Deck 13: Financing the Business

Question 1

Which of the following businesses would be most likely to have the greatest proportion of working capital held as inventory?

A)an accountant
B)a supermarket
C)a medical practice
D)an auto electrician

Answer 1

B

Question 2

Which of the following businesses would be most likely to have the greatest proportion of working capital held as debtors?

A)an accountant
B)a supermarket
C)a milk bar
D)a restaurant

Answer 2

A

Question 3

The level of debtors is determined by:

A)all of the options are used to determine the level of debtors
B)total sales
C)credit policies
D)collection policies

Answer 3

A

Question 4

Manufacturers hold raw materials inventory so:

A)production is not affected by disruptions in supply.
B)they are immune to sudden changes in price.
C)there is sufficient time between delivery and use for the quality to be checked.
D)their warehouses are not sitting empty too much of the time.

Question 5

If working capital is allowed to increase to an inappropriately high level:

A)it can reduce the average rate of return on equity.
B)there will be an opportunity cost of doing so
C)all of the options are true
D)it can reduce the average rate of return on assets

Question 6

Which of these is a typical source of temporary finance?

A)commercial bills
B)trade creditors
C)accrued wages
D)all of the above

Question 7

How do entities ensure that customers are able to honour credit sales?

A)get them to fill in a credit-scoring questionnaire before extending credit
B)have their directors give a personal guarantee for the amount owing
C)limit the size of credit a customer can build up
D)all of the options are true

Question 8

Net working capital is:

A)cash minus current liabilities
B)current assets minus current liabilities
C)the ability to meet short-term financial commitments
D)cash plus currents assets

Question 9

Forms of funding include

A)spontaneous.
B)temporary.
C)permanent.
D)all of the options are forms of funding

Question 10

If a company becomes insolvent the penalty is:

A)a possible gaol term for the shareholders.
B)a fine determined by ASIC.
C)an increase in the tax rate payable for the next 12 months.
D)the winding up of the entity.

Question 11

A change in the debtor's turnover period from 31 days to 25 days means that:

A)debtors are paying their accounts faster
B)debtors are taking longer to pay their accounts
C)debtors are buying less on credit
D)sales on credit are increasing

Question 12

When an entity does not have enough cash to meet its financial obligations as they fall due it is said to be

A)liquid.
B)insolvent.
C)dissolved.
D)wound up.

Question 13

Spontaneous sources of funds:

A)are generally free of charge to the borrowing firm.
B)generally include commercial bills and bank loans
C)are generally funds with maturities greater than one year
D)all of the options are true

Question 14

The cost of holding cash is:

A)the opportunity cost of holding currency or cash deposits rather than short-term securities.
B)the cost of ensuring the physical security of the currency.
C)losses from inflation.
D)all of the options are true

Question 15

Examples of cash outflows from an entity do not include

A)sale of unused assets.
B)purchase of labour and materials.
C)payment of taxes.
D)purchase of inventories.

Question 16

Temporary assets should be financed with:

A)temporary,permanent or spontaneous sources of funding.
B)temporary sources of funding
C)spontaneous sources of funding only
D)spontaneous and permanent sources of funding

Question 17

The most important source of spontaneous short-term funding for entities is normally:

A)accrued wages.
B)trade credit.
C)bank overdraft.
D)factoring.

Question 18

Permanent assets should be financed with what sources of funding?

A)permanent
B)temporary
C)spontaneous
D)permanent and spontaneous

Question 19

Which of these is a spontaneous source of finance?

A)lease agreements
B)pay-as-you-go tax instalments
C)bank overdraft
D)all of the options are sources of spontaneous funding

Question 20

Which of the following is a cost of granting credit?

A)the opportunity cost of funds being tied up
B)all the options are costs of granting credit
C)administration costs for managing receivables
D)the cost of carrying slow payers and bad debts

Question 21

Loans which are initially drawn down to the full amount and repaid over the term of the loan by a fixed repayment schedule are known as:

A)instalment loans
B)fully drawn loans
C)interest only loans
D)variable rate interest loans

Question 22

Which of the following is not a source of long term financing?

A)leasing
B)fully drawn advances
C)instalment loans
D)commercial bills

Question 23

Which is most likely concerning the level of inventory held by Telstra and Woolworths as a percentage of current assets?

A)Telstra has a slightly lower percentage than Woolworths
B)their percentages are similar
C)Woolworths has a slightly higher percentage than Telstra
D)Woolworths has a much higher percentage than Telstra

Question 24

Corporate bonds are classed as:

A)unsecured debt.
B)hybrid debt.
C)uncoordinated debt.
D)secured debt.

Question 25

If creditors at the start of the period are $26 000 and at the end of the period are $28 000 and credit purchases are $170 000 for the period,credit turnover in days is:

A)56 days
B)60 days
C)58 days
D)6 days

Question 26

In the event of insolvency,subordinated debt ranks:

A)below other similar classes of debt for repayment
B)above other similar classes of debt for repayment
C)equally with other similar classes of debt for repayment
D)none of the options is true

Question 27

Which of the following statements are applicable to operating leases?

A)the lease is cancellable upon giving notice
B)the lease is for the majority of the useful life of the asset
C)interest and depreciation are expenses of the lessee
D)none of the options apply to operating leases

Question 28

Which of these is a characteristic of a variable-rate business loan?

