Question 1

Short-term financing is used to start a new business.

Accepted Answer

Short-term financing is typically used to cover temporary cash flow shortages, finance day-to-day operations, or address unexpected expenses, not to start a new business. Starting a new business often requires long-term financing to cover the initial setup costs and investments.

Question 2

Most financial managers consider long-term financing to be money that will be used for longer than one year.

Accepted Answer

Long-term financing refers to money that will be used for longer than one year.

Question 3

According to the risk-return ratio,conservative decisions actually result in more risk when compared to decisions that are often considered high-risk decisions.

Accepted Answer

According to the risk-return ratio, higher-risk decisions typically offer the potential for higher returns, but also come with a greater risk of loss. Conservative decisions, on the other hand, tend to have lower potential returns but also come with lower risk. Therefore, conservative decisions result in less risk compared to high-risk decisions.

Question 4

Equity capital generally provides the greatest part of a firm's financing.

Accepted Answer

Debt capital, such as loans and bonds, often provide a significant portion of a firm's financing.

Question 5

The first step in building a budget is to identify sources of debt financing.

Accepted Answer

The first step in building a budget is to identify sources of income and expenses, not debt financing.

Question 6

Selling a firm's unneeded assets is a reasonable last resort when neither equity capital nor debt capital can be found to meet a firm's need for capital.

Accepted Answer

When a firm cannot secure equity capital or debt capital, selling off unneeded assets can provide a source of capital. However, it should be considered a last resort as it can negatively affect the firm's operations and future growth potential.

Question 7

A cash budget estimates a firm's expenditures for major assets like replacement of obsolete equipment and mergers and acquisitions.

Accepted Answer

A cash budget estimates a firm's cash inflows and outflows for a given period, typically a month or a year. It focuses on a company's operational cash flows and does not include major capital expenditures or investment decisions such as acquisitions.

Question 8

In order to catch problems before they get out of hand,a business firm should compare its financial performance against various budgets.

Accepted Answer

By comparing financial performance against budgets, a business can identify any variances or discrepancies that may indicate problems and take corrective action before they become larger issues.

Question 9

Debt capital is borrowed money that does not have to be repaid.

Accepted Answer

Debt capital is borrowed money that must be repaid with interest.

Question 10

Effective financial management involves careful planning to determine the best financial sources and to ensure that projected uses are in keeping with the organization's goals.

Accepted Answer

Effective financial management involves careful planning to determine the best financial sources and to ensure that projected uses are in keeping with the organization's goals. This is true.

Question 11

Short-term financing is used to finance a merger or expansion.

Accepted Answer

Short-term financing is used for immediate cash flow needs, such as meeting payroll or inventory purchases, rather than long-term investments like mergers or expansions. Long-term financing options are more appropriate for these types of ventures.

Question 12

For a manufacturer,it is impossible to have cash-flow problems before peak sales periods.

Accepted Answer

Cash-flow problems can arise for manufacturers at any time, including before peak sales periods. Factors such as production costs, inventory management, and delayed payments from customers or suppliers can all contribute to cash-flow problems.

Question 13

Florida-based Swim and Fin Products often experiences a time lag between the time goods are produced and the time that retailers pay for the finished products.In this situation,the Swim and Fin's financial problems are the result of speculative production.

Accepted Answer

Speculative production occurs when a company produces goods without having confirmed orders or customers, in the hopes of selling the products once they are produced. In this situation, Swim and Fin Products is experiencing a time lag between production and payment, indicating that they may have engaged in speculative production and are now facing financial difficulties as a result.

Question 14

Zero-base budgeting is a budgeting approach in which every expense must be justified in every budget.

Accepted Answer

Zero-base budgeting requires justification for every expense, making it a more thorough and comprehensive budgeting approach compared to traditional budgeting methods.

Question 15

When constructing budgets,most managers begin with departmental budgets for sales and various expenses that are then combined into a company-wide cash budget.

Accepted Answer

This is a common approach in budgeting where departmental budgets for sales and expenses are created and then consolidated into a master budget or company-wide cash budget.

Question 16

During the recent economic crisis,the number of business bankruptcies actually declined.

Accepted Answer

During the recent economic crisis, the number of business bankruptcies actually increased.

Question 17

All of the activities concerned with obtaining money and using it effectively are called financial management.

Accepted Answer

Financial management involves managing all aspects of money, including budgeting, investing, borrowing, and spending.

Question 18

When a firm makes the decision to borrow money,it is a clear sign that the firm is in financial trouble.

Accepted Answer

Borrowing money is a common financial strategy for firms to fund growth opportunities, invest in research and development, or manage cash flow. It does not necessarily indicate financial trouble. However, excessive borrowing or inability to pay back debt can lead to financial trouble.

Question 19

One of the most important priorities for someone interested in careers in finance is honesty.

Accepted Answer

Honesty is crucial in finance as it involves handling important financial information and making decisions that can impact businesses and individuals. Maintaining trust and integrity is key to being successful in a finance career.

Question 20

For the majority of businesses,newly-proposed financial reforms by the U.S.House of Representatives and the Senate will likely increase the time and cost of obtaining financing.

Accepted Answer

The newly-proposed financial reforms by the U.S. House of Representatives and the Senate are likely to increase regulatory requirements and compliance costs for lenders, which could result in longer processing times and higher costs for businesses seeking financing.

Quiz 16: Mastering Financial Management