answer 21

Trade creditors

Question 22

The instruments used in trade credit consist of the following:

Answer 22

(1) open-book credit, (2) trade acceptance, and (3) promissory notes.

Question 23

It is unsecured and permits the customer to pay for goods delivered to him in a specified number of days.

Answer 23

open-book credit

Question 24

It is a time draft drawn by a seller upon a purchase payable to the seller as payee, and accepted by the purchaser as evidence that the goods shipped are satisfactory and that the price is due and payable

Answer 24

trade acceptance

Question 25

It is where the seller allows the buyer to pay within a certain number of days. The arrangement provides the buyer some relief in financing his short-term requirements

Answer 25

Trade acceptance

Question 26

It is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay, on demand or at a fixed or deter- minable future time, a certain sum of money to, or to the order of, a specified person or to bearer

Answer 26

promissory note

Question 27

are institutions which individuals or firms may tap as source of short-term financing.

Answer 27

Commercial banks

Question 28

Com- mercial banks grant two types of short-term loans:

Answer 28

1. those which require collateral, and 2. those which do not require collateral.

Question 29

are those that help business firms in borrowing funds from the money market.

Answer 29

Commercial paper houses

Question 30

Under this scheme, the business firm in need of funds issues a commercial paper, which is a short-term promissory note, generally unsecured, and issued by large, estab- lished firms

Answer 30

Commercial paper houses

Question 31

It is sold to investors through the commercial paper house.

Answer 31

Commercial paper

Question 32

These are financial institutions that finance inventory and equipment of almost all types and sizes of business firms

Answer 32

Business finance companies

Question 33

These are institutions that buy the accounts receivables of firms, assuming complete accounting and col- ection responsibilities. Engineering firms which main- tain sizable amounts of accounts receivable may avail of the services of factors when they are in dire need of cash.

Answer 33

Factors

Question 34

are also possible sources of short-term funds. Industry reports indicate that in the Philippines they regularly make investments in short-term commercial papers and promissory notes.

Answer 34

Insurance companies

Question 35

Long-Term Sources of Funds

Answer 35

1. long-term debts 2. common stocks, and 3. retained earnings.

Question 36

Long-term debts are sub-classified into

Answer 36

term loans and bonds.

Question 37

It is a "commercial or industrial loan from a commercial bank, commonly used for plant and equipment, working capital, or debt repayment." Term loans have maturities of 2 to 30 years."

Answer 37

Term Loans

Question 38

It is a certificate of indebtedness issued by a corporation to a lender. It is a marketable security that the firm sells to raise funds

Answer 38

Bonds

Question 39

Type of Bond

Answer 39

1. Debentures 2. Mortgage bond 3. Collateral trust bond 4. Guaranteed bond 5. Subordinated debentures 6. Convertible bonds 7. Bonds with warrants 8. Income bonds

Question 40

A type of bond that has no collateral requirement

Answer 40

1. Debentures

Question 41

A type of bond that secured by real estate

Answer 41

2. Mortgage bond

Question 42

A type of bond that secured by stocks and bonds owned by the issuing corporation

Answer 42

3. Collateral trust bond

Question 43

A type of bond where payment of interest or principal is guaranteed by one or more individuals or corporations

Answer 43

4. Guaranteed bond

Question 44

A type of bond with an inferior claim over other debts

Answer 44

5. Subordinated debentures

Question 45

A type of bond that convertible into shares of common stock

Answer 45

6. Convertible bonds

Question 46

A type of bond where warrants are options which permit the holder to buy stock of the issuing company at a stated price

Answer 46

7. Bonds with warrants

Question 47

A type of bond that pays interest only when earned

Answer 47

8. Income bonds

Question 48

refer to "corporate earnings not paid out as dividends. " This simply means that whatever earnings that are due to the stock- holders of a corporation are reinvested.

Answer 48

Retained Earnings.

Question 49

THE BEST SOURCE OF FINANCING ACCORDING TO Schall and Haley

Answer 49

1. flexibility 2. risk 3. income 4. control 5. timing 6. other factors like collateral values, flotation costs, speed, and exposure.

Question 50

Some fund sources impose certain restrictions on the activities of the borrowers. An example of a restriction is the prohibition on the issuance of additional debt in- struments by the borrower.

