Question 1

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

If a firm stops taking trade credit discounts, it will have to pay the full amount of accounts payable later, which will result in a rise in accounts payable.

Question 2

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

Accepted Answer

Stretching accounts payable, which means delaying payment to suppliers beyond the agreed terms, can harm supplier relationships, potentially incur late fees, and is not considered an entirely ethical practice as it can reflect poorly on a company's financial management and reliability.

Question 3

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 has a shorter repayment period and higher interest rates, making it riskier than long-term financing. During periods of tight credit, it may be difficult for the firm to renew its debt, especially if the funds were used to finance long-term assets that are not easily liquidated. Therefore, short-term financing carries more risk than long-term financing.

Question 4

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 5

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 usually have a simplified application process and require less documentation, which allows lenders to process them more quickly than long-term loans. Additionally, long-term loans involve more risk for lenders, so they typically conduct more thorough evaluations of borrowers and require more detailed loan agreements.

Question 6

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 company's normal operations and are not under the direct control of management. External factors such as payment terms from suppliers and customers, as well as industry-specific regulations, can impact the level of accruals.

Question 7

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 8

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

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

Question 9

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 a cost-effective way for managers to finance their operations. However, if the cost of the costly component of trade credit is lower than the cost of credit from other sources, then it may make sense to use it. Ultimately, the decision should be based on a cost-benefit analysis.

Question 10

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 11

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

This statement is true. When choosing between taking a trade discount or borrowing money, it is important to compare the cost of the cash discount to the cost of borrowing from a bank or another source. This allows the business to make an informed decision on whether or not to take advantage of the discount.

Question 12

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 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 to rely more on trade credit to finance its purchases, leading to an increase in its use of trade credit. This is because trade credit allows the firm to delay payment for a period of time, providing a form of short-term financing.

Question 14

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 higher discount of 3% for early payment instead of 2%, customers may be more incentivized to pay their bills faster. This, in turn, should lead to a decrease in the average accounts receivable balance.

Question 15

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

Accepted Answer

A firm's collection policy determines how quickly it collects payments from customers. If the policy is too strict, it may deter customers from making purchases, reducing sales. However, if the policy is too lenient, it may increase sales but also increase the company's accounts receivable and reduce its cash flow, affecting working capital. A well-designed collection policy can strike a balance between maximizing sales and maintaining cash flow, thus affecting profits positively. Therefore, changes in a firm's collection policy can affect sales, working capital, and profits.

Question 16

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 because firms miss out on the opportunity to reduce their purchase prices. This behavior is often observed in firms that are performing poorly or have inadequate cash balances, as they may not have the liquidity to take advantage of these discounts.

Question 17

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

Accepted Answer

Accruals are typically considered "free" capital because they represent debts that have been recognized but not yet paid, and therefore no explicit interest is typically required to be paid on them.

Question 18

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 is typically easier to obtain and can be processed more quickly than long-term debt financing. This is because lenders are usually more willing to provide short-term credit since the repayment period is shorter and less risky.

Question 19

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

Free trade credit is the cost-free credit period before the discount period ends, and costly trade credit refers to the period after the discount period, where the buyer incurs costs for not taking the discount.

Question 20

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 are also considered a form of liquidity because they can be quickly converted into cash, thus serving the purpose of providing liquidity for the company.

Quiz 21: Supply Chains and Working Capital Management