Question 1

Slater Co. has very old computers and manufacturing equipment and knows it needs to upgrade them or risk losing much of its business. Slater does not have the money to purchase the computers, so it will most likely need

Accepted Answer

Long-term financing would enable Slater Co. to make a significant investment in upgrading its equipment and computers. This type of financing typically has a longer repayment period, and may be used to purchase expensive assets such as machinery or equipment. This would be the best option as it allows Slater Co. to make a big investment with a manageable repayment schedule.

Question 2

For a department store such as Macy's, the most likely need for short-term financing will be for

Accepted Answer

The most likely need for short-term financing for a department store such as Macy's will be to finance inventory purchases. As a retailer, Macy's must keep its shelves stocked with a wide variety of products to attract customers, and it often needs to purchase large quantities of inventory on credit. Short-term financing can provide the necessary funds to purchase inventory and can help ensure that the company has the products it needs to generate sales and profits.

Question 3

Long-term financing should be used to do which of the following?

Accepted Answer

Long-term financing should be used for investments that generate returns over an extended period of time, such as developing new products. Financing short-term expenses like salaries, utilities, and inventory for resale should be covered with short-term financing. Financing speculative production, which involves a high degree of uncertainty, is generally not a suitable use of long-term financing.

Question 4

Sally Overall is thinking about two different decisions. One decision is quite risky, while the other decision is more conservative. To help her make the right decision, she decides to calculate the

Accepted Answer

The best choice for Sally Overall to help her make the decision between a risky and conservative option is to calculate the risk-return ratio. This ratio measures the potential return of an investment against the potential risk of that investment, making it a useful tool for evaluating the tradeoff between risk and potential reward when making investment decisions.

Question 5

A tool that managers use to estimate major expenditures for assets, expansion of facilities, and mergers and acquisitions is called a(n)

Accepted Answer

A capital budget is specifically designed for major expenditures related to long-term assets. It helps managers plan and make decisions for asset purchases, expansions, and mergers and acquisitions.

Question 6

The ____ ratio is based on the principle that a high-risk investment should generate higher financial returns for a business and more conservative decisions often generate lesser returns.

Accepted Answer

The risk-return ratio is specifically designed to measure the return on investments in terms of the level of risk involved in the investment. In general, riskier investments should yield higher returns while less risky investments should generate lower returns.

Question 7

Maria has been asked by top management to develop financial ____ that the company will achieve over the next one- to ten-year period.

Accepted Answer

Goals refer to the desired outcomes or targets that a company aims to achieve over a specified period, aligning with the context of a one- to ten-year timeframe.

Question 8

Borrowed money that will be used for more than one year is called

Accepted Answer

Borrowed money that will be used for more than one year is referred to as long-term financing. Trade credit and short-term financing both refer to borrowing money that will be used for a shorter period of time, typically less than a year. Equity capital refers to capital raised by issuing shares of a company's stock, rather than borrowing money. Secured financing refers to borrowing money that is secured by assets or collateral.

Question 9

A statement that projects income and/or expenditures over a specified future period is called a

Accepted Answer

A statement that projects income and/or expenditures over a specified future period is called a budget. A financial plan refers to a broader set of strategies for managing finances, including investments and retirement planning. A cash flow plan focuses specifically on tracking and projecting cash inflows and outflows. A resources plan and resource allocation statement are not commonly used terms in financial management. Therefore, the best choice is E: budget.

Question 10

Tom Jackson, president of Jackson Manufacturing, suspects that the managers of two departments have been padding their budgets for the last three years. To eliminate this problem, Tom would

Accepted Answer

Zero-base budgeting (ZBB) begins with a budget of zero and requires managers to justify every expense for each new period. This approach can help detect and eliminate unnecessary expenses and prevent budget padding. Thus, to eliminate the problem of budget padding, Tom Jackson should use zero-base budgeting. Firing the managers, hiring an efficiency expert or a new accountant, or using traditional budgeting may not necessarily solve the problem of budget padding.

