Tag: ACA

The legal relationship between a bank and its customer can include the bailor/bailee relationship, the mortgagor/mortgagee relationship and the fiduciary relationship.

Alex, a business consultant to banking customers has made the following statements concerning each relationship.

Statement 1 In the fiduciary relationship the bank is expected to act with the utmost good faith towards the customer.
Statement 2 In the mortgagor/mortgagee relationship the bank asks the customer to secure a loan with a charge over the customer’s liabilities.
Statement 3 In the bailor/bailee relationship the bank accepts the customer’s property for storage in its safe deposit boxes and undertakes to take reasonable care to safeguard it against loss or damage.

Identify which of the statements about these relationships are true?

Select ONE answer:

1. Statements 1 and 2 only
2. Statements 2 and 3 only
3. Statements 1 and 3 only
4. Statements 1, 2 and 3

Show your workings to arrive at your answer, and explain and justify your reasons:

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

This multiple-choice question is suitable for Accounting KS5 classes.

The answer is 3

1. Not correct
2. Not correct
3. Correct == > Statements 1 and 3 accurately describe the fiduciary and the bailor/bailee relationships, respectively. Statement 2 is inaccurate as it states that the charge is over the customer’s liabilities, when in fact it would be over the customer’s assets.
4. Not correct

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If a company moves from a defensive working capital policy to an aggressive working capital policy, it should expect?

Select ONE answer:

1. Liquidity to decrease, whereas expected profitability would increase
2. Expected profitability to increase, whereas risk would decrease
3. Liquidity would increase, whereas risk would also increase
4. Risk and profitability to decrease

Show your workings to arrive at your answer, and explain and justify your reasons:

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

This multiple-choice question is suitable for Accounting KS5 classes.

The answer is 1

1. Correct == > An aggressive policy implies financing long-term needs with short-term funds which would reduce liquidity but increase profitability due to the cheaper short-term debt relative to long-term debt: decreased liquidity = increased risk
2. Not correct
3. Not correct
4. Not correct

This work is licensed under a Creative Commons Attribution 4.0 International License.

There are a number of motives that influence how much a business wishes to hold in cash.

When a company holds cash in order to make the payments that are necessary to keep the business going, such as wages, taxes and payments to suppliers, the motive behind this is?

Select ONE answer:

1. The transactions motive
2. The finance motive
3. The precautionary motive
4. The speculative motive

Show your workings to arrive at your answer, and explain and justify your reasons:

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

This multiple-choice question is suitable for Accounting KS5 classes.

The answer is 1

1. Correct == > The transactions motive means that a business holds cash to meet its current day-to-day financial obligations.
2. Not correct
3. Not correct
4. Not correct

This work is licensed under a Creative Commons Attribution 4.0 International License.

Alex plc is trying to decide on its optimal level of current assets.

The company’s management face a trade-off between?

Select ONE answer:

1. Profitability and risk
2. Inventory and receivables
3. Equity and debt
4. Short-term and long-term borrowing

Show your workings to arrive at your answer, and explain and justify your reasons:

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

This multiple-choice question is suitable for Accounting KS5 classes.

The answer is 1

1. Correct == > All businesses face a trade-off between being profitable and being liquid. Less liquidity may yield greater profitability, but less liquidity equals greater risk. As both inventory and receivables (2) are current assets the trade-off between these does not affect the overall level of the value of current assets. The equity and debt (3) trade-off is concerned with long-term capital structure rather than current assets. The short-term versus long-term borrowing trade-off (4) is a financing decision unrelated to current assets.
2. Not correct
3. Not correct
4. Not correct

This work is licensed under a Creative Commons Attribution 4.0 International License.