Deck 13: Financing the Business

Question 1

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

A) accrued wages.
B) bank overdrafts.
C) trade credit.
D) ordinary shares.

Answer 1

C

Question 2

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

A) A grocery retailer.
B) An accountant.
C) A coffee shop.
D) A restaurant.

Answer 2

B

Question 3

The level of debtors is determined by:

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

Answer 3

D

Question 4

Spontaneous sources of funds:

A) generally include a borrowing charge.
B) arise in a substantially unplanned and unstructured way in the normal course of business.
C) include leases.
D) all of the options are true.

Question 5

An entity offers their customers discount terms of 2/10 net 30 to encourage payment of invoices.What does this mean?

A) Take 2% off if paying within 10 days, or pay 100% before 30 days.
B) Take 2% off if paying within 30 days.
C) Pay 10% today and the balance in 30 days.
D) In two days' time, pay 10% and the balance in 30 days.

Question 6

Which of these is not a spontaneous source of finance?

A) Accrued wages.
B) Pay-as-you-go tax instalments.
C) Bank overdrafts.
D) Trade creditors.

Question 7

Sources of funding that can help an entity maintain an appropriate level of net working capital include:

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

Question 8

If the levels of inventory are expressed as a percentage of current assets,which of the following statements is the most likely in terms of the inventory held by Telstra and Woolworths?

A) Telstra's inventory % would be slightly higher than Woolworths.
B) Their inventory percentages would be similar.
C) Woolworths would have a much higher inventory % than Telstra.
D) Woolworths would have a slightly higher inventory % than Telstra.

Question 9

An entity that does not have enough cash to meet its financial obligations as they fall due is said to be:

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

Question 10

The penalty for insolvency is:

A) the winding up of the entity.
B) a possible jail term for the shareholders.
C) a fine determined by the ASIC.
D) an increase in the tax rate payable for the next 2 years.

Question 11

How do entities manage their customer credit policies?

A) Ask potential customers to complete a credit-scoring questionnaire.
B) All of these options help entities to manage their credit policies.
C) Set upper credit limits.
D) Maintain strict payment terms.

Question 12

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

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

Question 13

A change in the days debtors turnover from 35 days to 28 days means that:

A) debtors are purchasing less on credit.
B) credit sales are increasing.
C) debtors are paying their accounts earlier.
D) debtors are paying their accounts later.

Question 14

Issues that require an entity to manage its cash include:

A) the cost of not having enough cash.
B) the need to have sufficient cash to meet commitments.
C) the timing of cash flows.
D) all of these issues require cash management.

Question 15

Costs involved in managing cash include:

A) no interest earned on cheque accounts.
B) merchant fees for debit cards.
C) keeping cash secure from thieves.
D) all of the above.

Question 16

Which of the following is not a cost of granting credit to customers?

A) The opportunity cost of funds being tied up.
B) Administration costs for managing receivables.
C) Attracting new customers.
D) The cost of carrying slow payers and bad debts.

Question 17

Manufacturers hold raw materials inventory so:

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

Question 18

Examples of cash outflows from an entity do not include:

A) purchase of materials.
B) sale of unused assets.
C) payment of taxes.
D) payment of salaries and wages.

Question 19

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 grocery retailer.
C) A medical practice.
D) An auto repair shop.

Question 20

Temporary assets should be financed with:

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

Question 21

Which of the following is not a reason that a company may issue options?

A) To reward and motivate employees.
B) To set in place a programmed raising of future funds.
C) To make the current share issue less attractive.
D) As an additional benefit to the current share issue.

Question 22

The parties involved in a novated lease are:

A) employer and employee.
B) employee and financial institution.
C) employer and financial institution.
D) employer, employee and financial institution.

Question 23

Which of the following statements regarding a hire-purchase agreement is correct?

A) They are normally used to provide motor vehicles to employees as part of salary packages.
B) Equipment is purchased by a financial institution which then hires the equipment to the entity for use during the agreement period.
C) They are non-cancellable.
D) Ownership of the hire equipment stays with the financial institution at the end of the agreement period.

Question 24

Which of the following is a characteristic of a fixed rate business loan?

A) The interest rate may be converted to a variable rate after the initial period expires.
B) The term of the loan is usually up to 25 years.
C) All of these options are characteristics of a fixed rate business loan.
D) The loan may be unsecured, secured with entity assets, or secured with residential property.

Question 25

Which of the following is a benefit of keeping inventory on hand?

A) Sales are made and profits are gained.
B) Cross-sales are made and profits increased.
C) All of these options are benefits of holding inventory.
D) Goodwill is built up and no-inventory costs are avoided.

Question 26

Which of the following statements apply to operating leases?

A) The lease is cancellable upon giving notice.
B) The lease is for the full period of the asset's useful life.
C) Ownership of the asset is with the lessee.
D) None of these statements apply to operating leases.

