Deck 7: Current Asset Management

Question 1

Unfortunately, float is too complicated to be effectively managed through any combination of disbursement and collection strategies.

Answer 1

False

Question 2

In the management of cash and marketable securities, the primary concern is profitability.

Answer 2

False

Question 3

Proper management of sales, receivables, payables, and inventory form the basis of cash flow.

Answer 3

True

Question 4

A primary goal of cash management is to insure that the inflows and outflows of cash are synchronized.

Question 5

A lock-box system is a method of extending disbursements.

Question 6

A lock-box is used by the selling corporation to speed up the check collection and check-clearing process.

Question 7

Checks can be cleared only through the Federal Reserve System.

Question 8

"Extended disbursement float" has to do with the length of time a corporation takes to collect bills.

Question 9

"Float" has been largely reduced because of electronic payments and improvements in B2B business relationships.

Question 10

Cash balances are usually determined by the amount of cash flowing through the firm on a yearly basis.

Question 11

"Float" is the name given for a short-term loan between suppliers and buyers.

Question 12

The cash-generating process for a firm is continuous, even though cash flow can be sporadic.

Question 13

Float is the difference between the cash balance on the corporate books and the amount currently credited to the corporation by the bank.

Question 14

For most firms, the primary motive for holding cash is the transaction motive.

Question 15

It is possible for companies to operate with negative cash balances on their books.

Question 16

Minimizing cash balances can improve overall corporate profitability.

Question 17

A lock-box is used to safeguard the corporation's marketable securities.

Question 18

Computerized cash management and electronic funds transfer allow firms to carry smaller cash balances.

Question 19

For most modern corporations, the more cash they have, the better off they are.

Question 20

Cost-benefit is not a consideration in development of a cash management system, only safety and liquidity.

Question 21

Bankers' acceptances are short-term securities that arise from foreign trade.

Question 22

It is less expensive to clear a check through the Federal Reserve System than to process an automatic fund transfer through an automated clearinghouse.

Question 23

The use of automated clearinghouses (ACHs) saves money for consumers, corporations, and financial institutions by reducing transaction costs.

Question 24

When considering risk and popularity, banker's acceptances rank behind Treasury bills and commercial paper as a vehicle for short-term investments.

Question 25

Electronic funds transfer will likely increase the use of float.

Question 26

Because they generally run a surplus budget, government agencies are able to issue securities with slightly lower yields than direct Treasury issues.

Question 27

Eurodollars are U.S. dollars held on deposit by foreign banks.

Question 28

Stretching out the maturity of marketable securities can rarely result in a loss.

Question 29

SWIFT has combated the growing issue of electronic fraud with smart card technology that no longer requires users to manually log in to the network, and thus eliminates any paper trail.

Question 30

Every message routed through SWIFT is encrypted and every money transaction is authorized by another code for security purposes.

Question 31

Cash management becomes more important as the level of short-term interest rates rises.

Question 32

The investment of excess short-term funds is usually diversified between short- and long-term marketable securities.

Question 33

Multinational firms find it difficult to shift funds from one country to another.

Question 34

As of 2013, the Federal Reserve intends to maintain low interest rates on U. S. government securities as long as inflation remains comparatively low and unemployment remains high.

Question 35

Treasury bills are unique in that they trade on a premium basis.

Question 36

In general, cash management at the international level employs the same techniques as domestic cash management.

Question 37

Small-denomination certificates of deposit are usually more liquid than large-denomination CDs.

Question 38

The rate on Eurodollar certificates of deposit is usually lower than domestic certificates of deposit.

Question 39

Certificates of deposit purchased in small denominations of $1,000 at commercial banks or savings and loan organizations are readily marketable.

Question 40

The "SWIFT" transfer system was developed to aid regional bank fund transfers within the United States.

Question 41

Just-in-time inventory management typically pushes the cost of holding inventory from the manufacturer to the manufacturer's suppliers.

Question 42

Just-in-time inventory systems can leave manufacturers empty-handed if suppliers can't keep up with product growth rates.

Question 43

The use of "float" has dramatically increased since the Check Clearing for the 21^st Century Act was passed.

Question 44

If we assume that inventory is used up at a constant rate and safety stock is zero, the average inventory will be half the re-order size.
Since safety stock = 0, and (EOQ/2) + Safety stock = Average inventory, then we carry one half that amount.

Question 45

The two basic costs associated with inventory are production cost and ordering cost.

Question 46

The "economic ordering quantity" helps a firm determine the most efficient order size to place.

Question 47

The 5 Cs of credit include "character, capital, capacity, conditions, and collateral."

Question 48

If a firm averages $2,000 in daily credit sales and offers 60-day terms, the average accounts receivable balance will be $120,000.
Avg. A/R = Daily credit sales × Credit terms
$120,000 = $2,000 × 60 days

Question 49

A reduction in carrying costs would increase the economic order quantity.
By reducing the denominator in the EOQ formula, the quantity is increased.

Question 50

Seasonal production allows for maximum efficiency in machinery and manpower use.

Question 51

Maintaining a safety stock will always guard against an "EOQ point" from occurring.

