Module 6 - Managing the Finance Function Flashcards
(98 cards)
1
Q
an essential management duty which is concerned with the “acquisition and administration of funds with a view to achieving business objectives”
A
finance function
2
Q
three basic management features
A
- finance function
- producing
- marketing
3
Q
process flow of the finance function
A
- determination of fund requirements
- procurement of funds
- effective and efficient use of funds
4
Q
reasons why funds are needed by every company, including an engineering firm
A
- to fund routine operations
- to support the credit facilities of the company
- to fund the inventory purchase
- to fund the acquisition of large properties
5
Q
an engineering company’s daily operations that require financing
A
- wages and salaries
- rent
- taxes
- power and light
- marketing expenses (advertising, entertainment, travel expenses, telephone, and telegraph, stationary and printing, postage, etc.)
- administrative expenses (auditing, legal services, etc.)
6
Q
sales terms range from _____ to ____________________ for consumers if the engineering firm creates goods
A
cash, 90-day credit extensions
7
Q
determination of fund requirements
A
- finance daily operations
- financing the firm’s credit services
- financing the purchase of inventory
- financing the purchase of major asset
8
Q
engineering firm’s sources of funds
A
- cash sales
- collection of account receivables
- loans and credits
- sale of assets
- ownership contribution
- advances from customers
9
Q
cash is derived when the firm sells its products or services
A
cash sales
10
Q
some engineering firms extend credit to customers and when those are settled, cash is made available
A
collection of account receivables
11
Q
when other sources of financing are not enough, the firm will have to resort to borrowing
A
loans and credits
12
Q
cash is sometimes obtained from the sale of the company’s assets
A
sale of assets
13
Q
when cash is not enough, the firm may tap its owners to provide more money
A
ownership contribution
14
Q
sometimes, customers are required to pay cash advances on orders made which helps the firm in financing its production activities
A
advances from customers
15
Q
loans and credits can be known as _________, _________, or _____________ credits
A
short, medium, long-term
16
Q
loans and credits with repayment schedules of less than __________ are short-term sources of funds
A
one year
17
Q
short-term creditors often need _____________
A
collateral
18
Q
advantages of short-term credits
A
- they’re simpler to acquire
- often, short-term lending is less expensive
- short-term lending gives the borrower versatility
19
Q
disadvantages of short-term credits
A
- more frequently, short-term credits mature
- short-term debt can also be more expensive than long-term debt
20
Q
supplies of short-term funds
A
- trade creditors
- commercial banks
- commercial paper houses
- business finance
- factors
- insurance firms
21
Q
refer to suppliers extending credit to a buyer for use in manufacturing, processing, or reselling goods for profit
A
trade creditors
22
Q
the instruments used in trade credit consist of what?
A
- open-book credit
- trade acceptance
- promissory notes
23
Q
the _________________ is unsecured and allows the client to pay within a defined number of days for products shipped to him
A
open-book credit
24
Q
a very useful source of funding for financially weak engineering companies
A
open-book credit
25
a time draft drawn up by the seller upon a purchase payable as payee to the seller and approved by the buyer as proof that the goods delivered are acceptable and that the price is due and payable
trade acceptance
26
the seller requires the buyer to pay within a certain number of days under the terms given in the ______________________
trade acceptance
27
an unconditional written promise made by one party to another, signed by the maker, to pay a certain amount of money to, or at the order of, a specified person or bearer on request or at a fixed or determinable future time
promissory notes
28
organizations that can be used as a source of short-term funding by individuals or businesses
commercial banks
29
types of short-term loans that are issued by commercial banks
- those that require collateral
- those that do not require collateral
30
examples of commercial banks issuing short-term loans
- City Trust
- Premier Bank
- Land Bank
31
those that assist business enterprises to borrow money from the money market
commercial paper houses
32
a _________________ is issued by a business company in need of capital, which is a short-term promissory note, normally unsecured, and issued by big, existing companies
commercial paper
33
the company paper is sold via a _____________________ to investors
commercial paper house
34
financial institutions that finance almost all forms of business firms' inventory and equipment
business finance companies
35
examples of financing companies in the Philippines
- Philacor Credit Company
- Combined Orix Leasing and Financing Company
36
organizations that purchase corporations' accounts receivables, assuming full accounts and collection obligations
factors
37
when they are in desperate need of cash, engineering firms that maintain large amounts of account receivable can use the services of ____________
variables/factors
38
possible providers of short-term funds are often _________________
insurance firms
39
industry studies suggest that ______________ routinely invest in short-term business papers and promissory notes in the Philippines
insurance firms
40
category of long-term funding sources
- long-term debts
- common stocks
- retained earnings
41
a company or industrial loan from a commercial bank, generally used for plant and equipment, working capital, or repayment of debt
term loan
42
term loans have maturities of between _____ and _______
2, 30 years
43
benefits of term loans
- funds can be generated more quickly than other long-term sources
- they are flexible, i.e. they can be easily tailored to the needs of the borrower
- the cost of issuance is low compared to other long-term sources
44
an indebtedness certificate given to a lender by a business
bond
45
