Question 1

A compensating balance:

Accepted Answer

A compensating balance is a minimum balance that must be maintained in a bank account as part of a loan agreement, and it may be required even if a company never borrows funds, as it serves as a form of collateral or assurance for the bank.

Question 2

Assume each month has 30 days and a company has a 30-day accounts receivable period. During the second calendar quarter of the year, that company will collect payment for the sales it made during which of the following months?

Accepted Answer

Given a 30-day accounts receivable period, the company collects payments for sales made 30 days prior. The second calendar quarter includes April, May, and June. Therefore, the company will collect payments for sales made in March, April, and May.

Question 3

Which one of the following statements is correct concerning a company's cash balance?

Accepted Answer

A cumulative cash deficit means that the company has spent more money than it has received in a given period, resulting in a negative cash balance. This indicates a borrowing need, as the company will need to obtain funds to cover its expenses and maintain adequate cash reserves. Choices A, B, C, and E are incorrect statements regarding a company's cash balance.

Question 4

A cumulative cash deficit indicates a company:

Accepted Answer

A cumulative cash deficit means that a company is consistently spending more cash than it is bringing in. This indicates that the company has a short-term need for external funding to cover its expenses and liabilities until it can achieve profitability.

Question 5

With a compromise financial policy companies will:

Accepted Answer

Companies with a compromise financial policy borrow short-term funds and invest in marketable securities. This strategy enables companies to have enough working capital to fund day-to-day operations while earning a return on their excess cash through investments in marketable securities. This approach helps strike a balance between financial stability and profitability.

Question 6

Timko has a 90-day collection period and produces seasonal merchandise. Sales are lowest during the first calendar quarter of a year and the highest during the third quarter. The company maintains a relatively steady level of production which means that its cash disbursements are fairly equal in all quarters. This company is most apt to face a cash-out situation in:

Accepted Answer

The answer of Timko has a 90-day collection period and...

Question 7

Brustle's Pottery either factors or assigns all of its receivables to other firms. This is known as:

Accepted Answer

Accounts receivable financing (also known as factoring) refers to when a company sells its outstanding invoices to a third-party financial company for immediate cash. This is what Brustle's Pottery is doing by either factoring or assigning all of its receivables to other firms. Option B, pledged financing, refers to using assets (such as accounts receivable) as collateral for a loan. Options C, D, and E are not relevant to the scenario described.

Question 8

Rose's Gift Shop borrows money on a short-term basis by pledging its inventory as collateral. This is an example of a(n):

Accepted Answer

The scenario describes an inventory loan, which is a loan where inventory is pledged as collateral. A debenture is a long-term debt instrument, a line of credit is a pre-approved loan amount that a borrower can draw from when needed, a banker's acceptance is a short-term credit investment created by a non-financial firm and guaranteed by a bank, and a working loan is a general term for a loan used to finance ongoing operations.

Question 9

Money deposited by a borrower with a bank in a low or non-interest-bearing account as a condition of a loan agreement is called a:

Accepted Answer

Money deposited by a borrower with a bank in a low or non-interest-bearing account as a condition of a loan agreement is called a compensating balance. This balance helps the bank mitigate the risk of the loan and is an effective way for the bank to ensure that the borrower maintains a certain level of liquidity, creating a win-win situation for both parties involved.

Question 10

Which type of arrangement is a hardware store most apt to use to finance its inventory?

Accepted Answer

A blanket inventory lien gives the lender a security interest in all of the borrower's inventory, which is a common way for a hardware store to finance its inventory.

Question 11

Steve has estimated the cash inflows and outflows for his hardware store for next year. The report that he has prepared recapping these cash flows is called a:

Accepted Answer

A cash budget is a report that predicts the projected cash inflows and outflows for a business over a period of time, typically a year. It helps businesses manage their finances more effectively by identifying potential cash shortages or surpluses in advance. Steve's report fits the description of a cash budget. A pro forma income statement is a projected financial statement that estimates a business's revenue and expenses for a future period. A sales projection is a forecast of expected sales volume. Receivables analysis and credit analysis are both tools used to assess a business's creditworthiness and ability to pay back debts, and are not relevant to Steve's cash flow projections.

