Deck 15: Management of Current Liabilities

Question 1

Lenders recognize that by having an interest in collateral they can reduce losses if the borrowingfirm defaults,

A) therefore lenders prefer to lend to customers from whom the are able to require collateral.
B) and the presence of collateral reduces the risk of default.
C) but the presence of collateral has no impact on the risk of default.
D) therefore lenders will impose a higher interest rate on unsecured short-term borrowing.

Answer 1

but the presence of collateral has no impact on the risk of default.

Question 2

Lenders require collateral to

A) extend to the borrower an unsecured loan.
B) control the borrowing firm.
C) reduce the risk of default.
D) reduce the losses if the borrower defaults.

Answer 2

reduce the losses if the borrower defaults.

Question 3

All of the following goods represent appropriate collateral for a secured loan to a school supplymanufacturer except

A) index cards.
B) unbound pages.
C) notebooks and binders.
D) reams or rolls of paper.

Answer 3

unbound pages.

Question 4

The major type of loan made by banks to businesses is the

A) fixed-asset-based loan.
B) capital improvement loan.
C) short-term secured loan.
D) short-term self-liquidating loan.

Question 5

Which of the following is NOT an advantage of factoring?

A) creation of a known pattern of cash flows
B) elimination of credit and collection department
C) accounts receivable immediately turned into cash
D) the effective interest rate

Question 6

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

A) $1,100
B) $900
C) $1,000
D) $990

Question 7

A firm has directly placed an issue of commercial paper that has a maturity of 60 days. The issuesold for $980,000 and has an annual interest rate of 12.24 percent. The value of the commercialpaper at maturity is ___________ .

A) $999,992
B) $19,992
C) $960,008
D) $980,000

Question 8

When a firm stretches accounts payable without hurting its credit rating, the cost of foregoing thecash discount is

A) immaterial.
B) reduced.
C) increased.
D) unaffected.

Question 9

Most commercial paper has maturities ranging from

A) one year to three years.
B) seven days to 30 days.
C) three days to 270 days.
D) six months to one year.

Question 10

Appropriate collateral for a secured short-term loan is

A) work-in-process inventory.
B) fixed assets.
C) common stock in a privately-held corporation.
D) raw materials inventory and receivables.

Question 11

The two major sources of short-term financing are

A) accounts payable and accruals.
B) a line of credit and accruals.
C) accounts receivable and notes payable.
D) a line of credit and accounts payable.

Question 12

Short-term self-liquidating loans are intended to

A) finance capital assets.
B) finance merger/acquisition activity.
C) recapitalize the firm.
D) cover seasonal peaks in financing caused by inventory and receivable buildups.

Question 13

A firm arranges a discount loan at a 12 percent interest rate, and borrows $100,000 for one year. Thestated interest rate is__________ and the effective interest rate is ___________.

A) 13.64%; 12.00%
B) 12.00%; 10.71%
C) 12.00 %; 12.00%
D) 12.00%; 13.64%

Question 14

If a firm gives up the cash discount on goods purchased on credit, the firm should pay the bill

A) as soon as possible.
B) on the last day of the credit period.
C) before the credit period ends.
D) as late as possible.

Question 15

1/15 net 30 date of invoice translates as

A) a one percent cash discount may be taken if paid in 15 days; if no cash discount is taken, the balance is due in 30 days after the middle of the month.
B) a one percent cash discount may be taken if paid in 15 days; if no cash discount is taken, the balance is due 30 days after the end of the month.
C) a one percent discount may be taken on 15 percent of the purchase if the account is paid within 30 days after the end of the month.
D) a one percent cash discount may be taken if paid in 15 days; if no cash discount is taken, the balance is due 30 days after the invoice date.

Question 16

One of the most common designations for the beginning of the credit period is

A) 2/10.
B) the end of the month.
C) the date of invoice.
D) the transaction date.

Question 17

Seasonal buildups of inventory and receivables are generally financed with

A) short-term loans.
B) long-term loans.
C) stockholders' equity.
D) accruals.

Question 18

Financing that matures in one year or less and has specific assets pledged as collateral is called

A) unsecured short-term financing.
B) spontaneous financing.
C) secured short-term financing.
D) none of the above.

Question 19

The primary source of secured short-term loans to businesses are

A) savings and loans and factors.
B) commercial banks and commercial finance companies.
C) life insurance companies and government securities brokers.
D) commercial paper dealers and investment bankers.

