Full Test Bank Financing The Business Ch.13 nan

Testbank

to accompany

Accounting: business reporting for decision making

7th edition

by

Birt et al.

Not for distribution. Instructors may assign selected questions in their LMS.

© John Wiley & Sons Australia, Ltd 2020

Chapter 13: Financing the business

Learning objectives

1. Discuss the management of net working capital

Q1, Q2, Q3, Q4, Q5, Q6, Q7, Q8, Q54, Q55

2. Outline the issues underlying the management of cash

Q9, Q10, Q11, Q12, Q13, Q56, Q57

3. Discuss the management of accounts receivable

Q14, Q15, Q16, Q17, Q18, Q58, Q59

4. Identify the issues with respect to the management of inventories

Q19, Q20, Q21, Q22, Q23, Q24, Q60

5. Compare the sources of short-term finance

Q25, Q26, Q27, Q28, Q61, Q62, Q63

6. Compare the sources of long-term debt finance

Q29, Q30, Q31, Q32, Q33, Q34, Q35, Q36, Q37, Q38, Q64, Q65

7. Explain equity finance instruments and their roles

Q39, Q40, Q41, Q42, Q43, Q44, Q66

8. Discuss hybrid financial instruments

Q45, Q46, Q47, Q48, Q67

9. Describe the use of international finance

Q49, Q50, Q68

10. Describe new funding opportunities for business such as crowdfunding, ICOs, angel investors and microcredit

Q51, Q52, Q53, Q69, Q70

Multiple-choice questions

1. Sources of funding that can help an entity maintain an appropriate level of net working capital include:

a. temporary.

b. permanent.

c. spontaneous.

d. all of the options are sources of funding.

Learning objective 13.1 ~ Discuss the management of net working capital

1. Which of these is not a spontaneous source of finance?

a. Accrued wages

b. Pay-as-you-go tax instalments

c. Bank overdrafts

d. Trade creditors

Learning objective 13.1 ~ Discuss the management of net working capital

1. Which of the below statements regarding spontaneous sources of funding is true?

a. Spontaneous sources of funding arise in a substantially unplanned and unstructured way in the normal course of business.

b. Spontaneous sources of funding include leases.

c. Spontaneous sources of funding generally include a borrowing charge.

d. All of the options are true.

Learning objective 13.1 ~ Discuss the management of net working capital

1. How should temporary assets be financed?

a. With spontaneous sources of funding only

b. With temporary sources of funding only

c. With spontaneous and permanent sources of funding

d. With temporary, permanent or spontaneous sources of funding

Learning objective 13.1 ~ Discuss the management of net working capital

1. The most important source of spontaneous short-term funding for entities is normally:

a. accrued wages.

b. bank overdrafts.

c. trade credit.

d. ordinary shares.

Learning objective 13.1 ~ Discuss the management of net working capital

1. Which of the following businesses would be most likely to have the greatest proportion of working capital held as debtors?

a. A grocery retailer

b. An accountant

c. A coffee shop

d. A restaurant

Learning objective 13.1 ~ Discuss the management of net working capital

1. Which of the following businesses would be most likely to have the greatest proportion of working capital held as inventory?

a. An accountant

b. A grocery retailer

c. A medical practice

d. An auto repair shop

Learning objective 13.1 ~ Discuss the management of net working capital

1. If working capital is allowed to increase to an inappropriately high level:

a. it can reduce the average rate of return on equity.

b. there will be an opportunity cost of doing so.

c. it can reduce the average rate of return on assets.

d. all of the options are true.

Learning objective 13.1 ~ Discuss the management of net working capital

1. An entity that does not have enough cash to meet its financial obligations as they fall due is said to be:

a. liquid.

b. dissolved.

c. insolvent.

d. wound up.

Learning objective 13.2 ~ Outline the issues underlying the management of cash

1. Costs involved in managing cash include:

a. no interest earned on cheque accounts.

b. merchant fees for debit cards.

c. keeping cash secure from thieves.

d. all of the above.

