CURRENT LIABILITIES MANAGEMENT

A _________ guarantees the borrower that a specified amount of funds will be available regardless of the tightness of money. (a) revolving credit agreement (b) line of credit (c) short-term self-liquidating loan (d) single payment note

A

A bank lends a firm $500,000 for one year at 8 percent and requires compensating balances of 10 percent of the face value of the loan. The effective annual interest rate associated with this loan is (a) 8.9 percent. (b) 8 percent. (c) 7.2 percent. (d) 7.0 percent.

A

The primary source of secured short-term loans to businesses are (a) commercial banks and commercial finance companies. (b) savings and loans and factors. (c) commercial paper dealers and investment bankers. (d) life insurance companies and government securities brokers.

A

When a firm stretches accounts payable without hurting its credit rating, the cost of foregoing the cash discount is (a) reduced. (b) increased. (c) unaffected. (d) immaterial.

A

A _________ is an agreement between a commercial bank and a business that states the maximum amount of unsecured short-term borrowing the bank will make available to the firm over a given period of time, provided sufficient funds are available. (a) revolving credit agreement (b) line of credit (c) short-term self-liquidating loan (d) single payment note

B

A field warehouse is (a) a warehouse outside the metropolitan area. (b) a warehouse on the borrower's premises. (c) a central warehouse storing the merchandise of several businesses. (d) a warehouse located near the lender.

B

A firm purchased goods on January 27 with a purchase price of $1,000 and credit terms of 2/10 net 30 EOM. The firm paid for these goods on February 9. The firm must pay _____ for the goods. (a) $1,000 (b) $980 (c) $800 (d) $900

B

Appropriate collateral for a secured short-term loan is (a) fixed assets. (b) raw materials inventory and receivables. (c) common stock in a privately-held corporation. (d) work-in-process inventory.

B

As part of a union negotiation agreement, the United Clerical Workers Union conceded to be paid every two weeks instead of every week. A major firm employing hundreds of clerical workers had a weekly payroll of $1,000,000 and the cost of short-term funds was 12 percent. The effect of this concession was to delay clearing time by one week. Due to the concession, the firm (a) realized an annual loss of $120,000. (b) realized an annual savings of $120,000. (c) increased its cash cycle. (d) decreased its cash turnover.

B

Commercial paper is usually sold at a discount from (a) its cost. (b) its par value. (c) the prime rate. (d) treasury notes.

B

3/10 net 45 EOM translates as (a) a 10 percent cash discount may be taken if paid in three days; if no cash discount is taken, the balance is due in 45 days. (b) a 3 percent cash discount may be taken if paid in 10 days; if no cash discount is taken, the balance is due 45 days after transaction is complete. (c) a 3 percent cash discount may be taken if paid in 10 days; if no cash discount is taken, the balance is due 45 days after the end of the month. (d) a 3 percent discount may be taken on 10 percent of the purchase if the account is paid within 45 days after the end of the month.

C

A firm arranged for a 120-day bank loan at an annual rate of interest of 10 percent. If the loan is for $100,000, how much interest in dollars will the firm pay? (Assume a 360-day year.) (a) $10,000. (b) $30,000. (c) $3,333. (d) $1,000.

C

A firm arranges a discount loan at a 12 percent interest rate, and borrows $100,000 for one year. The stated interest rate is _________ and the effective interest rate is _________. (a) 12.00%; 12.00% (b) 13.64%; 12.00% (c) 12.00%; 13.64% (d) 12.00%; 10.71%

C

A firm has directly placed an issue of commercial paper that has a maturity of 60 days. The issue sold for $980,000 and has an annual interest rate of 12.24 percent. The value of the commercial paper at maturity is (a) $19,992. (b) $980,000. (c) $999,992. (d) $960,008.

C

A letter written by a company's bank to the company's foreign supplier, stating that the bank will guarantee payment of an invoiced amount if all the underlying agreements are met is called (a) a letter of invoice. (b) a letter of intent. (c) a letter of credit. (d) None of the above.

C

A terminal warehouse is (a) a warehouse located at the airport. (b) a warehouse on the borrower's premises. (c) a central warehouse storing the merchandise of several businesses. (d) a warehouse located near the lender.

C

Appropriate collateral for a loan secured under a trust receipt inventory loan is (a) drill bits. (b) pencils. (c) recreation vehicles. (d) bananas.

