Question 1

Which of the following is a major source of short-term financing that is interest free, usually requires no collateral, and is involved in some form in 70-90% of all transactions between businesses?

Accepted Answer

Trade credit is a major source of short-term financing that is interest-free, usually requires no collateral, and is involved in some form in 70-90% of all transactions between businesses. Trade credit is simply the extension of credit by a supplier to a customer for the purchase of goods or services. It is a common practice in many industries and can be an important component of a business's working capital management strategy.

Question 2

What is the most common form of short-term financing?

Accepted Answer

Trade credit is the most common form of short-term financing as it involves the supplier extending credit to the buyer, allowing the buyer to delay payment for goods or services received. This is a common practice among businesses and can provide a valuable source of short-term financing, especially for small businesses. Factoring and bank loans may also be used for short-term financing, but they are not as common as trade credit. The sale of stock is a form of long-term financing and is not typically used for short-term financing needs.

Question 3

Lockheed Martin purchased raw materials to produce Black Hawk helicopters. Their payment term is 30 days. Which of the following has Lockheed utilized?

Accepted Answer

Lockheed Martin has utilized trade credit, which is the opportunity to purchase goods or services on credit with a predetermined payment term, in this case, 30 days.

Question 4

Rami has a long-standing relationship with his banker. When his company needs a short-term loan, he is able to obtain a loan at prime rate and does not have to put up any collateral for the loan. What type of financing has Rami obtained?

Accepted Answer

Rami has obtained an unsecured loan because he does not have to put up any collateral for the loan.

Question 5

Which form of short-term financing is similar to a credit card in that you have a maximum credit limit you can borrow against at any time and you pay interest only on the amount of funds you have used?

Accepted Answer

A line of credit is the best choice since it functions similarly to a credit card, providing a maximum credit limit that a business can borrow against as needed. Interest is only charged on the amount borrowed, making it an efficient way to manage short-term cash flow needs. Factoring involves selling accounts receivable to a third party for cash, trade credit extends credit terms from suppliers, and equity financing involves selling ownership in a business to raise funds, none of which are as similar to a credit card as a line of credit.

Question 6

Sandra has a dog boarding and grooming business. She purchases grooming supplies and dog food from a supplier and takes delivery; however, she has 30 days within which to pay the supplier's invoice. This is an example of which of the following?

Accepted Answer

This is an example of trade credit, which is when a supplier allows a business to purchase goods or services and pay for them at a later date, typically within 30 to 90 days. This can help a business manage cash flow by allowing them to receive and use the goods or services before having to pay for them.

Question 7

As a way to cover their short-term financial needs, Smith & Welling CPAs have access to a fixed amount of funds from their bank they can borrow as needed. Which of the following does this exemplify?

Accepted Answer

A line of credit is a pre-approved amount of funds that a borrower can access on an as-needed basis. Smith & Welling CPAs have access to a fixed amount of funds from their bank, which they can borrow as needed. This fits the definition of a line of credit. Trade credit refers to the credit extended by suppliers to their customers, promissory note is a written promise to repay a debt, and commercial paper is a short-term debt instrument issued by companies.

Question 8

What is short-term financing NOT backed by collateral called?

Accepted Answer

Short-term financing that is not backed by collateral is called unsecured financing.

Question 9

Kevin received unsecured financing from a bank for his plumbing business. This means that Kevin did NOT have to provide the bank with which of the following?

Accepted Answer

Unsecured financing means that the borrower does not have to provide collateral, such as property or assets, to secure the loan. The bank may still require reasons for the loan, application forms, and credit reports to evaluate the borrower's creditworthiness.

Question 10

Which of the following are loans from banks and financing companies that are protected by collateral such as inventory or accounts receivable balances?

Accepted Answer

Secured loans are loans from banks and financing companies that are protected by collateral such as inventory or accounts receivable balances. Equity financing involves selling a stake in the business to investors. A line of credit is a flexible loan option that allows businesses to borrow funds as needed. Trade credit is a form of financing where a supplier extends credit to a customer for purchasing goods or services.

Question 11

Banks and other financial institutions offer short-term loans not secured by collateral at interest rates that vary based on which of the following?

