SHORT-TERM BORROWINGS

Instruction: Write “T” if the answer is true and “F” if the answer is false. Write the answer on the space provided for
each number.

1. Current liabilities are obligations payable beyond one year. Answer: _________ F

2. Short-term financing is easier to arrange than long-term financing. Answer: _________ T

3. Under accrual, expenses are recorded immediately regardless if it paid or not. Answer: _________ F

4. Short-term financing affords the borrower lesser flexibility than long-term financing. Answer: _________ F

5. To compute the average accounts payable, the annual purchases are multiplied to the number of days in a year and
then divided by the credit period. Answer: _________ F

6. Under the terms of credit, the length of the credit period and any cash discounts offered are both included.
Answer: _________ T

7. Under the nature of demand and supply, if the supply is greater than the demand, the credit term offered is more
lenient. Answer: _________ T

8. Interest rate under short-term financing is fixed for a period of one year. Answer: _________ F

9. Under the trust receipt, the title to the inventory is retained by the creditor but the debtor is authorized to use the
inventory for production or selling. Answer: _________ T

10. Commercial papers are issued with an unsecured promissory note. Answer: _________ T

11. The primary purpose of compensating balances required of borrowers is to compensate the bank for the services it
provides to the customers. Answer: _________ F

12. Accounts receivable is not acceptable collateral. Answer: _________ F

13. Under the warehouse receipt agreement, the goods are specified, segregated, and stored in a public or terminal
warehousing company. Answer: _________ T
14. The proceeds on the checks factored are equivalent to the face value of the check less the necessary charges.
Answer: _________ T

15. Commercial papers interest rate is higher than bank rates. Answer: _________ F
Instruction: Encircle the letter that corresponds to your answer.

1. All, except for one, is not included in the five C’s of credit?
a. character c. capital
b. collections d. collateral

2. Which part of credit policy dictates how delinquent accounts should be handled?
a. setting the credit terms. c. developing a collection policy. d. none
b. determining credit standards. of the above.

3. Debtors feel that there is more risk associated with short-term debt than long-term debt because of
I. uncertainty arising from interest rate fluctuations
II. relatively high cost of short-term debt
a. I only
b. II only
c. I and II
d. Cannot be determined
4. One of the following forms of short-term financing is a secured credit.
a. commercial paper b. line of c. chattel mortgage d. banker’s
credit acceptances

5. Creditors are aware of the relative risk associated with short-term debt is ____ the risk associated with
long-term debt.
a. lower than c. higher than
b. equal to d. none of the above

6. Debtors feel that there is more risk associated with short-term debt than long-term debt because of
I. risk of being unable to refund the debt
II. relatively high cost of short-term debt
a. I only c. I and II
b. II only d. Cannot be determined

7. One of the following information is not a source of short-term credit.

a. term credit c. deferred income
b. accruals d. common stock

8. It is a short-term loan that can be issued by corporations with high credit standing.
a. revolving credit agreements c. trade credit
b. commercial paper d. inventory loans

9. The cost of trade credit involving cash discounts as a form of short-term financing is: a.
usually greater than the cost of commercial bank credit
b. usually greater than the cost of factoring receivables
c. excessive and to be avoided if at all possible
d. the lowest of any form of short-term financing

10. Pledging accounts receivable has all of the following characteristics except:
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 firm, which then submits the payment to the bank
d. all of the above are characteristics of pledging
11. Which of the following appropriately describe a bank line of credit?
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

12. Which one of the following would help a business to acquire additional short-term credit in excess of
 its regular line of bank credit?
a. sell common stock to the bank with a repurchase agreement
b. pledge accounts receivable as specific collateral for an additional loan
c. subordinate the interests of the owners to the bank’s additional loans
d. make limited use of overdrafts
13. It is the most common and very important form of short-term financing.
a. a revolving credit agreement b. accounts-receivable c. inventory loans
financing d. trade credit

14. It is a claim against a customer’s inventory when the individual items are indistinguishable.
a. floor plan receipt c. warehouse receipt
b. trust receipt d. blanket inventory lien

15. Factoring accounts receivable has all of the following characteristics except:
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

Instruction: Encircle the letter that corresponds to your answer.

1. Let us assume that the current borrowing rate is at 15%. Which of the following discounts should your firm
take?
I. 2/10 net 30
II. 1/15 net 60
III. 3/10 net 70
IV. 1/10 net 45
a. II only c. II and IV
b. I and III d. I, III, and IV

2. Which of the following credit terms has the lowest relevant cost?
a. 3/10 net 60 c. 2/15 net 45
b. 2/10 net 60 d. 4/15 net 90

3. The implied rate of interest on the offered credit term of 1/20, n/45 is
a. 1.01% c. 14.75%
b. 12.12% d. 25.25%

Answer: (.01/.99) (365/25) = .1475

4. Which of the following credit terms has the highest relevant cost?
a. 3/10 net 60 b. 2/10 net 60 c. 2/15 net 45 d. 4/15 net 90

5. What is the implied rate of interest if the credit term offered is 3/10, n/30?
a. 37.08% c. 56.44%
b. 5.69% d. 3.09%

Answer: (.03/.97) x (365/20) = .5644

6. A company obtained a short-term loan from a bank. Information about such loan is as follows:
Principal of loan P10,000,000
Stated interest rate 10%
Terms 1 year

If the loan is add-on interest, the effective rate is

a. 8.89%. b. 9.09%. c. 10%.
d. 11.11%.

7. A company received a P500,000 line of credit from its bank. Some information about the credit line is
as follows:
Stated interest rate 12%
Compensating balance 15%

Assuming that the company drew down the entire amount at the beginning of the year, and that the loan is
discounted, what is the effective interest rate on the loan?
a. 13.64% b. 14.12% c. 14.29% d. 16.44%

Answer: 60,000/(500,000 – 75,000 – 60,000) = 16.44%

8. What is the effective interest rate for a one-year treasury bill that is priced at a 4% discount?
a. 3.83% c. 4.17%
b. 4% d. 4.22%

Answer:
discount = 0.04 x 1,000 = 40
effective interest rate = 40 /960 = 4.17%

9. What is the current price of P100,000 short-term loan due in 180 days on an 8% add-on basis?
a. P100,000 c. P 96,000
b. P104,000 d. P 92,000

Answer: P100,000 + (100,000 x 0.08 x 180/360) = P104,000

10. What is the current price of P100,000 short-term loan due in 90 days on an 8% discounted basis?
a. P 98,000
b. P102,000
c. P 92,000
d. answer