Deck 20: Financial Decisions and Risk Management

Question 1

What does a credit policy of "2/10,net 30" mean?

A) That the selling company offers a 10 percent discount if the customer pays within 2 days.The customer has 30 days to pay the regular price.
B) That if the buyer pays the net bill within 10 days,a 2 percent discount will be given.
C) That the selling company offers a offers a 2 percent discount if the customer pays within 10 days.The customer has 30 days to pay the regular price.
D) That the buyer has two months to pay the bill.If the buyer pays before that time,a 10 percent discount will be given.
E) None of these is correct.

Answer 1

C
That the selling company offers a offers a 2 percent discount if the customer pays within 10 days.
The customer has 30 days to pay the regular price.

Question 2

For most companies,the largest single category of a firm's short-term debt is

A) buildings.
B) inventories.
C) accounts receivable.
D) accounts payable.
E) equipment.

Answer 2

D
accounts payable.

Question 3

Why is it necessary for a business firm to establish a credit policy?

A) A credit policy is necessary to determine how much money the business can borrow to purchase supplies.
B) A credit policy is necessary to determine how dividends will be distributed to the shareholders.
C) A credit policy is necessary to determine which suppliers the firm needs to pay.
D) A credit policy is a means of accounting for the dollar value of inventory-in-process.
E) A credit policy provides financial managers with expected dates of payment from buyers of the firm's products and services.

Answer 3

E
A credit policy provides financial managers with expected dates of payment from buyers of the firm's products and services.

Question 4

Which of the following demonstrates good management of short-term debt?

A) Delaying bill payments as long as possible
B) Selling stock instead of bonds
C) Paying bills when they are received
D) Prepaying taxes
E) Renting or leasing instead of buying

Question 5

________ are at the heart of financial control.

A) Accounting managers
B) Budgets
C) Approval sign-offs
D) Financial managers
E) Authorized spending levels

Question 6

Which term is used to identify the business activity that is concerned with determining a firm's long-term investments,obtaining the funds to pay for those investments,and conducting the firm's everyday financial activities?

A) Bookkeeping
B) Corporate finance
C) Investment brokers
D) Chartered banks
E) Money markets

Question 7

All of the following are responsibilities of the financial manager except

A) determining a firm's long-term investments.
B) obtaining funds to pay for those investments.
C) developing the firm's financial statements.
D) conducting the firm's everyday financial activities.
E) managing the risks that the firm takes.

Question 8

Henry has received notice from a supplier that all invoices must be paid within 30 days rather than 60 days as previously given.Which of the following will be impacted by this change?

A) Inventories
B) Raw materials inventory
C) Accounts receivable
D) Capital expenditures
E) Cash flow

Question 9

A credit policy of "2/10,net 30" means

A) That if a customer pays its bill within 10 days,it will receive a 30 percent discount.
B) That if a customer pays its bill within 30 days,it will receive a 10 percent discount.
C) That if a customer pays its bill within 2 days,it will receive a 10 percent discount.
D) That if a customer pays its bill within 10 days,it will receive a 2 percent discount.
E) None of these.

Question 10

David is in the process of checking actual performance against plans to ensure that the desired financial outcome occurs.David is involved in

A) cash flow management.
B) financial control.
C) financial planning.
D) determining the firm's long-term investments.
E) obtaining funds to pay for investments.

Question 11

Which of the following represents the overall objective of financial managers?

A) To ensure that the company has enough funds on hand to purchase materials needed to produce goods and services
B) To ensure that the company has enough money to pay for its debts
C) To increase the supply of money for the economy
D) To increase the value of the firm and thus to increase shareholder wealth
E) To manage the firm's cash flow

Question 12

Sally is looking at an invoice dated July 1st for $1000 that has terms of 2/10; net 30.If she pays the bill on July 3rd how much should she write the cheque for?

A) $900
B) $980
C) $998
D) $1000
E) $700

Question 13

When managers at Kraft Foods anticipate how much cheddar cheese Safeway supermarkets will buy each month and when they will pay for those purchases,Kraft is managing its

A) accounts payable.
B) accounts receivable.
C) credit policies.
D) capital expenditures.
E) inventories.

Question 14

Tony is responsible for planning and controlling the acquisition and dispersal of the company's financial assets.What is Tony's job title?

A) Management information systems manager
B) Financial manager
C) Purchasing manager
D) Accounting manager
E) Chief risk manager

Question 15

When constructing a financial plan,which one of the following questions does a financial manager not ask?

A) What funds are needed to meet immediate plans?
B) When will the company need more funds?
C) Where can the company get the funds to meet its short-term needs?
D) Where can the company get the funds to meet its long-term needs?
E) How well will the stock market do next year?

