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BSA 35P > Chapter 16 TB > Flashcards

Chapter 16 TB Flashcards

1
Q

Spontaneous unsecured financing has a specific interest cost associated with it that can be at a fixed or floating rate.

T or F?

A

FALSE

No interest.

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2
Q

Accounts payable are spontaneous secured sources of short-term financing that arise from the normal operations of a firm.

T or F?

A

FALSE

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3
Q

Notes payable are either spontaneous secured or spontaneous unsecured financing and result from the normal operations of a firm.

T or F?

A

FALSE

Accounts payable are either spontaneous secured or spontaneous unsecured financing and result from the normal operations of a firm.

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4
Q

Accounts payable results from transactions in which merchandise is purchased but no formal note is signed to show the purchaser’s liability to the seller.

T or F?

A

TRUE

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5
Q

In credit terms, EOM (End-of-Month) indicates that the accounts payable must be paid by the end of the month in which the merchandise has been purchased.

T or F?

A

FALSE

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6
Q

Spontaneous liabilities such as accounts payable and accruals represent a source of financing that arise from the normal course of business.

T or F?

A

TRUE

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7
Q

The cost of giving up a cash discount is the implied rate of interest paid in order to delay payment of an account payable for an additional number of days.

T or F?

A

TRUE

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8
Q

In giving up a cash discount, the amount of the discount that is given up is the interest being paid by a firm to keep its money by delaying payment for a number of days.

T or F?

A

TRUE

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9
Q

A firm should take the cash discount if the firm’s cost of borrowing from the bank is greater than the cost of giving up a cash discount.

T or F?

A

FALSE

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10
Q

If a firm anticipates stretching accounts payable, its cost of giving up a cash discount is reduced.

T or F?

A

TRUE

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11
Q

For firms that are in a financial position to take a cash discount, it is advisable to take the discount if the terms offered are 2/10 net 30.

T or F?

A

TRUE

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12
Q

Spontaneous liabilities such as accounts payable and notes payable represent a source of financing that arise from the normal course of business.

T or F?

A

FALSE

Spontaneous liabilities such as accounts payable and accruals represent a source of financing that arise from the normal course of business.

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13
Q

Spontaneous liabilities such as accounts payable and accruals represent a use of financing that arise from the normal course of business.

T or F?

A

FALSE

Spontaneous liabilities such as accounts payable and accruals represent a source of financing that arise from the normal course of business.

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14
Q

For firms that are in a financial position to take a cash discount, it is advisable not to take the discount if the terms offered are 2/10 net 30.

T or F?

A

FALSE

For firms that are in a financial position to take a cash discount, it is advisable to take the discount if the terms offered are 2/10 net 30.

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15
Q

As sales increase, a company needs more inventory and more employees resulting in ________.

A) more accounts payable and accruals, and therefore increasing its spontaneous liabilities
B) less accounts payable and accruals, and therefore decreasing its spontaneous liabilities
C) more accounts payable and accruals, and therefore decreasing its spontaneous liabilities
D) less accounts payable and accruals, and therefore increasing its spontaneous liabilities

A

A

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16
Q

The two major spontaneous liabilities that provide sources of short-term financing are ________.

A) a line of credit and notes payable
B) accounts payable and accruals
C) a line of credit and term loans
D) accounts receivable and notes payable

A

B

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17
Q

Accruals and accounts payable are ________.

A) negotiated and secured sources of long-term financing
B) negotiated and unsecured sources of short-term financing
C) secured sources of short-term financing
D) spontaneous and unsecured sources of short-term financing

A

D

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18
Q

1/15 net 30 date of invoice translates as ________.

A) a 1 percent cash discount may be taken if paid in 15 days; if no cash discount is taken, the balance is due in 30 days after the middle of the month
B) a 1 percent cash discount may be taken if paid in 15 days; if no cash discount is taken, the balance is due 30 days after the invoice date
C) a 1 percent cash discount may be taken if paid in 15 days; if no cash discount is taken, the balance is due 30 days after the end of the month
D) a 1 percent discount may be taken on 15 percent of the purchase if the account is paid within 30 days after the end of the month

A

B

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19
Q

3/10 net 45 EOM translates as ________.

