Question 1

Accruals are "free" capital in the sense that no explicit interest must normally be paid on accrued liabilities.

Accepted Answer

Accrued liabilities are amounts that a company owes but has not yet paid, such as salaries, interest, and taxes. They represent a form of financing because the company is essentially borrowing money from its suppliers or employees. However, unlike other forms of financing such as loans or bonds, no explicit interest must normally be paid on accrued liabilities. Therefore, they can be considered "free" capital in the sense that they do not involve an explicit cash outflow for interest payments.

Question 2

The calculated cost of trade credit for a firm that buys on terms of 2/10 net 30 is lower (other things held constant)if the firm plans to pay in 40 days than in 30 days.

Accepted Answer

The answer of The calculated cost of trade credit for...

Question 3

As a rule,managers should try to always use the free component of trade credit but should use the costly component only if the cost of this credit is lower than the cost of credit from other sources.

Accepted Answer

Using the free component of trade credit is beneficial for managers as it does not involve any explicit costs. However, using the costly component may involve interest or other fees, which would increase the overall cost of credit. Therefore, managers should only use the costly component if it is cheaper than other sources of credit they have access to.

Question 4

The four primary elements in a firm's credit policy are (1)credit standards, (2)discounts offered, (3)credit period,and (4)collection policy.

Accepted Answer

The four primary elements in a firm's credit policy are credit standards, discounts offered, credit period, and collection policy.

Question 5

Suppose a firm changes its credit policy from 2/10 net 30 to 3/10 net 30.The change is meant to meet competition,so no increase in sales is expected.The average accounts receivable balance will probably decline as a result of this change.

Accepted Answer

By offering a slightly better discount (3% instead of 2%) for prompt payment, customers may be more likely to pay within the 10 days and the average accounts receivable balance could decline.

Question 6

The facts (1)that no explicit interest is paid on accruals and (2)that the firm can control the level of these accounts at will makes them an attractive source of funding to meet working capital needs.

Accepted Answer

The answer of The facts (1)that no explicit interest is...

Question 7

"Stretching" accounts payable is a widely accepted,entirely ethical,and costless financing technique.

Accepted Answer

Stretching accounts payable involves delaying invoice payments to suppliers, which can create financial strain and negatively impact supplier relationships. It is not entirely ethical and can lead to hidden costs such as late fees or loss of supplier discounts.

Question 8

If a firm busy on terms of 2/10 net 30,it should pay as early as possible during the discount period.

Accepted Answer

The answer of If a firm busy on terms of...

Question 9

Changes in a firm's collection policy can affect sales,working capital,and profits.

Accepted Answer

Changes in a firm's collection policy can have an impact on sales as customers may change their buying behavior based on the new policies. It can also impact working capital as the timing of cash inflows may change, affecting the company's ability to pay bills and invest in new projects. Finally, changes in collection policy can impact profits as it can lead to bad debts or have an impact on the cost of financing receivables.

Question 10

Funds from short-term loans can generally be obtained faster than from long-term loans for two reasons: (1)when lenders consider long-term loans they must make a more thorough evaluation of the borrower's financial health,and (2)long-term loan agreements are more complex.

Accepted Answer

Short-term loans typically have less stringent approval processes and simpler loan agreements compared to long-term loans, which require more in-depth evaluation and complex negotiations for repayment terms.

Question 11

Trade credit can be separated into two components: free trade credit,which is credit received after the discount period ends,and costly trade credit,which is the cost of discounts not taken.

Accepted Answer

Trade credit can be separated into two components: free trade credit, which is credit received during the discount period without incurring any cost, and costly trade credit, which refers to the cost associated with not taking the discounts and extending payment beyond the discount period.

Question 12

One of the advantages of short-term debt financing is that firms can obtain short-term credit more quickly than long-term credit.

Accepted Answer

Short-term debt financing involves borrowing money for a shorter period of time, typically less than a year. As the repayment period is shorter, lenders are often willing to provide credit more quickly compared to long-term debt financing, which involves borrowing money for a longer period of time, typically more than a year. Therefore, the statement is true.

Question 13

If a firm's suppliers stop offering discounts,then its use of trade credit is more likely to increase than to decrease,other things held constant.

Accepted Answer

If suppliers stop offering discounts, the firm may have less cash on hand, leading to an increased reliance on trade credit to finance its operations.

Question 14

The calculated cost of trade credit can be reduced by paying late.

Accepted Answer

The answer of The calculated cost of trade credit can...

Question 15

When deciding whether or not to take a trade discount,the cost of borrowing from a bank or other source should be compared to the cost of trade credit to determine if the cash discount should be taken.

Accepted Answer

It is important to compare the cost of borrowing with the cost of trade credit when deciding whether or not to take a trade discount. This allows a business to determine if it is more cost-effective to take the discount or to borrow from a different source.

Question 16

Short-term financing is riskier than long-term financing since,during periods of tight credit,the firm may not be able to rollover (renew)its debt.This is especially true if the funds are used to finance long-term assets rather than short-term assets.

Accepted Answer

Short-term financing typically involves borrowing money for less than a year, and it may be riskier than long-term financing, which involves borrowing money for a longer period of time. During periods of tight credit, it may be difficult for companies to renew their debt, which can be challenging if they have used the funds to finance long-term assets that cannot be easily sold or converted into cash. This can increase the risk of default or bankruptcy.

Question 17

Accruals are "spontaneous," but unfortunately,due to law and economic forces,firms have little control over the level of these accounts.

Accepted Answer

Accruals, such as accounts payable and accounts receivable, are a result of a firm's normal business operations and are not actively managed by the firm. The level of these accounts is influenced by external factors such as trade credit terms and customer payment behavior, and therefore the firm has limited control over their level.

Question 18

Short-term marketable securities are held for two separate and distinct purposes: (1)to provide liquidity as a substitute for cash and (2)as a non-operating investment.Marketable securities held while awaiting reinvestment are not available for liquidity purposes.

Accepted Answer

Marketable securities held while awaiting reinvestment can still be liquidated if needed, and therefore can be used for liquidity purposes.

Question 19

Not taking cash discounts is costly,and as a result,firms that do not take them are usually those that are performing poorly and have inadequate cash balances.

Accepted Answer

Not taking cash discounts can lead to higher costs for firms because they miss out on savings offered for early payment. Firms that are performing poorly or have inadequate cash balances may not be able to take advantage of these discounts, thus incurring higher expenses.

Question 20

One of the effects of ceasing to take trade credit discounts is that the firm's accounts payable will rise,other things held constant.

Accepted Answer

When a firm ceases to take trade credit discounts, it means that the firm is not paying its accounts payable early and is instead paying them within the maximum credit period allowed by the supplier. This will lead to an increase in the firm's accounts payable balance, as they will have a larger amount of outstanding payments to make.

Quiz 16: Supply Chains and Working Capital Management