Deck 8: Sources and Forms of Financing

Question 1

Which of the following is a financial need?

A) revolving credit
B) bond payable
C) inventories
D) working capital loan

Answer 1

inventories

Question 2

Which of the following is an important consideration to take into account when choosing the right form and source of financing?

A) systemic factors
B) timing factors
C) control factors
D) behavioural factors

Answer 2

control factors

Question 3

What does the equity and liability side of the statement of financial position address?

A) financing requirements
B) non-current assets
C) internal financing
D) financial needs

Answer 3

financing requirements

Question 4

What generates internal sources of funds?

A) shareholders
B) lenders
C) the business itself
D) venture capitalists

Question 5

What type of risk is involved when forecasting uncertainties related to the industry and the economic environment in which a firm operates?

A) time risk
B) business risk
C) financial risk
D) instrument risk

Question 6

Which source of financing has the highest level of risk?

A) common shares
B) subordinated debt
C) preferred shares
D) unsecured debt

Question 7

Which of the following is a source of financing?

A) working capital loan
B) insurance companies
C) retained earnings
D) depreciation

Question 8

What are financing instruments called?

A) financing requirements
B) forms of financing
C) sources of financing
D) options related to financing

Question 9

Which form of financing is used to finance trade receivables?

A) mortgage
B) factoring
C) consignment
D) conditional sales contract

Question 10

What financing options are NOT offered by chartered banks?

A) lines of credit
B) single loans
C) factoring loans
D) mortgages

Question 11

Who provides retained earnings as a source of financing?

A) businesses
B) investment dealers
C) shareholders
D) bankers

Question 12

How can non-current assets be financed?

A) through trade credit (suppliers)
B) through retained earnings
C) through confirming institutions
D) through factoring companies

Question 13

What is a typical form of intermediate financing?

A) preferred shares
B) term loans
C) revolving credit
D) bonds

Question 14

What is the matching principle?

A) the process that relates current liabilities to long-term debt
B) the process that relates current assets to capital assets
C) the process that relates debt to total assets
D) the process that relates financial needs to financing requirements

Question 15

A business uses the most conservative strategy to finance its current asset accounts. What are the current asset accounts most likely financed by?

A) long-term borrowings
B) current liabilities
C) internal sources of financing
D) leasing arrangements

Question 16

Which of the Cs of credit do banks use to gauge security?

A) conditions
B) collateral
C) capacity
D) character

Question 17

Which of the Cs of credit relates to insurance?

A) coverage
B) conditions
C) circumstances
D) character

Question 18

What term refers to supplier credit?

A) trade credit
B) investment credit
C) inventory credit
D) revolving credit

Question 19

Which of the following is a factor that makes a business creditworthy?

A) its number of years in business
B) its industry
C) its name recognition
D) its character

Question 20

What is an advantage of supplier credit?

A) It does not need to be repaid within the short term.
B) It has a long-term payment schedule.
C) It is suitable for long-term growth.
D) It is inexpensive.

Question 21

What type of loan helps a business to finance a capital project until regular financing becomes available?

A) consignment financing
B) evolving financing
C) self-liquidating financing
D) interim financing

Question 22

What is often used to finance working capital accounts?

A) mortgages
B) long-term borrowings
C) bonds
D) self-liquidating loans

Question 23

What does a factoring company finance?

A) trade receivables
B) machinery
C) inventories
D) intangible assets

Question 24

What do financial institutions use floor planning to finance?

A) machinery
B) in-process inventory
C) trade receivables
D) operating capital

Question 25

What does consignment finance in an excellent way?

A) flexible working capital accounts
B) machinery
C) trade receivables
D) inventories

Question 26

What term refers to an agreement made between a buyer and a seller regarding the purchase of a capital asset such as a truck?

A) a conditional sales contract
B) factoring
C) a long-term loan
D) a working capital loan

Question 27

What type of financing includes subordinated debts?

A) risk capital financing
B) ownership financing
C) equity financing
D) working capital financing

Question 28

What do shareholders' specific rights include?

A) authorizing the sale of capital assets
B) changing the amount of authorized common and preferred shares
C) sharing in residual assets of the corporation
D) electing the managers of the corporation

Question 29

Which of the following is NOT considered a risk capital investment?

A) a buyout investment
B) a working capital investment
C) a start-up investment
D) a turnaround investment

Question 30

When are dividends paid to preferred shareholders?

A) after common shareholders have been paid
B) before interest on debt have been paid
C) before common shareholders have been paid
D) before income taxes have been paid

Question 31

What is a broad category of government financing?

A) equity financing
B) export financing
C) working capital financing
D) allowances for income tax purposes

Question 32

Which of the following can be cancelled by the lessee at any time upon due notice?

A) a financial lease
B) a turnaround lease
C) an operating lease
D) a sale and leaseback

Question 33

What is a tax-deductible expense when considering a lease or buy option?