A) a 10 percent cash discount may be taken if paid in three days; if no cash discount is taken, the balance is due in 45 days
B) a 3 percent cash discount may be taken if paid in 10 days; if no cash discount is taken, the balance is due 45 days after transaction is complete
C) a 3 percent cash discount may be taken if paid in 10 days; if no cash discount is taken, the balance is due 45 days after the end of the month
D) a 3 percent discount may be taken on 10 percent of the purchase if the account is paid within 45 days after the end of the month

A

C

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20
Q

One of the most common designations for the beginning of the credit period is ________.

A) 2/10
B) the date of invoice
C) the end of a quarter
D) the transaction date

A

B

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21
Q

If a firm decides to take the cash discount that is offered on goods purchased on credit, the firm should ________.

A) pay as soon as possible
B) pay on the last day of the credit period
C) not take the discount no matter when the firm actually pays
D) pay on or before the last day of the discount period

A

D

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22
Q

The cost of giving up a cash discount on a credit purchase is ________.

A) added on to the price of the goods in order to make payment quickly
B) deducted from the price of the goods in order to make payment quickly
C) the implied interest rate paid in order to delay payment for an additional number of days
D) the true purchase price of the goods

A

C

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23
Q

If a firm gives up the cash discount on goods purchased on credit, the firm should pay the bill ________.

A) as per its will
B) on the last day of the discount date
C) after the credit period
D) on the last day of the credit period

A

D

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24
Q

A firm is offered credit terms of 2/10 net 45 by most of its suppliers but frequently does not have the cash available to take the discount. The firm has a credit line available at a local bank at an interest rate of 12 percent. The firm should ________.

A) give up the cash discount, financing the purchase with the line of credit
B) take the cash discount and pay on the 45th day after the date of sale
C) take the cash discount and pay on the first day of the cash discount period
D) take the cash discount, financing the purchase with the line of credit, the cheaper source of funds

A

D

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25
Q

A firm is offered credit terms of 1/10 net 45 EOM by a major supplier. The firm has determined that it can stretch the credit period (net period only) by 25 days without damaging its credit standing with the supplier. Assuming the firm needs short-term financing and can borrow from the bank on a line of credit at an interest rate of 14 percent, the firm should ________.

A) give up the cash discount and finance the purchase with the line of credit
B) give up the cash discount and pay on the 70th day after the date of sale
C) take the cash discount and pay on the first day of the cash discount period
D) take the cash discount and finance the purchase with the line of credit, the cheaper source of funds

A

B

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26
Q

________ are the major source of unsecured short-term financing for business firms.

A) Accounts receivable
B) Term loans
C) Notes payable
D) Accounts payable

A

D

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27
Q

If a firm stretches its accounts payable, its cost of giving up a cash discount is increased.

T or F?

A

FALSE

If a firm stretches its accounts payable, its cost of giving up a cash discount is decreased.

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28
Q

Accruals are liabilities for services received for which payment has yet to be made.

T or F?

A

TRUE

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29
Q

It would be a financially sound decision to pay employees once every two weeks rather than once a month.

T or F?

A

FALSE

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30
Q

When a firm stretches accounts payable without hurting its credit rating, the cost of giving up a cash discount is ________.

A) reduced
B) increased
C) unaffected
D) increased or decreased depending on the opening accounts payable balance

A

A

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31
Q

________ are liabilities for services received for which payment has yet to be made.

A) Notes payable
B) Accruals
C) Accounts payable
D) Accounts receivable

A

B

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32
Q

Unlike the spontaneous sources of unsecured short-term financing, bank loans are negotiated and result from deliberate actions taken by the financial manager.

T or F?

A

TRUE

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33
Q

Self-liquidating loans are intended merely to carry a firm through seasonal peaks in financing needs that are due primarily to buildups of accounts receivable and inventory.

T or F?

A

TRUE

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34
Q

Self-liquidating loans are mainly invested in productive assets (i.e., fixed assets) which provide the mechanism through which the loan is repaid.

T or F?

A

FALSE

Self-liquidating loans are mainly invested in productive assets (i.e., inventory and accounts receivable) which provide the mechanism through which the loan is repaid.

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35
Q

The major attraction of a line of credit from the bank’s point of view is that it eliminates the need to examine the creditworthiness of a customer each time it borrows money within the year.

T or F?

A

TRUE

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36
Q

The interest rate on a line of credit is normally stated as a fixed rate-the prime rate.

