Chapter 18 – Financial Management
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1. Finance is the function in a business that acquires funds for the firm and manages those
funds within the firm.
2. Managing a firm’s resources so that it can meet its goals and objectives is the goal of
financial accounting.
3. A financial manager makes recommendations to top executives regarding strategies for
improving the financial strength of a firm.
4.
Chapter 18 – Financial Management
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The duties and responsibilities of a financial manager are virtually identical to the duties
and responsibilities of an accountant.
5. Financial managers use data prepared by accountants to develop strategies for improving
the financial performance of the firm.
6. There is actually a stronger relationship between finance and marketing than there is
between finance and accounting.
7. Financial managers examine the data prepared by accountants and make
recommendations to top management regarding strategies for improving the financial
performance of the company.
8.
Chapter 18 – Financial Management
Financial management is more important for a large firm than it is for a small firm.
9. The chief financial officer (CFO) is responsible for accounting and financial functions.
10. The chief financial officer of a company is responsible for managing cash, accounts
receivable, and inventory.
11. While finance is a critical activity for profit-seeking organizations, by definition
nonprofit organizations are not required to fulfill the finance function.
12. A comptroller is responsible for the acquiring and managing of funds for an
organization.
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39. The primary focus of a cash flow forecast is the firm’s revenue and costs for the current
operating period.
40. A firm’s most recent financial statements often serve as the basis for predicting future
sales, costs and expenses.
41. The long-term financial forecast plays a crucial part in the company’s long-term strategic
plan.
42. The long-term financial forecast gives top management some sense of the profit
potential of various strategic decisions.
43.
Chapter 18 – Financial Management
A budget reflects management’s expectations for revenues and allocates the use of
specific resources throughout the firm.
44. Budgets are prepared after the financial forecasts are developed.
45. To be effective, budgets are prepared independently of organizational forecasts.
46. A capital budget highlights the expected funds provided by owner investments.
47. An operating budget analyzes the firm’s spending plans for long-lasting assets that
require large sums of money.
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48. A capital budget highlights a firm’s spending plans for major assets, such as property,
buildings, and equipment.
49. A capital budget combines all of the other budgets into one detailed plan for monitoring
the operations of the firm.
50. The operating (master) budget identifies the funds (and the allocation of those funds)
required to operate a business at a projected level of revenue.
51. A cash budget helps managers anticipate borrowing, debt repayment, operating
expenses, and short-term investment opportunities.
52.
Chapter 18 – Financial Management
The main objective of financial control is to establish priorities for the purchase of plant
and equipment.
53. By identifying variances from the financial plan, managers are able to focus on those
departments that require corrective action.
54. Financial control is a process where firms compare actual revenues and costs with
budgeted revenues and costs.
55. Since short-term financial forecasts predict expected future events, they should not be
influenced by recent financial statements.
Feedback: Past financial statements are often used as the basis for making projections about
future sales revenues, costs and expenses used in the short-term forecast.
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62. 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.
Feedback: Karen is involved in financial control, which is the process of comparing actual
revenues, costs, and expenses against their projected values. The control process helps
financial managers identify deviations and take corrective action when necessary. The Capital
Budget is a projected statement of the number and types of fixed assets required to run the
operation over a specified period of time.
63. 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.
Feedback: Forecasting for the future is an important part of any firm’s strategic plan. If a firm
is planning to expand, it is important to begin creating long-term forecasts, where the firm
predicts revenues and expenses for periods longer than one year, sometimes 5 to 10 years out.
64.
Chapter 18 – Financial Management
Big Bear Ski Lodge owners know that the lifts on the north slope will need replacing in
the next two years. Three months prior to replacement, they will include the expenditure
in their cash budget.
Feedback: Chair lifts would be considered a capital budget item – a major capital expenditure
for a ski lodge. A major purchase such as this would be part of the capital budget, in the
company’s financial plan.
65. Big Bear Ski Lodge’s cash budget for the month of March, 2012, shows a negative
amount. Due to the fact that the months of January and February were quite lucrative
and showed positive amounts, the finance manager will not borrow any money on the
short-term to cover for March’s deficit.
Feedback: The finance manager utilizes the cash budget (see Figure 18.3) to estimate cash
inflows and outflows on a period-by-period basis (usually a month or a quarter). If the month
of March shows a deficit, the cash collected in January and February has already been
dispersed to pay for expenses during those months and the subsequent month of March. The
manager will need to consider short-term financing to cover the shortage.
66. One very important responsibility of the finance department in both large and small
businesses involves acquiring needed funds to operate the business.
