Deck 27: Cash Management

Question 1

The cost of holding cash:

A)is the opportunity cost of the lost investment income.
B)is zero because it is the most liquid asset a firm can hold.
C)decreases as cash holdings increase.
D)increases as market rates decline.
E)is irrelevant in today's electronic world.

Answer 1

is the opportunity cost of the lost investment income.

Question 2

When a firm writes a check,there is an immediate decrease in the ________ balance,but no immediate change in the ________ balance.

A)bank; collected
B)ledger; book
C)bank; ledger
D)book; bank
E)available; book

Answer 2

book; bank

Question 3

Firms hold cash to satisfy the transaction motive.This means that cash is held to:

A)meet disbursements for normal operations.
B)balance the flow between cash inflows and outflows.
C)meet unexpected emergency cash needs.
D)meet disbursements for normal operations and to balance the flow between cash inflows and outflows.
E)offset fees that would otherwise be charged by the firm's bank.

Answer 3

meet disbursements for normal operations and to balance the flow between cash inflows and outflows.

Question 4

The fastest but most expensive way for a firm to transfer surplus funds from the local deposit bank to the concentration bank is:

A)a depository transfer check.
B)a cashier's check.
C)a wire transfer.
D)the firm's in-house transfer system.
E)an automated clearinghouse transfer.

Question 5

Firms would need to hold zero cash for transaction purposes if all outgoing cash transactions could be:

A)greater than total cash inflows.
B)less than total cash inflows.
C)separated from all incoming transactions.
D)perfectly synchronized with cash inflows.
E)performed electronically.

Question 6

All the following can create disbursement float except the:

A)payment of wages.
B)payment for raw materials.
C)disbursement of funds to a supplier.
D)distribution of cash dividends.
E)sale of an asset.

Question 7

By getting closer to the source of payment,lockboxes can be used to reduce:

A)availability float.
B)mailing float.
C)in-house processing float.
D)disbursement float.
E)clearing float.

Question 8

Firms hold cash,in part,to satisfy compensating balance requirements.Compensating balances are cash balances held at:

A)the firm in excess of its transactions needs.
B)the firm that are below that of its transactions needs.
C)the firm in excess of its cash inflows.
D)commercial banks to pay implicitly for bank services.
E)commercial banks as emergency funds.

Question 9

Average daily float can be calculated as:

A)Average daily receipts/Weighted average delay.
B)Annual sales/365.
C)Total receipts/Total days.
D)Total float × Total days.
E)Average daily receipts × Weighted average delay.

Question 10

Which one of these probably has reduced collection time the most?

A)Traditional lockboxes
B)Concentration accounts
C)Financial EDI
D)Zero-balance accounts
E)Depository transfer checks

Question 11

Determining the appropriate cash balance involves assessing the trade-off between:

A)income and diversification.
B)the benefits and costs of liquidity.
C)balance sheet strength and transaction needs.
D)short-term and long-term investment returns.
E)cash needs and cash preferences.

Question 12

Net collection float means the:

A)book balance is greater than the ledger balance.
B)the available balance is less than the book balance.
C)disbursement float equals the book cash.
D)disbursement float exceeds the collection float.
E)collection float equals the disbursement float.

Question 13

Most large firms hold a larger cash balance than most models imply because:

A)it is too difficult to estimate the costs of security transactions.
B)banks are compensated by account balances for payment of services.
C)corporations have few bank accounts and it is difficult to manage their cash.
D)cash is costless and need not be managed closely.
E)the costs of holding cash for these firms is negligible.

Question 14

The difference between available cash and book cash is called:

A)float.
B)disbursement float.
C)surplus.
D)collection float.
E)the net deficit.

Question 15

Collection float includes:

A)availability delay and processing delay only.
B)billing time,mailing time,processing delay,and availability delay.
C)mailing time,processing delay,and availability delay.
D)availability delay only.
E)mailing time and processing delay only.

Question 16

Which one of the following related to float management is true?

A)Float management is the practice of speeding up the disbursement of cash.
B)An objective of float management is the elimination of disbursement float.
C)An objective of float management is to reduce float by reducing sales.
D)Firms prefer net disbursement float over net collection float.
E)Float management is no longer needed.

Question 17

Collection float increases:

A)disbursement float.
B)the bank balance.
C)the book balance.
D)the collected balance.
E)both book and bank balances.