T or F?

A

FALSE

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37
Q

A line of credit is an agreement between a commercial bank and a business, specifying the amount of unsecured short-term borrowing the bank will make available to the firm over a given period of time.

T or F?

A

TRUE

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38
Q

A revolving credit agreement is a form of financing consisting of short-term, unsecured promissory notes issued by firms with a high credit standing.

T or F?

A

FALSE

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39
Q

A compensating balance is a checking account balance equal to a certain percentage of the amount borrowed from a bank under a line-of-credit or revolving credit agreement.

T or F?

A

TRUE

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40
Q

The risk-free rate is the lowest rate of interest charged by the nation’s leading banks on business loans to their most important and reliable business borrowers.

T or F?

A

FALSE

The prime rate is the lowest rate of interest charged by the nation’s leading banks on business loans to their most important and reliable business borrowers.

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41
Q

Operating change restrictions are contractual restrictions that a bank may impose on a firm as part of a line of credit agreement.

T or F?

A

TRUE

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42
Q

The effective interest rate on a bank loan depends on whether interest is paid when the loan matures or in advance.

T or F?

A

TRUE

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43
Q

The prime rate of interest fluctuates with changing supply-and-demand relationships for short-term funds.

T or F?

A

TRUE

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44
Q

A discount loan is a loan on which interest is paid in advance by deducting it from the loan so that the borrower actually receives less money than is requested.

T or F?

A

TRUE

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45
Q

A single-payment note is a secured fund which can be obtained from a commercial bank when a borrower needs additional funds for a short period.

T or F?

A

FALSE

A single-payment note is a short-term, one-time loan made to a borrower who needs funds for a specific purpose for a short period.

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46
Q

Under a line of credit agreement, a bank may retain the right to revoke the line if any major changes occur in the firm’s financial condition or operations.

T or F?

A

TRUE

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47
Q

Under a line of credit agreement, a bank may require an annual cleanup, which means that the borrower must pay off all its outstanding debts to all its operational creditors for a certain number of days during the year.

T or F?

A

FALSE

Annual cleanup efers to the requirment that for a certain number of days during the year, borrowers undera a line of credit carry a zero loan balance.

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48
Q

Although more expensive than a line of credit, a revolving credit agreement can be less risky from the borrower’s viewpoint.

T or F?

A

TRUE

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49
Q

An increment above the prime rate on a floating-rate loan will be higher than on a fixed-rate loan of equivalent risk because the lender bears higher risk with a floating-rate loan.

T or F?

A

FALSE

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50
Q

A fixed-rate loan is a loan whose rate of interest is established at a fixed increment above the prime rate and is allowed to vary above the prime rate only when the prime rate varies until maturity.

T or F?

A

FALSE

A floating-rate loan is a loan whose rate of interest is established at a fixed increment above the prime rate and is allowed to vary above the prime rate only when the prime rate varies until maturity.

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51
Q

The effective interest rate for a discount loan is greater than the loan’s stated interest rate.

T or F?

A

TRUE

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52
Q

A compensating balance is a balance in checking account that is equal to a certain percentage of the borrower’s short-term unsecured loan.

T or F?

A

TRUE

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53
Q

Operating-change restrictions gives the bank a right to revoke the line of credit if any major changes occur in a firm’s financial condition or operations.

T or F?

A

TRUE

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54
Q

If one borrows $1,000 at 8 percent interest on a discount basis, the effective rate of interest is 7.2 percent.

T or F?

A

FALSE

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55
Q

The higher the riskiness of a borrower, the higher is the premium charged above the prime rate by a banker.

T or F?

A

TRUE

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56
Q

Lines of credit are non-guaranteed loans that specify the maximum amount that a firm can owe the bank at any point in time.

T or F?

A

TRUE

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57
Q

Lines of credit are guaranteed loans that specify the maximum amount that a firm can owe the bank at any point in time.

T or F?

A

FALSE

Revolving credit agreements are guaranteed loans that specify the maximum amount that a firm can owe the bank at any point in time.

58
Q

A compensating balance not only forces the borrower to be a good customer of the bank but may also raise the interest cost to the borrower.

T or F?

A

TRUE

59
Q

Tangshan Mining borrowed $10,000 for one year under a line of credit with a stated interest rate of 8 percent and a 10 percent compensating balance. Thus, the firm keeps a balance of about $800 in its checking account.

