Question 1

Petes Manufacturing is hesitant to extend trade credit to Ramon Drake.Instead,Ramon agrees to sign a promissory note.Petes prefers this note because
A) it specifies when the goods will be delivered.
B) the money will still be paid if Brendan declares bankruptcy.
C) it is a legally binding and enforceable agreement.
D) it is a form of commercial paper.
E) it will receive the money from Brendan much sooner.

Accepted Answer

By signing a promissory note, Ramon is making a legally binding and enforceable agreement to pay Petes Manufacturing. This provides Petes with added security and protection in the event that Ramon fails to pay. Additionally, promissory notes are a form of commercial paper, which can be bought and sold on the open market, providing potential liquidity for Petes if needed.

Question 2

A written pledge by a borrower to pay a certain sum of money to a creditor at a specified future date is called
A) a promissory note.
B) collateral.
C) a factor account.
D) a charge account.
E) a term loan agreement.

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. Collateral refers to assets pledged as security for a loan. A factor account is a financing arrangement in which a business sells its accounts receivable to a third party at a discount. A charge account is a type of revolving credit account. A term loan agreement is a contract between a borrower and a lender specifying the terms of a loan.

Question 3

Thomas 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,Thomas Ski Equipment writes a check for ____ to pay the invoice.
A) $10,200
B) $10,000
C) $9,800
D) $9,000
E) $200

Accepted Answer

The discount terms 2/10, net/60 mean a 2% discount is available if paid within 10 days; otherwise, the full amount is due in 60 days. Since the payment is made 20 days later, the discount period has passed, and the full invoice amount of $10,000 is due.

Question 4

Which of the following companies would most likely be able to issue commercial paper?
A) Mike's Pizza Place
B) A local housing construction company
C) General Electric
D) A medium-sized advertising agency
E) United Way

Accepted Answer

General Electric is a large and established company with a strong credit rating and the ability to easily sell commercial paper to investors. Mike's Pizza Place, a local housing construction company, a medium-sized advertising agency, and United Way might not have the same level of financial stability or creditworthiness, making it less likely that they would be able to issue commercial paper.

Question 5

Over the years,Leopard Productions has been slow making payments to its bank.Now it is in need of financing.Based on past experience,the interest rate Leopard will pay is the
A) interest rate determined by the SBA.
B) finance rate determined by the Department of Commerce.
C) prime rate.
D) prime rate plus 4 percent.
E) prime rate minus 2 percentage points.

Accepted Answer

Based on the past experience of slow payments, Leopard Productions is likely to be classified as a higher risk borrower, and therefore would be charged a higher interest rate. The prime rate, which is typically used as a base rate for variable interest loans, plus an additional 4 percent would likely be the rate charged to Leopard Productions in this situation.

Question 6

The cost of borrowing money that is reserved for large corporations with excellent credit ratings is called the
A) prime interest rate.
B) bank discount.
C) discount factor.
D) add-on interest rate.
E) compound interest rate.

Accepted Answer

The prime interest rate is the rate that banks charge their most creditworthy clients for loans. These clients are typically large corporations with excellent credit ratings.

Question 7

Suppose IBM decided to issue commercial paper in denominations of $5,000 to raise a large sum of money.Since the commercial paper is secured only by IBM's reputation,
A) IBM does not have to pay back the principal.
B) IBM has to pay interest rates higher than those charged by commercial banks for short-term loans.
C) no interest is paid.
D) no collateral is involved.
E) the commercial paper can be issued only in $1,500 or $10,000 denominations.

Accepted Answer

The answer of Suppose IBM decided to issue commercial paper...

Question 8

____ is (are)short-term promissory notes with no collateral that are issued by large corporations.
A) Serial bonds
B) Sinking funds
C) Convertible bonds
D) Credit agreements
E) Commercial paper

Accepted Answer

Commercial paper is a short-term unsecured promissory note issued by large corporations to finance their short-term credit needs.

Question 9

Harry 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 ____.
A) $1,200;$1,200
B) $1,200;$38,800
C) $0;$40,000
D) $0;$41,200
E) $0;$1,200

Accepted Answer

The terms 3/10, net/60 mean a 3% discount is available if paid within 10 days. Since the invoice is paid on day 20, no discount is applicable, and the full amount of $40,000 is due.

Question 10

Blooming Wholesale Foods allows retailers to purchase merchandise using trade credit.For Blooming,this type of transaction
A) is written off as a bad-debt expense.
B) is an unusual type of transaction between a wholesaler and retailers.
C) should be paid within thirty to sixty days.
D) is referred to as a notes payable account by Dillon's accountants.
E) creates a liability for Dillon Wholesale.

Accepted Answer

Trade credit typically requires payment within a specified period, often thirty to sixty days, allowing retailers to manage cash flow while purchasing goods.

Question 11

Which of the following is not an advantage that promissory notes have over trade credit from the perspective of the seller?
A) Notes are legally binding agreements.
B) Most notes earn interest for the seller.
C) Notes are negotiable instruments.
D) The company extending credit can sell the note and receive the money quickly.
E) The seller may demand payment from the buyer at any time.

Accepted Answer

This statement is actually not an advantage of promissory notes, but rather a characteristic of trade credit as well. Both promissory notes and trade credit allow the seller to demand payment from the buyer at any time. Therefore, the correct answer is E.

Question 12

In a revolving credit agreement,the borrower typically pays ____ of the ____ portion of the agreement.
A) 1.0 to 3.0 percent;unused
B) 1.0 to 3.0 percent;used
C) only regular interest;used
D) 0.25 to 1.0 percent;used
E) 0.25 to 1.0 percent;unused

Accepted Answer

The answer of In a revolving credit agreement,the borrower typically...