Question 18

Checks written by a firm are said to generate ________ float.

A)collection
B)ledger
C)disbursement
D)book
E)accounting

Question 19

An appropriate cash balance is reached when the:

A)interest on any marketable security is maximized.
B)interest foregone from not investing in Treasury bills is minimized.
C)value of cash liquidity equals interest foregone on an equivalent amount of Treasury bills.
D)liquidity value is greater than the interest foregone on an equivalent amount of Treasury bills.
E)balance is maintained at a zero level.

Question 20

Financial managers frequently broaden their definition of cash to include:

A)currency,bank checking accounts,as well as stock and bond investments.
B)currency,bank checking accounts,and bond investments.
C)cash,bond investments,bank checking accounts,and short-term marketable securities.
D)currency,bank checking accounts,and short-term marketable securities.
E)cash and bank accounts only.

Question 21

Money market securities are best defined as securities:

A)purchased through a bank.
B)that are risk-free.
C)with maturities of one year or less.
D)that are purchased with cash and held until maturity.
E)that are held for one week or less.

Question 22

This morning,Wilson's Meats had both a book and a bank balance of $1,500.Today,the firm received 20 checks from customers that averaged $110 each.The funds from these checks will be delayed by one day,which will cover both the processing and availability delays.Wilson's also received $4,000 of payments from customers who are billed and pay electronically.The electronic payments are available immediately.What is the firm's collection float as of the end of this day?

A)−$6,200
B)−$2,200
C)−$1,200
D)−$1,800
E)−$3,700

Question 23

Probably the most sensible cash management policy would be to maintain:

A)sufficient cash on hand to meet all ordinary business needs plus some excess cash to invest in marketable securities as a precautionary measure.
B)about 90 percent of the firm's ordinary cash needs in cash and delay payment on the remaining 10 percent.
C)enough cash on hand to meet any potential demand for cash.
D)a zero-cash balance and transfer funds semi-monthly to pay bills.
E)twice the amount of cash on hand that would be typically indicated based on the firm's normal cash flows.

Question 24

Which one of these money market securities generally has the shortest life?

A)Repurchase agreements
B)Jumbo certificates of deposit
C)Money market preferred stock
D)Commercial paper
E)U.S.Treasury bills

Question 25

The 2017 Tax Cuts and Jobs Act set the dividend exclusion for dividend income received by corporate shareholders at ________ percent (or more).

A)50
B)0
C)25
D)70
E)33

Question 26

Who deposits the checks into the payee's account when those checks are mailed to a traditional lockbox?

A)Any postal employee
B)A specially designated postal employee
C)A bank employee
D)The payee
E)The payers

Question 27

UpTown Beverages has a checkbook balance of $132,462.However,when the financial manager looks up the firm's account on the bank's website,the balance that appears is $147,918.What is the net float? Is the net float a collection float or a disbursement float?

A)−$15,456; collection float
B)−$15,456; disbursement float
C)$15,456; collection float
D)$15,456; disbursement float
E)$0; neither collection nor disbursement float

Question 28

Which one of the following is the best means of managing disbursements from an ethical,business,and economic point of view?

A)Purposely mailing checks without a signature as a means of delaying payment
B)Delaying paying suppliers until 30 days past the due date of each invoice
C)Purposely mailing payments to suppliers from locations that maximize mailing time
D)Taking early payment discounts while paying bills after their due dates
E)Funding your bank account with the minimum amount needed to pay bills in a timely manner

Question 29

One primary reason concentration bank accounts are established is to:

A)reduce default risk.
B)increase disbursement float.
C)control disbursements for a specific purpose.
D)pool funds.
E)replace traditional lockboxes.

Question 30

Which one of the following is a money-market security that has limited marketability?

A)Jumbo certificates of deposit (CD's)
B)Commercial paper
C)Common stock
D)U.S.Treasury bills
E)Ordinary preferred stock

Question 31

Top Notch Tools has average daily receipts of $3,600.These receipts are available after 1.5 days on average.What is the NPV of eliminating the float if the cost to do so is $1,500?

A)$3,260
B)$3,900
C)$2,100
D)$5,400
E)$3,150

Question 32

Which one of these statements correctly applies to a lockbox system of cash collections?

