Deck 15: Managing Cash Flow

Question 1

When creating the cash budget,keep in mind that:

A)it should be a monthly plan,projected out for 3 years.
B)the more variable the sales pattern,the shorter the planning horizon should be.
C)it should be quarterly estimates for a period of 1 year.
D)it is a verbal or mental "document" in order to permit maximum flexibility.

Answer 1

B

Question 2

Jane is arguing with Joan about how much cash on hand their small retail outlet needs as they prepare their cash budget.Jane feels that with the Christmas season coming up,their busiest time,they need more cash handy.Joan feels they don't because their sales volume will be up significantly.Jane and Joan are discussing which step of the cash budgeting process?

A)Determining an adequate minimum cash balance
B)Forecasting sales
C)Forecasting cash receipts
D)Forecasting cash disbursements

Answer 2

A

Question 3

Generally speaking,most small business owners tend to:

A)overestimate cash disbursements.
B)underestimate cash receipts.
C)underestimate cash disbursements.
D)try to count unpaid cash disbursements as cash that can be spent.

Answer 3

C

Question 4

________ is the money that moves through the business in a continuous cycle.

A)Profit
B)Net income
C)Cash
D)Cash flow

Question 5

Which of the following would be a potential source of information for a sales forecast?

A)Past records
B)Trade associations and the Chamber of Commerce
C)Similar firms
D)All of these

Question 6

When a firm sells goods or services on credit,the owner needs to remember that for cash budgeting purposes:

A)the sale may be immediately posted as if it has been collected.
B)the sale should be recorded in the month it was made.
C)he/she must account for a delay between the sale and collection of proceeds.
D)such a transaction counts as a cash disbursement.

Question 7

Bill and Henry are discussing the volume of cash that has been coming into and going out of their business during the accounting period.They are discussing:

A)profit.
B)net income.
C)accounts receivable and payable.
D)cash flow.

Question 8

Which of the following items appear on a cash budget?

A)Depreciation
B)Bad debt expenses
C)Noncash items not involving cash transfers
D)Cash receipts and disbursements

Question 9

________ is simply the money owed the firm by customers because they've purchased goods or services on credit.

A)Accounts receivable
B)Accounts payable
C)Barter
D)Cash management

Question 10

A cash budget is only as accurate as the ________ forecast from which it is derived.

A)profit
B)receivables
C)income
D)sales

Question 11

The first step in managing cash more effectively is:

A)having an adequate cash reserve for emergency expenditures.
B)rapid payment of accounts payable.
C)speeding up payment of accounts receivable.
D)understanding the company's cash flow cycle.

Question 12

The cash budget is based on the ________ method of accounting.

A)cash
B)financial
C)accrual
D)hybrid

Question 13

When estimating the firm's end-of-month cash balance the owner should first:

A)determine the cash balance at the beginning of the month.
B)add up total cash receipts and subtract cash on hand.
C)review the accounts receivable.
D)make a daily list of cash disbursements.

Question 14

When forecasting cash disbursements in the cash budget:

A)they count as a cash receipt until they are paid.
B)they should be recorded in the month they will be paid.
C)the disbursement should be recorded in the month the obligation was incurred.
D)the money can be used for other purposes until it is due for disbursement.

Question 15

________ typically lead(s)sales;________ typically lag(s)sales.

A)Production;receivables
B)Collections;purchases
C)Receipts;production
D)Purchases;collections

Question 16

The "big three" of cash management include:

A)accounts receivable,overhead,and inventory.
B)accounts payable,accounts receivable,and taxes.
C)accounts receivable,accounts payable,and inventory.
D)accounts receivable,prices,and expenses.

Question 17

________ companies are most likely to suffer cash shortages.

A)Slow-growth
B)Service
C)Manufacturing
D)Fast-growth

Question 18

________ is simply a "cash map" which shows the amount and the timing of cash receipts and cash disbursements over time.

A)The income statement
B)A balance sheet
C)A cash budget
D)The pro forma

Question 19

Once the owner determines an adequate minimum cash balance,what is the next step in creating a cash budget?

A)Forecasting profits
B)Forecasting sales
C)Forecasting cash receipts
D)Forecasting cash disbursements

Question 20

The heart of the cash budget is the ________ forecast.

A)cash receipts
B)cash disbursements
C)sales
D)receivables

Question 21

The Fair Debt Collection Practices Act prohibits business owners from:

A)harassing people who are past due.
B)sending invoices the same day the product is shipped.
C)hiring debt collection attorneys.
D)referring past-due bills to collection agencies.

Question 22

The annual losses in bad debts for small businesses is:

A)$856 million.
B)$12 billion.
C)$42 billion.
D)$312 million.

Question 23

Which of the following are credit reporting services a small business owner could use to check a customer's credit?

