Week 6

Question 1

When do we not exclude interest costs from usable funds?

Answer 1

When interest costs are due at maturity

Question 2

When do we exclude costs interest costs from usable funds?

Answer 2

If interest costs are paid in advance

Question 3

What are spontaneous liabilities?

Answer 3

Liabilities that occur in the normal course of business

Liabilities for service performed for which payment has yet to be made (Wages/Tax)

Question 4

What is accounts payable management?

Answer 4

Managing time from purchases to payment

Should pap on last day possible

Question 5

What is stretching accounts payable?

Answer 5

Paying bills as late as possible without damaging credit.

Question 6

What are the ethical issues with stretching accounts payable?

Answer 6

May cause the firm to violate the agreement with the supplier

Suppliers may impose late fees or refuse future credit

Question 7

What are 3 sources of unsecured financing?

Answer 7

Single Payment Note
Line of credit
Revolving credit agreements

Question 8

What is a fixed interest rate?

Answer 8

Interest rate at a fixed increment above the benchmark (OCR)

Question 9

What is a floating interest rate?

Answer 9

Set above the benchmark, and will vary with the benchmark

Question 10

What is a single payment note?

Answer 10

1 Time loan

Will maintain compensating balance equal to a % of the loan

Question 11

What is a line of credit?

Answer 11

The firm can borrow a predetermined amount

Can be revoked due to changes in firms condition

Question 12

What is the annual clean up in regards to the line of credit?

Answer 12

The number of days borrower must have zero account balance

Question 13

What is revolving credit?

Answer 13

Guaranteed line of credit
Guaranteed that the bank will make certain mount available

Interest applies to unused portions as well

Question 14

What is commercial paper?

Answer 14

Short term, unsecured debt issued by.a high credit agencies (3-270 days)

Question 15

What are the costs of commercial paper?

Answer 15

Sell at a discount from face value

Trade-in market above T-Bill rate

Question 16

What is the pledging of accounts receivable?

Answer 16

Periodically send ledger of accounts receivable

The lender will determine the amount of funds

Question 17

What is non-notification?

Answer 17

Account customers don’t know the account is collateralized

Used in pledging of account receivable

Question 18

What is factoring of accounts receivable?

Answer 18

Outright sale of accounts receivable, title transferred and no longer on the balance sheet.

Send customers orders to pay factor. Factor accepts all credit risk

Question 19

What can be used for inventory loans?

Answer 19

Raw materials and finished goods only.

Don’t accept perishable goods

Question 20

What is a floating Inventory loan?

Answer 20

A general claim by a creditor against all inventory

Question 21

When is a floating inventory loan attractive to a creditor?

Answer 21

When the firm has a diverse group of inexpensive merchandise

Question 22

What is a trust receipt loan?

Answer 22

Normally against expensive inventory, repaid directly after-sale and normally advanced 80%-100% of the cost

**Must be identifiable by serial number

Question 23

What is a warehouse receipt loan?

Answer 23

The lender receives control of inventory and inventory stored at the designated warehouse on the lender’s behalf

Question 24

What is a Terminal warehouse?

Answer 24

Inventory stored in a warehouse operated by public warehousing company in creditors’ behalf.

Question 25

What is a field warehouse?

Answer 25

Collateral stored in borrowers warehouse and controlled by a field warehouse team