Question 27

If trade creditors at the beginning of the period are $56 000 and at the end of the period are $68 000,and total credit purchases for the period are $480 000,credit turnover in days is (round your answer up to the next full number of days):

A) 13 days.
B) 52 days.
C) 43 days.
D) 48 days.

Question 28

Which of the following is not a characteristic of debentures?

A) Debentures are issued to raise debt funds.
B) Debentures are secured.
C) Debentures may be issued privately to large institutional investors.
D) None of the above. All of the options are characteristics of debentures.

Question 29

Which of the following statements regarding finance leases is true?

A) The lease is cancellable.
B) The lease is for the majority of the useful life of the asset.
C) Interest and depreciation are expenses of the lessor.
D) The lease payments are treated as ownership costs.

Question 30

'Factoring' is one method of using accounts receivable as security over a loan.This occurs when:

A) a financial institution loans cash to an entity by acquiring 70 - 75% of an entity's accounts receivable.
B) a financial institution loans cash to an entity with the entity guaranteeing the money it receives from specific debtors will be used to repay the loan.
C) a financial institution loans cash to an entity by 'buying' the accounts receivable and obtaining the right to collect the accounts directly from the entity's debtors.
D) None of these options is correct.

Question 31

Which of the following is not a source of debt finance from the Australian market?

A) Leases.
B) Corporate bonds.
C) Unsecured notes.
D) Debentures.

Question 32

Which of the following statements about corporate bonds is true?

A) They are an unsecured debt.
B) They are issued to raise funds so that a business can expand its operations.
C) Good credit ratings are extremely important to potential issuers.
D) All of these statements are true.

Question 33

A commercial bill is an example of a:

A) discount security.
B) a full security.
C) a bank overdraft.
D) a long-term loan.

Question 34

A renounceable rights issue means:

A) shareholders are prevented from selling their rights to subscribe.
B) the new shares are being issued at a price higher than the current market price.
C) shareholders are able to sell their rights to subscribe.
D) they are only available to new shareholders.

Question 35

If average inventory is $225 000,total credit sales is $1 200 000 and cost of sales is $980 000,the days inventory turnover is (round your answer up to the next full number of days):

A) 69 days.
B) 84 days.
C) 23 days.
D) 19 days.

Question 36

Assets that are commonly leased by entities include:

A) motor vehicles, plant and equipment.
B) inventory and motor vehicles.
C) office equipment and supplies.
D) motor vehicles and supplies.

Question 37

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) interest only loans.
C) fully drawn advances.
D) business loans.

Question 38

Common types of short-term finance include:

A) commercial bills and bank under-drafts.
B) bank overdrafts and trade debit.
C) paid taxes and trade credit.
D) accrued wages and floor-plan finance.

Question 39

A change in the average inventory turnover period from 58 days to 76 days means that inventory is:

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

Question 40

Which of these is a 'holding' cost of inventory?

A) All of these options are 'holding' costs of inventory.
B) Theft.
C) Display costs.
D) Deterioration and obsolescence.

Question 41

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

Question 42

________________ finance is the most important example of inventory finance commonly found in the motor vehicle retail sector.

Question 43

A loan facility that is attached to a cheque account is a ___________ _____________.

Question 44

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

A) portfolio investment.
B) hybrid investment.
C) indirect investment
D) direct investment.

Question 45

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

Question 46

Ordinary shares may be transformed by:

A) issue of

Question 47

A feature of convertible

Question 48

Which of the following statements is correct with regards to hybrid debt securities?

A) Hybrid debt securities include both debt and equity features.
B) Convertible notes and convertible

Question 49

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

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

Question 50

Storage and display costs,insurance costs,deterioration and obsolescence are all examples of (ordering/holding)_____________ inventory costs.

Question 51

A cash ____________ enables managers to plan for the most advantageous arrangements for investing cash surpluses or providing for cash deficits.

Question 52

One aspect of managing the entity's credit policy is selecting suitable_____________ customers.

Question 53

The _________________ principle is based on the premise of matching the maturity of the source of funding with its use.

Question 54

The issuer of a _______________ security receives less than the face value of the security.

Question 55

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

Question 56

Which of the following statements about equity finance is true?

A) Ordinary shares are the main type of shares issued.
B)

Question 57

The principal difference between the two main hybrid instruments is:

A) convertible notes pay interest, and convertible

Question 58

A key feature of portfolio investment is:

A) there is direct investment of capital.
B) the investor has limited control over the Australian entity's key policies.
C) the investor has no control over the Australian entity's key policies.
D) the investor has full control over key policies of the Australian entity.

Question 59

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

A) Variable interest rate.
B) Conversion must take place between 2 and 10 years from the date of issue.
C) The note-holders decide when to convert the notes to ordinary shares.
D) The notes are unsecured.

Question 60

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

Question 61

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

Question 62

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

Question 63

For interest-only loans the _______________amount is repaid in full at the end of the loan term.