Answer 50

Flexibility

Question 51

It refers to the chance that the company will be affec- ted adversely when a particular source of financing is chosen.

Answer 51

Risk

Question 52

When the firm borrows, it must generate enough of this to cover the cost of borrowing and still be left with sufficient returns for the owners.

Answer 52

Income

Question 53

It is possible that the owners were enjoying higher rates of return on their investments before borrowing was made.

Answer 53

Income

Question 54

When new owners are taken in because of the need for additional capital, the current group of owners may lose control of the firm. If the current owners do not want this to happen, they must consider other means of financing.

Answer 54

Control

Question 55

The financial market has its ups and downs. This means that there are times when certain means of financing provide better benefits than at other times. The engineer manager must, therefore, choose the best time for borrowing or selling equity.

Answer 55

Timing

Question 56

There are other factors considered in determining the best source of funds. They are as follows:

Answer 56

1. Collateral values: Are there assets available as collateral? 2. Flotation cost: How much will it cost to issue bonds or stocks? 3. Speed: How fast can the funds required be raised? 4. Exposure: To what extent will the firm'be ex- posed to other parties?

Question 57

THE FIRM'S FINANCIAL HEALTH In general, the objectives of engineering firms are as follows:

Answer 57

1. to make profits for the owners; 2. to satisfy creditors with the repayment of loans plus interest; 3. to maintain the viability of the firm so that customers will be assured of a continuous supply of products or services, employees will be assured of employment, suppliers will be assured of a market, etc

Question 58

INDICATORS OF FINANCIAL HEALTH

Answer 58

1. Balance sheet - also called statement of financial position; 2. Income statement operations; also called statement of operations; 3. Statement of changes in financial position.

Question 59

It is a very important concept that the engineer manager must be familiar with.

Answer 59

Risk

Question 60

refers to the uncertaintiy concerning loss or injury

Answer 60

Risk

Question 61

The engineering firm is faced with a long list of exposure to risks, some of which are as follows:

Answer 61

1. fire 2. theft 3. floods 4. accidents 5. nonpayment of bills by customers (bad debts) 6. disability and death 7. damage claim from other parties.

Question 62

Risks may be classified as either _______ or ____________.

Answer 62

pure or speculative.

Question 63

Is a risk in which "there is only a chance of loss. "

Answer 63

Pure risk

Question 64

Is a risk in which there is a chance of either loss or gain. This type of risk is not insurable

Answer 64

Speculative risk

Question 65

It is "an organized strategy for protecting and conserving assets and people."

Answer 65

Risk management

Question 66

The purpose of of this is "to choose intelligently from among all the available methods of dealing with risk in order to secure the economic survival of the firm"

Answer 66

Risk management

Question 67

Methods of Dealing with Risk

Answer 67

1. the risk may be avoided 2. the risk may be retained 3. the hazard may be reduced 4. the losses may be reduced 5. the risk may be shifted

Question 68

It is a method of handling risk wherein the management assumes the risk

Answer 68

Risk retention

Question 69

It is a conscious and deliberate assumption of a recognized risk. In this case, management decides to pay losses out of currently available funds.

Answer 69

planned risk reten- tion / self-insurance

Question 70

It exists when manage- ment does not recognize that a risk exists and unwisely believes that no loss could occur.

Answer 70

Unplanned risk retention

Question 71

This may be reduced by simply instituting appropriate measures in a variety of business activities.

Answer 71

Hazards

Question 72

Another method of handling risk is by ______ it to another party. Examples of this are hedging, subcontracting, incorporation, and insurance.

Answer 72

Shifting

Question 73

It refers to making commitments on both sides of a transaction so the risks offset each other.

Answer 73

Hedging

Question 74

Examples of efforts on loss reduction are as follows: (mahaba wag na imemorize)

Answer 74

1. physically separating buildings to minimize losses in case of fire; 2. using fireproof materials on interior building construction; 3. storing inventory in several locations to minimize losses in cases of fire and theft; 4. maintaining duplicate records to reduce accounts receivable losses; 5. transporting goods in separate vehicles instead of concentrating high values in single shipments; 6. prohibiting key employees from traveling toge- ther; and 7. limiting legal liability by forming several separate corporations.