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CHAPTER 15
1) Submit in Blackboard for 25% credit towards final grade.
Due: per various dates listed in syllabus schedule of activities.
         Plagiarism will be checked by Professor with Safe-Assign within Blackboard.
2) Using chapter Power Point Slides (.ppt) found inside Cengage MindTap – Study Tools
          Research and compete the missing slide data in a brief sentence.
          Keep responses aligned with Cengage chapter resources (not your personal view).
3) Each chapter is due different dates, so separate papers will be needed to complete assignments. 
         No special paper format or number of paragraphs required.
         Sentence quantity is determined by (dot) bullet point or number indicators within .ppt slide for missing data.
4) A good idea is to copy paste each chapter onto a blank word .doc page.
Save with appropriate file name for each chapter. Once complete, attach file under the “Write Submission” area within this Blackboard link by clicking on picture of paper & pencil. Scroll downward.
5) On all papers, be sure to list your Name and Course: GEB1011-2213 #1838
Chapter 15 – Using Management and Accounting Information, Due: Feb. 22, 2021
         a)  Provide answers for the following slides #11, 17, 19, 25, 27, 29, 32, 34, 38, 41.  
Chapter 16 Assignment (Required)
       Plagiarism will be checked by Professor with Safe-Assign within Blackboard. 2) Using chapter Power Point Slides (.ppt) found inside Cengage MindTap – Study Tools          Research and compete the missing slide data in a brief sentence.          Keep responses aligned with Cengage chapter resources (not your personal view). 3) Each chapter is due different dates, so separate papers will be needed to complete assignments.          No special paper format or number of paragraphs required.         Sentence quantity is determined by (dot) bullet point or number indicators within .ppt slide for missing data. 4) A good idea is to copy paste chapter onto a blank word .doc page.  Save with appropriate file name for each chapter. Once complete, attach file under the “Write Submission” area within this Blackboard link, by clicking on picture of paper & pencil. Scroll downward to see. 5) Be sure to list your Name and Course: GEB1011-2213 #1838 Chapter 16 – Mastering Financial Management, Due: Mar. 8, 2021            a) Provide answers for the following slides# 4, 16, 18, 19, 26, 31, 32, 35.

Chapter 15
Using Management and Accounting Information
Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Learning Objectives
15-1 Examine how information can reduce risk when making a decision.
15-2 Discuss management’s information requirements.
15-3 Outline the five functions of an information system.
15-4 Explain why accurate accounting information and audited financial statements are important.
15-5 Read and interpret a balance sheet.
15-6 Read and interpret an income statement.
15-7 Describe business activities that affect a firm’s cash flow.
15-8 Summarize how managers evaluate the financial health of a business.

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Information and Risk
To improve the decision-making process, the information used by individuals and business firms must be relevant.
Using relevant information results in better decisions.
Relevant information → Better intelligence and knowledge → Better decisions
For businesses, better intelligence and knowledge that lead to better decisions are especially important because they can provide a competitive edge over competitors and improve a firm’s profits.

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

FIGURE 15-1 The Relationship Between Information and Risk

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Difference Between Data and Information
Data – numerical or verbal descriptions that usually result from some sort of measurement
Information – data presented in a form that is useful for a specific purpose

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Knowledge Management (1 of 2)
Database – a single collection of data and information stored in one place that can be used by people throughout an organization to make decisions
Knowledge management (K M) – a firm’s procedures for generating, using, and sharing important data and information

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Knowledge Management (2 of 2)
Making Smart Decisions
Decision-support system (D S S) – a type of software program that provides relevant data and information to help a firm’s employees make decisions
Expert system – a type of computer program that uses artificial intelligence to imitate a human’s ability to think
Business Application Software
A number of business software applications can improve both employee decision making and productivity.

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

TABLE 15-1 Current Business Application Software Used to Improve Productivity

Word processing Users can prepare and edit written documents and store them in the computer or on a memory device.

Desktop publishing Users can combine text and graphics in professional reports, newsletters, and pamphlets.

Accounting Users can record routine financial transactions and prepare financial reports at the end of the accounting period.

Database management Users can electronically store large amounts of data and transform the data into information.

