Question 1

Family and friends represent the most important source of credit for most small businesses.

Accepted Answer

The answer of Family and friends represent the most important...

Question 2

A line of credit represents a guarantee from a bank to lend a firm a given amount of money.

Accepted Answer

A line of credit is an arrangement between a financial institution and a customer that establishes a maximum loan balance that the lender permits the borrower to access or maintain. It does not guarantee a firm will borrow the money, but it allows the firm to borrow up to a certain amount when needed.

Question 3

Inadequate expense control typically occurs as a result of undercapitalization.

Accepted Answer

Undercapitalization refers to a problem many beginning business ventures have-insufficient start-up funds. Expense control problems can occur even in firms that do not start out undercapitalized, and is an area of concern to all businesses, not just new firms. Constant attention is needed to ensure expenses increase only when necessary.

Question 4

The financial manager of a company is responsible for managing cash,budgets,accounts receivable,and managing taxes.

Accepted Answer

The financial manager is responsible for managing all of the mentioned tasks.

Question 5

An unsecured corporate bond is known as a debenture bond.

Accepted Answer

An unsecured corporate bond, which is not backed by any collateral, is known as a debenture bond.

Question 6

Investors and entrepreneurs should have an understanding of financial issues.

Accepted Answer

Understanding financial issues is crucial for investors and entrepreneurs as it can help them make informed decisions, manage risks, and ensure financial stability and growth for their businesses.

Question 7

The last step in the financial planning process is to establish financial controls.

Accepted Answer

Establishing financial controls is an important step in the financial planning process to ensure that the plan is being followed and to make any necessary adjustments or corrections. This involves monitoring financial activities and comparing them to budgeted amounts or other benchmarks, as well as implementing measures to prevent or detect fraud and errors.

Question 8

While firms finance their long-term needs with debt financing,their short-term needs are provided by equity financing.

Accepted Answer

This statement is incorrect. Firms typically finance their short-term needs with debt financing, while their long-term needs may be funded through equity financing.

Question 9

Many sellers offer a 2% discount to a buyer that makes payment 20 days before the due date, (2/10,net 30).Firms that fail to take advantage of this early payment discount are losing approximately 36%.

Accepted Answer

The annualized cost of not taking a 2% discount for paying 20 days early is approximately 36%, calculated using the formula: (Discount % / (1 - Discount %)) * (360 / (Full Payment Due Days - Discount Days)).

Question 10

A term-loan agreement requires the borrower to repay the loan in one lump sum at the end of the loan period.

Accepted Answer

A term-loan agreement typically requires the borrower to make regular, fixed payments over the course of the loan period, rather than repaying the entire loan amount in one lump sum at the end.

Question 11

Trade credit is the practice of buying goods now and paying for them later.

Accepted Answer

Trade credit allows businesses to delay payment for goods and services received, typically with an agreement or contract specifying the terms of repayment.

Question 12

Financial managers are responsible for accounts receivable and accounts payable management.

Accepted Answer

Financial managers are responsible for managing cash flow, budgeting, financial reporting, and overseeing financial transactions including accounts receivable and accounts payable.

Question 13

Retained earnings represent a source of equity financing.

Accepted Answer

Retained earnings are profits that a company has earned but not distributed as dividends to stockholders. They can then be reinvested back into the company, representing a form of equity financing.

Question 14

A company's capital budget helps management plan for cash shortages or surpluses.

Accepted Answer

A capital budget highlights the firm's planned spending on fixed assets such as buildings and equipment. It is the cash budget that provides managers with information regarding projected cash balances.

Question 15

Acquiring and storing inventory represents a sizable expenditure for many businesses.

Accepted Answer

Acquiring and storing inventory requires a significant investment of money, time, and resources, making it a substantial expense for many businesses.

Question 16

Suppliers prefer to offer trade credit to customers with poor credit ratings or no credit history.

Accepted Answer

Suppliers prefer to offer trade credit to customers with good credit ratings and a positive credit history to minimize their risk of late or non-payment. Offering trade credit to customers with poor credit ratings or no credit history increases the supplier's risk of non-payment and is not usually preferred.

Question 17

Effective financial managers evaluate customers' ability to pay for merchandise purchased on credit.

Accepted Answer

Effective financial managers do evaluate customers' ability to pay for merchandise purchased on credit to ensure that the company does not incur losses in the form of bad debts.

Question 18

A well-known finance designation is the CFA designation.

Accepted Answer

The CFA designation, which stands for Chartered Financial Analyst, is a well-known finance designation offered by the CFA Institute.

Question 19

When using equity financing,firms incur a legal obligation to repay the amount of money invested.

Accepted Answer

Equity financing does not require firms to repay the amount of money invested, as investors receive ownership in the company in exchange for their investment. Therefore, there is no legal obligation for the company to repay the amount invested.

Question 20

Much of a financial manager's day-to-day activities are involved in managing the short-term financial needs of the firm.

Accepted Answer

Financial managers are responsible for managing both the short-term and long-term financial needs of the firm. However, managing short-term financial needs, such as cash flow management, budgeting, and financial analysis, is a significant part of their day-to-day activities.

Quiz 17: Financial Management Appendix C Managing Risk