Deck 17: Cash,receivables,and Inventory Management

Question 1

The goal of cash management is to hold the minimum amount of cash necessary to meet the firm's obligations in a timely manner.

Answer 1

True

Question 2

Generally,the least important motive for holding liquid assets for a typical company is the speculative motive.

Answer 2

True

Question 3

The risk-return trade-off leads to two objectives: (1)keep enough cash on hand to make necessary payments,and (2)reduce investments in idle cash to a minimum.

Answer 3

True

Question 4

Motives for holding stocks of cash include transaction,precautionary,and speculative.

Question 5

The initial step in any effective cash management program is cash flow forecasting.

Question 6

Near-cash assets consist of marketable securities and accounts receivable.

Question 7

Lockbox arrangements may reduce mail float,processing float,and transit float.

Question 8

In a lockbox system,customer payments are collected directly by the bank and deposited immediately in the corporation's account.

Question 9

The industry in which a firm operates has relatively little effect on the relative amounts of transaction cash held.

Question 10

Effective cash management involves the trade-off between the risk of insolvency (resulting in higher near cash balances)and the desire to earn higher returns (resulting in lower near cash balances).

Question 11

The most important reasons firms hold cash balances are the transaction and precautionary motives.

Question 12

The funds needed to satisfy the precautionary motive are entirely held in cash.

Question 13

Firms like to hold large stocks of cash since the risk of becoming insolvent is minimized.

Question 14

Transaction balances are used to meet the regular cash needs of the firm,not irregular outflows that will be handled with speculative balances.

Question 15

Marketable securities are purchased when excess cash is temporarily available and sold when cash is needed.

Question 16

The objective of managing cash inflows is to decrease the float while the objective of managing cash outflows is to increase the float.

Question 17

Speculative cash balances are held to take advantage of uncertain profit-making opportunities.

Question 18

The more difficult it is to estimate a firm's cash flow needs,the greater the need to carry higher precautionary balances.

Question 19

The estimated value of reducing float by one day is one day's interest on the freed-up sales.

Question 20

Companies with the largest cash balances reduce their risk of insolvency and thus maximize the value of the companies for their shareholders.

Question 21

Zero balance accounts reduce disbursing float.

Question 22

Lock-box arrangements yield benefits for all companies regardless of the size of sales or customer remittance checks.

Question 23

Zero balance accounts permit centralized control over cash outflows while maintaining divisional disbursing authority.

Question 24

A negotiable certificate of deposit is a marketable receipt for funds deposited in a bank for a period of one to 18 months.

Question 25

Payable-through drafts look like checks but are not drawn on a bank.

Question 26

Commercial paper is a short-term,unsecured,promissory note.

Question 27

The main purpose of using a payable-through draft system is to gain effective control over field payments.

Question 28

If current interest rates are low,and therefore expected to increase in the future,a firm wanting to reduce its interest rate risk would hold debt with longer maturities.

Question 29

Yields on various financial instruments tend to be positively correlated with maturity.

Question 30

An extremely liquid asset is one that can be sold for cash quickly without a reduction in price below its current market value.

Question 31

The interest earned on U.S.Treasury bills is subject to state and local income taxes.

Question 32

A security is considered liquid if it can be sold,regardless of the time it takes to make the sale.

Question 33

Marketable securities are near-cash assets because they can be converted into cash quickly.

Question 34

The minimum denomination of U.S.Treasury bills is $100,000.

Question 35

One advantage of zero balance accounts is an increase in disbursing float.

Question 36

Marketable securities are only those security investments the firm can convert into cash balances within one year.

Question 37

A Treasury bill is a near-cash asset.

Question 38

The benefits derived from reduced mail and processing floats must be greater than the bank fees associated with a lockbox system or else a firm would be better off without the lockbox.

Question 39

One of the attractive features of commercial paper is an active secondary market.

Question 40

A zero balance account permits divisions to disburse funds while maintaining centralized control of several bank accounts.

Question 41

When a corporation designs an investment strategy for investing temporary excess cash balances in marketable securities,it must consider a variety of factors.Which of the following is the least important?

