Question 1

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

Accepted Answer

Trade credit is actually one of the least expensive forms of short-term financing as it involves a delay in payment for goods or services received, without any interest or fees charged.

Question 2

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 3

A revolving credit agreement represents a line of credit that is guaranteed.

Accepted Answer

A revolving credit agreement is guaranteed up to a certain amount, and can be used and repaid repeatedly within the terms of the agreement.

Question 4

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 5

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

Accepted Answer

The answer of A revolving credit agreement is designed to...

Question 6

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 7

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 form of credit in which a vendor 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, typically within 30, 60, or 90 days.

Question 8

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

Accepted Answer

An unsecured loan is not backed by collateral and is based on the borrower's creditworthiness and ability to repay the loan.

Question 9

The finance manager at Preferred Pet Care Inc has asked the company's accountant to prepare a report that shows the amount the firm is spending monthly on veterinary supplies for its western suburb service area,in the hopes of negotiating better payment terms with its suppliers.The purpose of this effort is to increase cash levels within the firm.

Accepted Answer

The finance manager at Preferred Pet Care Inc is asking for a report on the amount spent on veterinary supplies in the western suburb service area in order to negotiate better payment terms with suppliers and increase cash levels within the firm.

Question 10

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 11

Backstreet Books is seeking financing to fund the opening of two more locations in a major university town.There is no need to consider debt financing for this project.It will require a sizeable investment in equity funds.

Accepted Answer

The answer of Backstreet Books is seeking financing to fund...

Question 12

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

Accepted Answer

While obtaining long-term financing is important, financial managers also spend time on short-term financing, managing cash flow, making investment decisions, forecasting financial performance, and managing risk.

Question 13

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

Accepted Answer

Trade credit is the most common form of short-term funding, where a supplier allows a buyer to postpone payment for goods or services received.

Question 14

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 the firm's overall financial health, including both short-term and long-term financial needs. However, a significant part of their job involves managing the day-to-day cash flow, making sure the firm has enough money to meet its short-term obligations such as paying suppliers, payroll, and operating expenses.

Question 15

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 that is backed by collateral, such as a car or a house. While the borrower may have a longer repayment period, usually between 5-10 years, they are still required to make regular payments towards the loan.

Question 16

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

Accepted Answer

Trade credit is a common practice in which a buyer purchases goods or services with the agreement to pay the seller at a later specified date. This allows a buyer to delay payment and potentially improve their cash flow, while giving the seller the benefit of making a sale without requiring immediate payment.

Question 17

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 18

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

Accepted Answer

The terms "2/10, net 30" indicate a 2% discount if payment is made within 10 days, not a 10% discount.

Question 19

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

Accepted Answer

This statement is false. Suppliers prefer to offer trade credit to customers with good credit ratings and history because it reduces the risk of non-payment and improves the chances of timely payment. Providing trade credit to customers with poor credit ratings or no credit history can lead to losses for the supplier.

Question 20

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 a written agreement between a supplier and a business customer, in which the customer promises to pay the supplier a specific amount of money by a certain date or on demand.

Quiz 18: Financial Management