Question 20

Most commercial paper is purchased by

A) banks and life insurers.
B) the federal government.
C) manufacturers.
D) governments and individuals.

Question 21

With a floating-rate note, the interest rate on the note changes

A) when the prime rate changes.
B) when the risk level of the borrower changes.
C) when the demand for loans changes.
D) when bank profits change.

Question 22

A firm is offered credit terms of 1/10 net 45 EOM by a major supplier. The firm has determined thatit can stretch the credit period (net period only) by 25 days without damaging its credit standingwith the supplier. Assuming the firm needs short-term financing and can borrow from the bank on a line of credit at an interest rate of 14 percent, the firm should

A) take the cash discount and finance the purchase with the line of credit, the cheaper source of funds.
B) take the cash discount and pay on the first day of the cash discount period.
C) give up the cash discount and pay on the 70th day after the date of sale.
D) give up the cash discount and finance the purchase with the line of credit.

Question 23

By offering credit to customers, the firm may

A) decrease its investment in accounts payable.
B) decrease the cost of goods purchased.
C) increase the price of the good to cover its costs.
D) decrease its investment in accounts receivable.

Question 24

The risk to a Canadian importer with foreign currency denominated accounts payable is that the dollar will

A) appreciate.
B) depreciate.
C) remain unchanged.
D) there is no risk to a Canadian importer in this situation

Question 25

Commercial paper is usually sold at a discount from

A) treasury notes.
B) its par value.
C) the prime rate.
D) its cost.

Question 26

The interest rate charged on secured short-term loans to a corporation is generally higher than that charged on unsecured short-term loans because

A) lenders of secured loans must pay more for their funds.
B) it is costly to negotiate and administer secured loans.
C) secured loans are less risky than unsecured loans.
D) the risk of default is lower on secured loans.

Question 27

In a revolving credit agreement, the firm pays interest on

A) the amount actually borrowed and commitment fees on any unused portion of the loan.
B) only the amount actually borrowed.
C) the full line of credit.
D) the unused portion of the line of credit.

Question 28

All of the following goods represent appropriate collateral for a secured loan to a candymanufacturer except

A) cream.
B) individually wrapped chocolates.
C) cocoa beans.
D) boxes.

Question 29

__________is a short-term, unsecured promissory note issued by firms with a high credit standing.These notes are primarily issued by commercial finance companies.

A) A line of credit
B) Commercial paper
C) A self-liquidating loan
D) A revolving line of credit

Question 30

Collateral is typically required for a

A) single payment note.
B) short-term self-liquidating loan.
C) secured short-term loan.
D) line of credit.

Question 31

A firm is offered credit terms of 2/10 net 45 by most of its suppliers but frequently does not have the cash available to take the discount. The firm has a credit line available at a local bank at an interest rate of 12 percent. The firm should

A) take the cash discount and pay on the first day of the cash discount period.
B) take the cash discount, financing the purchase with the line of credit, the cheaper source of funds.
C) give up the cash discount, financing the purchase with the line of credit.
D) take the cash discount and pay on the 45th day after the date of sale.

Question 32

A firm arranged for a 120-day bank loan at an annual rate of interest of 10 percent. If the loan is for$100,000, how much interest in dollars will the firm pay? (Assume a 360-day year.)

A) $1,000
B) $10,000
C) $30,000
D) $3,333

Question 33

A field warehouse is

A) a warehouse located near the lender.
B) a warehouse outside the metropolitan area.
C) a warehouse on the borrower's premises.
D) a central warehouse storing the merchandise of several businesses.

Question 34

Short-term loans that businesses obtain from banks and through commercial paper are

A) spontaneous and unsecured.
B) negotiated and secured.
C) spontaneous and secured.
D) negotiated and unsecured.

Question 35

Much of commercial paper is issued by

A) small businesses.
B) small manufacturing firms.
C) commercial finance companies.
D) venture capitalists.

Question 36

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

A) line of credit
B) single payment note
C) short-term self-liquidating loan
D) revolving credit agreement

Question 37

Short-term self-liquidating loans are intended to

A) cover seasonal peaks in financing caused by inventory and receivables buildup.
B) finance merger and/or acquisition activity.
C) finance capital assets.
D) recapitalize the firm.

