Firms Generally Choose to Finance Temporary Current Operating Assets with Short-Term

question 111

Multiple Choice

Firms generally choose to finance temporary current operating assets with short-term debt because

• A)matching the maturities of assets and liabilities reduces risk under some circumstances, and also because short-term debt is often less expensive than long-term capital.
• B)short-term interest rates have traditionally been more stable than long-term interest rates.
• C)a firm that borrows heavily on a long-term basis is more apt to be unable to repay the debt than a firm that borrows short term.
• D)the yield curve is normally downward sloping.
• E)short-term debt has a higher cost than equity capital.

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Definitions:

Direct Materials

Raw materials that are directly incorporated into a finished product and are easily traceable to it.

Labour Rate Variance

The difference between the actual labor costs incurred and the standard labor costs for the actual production level.

Actual Rate

The actual cost incurred or the price paid for materials, labor, or overhead as opposed to budgeted or standard costs.

Standard Rate

A predetermined cost that is often used in budgeting and costing exercises to estimate the expected rate for services or products.