Multiple-Choice Quiz

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Chapter 11: Short-Term Financing

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1. Under COD terms, the seller:

extends credit to the buyer on open account.

extends credit to the buyer subject to bank approval.

requires the buyer to make partial payment at fixed intervals.

bears the risk of the buyer's refusing the goods shipped.

2. The type of business most likely to use trust receipt financing would be:

a forest products company.

an oil refinery.

an automobile dealership.

a grocery store chain.

3. The trade terms "2/15, net 30" indicate that:

a 2% discount is offered if payment is made within 15 days.

a 15% discount is offered if payment is made within 30 days.

a 2% discount is offered if payment is made within 30 days.

a 30% discount is offered if payment is made within 15 days.

4. If credit terms of "2/10, net 40" are offered, the approximate cost of not taking the discount and paying at the end of the credit period would be closest to which of the following? (Assume a 365-day year.)

18.6%

24.3%

24.8%

30.0%

5. If a discount date is missed for some reason, when should a rational manager pay the bill?

As soon as possible after the discount date so as to not upset the supplier.

No sooner than six months so as to maximize the use of "free" trade credit financing.

On the final due date.

None of the above.

6. If MetroPulse Media receives an invoice for purchases dated 10/21/X5 subject to credit terms of "3/10, net 30 EOM," what is the last possible day the payment should be made (1) if the discount is taken and (2) if the discount is not taken?

November 1 and November 20, respectively.

November 10 and November 20, respectively.

November 10 and November 30, respectively.

December 10 and December 30, respectively.

7. When a firm needs short-term funds for a specific purpose, the bank loan will likely be a:

compensating balance arrangement.

revolving credit agreement.

transaction loan.

line of credit.

8. Inventory is in the possession of a third party under which of the following methods?

Floating lien

Terminal warehouse receipts

Chattel mortgage

Trust receipts

9. The Houser Company has negotiated a $500,000 revolving credit agreement with Chitwood National Bank. The agreement calls for an interest rate of 10% on fund used, a 15% compensating balance, and a commitment fee of 1% on the unused amount of the credit line. Assuming that the compensating balance would not otherwise be maintained, the effective annual interest cost if the firm borrows $200,000 for one year is closest to

11.5 percent.

15 percent.

26.5 percent.

13.53 percent.

10. A formal, legal commitment to extend credit up to some maximum amount over a stated period of time.

Letter of credit

Revolving credit agreement

Line of credit

Trade credit

11. The type(s) of collateral generally used for a secured short-term loan is(are) .

inventory and/or receivables

common stock and/or bonds

real estate

machinery

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