Question 1

________ is a form of short-term financing. Businesses buy merchandise from their suppliers, but are not required to pay for their purchases until some future date

Accepted Answer

Trade credit is a form of short-term financing where businesses can purchase goods and services from their suppliers on credit and pay for it at a later date. It is a common practice in business transactions and allows businesses to maintain cash flow and manage their working capital effectively. Secured credit involves collateral, revolving credit is a line of credit with a predetermined credit limit, and factoring involves selling accounts receivables to a third party for a quicker cash flow.

Question 2

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

Accepted Answer

Trade credit is the most widely used source of short-term funding, as it allows businesses to purchase goods or services from suppliers on credit terms, typically paying for them at a later date. This form of financing is common across various industries, making it a primary method for managing cash flow and operational expenses without immediate cash outlay.

Question 3

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

Accepted Answer

Commercial paper is a form of short-term financing that allows companies to borrow money for up to 270 days through the issuance of unsecured promissory notes to investors. Retained earnings, common stock, and corporate bonds are typically used for long-term financing.

Question 4

Lending institutions may offer a borrower a percentage of the value of the borrower's accounts receivable so the borrowing firm can continue to operate while it waits to collect on its credit sales. This process is called __________

Accepted Answer

The process described in the question is pledging, where the borrower uses their accounts receivable as collateral to obtain a loan. Establishing a line of credit and revolving credit also involve borrowing money from a lending institution, but do not specifically involve using accounts receivable as collateral. Inventory valuation refers to the accounting process of determining the value of a company's inventory.

Question 5

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

Accepted Answer

By selling shares of ownership, California Scientific is raising funds through equity financing. Equity financing involves selling ownership in the company in exchange for capital, whereas debt financing involves borrowing money that must be repaid over time, retained financing involves reinvesting earnings back into the company and asset financing involves using assets as collateral for loans. Since the question specifically mentions selling shares of ownership, the answer is equity financing.

Question 6

The owner of Mountain Cycle Shop worries that cash flows this winter may be insufficient to meet his current operating expenses. While he anticipates a surplus of cash inflows as warm weather approaches, he needs funds now to meet his immediate obligations. He can best resolve his cash flow concerns by obtaining ________ financing

Accepted Answer

Short-term financing is the best choice for meeting the immediate obligations of the business owner. As he expects a surplus of cash inflows with warm weather, he can repay the short-term loan quickly. Intermediate, long-term, and contingency financing would not be appropriate as they require a longer period to repay and may not provide immediate relief for his current cash flow concerns.

Question 7

Which of the following statements represents good advice prior to making capital expenditures?

Accepted Answer

It is important for companies to carefully consider their options and weigh the potential return on investment before committing to capital expenditures, as these investments are often significant in terms of cost and time. Rushing into a capital expenditure decision without proper consideration can result in wasted resources and financial strain.

Question 8

Green Builder's Supply, Inc., 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 who wait to pay their bill on the last day before late penalties are charged are showing that they understand the time value of money, which means they recognize that money has more value in their hands today than in the future due to factors like inflation and the potential to earn interest on the money.

Question 9

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

Accepted Answer

Speeding up cash collections will increase the amount of cash coming in to the business, while slowing down cash payments will decrease the amount of cash going out. This will improve cash management by ensuring that the business has enough cash on hand to meet its financial obligations.

Question 10

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

Accepted Answer

Liberty's borrowing of an additional $2 million and the requirement to repay it in nine months indicate that this is a debt financing activity.

Question 11

Finance managers spend the majority of their time managing _____

Accepted Answer

Finance managers typically spend a majority of their time managing short-term financial needs, such as budgeting, forecasting, and managing liquidity. While they also play a role in managing long-term financial needs and equity financing, these tasks are typically less frequent and require less daily attention than managing short-term finances.

Question 12

Typically, only highly regarded customers with financial stability receive ___________

Accepted Answer

Unsecured loans are typically offered to highly regarded customers with financial stability because these loans do not require collateral, relying instead on the borrower's creditworthiness.

Question 13

Which of the following represents a capital expenditure?

Accepted Answer

Capital expenditures are long-term investments made by a company to acquire or upgrade fixed assets, such as buildings, equipment, or land, that will be used to generate revenue for many years to come. In this case, purchasing a building for office space is a capital expenditure. The other options are operational expenses, which are shorter-term expenses incurred to keep a business running day-to-day.

Question 14

The CFO of a satellite radio company was trying to work his magic today as he solicited another telecommunications/entertainment company to invest in his company in order to prevent bankruptcy. Having refinanced the company less than a year ago, the satellite radio finance manager had a $75 million note coming due today. The current financing arrangement represents:

Accepted Answer

The fact that the note is coming due today suggests that it is short-term debt financing, meaning that the company will need to pay it back within a year.

Question 15

With plans to build a $50 million theme park, Extreme Entertainment, Inc., intends to finance this project through the sale of additional shares of ownership in their firm. Selling new shares of stock represents ___________ financing

Accepted Answer

Selling new shares of stock represents equity financing, as it involves raising funds by selling ownership in the company to investors.

Question 16

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 legal document that outlines a borrower's promise to repay a specific amount of money to a lender at a specific time or on demand. By signing a promissory note, the customer is agreeing to make payments to the supplier, even if they have a poor credit history. This gives the supplier some measure of assurance that they will be paid back, even if the customer runs into financial difficulties. Indenture agreements, lines of credit, and factoring agreements may not provide the same level of security to the supplier.

Question 17

If you are at the Phoenix Sky Harbor International Airport, you will no longer get a pat-down if you go through the metal detector. The airport now has full body screening ports that scan the entire body and readily detect weapons or explosive devices that someone may want to take on board a plane. These expensive devices represent:

Accepted Answer

The full body screening ports are expensive devices that are expected to last for a long time, making them long-term assets for the airport.

Question 18

The Making Ethical Decisions box "Good Finance or Bad Medicine" has an important message for managers who make financial decisions. Which of the following statements summarizes this message?

Accepted Answer

The message of the Making Ethical Decisions box is that managers must balance good financial decisions with ethical considerations, particularly in the context of healthcare where patients' health and well-being are at stake. The box highlights the importance of investing in necessary resources and equipment, regardless of whether or not insurance companies will cover the costs, and of prioritizing patient care over financial gain. Choice B is incorrect because financial decisions should not be based solely on what insurance companies are willing to pay, as this may lead to ethically questionable decision-making that puts profits ahead of patients. Choice C is unrelated to the message of the box. Choice D is also incorrect because while having a good law firm may be useful, it should not be prioritized above patients' needs and hospital resources.

Question 19

Lancer Wholesale Company wants to improve cash flow. Which of the following strategies would be most likely to help Lancer achieve this objective?

Accepted Answer

Offering cash discounts to buyers who pay their accounts promptly can improve cash flow by incentivizing customers to pay their bills as soon as possible. This can help ensure that Lancer Wholesale Company has cash on hand to meet expenses and invest in future growth opportunities. Relaxing credit policies, accepting IOUs, and offering extended payment plans could all potentially harm cash flow if customers delay payment or default on their debts.

Question 20

A loan backed by collateral represents a(n):

Accepted Answer

A loan backed by collateral is a secured loan. This means that the borrower provides an asset as collateral to the lender to secure the loan. If the borrower defaults on the loan, the lender can seize the collateral to recover their losses. This type of loan is considered less risky for the lender, which can result in lower interest rates for the borrower.

Quiz 18: Financial Management