Multiple Choice
Which of the following types of receivables are typically included in current assets on the balance sheet?
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7. Receivables and Investments
Types of Receivables
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Trade credit is considered what type of loan?
A
A secured loan backed by collateral
B
An informal, short-term loan extended by suppliers to customers
C
A formal, long-term loan issued by a bank
D
A government-subsidized loan
Verified step by step guidance1
Understand the concept of trade credit: Trade credit is a type of financing where suppliers allow customers to purchase goods or services and pay for them later, typically within a short-term period.
Recognize the informal nature of trade credit: Unlike formal loans issued by banks or government-subsidized loans, trade credit does not involve formal agreements or collateral. It is based on trust between the supplier and the customer.
Identify the short-term aspect of trade credit: Trade credit is usually extended for a short duration, such as 30, 60, or 90 days, making it a short-term loan.
Compare trade credit with other types of loans: A secured loan requires collateral, a formal loan involves legal agreements, and government-subsidized loans are supported by government programs. Trade credit does not fit into these categories.
Conclude that trade credit is an informal, short-term loan extended by suppliers to customers, based on the characteristics discussed above.
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