Deck 16: Short-Term Business Financing

Question 1

Short-term financing offers greater flexibility than long-term financing.

Answer 1

True

Question 2

Using the conservative approach for financing a firm's assets, long term financing would be used only to finance fixed assets, while short term financing would be used to finance current assets including seasonal fluctuations.

Answer 2

False

Question 3

Short-term financing sources include bank loans, trade credit, and commercial paper.

Answer 3

True

Question 4

A firm's choice of financing strategy depends on a number of factors including its operating characteristics, cost, flexibility, and the ease of obtaining future financing.

Question 5

The aggressive financing approach is a strategy that attempts to match the maturities of assets with the maturities of the liabilities with which they are financed.

Question 6

The need for current funds increases when there is an upswing in the business cycle or the sales cycle of an industry.

Question 7

A line of credit costs the firm only the normal interest for the period during which money is actually borrowed.

Question 8

Working capital includes a firm's marketable securities, accounts receivable, inventories, and mortgage debt.

Question 9

The choice of financing strategy involves a tradeoff between return and risk.

Question 10

Using aggressive approach for financing a firm's assets, long term financing would be used only to finance fixed assets, while short term financing would be used to finance current assets including seasonal fluctuations.

Question 11

An aggressive financing plan has a higher financing cost, but with lower risk of not being able to borrow when short-term funds are needed.

Question 12

If net working capital is negative, current assets are partially financed by the firm's long-term debt.

Question 13

The prime rate is the interest rate the bank charges its most creditworthy customers.

Question 14

Firms using maturity matching will have current ratios equal to 1.0.

Question 15

A line of credit is also often referred to as a revolving credit agreement.

Question 16

The conservative financing approach is a strategy that attempts to match the maturities of assets with the maturities of the liabilities with which they are financed.

Question 17

Permanent current assets reflect the minimum investment level in cash, accounts receivable, and inventories needed to support sales.

Question 18

An advantage of short-term borrowing is the need for frequent renewals.

Question 19

The maturity matching approach is a financing strategy that attempts to match the maturities of assets with the maturities of the liabilities which they are financed.

Question 20

Service industries tend to have larger proportions of fixed assets to current assets.

Question 21

For compensating balance loans, to receive the desired usable funds, the loan request must equal Desired usable funds x (1 - Compensating balance requirement).

Question 22

Trade credit may be considered the least formal of all forms of financing.

Question 23

In general, most businesses should take advantage of a cash discount of 2/10 net 30 because the cost of not doing so is more expensive than the cost of borrowing.

Question 24

A discounted loan is one in which the borrower receives a discount on the interest rate.

Question 25

To compute the effective cost of a revolving agreement, the joint effect of interest on borrowed funds and commitment fees must be considered.

Question 26

Trade credit is the single most important form of short-term business financing.

Question 27

Discounting has the effect of reducing the available funds received by the borrower while raising the effective interest rate.

Question 28

When a loan is discounted, to receive the desired usable funds, the loan request must equal Desired usable funds x (1 - Discount).

Question 29

A compensating balance requirement means that a lending institution will require a borrowing company to keep a certain percentage of the loaned amount on deposit with that institution.

Question 30

Compensating balances decrease the effective cost of borrowing.

Question 31

A line of credit is a legal obligation of the bank to provide funds up to the agreed-upon borrowing limit for a period of time.

Question 32

The U.S. Small Business Administration (SBA) was established by the federal government to provide financial assistance to small firms unable to obtain loans through direct government loans.

Question 33

A revolving credit agreement is a commitment in the form of a standby agreement for a guaranteed line of credit.

Question 34

A discounted loan is one in which the borrower receives the principal plus the interest at the time the loan is made.

Question 35

A commercial finance company typically purchases the accounts receivable outright and assumes all credit risks.

Question 36

A factor engages in accounts receivable financing for business by taking accounts receivable as collateral for making short-term loans.

Question 37

Short-term financing may come in the form of trade credit extended between businesses.

Question 38

An acceptance is a receivable from the sale of merchandise on the basis of a draft or bill of exchange drawn against the buyer or the buyer's bank.

Question 39

Maturity factoring is where the firm selling its accounts receivable is paid on the normal collection date or net due date of the account.

Question 40

A factor engages in accounts receivable financing for business by purchasing accounts outright and assuming all credit risks.

Question 41

Stocks and bonds are rarely used as collateral for short-term loans.

Question 42

Grain would be a type of inventory for which a blanket inventory lien would be used.

Question 43

When accounts receivable are factored: money is advanced to the borrower as a loan against accounts receivable; accounts receivable balances remain on the balance sheet; the customer payment is made to the firm, which then submits the payment to the bank; and interest is charged on the loan.

Question 44

With accounting factoring, the factor assumes all credit risk on accounts receivable.

Question 45

A trust receipt is a claim against a customer's inventory when the individual items are indistinguishable.

Question 46

Inventory loans are less expensive than unsecured loans to business borrowers.

Question 47

If a borrowing firm does not qualify for an unsecured bank loan and pledges its accounts receivable as security, it eliminates the need for a credit investigation.