Learning objective 13.2 ~ Outline the issues underlying the management of cash

1. Examples of cash outflows from an entity do not include:

a. purchase of materials.

b. sale of unused assets.

c. payment of taxes.

d. payment of salaries and wages.

Learning objective 13.2 ~ Outline the issues underlying the management of cash

1. Issues that require an entity to manage its cash include:

a. the cost of not having enough cash.

b. the need to have sufficient cash to meet commitments.

c. the timing of cash flows.

d. all of these issues require cash management.

Learning objective 13.2 ~ Outline the issues underlying the management of cash

1. What is the penalty for insolvency?

a. A fine determined by the ASIC

b. The winding up of the entity

c. A possible jail term for the shareholders

d. An increase in the tax rate payable for the next 2 years

Learning objective 13.2 ~ Outline the issues underlying the management of cash

1. Which option below describes how entities manage their customer credit policies?

a. Set upper credit limits

b. Maintain strict payment terms

c. Ask potential customers to complete a credit-scoring questionnaire

d. All of these options help entities to manage their credit policies

Learning objective 13.3 ~ Discuss the management of accounts receivable

1. Which of the following is not a cost of granting credit to customers?

a. The opportunity cost of funds being tied up

b. Administration costs for managing receivables

c. Attracting new customers

d. The cost of carrying slow payers and bad debts

Learning objective 13.3 ~ Discuss the management of accounts receivable

1. How is the level of debtors determined?

a. By credit policies

b. By the level of credit sales

c. By collection policies and procedures

d. All of the options are used to determine the level of debtors

Learning objective 13.3 ~ Discuss the management of accounts receivable

1. A change in the days debtors turnover from 35 days to 28 days means that:

a. debtors are purchasing less on credit.

b. credit sales are increasing.

c. debtors are paying their accounts earlier.

d. debtors are paying their accounts later.

Learning objective 13.3 ~ Discuss the management of accounts receivable

1. An entity offers their customers discount terms of 2/10 net 30 to encourage payment of invoices. What does this mean?

a. Take 2% off if paying within 10 days, or pay 100% before 30 days

b. Take 2% off if paying within 30 days

c. Pay 10% today and the balance in 30 days

d. In two days’ time, pay 10% and the balance in 30 days

Learning objective 13.3 ~ Discuss the management of accounts receivable

1. Why do manufacturers hold raw materials inventory?

a. So their warehouses are not sitting empty too much of the time

b. So production is not affected by disruptions in supply

c. So there is sufficient time between delivery and use for the quality to be checked

d. So they are immune to sudden changes in price

Learning objective 13.4 ~ Identify the issues with respect to the management of inventories

1. If the levels of inventory are expressed as a percentage of current assets, which of the following statements is the most likely in terms of the inventory held by Telstra and Woolworths?

a. Telstra would have a slightly higher inventory percentage than Woolworths.

b. Their inventory percentages would be similar.

c. Woolworths would have a much higher inventory percentage than Telstra.

d. Woolworths would have a slightly higher inventory percentage than Telstra.

Learning objective 13.4 ~ Identify the issues with respect to the management of inventories

1. If average inventory is $225 000, total credit sales is $1 200 000 and cost of sales is $980 000, what is the days inventory turnover? (Round your answer up to the next full number of days.)

a. 69 days

b. 84 days

c. 23 days

d. 19 days

Learning objective 13.4 ~ Identify the issues with respect to the management of inventories

1. Which of the following is a benefit of keeping inventory on hand?

a. Sales are made and profits are gained.

b. Cross-sales are made and profits increased.

c. All of these options are benefits of holding inventory.

d. Goodwill is built up and no-inventory costs are avoided.

Learning objective 13.4 ~ Identify the issues with respect to the management of inventories

1. Which of these is a ‘holding’ cost of inventory?

a. Theft

b. Display costs

c. Deterioration and obsolescence

d. All of these options are ‘holding’ costs of inventory

Learning objective 13.4 ~ Identify the issues with respect to the management of inventories

1. A change in the average inventory turnover period from 58 days to 76 days means that inventory is:

a. being purchased for cash.

b. being sold more slowly.

c. being sold more quickly.

d. none of the options are true.

