Question 1

Advance factoring is where the firm selling its accounts receivable is paid on the normal collection date or net due date of the account.

Accepted Answer

A) True 
 B)False

Question 2

Spontaneous financing refers to:

Accepted Answer

A) financing provided by accounts payable and accrued liabilities 
B) line of credit agreements 
C) revolving credit agreements 
D) none of the above

Question 3

The prime rate is the interest rate the bank charges its most creditworthy customers.

Accepted Answer

A) True 
 B)False

Question 4

In order to borrow $100,000 for a 10% loan on discount basis,the firm will actually have to borrow:

Accepted Answer

A) $110,000 
B) $111,111 
C) $100,000 
D) $90,000

Question 5

Working capital includes a firm's marketable securities,accounts receivable,inventories,and mortgage debt.

Accepted Answer

A) True 
 B)False

Question 6

2/10 net 30 translates as

Accepted Answer

A) a 2 percent cash discount may be taken if paid in 10 days of shipment;if not paid within 10 days,the net amount is due in 30 days. 
B) a 2 percent cash discount may be taken if paid in 10 days of shipment;if not paid within 10 days,the net amount is due 30 days after the middle of the month. 
C) a 2 percent cash discount may be taken if paid in 10 days of shipment;if not paid within 10 days,the net amount is due 30 days after the end of the month. 
D) a 2 percent cash discount may be taken if paid in 10 days of shipment;if not paid within 10 days,the net amount is due in 20 days. 
E) none of the above

Question 7

Net working capital is defined as:

Accepted Answer

A) current assets plus current liabilities 
B) current assets less fixed assets 
C) current assets less current liabilities 
D) current liabilities plus long-term liabilities

Question 8

Commercial finance companies:

Accepted Answer

A) make riskier unsecured business loans but charge higher interest rates 
B) specialize in loans secured by inventories and real estate 
C) concentrate their lending activity to firms pledging the notes receivable of their customers 
D) are primarily interested in loans secured by a business customer's accounts receivable and inventories

Question 9

The most important reason for directly issuing or using commercial paper dealers is:

Accepted Answer

A) the cost of borrowing is generally less than regular bank rates 
B) it's a profitable alternative to the purchase of Treasury bills 
C) the avoidance of compensating balances 
D) the convenience and profitability

Question 10

A trust receipt is a claim against a customer's inventory when the individual items are indistinguishable.

Accepted Answer

A) True 
 B)False

Question 11

Factoring accounts receivable has all of the following characteristics except:

Accepted Answer

A) money is advanced to the borrower as a loan against accounts receivable 
B) accounts receivable balances are removed from the balance sheet 
C) the customer payment is made to the factor 
D) all of the above are characteristics of pledging

Question 12

If a firm chooses to take a cash discount,it should

Accepted Answer

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 first day of the discount period. 
E) none of the above

Question 13

Industry characteristics can affect whether the firm chooses an aggressive,conservative,or maturity matching strategy for financing its assets.

Accepted Answer

A) True 
 B)False

Question 14

When accounts receivable are factored: the borrower sells the receivable;accounts receivable balances are removed from the balance sheet;the customer payment is made to the factor;and interest is charged on the funds advanced.

Accepted Answer

A) True 
 B)False

Question 15

A factor engages in accounts receivable financing for business by purchasing accounts outright and assuming all credit risks.

Accepted Answer

A) True 
 B)False

Question 16

The bank line of credit is:

Accepted Answer

A) the type of business activity on which a particular bank concentrates its lending 
B) the maximum amount of credit extended to a business customer during a period of one year 
C) the average of loans made to a business customer during a year 
D) the loan limit that a bank has established for a business customer

Question 17

Eriez Magnetics purchased goods with a purchase price of $10,000 and credit terms of 2/10 net 30.The firm paid for these goods on the 5th day after the date of sale.The firm must pay ________ for the goods.

Accepted Answer

A) $8,000 
B) $9,900 
C) $9,000 
D) $10,000 
E) none of the above

Question 18

A revolving credit agreement is a:

Accepted Answer

A) banker's agreement to extend the maturity of a loan 
B) banker's standby agreement to provide a guaranteed line of credit for a specified period of time 
C) large loan supported by a group of banks on an alternating basis 
D) loan arrangement with a bank whereby secured and unsecured loans are alternately used

Question 19

Discounting has the effect of reducing the available funds received by the borrower while raising the effective interest rate.

Accepted Answer

A) True 
 B)False

Question 20

Maturity factoring is where the firm selling its accounts receivable is paid on the normal collection date or net due date of the account.

Accepted Answer

A) True 
 B)False

Exam 16: Short-Term Business Financing

Advance factoring is where the firm selling its accounts receivable is paid on the normal collection date or net due date of the account.

Spontaneous financing refers to:

The prime rate is the interest rate the bank charges its most creditworthy customers.

In order to borrow $100,000 for a 10% loan on discount basis,the firm will actually have to borrow:

Working capital includes a firm's marketable securities,accounts receivable,inventories,and mortgage debt.

2/10 net 30 translates as

Net working capital is defined as:

Commercial finance companies:

The most important reason for directly issuing or using commercial paper dealers is:

A trust receipt is a claim against a customer's inventory when the individual items are indistinguishable.

Factoring accounts receivable has all of the following characteristics except:

If a firm chooses to take a cash discount,it should

Industry characteristics can affect whether the firm chooses an aggressive,conservative,or maturity matching strategy for financing its assets.

When accounts receivable are factored: the borrower sells the receivable;accounts receivable balances are removed from the balance sheet;the customer payment is made to the factor;and interest is charged on the funds advanced.

A factor engages in accounts receivable financing for business by purchasing accounts outright and assuming all credit risks.

The bank line of credit is:

Eriez Magnetics purchased goods with a purchase price of $10,000 and credit terms of 2/10 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 revolving credit agreement is a:

Discounting has the effect of reducing the available funds received by the borrower while raising the effective interest rate.

Maturity factoring is where the firm selling its accounts receivable is paid on the normal collection date or net due date of the account.