Financial Management - Chapter 18 Short-Term Finance and Planning

Chapter 18 Short-Term Finance and Planning

 

1.	The length of time between the purchase of inventory and the receipt of cash from the sale of that inventory is called the:    A.  operating cycle. B.  inventory period. C.  accounts receivable period. D.  accounts payable period. E.  cash cycle. Refer to section 18.2

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-01 The operating and cash cycles and why they are important. Section: 18.2 Topic: Operating cycle

2.	The length of time that elapses between the day a firm purchases an inventory item and the day that item sells is called the:    A.  operating cycle. B.  inventory period. C.  accounts receivable period. D.  accounts payable period. E.  cash cycle. Refer to section 18.2

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-01 The operating and cash cycles and why they are important. Section: 18.2 Topic: Inventory period

3.	The length of time between the sale of inventory and the collection of the payment for that sale is called the:    A.  operating cycle. B.  inventory period. C.  accounts receivable period. D.  accounts payable period. E.  cash cycle. Refer to section 18.2

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-01 The operating and cash cycles and why they are important. Section: 18.2 Topic: Accounts receivable period

4.	The length of time between the day a firm purchases an item from its supplier until the day that supplier is paid for that purchase is called the:    A.  operating cycle. B.  inventory period. C.  accounts receivable period. D.  accounts payable period. E.  cash cycle. Refer to section 18.2

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-01 The operating and cash cycles and why they are important. Section: 18.2 Topic: Accounts payable period

5.

Central Supply purchased a toboggan for inventory this morning and paid cash for it. The time period between today and the day Central Supply will receive cash from the sale of this toboggan is called the:    A.  operating cycle. B.  inventory period. C.  accounts receivable period. D.  accounts payable period. E.  cash cycle. Refer to section 18.2

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-01 The operating and cash cycles and why they are important. Section: 18.2 Topic: Cash cycle

6.	A graphical representation of the operating and cash cycles is called a(n):    A.  operating chart. B.  cash flow time line. C.  production flow line. D.  component chart. E.  working time line. Refer to section 18.2

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-01 The operating and cash cycles and why they are important. Section: 18.2 Topic: Cash flow time line

7.	Costs that increase as a firm acquires additional current assets are called _____ costs.    A.  carrying B.  shortage C.  order D.  safety E.  trading Refer to section 18.3

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-02 The different types of short term financial policy. Section: 18.3 Topic: Carrying costs

8.	Costs that decrease as a firm acquires additional current assets are called _____ costs.    A.  carrying B.  shortage C.  debt D.  equity E.  payables Refer to section 18.3

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-02 The different types of short term financial policy. Section: 18.3 Topic: Shortage costs

9.

Steve has estimated the cash inflows and outflows for his hardware store for next year. The report that he has prepared recapping these cash flows is called a:    A.  pro forma income statement. B.  sales projection. C.  cash budget. D.  receivables analysis. E.  credit analysis. Refer to section 18.4

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-03 The essentials of short-term financial planning. Section: 18.4 Topic: Cash budget

10.	Taylor Supply has made an agreement with its bank that it can borrow up to $10,000 at any time over the next year. This arrangement is called a(n):    A.  floor loan. B.  open loan. C.  compensating balance. D.  line of credit. E.  bank note. Refer to section 18.5

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-03 The essentials of short-term financial planning. Section: 18.5 Topic: Line of credit

11.	Money deposited by a borrower with the bank in a low or non-interest-bearing account as a condition of a loan agreement is called a:    A.  compensating balance. B.  secured credit deposit. C.  letter of credit. D.  line of credit. E.  pledge. Refer to section 18.5

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-03 The essentials of short-term financial planning. Section: 18.5 Topic: Compensating balances

12.	Brustle's Pottery either factors or assigns all of its receivables to other firms. This is known as:    A.  accounts receivable financing. B.  pledged financing. C.  capital funding. D.  daily funding. E.  capital financing. Refer to section 18.5

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-03 The essentials of short-term financial planning. Section: 18.5 Topic: Accounts receivable financing

13.	Rose's Gift Shop borrows money on a short-term basis by pledging its inventory as collateral. This is an example of a(n):    A.  debenture. B.  line of credit. C.  banker's acceptance. D.  working loan. E.  inventory loan. Refer to section 18.5

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-03 The essentials of short-term financial planning. Section: 18.5 Topic: Inventory loan

14.	Which one of the following increases cash?    A.  granting credit to a customer B.  purchasing new machinery C.  making a payment on a bank loan D.  purchasing inventory E.  accepting credit from a supplier Refer to section 18.1

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 18-04 The sources and uses of cash on the balance sheet. Section: 18.1 Topic: Sources and uses of cash

15.	Which of the following are uses of cash? I. collecting a receivable II. increasing inventory III. obtaining a bank loan IV. paying a supplier for previous purchases    A.  I and III only B.  II and IV only C.  I and II only D.  I, II, and IV only E.  II, III, and IV only Refer to section 18.1

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 18-04 The sources and uses of cash on the balance sheet. Section: 18.1 Topic: Sources and uses of cash

16.