T or F?

A

FALSE

$1,000
($10,000 X 10%)

60
Q

Revolving credit agreements are guaranteed loans that specify the maximum amount that a firm can owe the bank at any point in time.

T or F?

A

TRUE

61
Q

Revolving credit agreements are non-guaranteed loans that specify the minimum amount that a firm can owe the bank at any point in time.

T or F?

A

FALSE

Revolving credit agreements are guaranteed loans that specify the maximum amount that a firm can owe the bank at any point in time.

62
Q

A commitment fee is the fee that is normally charged on a revolving credit agreement.

T or F?

A

TRUE

63
Q

Because the bank guarantees the availability of funds, a commitment fee is normally charged on a simple line of credit agreement.

T or F?

A

FALSE

Because the bank guarantees the availability of funds, a commitment fee is normally charged on a revolving credit agreement.

64
Q

The major type of loan made by banks to businesses is the ________.

A) fixed-asset-based loan
B) short-term secured loan
C) short-term, self-liquidating loan
D) capital improvement loan

A

C

65
Q

Short-term loans that businesses obtain from banks and through commercial paper are ________.

A) negotiated and secured
B) negotiated and unsecured
C) spontaneous and secured
D) spontaneous and unsecured

A

B

66
Q

Short-term, self-liquidating loans are intended to ________.

A) provide one-time loan to the borrower who needs funds for a specific purpose
B) cover seasonal peaks in financing caused by inventory and receivable buildups
C) provide maximum amount to the firm that it can owe to the bank
D) recapitalize the firm

A

B

67
Q

A loan that is usually a one-time loan made to a borrower who needs funds for a specific purpose for a short period is called a ________.

A) term loan
B) bill of exchange
C) mortgage loan
D) single-payment note

A

D

68
Q

The ________ is a rate of interest charged on business loans by the nation’s leading banks to creditworthy business borrowers.

A) prime rate
B) commercial paper rate
C) federal funds rate
D) treasury bill rate

A

A

69
Q

A single-payment note generally has a maturity of ________.

A) 30 days to 9 months or more
B) 10 to 12 months or more
C) 12 to 24 months or more
D) 10 to 24 months or more

A

A

70
Q

Which of the following are the three basic ways of lending unsecured, short-term funds by commercial banks?

A) mortgage-backed securities, T-bonds, and commercial paper
B) single-payment note, lines of credit, and revolving credit agreements
C) T-bills, municipal bonds, and commercial paper
D) commercial paper, real estate bonds, and corporate bonds

A

B

71
Q

In a line of credit arrangement, a firm pays interest on ________.

A) the full line of credit
B) the total line of credit
C) only the amount actually borrowed
D) only the amount actually borrowed and commitment fees on any unused portion of the loan

A

C

72
Q

Loans on which the interest is paid in advance are often called ________.

A) premium loans
B) long-term loans
C) term deposits
D) discount loans

A

D

73
Q

The prime rate of interest fluctuates with ________.

A) the changing supply-and-demand relationship for long-term funds
B) the changing supply-and-demand relationship for short-term funds
C) the liquidity requirement in a money market
D) the demand in a bond market

A

B

74
Q

A ________ is an agreement between a commercial bank and a business that states the maximum amount of unsecured short-term borrowing the bank will make available to the firm over a given period of time, provided sufficient funds are available.

A) revolving credit agreement
B) line of credit
C) commercial paper
D) single payment note

A

B

75
Q

Seasonal buildups of inventory and receivables are generally financed with ________.

A) short-term loans
B) long-term loans
C) retained earnings
D) stockholders’ equity

A

A

76
Q

The effective interest rate generally is ________.

A) higher on a loan if interest is paid at maturity
B) lower if the loan is a discount loan
C) higher if the loan is a discount loan
D) not affected by whether the loan is a discount loan or a loan with interest paid at maturity

A

C

77
Q

A(n) ________ effectively raises the interest cost to the borrower on a line of credit.

A) operating-change restriction
B) annual cleanup
C) compensating balance
D) commitment fee

A

C

78
Q

________ ensure that money lent under a line of credit agreement is actually being used to finance seasonal needs.

A) Operating-change restrictions
B) Annual cleanups
C) Compensating balances
D) Commitment fees

A

B

79
Q

A ________ guarantees the borrower that a specified amount of funds will be available regardless of the scarcity of money.

