Question 1

Equity financing must be repaid.

Accepted Answer

Equity financing is not a loan, and therefore does not need to be repaid. Instead, investors receive a percentage of ownership in the company and may receive dividends or a share of profits.

Question 2

White Palace operates a chain of restaurants specializing in hamburgers.The firm plans to expand to new communities.The acquisition of land and construction of new restaurants represent capital expenditures.

Accepted Answer

The statement mentions that White Palace wants to expand to new communities, which implies they will acquire land and construct new restaurants, making it a capital expenditure.

Question 3

A revolving credit agreement represents a line of credit that is guaranteed.

Accepted Answer

A revolving credit agreement typically provides ongoing access to a certain amount of credit, which can be used and repaid repeatedly as long as the borrower stays within the credit limit and makes timely payments. This type of credit is often backed by collateral or a personal guarantee, which makes it a secure form of financing for lenders.

Question 4

The main objective of financial control is to establish priorities for the purchase of plant and equipment.

Accepted Answer

The main objective of financial control is to monitor and manage financial resources so that the organization can achieve its goals and objectives by ensuring effective and efficient use of funds. Establishing priorities for the purchase of plant and equipment is just one aspect of financial control, but it is not the main objective.

Question 5

Karen,a financial manager with Bigbux Incorporated,regularly compares actual revenues and expenses against their projected values.After identifying areas with significant deviations from planned values,she investigates to find the cause of these variances.Karen's activities represent the steps involved in the preparation of Bigbux's capital budget.

Accepted Answer

Karen's activities are actually part of the process of preparing an operating budget, not a capital budget. The preparation of a capital budget involves evaluating long-term investments in property, equipment, or other assets.

Question 6

The FeelsoGood Furniture Stores often rely on factoring to meet their short-term financing needs.This means that FeelsoGood borrows money from a finance company and pledges its accounts receivables as collateral.

Accepted Answer

Factoring involves selling accounts receivables to a finance company at a discount, not borrowing money and using them as collateral.

Question 7

If a buyer is offered the terms of sale of "3/10,net 30" this means that the buyer can receive a 10 percent discount by making full payment within 3 days of the billing date.

Accepted Answer

The terms "3/10, net 30" mean the buyer can receive a 3 percent discount if payment is made within 10 days, not a 10 percent discount within 3 days.

Question 8

Sound financial management involves determining the most appropriate sources of funds to meet the short-term and long-term needs of an organization.

Accepted Answer

Sound financial management involves analyzing the financial situation of an organization and determining the most appropriate sources of funds to meet its short-term and long-term needs. This includes managing cash flows, evaluating investment opportunities, and considering the cost of capital.

Question 9

Factoring represents the least expensive way for a firm to raise short-term funds.

Accepted Answer

Factoring involves selling accounts receivable at a discount to a third party, and it can be more expensive than other forms of short-term financing due to the fees and interest rates charged by the factor.

Question 10

An operating budget analyzes the firm's spending plans for long-lasting assets that require large sums of money.

Accepted Answer

An operating budget analyzes the firm's expected revenue and expenses for a specific period of time, typically a year. It includes items such as salaries, supplies, and marketing expenses, rather than long-lasting assets. A capital budget, on the other hand, focuses on the firm's spending plans for large assets such as buildings, equipment, and vehicles.

Question 11

Equity financing refers to the money a firm receives from the sale of bonds.

Accepted Answer

Equity financing refers to the money a firm receives from the sale of stocks, not bonds.

Question 12

Companies raising funds must choose either debt or equity sources,but not both.

Accepted Answer

Companies can choose to raise funds through both debt and equity sources depending on their financial needs and goals.

Question 13

Trade credit represents one of the most expensive forms of short-term financing.

Accepted Answer

Trade credit is actually one of the least expensive forms of short-term financing as it involves the supplier extending credit to the buyer with no interest or fees charged.

Question 14

The most widely used source of short-term funding is trade credit.

Accepted Answer

Trade credit is a common form of short-term financing where a supplier allows the buyer to delay payment for goods or services received, often with a specified payment period, typically ranging from a few days to several months. Trade credit is widely used because it is easy to obtain and flexible, and often comes without explicit interest charges.

Question 15

A revolving credit agreement is designed to reduce the risk of lending money.

Accepted Answer

The answer of A revolving credit agreement is designed to...

Question 16

Inadequate control of expenses represents a common financial problem that contributes to business failures.

Accepted Answer

Inadequate control of expenses can lead to overspending, which can reduce profits and ultimately lead to business failure. Therefore, it is a common financial problem that needs to be addressed in order to ensure long-term success.

Question 17

The duties and responsibilities of a financial manager are virtually identical to the duties and responsibilities of an accountant.

Accepted Answer

While both financial managers and accountants deal with financial operations and data, the roles have distinct responsibilities. Financial managers are responsible for making financial decisions, analyzing financial data to identify trends, creating financial reports and budgets, and implementing strategies to improve the overall financial health of an organization. Accountants primarily focus on bookkeeping, tax planning and compliance, financial statement preparation, auditing, and ensuring accurate financial records.

Question 18

A share of stock represents a company-issued IOU including a promise to repay on a certain date.

Accepted Answer

A share of stock represents ownership in a company, not a debt or a promise to repay.

Question 19

Venture capital is money that is invested in new or emerging companies that are perceived as having great profit potential.

Accepted Answer

This is the correct definition of venture capital.

Question 20

Only financially stable firms are able to sell commercial paper to raise short-term funds.

Accepted Answer

Commercial paper is typically issued by firms with high credit ratings, indicating financial stability, as it is an unsecured form of borrowing.

Quiz 17: Financial Management Appendix C Managing Risk