Learning objective 13.4 ~ Identify the issues with respect to the management of inventories

1. Which of the following is a common type of short-term finance?

a. Paid taxes and trade credit

b. Accrued wages and floor-plan finance

c. Commercial bills and bank under-drafts

d. Bank overdrafts and trade debit

Learning objective 13.5 ~ Compare the sources of short-term finance

1. ‘Factoring’ is one method of using accounts receivable as security over a loan. This occurs when:

a. a financial institution loans cash to an entity by acquiring 70–75% of an entity’s accounts receivable.

b. a financial institution loans cash to an entity with the entity guaranteeing the money it receives from specific debtors will be used to repay the loan.

c. a financial institution loans cash to an entity by ‘buying’ the accounts receivable and obtaining the right to collect the accounts directly from the entity’s debtors.

d. none of these options is correct.

Learning objective 13.5 ~ Compare the sources of short-term finance

1. If trade creditors at the beginning of the period are $56 000 and at the end of the period are $68 000, and total credit purchases for the period are $480 000, what is the credit turnover in days? (Round your answer up to the next full number of days.)

a. 13 days

b. 52 days

c. 43 days

d. 48 days

Learning objective 13.5 ~ Compare the sources of short-term finance

1. A commercial bill is an example of a:

a. discount security.

b. full security.

c. bank overdraft.

d. long-term loan.

Learning objective 13.5 ~ Compare the sources of short-term finance

1. What are the parties involved in a novated lease?

a. Employer and financial institution

b. Employer, employee and financial institution

c. Employer and employee

d. Employee and financial institution

Learning objective 13.6 ~ Compare the sources of long-term debt finance

1. Which of the following statements is true?

a. Good credit ratings are extremely important to potential issuers of corporate bonds.

b. Corporate bonds are an unsecured debt.

c. Corporate bonds are issued to raise funds so that a business can expand its operations.

d. All of these statements are true.

Learning objective 13.6 ~ Compare the sources of long-term debt finance

1. Which option below is not a characteristic of a fixed rate business loan?

a. The loan may be unsecured, secured with entity assets, or secured with residential property.

b. The interest rate may be converted to a variable rate after the initial period expires.

c. The term of the loan is usually up to 25 years.

d. None of the options listed. All of these options are characteristics of a fixed rate business loan.

Learning objective 13.6 ~ Compare the sources of long-term debt finance

1. Which of the following is not a source of debt finance from the Australian market?

a. Leases

b. Corporate bonds

c. Unsecured notes

d. Debentures

Learning objective 13.6 ~ Compare the sources of long-term debt finance

1. What are loans that are initially drawn down to the full amount and repaid over the term of the loan by a fixed repayment schedule known as?

a. Interest only loans

b. Fully drawn advances

c. Business loans

d. Instalment loans

Learning objective 13.6 ~ Compare the sources of long-term debt finance

1. Which assets below are commonly leased by entities?

a. Office equipment and supplies

b. Motor vehicles and supplies

c. Motor vehicles, plant and equipment

d. Inventory and motor vehicles

Learning objective 13.6 ~ Compare the sources of long-term debt finance

1. Which of the following statements regarding a hire-purchase agreement is correct?

a. They are normally used to provide motor vehicles to employees as part of salary packages.

b. Equipment is purchased by a financial institution which then hires the equipment to the entity for use during the agreement period.

c. They are non-cancellable.

d. Ownership of the hire equipment stays with the financial institution at the end of the agreement period.

Learning objective 13.6 ~ Compare the sources of long-term debt finance

1. Which of the following statements apply to operating leases?

a. The lease is cancellable upon giving notice.

b. The lease is for the full period of the asset’s useful life.

c. Ownership of the asset is with the lessee.

d. None of these statements apply to operating leases.

Learning objective 13.6 ~ Compare the sources of long-term debt finance

1. Which of the following statements regarding finance leases is true?

a. The lease is cancellable.

b. The lease is for the majority of the useful life of the asset.

c. Interest and depreciation are expenses of the lessor.

d. The lease payments are treated as ownership costs.