Question 13

Ramirez Company sells its garden hoses to Kim's Lawn and Garden Center but does not require Kim's to pay for them right away.If this is a standard trade-credit agreement,Kim's will have to pay for the garden hoses in
A) 30 to 60 days.
B) 1 to 20 days.
C) 45 to 90 days.
D) 60 to 180 days.
E) as many days as it takes to sell the merchandise.

Accepted Answer

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

Question 14

Assume that the First State Bank of Chicago requires a 20 percent compensating balance on short-term loans.If you borrow $50,000,at least ____ of the loan amount must be kept on deposit at the bank.
A) $4,000
B) $10,000
C) $1,000
D) $20,000
E) $50,000

Accepted Answer

A compensating balance of 20 percent on a $50,000 loan means 20% of $50,000 must be kept on deposit, which is $10,000.

Question 15

The lowest rate of interest charged by a bank for a short-term loan is known as
A) the discount rate.
B) dividends.
C) add-on interest.
D) the compound interest rate.
E) the prime interest rate.

Accepted Answer

The prime interest rate is the lowest rate of interest charged by banks for short-term loans to their most creditworthy customers.

Question 16

If Sunbelt Computers were to take out a short-term loan from Chase for $5 million and were required to keep $500,000 of that in its Chase account,this would be called a(n)
A) compensating balance.
B) security deposit.
C) commercial-paper arrangement.
D) reserve requirement.
E) insurance policy.

Accepted Answer

This would be considered a compensating balance, which is a requirement by a lender for a borrower to maintain a certain amount of funds in a specified account as a condition of a loan. In this case, Chase is requiring Sunbelt Computers to keep $500,000 in its account as a way to ensure that they can reduce their risk if Sunbelt Computers were to default on the loan.

Question 17

Commercial paper usually is issued
A) for 3 to 7 years.
B) for short-term financing by large corporations.
C) for short-term financing by small businesses.
D) by large corporations unable to get credit elsewhere.
E) by savings and loan associations.

Accepted Answer

Commercial paper is typically issued by large corporations for short-term financing purposes, usually for a period of 1 to 270 days.

Question 18

Willy received unsecured financing from a bank for his plumbing business.This means that Willy did not have to provide the bank with any
A) application forms.
B) collateral.
C) reasons for the loan.
D) promise to pay interest.
E) scheduled monthly payments.

Accepted Answer

Unsecured financing means that the borrower does not have to provide collateral, such as property or a vehicle, to secure the loan.

Question 19

The assets most commonly used as collateral for short-term financing include
A) cash and accounts receivable.
B) accounts payable and notes payable.
C) inventory and equipment.
D) marketable securities and owners' equity.
E) accounts receivable and inventory.

Accepted Answer

Accounts receivable and inventory are two of the most common assets used as collateral for short-term financing. Accounts receivable are valuable assets that result from selling goods or services to customers on credit, and they can be used to secure short-term loans or lines of credit. Inventory is another valuable asset that can be used as collateral, particularly for businesses that have a significant amount of unsold inventory on hand. By pledging these assets as collateral, businesses can often obtain financing at more favorable terms than they would otherwise be able to.

Question 20

The Fruitiest Candy Company finds that from time to time it needs short-term funds to cover its operating expenses.It wants to establish a prearranged loan with a bank but has not found a bank that will guarantee such a loan.Perplexed by this,the management team asks you how they should proceed.You recommend that they
A) file a suit against the banks.
B) find a bank out of state or out of the country that will guarantee that the money will be available when needed.
C) simply file a claim with the FDIC.
D) retaliate by withdrawing all cash from the local bank and canceling all certificates of deposit.
E) set up a line of credit with a bank that offers a revolving credit agreement.

Accepted Answer

The best option for the Fruitiest Candy Company is to set up a line of credit with a bank that offers a revolving credit agreement. This will provide them with the flexibility to access the funds they need when they need them, without having to go through the process of securing a prearranged loan each time. It is also a commonly used financial tool for operating expenses, and many banks offer this service. Choosing this option will allow for smooth business operations and financial stability.

Quiz 16: Mastering Financial Management

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

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

Thomas 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,Thomas Ski Equipment writes a check for ____ to pay the invoice.

Which of the following companies would most likely be able to issue commercial paper?

Over the years,Leopard Productions has been slow making payments to its bank.Now it is in need of financing.Based on past experience,the interest rate Leopard will pay is the

The cost of borrowing money that is reserved for large corporations with excellent credit ratings is called the

Suppose IBM decided to issue commercial paper in denominations of $5,000 to raise a large sum of money.Since the commercial paper is secured only by IBM's reputation,

____ is (are) short-term promissory notes with no collateral that are issued by large corporations.

Harry 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 .

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

Which of the following is not an advantage that promissory notes have over trade credit from the perspective of the seller?

In a revolving credit agreement,the borrower typically pays of the portion of the agreement.

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

Assume that the First State Bank of Chicago requires a 20 percent compensating balance on short-term loans.If you borrow $50,000,at least ____ of the loan amount must be kept on deposit at the bank.

The lowest rate of interest charged by a bank for a short-term loan is known as

If Sunbelt Computers were to take out a short-term loan from Chase for $5 million and were required to keep $500,000 of that in its Chase account,this would be called a(n)

Commercial paper usually is issued

Willy received unsecured financing from a bank for his plumbing business.This means that Willy did not have to provide the bank with any

The assets most commonly used as collateral for short-term financing include