Accepted Answer

The interest rates offered on short-term loans not secured by collateral vary based on the business's credit rating. This is because a higher credit rating indicates a lower risk of default, and thus lower interest rates. The other options, such as the type of business, owner's personal wealth, and state of the economy, may also be considered by lenders but are not the primary factors in determining interest rates for short-term loans.

Question 12

In which type of sales arrangement does a seller allow a buyer 30 to 60 days to pay for a purchase?

Accepted Answer

The sales arrangement described in the question is trade credit, where the seller allows the buyer a certain amount of time to pay for their purchase. Choice A, a bank loan, is not a sales arrangement but a form of financing. Choice C, a promissory note, is a legal document in which the borrower promises to pay back a loan according to specified terms. Choice D, factoring, is a process where a company sells its accounts receivable to a third-party factoring company to receive immediate payment, rather than waiting for their customers to pay their invoices.

Question 13

Thom has a culinary supply business. He orders pots and pans from a manufacturer and takes delivery. However, he has up to 10 days to pay the invoice without interest or penalty. This is an example of which of the following?

Accepted Answer

The fact that Thom has up to 10 days to pay for the pots and pans he orders from the manufacturer without incurring interest or penalty is an example of trade credit, which is essentially a form of credit extended to businesses by their suppliers to enable them to buy now and pay later.

Question 14

Companies often look at short-term debt financing because it is usually easier to obtain than long-term debt financing for three reasons. Which of the following is NOT one of the three reasons?

Accepted Answer

Short-term loans do not necessarily look better on the balance sheet than long-term loans. In fact, having a large amount of short-term debt can be seen as a negative signal to investors, as it may indicate that the company is struggling to meet its long-term obligations.

Question 15

MCB Company experienced a significant increase in sales as a result of its new promotional campaign. Yesterday, however, it realized that because most of those sales were on credit, it did not have enough money in the bank to pay this month's bills. MCB can take care of this situation temporarily by doing which of the following?

Accepted Answer

MCB Company needs a short-term solution to its cash flow problem, as it needs the money to pay its bills this month. Obtaining long-term financing or issuing shares are more long-term solutions that would not address the immediate need for cash. Selling commercial drafts may be an option, but it may not generate enough money quickly. Therefore, obtaining short-term financing, such as a line of credit or a short-term loan, is the best choice to address the immediate need for cash.

Question 16

In order to obtain a short-term loan from the bank, Dillon Foods must pledge its inventory as security. In this scenario, the inventory serves as which of the following for the loan?

Accepted Answer

The inventory is serving as collateral for the short-term loan, meaning that if Dillon Foods fails to repay the loan, the bank can seize the inventory to satisfy the debt.

Question 17

Vikram and Rupi decide to start a new restaurant. They obtain a loan from the bank, but the bank insists that they pledge the equipment owned by the restaurant as security for the repayment of the loan. Which of the following does this exemplify?

Accepted Answer

Pledging equipment as security for a loan is an example of collateral, where an asset is pledged as security against the repayment of a loan. Securitization refers to the process of pooling and repackaging assets into securities, while amortization refers to the process of paying off a loan in regular instalments over a period of time. Working capital refers to the funds used to cover a company's day-to-day operating expenses.

Question 18

Tidewater Distributors has an arrangement with its bank in which it has access to a fixed amount of funds to use as needed, and the company has to make monthly payments along with interest based on the outstanding amount of the loan. What type of financing does Tidewater Distributors use?

Accepted Answer

Tidewater Distributors is utilizing a line of credit, which provides them with access to a fixed amount of funds and requires them to make monthly payments along with interest based on the outstanding balance of the loan. Commercial paper, factoring, and trade credit are all different methods of financing and do not fit the description provided in the question.

Question 19

Which of the following is NOT a characteristic of short-term financing?

Accepted Answer

The answer of Which of the following is NOT a...

Question 20

Which of the following is the lowest rate charged by banks for short-term loans?

Accepted Answer

The answer of Which of the following is the lowest...

Quiz 19: Recognizing the Basics of Financial Management