Question 48

The practice of compensating balances is diminishing.

Question 49

A field warehouse is a warehouse on the grounds of the borrowing business establishment.

Question 50

A claim against an inventory when individual items are indistinguishable is called a complete inventory lien.

Question 51

Advance factoring is where the firm selling its accounts receivable is paid on the normal collection date or net due date of the account.

Question 52

If a borrowing firm does not qualify for an unsecured bank loan and pledges its accounts receivable as security, it must execute an assignment of these accounts to the bank.

Question 53

A trust receipt is a lien against everything in inventory.

Question 54

When accounts receivable are factored: the borrower sells the receivable; accounts receivable balances are removed from the balance sheet; the customer payment is made to the factor; and interest is charged on the funds advanced.

Question 55

An owner of a business may not assign life insurance as collateral for a short-term loan.

Question 56

New cars would be a type of inventory for which a trust receipt would be used.

Question 57

Tea leaves would be a type of inventory for which a blanket inventory lien would be used.

Question 58

New cars would be a type of inventory for which a blanket inventory lien would be used.

Question 59

When accounts receivable are pledged: money is advanced to the borrower as a loan against accounts receivable; accounts receivable balances remain on the balance sheet; the customer payment is made to the firm, which then submits the payment to the bank; and interest is charged on the loan.

Question 60

With a trust receipt lean, the bank retains ownership of the goods until they are sold in the regular course of business.

Question 61

Current assets less current liabilities.

A) Working liabilities
B) Long-term liabilities
C) Working capital
D) Net working capital

Question 62

The bank line of credit is:

A) the type of business activity on which a particular bank concentrates its lending
B) the maximum amount of credit extended to a business customer during a period of one year
C) the average of loans made to a business customer during a year
D) the loan limit that a bank has established for a business customer

Question 63

Permanent current assets are:

A) accounts receivable that have become bad debts
B) inventories that have become obsolete
C) the level of current assets equal to fixed assets
D) the level of current assets needed to support sales

Question 64

The largest providers of short-term financing are:

A) commercial banks
B) commercial finance companies
C) factors
D) commercial paper issuers

Question 65

Spontaneous financing refers to:

A) financing provided by accounts payable and accrued liabilities
B) line of credit agreements
C) revolving credit agreements
D) financing done without collateral

Question 66

When old short-term debt is replaced by new short-term debt as the old debt comes due, the process is known as:

A) compensating balance
B) rolling the debt
C) fluctuating financing
D) re-terming

Question 67

Which of the following are typical financing strategies used by businesses?

A) maturity matching, aggressive financing, and conservative financing
B) size matching, aggressive financing, and aggressive financing
C) maturity matching, size matching, and aggressive financing
D) maturity matching, size matching, and conservative financing

Question 68

If total assets are $100,000, fixed assets are $30,000, current liabilities are $20,000, then net working capital is:

A) $100,000
B) $70,000
C) $50,000
D) $0

Question 69

An influence that affects the selection of a short-term financing strategy includes:

A) cost
B) market risk
C) term risk
D) arbitrage

Question 70

Cash, marketable securities, accounts receivable, and inventories.

A) Working liabilities
B) Current liabilities
C) Working capital
D) Net working capital

Question 71

Compensating balances at a commercial bank are:

A) net differentials of balances with correspondent banks
B) maintained by Federal Reserve for services rendered
C) account balances required in connection with unsecured business loans under bank lines of credit
D) required vault-held reserves as an alternative to reserves held by Federal Reserve Banks

Question 72

For most lines of business the basic source of short-term loan financing is:

A) commercial banks
B) finance companies
C) the commercial paper market
D) factors

Question 73

If a firm has positive net working capital, the current ratio is:

A) greater than one
B) less than one
C) equal to one
D) between zero and one

Question 74

Tea leaves would be a type of inventory for which a trust receipt would be used.

Question 75

Higher financing cost and lower risk of not being able to borrow when short-term funds are needed are characteristics of:

A) aggressive financing
B) conservative financing
C) maturity matching
D) term borrowing

Question 76

A firm's current assets.

A) Working liabilities
B) Current liabilities
C) Working capital
D) Net working capital

Question 77

If net working capital is negative:

A) current assets are greater than current liabilities
B) it represents the portion of fixed assets that are financed through long-term financing
C) it represents the portion of fixed assets that are financed by current liabilities
D) none of the above

Question 78

Net working capital is defined as:

A) current assets plus current liabilities
B) current assets less fixed assets
C) current assets less current liabilities
D) current liabilities plus long-term liabilities

Question 79

Which of the following operating characteristics does not affect a firm's short-term financing strategy?

A) industry and company factors
B) seasonal variation
C) fixed asset investments
D) cyclical variations

Question 80

In general, short-term self-liquidating bank loans are intended to:

A) help recapitalize a company.
B) help a company finance merger & acquisitions.
C) help a company finance seasonal inventory and accounts receivable requirements.
D) help a company finance investment in capital assets.