Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

9. Current Liabilities

Types of Liabilities

Financial Accounting

9. Current Liabilities

Types of Liabilities

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Multiple Choice

Which of the following best describes the primary risk of providing collateral for a loan?

The borrower is required to pay a higher interest rate.

The borrower loses ownership of the collateral immediately upon signing the loan agreement.

The loan automatically converts to equity if not repaid.

The lender may seize the collateral if the borrower defaults on the loan.

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Verified step by step guidance

Understand the concept of collateral: Collateral is an asset pledged by the borrower to secure a loan. It serves as a guarantee for the lender that the loan will be repaid. If the borrower defaults, the lender has the right to seize the collateral to recover the loan amount.

Analyze the options provided in the question: Carefully read each option and evaluate whether it accurately describes the risk associated with providing collateral for a loan.

Option 1: 'The borrower is required to pay a higher interest rate.' This is not directly related to the risk of providing collateral. Interest rates are determined by various factors, but collateral typically reduces the risk for the lender and may lead to lower interest rates.

Option 2: 'The borrower loses ownership of the collateral immediately upon signing the loan agreement.' This is incorrect because the borrower retains ownership of the collateral unless they default on the loan.

Option 3: 'The loan automatically converts to equity if not repaid.' This is unrelated to the concept of collateral. Collateral does not involve equity conversion; it involves the lender seizing the pledged asset if the borrower defaults.