C

Commercial paper is generally issued in multiples of (a) $1,000 or more. (b) $10,000 or more. (c) $100,000 or more. (d) $1,000,000 or more.

C

Financing that arises from the normal operations of the firm is said to be (a) expected. (b) accrued. (c) spontaneous. (d) payable.

C

Financing that matures in one year or less and has specific assets pledged as collateral is called (a) spontaneous financing. (b) unsecured short-term financing. (c) secured short-term financing. (d) none of the above.

C

In a line credit arrangement, the firm pays interest on (a) the full line of credit. (b) the unused portion of the line of credit. (c) only the amount actually borrowed. (d) only the amount actually borrowed and commitment fees on any unused portion of the loan.

C

Lenders require collateral to (a) reduce the risk of default. (b) control the borrowing firm. (c) reduce the losses if the borrower defaults. (d) extend to the borrower an unsecured loan.

C

A _________ is a type of loan made to a business by a commercial bank. This type of loan is made when the borrower needs additional funds for a short period but does not believe the need will continue or reoccur on a seasonal basis. (a) revolving credit agreement (b) line of credit (c) short-term self-liquidating loan (d) single payment note

D

Tangshan Mining was extended credit terms of 3/15 net 30 EOM. The cost of giving up the cash discount, assuming payment would be made on the last day of the credit period, is 75.25 percent. If the firm were able to stretch its accounts payable to 60 days without damaging its credit rating, the cost of giving up the cash discount would only be (a) 18.81%. (b) 18.25%. (c) 21.90%. (d) 22.58%.

D

Which of the following is NOT an advantage of factoring? (a) Accounts receivable immediately turned into cash. (b) Elimination of credit and collection department. (c) Creation of a known pattern of cash flows. (d) The effective interest rate.

D

A firm purchased goods with a purchase price of $1,000 and credit terms of 1/10 net 30. The firm paid for these goods on the 5th day after the date of sale. The firm must pay _________ for the goods. (a) $990 (b) $900 (c) $1,000 (d) $1,100

A

By offering credit to customers, the firm may (a) increase the price of the good to cover its costs. (b) decrease its investment in accounts receivable. (c) decrease its investment in accounts payable. (d) decrease the cost of goods purchased.

A

Collateral is typically required for a (a) secured short-term loan. (b) line of credit. (c) short-term self-liquidating loan. (d) single payment note.

A

Much of the commercial paper is issued by (a) commercial finance companies. (b) small businesses. (c) venture capitalists. (d) small manufacturing firms.

A

Revolving credit agreements are (a) guaranteed loans that specify the maximum amount that a firm can owe the bank at any point in time. (b) non-guaranteed loans that specify the maximum amount that a firm can owe the bank at any one time. (c) credit arrangements made in cooperation with suppliers that allows the firms to roll over accounts payable each month. (d) None of the above

A

Seasonal build-ups of inventory and receivables are generally financed with (a) short-term loans. (b) long-term loans. (c) accruals. (d) stockholders' equity.

A

Tangshan Mining was extended credit terms of 3/15 net 30 EOM. The cost of giving up the cash discount, assuming payment would be made on the last day of the credit period, would be (a) 75.25%. (b) 18.56%. (c) 72.99%. (d) 37.12%.

A

The _________ is the lowest rate of interest charged on business loans to the best business borrowers by the nation's leading banks. (a) prime rate (b) commercial paper rate (c) federal funds rate (d) treasury bill rate

A

The cost of borrowing through the sale of commercial paper is typically _________ the prime bank loan rate. (a) lower than (b) the same as (c) unrelated to (d) higher than

A

The cost of giving up a cash discount under the terms of sale 1/10 net 60 (assume a 360-day year) is (a) 7.2 percent. (b) 6.1 percent. (c) 14.7 percent. (d) 12.2 percent.

A

1/15 net 30 date of invoice translates as (a) a 1 percent cash discount may be taken if paid in 15 days; if no cash discount is taken, the balance is due in 30 days after the middle of the month. (b) a 1 percent cash discount may be taken if paid in 15 days; if no cash discount is taken, the balance is due 30 days after the invoice date. (c) a 1 percent cash discount may be taken if paid in 15 days; if no cash discount is taken, the balance is due 30 days after the end of the month. (d) a 1 percent discount may be taken on 15 percent of the purchase if the account is paid within 30 days after the end of the month.