Graphics Users can display and print pictures, drawings, charts, and diagrams.

Spreadsheets Users can organize numerical data into a grid of rows and columns.

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

What Is a Management Information System?
Management information system (M I S) – a system that provides managers and employees with the information they need to perform their jobs as effectively as possible
The purpose of an MIS is to distribute timely and useful information from both internal and external sources to the managers and employees who need it.

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

FIGURE 15-2 Management Information System (M I3S)

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

A Firm’s Information Requirements (1 of 2)
Many firms are organized into five areas of management:

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

A Firm’s Information Requirements (2 of 2)
Managers in each of these areas need specific information in order to make decisions.
Financial managers must ensure that the firm’s managers and employees, lenders and suppliers, stockholders and potential investors, and government agencies have the information they need to measure the financial health of the firm.
Operations managers are concerned with present and future sales levels, current inventory levels of work in process and finished goods, and the availability and cost of the resources required to produce goods and services.
Marketing managers need to have detailed information about a firm’s products and services and those offered by competitors.
Human resources managers must be aware of anything that pertains to a firm’s employees.
Administrative managers are responsible for the overall management of the organization.

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

FIGURE 15-3 Five Management Information System Functions

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Why Accounting Information Is Important
Accounting – the process of systematically collecting, analyzing, and reporting financial information
Not only can accounting information be used to answer questions about what has happened in the past, it can also be used to help make decisions about the future.
To improve the accuracy of a firm’s accounting information and its financial statements, businesses rely on audits conducted by accountants employed by public accounting firms.

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Why Audited Financial Statements Are Important
Audit – an examination of a company’s financial statements and the accounting practices that produced them
The purpose of an audit is to make sure that a firm’s financial statements have been prepared in accordance with generally accepted accounting principles.
Generally accepted accounting principles (G A A P s) – an accepted set of guidelines and practices for U.S. companies reporting financial information and for the accounting profession

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Accounting Fraud, Ethical Behavior, and Reform
Accounting problems at many companies have forced many investors, lenders and suppliers, and government regulators to question the motives behind fraudulent and unethical accounting practices.
Unfortunately, the ones hurt when companies report inaccurate or misleading accounting information often are not the high-paid corporate executives; rather, it’s the employees, who lose their jobs and the money they invested in the company’s retirement program if the company files for bankruptcy, and the investors, lenders, and suppliers, who experience a loss due to their investments in the company based on fraudulent accounting information.
To help ensure that corporate financial information is accurate and to prevent accounting scandals, Congress enacted the Sarbanes-Oxley Act.

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Different Types of Accounting
Accounting is usually broken down into two broad categories:
1.

2.

Additional special areas of accounting include:

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Careers in Accounting
Accountants generally are classified as either:

Certified public accountant (C P A) – an individual who has met state requirements and experience and has passed a rigorous accounting examination

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Accounting Equation (1 of 2)
Accounting equation – the basis for the accounting process:
= +

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Accounting Equation (2 of 2)
To use the accounting equation, a firm’s accountants record the firm’s day-to-day financial transactions using the double-entry bookkeeping system.
Double-entry bookkeeping system – a system in which each financial transaction is recorded as two separate accounting entries to maintain the balance shown in the accounting equation
At the end of a specific accounting period, all of the financial transactions are summarized in the firm’s financial statements and included in the firm’s annual report.
Annual report – a report distributed to stockholders and other interested parties that describes the firm’s operating activities and its financial condition

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Balance Sheet
Balance sheet (or statement of financial position) – a summary of the dollar amounts of a firm’s assets, liabilities, and owners’ equity accounts at the end of a specific accounting period
The balance sheet must demonstrate that assets are equal to liabilities plus owners’ equity, and the accounting equation is still in balance.