A) liquidity
B) financial risk
C) achieving the highest yield
D) maintaining the safety of principal

Question 42

John Maynard Keynes segmented a firm's demand for cash into the following motives:

A) risk, investment, and liquidity.
B) transaction, speculative and precautionary.
C) transaction, liquidity, and speculative.
D) transaction, speculative, and risky.

Question 43

Which of the following affects the precautionary motive for holding cash?

A) the cash flow predictability
B) the firm's access to external funds
C) both A and B
D) none of the above

Question 44

Money-market mutual funds are diversified portfolios of short-term,high-grade debt instruments.

Question 45

Cash inflows come from

A) purchase of marketable securities.
B) purchase of fixed assets.
C) credit sales.
D) cash sales.

Question 46

Which of the following is NOT a motive for a corporation to hold cash balances?

A) transactions
B) float
C) precautionary
D) speculative

Question 47

U.S.Treasury bills are extremely liquid due to excellent secondary markets.

Question 48

Available yields on financial securities depend on their financial risk,interest rate risk,liquidity,and taxability.

Question 49

A company that has an unpredictable cash flow,and is holding cash because of things that might happen due to this uncertainty,is holding a larger minimum cash balance due to which type of motive?

A) transaction
B) precautionary
C) speculative
D) common sense

Question 50

A construction firm that accumulates cash in anticipation of a significant drop in lumber costs is an example of the ________ motive for holding cash.

A) transaction
B) speculative
C) hedging
D) precautionary

Question 51

Which of the following would be an example of the "precautionary motive" for a firm holding cash balances?

A) purchase of inventory
B) anticipating a strike
C) purchase fixed assets
D) make dividend payments

Question 52

A company is technically insolvent when

A) cash outflows in a given period are greater than cash inflows.
B) earnings before interest payments are less than the interest payments.
C) it lacks the necessary liquidity to promptly pay its current debt obligations.
D) current ratio is less than 1.0.

Question 53

Which of the following would be an example of the "speculative motive" for a firm holding cash balances?

A) make dividend payments
B) anticipating a strike
C) purchase of inventory
D) take advantage of an anticipated decline in the price of raw materials

Question 54

All of the following elements of a cash management program will likely contribute to an increase in the value of the firm EXCEPT

A) collect cash more quickly.
B) slow down cash disbursements.
C) prepare more accurate cash flow forecasts.
D) increase cash balances for precautionary reasons.

Question 55

A company concerned about the liquidity of its near-cash securities should invest in U.S.Treasury bills because the secondary market for U.S.Treasury bills is excellent.

Question 56

U.S.Treasury bills,bankers' acceptances and commercial paper are all sold on a discount basis.

Question 57

The speed of the collections process is determined by three types of float: mail float,processing float,and transit float.

Question 58

U.S.Treasury bills are exempt from federal,state,and local income taxes.

Question 59

Which of the following would be an example of the "transactions motive" for a firm holding cash balances?

A) investing "excess cash balances"
B) anticipating a downturn in the economy
C) purchase of inventory
D) take advantage of an anticipated decline in the price of raw materials

Question 60

Commercial paper is much more liquid than money-market mutual funds because commercial paper is available to only the most creditworthy corporations.

Question 61

What is the greatest risk associated with cash management?

A) yields
B) insolvency
C) holding too much cash
D) managing float

Question 62

The PMI,Inc.processes an estimated 200,000 checks per year from its customers.Total revenue collected by check is $40,000,000.The average float time until the funds are credited to PMI's checking account is 6 days.For an extra cost of $ .06/check,PMI's bank will install a lock-box system that will reduce float time from 6 days to 2.5 days.If PMI earns 3.5% on its checking account,how much per check will PMI make if it uses the lock-box system?

A) $.005
B) $.006
C) $.007
D) $.008

Question 63

The Siskiyou Manufacturing Company will collect an estimated $12,000,000 next year; and it will receive an estimated 20,000 checks.Siskiyou's bank has offered to set up a lock-box system that will reduce float time by 4.5 days.The cost of the system will be $.15 per check.What is the minimum annual interest rate on its cash balance that Siskiyou should receive before it would be willing to adopt the lock-box system?

A) 3.25%
B) 2.03%
C) 1.82%
D) 1.07%

Question 64

Payable-through drafts

A) provide for effective control over field payments.
B) are not legal instruments.
C) cannot be cleared through the banking system.
D) are a form of commercial paper.

