Exam 16: Current Liabilities Management

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 ________.

The cost of giving up a cash discount on a credit purchase is ________.

Discuss and contrast the three types of loans discussed in the text that use inventory as collateral: floating inventory liens, trust receipt inventory loans, and warehouse receipt loans.

An increment above the prime rate on a floating-rate loan will be higher than on a fixed-rate loan of equivalent risk because the lender bears higher risk with a floating-rate loan.

Operating change restrictions are contractual restrictions that a bank may impose on a firm as part of a line of credit agreement.

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.

The cost of giving up a cash discount is the implied rate of interest paid in order to delay payment of an account payable for an additional number of days.

A compensating balance is a balance in checking account that is equal to a certain percentage of the borrower's short-term unsecured loan.

3/10 net 45 EOM translates as ________.

Factoring accounts receivable is relatively an inexpensive source of unsecured short-term funds that allows firms to turn accounts receivable immediately into cash.

With a floating-rate note, the interest rate on the note changes ________.

If a firm gives up the cash discount on goods purchased on credit, the firm should pay the bill ________.

Commercial paper is issued in multiples of ________.

The cost of giving up a cash discount under the terms of sale 5/20 net 120 (assume a 360-day year) is ________.

A compensating balance not only forces the borrower to be a good customer of the bank but may also raise the interest cost to the borrower.

Lenders recognize that by having an interest in collateral they can reduce losses if the borrowing firm defaults, ________.

Short-term loans that businesses obtain from banks and through commercial paper are ________.

Revolving credit agreements are ________.

Factoring accounts receivable is relatively an expensive source of secured short-term funds that allows firms to turn accounts receivable immediately into cash.

Tangshan Mining has 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 75.26 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 ________.