A)Mailing time is reduced while the collection time remains constant.
B)Electronic lockboxes have totally replaced traditional lockbox systems.
C)Checks can be deposited prior to the payments being applied to the customers' accounts.
D)Mailing time is reduced but the processing delay is increased.
E)Checks are held by the bank until the payee firm approves them to start the check-clearing process.

Question 33

U.S.Treasury bills:

A)are subject to the same risks as short-term tax exempts.
B)all have initial maturities of 90 days or less.
C)are issued for time periods as short as one week.
D)must be held to maturity and not resold.
E)are sold at weekly auctions.

Question 34

Which one of the following is the most marketable and has the least default risk?

A)Money market preferred stock
B)Commercial paper
C)Municipal bonds
D)Repurchase agreements
E)U.S.Treasury bills

Question 35

If a firm has seasonal sales,then it is highly likely the firm will:

A)hold extra excess cash throughout the year.
B)borrow short term for part of the year and invest in marketable securities the rest of the year.
C)never be able to invest any excess funds.
D)continually have short-term loans outstanding.
E)have less volatile cash flows than a comparable firm with constant sales.

Question 36

Atlas receives four checks per month.The amounts of the checks and their respective processing and availability delays are as follows: What is the weighted average delay?

A)1.96 days
B)1.93 days
C)2.03 days
D)2.11 days
E)2.07 days

Question 37

Short-term marketable securities generally have:

A)high maturity risk.
B)little,if any,marketability.
C)significant default risk.
D)a high level of liquidity.
E)maturities between one and two years.

Question 38

Money market preferred stock offers competitive rates of return similar to traditional money-market instruments but:

A)forfeits the tax benefits normally provided to corporate shareholders.
B)still provides the corporate investor with the tax exclusion on dividend income.
C)has a fixed rate of dividend income.
D)is only an overnight investment.
E)has highly volatile stock prices due to the fixed coupon.

Question 39

Which one of the following statements concerning zero-balance accounts is false?

A)Zero-balance accounts are set up to process disbursements only.
B)Each zero-balance account maintains a minimal level of safety stock.
C)Funds are automatically transferred into the zero-balance account as checks are presented for payment.
D)Zero-balance accounts are frequently used for payroll disbursements.
E)The master and the zero balance accounts are frequently located within the same bank.

Question 40

On an average day,DDL Enterprises writes checks totalling $1,500.These checks take an average of 5 days to clear.On an average day,DDL receives checks totalling $1,700 which take 4 days to clear.The cost of debt is 7.5 percent.What is the firm's disbursement float?

A)−$700
B)−$6,800
C)$700
D)$7,500
E)$6,800

Question 41

Solid Financial provides lockbox services.They estimate that your firm can reduce its average collection mail time by 1.6 days and the clearing and processing time by 1.2 days by implementing their system.Your firm receives 74 checks a day with an average value of $9,750 each.The current T-Bill rate is .014 percent per day.Assume a 365-day year.What is the net amount of annual income your firm can earn if it installs this service at an annual cost of $48,000?

A)$65,675.00
B)$62,640.00
C)$56,408.17
D)$55,232.22
E)$58,746.20

Question 42

Sports 'n More receives five checks per month.These checks average $811,$416,$6,420,$22,900,and $8,700.The three larger sized check amounts are available after 1.5 days while the two smaller check amounts are available after one day.What is the weighted average delay?

A)1.48 days
B)1.39 days
C)1.46 days
D)1.37 days
E)1.00 day

Question 43

Fly-By-Night Airlines currently has $2.4 million on deposit with its bank.It also has a book balance of $2.4 million.What will be its bank and book balances as soon as it writes a check for $1.1 million to pay its fuel bill?

A)$2.4 million; $1.3 million
B)$2.4 million; $2.4 million
C)$1.3 million; $2.4 million
D)$1.3 million; $1.3 million
E)$1.85 million; $1.85 million

Question 44

Mail float

Question 45

Rubber Tires receives three checks a month.The first check averages $842,000 and clears in 1.2 days.The second check averages $318,000 and clears in .7 days.The third check averages $465,000 and clears in 2 days.What is the average daily float? Assume a 30-day month.

