Question 1

Which of the following is not a characteristic of short-term financing?

Accepted Answer

Short-term financing does not necessarily have to be repaid within three years. Its repayment period can range from a few days to a few years, depending on the agreement between the borrower and the lender.

Question 2

Sanchez Company sells its garden hoses to Gary's Lawn and Garden Center but does not require Gary's to pay for them right away. If this is a standard trade-credit agreement, Gary's will have to pay for the garden hoses in

Accepted Answer

Standard trade-credit agreements typically require payment within 30 to 60 days.

Question 3

The most popular form of short-term financing is

Accepted Answer

Trade credit is the most popular form of short-term financing as it allows businesses to obtain goods or services from suppliers and pay for them at a later date, generally within a few weeks or a few months. This type of financing does not require any collateral, and is often extended to businesses that have a good credit history with their suppliers. Bank loans, sale of bonds, and sale of stock are options for long-term financing, while loans from insurance companies are not as common as trade credit.

Question 4

Money received from the sale of shares of ownership in a business is called

Accepted Answer

Equity capital is money raised by selling shares of ownership in a business. The buyers of these shares become part owners of the business and share in its profits and losses.

Question 5

The greatest part of a firm's financing is provided by

Accepted Answer

Sales revenue is typically the largest source of financing for a firm, as it is the income generated from the sale of goods or services.

Question 6

Beard Auction receives an invoice from one of its European suppliers for antiques. The amount of the invoice is $40,000 with terms of 3/10, net/60. If the invoice is paid on day 20, Beard is entitled to a ____ cash discount and will write the check for ____.

Accepted Answer

The terms 3/10, net/60 mean that a 3% discount is available if the invoice is paid within 10 days; otherwise, the full amount is due within 60 days. Since the invoice is paid on day 20, Beard Auction does not qualify for the discount and must pay the full amount of $40,000.

Question 7

When a seller allows a buyer thirty to sixty days to pay for a purchase, the sales arrangement is called

Accepted Answer

Trade credit refers to the practice of allowing customers to purchase goods or services on credit and pay for them later within a set timeframe, which in this case is thirty to sixty days. This type of sales arrangement is commonly used in business-to-business transactions to facilitate trade between companies. A bank loan, promissory note, and equity financing are not accurately described by the scenario given.

Question 8

Sara Lee Corporation is a large conglomerate of businesses participating in a variety of industries. A few years ago, Sara Lee was considering the purchase of Bryan Foods. If Bryan Foods represented a tremendous opportunity to make the company more successful, Sara Lee may, as a last resort, have considered

Accepted Answer

Selling assets from another division is the best choice as it would provide long-term funding for the acquisition of Bryan Foods without affecting the current financial position of the company. The sale of assets would enable Sara Lee to retain control over its operations and profitability while also expanding its business. Seeking short-term financing or using trade credit may not provide adequate funding for the acquisition, and using future sales revenues could put the company at risk if the sales projections are not met. Sharing the idea with competitors could be detrimental to Sara Lee's competitiveness in the market.

Question 9

A written pledge by a borrower to pay a certain sum of money to a creditor at a specified future date is called

Accepted Answer

A written pledge by a borrower to pay a certain sum of money to a creditor at a specified future date is called a promissory note.

Question 10

Melissa feels confident about obtaining short-term financing for her art gallery because, like many companies, she has a(n)

Accepted Answer

Melissa feels confident about obtaining short-term financing for her art gallery because of her close working relationship with a lender. This suggests that she has established a good credit history and demonstrated her ability to repay loans, which has earned her the trust of the lender. This relationship can be valuable in securing short-term financing quickly and at a reasonable cost. Options A, B, and C are unlikely, as they suggest that Melissa has an unlimited source of financing, a large amount of money, or cash reserves, which is not typically the case for most companies. Option D is also unlikely, as a relationship with a friend of a banker does not necessarily guarantee access to financing.

Question 11

Jacob and Molly decide to start a new cake-decorating business. They each contribute $10,000 to get the business off the ground. This money is considered

Accepted Answer

The money contributed by Jacob and Molly is considered equity capital, which is the funding provided by the owners of a business. This means that they are part owners of the business, and any profits or losses will be shared among them.

Question 12

Which of the following might be considered the most drastic step in securing funding, often a last resort for a corporation?

Accepted Answer

Sale of assets is often considered the most drastic step in securing funding as it involves selling off important company assets to generate cash, which is a last resort for a corporation. It can also have long-term impacts on the company's ability to operate and grow in the future. The other options, such as using sales revenue, equity capital funding, short-term borrowing, and debt capital funding, are more common and less drastic methods of securing funding.

Question 13

Money obtained through various types of loans is called

Accepted Answer

Money obtained through various types of loans is called debt capital.

Question 14

Harlen Manufacturing is hesitant to extend trade credit to Brendan Drake. Instead, Brendan agrees to sign a promissory note. Harlen prefers this note because

Accepted Answer

By signing a promissory note, Brendan is legally bound to repay the money owed to Harlen Manufacturing. If there is a default, Harlen can take legal action to enforce the agreement. This will provide more security for Harlen than extending trade credit, which is not a legally binding agreement.

Question 15

Max Beauty Supply has ordered $5,000 worth of merchandise from Kelly's Beauty Supply, Inc. The invoice to Max has discount terms of 2/10, net/30. Max writes a check within ten days for

Accepted Answer

Max is eligible for a 2% discount if they pay within ten days of the invoice date. 2% of $5,000 is $100, so Max can receive a discount of $100 if they pay within ten days. Therefore, Max's payment will be $5,000 - $100 = $4,900.

Question 16

Jackson Ski Equipment receives an invoice for $10,000 worth of merchandise from one of its suppliers. The invoice has discount terms of 2/10, net/60. Twenty days later, Jackson Ski Equipment writes a check for ____ to pay the invoice.

Accepted Answer

Since Jackson Ski Equipment pays the invoice 20 days later, they miss the 2% discount period which is within 10 days. Therefore, they pay the full invoice amount of $10,000.

Question 17

Dillon Wholesale Foods allows retailers to purchase merchandise using trade credit. For Dillon, this type of transaction

Accepted Answer

Trade credit is a common practice where retailers are allowed to purchase goods and pay for them within a specified period, typically 30 to 60 days, rather than paying upfront.

Question 18

Financial managers should

Accepted Answer

Establishing a means of monitoring financial performance on an interim basis is essential for financial managers to ensure that they can detect and address budgeting problems before they escalate. Ignoring minor budgeting problems or preparing budgets and hoping for the best are not effective strategies, while hiring a person to go over interim budgets or firing/demoting individual managers based on budgeting goals only is not a comprehensive solution. Therefore, the best choice is to establish a monitoring mechanism.

Question 19

Ms. Thomas has received an invoice from the manufacturer for which she distributes products. The invoice states credit terms of 3/10, net/30. Puzzled by this, she calls on you to explain. You indicate that the notation 3/10 means that

Accepted Answer

The notation 3/10, net/30 means that the buyer can take a 3 percent discount on the invoice amount if the payment is made within 10 days; otherwise, the full invoice amount is due within 30 days.

Question 20

Short-term financing not backed by collateral is called

Accepted Answer

Unsecured financing refers to short-term loans or credit lines that are not backed by collateral or security. The lender relies solely on the borrower's creditworthiness and financial standing to determine the risk of lending money.

Quiz 19: Mastering Financial Management