A)National Association of Credit Management
B)TRW
C)Dun & Bradstreet
D)All of these

Question 24

The first step to building a workable credit policy is:

A)screening customers carefully before granting them credit.
B)establishing a firm credit policy in writing.
C)developing a policy for pursuing past-due accounts.
D)creating a thorough credit application.

Question 25

When it comes to trade credit,the small business owner:

A)should avoid it as it generally leads to overextension of his/her credit line.
B)should almost always take advantage of it.
C)should only consider it if they have a strong accounts receivables situation.
D)should know that its use makes little difference in the company cash flow and therefore should be avoided.

Question 26

The most important item on the balance sheet is:

A)cash.
B)disbursements.
C)expenses.
D)receivables.

Question 27

An important source of credit information that collects information on small businesses that other reporting services ignore is:

A)National Association of Credit Management.
B)TRW.
C)Dun & Bradstreet.
D)National Association of Small Business Owners.

Question 28

Small businesses selling on credit find that:

A)it is relatively inexpensive and simple.
B)it is expensive and requires a great deal of effort.
C)it is essentially borrowing money from the customer.
D)many can get by without selling on credit because their business customers don't expect to use credit.

Question 29

Exchanging goods and services for other goods and services,or ________,is an effective way for a small business to conserve cash.

A)leasing
B)bartering
C)arbitraging
D)credit sales

Question 30

A ________ is a contract in which a business selling an asset on credit gets a security interest in that asset,protecting the company's legal rights in case the buyer fails to pay.

A)security agreement
B)lock box
C)cash on delivery agreement
D)None of the above

Question 31

A small business owner could accelerate accounts receivable by:

A)having customers mail printed orders to you.
B)sending or faxing invoices the day of shipment.
C)slowing their own accounts payable.
D)depositing customer checks and credit card receipts weekly.

Question 32

Efficient cash managers:

A)disregard trade discounts because of their hidden expenses.
B)avoid the use of credit cards to stretch their firm's cash balance.
C)set up a payment calendar in order to both pay on time and take advantage of cash discounts for early payment.
D)use expressions like "the check's in the mail" to mollify creditors when short on cash.

Question 33

A bank account that technically never has funds in it but is tied to another master account so that when checks are presented for payment the master account is debited,permitting the company to use its own money during the "float" period,is called a(n):

A)cash account.
B)accrual account.
C)sweep account.
D)zero balance account.

Question 34

Once a credit account becomes past due,a small business owner should:

A)wait patiently;the customer will most likely pay the bill sooner or later.
B)turn the account over to a collection agency the day it becomes past due.
C)contact the customer immediately,ask for full payment,and set a deadline.
D)call the "deadbeat" in the middle of the night and make harassing and threatening remarks until he pays.

Question 35

If a small business owner receives a "Notice of Filing" from a customer,he should:

A)send a second notice.
B)ask that customer for a portion of the purchase price up front.
C)arrange for a lockbox for future payments from that customer.
D)immediately file a proof-of-claim.

Question 36

The American Collector's Association has found that only about ________ of accounts over 90 days delinquent will be paid voluntarily.

A)5%
B)10%
C)2%
D)13%

Question 37

Once a small business has established a firm written credit policy and communicated it,the next step in building an effective credit policy is to:

A)send invoices promptly.
B)determine what percentage of sales is being written off as bad debt.
C)create a simple credit application.
D)create a "tracking file" of events.

Question 38

The first line of defense against bad debt losses is:

A)screening customers carefully before granting them credit.
B)establishing a firm credit policy in writing.
C)developing a policy for pursuing past-due accounts.
D)creating a thorough credit application.

Question 39

When managing your accounts payable,as a small business owner you should:

A)take advantage of any float you have before your check is cashed.
B)send second notices when payables are only 15 days past due.
C)pay payables as early as possible.
D)stretch out all payables as long as possible.

Question 40

An arrangement in which customers mail their payments on account to a post office box which the company's bank monitors,from which it collects the payments,and then immediately deposits the payments into the firm's interest-bearing account is called a:

A)zero balance account.
B)lockbox.
C)sweep account.
D)credit reference.

Question 41

________ is not one of the three estimates a financial analyst suggests.

A)Optimistic
B)Pessimistic
C)Standard
D)Most likely

Question 42

Cash management involves:

A)forecasting.
B)collecting.
C)disbursing and investing.
D)All of the above

Question 43

Some businesses use ________,in which a company bills a portion of its credit customers each day of the month,to smooth out uneven cash receipts.

A)process billing
B)a zero balance account
C)alternate billing
D)cycle billing

Question 44

At the end of a(n)________,a business turns the equipment back over to the leasing company with no further obligation.

