The Toy Store Borrowed $12,000 from the Bank and Agreed

question 170

Multiple Choice

The Toy Store borrowed $12,000 from the bank and agreed to keep $3,000 on deposit at all times. The net result of this compensating balance agreement is that:

• A) the Toy Store actually only borrowed $9,000.
• B) the Toy Store actually only borrowed $3,000.
• C) the actual interest rate is lower than the stated interest rate.
• D) none of the above are true.

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Definitions:

Working Capital Management

The management of a company's short-term assets and liabilities to ensure it has adequate funds to continue its operations and avoid financial distress.

Current Assets

Current assets are assets that a company expects to convert into cash, sell, or consume within one year or within its operating cycle, whichever is longer.

Current Liabilities

Financial obligations of a business that are due and payable within a year.

Collection Process

The method by which a company pursues payment on outstanding invoices from customers, including sending reminders, making calls, or taking legal action.