Which one of the following will increase net working capital? Assume the current ratio is greater than 1.0.    A.  paying a supplier for a previous purchase B.  paying off a long-term debt C.  selling inventory at cost D.  purchasing inventory on credit E.  selling inventory at a profit on credit Refer to section 18.1

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 18-04 The sources and uses of cash on the balance sheet. Section: 18.1 Topic: Net working capital

17.

Which one of the following will decrease the net working capital of a firm? Assume the current ratio is greater than 1.0.    A.  selling inventory at cost B.  collecting payment from a customer C.  paying a payment on a long-term debt D.  selling a fixed asset for book value E.  paying a supplier for the purchase of an inventory item Refer to section 18.1

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 18-04 The sources and uses of cash on the balance sheet. Section: 18.1 Topic: Net working capital

18.	Which of the following are sources of cash? I. decrease in inventory II. increase in accounts receivable III. repayment of a bond IV. sale of preferred stock    A.  I and III only B.  I and IV only C.  II and III only D.  I, II, and III only E.  I, III, and IV only Refer to section 18.1

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 18-04 The sources and uses of cash on the balance sheet. Section: 18.1 Topic: Sources of cash

19.

Which of the following will increase the operating cycle? I. increasing the inventory turnover rate II. increasing the payables period III. decreasing the receivable turnover rate IV. decreasing the inventory level    A.  I only B.  III only C.  II and IV only D.  I and IV only E.  II and III only Refer to section 18.2

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 18-01 The operating and cash cycles and why they are important. Section: 18.2 Topic: Operating cycle

20.

Which one of the following equals the operating cycle?    A.  cash cycle plus accounts receivable period B.  inventory period plus the accounts receivable period C.  inventory period plus the accounts payable period D.  accounts payable period minus the cash cycle E.  accounts payable period plus the accounts receivable period Refer to section 18.2

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-01 The operating and cash cycles and why they are important. Section: 18.2 Topic: Operating cycle

21.

Which one of the following will decrease the operating cycle?    A.  decreasing the inventory turnover rate B.  decreasing the accounts payable period C.  increasing the accounts receivable turnover rate D.  increasing the accounts payable period E.  increasing the accounts receivable period Refer to section 18.2

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 18-01 The operating and cash cycles and why they are important. Section: 18.2 Topic: Operating cycle

22.	The operating cycle describes how a product:    A.  is priced. B.  is sold. C.  moves through the current asset accounts. D.  moves through the production process. E.  generates a profit. Refer to section 18.2

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-01 The operating and cash cycles and why they are important. Section: 18.2 Topic: Operating cycle

23.	Which of the following determines the length of the operating cycle? I. cash cycle II. inventory period III. accounts payable period IV. accounts receivable period    A.  I and III only B.  II and IV only C.  I, II, and IV only D.  II, III, and IV only E.  I, II, III, and IV Refer to section 18.2

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-01 The operating and cash cycles and why they are important. Section: 18.2 Topic: Operating cycle

24.

Which of the following will increase the cash cycle, all else constant? I. increasing the inventory period II. decreasing the accounts receivable turnover rate III. increasing the accounts payable period IV. decreasing the accounts receivable period    A.  I and II only B.  III and IV only C.  I and IV only D.  I, II, and III only E.  I, III, and IV only Refer to section 18.2

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 18-01 The operating and cash cycles and why they are important. Section: 18.2 Topic: Cash cycle

25.	An increase in which one of the following will decrease the cash cycle, all else equal?    A.  payables turnover B.  days sales in inventory C.  operating cycle D.  inventory turnover rate E.  accounts receivable period Refer to section 18.2

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 18-01 The operating and cash cycles and why they are important. Section: 18.2 Topic: Cash cycle

26.

Metal Designs, Inc., historically produced products for inventory. Now, the firm only produces a product when it receives an actual order from a customer. All else equal, this change will:    A.  increase the operating cycle. B.  lengthen the accounts receivable period. C.  shorten the accounts payable period. D.  decrease the cash cycle. E.  decrease the inventory turnover rate. Refer to section 18.2

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 18-01 The operating and cash cycles and why they are important. Section: 18.2 Topic: Cash cycle

27.