Learning objective 13.6 ~ Compare the sources of long-term debt finance

1. Which of the following is a characteristic of debentures?

a. Debentures may be issued privately to large institutional investors.

b. Debentures are issued to raise debt funds.

c. Debentures are secured.

d. All of the options are characteristics of debentures.

Learning objective 13.6 ~ Compare the sources of long-term debt finance

1. Which of the following is not a reason that a company may issue options?

a. To reward and motivate employees.

b. To set in place a programmed raising of future funds.

c. To make the current share issue less attractive.

d. As an additional benefit to the current share issue.

Learning objective 13.7 ~ Explain equity finance instruments and their roles

1. Which of the following statements about preference shares is incorrect?

a. In the event of a company winding-up, they rank behind ordinary shares.

b. Payment of preference dividends ranks ahead of payment of ordinary dividends.

c. Dividends to be paid on preference shares are usually at a fixed rate.

d. Preference shares are legally regarded as equity even if they are accounted for as debt.

Learning objective 13.7 ~ Explain equity finance instruments and their roles

a. shareholders are prevented from selling their rights to subscribe.

b. the new shares are being issued at a price higher than the current market price.

c. shareholders are able to sell their rights to subscribe.

d. they are only available to new shareholders.

Learning objective 13.7 ~ Explain equity finance instruments and their roles

1. Which of the following statements about equity finance is true?

a. Ordinary shares are the main type of shares issued.

b. Preference shares normally don’t have voting rights attached.

c. Ordinary shares have no fixed maturity date.

d. All of these statements are true.

Learning objective 13.7 ~ Explain equity finance instruments and their roles

1. How can ordinary shares be transformed?

a. By the winding-up of the company

b. By issue of preference shares

c. By a share split

d. All of the options listed

Learning objective 13.7 ~ Explain equity finance instruments and their roles

1. One of the main attributes of companies that enables them to raise equity finance is:

a. it is a separate legal entity.

b. it can sue or be sued.

c. it is listed on the securities exchange.

d. limited liability of shareholders.

Learning objective 13.7 ~ Explain equity finance instruments and their roles

1. Which of the following statements is incorrect with regards to hybrid debt securities?

a. The issuer receives cash only at the time of issue.

b. Hybrid debt securities include both debt and equity features.

c. Convertible notes and convertible preference shares are hybrid securities.

d. None of the options listed; all of these statements are correct.

Learning objective 13.8 ~ Discuss hybrid financial instruments

1. Which of these is not normally a condition attached to convertible notes?

a. Variable interest rate.

b. Conversion must take place between 2 and 10 years from the date of issue.

c. The note-holders decide when to convert the notes to ordinary shares.

d. The notes are unsecured.

Learning objective 13.8 ~ Discuss hybrid financial instruments

1. Which option below describes a feature of convertible preference shares?

a. There is no discount rate applied to the price

b. Cash is exchanged on the conversion date

c. They generally convert to ordinary shares in a fixed ratio

d. They convert to ordinary shares based on the shares’ prices in the market

Learning objective 13.8 ~ Discuss hybrid financial instruments

1. What is the principal difference between the two main hybrid instruments?

a. Convertible notes convert to ordinary shares, and convertible preference shares are split to a fixed ratio.

b. Convertible notes convert to preference shares, and convertible preference shares convert to ordinary shares.

c. Convertible notes pay interest, and convertible preference shares pay dividends.

d. Convertible notes pay dividends, and convertible preference shares pay interest.

Learning objective 13.8 ~ Discuss hybrid financial instruments

1. Foreign investment, where capital is invested in an entity by an investor with significant influence over the key policies of the entity, is known as:

a. portfolio investment.

b. hybrid investment.

c. indirect investment

d. direct investment.

Learning objective 13.9 ~ Describe the use of international finance

1. A key feature of portfolio investment is:

a. there is direct investment of capital.

b. the investor has limited control over the Australian entity’s key policies.

c. the investor has no control over the Australian entity’s key policies.

d. the investor has full control over key policies of the Australian entity.

