Question 1

A firm negotiates a(n)_________ with its bank so the firm will have access to a specified amount of unsecured short-term funds,provided the bank has the funds available.

Accepted Answer

A line of credit is a type of borrowing agreement between a bank and a firm that provides the firm with access to a specified amount of unsecured short-term funds, provided the bank has the funds available. The firm can draw on the line of credit as needed, and interest is only charged on the amount borrowed. The other options listed are not relevant to this type of borrowing agreement.

Question 2

Charging interest on past due customer accounts reflects that:

Accepted Answer

Charging interest on past due customer accounts reflects the time value of money, as the seller is essentially loaning money to the customer and should be compensated for the time value of that loan.

Question 3

When Libertine Industries renegotiated their loan agreement,they borrowed an additional $2 million.The new loan requires Libertine to repay the new amount in nine months.Liberty's activity represents ________ financing.

Accepted Answer

Libertine Industries borrowed an additional $2 million through a loan agreement, which requires them to repay the new amount in nine months. This indicates that Libertine has taken on more debt financing.

Question 4

By selling shares of ownership in their company,Ottawa Scientific acquires the funds needed to finance their research and development projects.Ottawa Scientific provides for their long-term funding needs through ________ financing.

Accepted Answer

By selling shares of ownership, Ottawa Scientific is raising funds through equity financing. This type of financing involves selling ownership in the company in exchange for funds, as opposed to taking on debt through loans or bonds. Retained financing involves using profits from the company to fund projects, and asset financing involves using physical assets as collateral for loans. Neither of these methods are mentioned in the scenario.

Question 5

Which of the following presents an effective technique to improve cash management?

Accepted Answer

By speeding up cash collections and slowing down cash payments, a company can improve their cash flow and better manage their finances. This means collecting payments from customers more quickly and delaying payments to suppliers or other creditors if possible. This ensures that there is a consistent cash balance available for operating expenses and investments. Speeding up both collections and payments may be difficult to achieve, while slowing down both could lead to strained relationships with suppliers and missed opportunities.

Question 6

New World Chemical does not offer customers a cash discount for early payment of their accounts receivable.As a result,most customers wait to pay their bill on the last day before late penalties are charged.These customers apparently understand the:

Accepted Answer

Customers are waiting until the last minute to pay their bill because they understand the time value of money, meaning they want to hold onto their cash for as long as possible to earn interest or invest it elsewhere before paying their bill. The other choices mentioned (B, C, and D) are not related to this scenario.

Question 7

Clark,president of Cycles Go Go,worries that cash flows may be insufficient to pay his current operating expenses.While he anticipates a surplus of cash inflows as warm weather approaches,he needs to borrow funds now to meet his immediate obligations.Clark can best resolve his cash flow concerns by obtaining ________ financing.

Accepted Answer

Clark needs to borrow funds now to meet his immediate obligations, which indicates a short-term financing need. Short-term financing is typically used to cover operating expenses and is repaid within one year. Intermediate financing is used for larger purchases that will be repaid over one to three years, contingency financing is used for unexpected situations, and long-term financing is used for large capital projects that will be repaid over multiple years.

Question 8

________ describes the short-term financing available to firms that buy merchandise from their suppliers and are not required to pay for their purchase until some future date.

Accepted Answer

Trade credit is the short-term financing that a business can receive from its suppliers when buying merchandise on credit. The payment is usually deferred to some future date, allowing the purchasing business to sell the merchandise and generate revenue before paying for it. Trade credit is a common form of financing used by businesses to manage their cash flow and support their operations.

Question 9

Victoria Nursery offers customers credit terms of 3/15 net 30.This gives customers a:

Accepted Answer

The credit terms of 3/15 net 30 indicate that customers can receive a 3% discount if they pay within 15 days, otherwise they must pay the full amount within 30 days. There is no mention of a 15% discount or a 3-day payment window in this credit arrangement.

