Exam 16: Current Liabilities Management

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

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.

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.

Tangshan Mining has extended credit terms of 3/15 net 30 EOM. The cost of giving up the cash discount, assuming payment would be made on the last day of the credit period, would be ________.

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.

Tangshan Mining issued $1,000,000 of commercial paper for $992,500 for 45 days. Based on this information, the effective annual rate of interest on the commercial paper would be ________ (assume 360 days in a year).

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

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

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

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.

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

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

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

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.

A firm purchased goods with a purchase price of $1,000 and credit terms of 1/10 net 30. The firm paid for these goods on the 5th day after the date of sale. The firm must pay ________ for the goods.

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.

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 ________.

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

Commercial paper issues have maturities ranging from ________.

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.