Question 16

Why is it in the firm's interest to withhold payment as long as it can?

A) Withholding payment increases the value of the accounts payable that may be subsequently factored.
B) The longer the firm withholds payment,the longer it will have cash available for investments or other uses.
C) The longer it withholds interest,the higher the amount that can be factored from accounts receivable.
D) The longer it withholds payments the more it can raise the selling price of its own goods.
E) The longer it withholds funds,the lower the interest rate will be.

Question 17

David is looking at a bill for supplies his company bought.It is dated May 1st and the terms are 2/10; net 30.In order to pay the least amount,when should he pay the bill?

A) Any day in May
B) May 10
C) May 21
D) May 31
E) May 15

Question 18

Which of the following is not a responsibility of financial managers?

A) Determining a firm's long-term investments
B) Managing risks
C) Obtaining loans
D) Identifying markets for the company's products in order to ensure good cash flow
E) Conducting the firm's everyday financial activities

Question 19

In 2012,Canadian Pacific Railway Ltd.announced that it would make investments totaling $1.2 billion in order to improve its operating ratio,which in 2011 was the worst among North America's Big Six railways.This activity is CPR's

A) cash flow management plan.
B) financial plan.
C) leveraging.
D) budget.
E) financial control.

Question 20

Which of the following terms would a firm use to speed up cash flow?

A) 1/10; net 60
B) 1/10; net 30
C) 3/10; net 30
D) 2/10; net 60
E) 2/10; net 30

Question 21

Scott has been informed by his financial manager that his accounts receivable are being paid much too late.To fix this problem,Scott should

A) develop a credit policy.
B) call the companies and request the funds.
C) charge higher interest rates.
D) demand that the money be paid.
E) sell the late accounts to collection agents.

Question 22

Capital expenditures differ from operating expenditures in that

A) they are much smaller.
B) they are shorter commitments.
C) they are part of working capital.
D) they are not budgeted.
E) they are not normally sold or converted into cash.

Question 23

What is a trade draft?

A) A type of secured loan with trade products serving as collateral.
B) A means of pledging accounts receivable.
C) An agreement to meet certain terms,which are attached to the shipment,and which must be signed before the goods are delivered to the buyer.
D) A legal agreement promising to pay for the goods,which is signed by the buyer before the seller will ship the goods.
E) A standing agreement between a bank and a firm.

Question 24

What is a promissory note?

A) A "gentleman's agreement" to pay for products that were shipped on faith that the payment would be forthcoming.
B) A short-term loan which uses accounts receivable as collateral for a loan.
C) An agreement signed by the buyer stating when and how much money will be paid to the seller in return for immediate credit.
D) The requirement for a firm to maintain a certain amount of funds on deposit with the lending bank.
E) The right given to a bank to seize certain assets if payment is not made when due.

Question 25

Large companies typically devote ____ cents of every sales dollar to working capital.

A) 5
B) 15
C) 20
D) 30
E) 45

Question 26

Scott is managing a company and he has been advised by his financial manager that his largest source of short-term debt is too high.What source of funding is Scott's financial manager probably talking about?

A) Inventory loans
B) Bank notes
C) Credit cards
D) Commercial paper
E) Accounts payable

Question 27

Which of the following is not an accurate statement about long-term expenditures?

A) Long-term expenditures represent an ongoing tie-up of the firm's funds.
B) Normally,long-term fixed assets are not sold or converted into cash.
C) Long-term expenditures usually require less planning than operating expenditures.
D) Acquisition of fixed assets requires a very large investment of company funds.
E) Long-term expenditures are usually more carefully planned than short-term outlays.

Question 28

Sources of short-term funds include all of the following except

A) factoring accounts receivable.
B) secured loans.
C) bonds.
D) unsecured loans.
E) trade credit.

Question 29

The most common form of trade credit is

A) the trade acceptance.
B) the trade draft.
C) the promissory note.
D) open-book credit.
E) none of these.

Question 30

With respect to inventory,which of the following is correct?

A) Inventory is not an asset.
B) All inventory is an asset except work-in-process inventory.
C) Factoring inventory is generally a bad idea.
D) Finished goods inventory is twice the value of work-in-process inventory.
E) Rolls of denim at a Levi's factory is raw materials inventory.

Question 31

A "gentlemen's agreement" to pay for products purchased is known as

A) commercial paper.
B) open-book credit.
C) a promissory note.
D) a trade draft.
E) trade credit.

