Question 1

The factor (lender) purchasing accounts receivable from borrower has recourse against the borrower if the accounts receivable can not be collected.

Accepted Answer

The answer of The factor (lender) purchasing accounts receivable from...

Question 2

When a firm factors its accounts receivable, the factor normally performs the functions of risk bearing, credit checking, and lending.

Accepted Answer

Factoring involves the transfer of accounts receivables to a factor who then provides financing to the firm. The factor assumes the risk of non-payment by the debtor, performs credit checks on the debtor, and provides lending to the firm by advancing a percentage of the receivables' value.

Question 3

If a firm fails to take trade credit discounts it may cost the firm money, but generally such a policy has a negligible effect on the firm's income statement and no effect on the firm's balance sheet.

Accepted Answer

Failing to take trade credit discounts will increase the cost of goods sold and decrease net income, thus affecting the firm's income statement. However, it does not affect the firm's balance sheet.

Question 4

A promissory note is a document specifying the terms and conditions of a loan, including the amount, interest rate, and repayment schedule.

Accepted Answer

A promissory note is a legally binding document that outlines the specifics of a loan agreement, including the amount borrowed, the interest rate, and the payment schedule. It is signed by both the borrower and lender as a promise to repay the loan according to the terms outlined in the note.

Question 5

On a 1-year loan for R10,000, a firm would be better off borrowing at a rate of 9.5 percent discounted interest than 9 percent simple interest.

Accepted Answer

In discounted interest, the interest is deducted from the principal at the start, resulting in a higher effective interest rate compared to simple interest, where interest is calculated on the principal amount only.

Question 6

Factoring involves the outright sale of accounts receivable.

Accepted Answer

Factoring is the process of selling accounts receivable to a third-party financial company. The factoring company then collects the money owed by the debtor and takes a fee for their service before giving the remaining balance to the original business.

Question 7

A bank with fluctuating deposit liabilities in a static community will tend to follow creative banking practices when approving loans.

Accepted Answer

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Question 8

Liabilities such as wages and taxes that increase spontaneously with operations are called accruals.

Accepted Answer

Accruals are liabilities that arise during the normal course of business operations and increase spontaneously. Examples of accruals include wages and salaries owed to employees, taxes owed to the government, and accounts payable to suppliers.

Question 9

The pledging of receivables differs from factoring in that, under pledging, the lender normally has recourse against the borrower.

Accepted Answer

Under pledging, the borrower retains ownership of the receivables, and the lender has recourse against the borrower in case of non-payment. In contrast, under factoring, the factor (lender) purchases the receivables from the borrower, and assumes the credit risk of the debtor, without recourse to the borrower.

Question 10

Commercial paper is a type of secured promissory issued by large, strong financial firms.

Accepted Answer

Commercial paper is actually an unsecured promissory note issued by large, creditworthy corporations or financial institutions.

Question 11

Assume a firm takes out a discounted loan with its local bank.By the very nature of a discount loan, a compensating balance requirement will exist, and this will lead to a higher effective rate on this loan versus the loan's simple, or stated, rate.

Accepted Answer

The answer of Assume a firm takes out a discounted...

Question 12

Trade credit is seldom used by firms and is an insignificant component of short-term debt for most firms.

Accepted Answer

According to research, trade credit is a common form of short-term debt for many firms, especially small and medium-sized enterprises.

Question 13

A commitment fee is a fee charged on unused balance of a revolving credit agreement to compensate the bank for guaranteeing that the funds will be available when needed by the borrower.

Accepted Answer

A commitment fee is indeed charged on the unused balance of a revolving credit agreement to compensate the bank for ensuring the availability of funds to the borrower when needed.

Question 14

A compensating balance is an arrangement in which a bank agrees to lend up to a specified maximum amount of funds during a designated period.

Accepted Answer

A compensating balance is not a loan arrangement, but rather a requirement by a bank for a borrower to maintain a minimum balance in an account in exchange for extending credit or other services.

Question 15

A firm constructing a new manufacturing plant and financing it with short-term loans that are scheduled to be converted to bonds when the plant is completed, would want to separate the construction loan from other current liabilities associated with working capital management.

Accepted Answer

It is beneficial for the firm to separate the construction loan from other current liabilities to have a clear understanding of the funds being used for the construction project and to accurately track the expenses and progress of the project. Additionally, separating the construction loan from working capital management can help prevent any confusion or misallocation of funds.

Question 16

Accounts receivable financing, especially the factoring of accounts, is a very flexible source of funds.Once the factoring procedure has been established, funds from this type of financing will automatically increase as the firm increases its sales.

Accepted Answer

Accounts receivable financing through factoring provides a continuous and flexible source of funds as the firm's sales increase, making it a reliable source of financing.

Question 17

Long-term loan agreements always contain provisions, or covenants, which constrain the firm's future actions.Short-term credit agreements are just as restrictive in order to protect the interests of the lender.

Accepted Answer

The answer of Long-term loan agreements always contain provisions, or...

Question 18

The risk of default on pledged accounts receivable is borne by the lender to whom the receivables are pledged.

Accepted Answer

The risk of default on pledged accounts receivable typically remains with the borrower, not the lender, because the borrower is responsible for the collection of the receivables.

Question 19

The uniform commercial code is a system of standards that simplifies procedures for establishing loan security.

Accepted Answer

The Uniform Commercial Code (UCC) does include provisions related to loan security, as well as other provisions related to commercial transactions, but its main purpose is to simplify and standardize commercial law across different US states.

Question 20

Many firms borrow by using banker's acceptances (i.e., getting a bank to guarantee the firm's debt) when they are too small or too risky to use the commercial paper market.

Accepted Answer

This statement is true. Banker's acceptances are often used by smaller or riskier firms as a way to access financing because they are guaranteed by a bank and therefore considered less risky by investors.

Quiz 16: Managing Short-Term Liabilities Financing