a marketable protection that the organization sells in order to collect funds
bond
46
types of bonds
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
47
type of bond: no collateral requirement
debentures
48
type of bond: secured by real estate
mortgage bond
49
type of bond: secured by stocks and bonds owned by the issuing corporation
collateral trust bond
50
type of bond: payment of interest or principal is guaranteed by one or more individuals or corporations
guaranteed bond
51
type of bond: with an inferior claim over other debts
subordinated debentures
52
type of bond: convertible into shares of common stock
convertible bonds
53
type of bond: warrants are options which permit the holder to buy stock of the issuing company at a stated price
bonds with warrants
54
type of bond: pays interest only when earned
income bonds
55
the issuance of ______________ forms the third source of long-term funds
common stocks
56
common stocks reflect ____________________
corporate ownership
57
_______________ do not have maturity and redemption periods, unlike bonds and term loans that must be repaid at a certain date
common stocks
58
referred to as "corporate profits not paid out as dividends"
retained earnings
59
any gain that is owed to a corporation's stockholders is reinvested
retained earnings
60
considerations that must be considered in order to assess the best source of financing
1. flexibility
2. risk
3. income
4. control
5. timing
6. other factors (collateral values, flotation cost, speed, exposure)
61
book and author/s that proposed considerations to be considered in order to assess the best source of financing
Schall and Haley (Introduction to Financial Management, Sixth Edition)
62
_______ applies to the possibility that the organization may be adversely affected when a specific source of funding is selected when applied to the determination of fund sources
risk
63
in general, priorities of engineering firms
- for the owners to make money
- the redemption of loans plus interest to please creditors
- to sustain the company's profitability such that consumers are assured of a continuous supply of goods or services, workers are assured of jobs, suppliers are assured of a market, etc
64
three simple financial statements that indicate financial health
- balance sheet
- income statement
- statement of changes in financial position
65
also called statement of financial position
balance sheet
66
also called statement of operations
income statement
67
entrusted with the role of making profits for the company, especially those at the top level
engineering manager
68
refers to the uncertainty concerning loss or injury
risk
69
list of risks
1. fire
2. theft
3. floods
4. accidents
5. nonpayment of bills by customers (bad debts)
6. disability and health
7. damage claim from other parties
70
two types of risk
- pure risk
- theoretical/speculative risk
71
______ risk is one in which "there is just a possibility of losing"
pure
72
______ risks can be protected by insurers and are insurable
pure
73
_______________ risk is one in which either loss or gain is a possibility
speculative
74
this risk form is not insurable
speculative risk
75
an orchestrated technique for the safety and security of assets and resources
risk management
76
__________________ is meant to deal with pure risks, whereas the __________________________ is targeted at natural and inevitable speculative risks
risk management, implementation of sound management practices
77
methods of dealing with risk
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
78
risk managing approach in which the management bears the risk
risk retention
79
a _______________________, also referred to as _____________, is a deliberate and intentional presumption of a known risk
planned retention of risk, self-insurance
80
examples of risk-shifting
- hedging
- subcontracting
- incorporation
- insurance
81
______________________ are drawn on a timeline that is divided into increments of months or years depending on project needs
cash flow diagrams
82
in cash flow diagrams, ______________ is recorded above the line and ________________ below
income, expenditures
83
cash flow schedules are created in _______________
spreadsheets
84
two key financial summary documents created as a result of company accounting processes
- balance sheets
- profit and loss statements
85
demonstrates that the difference between a company’s assets and its liabilities is retained by the company as equity
balance sheet
86
formula for balance sheets
assets = owner’s equity + liabilities
87
_____________ will not be converted to cash within the year (machinery, buildings, vehicles, etc.) and support the revenue generating activities of the firm
fixed assets
88
_______________ will be used or converted to cash or consumed within the year (cash on hand, stock, prepayments from customers, work in progress, etc.)
current assets
89
the contributed capital of the shareholders plus the retained earnings and is the residual of assets in excess of liabilities
capital
90
________________ do not need to be paid in the current year (loans, mortgages, bonds, etc.)
long-term liabilities
91
__________________ are scheduled to be paid in the current year (payments due to suppliers, payroll expenditures, etc.)
current liabilities
92
designed to show the reader the results of business operations for a given period of time
P&L statements
93
the equation for P&L statements
net income = revenue – expenses
94
the increase in shareholders’ equity created by all income generating activities (e.g., product sales, maintenance services)
revenue
95
the cost of merchandise purchased for resale or cost of manufactured items that are sold during the period and only applies to merchandisers or manufacturers
cost of goods sold
96
separated because it is not a cash expense, but instead represents the allocation of costs of fixed assets to periods they give rise to revenues
depreciation expense
97
earnings before interest and taxes and is a measure of how well the company can pay fixed interest costs
EBIT or operating income
98
not income statement items but are included to show the growth of retained earnings for the period
dividends
