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ACCOUNTING > Trade Credit & Commercial Bank Loan Products > Flashcards

Trade Credit & Commercial Bank Loan Products Flashcards

1
Q

Postponing payment beyond the end of the net (credit) period

A

Stretching Accounts Payable

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2
Q

Possible costs of “stretching accounts payable”

A
  • cost of the cash discount (if any) forgone
  • Late payment penalties or interest
  • Deterioration in credit rating
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3
Q

Should a company use Trade credit?

A

– If your company has the free cash flow to take
the discount offered in the terms of credit, then
yes.
– However, you should calculate the cost of trade
credit, or the cost of not taking the discount. If
you do not have the cash flow to take the
discount, you are usually better off with a
cheaper form of financing. It is always better to
have enough cash flow on hand to take the
discount.

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4
Q

Lost discount only provides 20
extra days of credit, assuming payment on
day 30.
T OR F

A

T

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5
Q

4 major reason why businesses borrow

A
  • for WC
  • for PA
  • for REHIF
  • for AE
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6
Q

An agreement where a customer can purchase
goods on account (without paying cash), paying
the supplier at a later date.

A

Trade Credit

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7
Q

• Usually when the goods are delivered, a trade

credit is given for a specific amount of days -

A

30,

60 or 90.

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8
Q

represent the credit sales for which a firm has yet to receive payment.

A

– Accounts receivable

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9
Q

represents the amount that a firm owes its suppliers for goods that it has received but for which it
has not yet paid.

A

– Accounts payable

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10
Q

formula for calculating the effective annual cost to your firm if it chooses not to take advantages of trade discount

A

EAR = (1+r)^n -1
where r = 1/99
where n = 360/ (credit period - discount period)

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11
Q

benefits of trade credit

A

• First, trade credit is simple and convenient to
use, and it has lower transaction costs than
alternative sources of funds.
• Second, it is a flexible source of funds, and can
be used as needed.
• Finally, it is sometimes the only source of funding available to a firm.

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12
Q

Types of Trade credit

A
  • Cash terms
  • Net period credit
  • net period credit w/ discount
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13
Q

– Under this credit arrangement, there is no risk to the supplier. The use of this happens when
there is a ͞seller market͟ for the product.

A

– Cash terms

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14
Q

– Under this credit arrangement, the supplier fixes the payment period but does not give a discount.
This credit term is more common in goods that carry small profit margins.

A

-Net period credit

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15
Q

These are also used as a temporary arrangement

when the supplier does not know the creditworthiness of a new customer.

A

cash terms

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16
Q

The supplier fixes a payment period and allows a cash discount for prompt payment

A

-Net period credit discount

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17
Q

is the total length of time credit is
extended to the buyer—the total amount of time they
have to pay (30 days).

A

credit period

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18
Q

is the number of days the buyer has to take advantage of the discount (10 days).

2/10, n 30

A

discount period

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19
Q

is the percentage discount offered if the buyer pays early (2%).

A

cash discount

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20
Q

– If payments consistently exceed 30 days, firm runs the risk of
becoming ͞Cash on Delivery͟, or COD

A

Loss of discount and no credit period

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21
Q

• Payable on a fixed date or within a specified period of time for which interest is not collected in advance or discounted from the face value of the promissory note.

A

short term loans

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22
Q

Allows a customer to get advances using post-dated checks

issued by their customers.

A

Post-dated Check Discounting Line

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23
Q

the bank provides a
short-term loan to the banking customer by granting access to
funds that haven’t yet been received from the account against
which the check is drawn.

A

Post dated check discounting line

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24
Q

post dated check discounting line must take in consideration

A
  • Creditworthiness of the check issuer must be considered.

* Checks should be supported by delivery receipts.

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25
Q

A type of accommodation wherein the bank makes
funds available to the client ͞on demand͟ up to a
specified amount during the year. Draw downs are
made via 30-180 day promissory note.