Question 11

Jones Manufacturing needs $450,000 to build a new plant. It must also spend $200,000 on new equipment for the plant. Both of these needs are examples of

Accepted Answer

Building a new plant and purchasing new equipment are both long-term investments and require long-term financing. Therefore, the best choice is D, which represents long-term financing needs.

Question 12

Todd develops a plan for obtaining and using the money necessary for his company to implement its goals. This is called a(n)

Accepted Answer

A financial plan is specifically designed to detail how a company will obtain and allocate the necessary funds to achieve its objectives. A credit policy relates to how a company will extend or receive credit, a capital budget outlines expenditures for long-term assets, an operational plan identifies how day-to-day activities will be carried out, and a financing agreement is a specific contract for obtaining or repaying funds.

Question 13

The steps in effective financial planning are

Accepted Answer

Effective financial planning involves establishing organizational goals, identifying financial needs, and identifying sources of financing to achieve those goals. Budgeting is also a critical component of financial planning to ensure that financial resources are properly allocated and used. Once the plan is implemented, it should be regularly monitored and evaluated to ensure that it is meeting the organization's goals and financial objectives.

Question 14

Kliting Co. is concerned with whether or not it will be able to pay its bills with money coming in from sales. It would be helpful for Kliting to prepare a ____ to better understand its needs.

Accepted Answer

A cash budget is a financial statement that estimates the cash inflows and outflows of an organization for a specific period. It would provide Kliting Co. with a better understanding of its ability to pay its bills with incoming cash from sales. A capital budget deals with long-term investments, a zero-based budget requires each expense to be justified anew for each period, and a loan application or revolving credit agreement are financing options that do not provide insight into cash inflows and outflows.

Question 15

When each new budget is based on the dollar amounts contained in the budget from the preceding year, a company is using ____ budgeting.

Accepted Answer

Traditional budgeting involves basing the new year's budget on the dollar amounts from the previous year's budget. This method assumes that last year's budget was accurate and adjusts it based on any changes in the upcoming year. Zero-base budgeting, on the other hand, requires managers to justify all expenses from scratch each year. Cash and capital budgeting focus on specific areas of the company's finances, and production budgeting focuses on forecasting the amount of goods to produce.

Question 16

All of the following are uses of long-term financing except

Accepted Answer

Long-term financing is not typically used to address immediate cash-flow problems, as it is meant to fund larger, strategic initiatives such as starting a new business, executing mergers and expansions, developing and marketing new products, and replacing obsolete equipment. Short-term financing would be more appropriate for addressing immediate cash-flow issues.

Question 17

At Furman Company, managers go through a lengthy budgeting process wherein each department manager is required to provide documentation justifying every expected expense. Furman uses ____ budgeting.

Accepted Answer

The lengthy budgeting process and requirement for justification of every expected expense indicates the use of zero-base budgeting, where each expense is justified from scratch instead of just being adjusted from the previous year's budget.

Question 18

The primary sources of funds available to a business include all of the following except

Accepted Answer

Government grants are not a primary source of funds for most businesses, as they are typically not a regular or reliable source of funding compared to debt, equity, asset sales, or sales revenue.

Question 19

Tidewater Distributors is successfully using short-term financing to buy inventory for resale. As sales climb, the managers realize that they must decide what to do with the money. Since you are the financial manager, they ask for your advice. You advise them to first

Accepted Answer

Repaying the short-term obligations should be the first priority as it will help reduce the interest expenses and will help in maintaining the creditworthiness of the company. Using the money for personal benefits or increasing employee wages may not be the best use of the funds in the long run. Enrolling the salespeople in a training course may be beneficial, but it should not be done at the cost of repaying the short-term obligations. Borrowing more money may not be a good option as it will increase the debt burden of the company.

Question 20

Each year Caliente, Inc., follows a budgeting process. The first step is always to look at the previous year's budget and see if anything needs to be updated. Caliente uses ____ budgeting.

Accepted Answer

The fact that Caliente, Inc. is looking at the previous year's budget and updating it suggests that they are using a traditional budgeting method. Traditional budgeting involves adjusting the previous year's budget based on changes in external and internal factors. None of the other options (cash, capital, zero-base, or historical) involve using the previous year's budget as a starting point.

Quiz 19: Mastering Financial Management