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

FIGURE 15-5 Personal Balance Sheet

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

FIGURE 15-6 Business Balance Sheet

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Assets (1 of 3)
On a balance sheet, assets are listed in order from the most liquid to the least liquid.
Liquidity – the ease with which an asset can be converted into cash
Current Assets
Current assets – assets that can be converted quickly into cash or that will be used in one year or less

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Assets (2 of 3)
Current Assets (continued)
Order of current assets from most liquid to least liquid:

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Assets (3 of 3)
Fixed Assets
Fixed assets – assets that will be held or used for a period longer than one year
Examples:
Depreciation – the process of apportioning the cost of a fixed asset over the period during which it will be used
Intangible Assets
Intangible assets – assets that do not exist physically but that have a value based on the rights or privileges they confer on a firm
Examples:

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Liabilities and Owners’ Equity (1 of 2)
Current Liabilities
Current liabilities – debts that will be repaid in one year or less
Balance sheet Includes:

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Organizing e-Business Resources
Long-Term Liabilities
Long-term liabilities – debts that need not be repaid for at least one year
Owners’ or Stockholders’ Equity
For a sole proprietorship or partnership, the owners’ equity is shown as the difference between assets and liabilities.
For a corporation, the owners’ equity usually is referred to as stockholders’ equity.
The dollar amount reported on the balance sheet is the total value of stock plus retained earnings that have accumulated to date.
Retained earnings – the portion of a business’s profits not distributed to stockholders

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Income Statement
Income statement – a summary of a firm’s revenues and expenses during a specified accounting period
The difference between income and expenses is referred to as:
Profit or loss (for a business)
Cash surplus or cash deficit (for an individual)
For a business:
– – = Net income

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

FIGURE 15-7 Personal Income Statement

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

FIGURE 15-8 Business Income Statement

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Revenues
Revenues – the dollar amounts earned by a firm from selling goods, providing services, or performing business activities
Gross sales − Sales deductions = Net sales
Gross sales – the total dollar amount of all goods and services sold during the accounting period
Deductions:

Net sales – the actual dollar amounts received by a firm for the goods and services it has sold after adjustment for returns, allowances, and discounts

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Cost of Goods Sold
Cost of goods sold – the dollar amount equal to beginning inventory plus net purchases less ending inventory
Cost of goods sold = Beginning inventory + Net purchases – Ending inventory
Gross profit – a firm’s net sales less the cost of goods sold
Gross profit = Net sales – Cost of goods sold

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Operating Expenses
Operating expenses – all business costs other than the cost of goods sold
Total operating expenses generally are divided into two categories:

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Net Income
Net income – occurs when revenues exceed expenses
Net loss – occurs when expenses exceed revenues

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Statement of Cash Flows (1 of 2)
Statement of cash flows – a statement that illustrates how the company’s operating, investing, and financing activities affect cash during an accounting period

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

FIGURE 15-9 Statement of Cash Flows

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Statement of Cash Flows (2 of 2)
Three different activities of a statement of cash flows; Explain briefly:

The totals of all three activities are added to the beginning cash balance to determine the ending cash balance.

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Financial Ratios (1 of 3)
Financial ratio – a number that shows the relationship between two elements of a firm’s financial statements
Measuring a Firm’s Ability to Earn Profits
Return on sales (or profit margin) – a financial ratio calculated by dividing net income after taxes by net sales
Example for Northeast Art Supply:

The return on sales indicates how effectively the firm is transforming sales into profits.
A higher return is better than a low one.
A low return on sales can be increased by reducing expenses and increasing sales.

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Financial Ratios (2 of 3)
Measuring a Firm’s Ability to Pay Its Debts
Current ratio – a financial ratio computed by dividing current assets by current liabilities
Example for Northeast Art Supply:

A high current ratio indicates that a firm can pay its current liabilities.
A low current ratio can be improved by repaying current liabilities, by reducing dividend payments to stockholders to increase the firm’s cash balance, or by obtaining additional cash from investors.

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Financial Ratios (3 of 3)
Measuring How Well a Firm Manages Its Inventory
Inventory turnover – a financial ratio calculated by dividing the cost of goods sold in one year by the average value of the inventory
Average value of the inventory:
(Beginning inventory + Ending inventory) ÷ 2
Example for Northeast Art Supply:

The average inventory turnover for all firms is about 9 times per year, but turnover rates vary widely from industry to industry.
The quickest way to improve inventory turnover is to order merchandise in smaller quantities at more frequent intervals.