A

CreditLine

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26
Q

An advanced cash on business checks prior to

clearing, drawn from banks within local and regional clearing desk

A

Domestic Bills Purchase Line

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27
Q

Creditworthiness of the check issuer must still

be considered

A

Domestic Bills Purchase Line

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28
Q
  • Used to eliminate availability float

* Suffers from settlement risk

A

Domestic Bills Purchase Line

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29
Q

Managing Float

A

-One factor that contributes to the length of a firm’s
receivables and payables is the delay between the
time a bill is paid and the cash is actually received.

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30
Q

the amount of time it takes for a
firm to be able to use funds after a customer has
paid for its goods.

A

Collection Float

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31
Q

Firms can reduce their working capital needs by

reducing their collection float.

A

managing float

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32
Q

• Collection Float is determined by three

factors:

A
  • Mail float
  • Processing float
  • Availability float
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33
Q

How long it takes the firm to receive

the check after the customer has mailed it

A

mail float

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34
Q

: How long it takes the firm to

process the check and deposit it in the bank

A

– Processing float

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35
Q

: How long it takes before the bank gives the firm credit for the funds

A

– Availability float

36
Q

The risk that one party will fail to deliver the terms of a contract with another party at the time of settlement.

A

Settlement Risk

37
Q

Settlement risk can be the

A

risk associated with default at settlement and any timing differences in settlement
between the two parties.

38
Q

-A monetary loan that is repaid in regular payments
over a set period of time, greater than 1 year.
-Generally require collateral

A

Term-Loan

39
Q

Covered by a term loan agreement with covenants

such as

A

financial ratios, dividend declaration, events of

default and other negative covenants.

40
Q

(most secure for seller)
• Where the buyer pays with money first and waits for the seller
to forward the goods

A

Advance payment

41
Q

(more secure for seller as well as buyer)
• Where the bank gives an undertaking (on behalf of buyer and at
the request of applicant) to pay the shipper (beneficiary) the
value of the goods shipped if certain documents are submitted
and if the stipulated terms and conditions are strictly complied
with

A

Documentary Credit

42
Q

(more secure for buyer and to a certain
extent to seller)
• Also called “Cash Against Documents”. Where shipment
happens first, then the title documents are sent to the
[collecting bank] buyer’s bank by seller’s bank [remitting bank],
for delivering documents against collection of
payment/acceptance

A

Documentary collection

43
Q

(most secure for buyer)
• Where the supplier ships the goods and waits for the buyer to
remit the bill proceeds, on open account terms.

A

Direct payment

44
Q

-A document issued by a financial institution, or a
similar party, assuring payment to a seller of goods
and/or services provided certain documents have been
presented to the bank.

-Serves as a guarantee to the seller that it will be paid
regardless of whether the buyer ultimately fails to pay.

A

Letter of Credit

45
Q

• Letters of credit are used primarily in

A

international
trade for transactions between a supplier in one
country and a customer in another.

46
Q

• Most letters of credit are governed by rules

promulgated by

A

the International Chamber of
Commerce known as Uniform Customs and Practice for
Documentary Credits (UCP 600 being the latest version)

47
Q
  • buyer bears the risk

- pay outstanding balance first to the seller then delivers the good

A

Cash advance

48
Q

cash delivery - you deliver the product then cancel

A

settlement risk

49
Q

pay outstanding balance with high interest and by taking low interest loan to pay the outstanding

A

loan takeout

50
Q

qualification of loan takeout

A
  • healthy
  • active
  • negative
51
Q

how can you avail loan takeout?

