Chapter 18 – Financial Management
To improve cash flow and profitability, effective managers attempt to minimize the
firm’s investment in inventory.
77. Capital expenditures are major investments in long-term assets such as property and
equipment.
78. Sound financial management involves determining the most appropriate sources of funds
to meet short-term and long-term needs of an organization.
79. While firms finance their long-term needs with debt financing, their short-term needs are
served by equity financing.
80. Short-term financing refers to borrowed funds that must be repaid in a year or less.
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100. Allison Robards, owner of Backstreet Books, an eclectic bookstore near a large
university, is seeking additional financing for books and CDs that she plans to buy and
sell in the same fiscal year. Even though it will be a sizeable investment in inventory,
Allison is seeking short-term financing.
Feedback: Inventory that is purchased and sold in the same year is financed with short-term
sources of funds.
101. The finance manager at Preferred Pet Care Inc has asked the company’s accountant to
prepare a report that shows the amount the firm is spending monthly on veterinary
supplies for its western suburb service area, in the hopes of negotiating better payment
terms with its suppliers. The purpose of this effort is to increase cash levels within the
firm.
Feedback: Analyzing the number and amounts of disbursements that a firm must make to its
suppliers is an important part of managing short-term cash flows. The firm may be able to
negotiate better payment terms, either by extending the credit terms (lengthening the time
period it has to pay its bills), or negotiating discounts for early payments. Both of these
strategies may increase cash flows for the business.
102.
Chapter 18 – Financial Management
Backstreet Books is seeking financing to fund the opening of two more locations in a
major university town. There is no need to consider debt financing for this project. It will
require a sizeable investment in equity funds.
Feedback: Although an expansion project is a sizeable investment that usually requires long-
term financing, both debt financing and equity financing may be considered for this project.
Long-term loans (debt financing) are repaid in a time period longer than one year, and usually
carry terms of anywhere from 2 – 10 years. Equity financing, funds from the sale of stock in
the firm does not need to be repaid.
103. Financial managers devote the majority of their time obtaining long-term financing to
fund the firm’s capital expenditures.
104. Small businesses rely heavily on long-term financing.
105. Much of a financial manager’s day-to-day activities involve managing the short-term
financial needs of the firm.
