Chapter 11 Questions
True/False
1) Only a handful of very large firms have access to funding sources such as asset-
backed debt securitizations, A-l commercial paper ratings, and below-prime lending
rates. (pg. 339)
2) Entrepreneurs requiring initial startup funding, generally seek capital from internal
sources. (pg. 339)
3) Home equity lines of credit are the only way in which entrepreneurs provide funding
for their businesses. (pg. 339)
4) The business operating cycle for a traditional manufacturer begins with the purchase
of raw materials and ends with collections from the customer. (pg. 340)
5) The vast majority of organizations experience a gap between the time when they have
to pay suppliers and when they receive payment from customers. This gap is known
as the cost cycle. (pg. 341)
6) Companies with a negative cash conversion cycle will see their working capital
requirements increase with growth. (pg. 341)
7) Corporate insolvency usually results when the firm fails to service its debt obligations
on time. (pg. 342)
8) Net working capital is difficult to calculate; the method of taking the difference
between current assets and current liabilities leaves the entrepreneur with ambiguous
figures. (pg. 342)
9) From an ongoing perspective, the company’s new ratio might be more indicative of
liquidity than either the current ratio or the quick ratio. (pg. 342)
10) Working capital requirements can fall short periodically as long as the company
remains profitable. (pg. 342)
11) An entrepreneur may only cash in his accounts receivable by going to a finance
company for a loan. (pgs. 342 – 343)
12) Accounts receivable represents liquid working capital that can be obtained
prematurely without cost. (pg. 342)
13) Techniques for forecasting future sales are limited to methods that use external or
economic information. (pg. 343)
14) From a microeconomic perspective, a company operating below its optimal output
should always offer generous credit terms in order to stimulate demand. (pg. 344)
15) The credit terms of “10/15, net 30” mean that the payment is due within 15 days, but
if paid within 10 days, there is a net 30% discount. (pg. 344)
16) The two major determinants of the credit decision are the character of the creditor
firm and the capacity of the debtor company to repay the loan. (pg. 347)
17) Building up inventory typically reduces cash levels. (pg. 348)
18) When paying for working capital shortfalls, entrepreneurs look for short-term cash at
the lowest possible rates. (pg. 348)
19) An entrepreneur only requires enough cash to cover needs under the most likely
scenario he/she has forecasted. (pgs. 348 – 349)
20) One way for entrepreneurs to stretch their payables (to take longer to pay bills) is to
take discounts. (pg. 349)
21) If an entrepreneur wants more credit and would like to stretch out her payables, she
can negotiate with her suppliers for more generous credit terms. (pg. 349)
22) By paying bills more slowly, an entrepreneur will hurt his or her business. (pg. 349)
23) Some suppliers use generous terms on trade credit as a form of sales promotion. This
is always less effective than an intensive advertising campaign or a high-pressure
sales team. (pg. 350)
24) Pledging means using accounts payable as collateral for a loan from a finance
company or bank. (pg. 351)
25) When a borrower instructs its customers to pay their invoices directly to the lender,
the arrangement is called, “Pledging with notification.” (pg. 351)
26) A chattel mortgage is a loan secured by specific assets. (pg. 352)
27) When using a public warehousing arrangement for a bank loan, the entrepreneur
surrenders access to his/her inventory. (pg. 352)
28) Factoring with recourse implies that if a company does not pay its bill, the factor must
absorb the loss. (pg. 352)
29) The term, factoring, refers to selling accounts receivable at a discount to a finance
company known as the factor. (pg. 352)
30) An entrepreneur’s inventory is an asset that legally cannot serve as collateral for a
loan. (pg. 352)
Multiple Choices
1) Which of these begins with the purchase of the raw materials, includes the work‐in‐
process period, and ends with the sale of the finished goods? (pg. 341)
2) During which of these operating cycles, the business generally receives some credit
from suppliers? (pg. 341)
3) Which of these begins with the purchase of the raw materials or finished goods, but it
ends with the payment to the supplier? (pg. 341)
4) Which of these describes a gap between the time when they have to pay suppliers and
the time when they receive payment from customers? (pg. 341)
5) The ______ of receivables collection and payment of accounts payable are key
determinants in whether a firm is cash rich or cash poor. (pg. 342)
6) The basis of all receivables and collections is actual net sales, which is equal to
______. (pg. 343)
E. None of the above
7) Methods of forecasting environmental change fall into two broad groups. One group
is primarily concerned with forecasting the future performance of the economy as a