A)the interest rate is normally fixed for the term of the loan
B)the term of the loan is up to 15 years
C)the loans are almost exclusively for residential property
D)none of the options is a characteristic of a variable-rate business loan

Question 29

An example of a discount security is:

A)a commercial bill.
B)ordinary shares
C)debentures
D)bank overdraft

Question 30

The number of parties involved in a novated lease is:

A)one.
B)two.
C)three.
D)four.

Question 31

When pledging a general line of receivables as security for a loan normally the loan-to-value ratio is in the order of:

A)90-95%.
B)70-75%.
C)50-55%.
D)85%.

Question 32

Which of the following is a way that entities can raise debt from the Australian market?

A)corporate bonds
B)unsecured notes
C)debentures
D)all the options are methods of raising debt from the Australian market

Question 33

Which of the following is a characteristic of debentures?

A)debentures are issued to raise debt funding
B)debentures are secured by a fixed or floating charge over the issuing entity's assets
C)debentures may be issued to the public via a prospectus
D)all of the options are characteristics of debentures

Question 34

A change in the average inventory turnover period from 83 to 59 days means that inventory is:

A)being sold more slowly
B)being sold more quickly
C)being purchased for cash
D)none of the options is true

Question 35

If average inventory is $100 500,credit sales is $ 1 200 000 and cost of sales $830 000 inventory turnover in days is:

A)44.2 days
B)8 days
C)28.7 days
D)11.4 days

Question 36

Which of the following is not a benefit of holding inventory?

A)wholesale price changes
B)sales are made and profits are gained
C)cross-sales are made and profits increased
D)goodwill is built up and no-stock costs are avoided

Question 37

Which of these is not a cost of holding inventory?

A)ordering costs
B)lost sales
C)storage costs
D)deterioration and obsolescence

Question 38

Which of the following statements regarding finance leases is true?

A)the lease is non-cancellable
B)the lease is for the majority of the useful life of the asset
C)interest and depreciation are expenses of the lessee
D)all of the options apply to finance leases

Question 39

The correct option for the lessee/hirer is:

A)hire purchase agreement (option 1)
B)Operating Lease (options 1)
C)Hire purchase agreement (option 2)
D)Operating Lease (options 2)

Question 40

Which of the following statements regarding leasing is incorrect?

A)an asset under lease is owned by the lessee
B)an asset under lease is controlled by the lessee
C)lease payments are tax deductible
D)interest and depreciation of a leased asset is not tax deductible

Question 41

A reason that a company may issue options is:

A)so that its ownership rights are not diluted.
B)to enhance earnings per share.
C)to reward and motivate employees.
D)none of the options is true

Question 42

The principal hybrid instruments are:

A)convertible notes and debentures
B)convertible notes and convertible

Question 43

Foreign investment where capital is invested in an entity by an investor with significant influence over the key policies of the investee,is known as:

A)portfolio investment
B)direct investment
C)medley investment
D)indirect investment

Question 44

A rights issue is:

A)the issue of new shares to existing shareholders in proportion to their current holdings
B)the right to subscribe to shares at a price and time that are predetermined
C)an issue of shares where the shareholder has the right to decide whether the shares are classified as debt or equity
D)none of the options is true

Question 45

The ease of conversion of an asset into cash is a measure of an entity's
____________________.

Question 46

The issuer of a discount security receives (more/less)_______________ than the face value of the security.

Question 47

A manager must trade off the costs versus the ______________ when making decisions about the level of inventory that the entity should carry.

Question 48

There are two types of floor-plan lenders: captives and _________________.

Question 49

If company M&Z Ltd is wound up,the claim of the ordinary shareholders to the net assets comes

A)first.
B)second behind banks.
C)third behind banks and other financial institutions.
D)last.

Question 50

Managers are able to plan for the most advantageous arrangements for investing cash surpluses or providing for cash deficits by using cash ____________ which will highlight any cash surpluses or deficits.

Question 51

One of the main attributes of a company that enables companies to raise equity finance is:

A)it is a separate legal entity
B)it can sue or be sued
C)limited liability of shareholders
D)it is listed on the securities exchange

Question 52

Which of these is not normally a condition attached to convertible notes?

A)fixed interest rate
B)conversion to take place between 2 and 10 years from the date of issue
C)the note-holders to decide when to convert the notes to ordinary shares
D)the notes are secured

Question 53

_________________ discounts are offered to debtors to provide a monetary incentive to encourage debtors to pay their accounts quickly.

Question 54

An entity is said to be _____________ if it is unable to pay its debts or meet its financial obligations on time.

Question 55

The principle of matching the maturity of the source of funding with its use is known as the ____________________ principle.

Question 56

Share capital may be transformed by:

A)a share consolidation
B)a share split
C)share dividends
D)all of the above

Question 57

The most important example of inventory finance where inventory is used as security for a loan is ________________ finance.

Question 58

An increase in the price of shares listed on the securities exchange means:

A)an increase in the shareholder's equity of that company
B)an increase in the market capitalisation of that company
C)an increase in the shareholders' voting rights
D)none of the options is true

Question 59

A measure of the success of collection policies for accounts receivable is a low level of ________ debts.

Question 60

Nearly all companies issue ordinary shares:

A)all of the options are true
B)but not all companies issue

Question 61

Finance leases are (cancellable/non-cancellable)___________________ contractual arrangements.

Question 62

Foreign investment where the investor has significant influence over the key policies of the investee is known as ___________ investment.

Question 63

Loan instruments that are secured by a fixed or floating charge over the entities assets are known as _______________.

Question 64

The main type of share by which companies divide and sell ownership rights to investors is the _______________ share.