Learning objective 13.9 ~ Describe the use of international finance

1. What technology are Initial coin offerings (ICOs) based on?

a. Cloud computing

b. Cryptocurrencies

c. Social media

d. Crowd funding

Learning objective 13.10 ~ Describe new funding opportunities for business such as crowdfunding, ICOs, angel investors and microcredit

1. What is an angel investor?

a. Loans issued to small-business owners with little or no capital

b. An investor from a religious organisation

c. A private investor who provides the capital for a business

d. All of the options are correct

Learning objective 13.10 ~ Describe new funding opportunities for business such as crowdfunding, ICOs, angel investors and microcredit

1. Which option below describes recipients of microloans?

a. People who are unable to secure loans through traditional financial institutions

b. Large-business owners with significant capital

c. Angel investors

d. All of the options describe microloan recipients

Learning objective 13.10 ~ Describe new funding opportunities for business such as crowdfunding, ICOs, angel investors and microcredit

Fill in the blanks

1. The ease of conversion of an asset into cash is a measure of an entity’s ___________.

a. liquidity

Learning objective 13.1 ~ Discuss the management of net working capital

1. The _________________ principle is based on the premise of matching the maturity of the source of funding with its use.

a. hedging

Learning objective 13.1 ~ Discuss the management of net working capital

1. If an entity is unable to pay its debts or meet its financial obligations on time it is said to be _____________.

a. insolvent

Learning objective 13.2 ~ Outline the issues underlying the management of cash

1. A cash ____________ enables managers to plan for the most advantageous arrangements for investing cash surpluses or providing for cash deficits.

a. budget

Learning objective 13.2 ~ Outline the issues underlying the management of cash

1. One aspect of managing the entity’s credit policy is selecting suitable_____________ customers.

a. creditworthy

Learning objective 13.3 ~ Discuss the management of accounts receivable

1. A low level of ________ debts is a measure of the success of collection policies for accounts receivable.

a. bad

Learning objective 13.3 ~ Discuss the management of accounts receivable

1. Storage and display costs, insurance costs, deterioration and obsolescence are all examples of _____________ (ordering/holding) inventory costs.

a. holding

Learning objective 13.4 ~ Identify the issues with respect to the management of inventories

1. The issuer of a(n) _______________ security receives less than the face value of the security.

a. discount

Learning objective 13.5 ~ Compare the sources of short-term finance

1. A loan facility that is attached to a cheque account is a(n) ___________ _____________.

a. bank overdraft

Learning objective 13.5 ~ Compare the sources of short-term finance

1. ________________ finance is the most important example of inventory finance commonly found in the motor vehicle retail sector.

a. Floor-plan

Learning objective 13.5 ~ Compare the sources of short-term finance

1. Finance leases are ___________________ (cancellable/non-cancellable) contractual arrangements.

a. non-cancellable

Learning objective 13.6 ~ Compare the sources of long-term debt finance

1. For interest-only loans the _______________amount is repaid in full at the end of the loan term.

a. principal

Learning objective 13.6 ~ Compare the sources of long-term debt finance

1. The _______________ share is the main type of share by which companies divide and sell ownership rights to investors.

a. ordinary

Learning objective 13.7 ~ Explain equity finance instruments and their roles

1. The two types of hybrid securities are convertible ______________ shares and convertible notes.

a. preference

Learning objective 13.8 ~ Discuss hybrid financial instruments

1. Foreign investment where the investor has significant influence over the key policies of the investee is known as ___________ investment.

a. direct

Learning objective 13.9 ~ Describe the use of international finance

1. An angel investor is a ___________ (private/public) investor who provides the capital for a business.

a. private

Learning objective 13.10 ~ Describe new funding opportunities for business such as crowdfunding, ICOs, angel investors and microcredit

1. ICOs can be an important source of ___________ for new companies that sell their underlying crypto tokens in exchange for bitcoin and ether.

a. funding

Learning objective 13.10 ~ Describe new funding opportunities for business such as crowdfunding, ICOs, angel investors and microcredit