[SOURCE] Midterms Flashcards
Inventory used as collateral should generally not be highly
a. perishable
b. marketable
c. identifiable
d. durable
ANSWER: a. perishable
What happens to the cost of a foregone cash discount as the number of days between the end of the discount period and the end of the credit period increases?
a. Rises
b. Falls
c. Remains constant
d. Fluctuates erratically
ANSWER: b. Falls
Small business firms are generally unable to use which of the following sources of short-term funds?
a. Bank loan
b. Trade credit
c. Commercial paper
d. Floating lien
ANSWER: c. Commercial paper
If a firm had been extending trade credit on a 2/10, net 30 basis, what change would be expected on the statement of financial position of its customers if the firm went to a net cash 30 policy?
a. Increased payables
b. Increased payables and increased bank loans
c. Increased receivables
d. Decreased receivables and increased bank loans
a. Increased payables
A small retail business would most likely finance its merchandise inventory with
a. Commercial paper
b. A terminal warehouse receipt loan
c. A line-of-credit
d. A chattel mortgage
ANSWER: c. A line-of-credit
Given that each of the following short-term sources is available, which source of financing is likely to have the highest cost for a small business?
a. Trade credit
b. Commercial bank loan
c. Advances by owners
d. Accruals
a. Trade credit
The principal difference between factoring and pledging receivables rests in the fact that in factoring
a. The accounts receivable are merely pledged as security for a loan.
b. The financial institution factoring the accounts reserves the right to substitute newer receivables for those accounts that appear difficult to collect.
c. The accounts receivable are pledged on a non-notification basis.
d. The accounts receivable are sold outright to a financial institution.
ANSWER: d. The accounts receivable are sold outright to a financial institution.
With credit terms of 3/8, n/30, what is the customer’s payment decision date?
a. Three days after the invoice is received.
b. The 8th day is the customer’s decision date.
c. Anytime during the period, 8th to the 30th.
d. The 30th day is the primary decision date.
ANSWER: b. The 8th day is the customer’s decision date.
Commercial paper tends to be quite popular with large, profitable corporations because
a. Even though interest costs are higher than the interest on ordinary bank loans, the interest is tax deductible.
b. Interest costs are lower than the interest on ordinary bank loans and compensating balances are not required of borrowers.
c. The market distribution for commercial paper is very narrow.
d. Purchasers of the commercial paper typically use this type of investment on a long-term basis.
ANSWER: b. Interest costs are lower than the interest on ordinary bank loans and compensating balances are not required of borrowers.
Which type of inventory financing provides the least amount of security to the lender
a. Public warehousing arrangement
b. Field warehousing agreement
c. Trust receipt
d. Blanket lien
ANSWER: d. Blanket lien.
The financing of the basic level of current assets by issuing commercial paper is inconsistent with
a. The maximization of shareowners’ wealth
b. The objective of matching the maturities of assets and liabilities
c. The goal of minimizing the cost of debt financing
d. The expectation that long-term interest rates will decrease in the coming year
ANSWER: b. The objective of matching the maturities of assets and liabilities.
To evaluate the efficiency of purchase transactions, management decides to calculate the economic order quantity for a sample of the company’s products. To calculate the economic order quantity, management would need data for all of the following except the
a. Volume of product sales
b. Purchase prices of the products
c. The fixed cost of ordering products
d. Volume of products in inventory
ANSWER: d. Volume of products in inventory.
Stretching accounts payable is likely to do all of the following except
a. Increase the cost of foregoing a cash discount
b. Lower the buyer’s credit rating
c. Damage relationships with suppliers
d. Lead to refusal of credit by suppliers
ANSWER: c. Damage relationships with suppliers.
Determining the appropriate level of working capital for a firm requires
a. Evaluating the risks associated with various levels of fixed assets and the types of debt used to finance these assets
b. Changing the capital structure and dividend policy of the firm
c. Maintaining short-term debt at the lowest possible level because it is generally more expensive than long-term debt
d. Offsetting the benefit of current assets and current liabilities against the probability of technical insolvency
ANSWER: d. Offsetting the benefit of current assets and current liabilities against the probability of technical insolvency.
The net effect of a compensating balance requirement on a loan from the viewpoint of the borrower is
a. The effective borrowing costs will be lower than if the compensating balance were not required
b. The effective borrowing costs will be higher than if the compensating balance were not required
c. The compensating balance has no effect on financing costs
d. The compensating balance will seldom be used if the loan maturity is less than 5 years
ANSWER: b. The effective borrowing costs will be higher than if the compensating balance were not required.
Which of the following is not a negotiated source of short-term financing
a. Bank loan
b. Open account
c. Factoring
d. Warehouse receipt loan
ANSWER: b. Open account
Factoring is a credit arrangement
a. which involves the outright sale of accounts receivable to a factor.
b. which should be used only as a last resort when all other sources of financing fail.
c. in which the factor is free to request new receivables for those accounts it deems uncollectible.
d. in which the cash advances from the factor is essentially a loan secured by the eventual collection of the receivables factored.
ANSWER: a. which involves the outright sale of accounts receivable to a factor.
Which one of the following is a spontaneous source of financing?
a. Notes payable
b. Long-term debt
c. Prepaid interest
d. Trade credit
ANSWER: d. Trade credit.
When a specified level of safety stock is carried for an item in inventory, the average inventory level for that item
a. Decreases by the amount of the safety stock
b. Is one-half the level of the safety stock
c. Increases by one-half the amount of the safety stock
d. Increases by the number of units of the safety stock
ANSWER: d. Increases by the number of units of the safety stock.
A firm which finances through a factor
a. Maintains a compensating balance
b. Uses another company to endorse or guarantee a loan
c. Sells approved accounts receivable without recourse
d. Uses inventory as collateral for a loan
ANSWER: c. Sells approved accounts receivable without recourse.
Pepper Company changed from a traditional manufacturing philosophy to a just-in-time technology. What are the expected effects of this change on Pepper’s inventory turnover and inventory as a percentage of total assets reported on Pepper’s balance sheet?
a. Decrease — Decrease
b. Decrease — Increase
c. Increase — Decrease
d. Increase — Increase
ANSWER: c. Increase — Decrease.
The principal advantage of using commercial paper as a short-term financing instrument is that it
a. is generally cheaper than a commercial bank loan.
b. is readily available to almost all companies.
c. offers security, i.e., collateral, to the lender.
d. can be purchased without commission costs.
ANSWER: a. is generally cheaper than a commercial bank loan.
All of the following are types of trade credit except
a. Open accounts
b. Notes payable
c. Lines of credit
d. Trade acceptances
ANSWER: c. Lines of credit.