Question 12

The Harvester collects 55 percent of sales in the month of sale, 40 percent of sales in the month following the month of sale, and 5 percent of sales in the second month following the month of sale. During the month of April, they will collect:

Accepted Answer

In April, the Harvester will collect 40 percent of March sales, as this is the percentage collected in the month following the month of sale. Choices A and E are incorrect as they pertain to sales from February, which would have been collected in March and not April. Choice B is incorrect as it pertains to sales from April, which have yet to be sold and therefore collected. Choice D is incorrect as it pertains to sales from March collected in the second month following the month of sale, which would be May and not April.

Question 13

Summertime Adventures is a seasonal firm that enjoys its highest sales during July and August. The company purchases inventory one month before it is sold and pays for its purchases 60 days after the invoice date. Which one of the following statements is supported by this information?

Accepted Answer

The answer of Summertime Adventures is a seasonal firm that...

Question 14

Which one of the following combinations is most apt to cause a company that is generally financially sound to have a negative net cash inflow for a particular quarter?

Accepted Answer

A one-time asset purchase can cause a significant outflow of cash in a particular quarter. Additionally, approaching high seasonal sales may require increased inventory, marketing or labor costs, which can further decrease net cash inflow. Even if the company is generally financially sound, the combination of these factors can result in a negative net cash inflow for the quarter.

Question 15

High Point Hotel (HPH) has $218,000 in accounts receivable. To finance a major purchase, the company assigns these receivables to Cross Town Bank. Which one of the following statements correctly describes this transaction?

Accepted Answer

HPH will receive some cash upfront but retains responsibility for any uncollected receivables, as the receivables are assigned, not sold.

Question 16

Which one of the following statements is correct?

Accepted Answer

Lines of credit often come with a requirement for a cleanup period, which is a stipulated time frame during which the borrower must reduce the outstanding balance to zero or a specified amount. This ensures that the line of credit is not used as a permanent source of financing.

Question 17

Taylor Supply has made an agreement with its bank that allows it to borrow up to $10,000 at any time over the next year. This arrangement is called a(n):

Accepted Answer

The described arrangement is a line of credit, as it allows Taylor Supply to borrow money up to a certain limit at any time during a specified period (in this case, over the next year). A floor loan typically has a fixed interest rate and is used to finance a specific asset or project. An open loan does not have a specific term or repayment schedule. Compensating balances require a borrower to keep a certain amount of money in a bank account as collateral for the loan. A bank note is a promissory note issued by a bank.

Question 18

The most common way to finance a temporary cash deficit is with a:

Accepted Answer

The best choice to finance a temporary cash deficit is a short-term unsecured bank loan because it provides the necessary funds without requiring collateral and can be paid back within a short period of time. Long-term loans are not appropriate for temporary cash deficits because they are meant for longer-term investments, and requiring collateral limits the flexibility of the borrower. Similarly, the issuance of corporate bonds is a long-term financing option and would be more appropriate for larger investments.

Question 19

An orange grower is most apt to use which type of financing for its crop?

Accepted Answer

Field warehouse financing is a type of financing specifically designed for agricultural crops that are stored in a warehouse. The financing is secured by the crop itself and is commonly used by farmers and growers to obtain working capital for their operations. Therefore, an orange grower is most likely to use field warehouse financing to finance its crop. The other choices are not as suitable for this specific purpose. Accounts receivable assignment, for example, is typically used for financing invoices, while blanked inventory liens are more commonly used for businesses that have a wide variety of inventory types that they want to use as collateral. Trust receipts are more commonly used in the shipping industry and commercial paper is a type of short-term borrowing by corporations.

Question 20

The primary difference between a line of credit and a revolving credit arrangement is the:

Accepted Answer

The answer of The primary difference between a line of...

Quiz 18: Short Term Finance and Planning