Which of the following statements is (are) correct? I. An increase in the accounts payable period shortens the cash cycle. II. The cash cycle is equal to the operating cycle minus the inventory period. III. A negative cash cycle is preferable to a positive cash cycle. IV. The cash cycle plus the accounts receivable period is equal to the operating cycle.    A.  I only B.  III and IV only C.  I and III only D.  I and IV only E.  I, II, and III only Refer to section 18.2

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 18-01 The operating and cash cycles and why they are important. Section: 18.2 Topic: Cash cycle

28.

Which one of the following statements is correct concerning the cash cycle?    A.  The longer the cash cycle, the more likely a firm will need external financing. B.  Increasing the accounts payable period increases the cash cycle. C.  A positive cash cycle is preferable to a negative cash cycle. D.  The cash cycle can exceed the operating cycle if the payables period is equal to zero. E.  Offering early payment discounts to customers will tend to increase the cash cycle. Refer to section 18.2

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 18-01 The operating and cash cycles and why they are important. Section: 18.2 Topic: Cash cycle

29.

Which of the following actions will tend to decrease the inventory period? I. discontinuing all slow-selling merchandise II. selling obsolete inventory below cost just to get rid of it III. buying raw materials only as needed for the manufacturing process IV. producing goods on demand versus for inventory    A.  I and III only B.  II and IV only C.  II, III, and IV only D.  I, II, and III only E.  I, II, III, and IV Refer to section 18.2

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 18-01 The operating and cash cycles and why they are important. Section: 18.2 Topic: Inventory period

30.

Which one of the following actions will tend to increase the accounts receivable period? Assume the accounts receivable period is currently 34 days.    A.  tightening the standards for granting credit to customers B.  refusing to grant additional credit to any customer who pays late C.  increasing the finance charges applied to all customer balances outstanding over thirty days D.  granting discounts for cash sales E.  eliminating the discount for early payment by credit customers Refer to section 18.2

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 18-01 The operating and cash cycles and why they are important. Section: 18.2 Topic: Accounts receivable period

31.	An increase in which one of the following is an indicator that an accounts receivable policy is becoming more restrictive?    A.  bad debts B.  accounts receivable turnover rate C.  accounts receivable period D.  credit sales E.  operating cycle Refer to section 18.2

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-01 The operating and cash cycles and why they are important. Section: 18.2 Topic: Accounts receivable period

32.

If you pay your suppliers five days sooner, then:    A.  your payables turnover rate will decrease. B.  you may require additional funds from other sources to fund the cash cycle. C.  the cash cycle will decrease. D.  your operating cycle will increase. E.  the accounts receivable period will decrease. Refer to section 18.2

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 18-01 The operating and cash cycles and why they are important. Section: 18.2 Topic: Accounts payable period

33.

Which one of the following will increase the accounts payable period, all else constant?    A.  an increase in the cost of goods sold account value B.  an increase in the ending accounts payable balance C.  an increase in the cash cycle D.  a decrease in the operating cycle E.  an increase in the accounts payable turnover rate Refer to section 18.2

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 18-01 The operating and cash cycles and why they are important. Section: 18.2 Topic: Accounts payable period

34.	Which one of the following managers determines which customers must pay cash and which can charge their purchases?    A.  purchasing manager B.  credit manager C.  controller D.  production manager E.  payables manager Refer to section 18.2

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-01 The operating and cash cycles and why they are important. Section: 18.2 Topic: Organizational chart

35.	Which one of the following managers determines when a supplier will be paid?    A.  controller B.  payables manager C.  credit manager D.  purchasing manager E.  production manager Refer to section 18.2

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-01 The operating and cash cycles and why they are important. Section: 18.2 Topic: Organizational chart

36.

A firm with a flexible short-term financial policy will:    A.  maintain a low balance in accounts receivables. B.  only have minimal amounts, if any, invested in marketable securities. C.  invest heavily in inventory. D.  have low cash balances. E.  have tight restrictions on granting credit to customers. Refer to section 18.3

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-02 The different types of short term financial policy. Section: 18.3 Topic: Short-term financial policy

37.

Which one of the following is indicative of a short-term restrictive financial policy?    A.  purchasing inventory on an as-needed basis B.  granting credit to all customers C.  investing heavily in marketable securities D.  maintaining a large accounts receivable balance E.  keeping inventory levels high Refer to section 18.3

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-02 The different types of short term financial policy. Section: 18.3 Topic: Short-term financial policy

38.