A)$69,600
B)$72,100
C)$73,600
D)$74,500
E)$68,900

Question 46

Processing float; time it takes the receiving firm to process incoming mail,prepare the bank deposit,and take the deposit to the bank

Question 47

Baker's Confectionery just received a check from a customer for $1,289 that it has recorded in its checkbook but has not yet deposited this check into the bank.After recording this check,the firm has a bank balance of $16,218 and a book balance of $16,309.All the firm's other deposits have cleared and those funds are currently available.What is the amount of the disbursement float?

A)$91
B)$246
C)$1,198
D)$2,487
E)$1,807

Question 48

Processing float

Question 49

During the month Leslie's receives four checks in the amounts of $100,$325,$200,and $500.They are delayed for 1.6 days,2.1 days,2.6,and 1 day,respectively.What is the average daily collection float? Assume a 30-day month.

A)$74.93
B)$63.80
C)$62.08
D)$59.47
E)$68.15

Question 50

Metal Manufacturers receives three checks per month.The first check is for $194,000 and takes two days to clear.The second check is for $318,000 and clears in one day.The third check is for $38,000 and clears in 2.5 days.What is the weighted average delay,the average daily receipts,and the average daily float? Assume a 30-day month.

A)1.83 days; $16,667; $23,333
B)1.46 days; $18,667; $27,333
C)1.83 days; $18,447; $26,700
D)1.46 days; $18,333; $26,700
E)1.51 days; $18,447; $27,800

Question 51

Availability float; time between the depositing of a check and the time when the funds become available for use
Disbursement float includes:

Question 52

Prime Bank is offering your company the use of their lockbox services.They estimate that you can reduce your average mail time by 1.5 days and they can save you a combined clearing and processing time of 1 day by putting the checks into the clearing system sooner.Your firm receives 198 checks a day with an average value of $2,300 each.The current T-Bill rate is .011 percent per day.Assume a 365-day year.Prime Bank will charge your firm an annual fee of $27,500 plus $.20 per check.What is the annual net savings from installing this system?

A)$4,115.36
B)$3,480.00
C)$2,816.00
D)$3,756.78
E)$4,108.29

Question 53

Availability float
Collection float includes:

Question 54

Downtown Bank provides lockbox services.They estimate that you can reduce your average mail time by 1.6 days and your combined clearing and processing time by .5 days by implementing their system.Your firm receives 654 checks a day with an average value of $975 each.The current T-Bill rate is .009 percent per day.Assume a 365-day year.The bank will charge your firm $.17 per check.What is the net present value from installing this system?

A)$105,215.84
B)$100,022.15
C)$98,548.32
D)$103,731.67
E)$102,718.28

Question 55

Uptown Bank provides lockbox services.They estimate that you can reduce your average mail time by 2.2 days and your combined clearing and processing time by .75 days by implementing their system.Your firm receives 65 checks a day with an average value of $298 each.The current T-Bill rate is .01 percent per day.Assume a 365-day year.The bank will charge your firm $.15 per check.What is the annual net savings from installing this system?

A)$1,215.84
B)−$1,022.15
C)$548.32
D)−$1,473.09
E)$718.28

Question 56

KN Florals receives the same checks each month.Of these monthly checks,48 are for $82.60 each,15 are for $71.50 each,and 9 are for $40.70 each.The delay for the $82.60 checks is 1.8 days,for the $71.50 checks 1.1 days,and for the $40.70 checks 1.3 days.Calculate the average daily float.Assume a 30-day month.

A)$293.09
B)$287.46
C)$309.10
D)$299.47
E)$358.02

Question 57

Mail float; time that elapses while a payment is in the mail system

Question 58

The Mesa Bank is offering your firm the free use of their lockbox services.They estimate that you can reduce your average mail time by 2 days and they can save you a combined clearing and processing time of 1.5 days by putting the checks into the clearing system sooner.Your firm receives 320 checks a day with an average value of $2,500 each.The current T-Bill rate is .015 percent per day.Assume a 365-day year.What is the annual amount of income your firm can earn if it installs this service?

A)$15,300
B)$14,800
C)$16,400
D)$153,300
E)$148,700

Question 59

Processing float

Question 60

The net float of a firm is made up of disbursement float and collection float.Identify and describe the components of both disbursement and collection float.

Question 61

Explain repurchase agreements and the role they can play in a firm's everyday operations.

Question 62

Explain why money market preferred stock appeals to corporations.

Question 63

Availability float