Question 38

A firm purchased goods on January 27 with a purchase price of $1,000 and credit terms of 2/10 net30 EOM. The firm paid for these goods on February 9. The firm must pay __________for the goods.

A) $800
B) $1,000
C) $980
D) $900

Question 39

As part of a union negotiation agreement, the United Clerical Workers Union conceded to be paidevery two weeks instead of every week. A major firm employing hundreds of clerical workers hada weekly payroll of $1,000,000 and the cost of short-term funds was 12 percent. The effect of this concession was to delay clearing time by one week. Due to the concession, the firm

A) realized an annual loss of $120,000.
B) decreased its cash turnover.
C) realized an annual savings of $120,000.
D) increased its cash cycle.

Question 40

A bank lends a firm $1,000,000 for one year at 12 percent on a discounted basis and requirescompensating balances of 10 percent of the face value of the loan. The effective annual interest rateassociated with this loan is

A) 15.4 percent.
B) 13.3 percent.
C) 12 percent.
D) 13.6 percent.

Question 41

Appropriate collateral for a loan secured under a floating inventory lien is

A) drill presses.
B) paper clips.
C) cars.
D) file cabinets.

Question 42

A bank lends a firm $500,000 for one year at 8 percent and requires compensating balances of 10percent of the face value of the loan. The effective annual interest rate associated with this loan is

A) 8 percent.
B) 7.0 percent.
C) 8.9 percent.
D) 7.2 percent.

Question 43

A firm issued $2 million worth of commercial paper that has a 90-day maturity and sells for$1,900,000. The annual interest rate on the issue of commercial paper is

A) 5 percent.
B) 17 percent.
C) 10 percent.
D) 21 percent.

Question 44

The prime interest rate charged by leading Canadian banks is based on the

A) Bank of Canada rate.
B) U.S. Federal Reserve rate.
C) T-bill rate.
D) Government of Canada 20-year bond rate.

Question 45

The cost of giving up a cash discount on a credit purchase is

A) deducted from the price of the goods.
B) added on to the price of the goods.
C) the implied interest rate paid in order to delay payment for an additional number of days.
D) the true purchase price of the goods.

Question 46

The effective interest rate

A) is lower if the loan is a discount loan.
B) is higher on a loan if interest is paid at maturity.
C) is not affected by whether the loan is a discount loan or a loan with interest paid at maturity.
D) is higher if the loan is a discount loan.

Question 47

__________ensure that money loaned under a line of credit agreement is actually being used to finance seasonal needs.

A) Commitment fees
B) Operating change restrictions
C) Annual cleanups
D) Compensating balances

Question 48

A terminal warehouse is

A) a central warehouse storing the merchandise of several businesses.
B) a warehouse on the borrower's premises.
C) a warehouse located at the airport.
D) a warehouse located near the lender.

Question 49

__________are liabilities for services received for which payment has yet to be made. The most common accounts are taxes and wages.

A) Accounts receivable
B) Accounts payable
C) Accruals
D) Notes payable

Question 50

A letter written by a company's bank to the company's foreign supplier, stating that the bank willguarantee payment of an invoiced amount if all the underlying agreements are met is called

A) a letter of invoice.
B) a letter of credit.
C) a letter of intent.
D) none of the above.

Question 51

Accruals and accounts payable are__________sources of short-term financing.

A) negotiated, unsecured
B) spontaneous, secured
C) spontaneous, unsecured
D) negotiated, secured

Question 52

If the firm decides to take the cash discount that is offered on goods purchased on credit, the firm should

A) take the discount no matter when the firm actually pays.
B) pay as soon as possible.
C) pay on the last day of the credit period.
D) pay on the last day of the discount period.

Question 53

In a line of credit arrangement, the firm pays interest on

A) only the amount actually borrowed and commitment fees on any unused portion of the loan.
B) the full line of credit.
C) the unused portion of the line of credit.
D) only the amount actually borrowed.

Question 54

A __________is a type of loan made to a business by a commercial bank. This type of loan is madewhen the borrower needs additional funds for a short period but does not believe the need willcontinue or reoccur on a seasonal basis.

A) revolving credit agreement
B) short-term self-liquidating loan
C) single payment note
D) line of credit

Question 55

Compared to a line of credit, a revolving credit agreement generally will be

A) a higher cost, lower risk method of short-term borrowing.
B) a lower cost, lower risk method of short-term borrowing.
C) a higher cost, higher risk method of short-term borrowing.
D) a lower cost, higher risk method of short-term borrowing.