whole; the other group is more concerned with forecasting ______ for individual
industries and products. (pg. 343)
D. weather patterns
E. None of above
8) The relative proportions of cash sales and credit sales make an important difference to
which of the following? (pg. 343)
9) The magnitude of a company’s accounts receivable obviously depends upon a number
of factors, except _________. (pgs. 343-344)
10) What economic factor concerning the entrepreneur’s product is the most significant
for the company’s credit policy? (pg. 344)
E. None of above
11) Which of the following is a method of pursuing payment from a customer whom the
entrepreneur believes able to pay? (pg. 346)
12) It’s safe to say that collection procedures are expensive and justifiable only when the
expected results ______. (pg. 346)
13) A method of reducing overdue accounts and limiting bad debts is setting limits to the
credit allowed on______. (pg. 346)
D. low-cost goods
E. none of the above
14) Which of the following is NOT one of the Five Cs of credit? (pg. 347)
15) Although the opportunity costs for accounts receivable may be quite large, the largest
current asset balances are usually in______. (pg. 347)
16) Which of the following assets represent the most important current asset of many
manufacturing companies? (pg. 347)
17) What does a trade-credit effectively amount to? (pg. 349)
18) Typically, a company can borrow what percent of its accounts receivable’s face value
if it has a good credit rating and its customers have excellent credit ratings. (pg. 351)
19) When factoring accounts receivables, a factor will charge the entrepreneur which of
the following fee(s)? (pg. 352)
A. An interest charge
B. A collection fee
C. A credit checking fee
20) Which of the following is NOT a way to use inventory as security for a loan?
(pg. 352)
21) Banks prefer 90-day maturities on short term loans in order to (pg. 354)
22) Which of the following is NOT a factor that influences the interest borrowers pay?
(pg. 355)
23) The bank discount method is common in ______. (pg. 355)
24) Bank term loans may include which of the following restrictive covenants? (pg. 356)
25) Which of the following requirements apply with an SBA loan (pg. 359)
26) 21) SBA‐guaranteed loans can be used for which of the following purposes? (pg. 359)
1) When choosing to use internal funds as means to support growth, discuss to
what ends this growth must be ultimately focused on (in terms of financing
2) What actions towards the ventures’ cash collection cycle, should an
entrepreneur take before seeking ways to prematurely extract short term cash
from his/her operating assets? (pgs. 340 – 351)
3) Discuss the importance of the cash conversion cycle. (pg. 341)
4) Net working capital is often thought of as the balance of completely liquid assets
and liabilities. However, this is not completely true. Please explain why parts of
working capital can become stagnant and hurt cash levels, even if a firm is
growing and profitable. (pg. 342)
5) Is it a mistake for a company to offer credit terms to its customers for early
payment? (pgs. 344 – 345)
6) What factors should an entrepreneur consider when appraising the
creditworthiness of new customers (also known as the 5Cs)? (pg. 347)
• Character – the customer’s integrity and willingness to repay the financial
obligation.
• Conditions – refer to national or international economic, industrial, and firm‐
specific prospects during the time period of the credit.
7) Why do entrepreneurs usually want to keep inventory levels as low as possible?
What are the challenges facing entrepreneurs who want to reduce their
inventory levels? (pgs. 347- 348)
To reduce the inventory expenses such as storage costs and insurance. To ensure that
as little capital as possible is tied up in inventory.
8) Discuss the importance of forecasting cash flow requirements as it pertains to
working capital. (pg. 348)
9) What are the advantages of trade credit over other sources of financing? (pg.
349)
• The first advantage is convenience: trade credit is not negotiated; it requires no
great expenditure of executive time, and no legal expenses.
10) Short of demanding payments, what sales terms could an entrepreneur choose in
order to collect cash more quickly? (pgs. 350 – 351)
11) What kind of information will the loan officer be interested in, when
entrepreneurs are looking for a bank loan? (pg. 356)
12) What are the three categories of restrictive covenants mentioned in the chapter,
in relation to loan agreements? (pg. 356)
13) List two examples of Routine Provisions. (pgs. 357-358)
• The borrower must furnish the bank with periodic financial statements and
14) Give an example of a Specific Provision that an entrepreneur might encounter in
a loan agreement. (pg. 358)
• Key executives may be required to sign employment contracts or take out
substantial life insurance.
compensation.
15) To qualify for assistance from the Small Business Administration, the proceeds