Question 1

A fraction of the available credit on a loan agreement deposited by the borrower with the bank in a low or non-interest-bearing account is called a:

Accepted Answer

This is known as a compensating balance, as it is used to offset some of the credit risk for the lender by ensuring that the borrower maintains a certain level of cash on deposit. This amount is typically a percentage of the total loan amount and is agreed upon in advance as part of the loan agreement. It is not the same as a collateral or security deposit, which is intended to cover losses in the event of default.

Question 2

The length of time between the acquisition of inventory and its sale is called the:

Accepted Answer

The inventory period specifically refers to the time it takes for inventory to be sold after it is acquired.

Question 3

Net working capital is defined as:

Accepted Answer

Net working capital is calculated by subtracting current liabilities from current assets. It represents the amount of available capital that a company has to fund its day-to-day operations. Option A refers only to current assets, not the difference between current assets and current liabilities. Option C describes present value of cash flows, not net working capital. Option D refers to total assets and liabilities, not net working capital.

Question 4

The length of time between the acquisition of inventory and the collection of cash from receivables is called the:

Accepted Answer

The operating cycle is the time it takes for a company to purchase inventory, sell the inventory, collect payment from customers, and then repeat the cycle. It represents the complete time it takes to convert cash into inventory and then back into cash (receivables, then cash). The inventory period, accounts receivable period, and accounts payable period are all components of the operating cycle. However, the operating cycle encompasses the entire process. Therefore, option A is the correct answer.

Question 5

A short-term loan secured by the borrower's inventory,either directly or via an intermediary,is called a(n):

Accepted Answer

An inventory loan is a short-term loan secured by the borrower's inventory, either directly or via an intermediary. Therefore, option E is the correct choice. Debenture is a long-term unsecured loan, a line of credit is a pre-approved amount of credit the borrower can use when needed, a banker's acceptance is a type of financial instrument used to facilitate international trade, and a compensating balance is a minimum balance that a borrower must maintain in a bank account as a condition of obtaining a loan. None of these options accurately describe a loan that is secured by the borrower's inventory.

Question 6

A _____ issued by a bank is a promise by that bank to make a loan if certain conditions are met.

Accepted Answer

A letter of credit is a document issued by a bank that guarantees payment to a seller of goods or services, as long as the seller meets the conditions specified in the letter. It is essentially a promise by the bank to make a loan to the buyer of the goods or services, and it provides a level of reassurance to the seller that they will receive payment for their goods or services.

Question 7

Which one of the following will increase net working capital? Assume that the current ratio is greater than 1.0.

Accepted Answer

The answer of Which one of the following will increase...

Question 8

A type of short-term loan where the borrower sells its receivables to the lender up-front,but at a discount to face value,is called:

Accepted Answer

The scenario described is that of factored receivables financing. In this type of financing, the borrower sells its receivables to the lender at a discount to face value in exchange for immediate cash. This allows the borrower to access funds quickly and the lender to earn a return on the investment.

Question 9

The length of time between the acquisition of inventory by a firm and the payment by the firm for that inventory is called the:

Accepted Answer

The length of time between the acquisition of inventory and the payment for that inventory is the accounts payable period. This is because accounts payable represent the amount owed to suppliers for inventory purchases.

Question 10

Which one of the following is a source of cash?

Accepted Answer

An increase in accounts payable is a source of cash because it means the company is delaying payments to its suppliers, thus retaining cash.

Question 11

A prearranged,short-term bank loan made on a formal or informal basis,and typically reviewed for renewal annually,is called a:

Accepted Answer

A prearranged, short-term bank loan made on a formal or informal basis, and typically reviewed for renewal annually, is called a line of credit. A letter of credit is a document issued by a bank to guarantee payment to a seller. A cleanup loan is a short-term loan used to repay existing debt. A compensating balance is a minimum balance that a bank requires a borrower to keep in their account as collateral. A roll-over refers to the renewal of a loan or investment.

Question 12

The forecast of cash receipts and disbursements for the next planning period is called a:

Accepted Answer

The forecast of cash receipts and disbursements for the next planning period is called a cash budget. The other options are not specifically related to cash receipts and disbursements forecasting.

Question 13

The length of time between the payment for inventory and the collection of cash from receivables is called the:

Accepted Answer

The cash cycle refers to the time it takes for a company to convert its investments in inventory and other resources into cash flows from sales, which includes the time between paying for inventory and collecting cash from receivables.

Question 14

Costs of the firm that rise with increased levels of investment in its current assets are called _____ costs.

Accepted Answer

Carrying costs are the costs that increase with the investment in current assets such as inventory, finished goods, and receivables. These costs include storage costs, insurance costs, and the cost of funds tied up in inventory. Shortage costs occur when a firm doesn't hold sufficient current assets and loses sales or customers. Order costs are associated with placing an order (such as purchasing) for goods or services. Safety costs refer to the cost associated with holding excessive levels of current assets for unexpected events or emergency conditions. Trading costs are associated with the buying or selling of securities.

Question 15

A short-term loan where the lender holds the borrower's receivables as security is called:

Accepted Answer

The answer of A short-term loan where the lender holds...

Question 16

The length of time between the sale of inventory and the collection of cash from receivables is called the:

Accepted Answer

The answer of The length of time between the sale...

Question 17

Costs of the firm that fall with increased levels of investment in its current assets are called _____ costs.

Accepted Answer

Shortage costs decrease as a firm invests more in its current assets, because having more current assets reduces the likelihood of running out of stock or not being able to meet short-term obligations.

Question 18

Which one of the following will decrease the net working capital of a firm? Assume that the current ratio is greater than 1.0.

Accepted Answer

Paying a payment on a long-term debt will decrease the net working capital of a firm, as it involves the outflow of cash or other current assets. The other options listed either do not affect net working capital or increase it.

Question 19

Which of the following are uses of cash?
I. marketable securities are sold.
II. the amount of inventory on hand is increased.
III. the firm takes out a long-term bank loan.
IV. payments are paid on accounts payable.

Accepted Answer

Increasing inventory and paying accounts payable both use cash, as they involve spending or allocating cash resources.

Question 20

A prearranged credit agreement with a bank typically open for two or more years is called a:

Accepted Answer

A revolving credit arrangement is a prearranged credit agreement with a bank that allows the borrower to access funds up to a certain limit and is typically open for two or more years.

Quiz 26: Short-Term Finance and Planning