Question 32

Jeremy has recently received merchandise along with invoices stating credit terms.Jeremy has most likely been given a(n)

A) trade acceptance.
B) line of credit.
C) revolving credit agreement.
D) promissory note.
E) open-book credit.

Question 33

The Gap has t-shirts boxed and ready to ship to retailers.These goods make up part of the ________ inventory.

A) accounts receivable
B) sales
C) sales-in-process
D) credit
E) finished goods

Question 34

ATC Machine Shops sends its ________ inventory to Warm Inc.to have its manufactured tools heat-treated.

A) raw materials
B) work-in-process
C) capital goods
D) finished goods
E) supplies

Question 35

Working capital is calculated as follows:

A) work-in-process inventory plus accounts receivable minus accounts payable.
B) long-term assets plus short-term assets.
C) inventory plus accounts receivable minus accounts payable.
D) goodwill plus current assets.
E) finished goods inventory plus cash.

Question 36

Mountain Steel brings in graphite,carbon,iron ore,nickel,and sulphur to produce steel.These supplies are

A) production inventory.
B) merchandise inventory.
C) raw materials inventory.
D) work-in-process inventory.
E) finished goods inventory.

Question 37

Which term is used to identify the granting of credit by one firm to another?

A) A line of credit
B) A commitment fee
C) Trade credit
D) A secured loan
E) An inter-firm understanding of commercial intent

Question 38

Before shipping a computer,Mega Computers insists that the buyer sign a document that states when and how much money will be paid.This is a(n)

A) line of credit.
B) revolving credit agreement.
C) open-book credit.
D) trade acceptance.
E) promissory note.

Question 39

Mega Computers has just shipped one of its products to Compucell on faith that they will pay the invoice.This is a(n)

A) trade acceptance.
B) revolving credit agreement.
C) line of credit.
D) open-book credit.
E) promissory note.

Question 40

For Levi Strauss' jean-making operation,rolls of denim are considered __________,while cut-but-not-yet-sewn jeans are considered ___________ .

A) work-in-process inventory; raw materials inventory
B) short-term capital; long-term capital
C) capital stock; supplies
D) raw materials inventory; work-in-process inventory
E) short-term credit; long-term credit

Question 41

For a specific firm,which of the following is most likely to carry the lowest interest rate?

A) Loan secured by fixed assets
B) Commercial paper
C) Loan secured by finished goods
D) Unsecured loan
E) Loan secured by raw materials

Question 42

Which of the following would a bank most likely offer?

A) Commercial paper
B) Trade credit
C) Trade drafts
D) Short-term bonds
E) Secured loans

Question 43

Which of the following is a short-term source of funds for an organization?

A) Issuing corporate bonds
B) Factoring accounts receivable
C) Issuing common stock
D) Issuing preferred stock
E) Obtaining financial help from a venture capitalist

Question 44

What is the difference between factoring accounts receivable and pledging accounts receivable as collateral for a short-term loan?

A) Factoring is the collateral used when issuing commercial paper.
B) Factoring involves selling the accounts receivable instead of using them to obtain a loan.
C) Factoring accounts receivable is accomplished through a finance company whereas using pledging accounts receivable as collateral is arranged with a bank.
D) Factoring involves agreeing to repurchase accounts receivable at a future date instead of using them as collateral to obtain a loan.
E) There is no difference between factory accounts receivable and pledging accounts receivable.

Question 45

Sallyanne is selling merchandise to a retailer using the terms of a trade draft.As a new employee of Sallyanne's,you discover that a trade draft is

A) a means of pledging accounts receivable.
B) an agreement to meet certain terms,which is attached to the shipment and which must be signed before the goods are delivered to the buyer.
C) a legal agreement promising to pay for the goods,which is signed by the buyer before the seller will ship the goods.
D) a type of secured loan with trade products serving as collateral.
E) the seller ships products on faith that payment will be forthcoming.

Question 46

The process of using accounts receivable as collateral is called ___________; the specific means by which the money is raised is called ___________.

A) commercial paper; factoring
B) factoring; commercial paper
C) pledging accounts receivable; factoring
D) equity financing; debt financing
E) short-term credit; long-term credit

Question 47

Which of the following is usually associated with unsecured short-term loans?

A) Trade drafts
B) Compensating balances
C) Collateral
D) Trade acceptances
E) Factoring

Question 48

Jack is setting up a global operation.The form of trade credit that is particularly useful for Jack's international transactions would be

A) revolving credit agreement.
B) promissory notes.
C) trade acceptance.
D) line of credit.
E) open-book credit.

Question 49

Why is it necessary for a business firm to put up collateral when it takes out a bank loan?