Question 10

As a result of cash flow shortages,Kellco Department Stores has fallen behind in payments to suppliers.Some suppliers are withholding shipments to Kelco until they receive payments on overdue accounts.To meet their immediate needs,Kellco Department Stores should utilize:

Accepted Answer

Short-term financing involves borrowing money for a short period of time, usually less than a year. It is the best choice for Kellco Department Stores in this situation as it will provide them with the immediate cash flow they need to pay their suppliers and continue operating their business. Long-term financing and contingency capital are not appropriate in this situation as they are designed for longer-term needs and are not meant to be used for short-term cash flow shortages. Vulture capital is also not appropriate as it typically involves high-risk investments and may not be available to Kellco Department Stores at this time.

Question 11

A loan that requires the borrower to provide collateral represents a:

Accepted Answer

A loan that requires the borrower to provide collateral is known as a secured loan. Collateral refers to an asset that the lender can seize if the borrower fails to repay the loan. The asset can be real estate, a vehicle, or any other valuable item that the lender deems appropriate. The collateral provides security for the lender in case the borrower defaults on the loan.

Question 12

Typically,only highly regarded customers of a bank receive:

Accepted Answer

Highly regarded customers of a bank are often offered unsecured loans because they are considered low risk, and the bank trusts their ability to repay without requiring collateral.

Question 13

Which of the following represents a capital expenditure?

Accepted Answer

A capital expenditure is an investment in a long-term asset that is expected to generate revenue over time. Purchasing a building for office space is a capital expenditure because it is a long-term asset that will benefit the company for many years. Issuing paycheques to workers and paying for advertising are operational expenses, and purchasing raw materials is a variable expense.

Question 14

By borrowing $10 million from the First Newfoundland Bank,Cain Industries utilizes

Accepted Answer

By borrowing $10 million from the First Newfoundland Bank, Cain Industries is utilizing debt financing. This is because the company is taking on debt (in the form of a loan) which they will need to repay in the future with interest. This is in contrast to equity financing, where a company raises funds by selling ownership stakes (shares) in the company.

Question 15

A ________ refers to a line of credit that is guaranteed by the bank.

Accepted Answer

A revolving credit agreement refers to a line of credit that is guaranteed by the bank. Collateral trust fund, contract credit agreement, and commercial credit agreement do not specifically refer to a line of credit that is guaranteed by the bank.

Question 16

Which of the following represents a source of short-term funding?

Accepted Answer

Commercial paper is a form of short-term debt that companies issue to raise funds quickly. Retained earnings represent earnings that a company has saved over time and are not a form of external funding. Common stock and corporate bonds are long-term sources of funding.

Question 17

The process of ________ uses a firm's accounts receivable as collateral for a loan.

Accepted Answer

Factoring is the process of using a firm's accounts receivable as collateral for a loan. The firm sells its outstanding invoices to a third party, or factor, at a discount in exchange for immediate cash to use for its operations. This allows the firm to improve its cash flow and reduce the risk of bad debt. Establishing a line of credit, inventory financing, and revolving credit are all different types of financing options that may be used by a firm, but they do not involve using accounts receivable as collateral.

Question 18

Some suppliers hesitate to offer trade credit to firms with a poor credit history.In these cases,the supplier may insist that the customer sign a(n):

Accepted Answer

A promissory note is a written promise to pay a specific amount of money by a certain date. If a supplier is hesitant to offer trade credit to a firm with a poor credit history, they may request that the customer sign a promissory note as a way of providing some assurance that the debt will be paid back. An indenture agreement is a legal contract that outlines the terms and conditions of a debt issue, typically used for bonds. A line of credit is a type of loan that can be drawn upon as needed, and a factoring agreement is a financial transaction where a company sells its accounts receivable to a third party at a discount. None of these options are as directly related to providing assurance of payment as a promissory note.

Question 19

The most widely used source of short-term funding is:

Accepted Answer

Trade credit is the most widely used source of short-term funding because it is a relatively inexpensive and easy way to obtain financing.

Question 20

Obtaining long-term financing:

Accepted Answer

The answer of Obtaining long-term financing:
...

Quiz 17: Financial Management

A firm negotiates a(n) _________ with its bank so the firm will have access to a specified amount of unsecured short-term funds,provided the bank has the funds available.