Question 56

The cost of giving up a cash discount under the terms of sale 1/10 net 60 (assume a 360-day year) is

A) 14.7 percent.
B) 6.1 percent.
C) 7.3 percent.
D) 12.2 percent.

Question 57

The prime rate of interest fluctuates with

A) the changing supply and demand relationship for long-term funds.
B) the changing supply and demand relationship for short-term funds.
C) demand in the bond market.
D) the risk of the firm borrowing the funds.

Question 58

The cost of borrowing through the sale of commercial paper is typically__________ the prime bank loan rate.

A) unrelated to
B) higher than
C) the same as
D) lower than

Question 59

Financing that arises from the normal operations of the firm are said to be

A) expected.
B) payable.
C) accrued.
D) spontaneous.

Question 60

Commercial banks lend unsecured short-term funds in the following three basic ways

A) single-payment note, revolving credit agreements, and commercial paper
B) single-payment note, lines of credit, and commercial paper
C) single-payment note, lines of credit, and revolving credit agreements
D) commercial paper, lines of credit, and revolving credit agreements

Question 61

The short-term self-liquidating loan is a secured short-term loan in which the borrowed money provides the mechanism through which the loan is repaid.

Question 62

Inventory is attractive as collateral since it normally has a market value greater than its book value, which is used to establish its value as collateral.

Question 63

The interest rate charged on a secured short-term loan to a corporation is typically __________the interest rate on an unsecured loan.

A) lower than
B) the same as
C) higher than
D) unrelated to

Question 64

A line of credit is similar to the agreement under which issuers of bank credit cards, such asMastercard and Visa, extend approved credit to cardholders.

Question 65

In a line of credit agreement, a bank may retain the right to revoke the line if any major changes occur in the firm's financial condition or operations.

Question 66

Commercial paper is generally issued in multiples of

A) $1,000,000 or more.
B) $100,000 or more.
C) $10,000 or more.
D) $1,000 or more.

Question 67

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.

Question 68

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

A) bananas.
B) recreation vehicles.
C) pencils.
D) drill bits.

Question 69

Loans on which the interest is paid in advance are often called

A) premium loans.
B) discount loans.
C) reduced-principle loans.
D) called loans.

Question 70

The__________ is the lowest rate of interest charged on business loans to the best business borrowers by the nation's leading banks.

A) treasury bill rate
B) commercial paper rate
C) federal bond rate
D) prime rate

Question 71

The prime rate of interest fluctuates with changing supply-and-demand relationships for short-term funds as well as the risk of the bank's business borrowers.

Question 72

The cost of giving up a cash discount is the implied rate of interest paid in order to delay payment of an account payable for an additional number of days.

Question 73

The interest rate charged on secured short-term loans is typically higher than the rate on unsecured short-term loans.

Question 74

Pledges of accounts receivable and factoring of accounts receivable are made on__________ basis, respectively.

A) a nonnotification and a notification
B) a notification and a nonrecourse
C) a nonrecourse and a notification
D) a notification and a recourse

Question 75

If a firm anticipates stretching accounts payable, its cost of giving up a cash discount is reduced.

Question 76

A firm has a line of credit and borrows $25,000 at 9 percent interest for 180 days or half a year.What is the effective rate of interest on this loan if the interest is paid in advance?

A) 9.4 percent
B) 4.7 percent
C) 9.9 percent
D) 10.3 percent

Question 77

Under the floating inventory lien, the borrower is free to sell the merchandise and is expected to remit the amount loaned against each item, along with accrued interest, to the lender immediately after the sale. The lender then releases the lien on the appropriate item.

Question 78

Nonrecourse basis is the basis on which accounts receivable are sold to a factor with the understanding that the factor accepts all credit risks on the purchased accounts.

Question 79

XYZ Corporation borrowed $100,000 for six months from the bank. The rate is prime plus 2 percent. The prime rate was 8.5 percent at the beginning of the loan and changed to 9 percent after two months. This was the only change. How much interest must XYZ corporation pay?

A) $18,212
B) $2,476
C) $5,417
D) $21,500

Question 80

The commercial finance companies usually charge a higher interest on secured short-term loansthan commercial banks because the finance companies generally end up with higher-riskborrowers.