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?

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.

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

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).

 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

 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
 There are many suppliers producing the product
When extending credit to firms in very mature industries, it is critical not only to identify which stage of the
cycle an individual business and its industry are in, but also…
 how a firm seeks to maintain existing basic technologies. (
 what the industry is doing to retain experienced management teams.
 what marketing efforts the industry is making to maintain existing customers.
 what a firm is doing to make the transition to stay in business.
Which of the following is least adversely affected by market overcapacity


that reflect payment defaults almost always point to integrity issues.

that show slow trade payments always point to integrity issues.

are not helpful in assessing integrity because management provides most of the information contained in
the reports.

that fail to reflect payment defaults indicate management integrity is sound.
Of the following factors, which ones place the supplier in a position of power, or leverage, in the
supplier/buyer relationship? (select all that apply)
 There are few suppliers producing the product
 Suppliers’ ability to integrate backward
 There are many suppliers producing the product
 Switching costs are minimal
 There are a lack of substitute products
For the purpose of analysing the management aspect of credit risk, management succession is a critical
issue to consider principally because… \
 loans made today will depend on future cash flow to be repaid as scheduled
 it is important to know exactly who the lender will be working with should the current CEO depart.
 it provides a head start on future lending relationships and opportunities.
 corporate governance efforts suffer without smooth transition in management.
For a business with numerous small buyers, the pressure from those buyers would likely…
 be more severe than the pressure from suppliers, thereby causing the relative level of inventory (stock) to
stretch over time.
 be less severe than the pressure from suppliers, thereby causing the relative level of inventory (stock) to
lessen over time.
 put little pressure on prices by virtue of significant individual purchases, thereby leaving prices
largely unaffected by buyer pressure.
 put great pressure on prices by virtue of significant individual purchases, thereby tending to drive prices

 assets and liabilities, arranged in descending order of liquidity.
 assets and liabilities, arranged in descending order of liquidity.
 cash flow information, arranged in operating, investing, and financing sections.
 gross profit offset by operating costs of running the company, which yields operating income.
 operating income offset by financing costs and other income streams falling outside the normal
course of business activity but sufficiently large to be reported individually, which yields profit
before taxes.
Assets, liabilities, revenues, and expenses are among the main elements of a firm's financial accounts.
 True
 False
Accrual Basis financial accounts… (select all that apply)
 match the recognition of revenues with the expenses that went into generating that revenue.
 recognise an economic transaction at the time cash is paid or received.
 recognise an economic transaction at the time it occurs without paying out or receiving the
cash that accompanies the transaction.
 record expenses before their associated revenues are recognised.
An increase in days stock indicates the firm…
 has more product available to process and sell to customers.
 is more efficient at turning raw materials into finished products.
 is paying its vendors more quickly.
 is paying its vendors more slowly.
An increase in trade debtors in days from one period to the next indicates…
 the firm's increased efforts to collect past due receivables are working.
 the firm is being paid more quickly by its customers.
 lower levels of trade debtors (assuming a constant sales level).
 the firm is being paid more slowly by its customers.
A cash flow coverage ratio less than 1.00 in a given operating period means
 interest, dividends and current maturities of long-term debt were covered by internal cash flow.
 internal cash flow from operations decreased from the prior year.
 payment obligations for interest, dividends and debt amortisation increased during the period.

 plus interest expense
 plus misc. income
Cash Basis financial accounts (select all that apply)
 recognise an economic transaction at the time cash is paid or received.
 match the recognition of revenues with the expenses that went into generating that revenue.
 recognise an economic transaction at the time it occurs without paying out or receiving the cash that
accompanies the transaction.
 may record revenues in a different accounting period than their associated expenses are
recognised.
Days stock measures the level of inventory (stock) relative to… (24 Points)
 sales. (24 Points)
 cost of goods sold. (0 Points)
 gross profit. (0 Points)
 production costs. (0 Points)
Financial gearing measures… (24 Points)
 total liabilities relative to net worth. (24 Points)
 total liabilities. (0 Points)
 the change in net worth over time. (0 Points)
 borrowed funds. (0 Points)
In addition to the tax on company (corporation) income, shareholders pay taxes on dividends.
 False
 True
If a firm consistently has very low financial gearing compared to its peers, it most likely means…
 cash flow is being managed better than its peers.
 it has a stronger capital base from which to grow than do other firms in the industry.
 it has a weaker capital base from which to grow when compared to other firms in the industry.
 it may be growing much too rapidly.
Increasing financial gearing from one period to the next means…
 liabilities are growing at a faster rate than net worth.
 liabilities are growing at a slower rate than net worth.

Which of the following business types are liable for income taxes (select all that apply)…
 sole trader. (0 Points)
 partnership. (0 Points)
 company (corporation). (24 Points)
 conglomerate. (0 Points)
What does a profit and loss account report? (select all that apply)
 Assets and liabilities, arranged in descending order of liquidity
 Assets and liabilities, arranged in ascending order of liquidity
 Gross profit offset by operating costs of running the business, which yields operating income
 Operating income offset by financing costs and other income streams falling outside the
normal course of business activity but sufficiently large to be reported individually, which
yields profit before taxes
 Revenue generated from basic operations offset by the direct cost of producing goods, which
yields gross profit
Which of the following are NOT among the five basic elements that make up financial accounts?
 Assets
 Expenses
 Liabilities
 Revenue
 Taxes
Which of the following statements is in agreement with the conservatism principle? (select all that
apply)
 Earnings during any period should be based on the current market prices of the inventory (stock)
used to generate sales
 The value of assets should be reduced if market value falls below historical cost
 Financial data should convey business operations in a less, rather than more, favourable light
when there is a choice
 The value of assets should be reduced if historical cost falls below market value
 Financial data should convey business operations in a more, rather than less, favourable light when
there is a choice

 available to pay operating expenses, interest expense, and income taxes.
 remaining after deducting the cost of goods sold and operating expenses.
 remaining after deducting the cost of goods sold, operating expenses, and interest remaining before
deducting the cost of goods sold.
 that a firm retains after accounting for its cost of goods sold.
The basic sections that make up a firm's financial accounts include: (select all that apply)
 Liabilities (8 Points)
 Taxes (0 Points)
 Revenue (8 Points)
 Assets (8 Points)
 Common stock (0 Points)
The operating expense percentage measures…
 the percentage of each sales dollar used for operating expenses and financing costs.
 dividing cost of goods sold by sales.
 the percentage of operating expenses necessary to assure profitability.
 the relative amount of operating expenses (excluding financing costs) incurred compared to
total sales.
The accounting equation states…
 assets must be exactly equal to the sum of liabilities and equity.
 the total of all debits must equal the total of all credits in any accounting transaction.
 all expenses incurred in generating revenue during a period be recognised in the same accounting
period as that revenue.
 liabilities must be exactly equal to the sum of assets and equity.
 equity must be exactly equal to the sum of liabilities and assets.
The accounting equation states assets must be exactly equal to the sum of liabilities and equity.
 True (24 Points)
 False (0 Points)
The accounting equation states liabilities must be exactly equal to the sum of assets and equity.
 False
True