Multiple Choice
Which of the following types of accounting measures a company's ability to protect its long-term creditors?
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1. Introduction to Accounting
Types of Accounting
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When you use credit in a financial transaction, what are you creating?
A
A line of credit
B
Debt
C
A default
D
Collateral
Verified step by step guidance1
Understand the concept of 'credit' in financial transactions. Credit refers to the ability to borrow money or access goods or services with the agreement to pay later.
Recognize that when you use credit, you are essentially borrowing funds or resources, which creates an obligation to repay. This obligation is referred to as 'debt.'
Analyze the options provided in the question: 'A line of credit,' 'Debt,' 'A default,' and 'Collateral.'
Clarify the definitions of each term: A line of credit is a pre-approved borrowing limit, a default is the failure to repay debt, and collateral is an asset pledged as security for a loan. Debt, however, directly refers to the obligation created when credit is used.
Conclude that the correct answer is 'Debt,' as using credit creates a financial obligation to repay, which is classified as debt.
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