Which of the following are associated with a restrictive short-term financial policy? I. little, if any, investment in marketable securities II. liberal credit terms for customers III. low cash balances IV. increasing inventory levels    A.  I and III only B.  II and IV only C.  I and IV only D.  III and IV only E.  I, II, and III only Refer to section 18.3

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-02 The different types of short term financial policy. Section: 18.3 Topic: Short-term financial policy

39.

The Lumber Mart recently replaced its management team. As a result, the firm is implementing a restrictive short-term policy in place of the flexible policy under which the firm had been operating. Which of the following should the employees expect as a result of this policy change? I. reduction in sales due to stock outs II. greater inventory selection III. decreased sales due to the new accounts receivable credit policy IV. decreased investment in marketable securities    A.  I and II only B.  II and IV only C.  I, II, and IV only D.  I, III, and IV only E.  I, II, III, and IV Refer to section 18.3

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-02 The different types of short term financial policy. Section: 18.3 Topic: Short-term financial policy

40.

A flexible short-term financial policy:    A.  increases a firm's need for long-term financing. B.  minimizes net working capital. C.  avoids bad debts by only selling items for cash. D.  maximizes fixed assets and minimizes current assets. E.  is most appropriate for a firm with relatively high carrying costs and relatively low shortage costs. Refer to section 18.3

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-02 The different types of short term financial policy. Section: 18.3 Topic: Short-term financial policy

41.

A flexible short-term financial policy: I. increases shortage costs due to frequent cash-outs. II. tends to increase sales as compared to a restrictive policy. III. requires a sizeable investment in current assets. IV. incurs more carrying costs than a restrictive policy.    A.  I and IV only B.  II and III only C.  I, II, and III only D.  II, III, and IV only E.  I, III, and IV only Refer to section 18.3

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-02 The different types of short term financial policy. Section: 18.3 Topic: Short-term financial policy

42.	Shortage costs include which of the following? I. disruption of production schedules II. inventory ordering costs III. lost customer goodwill IV. brokerage costs    A.  I and II only B.  II and III only C.  II, III, and IV only D.  I, II, and III only E.  I, II, III, and IV Refer to section 18.3

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-02 The different types of short term financial policy. Section: 18.3 Topic: Shortage costs

43.

The optimal investment in current assets for an operating firm occurs at the point where:    A.  both shortage costs and carrying costs equal zero. B.  shortage costs are equal to zero. C.  carrying costs are equal to zero. D.  carrying costs exceed shortage costs. E.  the total costs of holding current assets is minimized. Refer to section 18.3

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-02 The different types of short term financial policy. Section: 18.3 Topic: Optimal point

44.

Which one of the following statements is correct?    A.  A firm with a restrictive financing policy secures sufficient long-term financing to fund all its assets. B.  A firm with a flexible financing policy frequently invests in marketable securities. C.  A firm with a flexible financing policy tends to use short-term financing on a frequent basis. D.  Firms tend to avoid short-term financing under both restrictive and flexible financing policies. E.  Firms with seasonal sales select flexible financing policies. Refer to section 18.3

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 18-02 The different types of short term financial policy. Section: 18.3 Topic: Asset financing policies

45.

Which one of the following statements is correct?    A.  Seasonal needs are financed externally when firms adhere to a flexible financing policy. B.  A flexible financing policy tends to increase the risk of encountering financial distress. C.  Long-term interest rates tend to be less volatile than short-term rates. D.  Most firms tend to finance inventory with long-term debt. E.  Short-term interest rates are generally higher than long-term rates. Refer to section 18.3

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-02 The different types of short term financial policy. Section: 18.3 Topic: Financing policies

46.

Assume each month has 30 days and a firm has a 60-day accounts receivable period. During the second calendar quarter of the year, that firm will collect payment for the sales it made during which of the following months?    A.  October, November, and December B.  November, December, and January C.  December, January, and February D.  January, February, and March E.  February, March, and April Refer to section 18.4

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 18-03 The essentials of short-term financial planning. Section: 18.4 Topic: Cash collections

47.

The Harvester collects 25 percent of sales in the month of sale, 60 percent of sales in the month following the month of sale, and 15 percent of sales in the second month following the month of sale. During the month of April, the firm will collect:    A.  60 percent of February sales. B.  15 percent of April sales. C.  60 percent of March sales. D.  15 percent of March sales. E.  25 percent of February sales. Refer to section 18.4

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 18-03 The essentials of short-term financial planning. Section: 18.4 Topic: Cash collections

48.