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 16
Mastering Financial Management
Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Learning Objectives
16-1 Understand why financial management is important in today’s competitive economy.
16-2 Identify a firm’s short- and long-term financial needs.
16-3 Summarize the process of planning for financial management.
16-4 Identify the services provided by banks and financial institutions for their business customers.
16-5 Describe the advantages and disadvantages of different methods of short-term debt financing.
16-6 Evaluate the advantages and disadvantages of equity financing.
16-7 Evaluate the advantages and disadvantages of long-term debt financing.

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Need for Financial Management
Financial management – all the activities concerned with obtaining money and using it effectively
Proper financial management must ensure that:
Funds are available when needed both now and in the future, obtained at the lowest possible cost, and used as efficiently as possible.
Financing priorities are established in line with organizational goals and objectives.
Spending is planned and controlled.
A firm’s credit customers pay their bills on time, and the number of past due accounts is reduced.
Bills are paid promptly to protect the firm’s credit rating and its ability to borrow money.
The funds required for paying the firm’s taxes are available when needed to meet tax deadlines.
Excess cash is invested in certificates of deposit (CDs), government securities, or conservative, marketable securities.

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Careers in Finance
Typical job titles in finance include:
Chief financial officer
Vice-president of finance
Bank officer
Consumer credit officer
Financial analyst
Financial planner
Loan officer
Insurance analyst
Investment account executive
In addition to honesty, managers and employees in the finance area must:

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

TABLE 16-1 Comparison of Short- and Long-Term Financing
Whether a business seeks short- or long-term financing depends on what the money will be used for.
Short-Term Financing Needs

Cash-flow problems Speculative production

Current inventory needs Monthly expenses

Short-term promotional needs Unexpected emergencies

Long-Term Financing Needs

Business start-up costs Mergers and acquisitions

New product development Long-term marketing activities

Replacement of equipment Expansion of facilities

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Short-Term Financing
Short-term financing – money that will be used for one year or less
Cash flow – the movement of money into and out of an organization
Speculative production – the time lag between the actual production of goods and when the goods are sold

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Long-Term Financing
Long-term financing – money that will be used for longer than one year

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Risk–Return Ratio
Risk–return ratio – a ratio based on the principle that a high-risk decision should generate higher financial returns for a business and more conservative decisions often generate lower returns

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Planning—The Basis of Sound Financial Management
Financial plan – a plan for obtaining and using the money needed to implement an organization’s goals and objectives

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

FIGURE 16-3 The Three Steps of Financial Planning

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Developing the Financial Plan
Budget – a financial statement that projects income, expenditures, or both over a specified future period
Cash budget – a financial statement that estimates cash receipts and cash expenditures over a specified period
Most firms use one of two approaches to budgeting.
Traditional approach – a budgeting approach in which each new budget is based on the dollar amounts contained in the budget for the preceding year, the amounts are modified to reflect any revised goals, and managers are required to justify only new expenditures
Zero-base budgeting – a budgeting approach in which every expense in every budget must be justified
To develop a plan for long-term financing needs, managers often construct a capital budget.
Capital budget – a financial statement that estimates a firm’s expenditures for major assets and its long-term financing needs

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

FIGURE 16-4 Cash Budget for Stars and Stripes Clothing

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Traditional Banking Services for Business Clients (1 of 2)
Savings and Checking Accounts
A business with excess cash it is willing to leave on deposit with a bank for a set period of time can earn a higher rate of interest.
To do so, the business firm buys a certificate of deposit.
Certificate of deposit (C D) – a document stating that the bank will pay the depositor a guaranteed interest rate on money left on deposit for a specified period of time

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Traditional Banking Services for Business Clients (2 of 2)
Business Loans
Short-term business loans:
Must be repaid within one year or less
To help ensure that short-term money will be available when needed, many firms establish a line of credit.
Line of credit – a loan that is approved before the money is actually needed
Revolving credit agreement – a guaranteed line of credit
Long-term business loans:
Are repaid over a period of years
Most lenders require some type of collateral for long-term loans.
Collateral – real estate or property pledged as security for a loan