B

A firm has a line of credit and borrows $25,000 at 9 percent interest for 180 days or half a year. What is the effective rate of interest on this loan if the interest is paid in advance? (a) 4.7 percent. (b) 9.4 percent. (c) 9.9 percent. (d) 10.3 percent.

B

A firm is offered credit terms of 1/10 net 45 EOM by a major supplier. The firm has determined that it can stretch the credit period (net period only) by 25 days without damaging its credit standing with the supplier. Assuming the firm needs short-term financing and can borrow from the bank on a line of credit at an interest rate of 14 percent, the firm should (a) give up the cash discount and finance the purchase with the line of credit. (b) give up the cash discount and pay on the 70th day after the date of sale. (c) take the cash discount and pay on the first day of the cash discount period. (d) take the cash discount and finance the purchase with the line of credit, the cheaper source of funds.

B

All of the following goods represent appropriate collateral for a secured loan to a school supply manufacturer except (a) reams or rolls of paper. (b) unbound pages. (c) notebooks and binders. (d) index cards.

B

Commercial banks lend unsecured short-term funds in the following three basic ways. (a) Single-payment note, lines of credit, and commercial paper. (b) Single-payment note, lines of credit, and revolving credit agreements. (c) Single-payment note, revolving credit agreements, and commercial paper. (d) Commercial paper, lines of credit, and revolving credit agreements.

B

Lenders recognize that by having an interest in collateral they can reduce losses if the borrowing firm defaults, (a) and the presence of collateral reduces the risk of default. (b) but the presence of collateral has no impact on the risk of default. (c) therefore lenders prefer to lend to customers from whom they are able to require collateral. (d) therefore lenders will impose a higher interest rate on unsecured short-term borrowing.

B

One of the most common designations for the beginning of the credit period is (a) 2/10. (b) the date of invoice. (c) the end of the month. (d) the transaction date.

B

Pledges of accounts receivable and factoring of accounts receivable are made on _________ basis, respectively. (a) a nonrecourse and a notification (b) a nonnotification and a notification (c) a notification and a recourse (d) a notification and a nonrecourse

B

Short-term loans that businesses obtain from banks and through commercial paper are (a) negotiated and secured. (b) negotiated and unsecured. (c) spontaneous and secured. (d) spontaneous and unsecured.

B

Short-term self-liquidating loans are intended to (a) finance capital assets. (b) cover seasonal peaks in financing caused by inventory and receivable buildups. (c) finance merger/acquisition activity. (d) recapitalize the firm.

B

Short-term self-liquidating loans are intended to (a) finance capital assets. (b) cover seasonal peaks in financing caused by inventory and receivables buildup. (c) finance merger and/or acquisition activity. (d) recapitalize the firm.

B

The cost of giving up a cash discount under the terms of sale 5/20 net 120 (assume a 360-day year) is (a) 15 percent. (b) 18.9 percent. (c) 15.8 percent. (d) 20 percent.

B

The prime rate of interest fluctuates with (a) the changing supply and demand relationship for long-term funds. (b) the changing supply and demand relationship for short-term funds. (c) the risk of the firm borrowing the funds. (d) demand in the bond market.

B

The two major sources of short-term financing are (a) a line of credit and accounts payable. (b) accounts payable and accruals. (c) a line of credit and accruals. (d) accounts receivable and notes payable.

B

With a floating-rate note, the interest rate on the note changes (a) when the risk level of the borrower changes. (b) when the prime rate changes. (c) when the demand for loans changes. (d) when bank profits change.

B

XYZ Corporation borrowed $100,000 for six months from the bank. The rate is prime plus 2 percent. The prime rate was 8.5 percent at the beginning of the loan and changed to 9 percent after two months. This was the only change. How much interest must XYZ corporation pay? (a) $2,476. (b) $5,417. (c) $18,212. (d) $21,500.

B

_________ are liabilities for services received for which payment has yet to be made. The most common accounts are taxes and wages. (a) Notes payable (b) Accruals (c) Accounts payable (d) Accounts receivable

B

_________ ensure that money lent under a line of credit agreement is actually being used to finance seasonal needs. (a) Operating change restrictions (b) Annual cleanups (c) Compensating balances (d) Commitment fees

B

_________ involves the sale of accounts receivable. (a) A trust receipt loan (b) Factoring (c) A field warehouse arrangement (d) Pledging of accounts receivable

B

_________ is a short-term, unsecured promissory note issued by firms with a high credit standing. These notes are primarily issued by commercial finance companies. (a) A line of credit (b) Commercial paper (c) A revolving line of credit (d) A self-liquidating loan

B

Most commercial paper has maturities ranging from (a) six months to one year. (b) one year to three years. (c) three days to 270 days. (d) seven days to 30 days.

