FIN 480 UPDATED EXAM SCRIPT QUESTIONS AND
ANSWERS SURE A+
✔✔What happens to uncollected sales at the end of a quarter? - ✔✔They become the
beginning accounts receivable for the following quarter.
✔✔What are the four primary categories of cash outflows for a firm? - ✔✔Payments of
accounts payable, wages/taxes/other expenses, capital expenditures, and long-term
financing expenses like interest and dividends.
✔✔How is a cash surplus or deficit determined for a specific quarter? - ✔✔By
subtracting the total cash outflows from the total cash collections for that quarter.
✔✔Does a large cash outflow in the second quarter always indicate financial trouble? -
✔✔No, it may result from planned capital expenditures or the timing of receivable
payments.
✔✔What is the primary method for remedying a forecasted cash deficit? - ✔✔Short-
term borrowing.
✔✔What are the two main options for short-term borrowing? - ✔✔Unsecured borrowing
and secured borrowing.
✔✔What is a line of credit? - ✔✔An agreement authorizing a firm to borrow up to a
specified amount from a bank, typically evaluated annually and subject to a cleanup
period.
✔✔What is the difference between a line of credit and a revolving credit arrangement? -
✔✔A revolving credit arrangement is similar to a line of credit but remains open for two
or more years.
✔✔What is a compensating balance? - ✔✔Funds that a firm must leave on deposit with
a bank at little or no interest as a condition for receiving a loan.
✔✔How does a compensating balance affect the true cost of borrowing? - ✔✔It
increases the effective interest rate because the firm pays interest on the full loan
amount while having access to a smaller portion of those funds.
✔✔What is a letter of credit? - ✔✔A promise by a bank to make a loan if specific
conditions are met; it can be revocable or irrevocable.
✔✔What are the two main types of accounts receivable financing? - ✔✔Assigning
receivables and factoring receivables.
, ✔✔What are the three common types of inventory loans? - ✔✔Blanket inventory lien,
trust receipt, and field warehouse financing.
✔✔What is commercial paper? - ✔✔Unsecured debt sold directly by a firm to lenders
with a maturity of less than 270 days, often at a lower cost than bank loans.
✔✔How can a firm use trade credit as a funding source? - ✔✔By paying bills to
suppliers more slowly, the firm effectively uses the supplier's accounts receivable as a
source of short-term financing.
✔✔What is a 'cleanup period' in the context of a line of credit? - ✔✔A required period
during which the firm must pay off its balance to zero to demonstrate it is not relying on
the credit line for long-term funding.
✔✔What is the difference between committed and uncommitted lines of credit? - ✔✔A
committed line of credit requires the payment of a commitment fee to guarantee the
availability of funds.
✔✔What is factoring receivables? - ✔✔A form of secured borrowing where a firm sells
its accounts receivable to a third party (a factor) to obtain immediate cash.
✔✔Why might a firm choose commercial paper over a bank loan? - ✔✔Commercial
paper generally offers a lower cost of borrowing compared to traditional bank loans.
✔✔What is a trust receipt in inventory financing? - ✔✔A type of inventory loan often
used by car or appliance dealers where the lender retains title to the goods until they
are sold.
✔✔DSO (Days Sales Outstanding) - ✔✔Measures the average number of days it takes
a firm to collect payment after a sale.
✔✔What is the purpose of DSO? - ✔✔Used to evaluate accounts receivable efficiency.
✔✔How can managers reduce DSO? - ✔✔Tightening credit standards, Shortening
payment periods, Offering discounts for early payment, Improving collection efforts
✔✔Aging Schedule - ✔✔A breakdown of accounts receivable by how long invoices
have been outstanding.
✔✔What does an aging schedule do? - ✔✔Organizes receivables into "buckets" based
on age (in days).
✔✔What is the purpose of an aging schedule? - ✔✔Helps identify delinquent accounts,
Assesses collection performance and credit risk
ANSWERS SURE A+
✔✔What happens to uncollected sales at the end of a quarter? - ✔✔They become the
beginning accounts receivable for the following quarter.
✔✔What are the four primary categories of cash outflows for a firm? - ✔✔Payments of
accounts payable, wages/taxes/other expenses, capital expenditures, and long-term
financing expenses like interest and dividends.
✔✔How is a cash surplus or deficit determined for a specific quarter? - ✔✔By
subtracting the total cash outflows from the total cash collections for that quarter.
✔✔Does a large cash outflow in the second quarter always indicate financial trouble? -
✔✔No, it may result from planned capital expenditures or the timing of receivable
payments.
✔✔What is the primary method for remedying a forecasted cash deficit? - ✔✔Short-
term borrowing.
✔✔What are the two main options for short-term borrowing? - ✔✔Unsecured borrowing
and secured borrowing.
✔✔What is a line of credit? - ✔✔An agreement authorizing a firm to borrow up to a
specified amount from a bank, typically evaluated annually and subject to a cleanup
period.
✔✔What is the difference between a line of credit and a revolving credit arrangement? -
✔✔A revolving credit arrangement is similar to a line of credit but remains open for two
or more years.
✔✔What is a compensating balance? - ✔✔Funds that a firm must leave on deposit with
a bank at little or no interest as a condition for receiving a loan.
✔✔How does a compensating balance affect the true cost of borrowing? - ✔✔It
increases the effective interest rate because the firm pays interest on the full loan
amount while having access to a smaller portion of those funds.
✔✔What is a letter of credit? - ✔✔A promise by a bank to make a loan if specific
conditions are met; it can be revocable or irrevocable.
✔✔What are the two main types of accounts receivable financing? - ✔✔Assigning
receivables and factoring receivables.
, ✔✔What are the three common types of inventory loans? - ✔✔Blanket inventory lien,
trust receipt, and field warehouse financing.
✔✔What is commercial paper? - ✔✔Unsecured debt sold directly by a firm to lenders
with a maturity of less than 270 days, often at a lower cost than bank loans.
✔✔How can a firm use trade credit as a funding source? - ✔✔By paying bills to
suppliers more slowly, the firm effectively uses the supplier's accounts receivable as a
source of short-term financing.
✔✔What is a 'cleanup period' in the context of a line of credit? - ✔✔A required period
during which the firm must pay off its balance to zero to demonstrate it is not relying on
the credit line for long-term funding.
✔✔What is the difference between committed and uncommitted lines of credit? - ✔✔A
committed line of credit requires the payment of a commitment fee to guarantee the
availability of funds.
✔✔What is factoring receivables? - ✔✔A form of secured borrowing where a firm sells
its accounts receivable to a third party (a factor) to obtain immediate cash.
✔✔Why might a firm choose commercial paper over a bank loan? - ✔✔Commercial
paper generally offers a lower cost of borrowing compared to traditional bank loans.
✔✔What is a trust receipt in inventory financing? - ✔✔A type of inventory loan often
used by car or appliance dealers where the lender retains title to the goods until they
are sold.
✔✔DSO (Days Sales Outstanding) - ✔✔Measures the average number of days it takes
a firm to collect payment after a sale.
✔✔What is the purpose of DSO? - ✔✔Used to evaluate accounts receivable efficiency.
✔✔How can managers reduce DSO? - ✔✔Tightening credit standards, Shortening
payment periods, Offering discounts for early payment, Improving collection efforts
✔✔Aging Schedule - ✔✔A breakdown of accounts receivable by how long invoices
have been outstanding.
✔✔What does an aging schedule do? - ✔✔Organizes receivables into "buckets" based
on age (in days).
✔✔What is the purpose of an aging schedule? - ✔✔Helps identify delinquent accounts,
Assesses collection performance and credit risk
