Deck 7: Current Asset Management

Question 1

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

Answer 1

True

Question 2

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

Answer 2

True

Question 3

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

Answer 3

False

Question 4

Checks can be cleared only through the Federal Reserve System.

Question 5

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

Question 6

There are two kinds of float: mail float and clearing float.

Question 7

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

Question 8

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

Question 9

Minimizing cash balances can improve overall corporate profitability.

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

Reasons for holding cash could be for transaction balances, compensating balances for banks, and other precautionary needs.

Question 15

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

Question 16

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

Question 17

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

Question 18

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

Question 19

Cash flows are independent of the payment pattern of customers, the speed at which suppliers and creditors process checks, and the efficiency of the banking system.

Question 20

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

Question 21

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

Question 22

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 23

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

Question 24

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

Question 25

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

Question 26

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 27

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

Question 28

When utilizing a lockbox system, a customer typically sends a check to the bank, a bank employee picks up the check and processes the check electronically and then sends record of payment to the company's finance center.

Question 29

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

Question 30

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

Question 31

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

Question 32

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

Question 33

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

Question 34

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

Question 35

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

Question 36

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

Question 37

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

Question 38

Electronic funds transfer will likely increase the use of float.

Question 39

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

Question 40

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

Question 41

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 42

If a firm's average accounts receivable balance increases, this could be because the company improved what customers it extended credit to.

Question 43

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 44

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

Question 45

If a firm averages $2,000 in daily credit sales and offers 60-day terms, the average accounts receivable balance will be $120,000.

Question 46

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

Question 47

A reduction in carrying costs would increase the economic order quantity.

Question 48

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

Question 49

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

Question 50

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

Question 51

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

Question 52

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

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.

Question 55

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

Question 56

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

Question 57

A stock out saves the firm money because little inventory is held on hand, which saves on storage costs.

Question 58

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

Question 59

Assuming that inventory is used up at a constant rate and safety stock is zero, the average inventory will be half the re-order size.

Question 60

If a firm's average collection period increases, this could be because the company gave credit to customers with a low credit report.

Question 61

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

Question 62

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

Question 63

Cash should have a higher required return than accounts receivable because it is more liquid.

Question 64

Inventory should have a higher required return than cash because it is less liquid.

Question 65

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

Question 66

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

Question 67

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

Question 68

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 69

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 70

When considering a potential customer, the firm should overlook the customer's credit history if the customer is purchasing a huge order.

Question 71

Which of the following is the most liquid asset?

A) Prepaid expenses
B) Inventory
C) Cash equivalents
D) Accounts receivable

Question 72

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 73

"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 74

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

Question 75

A cash discount typically lowers the average collection period of a firm.

Question 76

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

Question 77

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 78

Liquidity of an asset has nothing to do with measuring the required rate of return on the asset.

Question 79

Cash flow does not rely on which of the following?

A) The payment arrangements 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

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