Which of the Following Statements About Various Short-Term Credit Alternatives

question 21

Multiple Choice

Which of the following statements about various short-term credit alternatives is correct?

• A)The firm has complete control over the terms and the levels of the accruals it uses, which makes this type of credit an attractive source of additional funding.
• B)Commercial paper is a type of secured promissory note issued by large, financially strong firms.
• C)Banks generally charge a commitment fee on the used balances of credit lines to compensate for guaranteeing the availability of revolving credit.
• D)The funds used by a firm to maintain a compensating balance with the bank cannot be used by the firm to pay its bills or to invest in capital budgeting projects.
• E)The credit created when one firm buys goods or services on credit from another firm is known as accounts receivable.

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Definitions:

Diminishing Marginal Utility

The principle that as a person consumes more of a product, there is a decline in the additional satisfaction or utility that person derives from consuming one more unit of the product.

Equality-Efficiency Trade-Off

This concept deals with the balance or compromise between achieving a more equitable distribution of resources and maximizing economic efficiency.

Income Equality

A situation in which earnings are distributed evenly across members of a society, reducing income disparities.

Growing Income Inequality

The increasing gap in the distribution of income and wealth among individuals or households within a community or country.