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1. Shareholders in the company (corporation) form of business are personally responsible for none of the liabilities of the company (corporation) unless they have provided a personal guarantee. A. False B. True 2. The financial accounts of a service business usually do NOT include which of the following accounts? A. Fixed assets B. Prepaid expenses C. Accounts payable (trade creditors) D. Cost of goods sold E. Notes payable 3. A major difference between the company (corporation) and partnership forms of business organisation is that none of the shareholders in a company (corporation) are personally responsible for business liabilities, as general partners are in a partnership. A. False B. True 4. Credit enhancements (security, guarantees, etc.) normally do not vary based on a borrower's legal structure. A. True B. False 5. In a period of declining sales, profits, and cash flow, a service provider, such as a software developer, would likely have the greatest borrowing need to finance which of the following? A. Investments B. New fixed assets until they are used up in producing products C. Inventory (stock) until it is converted to sales and cash D. General operations until the business returns to a more positive financial position E. A change in company ownership 6. The financial accounts of a sole trader present withdrawals taken during the year in the operating expenses of the business. A. True B. False 7. If assets are defined as everything that supports the production process or results from it, then the shorter the asset conversion cycle, the greater the level of financing a business normally requires. A. False B. True 8. Which of the following is typically NOT considered an acceptable borrowing cause? A. Finance the range of assets required to support rapid growth B. Finance survival until the company can be turned around C. Finance inventory (stock) until it is converted to sales and cash D. Pay down subordinated debt 9. The short-term financing gap can be expressed mathematically as… A. trade debtors in days plus inventory (stock) in days less trade creditors in days. B. trade debtors in days plus trade creditors in days less inventory (stock) in days. C. inventory (stock) in days less trade creditors in days. D. trade creditors in days plus inventory (stock) in days less trade debtors in days. 10. In a period of rapid economic growth, a manufacturer would likely have the greatest borrowing need to finance which of the following? (select all that apply) A. Trade debtors until they are collected in cash B. Inventory, stock, until it is converted to sales and cash C. A change in company ownership D. Finance fixed assets until they are used up in producing product E. Survival until the company can be turned around 11. Other things being equal, the… A. shorter a firm's trading cycle, the greater the amount of suppliers' credit or bank financing it will need. B. longer a firm's trading cycle, the smaller the amount of suppliers' credit or bank financing it will need. C. longer a firm's trading cycle, the greater the amount of suppliers' credit or bank financing it will need. D. shorter a firm's trading cycle, the greater the amount of term debt it will need. 12. Long-term debt repayment depends primarily upon… A. rapid turnover of inventory (stock). B. timely collection of accounts receivable (trade debtors). C. ongoing profitability. D. holding back payment of trade creditors as long as they'll allow. 13. Which of the following accounts would typically be proportionally larger on a manufacturer's financial statements than on those of a retailer? (select all that apply) A. Accounts payable (trade creditors) B. Income tax provision C. Work in process inventory (stock) D. Cost of goods sold E. Accounts receivable (trade debtors) 14. The trading cycle can be defined as the time it takes to convert the purchase of inventory (stock) into a sale and convert the sale to cash. A. True B. False 15. Wholesalers do not typically add tangible value to products before they sell them. A. True B. False 15/15 A business usually has a strong need for financing but represents too much risk to the bank as it progresses through which stage of its life cycle. Start-up Adolescence Maturity Decline A business that generally sells a major portion of its product to one buyer has leverage in that it can then dictate the terms of the relationship with the purchaser. True False A profitable business requires a considerable level of financing to entirely support increasing levels of operating expenses when in a growth phase. True False A business that generally sells a major portion of its product to one buyer has leverage in that it can then dictate the terms of the relationship with the purchaser. True False A business usually has the smallest need for financing as it progresses through which stage of its life cycle. Start-up Growth Maturity Decline A business that generally sells a major portion of its product to one buyer has leverage in that it can then dictate the terms of the relationship with the purchaser. True False A business usually has the greatest need for financing as it progresses through which stage of its life cycle. Adolescence Growth Maturity Transformation A profitable business requires a considerable level of financing to entirely support increasing levels of operating expenses when in a growth phase. True False A business usually has the