Question 52

Because of changing economic conditions, it is difficult for companies such as Dun & Bradstreet to devise models predicting payment problems and the probability of bankruptcy 12 months in the future.

Question 53

Finding out who is ultimately responsible for a bad debt can be helped by Dun & Bradstreet's D-U-N-S (Data Universal Number System) that tracks relationships and the ownership of businesses within Dun & Bradstreet's information base.

Question 54

Lower ordering costs would tend to increase a firm's economic order quantity.
By reducing the numerator in the basic EOQ formula, quantity (the quotient) is reduced.

Question 55

When a potential customer has a mediocre credit history, a firm should never consider allowing them to become a customer.

Question 56

A stock out occurs when a firm runs out of inventory and is unable to sell or deliver the product requested.

Question 57

When considering offering a cash discount, a firm must weigh the benefits of freed-up cash with the cost of the cash discount.

Question 58

Inventories are usually the most liquid, but lowest-yielding, current asset of a firm.

Question 59

Return on investment is the major decision criteria in credit decisions.

Question 60

One way businesses try to overcome the risk associated with new customers is to access a credit scoring report that will predict the probability of a customer causing credit problems in the future.

Question 61

In managing cash and marketable securities, what should be the manager's primary concern?

A)Maximization of profit
B)Maximization of liquid assets
C)Acceptable return on investment
D)Liquidity and safety

Question 62

Which of the following is not a valid reason for holding cash?

A)To meet transaction requirements
B)To earn the highest return possible
C)To satisfy emergency needs for funds
D)To provide a compensating balance for a bank

Question 63

The difference between the amount of cash on the firm's books and the amount credited to it by its bank is

A)an overdraft.
B)interest revenue.
C)extended disbursement.
D)float.

Question 64

International cash management systems are more complex than domestic cash management systems because of

A)the risk involved in currency fluctuations.
B)the changing interest rates across countries.
C)varying time zones across countries.
D)All of the options

Question 65

When selecting marketable securities, the company should always select securities with longer maturities if they offer higher yields.

Question 66

SWIFT's implementation of the "smart card" is expected to

A)decrease the likelihood of electronic fraud.
B)remove the need for secret information to be sent through the mail.
C)guarantee the identity of the sender.
D)All of the options

Question 67

Level production allows a company to reduce inventory and maximize efficiency as compared to seasonal production.

Question 68

Which of the following is not a true statement about automated clearinghouses (ACHs)?

A)Automated clearinghouses are responsible for the check clearing process between commercial banks and the Federal Reserve Banks.
B)Commercial transactions using automated clearinghouses have been growing at close to 17% per year since 1989.
C)Debits drawn on automated clearinghouses cost less than half that of checks processed through financial institutions.
D)The ability to reduce transactions costs and create convenience is driving the growth of automated clearinghouses.

Question 69

If a company would like to reduce their average collection period, they can either offer a cash discount or increase their net terms.

Question 70

"Float" takes place because

A)a firm is early in paying its bills.
B)the level of cash on the firm's books is equal to the level of cash in the bank.
C)a lag exists between writing a check and clearing it through the banking system.
D)a customer writes checks without adequate supporting balances.

Question 71

How will widespread adoption of electronic funds transfer affect the use of "float"?

A)It will increase its use somewhat.
B)It will decrease its use somewhat.
C)It will virtually eliminate its use.
D)It will have no effect on its use.

Question 72

Automated clearinghouses are commonly used by consumers to make direct payments for

A)insurance premiums.
B)mortgage payments.
C)utility bills.
D)All of the options

Question 73

International cash management systems are more complex than domestic cash management systems because

A)many developing countries still use a cash payments system.
B)some countries rely on electronic funds transfer more than the U.S.
C)liquidity management, involving short-term cash balances and deficits, has to be managed across international boundaries and time zones and is subject to the risks of currency fluctuations.
D)None of the options

Question 74

The system whereby funds are moved between computer terminals without use of checks is

A)electronic funds transfer.
B)float.
C)a lock-box system.
D)magnetic character recognition.

Question 75

Which of the following is not a method of speeding up collections?

A)Lock-box system
B)Regional collection centers
C)Extended disbursement float
D)All of the options are methods for speeding up collections.

Question 76

One of the first considerations in cash management is

A)to have as much cash as possible on hand.
B)synchronization of cash inflows and cash outflows.
C)profitability.
D)to put any excess cash into accounts receivable.

Question 77

One of the major cost savings for consumers using automated clearinghouses is

A)saving great amounts of money on postage.
B)saving time paying bills through check writing.
C)the security of having the payments and deposits directly deposited or deducted from your account.
D)All of the options are true.

Question 78

International cash management is more complex than domestic-based cash management because of

A)liquidity management issues.
B)different banking systems.
C)currency fluctuation risk.
D)All of the options

Question 79

Cash flow does not rely on which of the following?

A)The payment patterns of customers
B)The monetary policy of the Federal Reserve
C)The speed at which suppliers and creditors process checks
D)The efficiency of the banking system

Question 80

Some of the services provided around the clock by SWIFT are

A)international payments between banks.
B)foreign exchange.
C)trade finance transactions.
D)All of the options