A) So that the bank can keep a portion as advance payment on the loan
B) To show the bank that the business is big enough to require the loan
C) So that banks can seize the assets if loan payments are not made as promised
D) So the financial managers know dates of payment
E) So that the accounting people can generate accurate financial statements

Question 50

Jack is borrowing money which requires him to put up collateral.What type of credit is he using?

A) Line of credit
B) Unsecured loans
C) Trade credit
D) Commercial paper
E) Secured loans

Question 51

Secured,short-term loans are usually secured by

A) deposits with the bank.
B) fixed assets.
C) inventories.
D) commercial paper.
E) trade credit.

Question 52

Which of the following guarantees that funds will be available?

A) Trade credit
B) Pledging assets
C) Trade draft
D) Line of credit
E) Revolving credit agreement

Question 53

Collateral is

A) any asset that a lender has the right to seize if a borrower does not repay a secured loan.
B) when you use your forecasted sales to secure a loan.
C) the use of someone's signature in order to secure a loan.
D) when you use liquidated assets to pay off a loan.
E) any of these can be collateral.

Question 54

John bought $40 000 worth of receivables for 60 percent of that sum ($24 000).He will profit if the money he eventually collects exceeds the amount he paid for the receivables.John is involved in

A) pledging accounts receivable.
B) leveraging goods-in-process inventory.
C) collateralizing inventory.
D) factoring accounts receivable.
E) hedging.

Question 55

Sallyanne is selling merchandise to Jack's Machine Shop.Sallyanne felt secure in receiving payment because she had Jack sign a promissory note,which is

A) an agreement signed by the buyer stating when and how much money will be paid to the seller in return for immediate credit.
B) the requirement for a firm to maintain a certain amount of funds on deposit with the lending bank.
C) a "gentleman's agreement" to pay for products which were shipped on faith that the payment would be forthcoming.
D) the right given to a bank to seize certain assets if payment is not made when due.
E) basically the same thing as a trade acceptance.

Question 56

When is a commitment fee required of the borrower by a lending institution?

A) When using a revolving credit agreement in which the bank holds an open line of credit for a borrower
B) When issuing commercial paper
C) A commitment fee is never required because it is illegal for lending institutions to charge a commitment fee
D) When using collateral to secure a bank loan
E) When using trade credit

Question 57

Which of the following is backed solely by the firm's promise to pay?

A) Trade credit
B) Factoring accounts receivable
C) Promissory note
D) Commercial paper
E) Pledging accounts receivable

Question 58

Along with a computer,Mega Computers has sent a document that states the promised payment date and amount.The buyer must sign it before taking the computer.This is a(n)

A) open-book credit.
B) trade draft.
C) revolving credit agreement.
D) promissory note.
E) line of credit.

Question 59

A form of trade credit that is particularly useful for international transactions is a(n)

A) trade acceptance.
B) line of credit.
C) revolving credit agreement.
D) open-book credit.
E) promissory notes.

Question 60

How may a firm obtain an unsecured short-term bank loan?

A) Obtain open-book credit
B) Provide a fixed asset as a guarantee of payment
C) Pledge accounts receivable
D) Obtain a line of credit agreement
E) Obtain an inventory loan

Question 61

What is the major source of long-term debt financing for most corporations?

A) Corporate bonds
B) Long-term loans
C) Trade credit
D) Equity financing
E) Retained earnings

Question 62

Which of the following is the most conservative mix of long-term funding?

A) 25% debt,75% equity
B) 75% debt,25% equity
C) 100% equity
D) 100% debt
E) 50% debt,50% equity

Question 63

Which of the following is the riskiest mix of long-term funding?

A) 25% debt,75% equity
B) 100% equity
C) 50% debt,50% equity
D) 75% debt,25% equity
E) 100% debt

Question 64

You are managing a company that needs a quick injection of cash.Two ways of raising secured funds quickly are

A) bank loans and lines of credit.
B) inventory loans and factoring accounts receivable.
C) inventory loans and accessing accounts receivable.
D) accounts receivable and trade credit.
E) lines of credit and commercial paper.

Question 65

In most cases,equity financing takes two forms:

A) revolving credit agreements and lines of credit.
B) bank loans and commercial paper.
C) issuing common stock and retaining the firm's earnings.
D) issuing common stock and lines of credit.
E) commercial paper and retaining the firm's earnings.

Question 66

Laura is analyzing several investment possibilities.She finds that some options have a good chance of a payback (but the paybacks are small),while other options have a not-so-good chance of payback (but the payback is large).She has discovered the

A) cash flow trade-off.
B) cash flow decision.
C) risk-return relationship.
D) safety factor.
E) risk principle.

