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Exam 18: Financial Management

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Question 61

True/False

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Preferred Pet Care, Inc., a mobile pet care company is planning for the future. The company owners (two seasoned veterinarians) have brought together the vice president of marketing and the director of information systems to talk about how their expansion campaign: "We come to you!" The talks are in the preliminary stages, so there is no need to concern the finance team at this time because cash flow is currently not a problem.

A) True
B) False

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Question 62

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Forecasting means determining how closely the actual revenue and expense results matched up with the predicted revenues and expenses.

A) True
B) False

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Question 63

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The rate of return a company must earn to meet the demands of its lenders and expectations of its equity holders is called:

Drew's work in the finance department of his firm consists of checking accounting records and financial statements to verify that proper procedures are followed. Drew serves his company as a(n) :

Preferred Pet Care, Inc. plans to purchase a second mobile unit next year that will cost an estimated $55,000. The finance manager will include this projected purchase in the company's capital budget.

A bond represents a long-term debt obligation of a corporation or government.

An unsecured corporate bond is known as a debenture bond.

A firm's short-term financial forecast provides a projected sales estimate.

Leverage refers to the use of borrowed funds to increase a firm's rate of return.

Mini-Case Tishian's Funeral Home has been in business for over eighty years. Throughout its history, the firm has been a family-run operation. Today, the business is managed by Mort Tishian, a grandson of the founder. Unfortunately, Mort Tishian's tenure has been plagued with problems neither his father nor grandfather before him experienced. The reason is simple: the funeral business is undergoing rapid change. Small, family-owned funeral homes are losing ground to a new type of competitor, a large national network service that resembles a franchise system. More and more families "in their time of need" are choosing the new, highly promoted competitors instead of the traditional small familyoperated funeral homes. This trend has required a response from organizations like Tishian's Funeral Home. Bigger and better facilities are needed to remain competitive. All of this puts more pressure on the family-owners to be more active in the financial side of the business. Mort summed it up best when he said, "Grandpa told people, 'you pay me when you can, I ain't goin' nowheres.'" His creditors did the same with him. Today, it's a different game. Cash flow is key, and obtaining funds is no simple task. Additionally, creditors want their money now, not later. Banks are also more demanding. "Heck, Grandpa knew all the bankers he dealt with personally. I see new faces every time I go to the bank. If things don't get better, I suspect after eighty years of service, Tishian's Funeral Home will have its own funeral." -Mort Tishian feels it's necessary to predict revenues, costs, and expenses on a six-month basis. "It's the only way you get an idea of what to expect," explains Mort. In order to obtain these predictions, Mort needs to develop a(n) :

The interest paid for debt financing is a tax-deductible expense for the firm.

A promissory note is a written contract between a supplier and a business customer, with a promise that customer will pay supplier a specified amount by a certain date.

Acquiring funds through debt financing enhances the firm's ability to increase profits.

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

refers to the process that identifies variances by comparing actual revenues and expenses to projected revenues and expenses.

Allison O'Toole sells high end accessories at her resort boutique in Destin, FL. During the past ten years, Allison's business has performed quite well. Even when she made the decision to expand her store by purchasing the building next door, she financed this event by reinvesting her profits. Up until now, Allison has:

A comptroller is the chief accounting officer of an organization.

The terms "2/10, net 30" indicate that the seller is offering a 10% discount for early payment.

To improve cash flow and profitability, effective managers attempt to minimize the firm's investment in inventory.

As the owner of Kingdom's Treasures, Jerry negotiates with suppliers who hope to place their products in his high volume retail gift store. Jerry finances his inventory through the credit offered by suppliers who delay his payments for up to 60 days after the merchandise has been delivered to his business.