smallest need for financing as it progresses through which stage of its life cycle. Start-up Growth Maturity Decline A profitable business requires a considerable level of financing to entirely support increasing levels of operating expenses when in a growth phase. True False As a stage in the life cycle of an industry or business, "maturity" refers to… when market demand has exceeded the available supply and sales and profits grow very rapidly. a fundamental change in the operations of a business intended to try and stave off demise. products remaining widely accepted and in high demand, and the capacity of the market growing as new competitors enter the marketplace. the set of activities that accompany sales shifts from expansion to contraction. the life cycle stage in which a business is successfully dissolved. As a stage in the life cycle of an industry or business, "adolescence" refers to… the set of activities that accompany sales shifts from expansion to contraction when the product being sold has achieved a degree of acceptance and sales levels begin to increase. products remaining widely accepted and in high demand, the capacity of the market has grown as new competitors enter the marketplace. when market demand has exceeded the available supply and sales and profits grow very rapidly. the life cycle stage in which a business is successfully dissolved As a stage in the life cycle of an industry or business, "transition" refers to… any movement from one life cycle stage to the next the life cycle stage in which a business is successfully dissolved when the product being sold has achieved a degree of acceptance and sales levels begin to increase a fundamental change in the operations of a mature business intended to try and stave off demise. the set of activities that accompany sales shifts from expansion to contraction Credit risk varies depending on the stage of an industry's life cycle. Emerging and declining industries generally carry more risk, while growing and mature industries are less risky. True False Credit risk varies depending on the stage of an industry's life cycle. Emerging and declining industries generally carry less risk, while growing and mature industries are more risky. True False During a period of economic contraction as sales begin to decline, receivables (trade debtors) and inventory (stock) levels tend to decrease and capital spending slows or stops. True False During a period of economic contraction as sales begin to decline, receivables (trade debtors), inventory (stock) and capital spending levels tend to rise. True False During a growth phase, a profitable business requires a greater level of financing solely to support increasing levels of receivables (trade debtors) and inventory (stock). True False Integrity is a critical management characteristic because it is the single best indicator of success for a business. True False Integrity is a critical management characteristic because… (24 Points) the lender's relationship is with management, not with the business. it is the single most important indicator of a company's repayment ability. most of the information needed to properly assess credit risk is provided by management. it is the best single indicator of business success. In assessing the likelihood of loan repayment, it is equally important to focus analysis on management skill and management integrity, since both are fundamental to successful business operations True False In assessing the risk associated with loan repayment, it is equally important to focus analysis on management skill and management integrity, because… low integrity may be offset by successful application of business practices in highly competitive situations. weakness in one must be offset by strength in the other if debt is to be serviced properly. skill can rarely be supplemented readily from external sources. (0 Points) both skill and integrity are fundamental to successful business operations. In general, a firm that sells a minority of its output to any one buyer is said to have "power" or leverage, in that it can normally dictate the terms of the relationship to the purchaser. (24 Points) True False If barriers to entry are considered to be low in a given industry, you could expect to see… a concerted effort on the part of firms in the industry to increase switching costs. little effort on the part of firms in the industry to differentiate their product. sustained attempts on the part of firms in the industry to minimise value-added product features. sustained attempts on the part of firms in the industry to minimise advertising costs. If the bargaining power of buyers is weak in a given industry, the suppliers to that sector may well experience… movement by individual buyers to grow their volume of purchases. efforts by buyers to increase switching costs. pressure from buyers to drive up supply prices by threat of forward integration. demands from buyers to stretch trade payment terms. If products are well differentiated in a given market, a potential entrant may face heavy development and advertising costs to establish itself and its product, thus reducing the threat of entry. True False Management succession is a critical issue to consider when analysing the management aspect of credit risk primarily because… corporate governance efforts suffer without smooth transition in management. it provides a head start on future lending relationships and opportunities. loans