A) revolving credit agreement
B) mortgage loan
C) short-term, self-liquidating loan
D) single payment note

A

A

80
Q

Compared to a line of credit, a revolving credit agreement will be ________ for a firm.

A) a lower cost, higher risk method of short-term borrowing
B) a lower cost, lower risk method of short-term borrowing
C) a higher cost, higher risk method of short-term borrowing
D) a higher cost, lower risk method of short-term borrowing

A

D

81
Q

In a revolving credit agreement, the firm pays interest on ________.

A) the full line of credit
B) the unused portion of the line of credit
C) the amount actually borrowed and compensating balance
D) the amount actually borrowed and commitment fees on any unused portion of the loan

A

D

82
Q

With a floating-rate note, the interest rate on the note changes ________.

A) when the risk level of the borrower changes
B) when the prime rate changes
C) when the demand for loans changes
D) when bank profits changes

A

B

83
Q

Revolving credit agreements are ________.

A) guaranteed loans that specify the maximum amount that a firm can owe the bank at any point in time
B) non-guaranteed loans that specify the maximum amount that a firm can owe the bank at any one time
C) credit arrangements made in cooperation with suppliers that allows a firm to roll over accounts payable each month
D) short-term, unsecured promissory notes issued by a firm with a high credit standing

A

A

84
Q

Commercial paper is a form of financing that consists of short-term, secured promissory notes issued by firms with a high credit standing.

T or F?

A

FALSE

Commercial paper is a form of financing that consists of short-term, unsecured promissory notes issued by firms with a high credit standing.

85
Q

For firms that are able to raise funds through the sale of commercial paper, it is generally cheaper than borrowing from a commercial bank.

T or F?

A

TRUE

86
Q

Tangshan Mining issued $10,000 of commercial paper for $9,925 for 60 days. Based on this information, the effective annual rate of interest on the commercial paper would be about 10 percent.

T or F?

A

FALSE

87
Q

The interest paid by the issuer of commercial paper is determined by the size of the discount and the length of time to maturity.

T or F?

A

TRUE

88
Q

The risk to a U.S. importer with foreign-currency-denominated accounts payable is that the dollar will depreciate.

T or F?

A

TRUE

The relative price of domestic goods and services falls while the relative price of foreign goods and services increases

89
Q

In doing business in foreign countries, financing operations in the local market not only improves the company’s business ties to the host community but also minimizes exchange rate risk.

T or F?

A

TRUE

90
Q

Exchange rate risk can often be hedged by using currency forward, futures, or options markets.

T or F?

A

TRUE

91
Q

A ________ is a short-term, unsecured promissory note issued by firms with a high credit standing. These notes are primarily issued by commercial finance companies.

A) line of credit
B) commercial paper
C) revolving line of credit
D) T-bill

A

B

92
Q

Commercial paper issues have maturities ranging from ________.

A) six months to one year
B) one year to three years
C) three days to 270 days
D) 0 to 30 days

A

C

93
Q

Commercial paper is issued in multiples of ________.

A) $1,000 or more
B) $10,000 or more
C) $100,000 or more
D) $1,000,000 or more

A

C

94
Q

A large portion of the commercial paper is issued by ________.

A) commercial finance companies
B) government agencies
C) venture capitalists
D) small manufacturing firms

A

A

95
Q

Commercial paper is ________.

A) sold at its par value
B) sold at a discount from its par value
C) sold at the prime rate
D) sold at a premium from its par value

A

B

96
Q

The cost of borrowing through the sale of commercial paper is typically ________ the prime bank loan rate.

A) lower than
B) the same as
C) unrelated to
D) higher than

A

A

97
Q

A U.S.-based company that exports goods and has accounts receivable denominated in a foreign currency ________.

A) faces no risk if the relations between the countries get rough
B) faces the risk that the U.S. dollar will depreciate in value relative to the foreign currency
C) faces the risk that the U.S. dollar will appreciate in value relative to the foreign currency
D) faces the risk that the foreign currency would appreciate in value relative to the U.S dollar

A

C

98
Q

A letter written by a company’s bank to the company’s foreign supplier, stating that the bank will guarantee payment of an invoiced amount if all the underlying agreements are met is called ________.

