Question 1

Transit float in the check clearing system is the time required for checks to clear through the banking system.

Accepted Answer

Transit float refers to the time it takes for a check to clear through the banking system, which includes the time it takes for the check to physically move from one bank to another and for the funds to be settled.

Question 2

The three broad issues involved in receivables policy are (1) which customers should receive credit and how much, (2) what terms of sale (due dates and discounts) should be extended to customers, and (3) how should customers who don't pay on time be handled.

Accepted Answer

This statement accurately describes the three main issues involved in receivables policy.

Question 3

The fundamental benefit of offering trade credit is more sales.

Accepted Answer

By offering trade credit, customers may be more likely to purchase products or services because they have the option to delay payment. This can lead to increased sales for the company offering the trade credit.

Question 4

Float, or money tied up in the process of check clearing, consists of transit float arising from the administrative functions of the payee that delay the actual deposit of the check and processing float created in the Federal Reserve's check clearing system.

Accepted Answer

Float, or money tied up in the process of check clearing, consists of transit float, which arises from the time it takes for a check to move from the bank where it was deposited to the bank on which it was drawn, and processing float, which can occur at either the bank of deposit or the Federal Reserve if the check is processed there. The administrative functions of the payee that delay the actual deposit of the check do not create transit float; they contribute to mail float or delays before the check is deposited.

Question 5

A firm's financial managers should always attempt to set a credit policy that will result in no bad debts.

Accepted Answer

It is not always possible to completely eliminate bad debts, as some level of risk is inherent in extending credit. The goal should be to set a credit policy that minimizes the likelihood and impact of bad debts, while still allowing for profitable sales and growth.

Question 6

The level of a firm's receivables is influenced solely by factors outside the financial managers' control.

Accepted Answer

The level of a firm's receivables can be influenced by factors within the financial manager's control, such as the credit policies the manager implements or the invoicing and collection procedures they establish.

Question 7

Compensating balances cannot normally be used for transactions.

Accepted Answer

Compensating balances are funds that a borrower must keep in a bank account as a requirement of borrowing from that bank, and they typically cannot be used for transactions or withdrawn during the loan period.

Question 8

A firm's credit policy affects both its credit sales and its ACP.

Accepted Answer

A firm's credit policy determines the terms for which credit sales are made, which impacts the amount and timing of cash inflows. This in turn affects the firm's ACP (Accounts Receivable Collection Period) which is a measure of how quickly a firm collects payments from its credit customers. A looser credit policy may result in higher sales, but longer ACP, while a stricter credit policy may result in lower sales, but shorter ACP.

Question 9

Criteria for extending credit to new customers usually involve the following issues:
(1) length of time in business
(2) adequate net worth
(3) an acceptable current ratio
(4) a "clean" credit record.

Accepted Answer

These are common criteria considered by lenders when evaluating a new customer's creditworthiness.

Question 10

The cash manager's goal is to minimize the firm's cash balances.

Accepted Answer

The cash manager's goal is actually to maintain sufficient cash balances to meet the firm's current obligations and investment opportunities while also minimizing the cost of holding excess cash.

Question 11

Lock boxes are designed to reduce mail float.

Accepted Answer

Lock boxes are designed to receive payments and allow for quicker processing and depositing to reduce mail float.

Question 12

A lockbox system that accelerates cash collections also decreases a firm's receivables.

Accepted Answer

A lockbox system allows for faster processing and deposit of received payments, resulting in a decrease in the time it takes for receivables to turn into cash.

Question 13

A low level of cash may force the firm to interrupt operations.

Accepted Answer

A low level of cash means the firm may not have enough money to cover its expenses, pay its employees or vendors, or invest in new projects. This may lead to interruptions in operations, such as a delay in production, inability to fulfill customer orders, or even closure of the business.

Question 14

Processing float in the check clearing system is the time required for checks to clear through the banking system.

Accepted Answer

The answer of Processing float in the check clearing system...

Question 15

More aggressive collection procedures will generally reduce credit sales.

Accepted Answer

The answer of More aggressive collection procedures will generally reduce...

Question 16

A lockbox system can eliminate processing float.

Accepted Answer

A lockbox system involves directing payments to a central location where they are processed and deposited directly into a company's account. This reduces the time it takes for checks to be processed, eliminating processing float.

Question 17

A firm can avoid excess funds at regional banking facilities by using zero balance accounts, or ZBAs.

Accepted Answer

A zero balance account (ZBA) is a checking account in which a balance of zero is maintained by automatically transferring funds from a master account in an amount only large enough to cover checks presented. This helps firms avoid excess funds at regional banking facilities.

Question 18

A firm's cash includes currency, coins, demand deposit accounts in banks, and may include marketable securities.

Accepted Answer

This statement is true. Cash for a firm is defined as currency, coins, and demand deposit accounts in banks. Marketable securities may also be included as part of a firm's cash holdings.

Question 19

The cash conversion cycle is shorter than the operating cycle by the time it takes for the firm to pay its own bills.

Accepted Answer

The cash conversion cycle is the time it takes for a company to convert its investments in inventory and other resources into cash flow from sales. The operating cycle is the time it takes to acquire inventory, sell it, and receive payment from customers. The cash conversion cycle is shorter than the operating cycle because it does not include the time it takes for the firm to pay its own bills. Therefore, the answer is A.

Question 20

The more efficient the management of cash, the larger the amount of cash the firm needs to hold.

Accepted Answer

The more efficient the management of cash, the less cash the firm needs to hold as it can optimize cash flows and make better use of available funds. So, the statement is false.

Quiz 17: The Management of Working Capital