made now depend on cash flow in the future to be repaid as scheduled. it is important to know exactly who the bank will be working with should the current CEO depart. Market overcapacity decreases credit risk because it suggests customers are demanding more of a given product than the borrower can produce. True False Management succession is a critical issue to consider when analysing the management aspect of credit risk primarily because… corporate governance efforts suffer without smooth transition in management. it provides a head start on future lending relationships and opportunities loans made now depend on cash flow in the future to be repaid as scheduled. it is important to know exactly who the bank will be working with should the current CEO depart. Market overcapacity decreases credit risk because it suggests customers are demanding more of a given product than the borrower can produce. (24 Points) True False Management experience plays an important role in the lending decision process because… the majority of firms that ultimately fail have inexperienced management. in the end, management is responsible for all the decisions and policies adopted and implemented by the company. experience in one business sector is easily transferable to other business sectors. management integrity is a function of job experience. The degree of experience present in the upper management of a business plays a key role in assessing management risk because most firms that go out of business do so because of inexperienced management. management integrity is a function of job experience. the time spent in a specific business or industry is the best overall indicator of competence. management is ultimately responsible for decisions and policies adopted and implemented by the business. The generation of future cash flow is typically as dependent on management integrity as it is on management skill. True False The extent of the experience present in a firm's upper management plays an important role in the credit decision because the time spent in a business or industry is the best indicator of competence. management is ultimately responsible for all the decisions and policies adopted and implemented by the business. experience in one industry is usually easily transferred into success in other industries. most businesses that fail are characterised by inexperienced management. Which of the following factors does NOT place the supplier in a position of power, or leverage, in the supplier/buyer relationship? (select all that apply) Importance of the suppliers’ product as an input to industry's products A few suppliers dominate the market Minimal switching costs There is an abundance of substitute products There are many suppliers producing the product Which of the following is least adversely affected by market overcapacity? Product pricing Number of companies in the market Product availability Unit sales Product quality Which of the following factors does NOT place the supplier in a position of power, or leverage, in the supplier/buyer relationship? (select all that apply) Importance of the suppliers’ product as an input to industry's products A few suppliers dominate the market Minimal switching costs There is an abundance of substitute products [...]... available to service debt may or may not represent cash available to service debt represents the maximum cash available to service debt represents the minimum cash available to service debt Among other things, a profit and loss account reports… (24 Points) assets and liabilities, arranged in ascending order of liquidity (0 Points) revenue generated from basic operations offset by the direct cost... sections (0 Points) cash flow information, arranged in operating, investing, and financing sections (0 Points) assets and liabilities, arranged in descending order of liquidity (0 Points) Among other things, a profit and loss account reports (or shows)… (select all that apply) assets and liabilities, arranged in descending order of liquidity assets and liabilities, arranged in descending order... flow internally to cover the full, combined amounts of interest, dividends, and scheduled debt reductions.based on the level of net profit A cash flow coverage ratio greater than 1.00 means, among other things, the company… covered all its operational and investment activities from cash generated internally covered its scheduled debt reductions from cash generated internally was unable to make scheduled... rate than net worth liabilities are growing at a slower rate than net worth solvency risk is decreasing the firm is borrowing, in relative terms, fewer dollars If a sole trader elects a trade name, this becomes the taxable entity False True Operating profit can be defined as the funds… (24 Points) available after covering the cost of goods sold and operating expenses (24 Points) available . in the operating expenses of the business. A. True B. False 7. If assets are defined as everything that supports the production process or results from it, then the shorter the asset conversion. are used up in producing product E. Survival until the company can be turned around 11. Other things being equal, the… A. shorter a firm's trading cycle, the greater the amount of suppliers'. available to service debt. represents the minimum cash available to service debt. Among other things, a profit and loss account reports… (24 Points) assets and liabilities, arranged in ascending