Question 67

Mega Computer needs a large amount of long-term financing for a long period of time.The best choice is most likely

A) loans.
B) preferred stock.
C) common stock.
D) commercial paper.
E) bonds.

Question 68

Why does a business firm require long-term sources of funds?

A) To finance long-term expenditures for fixed assets
B) A long-term source of funds replaces the need for insurance
C) To obtain funds for purchasing inventories
D) To eliminate the need for frequently seeking short-term financing
E) To finance annual bonus payments for employees

Question 69

Rosella is financial manager who is comparing the effects of debt and equity financing.She finds that

A) debt financing affects management control,whereas equity financing does not.
B) debt financing makes a regular claim on income,whereas equity financing does not.
C) debt financing involves no fixed deadlines,whereas equity financing does.
D) debt financing does not affect management's flexibility,whereas equity financing does.
E) neither debt financing nor equity financing is tax deductible.

Question 70

What is the difference between a line of credit and a revolving credit agreement?

A) A line of credit is normally used by charitable and public-sector organizations,while a revolving credit agreement is usually used by private-sector business firms.
B) More money can be borrowed with a line of credit than with a revolving credit agreement.
C) There is no guarantee that the money will be available when it is requested in a line of credit,but there is an agreement that it will be available when requested in a revolving credit agreement.
D) A line of credit is only obtainable from a credit union,while a revolving credit agreement is only obtainable from a bank.
E) All of these.

Question 71

Clarence is a factor who has just bought $40 000 worth of finished goods for $24 000.The profit that he will make on this transaction depends on

A) the quality of the receivables,the cost of collecting them,and interest rates.
B) the cash he has available,and the trade credit he is able to get.
C) the availability of government loans,the quality of the receivables,and the interest rate.
D) the interest rate,the cost of collecting the receivables,and the maturity date of bonds of his company.
E) the general state of the economy,the number of firms who might be interested in the receivables,and the amount of money those firms have available.

Question 72

Which of the following is a restriction that may be placed on a borrowing firm for a long-term loan?

A) The borrower must pledge a certain amount of inventory.
B) The borrower must pledge future sales.
C) The borrower must factor accounts receivable.
D) The borrower must pledge long-term assets as collateral.
E) The borrower must pledge accounts receivable.

Question 73

Manicure Ltd.is a large lawn care company with hundreds of clients.The company needs some short-term financing to meet a cash flow gap while it makes immediate capital expenditures.If the following facts are known,which one would suggest that the company use a credit card for this purpose?

A) The company owners' family members have considerable liquid assets.
B) The company doesn't know when it will be able to repay the money.
C) The company thinks it can repay the money next month.
D) The company needs to obtain a line of credit without interest.
E) The company is able to provide collateral for a secured loan.

Question 74

The mix of debt and equity funding that a firm uses is called its

A) long-term funding mix.
B) financial mix.
C) corporate capital mix.
D) capital structure.
E) debt-to-equity ratio.

Question 75

Bonds that have the highest default rate and the highest yield rate are ________ bonds.

A) high grade
B) investment grade
C) mixed grade
D) income grade
E) junk

Question 76

Manitoba Hydro has relatively steady,predictable profits and cash-flow patterns.Its best choice for long-term funding is most likely

A) factoring accounts receivable.
B) common stock.
C) either common or preferred stock but not bonds.
D) preferred stock.
E) bonds.

Question 77

Monolith Corp.'s credit rating is so high that it is able to issue ________,which is backed solely by the firm's promise to pay.

A) accounts receivable
B) commercial paper
C) promissory notes
D) trade credit
E) debentures

Question 78

The two primary sources of long-term debt funds are

A) lines of credit and revolving credit agreements.
B) common stock and preferred stock.
C) trade credit and commercial paper.
D) commercial paper and bank loans.
E) long-term loans and the sale of bonds.

Question 79

Which of the following would require General Motors to publicly disclose the purpose for which funds are being sought?

A) Long-term loan
B) Sale of preferred stock
C) Short-term loan
D) Sale of common stock
E) Sale of bonds

Question 80

Fresh Foods needs some quick cash to pay some overdue bills.If the following facts were known,which one would support the idea of factoring to obtain the cash?

A) Factoring can be a costly way to obtain cash.
B) The company would not have to liquidate any of its core assets if it chooses factoring.
C) The company's customers might be unhappy if they hear that their account has been turned over to a factor.
D) The company would incur additional accounting expenses because they would have to keep track of the factored customer accounts.
E) Factoring companies usually aren't interested in receivables more than 90 days old.