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Credit and Debit Card Transactions
A recent Gallup poll found that:
Three out of four Americans (76 percent) have at least one credit card.
On average, Americans have 3.4 credit cards.
Half of Americans (48 percent) are carrying credit card debt from one month to the next because they don’t pay their entire credit card debt each month.
By depositing charge slips into a bank or other financial institution, the merchant can convert credit-card sales into cash.
In return for processing the merchant’s credit-card transactions, the financial institution charges a fee that generally ranges between 1.5 and 4 percent.
Debit card – a card that electronically subtracts the amount of a customer’s purchase from her or his bank account at the moment the purchase is made

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Electronic Banking Services
Electronic funds transfer (EFT) system – a means of performing financial transactions through a computer terminal
Four EFT applications:

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

International Banking Services
Letter of credit – a legal document issued by a bank or other financial institution guaranteeing to pay a seller a stated amount for a specified period of time
Certain conditions, such as delivery of the merchandise, may be specified before payment is made.
Banker’s acceptance – a written order for a bank to pay a third party a stated amount of money on a specific date
No conditions are specified; it is simply an order to pay without any strings attached.
Both a letter of credit and a banker’s acceptance are popular methods of paying for import and export transactions.

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Sources of Unsecured Short-Term Financing (1 of 3)
Short-term debt financing is usually easier to obtain than long-term debt financing for three reasons:

Most lenders do not require collateral for short-term financing.
Unsecured financing – financing that is not backed by collateral

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Sources of Unsecured Short-Term Financing (2 of 3)
Trade Credit
Trade credit – a type of short-term financing extended by a seller who does not require immediate payment after delivery of merchandise
It is the most popular form of short-term financing, because most manufacturers and wholesalers do not charge interest for trade credit.
Promissory Notes Issued to Suppliers
Promissory note – a written pledge by a borrower to pay a certain sum of money to a creditor at a specified future date
Promissory notes usually require the borrower to pay interest.
A promissory note offers two important advantages to the firm extending the credit.

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Sources of Unsecured Short-Term Financing (3 of 3)
Unsecured Bank Loans
Prime interest rate – the lowest rate charged by a bank for a short-term loan
Generally is reserved for large corporations with excellent credit ratings
As a condition of an unsecured loan, a bank may require that a compensating balance be kept on deposit at the bank and that every commercial borrower clean up (pay off completely) its short-term loans at least once a year and not use short-term borrowing again for a period of 30 to 60 days.
Commercial Paper
Commercial paper – a short-term promissory note issued by a large corporation
The interest rate a corporation pays when it sells commercial paper is tied to its credit rating and its ability to repay the commercial paper.

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Sources of Secured Short-Term Financing
Loans Secured by Inventory
Finished goods, raw materials, and work-in-process inventories may be pledged as collateral for short-term loans.
Loans Secured by Receivables
Accounts receivable – amounts owed to a firm by its customers
A firm can pledge its accounts receivable as collateral to obtain short-term financing.

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Factoring Accounts Receivable
Factor – a firm that specializes in buying other firms’ accounts receivable
The factor buys the accounts receivable for less than their face value; however, it collects the full face value dollar amount when each account is due.
The factor’s profit is the difference between the face value of the accounts receivable and the amount the factor has paid for them.

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

TABLE 16-2 Comparison of Short-Term Financing Methods (1 of 2)

Type of Financing Cost Repayment Period Businesses That May Use It Comments

Trade credit Low, if any 30–60 days All businesses with good credit Usually no finance charge

Promissory note issued to suppliers Moderate One year or less All businesses Usually unsecured but requires legal document

Unsecured bank loan Moderate One year or less All businesses Promissory note is required and compensating balance may be required

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

TABLE 16-2 Comparison of Short-Term Financing Methods (2 of 2)

Type of Financing Cost Repayment Period Businesses That May Use It Comments

Commercial paper Moderate 270 days or less Large corporations with high credit ratings Usually available only to large firms

Secured loan High One year or less Firms with questionable credit ratings Inventory or accounts receivable often used as collateral

Factoring High None Firms that have large numbers of credit customers Accounts receivable sold to a factor

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Selling Stock (1 of 3)
Initial Public Offering and the Primary Market
Initial public offering (I P O) – occurs when a corporation sells common stock to the general public for the first time
When a corporation uses an I P O to raise capital, the stock is sold in the primary market.
Primary market – a market in which an investor purchases financial securities (via an investment bank) directly from the issuer of those securities
Investment banking firm – an organization that assists corporations in raising funds, usually by helping to sell new issues of stocks, bonds, or other investment securities

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Selling Stock (2 of 3)
Initial Public Offering and the Primary Market (cont.)
Advantages of selling stock: Equity finance are low for two reasons.

