Question 1

The most widely used source of short-term funding is trade credit.

Accepted Answer

Trade credit is the most commonly used source of short-term funding. It involves receiving goods or services on credit from suppliers and paying for them at a later date. This allows a business to manage their cash flow effectively and avoid immediate payment of expenses, providing a short-term source of financing.

Question 2

Family and friends represent problem-free sources of financing for most small businesses.

Accepted Answer

Family and friends can provide financing, but it often comes with emotional entanglements, potential misunderstandings, and the risk of damaged relationships if the business fails or disagreements arise over the investment.

Question 3

A line of credit represents a guarantee from a bank to lend a firm a given amount of money.

Accepted Answer

A line of credit is an arrangement between a financial institution and a customer that establishes a maximum loan balance that the lender permits the borrower to access or maintain. It does not guarantee a firm will borrow the money, but it allows the firm to borrow up to a certain amount when needed.

Question 4

Pages and Pages Booksellers is seeking financing to fund the opening of two new locations in nearby college towns. There is no need to consider debt financing for this project. It will require a sizeable investment in equity funds.

Accepted Answer

Although an expansion project is a sizeable investment that usually requires long-term financing, both debt financing and equity financing may be considered for this project. Long-term loans (debt financing) are repaid in a time period longer than one year and usually carry terms of anywhere from 2-10 years. Equity financing, funds from the sale of stock in the firm, does not need to be repaid.

Question 5

A line of credit is a given amount of unsecured short-term funds a bank will lend to a business.

Accepted Answer

A line of credit refers to a specific amount of funds that a bank or financial institution will lend to a business, typically on an unsecured short-term basis. The borrower can draw upon these funds as needed, up to the maximum limit specified in the agreement, and only pays interest on the amount actually borrowed.

Question 6

Small businesses rely heavily on long-term financing.

Accepted Answer

Small businesses often rely more on short-term financing options, such as lines of credit, credit cards, and short-term loans, due to their flexibility and easier qualification criteria compared to long-term financing.

Question 7

Much of a financial manager's day-to-day activities involve managing the short-term financial needs of the firm.

Accepted Answer

Financial managers are responsible for managing and planning the financial resources of a firm. This includes managing short-term financial needs such as cash flow management, budgeting, and financial forecasting in order to ensure the financial stability and success of the company.

Question 8

Financial managers devote the majority of their time to obtaining long-term financing to fund the firm's capital expenditures.

Accepted Answer

While obtaining long-term financing is an important aspect of financial management, it is not the sole focus. Financial managers also analyze financial data, manage cash flow, invest in short-term assets, and make financial decisions to increase the firm's overall value.

Question 9

A promissory note is a written contract between a supplier and a business customer, with a promise that customer will pay supplier a specified amount by a certain date.

Accepted Answer

A promissory note is indeed a written contract between a supplier and a business customer where the customer promises to pay the supplier a specified amount by a certain date.

Question 10

Inventory financing represents the selling of accounts receivables as collateral for a loan.

Accepted Answer

Inventory financing refers to using the inventory that a business holds as collateral for a loan, not the selling of accounts receivables. Selling accounts receivables for cash is known as factoring or accounts receivable financing.

Question 11

A secured loan means the borrower has the security of knowing repayment is not due for several years.

Accepted Answer

A secured loan is a loan in which the borrower puts up collateral (such as a home or car) to guarantee repayment. The length of the repayment term is not determined by whether the loan is secured or unsecured.

Question 12

Trade credit represents one of the most expensive forms of short-term financing.

Accepted Answer

Trade credit is actually considered one of the cheapest forms of short-term financing as it often comes at no interest cost as long as payment is made within the agreed-upon timeframe.

Question 13

Factoring refers to the process of selling accounts receivable for cash.

Accepted Answer

Factoring is indeed the process of selling accounts receivable to a third party (typically a financial institution) in exchange for immediate cash, at a discount to the original value of the receivables. Factoring helps businesses improve their cash flow and reduce the risks of non-payment by customers.

Question 14

Suppliers prefer to offer trade credit to customers with poor credit ratings or no credit history.

Accepted Answer

Suppliers are more likely to offer trade credit to customers with good credit ratings and a solid payment history. Customers with poor credit ratings or no credit history may be seen as a higher risk for non-payment, and therefore may not be offered trade credit or may be offered unfavorable terms.

Question 15

Trade credit is the practice of buying goods now and paying for them later.

Accepted Answer

Trade credit is a common practice in business where a buyer can purchase goods or services from a supplier and agree to pay for them at a later date, typically within 30 to 90 days. This type of credit can help businesses manage cash flow and build relationships with suppliers.

Question 16

The terms "2/10, net 30" indicate that the seller is offering a 20% discount for early payment.

Accepted Answer

The terms "2/10, net 30" indicate that the seller is offering a 2% discount if the invoice is paid within 10 days; otherwise, the full amount is due within 30 days.

Question 17

Commercial finance companies normally charge lower rates on short-term loans than those charged by commercial banks.

Accepted Answer

Commercial finance companies typically charge higher rates on short-term loans than commercial banks due to the higher risk associated with the borrowers they serve, who often cannot secure financing from traditional banks.

Question 18

A line of credit is designed to reduce the risk of lending money.

Accepted Answer

A line of credit is designed to provide flexibility in borrowing and repaying money, rather than specifically reducing the risk of lending.

Question 19

Trade credit means the seller will sell and deliver products and/or services to the buyer, with the understanding that the buyer will pay for these products and/or services at a later date.

Accepted Answer

Trade credit is a type of financing arrangement where a seller allows a buyer to purchase goods or services on account, with the understanding that the buyer will pay for the goods or services at a later date, often with interest added. This is a common practice in business-to-business transactions.

Question 20

An unsecured loan does not require a borrower to provide collateral to secure a loan.

Accepted Answer

An unsecured loan is a loan that is not backed by collateral. This means that the borrower does not have to provide any assets as security for the loan. Therefore, an unsecured loan does not require collateral.

Quiz 18: Financial Management