A) the capital cost allowance
B) future taxes payable
C) the asset appreciation
D) the principal on the loan

Question 34

Which of the following is an example of risk capital long-term financing?

A) supplier credit
B) leasing
C) sale and leaseback
D) subordinated debt

Question 35

Which of the following is an external form of financing?

A) retained earnings
B) conditional sales contracts
C) profit for the year
D) depreciation

Question 36

What can inventory be financed through?

A) conditional sales contracts
B) consignment
C) operating lease
D) subordinated debt

Question 37

Which of the following is an intermediate form of financing?

A) trade credit
B) retained earnings
C) line of credit
D) term loans

Question 38

Which of the following is a financial need?

A) rent
B) risk capital
C) research and development
D) salaries

Question 39

Which of the following include financing requirements?

A) conditional sales contracts
B) non-current assets
C) trade payables
D) trade receivables

Question 40

Which of the following forms of financing can finance working capital accounts?

A) conditional sales contracts
B) a financial lease
C) a term loan
D) consignment

Question 41

The first thing that a CFO has to do before approaching investors is to identify where the money will be coming from.

Question 42

The purchase of non-currents assets and acquiring working capital has to do with financial needs.

Question 43

The equity and liability side of the statement of financial position deals with financing requirements.

Question 44

The key sources of financial needs are internal sources and external sources.

Question 45

External sources of financing are funds generated by a business and come from retained earnings and depreciation.

Question 46

Equity financing and long-term borrowings are considered financing requirements and used for buying assets.

Question 47

Funds generated by a business can be secured by increasing the level of working capital accounts such as inventories and trade receivables.

Question 48

Business risk has to do with the way a business is financed (debt versus shares).

Question 49

Instrument risk has to do with the quality of security available to satisfy investors.

Question 50

The industry and economic environment in which a firm operates impose a certain level of business risk.

Question 51

Institutions that provide funds, which include commercial banks, investment bankers, equipment vendors and government agencies, are considered forms of financing.

Question 52

A line of credit and seasonal loan is required to finance the flexible component of the current asset accounts.

Question 53

Suppliers usually finance businesses through trade credit.

Question 54

Factoring is an excellent way for a manufacturing business to finance its inventories.

Question 55

Terms loans and conditional sales contracts are usually considered "intermediate financing".

Question 56

Suppliers and confirming institutions usually finance businesses through bonds and subordinated debts.

Question 57

The matching principle has to do with the process that relates financial needs to financing requirements.

Question 58

The best strategy to finance working capital accounts is through long-term borrowings since it is the most aggressive approach and the least costly.

Question 59

One of the C's of credit is "collateral" which means the ability of a business to generate enough cash to meet its obligations.

Question 60

One of the C's of credit is "capital", which has to do with financial structure, that is, the mix between equity and debt.

Question 61

One of the C's of credit is "coverage" and has to do with insurance.

Question 62

Short-term borrowings can be obtained from suppliers and chartered banks.

Question 63

Two of the more important disadvantages of financing a business through trade credit are that it is costly and difficult to acquire.

Question 64

Both, self-liquidating loans and lines of credit are used to finance the purchase of machinery and equipment.

Question 65

Self-liquidating loans are used to finance temporary or fluctuating working capital accounts.

Question 66

Interim financing is primarily used to finance working capital accounts.

Question 67

Asset-based financing is a form of short-term risk capital financing.

Question 68

Consignment is the type of financing used by businesses to finance trade receivables when conventional financing (e.g., banks) is NOT available.

Question 69

Term loans are a principal form of medium-term financing used for buying non-current assets.

Question 70

A conditional sales contract is a written agreement between a buyer and a seller regarding the purchase of production equipment or other physical assets on a time-payment basis.

Question 71

Both, bonds and mortgages are used primarily to finance machinery and equipment.

Question 72

Secured bonds are essentially long-term promissory notes.

Question 73

Subordinated debts are risk capital term debt whereby investors accept a higher level of risk compared to conventional sources.

Question 74

One of the more important advantages of equity financing is that dividends are tax deductible.

Question 75

Funds provided by shareholders can come in the form of common shares and preferred shares.

Question 76

Preferred share financing has some characteristics both of common share and debt financing.

Question 77

The two more important collective rights of shareholders: (1) they can vote in a manner prescribed by the corporate charter; and (2) they can sell their share certificates to other interested parties.

Question 78

Risk capital investors provide equity financing to small and untried enterprises, thereby absorbing much of the risk that commercial lenders are unwilling to shoulder.

Question 79

The three more important characteristics that suppliers and chartered banks analyze before lending money to business are: payout of income, control and risk.

Question 80

Private investors and venture capital firms are individuals or groups of professionals with a vast amount of experience, contacts, and business kills that can help a business become more profitable.