A

when fixed credit is already done and then it become variable

52
Q
  • seller’s bears the risk
  • the seller’s delivers the product first and when buyer receive nagkakaron ng 30,60,90 discount period
  • deferred payment
  • short term lang bec no middle man to collect it
A

open account

53
Q
  • certification that IB gives to AB confirming that buyer has this balance and buyer promise to pay certain amount to a certain period of time
  • Issuing bank bears the risk
A

Letter of Credit

54
Q

seller’s bank

A

Advising bank

55
Q

buyer’s bank

A

Issuing bank

56
Q

t of f

request Buyer to IB to issue credit to AB

A

t

57
Q

t or f

request seller to AB to issue credit to IB

A

f

58
Q

what is needed in trade credit transaction

A
  • financial docu - FS/ITR/pay slip/bankstatements
  • commercial - SEC/BIR
  • Transport - shoulder the delivery cost
  • regulatory/compliance - not all products is can be delivered
59
Q

discount rate who take advantage?

A

both. B & S bec in buyer may discount and sa Seller receive early payment so both

60
Q
  • given to the high net worth individuals

- to perform bond mgt and investment mgt

A

Wealth mgt

61
Q

to deplete

they measure transaction within 30-180days

A

Draw downs

62
Q

T of F
the buyer does not normally have to pay until he receives
the agreed documents evidencing that the conditions have
been complied with.

A

T

63
Q

t or f
The buyer can be certain of payment by the
negotiating/paying bank provided all terms and conditions of
the credit are strictly complied with.

A

F

64
Q

T of F
The seller can be certain of payment by the
negotiating/paying bank provided all terms and conditions of
the credit are strictly complied with.

A

t

65
Q

t or F
The seller does not normally have to pay until he receives
the agreed documents evidencing that the conditions have
been complied with.

A

F

66
Q

Adv or DisAd
It offers both parties to a transaction a degree of
security combined with a possibility of securing
financial assistance more easily.

A

advantage

67
Q

disadvantage of Letter of credit

A

• Bank charges have to be shouldered by either the
buyer or the seller.
• Bank deals only with documents!
• Preparation of shipping documents under the credit.

68
Q

Type of LC

A

At sight LC

Usance LC

69
Q

• It is a kind of credit that the announcer bank after
observing the carriage documents from the seller and
checking all the documents immediately pays the
required money.

A

At sight LC

70
Q

It is kind of credit that won’t be paid and assigned
immediately after checking the valid documents but
paying and assigning it requires an indicated duration
which is accepted by both of the buyer and seller

A

Usance LC

71
Q

seller will give an opportunity to the buyer to pay the required money after taking the related goods
and selling them.

A

Usance of LC

72
Q

is the party on whose request the issuing bank

issues a credit.

A

applicant

73
Q

the party who is to receive the benefit

(payment) of the LC.

A

benefiaciary

74
Q

The bank which issues a credit is known as

A

issuing bank.

75
Q

The bank which upon request of the issuing bank
authenticates the credit and advises the beneficiary that an LC is
opened in his favor.

A

Advising bank

76
Q

: The Bank which adds confirmation to an LC is

termed as

A

• Confirming bank

77
Q

. It does so at the request of the issuing

bank and taking authorization from the issuing bank.

A

Confirming bank

78
Q

T of F
Typically, the payor
presents a document proving the goods were sent instead of
showing the actual goods.

A

payee

79
Q

is
normally the document accepted by banks as proof that goods
have been shipped.

A

BOL

80
Q

what include the docu of BOL

A 
Other documents include: 
– Bill of exchange 
– Invoice 
– Packing List 
– Airway Bill 
– Railway receipt 
– Insurance Policy
81
Q

processing backlogs in the financial system.

A

float

82
Q

provides short-term credit that optimizes working capital for both the buyer and the seller.

A

Supply chain finance (SCF)

83
Q

can be taken out by both corporations and individuals.

The bank that is in agreement with the customer guarantees a maximum amount that can be loaned to the customer. Along with the commitment fee there are also interest expenses for corporate borrowers and carry forward charges for consumer accounts.

A

Revolving lines of credit

84
Q

what’s beneficial?

sovereign country issuing a bond to local company of to foreign country?

A

foreign company

85
Q

documentary collection is also known as

A

Cash Against Document

ACCOUNTING (2 decks)

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