C

Most commercial paper is purchased by (a) manufacturers. (b) governments and individuals. (c) banks and life insurers. (d) the federal government.

C

The cost of giving up a cash discount on a credit purchase is (a) added on to the price of the goods. (b) deducted from the price of the goods. (c) the implied interest rate paid in order to delay payment for an additional number of days. (d) the true purchase price of the goods.

C

The effective interest rate is (a) higher on a loan if interest is paid at maturity. (b) lower if the loan is a discount loan. (c) higher if the loan is a discount loan. (d) not affected by whether the loan is a discount loan or a loan with interest paid at maturity.

C

The interest rate charged on secured short-term loans to a corporation is generally higher than that charged on unsecured short-term loans because (a) secured loans are less risky than unsecured loans. (b) the risk of default is lower on secured loans. (c) it is costly to negotiate and administer secured loans. (d) lenders of secured loans must pay more for their funds.

C

The major type of loan made by banks to businesses is the (a) fixed-asset-based loan. (b) short-term secured loan. (c) short-term self-liquidating loan. (d) capital improvement loan.

C

_________ effectively raises the interest cost to the borrower on a line of credit. (a) An operating change restriction (b) An annual cleanup (c) A compensating balance (d) A commitment fee

C

A bank lends a firm $1,000,000 for one year at 12 percent on a discounted basis and requires compensating balances of 10 percent of the face value of the loan. The effective annual interest rate associated with this loan is (a) 12 percent. (b) 13.3 percent. (c) 13.6 percent. (d) 15.4 percent.

D

A firm is offered credit terms of 2/10 net 45 by most of its suppliers but frequently does not have the cash available to take the discount. The firm has a credit line available at a local bank at an interest rate of 12 percent. The firm should (a) give up the cash discount, financing the purchase with the line of credit. (b) take the cash discount and pay on the 45th day after the date of sale. (c) take the cash discount and pay on the first day of the cash discount period. (d) take the cash discount, financing the purchase with the line of credit, the cheaper source of funds.

D

A firm issued $2 million worth of commercial paper that has a 90-day maturity and sells for $1,900,000. The annual interest rate on the issue of commercial paper is (a) 5 percent. (b) 10 percent. (c) 17 percent. (d) 21 percent.

D

Accruals and accounts payable are _________ sources of short-term financing. (a) negotiated, secured (b) negotiated, unsecured (c) spontaneous, secured (d) spontaneous, unsecured

D

All of the following goods represent appropriate collateral for a secured loan to a candy manufacturer except (a) boxes. (b) cocoa beans. (c) individually wrapped chocolates. (d) cream.

D

Appropriate collateral for a loan secured under a floating inventory lien is (a) cars. (b) drill presses. (c) file cabinets. (d) paper clips.

D

Compared to a line of credit, a revolving credit agreement generally will be (a) a lower cost, higher risk method of short-term borrowing. (b) a lower cost, lower risk method of short-term borrowing. (c) a higher cost, higher risk method of short-term borrowing. (d) a higher cost, lower risk method of short-term borrowing.

D

If a firm gives up the cash discount on goods purchased on credit, the firm should pay the bill (a) as late as possible. (b) as soon as possible. (c) before the credit period ends. (d) on the last day of the credit period.

D

If the firm decides to take the cash discount that is offered on goods purchased on credit, the firm should (a) pay as soon as possible. (b) pay on the last day of the credit period. (c) take the discount no matter when the firm actually pays. (d) pay on the last day of the discount period.

D

In a revolving credit agreement, the firm pays interest on (a) the full line of credit. (b) the unused portion of the line of credit. (c) only the amount actually borrowed. (d) the amount actually borrowed and commitment fees on any unused portion of the loan.

D

Loans on which the interest is paid in advance are often called (a) premium loans. (b) reduced-principle loans. (c) called loans. (d) discount loans.

D

The interest rate charged on a secured short-term loan to a corporation is typically _________ the interest rate on an unsecured loan. (a) lower than (b) the same as (c) unrelated to (d) higher than

D

_________ are the major source of unsecured short-term financing for business firms. (a) Accounts receivable (b) Accruals (c) Notes payable (d) Accounts payable

D