Question 65

Assume that liquid funds can be invested to yield 4.5 percent.If annual remittance checks total $2 billion,what is it worth for the firm to reduce float by 1 day?

A) $388,349
B) $246,575
C) $257,534
D) $24,658

Question 66

Flashbinder Guitars,Inc.is negotiating with the bank for a lockbox system that is expected to reduce check collection time by 4 days.Flashbinder Guitars' average check size is $1,200 and any funds freed up by the new system will be invested in a money-market account that is currently paying 2.5% annually.What is the most Flashbinder Guitars should be willing to pay the bank for the lockbox service,assuming the bank charges a per-check processing fee?

A) 20.500 cents
B) 29.767 cents
C) 30.726 cents
D) 32.877 cents

Question 67

When a corporation designs an investment strategy for investing temporary excess cash balances in marketable securities,it must consider a variety of factors.Which of the following is the most important?

A) maintaining the safety of principal
B) maintaining the greatest float
C) achieving the highest yield
D) illiquidity

Question 68

A company with national sales but only one large manufacturing operation and one administrative headquarters located in the same large northeastern city would most likely use which of the following techniques for cash management?

A) lockbox system
B) zero balance accounts
C) payable-through drafts
D) bankers' acceptances

Question 69

SteelCo Production,Inc.is considering the use of a lock-box collection system.SteelCo's average check receipt is $1,350.The company invests excess cash in money-market certificates and receives an average of 3.5% annual interest.The lock-box system will speed up SteelCo's collections by 2.5 days.What is the maximum per check processing cost that SteelCo should be willing to pay for the lock-box system?

A) $0.1871
B) $0.2987
C) $0.3236
D) $0.4519

Question 70

Flashbinder Guitars,Inc.is considering a lockbox system that will increase its check processing cost by $.15 per check.The company estimates an average check size of $1,700 and expects the lockbox to reduce check collection time by 3 days.What annual before-tax yield must Flashbinder Guitars,Inc.earn on its marketable securities for the lockbox system to be beneficial?

A) 1.825%
B) 1.118%
C) 1.074%
D) 0.735%

Question 71

Transit float is caused by

A) the time necessary for a deposited check to clear the banking system and become usable funds to the company.
B) the time funds are not available, through the company's bank account, until its payment check has cleared the banking system.
C) the elapsed time from the moment a customer mails his remittance check until the firm begins to process it.
D) the time required for the firm to process remittance checks.

Question 72

Centralized control over disbursements is assisted by which of the following cash management techniques?

A) lockbox system
B) zero balance accounts
C) payable-through drafts
D) both B and C

Question 73

Which of the following is used to manage a firm's cash disbursements?

A) lockbox system
B) bankers' acceptances
C) repurchase agreements
D) zero balance accounts

Question 74

Flashbinder Guitars,Inc.is considering a lockbox system that will increase its check processing cost by $.20 per check.The company estimates an average check size of $900 and expects any funds freed up by the new lockbox system can be invested in an account that earns 4% per year before taxes.What reduction in collection time is necessary for the lockbox to be beneficial to Flashbinder Guitars,Inc.?

A) 1.96 days
B) 2.03 days
C) 1.73 days
D) 2.15 days

Question 75

A lock-box system reduces

A) mail float.
B) transit float.
C) disbursing float.
D) A and B

Question 76

The benefits of a lockbox system include all of the following EXCEPT

A) increased working cash.
B) elimination of clerical functions.
C) increase in total float.
D) early knowledge of dishonored checks.

Question 77

The time necessary for a deposited check to clear through the commercial banking system causes which of the following types of floats?

A) mail
B) processing
C) transit
D) disbursing

Question 78

A lockbox system can reduce all of the following elements of float EXCEPT

A) mail float.
B) processing float.
C) transit float.
D) disbursing float.

Question 79

Cash management system objectives include

A) maintaining sufficient cash to meet disbursal needs.
B) maintaining idle cash balances at "doomsday event" levels.
C) maintaining accounts payable balances at zero by early bill payment.
D) All of the above are objectives of the system.

Question 80

A company trying to optimize the use of float will try to

A) increase its disbursing float.
B) decrease its disbursing float.
C) decrease processing float.
D) Both A and C