Question

Cash flows from operations may not be sufficient for a firm to keep up with growth-related financing needs, or the firm may not be able to always generate enough cash flow to maintain a surplus of cash. Firms prefer to borrow now to fulfill their capital requirements through means of short-term financing or long-term financing. Both methods have their advantages and disadvantages.

The following statement identifies a possible characteristic of short-term financing.

Consider this case:
Short-term loans usually have a lower cost than long-term loans. Identify whether the preceding statement is true or false.

a. This statement is false and a disadvantage of short-term financing.
b. This statement is true and an advantage of short-term financing.

Firms use a variety of short-term financing sources to support working capital. Use the descriptions in the following table to identify the short-term financing source.

Description Short-Term Financing Source
A formal, committed line of credit extended by a bank or other lending institution.
An obligation backed by collateral, often inventories or accounts receivable.

Answer 1

1. Consider this case:

Short-term loans usually have a lower cost than long-term loans. Identify whether the preceding statement is true or false.

a. This statement is false and a disadvantage of short-term financing.

2. Identify the short-term financing source:

An obligation backed by collateral, often inventories or accounts receivable.

Step-by-step explanation:

Some organizations regularly require short-term financing to ease uneven cash flows. It is also called working capital financing. Its duration is less than 12 months, unlike long-term financing that can last more than two years. Most of this financing is arranged with banks in the form of bank overdraft.