The Secondary Market
Secondary market – a market for existing financial securities that are traded between investors
Usually, secondary-market transactions are completed through a(n):

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Selling Stock (3 of 3)
Common Stock
Common stock – stock whose owners may vote on corporate matters but whose claims on profits and assets are subordinate to the claims of others
Preferred Stock
Preferred stock – stock whose owners usually do not have voting rights but whose claims on dividends and assets are paid before those of common-stock owners

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Retained Earnings
Retained earnings – the portion of a corporation’s profits not distributed to stockholders

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Venture Capital, Angel Investors, and Private Placements
Venture capital – money invested in small (and sometimes struggling) firms that have the potential to become very successful
Angel investor – an investor who provides financial backing for small business startups or entrepreneurs
Private placement – occurs when stock and other corporate securities are sold directly to insurance companies, pension funds, large institutional investors, or mutual funds

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Sources of Long-Term Debt Financing
Financial leverage – the use of borrowed funds to increase the return on owners’ equity
The principle of financial leverage works as long as a firm’s earnings are larger than the interest charged for the borrowed money.
For a small business, long-term debt financing is generally limited to loans, whereas large corporations have the additional option of issuing corporate bonds.

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Long-Term Loans
Term-Loan Agreements
Term-loan agreement – a promissory note that requires a borrower to repay a loan in monthly, quarterly, semiannual, or annual installments
The interest rate and repayment terms for term loans often are based on factors such as:

The lender usually requires some type of collateral.
Lenders may also require that borrowers maintain a minimum amount of working capital.

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Corporate Bonds (1 of 3)
Corporate bond – a corporation’s written pledge that it will repay a specified amount of money with interest
Interest rates for corporate bonds vary with the financial health of the company issuing the bond.
Specific factors that increase or decrease the interest rate that a corporation must pay when it issues bonds include:

Most corporate bonds are registered bonds.
Registered bond – a bond registered in the owner’s name by the issuing company
Maturity date – the date on which a corporation is to repay borrowed money

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

FIGURE 16-7 The Risk–Return Ratio for Corporate Bond Investors

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Corporate Bonds (2 of 3)
Types of Bonds
Debenture bond – a bond backed only by the reputation of the issuing corporation
Mortgage bond – a corporate bond secured by various assets of the issuing firm
Convertible bond – a bond that can be exchanged, at the owner’s option, for a specified number of shares of the corporation’s common stock

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Corporate Bonds (3 of 3)
Repayment Provisions for Corporate Bonds
Bond indenture – a legal document that details all the conditions relating to a bond issue
A corporation may use one of three methods to ensure it has sufficient funds available to redeem a bond issue.

Trustee – an individual or an independent firm that acts as a bond owner’s representative

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

TABLE 16-4 Comparison of Long-Term Financing Methods (1 of 2)

Type of Financing Repayment Repayment Period Cost/Dividends/Interest Businesses That May Use It

Equity

Common stock No None High initial cost; low ongoing costs because dividends not required All corporations that sell stock to investors

Preferred stock No None Dividends not required but must be paid before common stockholders receive any dividends Large corporations that have an established investor base of common stockholders

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

TABLE 16-4 Comparison of Long-Term Financing Methods (2 of 2)

Type of Financing Repayment Repayment Period Cost/Dividends/Interest Businesses That May Use It

Debt

Long-term loan Yes Usually 3–7 years Interest rates between 3 and 12 percent depending on economic conditions, the financial stability of the company requesting the loan, and the amount of the loan All firms that can meet the lender’s repayment and collateral requirements

Corporate bond Yes Usually 1–30 years Interest rates between 3.5 and 10 percent depending on the financial stability of the company issuing the bonds and economic conditions Large corporations that are financially healthy

Pride/Hughes/Kapoor, Foundations of Business, 6th Edition. © 2019 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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