A manufacturing firm has a 90-day collection period. The firm produces seasonal merchandise and thus has the least sales during the first quarter of a year and the highest level of sales during the fourth quarter of a year. The firm maintains a relatively steady level of production which means that its cash disbursements are fairly equal in all quarters. The firm is most apt to face a cash-out situation in:    A.  the first quarter. B.  the second quarter. C.  the third quarter. D.  the fourth quarter. E.  any quarter with equal probabilities of occurrence. Refer to section 18.4

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 18-03 The essentials of short-term financial planning. Section: 18.4 Topic: Cash collections

49.

Jill is the CFO of Summertime Adventures which is a seasonal firm specializing in products related to water sports. The firm purchases inventory one month before it is sold and pays for its purchases 60 days after the invoice date. Sales are highest during July and August. Currently, Jill is preparing the cash disbursements section of the firm's cash budget. Which one of the following statements is supported by this information?    A.  Inventory purchases will be highest during the months of July and August. B.  Inventory purchases will be highest during the months of May and June. C.  Payments to suppliers will be highest during the months of June and July. D.  Payments to suppliers will be highest during the months of July and August. E.  Payments to suppliers will be highest during the months of August and September. Refer to section 18.4

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 18-03 The essentials of short-term financial planning. Section: 18.4 Topic: Cash disbursements

50.

Which two of the following are most apt to cause a cash-out for a firm that is generally financially sound? I. fixed expenses II. fixed asset purchases III. flexible financing policy IV. highly seasonal sales    A.  I and III only B.  II and IV only C.  III and IV only D.  I, II, and III only E.  II, III, and IV only Refer to section 18.4

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 18-03 The essentials of short-term financial planning. Section: 18.4 Topic: Cash-out

51.

Which one of the following statements is correct concerning the cash balance of a firm?    A.  Most firms attempt to maintain a zero cash balance at all times. B.  The cumulative cash surplus shown on a cash budget is equal to the ending cash balance plus the minimum desired cash balance. C.  On a cash balance report, the cumulative cash surplus at the end of May is used as June's beginning cash balance. D.  A cumulative cash deficit indicates a borrowing need. E.  The ending cash balance must equal the minimum desired cash balance. Refer to section 18.4

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-03 The essentials of short-term financial planning. Section: 18.4 Topic: Cash balance

52.	A cumulative cash deficit indicates a firm:    A.  has at least a short-term need for external funding. B.  is facing long-term financial distress. C.  will go out of business within the year. D.  is capable of funding all of its needs internally. E.  is using its cash wisely. Refer to section 18.4

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-03 The essentials of short-term financial planning. Section: 18.4 Topic: Cash balance

53.	The most common means of financing a temporary cash deficit is a:    A.  long-term secured bank loan. B.  short-term secured bank loan. C.  short-term issue of corporate bonds. D.  long-term unsecured bank loan. E.  short-term unsecured bank loan. Refer to section 18.5

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-03 The essentials of short-term financial planning. Section: 18.5 Topic: Short-term borrowing

54.

The primary difference between a line of credit and a revolving credit arrangement is the:    A.  type of collateral used to secure the loan. B.  length of the credit period. C.  fact that the line of credit is a secured loan and the revolving credit arrangement is unsecured. D.  fact that the line of credit is an unsecured loan and the revolving credit arrangement is secured. E.  classification as either a committed or a noncommitted loan. Refer to section 18.5

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-03 The essentials of short-term financial planning. Section: 18.5 Topic: Short-term borrowing

55.

A compensating balance: I. is required when a firm acquires any bank financing other than a line of credit. II. increases the cost of short-term bank financing. III. may be required even if a firm never borrows funds. IV. is often used as a means of paying for banking services received.    A.  I and III only B.  II and IV only C.  II and III only D.  I and IV only E.  II, III, and IV only Refer to section 18.5

AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-03 The essentials of short-term financial planning. Section: 18.5 Topic: Short-term borrowing

56.

High Point Hotel (HPH) has $165,000 in accounts receivable. To finance a major purchase, the company assigns these receivables to Cross Town Bank. Which one of the following statements correctly describes this transaction?    A.  HPH will immediately receive $165,000 and will have no further obligation related to these receivables. B.  HPH will receive some amount of cash immediately while maintaining full responsibility for any uncollected receivables. C.  Cross Town Bank accepts full responsibility for the collection of the accounts receivables and, in exchange, immediately pays HPH a discounted value for its receivables. D.  Cross Town Bank accepts full responsibility for collecting the accounts receivables and pays HPH a discounted price for the accounts collected after the normal collection period has elapsed. E.  HPH receives the full amount of its receivables upon assignment but must reimburse Cross Town Bank for any uncollected account. Refer to section 18.5

AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 18-03 The essentials of short-term financial planning. Section: 18.5 Topic: Short-term borrowing