A) a letter of invoice
B) a letter of intent
C) a letter of credit
D) commercial paper

A

C

99
Q

A floating inventory lien is a lender’s claim on the borrower’s general inventory as collateral for a secured loan.

T or F?

A

TRUE

100
Q

Secured short-term financing has specific assets pledged as collateral.

T or F?

A

TRUE

101
Q

The security agreement is an agreement between the borrower and the lender that specifies the collateral held against a secured loan.

T or F?

A

TRUE

102
Q

Fixed assets are the most desirable short-term-loan collateral since they normally have a longer life, or duration, than the term of the loan.

T or F?

A

FALSE

103
Q

Lenders recognize that holding collateral can reduce losses if the borrower defaults, but the presence of collateral has no impact on the risk of default.

T or F?

A

TRUE

104
Q

Commercial finance companies are lending institutions that make only unsecured loans-both short-term and long-term—to businesses.

T or F?

A

FALSE

105
Q

Commercial finance companies usually charge a higher interest on secured short-term loans than commercial banks because the finance companies generally ends up with higher-risk borrowers.

T or F?

A

TRUE

106
Q

The interest rate charged on secured short-term loans is always equal to the rate on unsecured short-term loans.

T or F?

A

FALSE

107
Q

The outright sale of accounts receivable at a discount in order to obtain funds is called pledging accounts receivable.

T or F?

A

FALSE

The outright sale of accounts receivable at a discount in order to obtain funds is called factoring accounts receivable.

108
Q

One advantage of factoring accounts receivable is the ability it gives a firm to turn accounts receivable immediately into cash without having to worry about repayment.

T or F?

A

TRUE

109
Q

The higher cost of unsecured as opposed to secured borrowing is due to the greater risk of default.

T or F?

A

FALSE

110
Q

Factoring accounts receivable is not a form of secured short-term borrowing. It entails the sale of accounts receivable at a discount to obtain the required short-term funds.

T or F?

A

TRUE

111
Q

Pledges of accounts receivable are normally made on a non-notification basis, meaning that a customer whose account has been pledged as collateral is not notified.

T or F?

A

TRUE

112
Q

Pledges of accounts receivable are never made on a notification basis because the lender does not trust the borrower to collect the pledged account receivable and remit these payments as they are received.

T or F?

A

FALSE

113
Q

Nonrecourse basis is the basis on which accounts receivable once sold to a factor, the factor accepts all the credit risks on the purchased accounts.

T or F?

A

TRUE

114
Q

The percentage advanced by a lender constitutes the principal of a secured loan and varies according to the type and liquidity of the collateral.

T or F?

A

TRUE

115
Q

The pledging cost of accounts receivable is normally 1 to 4 percent above the prime rate.

T or F?

A

TRUE

116
Q

In pledging accounts receivable, the percentage advanced against the adjusted collateral is determined by the borrower based on its overall evaluation on the quality of the acceptable receivables and the expected cost of the liquidation.

T or F?

A

FALSE

In pledging accounts receivable, the percentage advanced against the adjusted collateral is determined by the lender based on its overall evaluation on the quality of the acceptable receivables and the expected cost of the liquidation.

117
Q

Factoring accounts receivable is relatively an inexpensive source of unsecured short-term funds.

T or F?

A

FALSE

Factoring accounts receivable is relatively an expensive source of secured short-term funds.

118
Q

Factoring accounts receivable is relatively an expensive source of unsecured short-term funds.

T or F?

A

FALSE

Factoring accounts receivable is relatively an expensive source of secured short-term funds.

119
Q

Factoring accounts receivable is relatively an inexpensive source of unsecured short-term funds that allows firms to turn accounts receivable immediately into cash.

T or F?

A

FALSE

Factoring accounts receivable is relatively an expensive source of secured short-term funds that allows firms to turn accounts receivable immediately into cash.

120
Q

Factoring accounts receivable is relatively an inexpensive source of unsecured short-term funds that allows firms to turn accounts receivable immediately into cash.

T or F?

A

TRUE

121
Q

Collateral is typically required for a ________.

A) secured short-term loan
B) line of credit
C) short-term, self-liquidating loan
D) single-payment note

A

A

122
Q

An appropriate collateral for a secured short-term loan is ________.

A) fixed assets
B) accounts receivables
C) common stock in a privately-held corporation
D) bank over-draft

A

B

123
Q

Financing that matures in one year or less and has specific assets pledged as collateral is called ________.

A) unsecured long-term financing
B) unsecured short-term financing
C) secured short-term financing
D) secured long-term financing

A

C

124
Q

Lenders of secured short-term funds prefer collateral ________.

A) as it reduces the risk of default
B) that are illiquid assets
C) to reduce the losses if the borrower defaults
D) so that they can charge a higher interest rate

A

C

125
Q

________ involves the sale of accounts receivable.

A) Trust receipt loan
B) Factoring
C) Field warehouse arrangement
D) Pledging of accounts receivable

A

B

126
Q

A ________ agreement normally states the exact conditions and procedures for the purchase of an account.

A) factoring
B) pledging accounts receivable
C) revolving credit
D) line of credit

A

A

127
Q

The stated cost of a pledge of accounts receivable is normally ________ above the prime rate.

A) 6 to 8 percent
B) 1 to 4 percent
C) 4 to 9 percent
D) 6 to 10 percent

A

B

128
Q

Which of the following is a disadvantage of factoring?

A) ensures an uneven pattern of cash flows
B) eliminates credit and collection departments
C) turns accounts receivable into cash quickly
D) highly expensive source of short-term financing

A

D

129
Q

Which of the following creates a secured short-term loan with accounts receivable?

A) lines of credit
B) commercial paper
C) pledge of accounts receivable
D) factoring of accounts receivable

A

C

130
Q

The primary source of secured short-term loans to businesses are ________.

A) commercial banks and commercial finance companies
B) lines of credit and revolving lines of credit
C) commercial paper dealers and investment bankers
D) life insurance companies and government securities brokers

A

A

131
Q

Pledges of accounts receivable and factoring of accounts receivable are made on ________ basis, respectively.

A) a nonrecourse and a notification
B) a nonnotification and a notification
C) a notification and a recourse
D) a notification and a nonrecourse

A

B

132
Q

Which of the following is an advantage of factoring?

A) accounts receivable immediately turned into cash
B) addition of credit and collection departments
C) less costly form of secured short-term loans
D) improves current ratio

A

A

133
Q

Lenders recognize that by having an interest in collateral they can reduce losses if the borrowing firm defaults, ________.

A) and the presence of collateral reduces the risk of default
B) but the presence of collateral has no impact on the risk of default
C) therefore lenders prefer to lend to customers from whom they are able to demand collateral
D) therefore lenders will impose a higher interest rate on unsecured long-term borrowing

A

B

134
Q

A trust receipt inventory loan is an arrangement in which the lender receives control of the pledged inventory collateral, which is stored by a designated agent.

T or F?

A

FALSE

A warehouse receipt loan is an arrangement in which the lender receives control of the pledged inventory collateral, which is stored by a designated agent.

135
Q

Inventory is more attractive than accounts receivable as a short-term collateral since it normally has a market value greater than its book value, which is used to establish its value as collateral.

T or F?

A

FALSE

136
Q

A floating inventory lien is most attractive when the firm has a stable level of inventory that consists of a diversified group of relatively inexpensive merchandise.

T or F?

A

TRUE

137
Q

Under the floating inventory lien, the borrower is free to sell the merchandise and is expected to remit the amount lent against each item, along with accrued interest, to the lender immediately after the sale. The lender then releases the lien on the appropriate item.

T or F?

A

FALSE

138
Q

Appropriate collateral for a loan secured under a floating inventory lien is ________.

A) cars
B) granite slabs
C) air conditioners
D) paper clips

A

D

139
Q

Appropriate collateral for a loan secured under a trust receipt inventory loan is ________.

A) drill bits
B) pencils
C) vehicles
D) bolts

A

C

140
Q

A terminal warehouse is ________.

A) a warehouse located beyond city limits for storing the merchandise
B) a warehouse on the borrower’s premises to store the merchandise
C) a central warehouse storing the merchandise of various customers
D) a warehouse located near the lender’s home for storing the merchandise

A

C

141
Q

A field warehouse is ________.

A) a warehouse outside the metropolitan area
B) a warehouse on the borrower’s premises
C) a central warehouse storing the merchandise of several businesses
D) a warehouse located near the lender

A

B

BSA 35P (9 decks)

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