A)capital lease
B)operating lease
C)open-ended lease to return
D)None of the above

Question 45

By planning cash needs ahead of time,an entrepreneur is able to:

A)reduce the amount of cash flowing out of the company.
B)develop a sound borrowing and repayment plan.
C)Both A and B
D)increase borrowing costs by borrowing only when necessary.

Question 46

The purchases for inventory and production lead sales.This statement means that:

A)purchases for inventory and production provide sales leads.
B)the bills for inventory typically must be paid before sales are generated.
C)cash must be available in order to pay for the purchases.
D)Both B and C

Question 47

Lockbox refers to:

A)customers send payments to a post office box the bank maintains.
B)customers send payments to company's mail box that has a lock.
C)customers send payments to collection company's mail box.
D)None of the above

Question 48

Entrepreneurs can trim costs by:

A)avoiding nonessential outlay.
B)looking for simple ways to cut costs.
C)establishing an internal security and control system.
D)All of the above

Question 49

The statement,"collection of accounts receivable lags behind sales," means that:

A)the collection of funds in the accounts receivable is always late.
B)customers always are late in paying their bills.
C)the customers who purchased goods on credit may not pay until a month or more later.
D)None of the above

Question 50

Marking down inventory items that don't sell will result in:

A)keeping the inventory lean.
B)reduction in inventory turn over ratio.
C)paying expenses on time.
D)All of the above

Question 51

A ________ is nothing more than a "cash map," showing the amount and timing of the cash receipts and the cash disbursements day by day,week by week,or month by month.

A)cash budget
B)cash on hand
C)cash disbursement
D)Both A and C

Question 52

A firm whose sales fluctuate widely over a relatively short time might require a ________ cash budget.

A)weekly
B)monthly
C)quarterly
D)biweekly

Question 53

When investing surplus cash,the small business owner's key objectives should be:

A)high yields.
B)current income.
C)liquidity and safety.
D)long-term yield.

Question 54

The real benefit of barter for the entrepreneur is that:

A)it is essentially without cost to the business owner.
B)it is considered a depreciable item for tax purposes rather than as income.
C)it saves the small business owner between $50,000 and $150,000 a year on average.
D)it is "paid" for at the wholesale cost of doing business,yet it is credited at the retail price.

Question 55

Which of the following is an effective way to trim overhead?

A)Leasing inventory
B)Accelerating accounts receivable
C)Establishing lockboxes or zero balance accounts
D)Negotiating fixed loan payments to coincide with company cash flow

Question 56

At the end of a(n)________,a business may exercise an option to purchase the equipment,usually for a nominal sum.

A)capital lease
B)operating lease
C)open-ended lease to return
D)None of the above

Question 57

What are the steps to creating a cash budget (not necessarily in order)?

A)Determining an adequate minimum cash balance
B)Forecasting sales & forecasting cash receipts
C)Forecasting cash disbursements & estimating the end-of-month cash balance
D)All of the above

Question 58

________ measures a company's liquidity and its ability to pay its bills and other financial obligations on time by tracking the flow of cash into and out of the business over a period of time.

A)Forecasting
B)Cash flow
C)Cash on hand
D)None of the above

Question 59

The budgeting strategy that evaluates the necessity of every item on the budget each year by starting with a zero in each budget category is called:

A)accrual budgeting.
B)cash budgeting.
C)zero-based budgeting.
D)cash flow budgeting.

Question 60

Many successful,growing,and profitable businesses fail because they:

A)become insolvent.
B)don't have adequate cash to meet the sales.
C)don't have management expertise.
D)Both A and B

Question 61

Typically,a small firm should prepare a monthly cash budget for at least one year into the future.

Question 62

The longer a company's cash flow cycle,the more likely it is to encounter a cash crisis.

Question 63

A cash budget is the document that shows a company the margin between its profit and its costs of goods and how to manage it.

Question 64

The cash flow cycle is the time lag between paying suppliers and receiving payment from customers.

Question 65

A firm whose sales volume is expanding rapidly need not be concerned about managing its cash flow.

Question 66

The objectives of cash management are to adequately meet the cash demands of the business and to avoid retaining unnecessarily large cash balances.

Question 67

Ways to cut overhead cost are:

A)when possible buy instead of lease.
B)avoid non-essential outlays.
C)hire consultants and full time employees.
D)None of the above

Question 68

________ refers to buying much needed materials,equipment,and supplies-without using cash.

A)Sweeping
B)Bartering
C)Purchase on an account
D)Net terms

Question 69

It is possible for a business to make a profit and go out of business due to cash flow problems.

Question 70

The cash budget is based on the residual method of accounting.

Question 71

A ________ is a checking account that technically never has funds in it but is tied to another master account like payroll.

A)cash account
B)money market account
C)zero balance account
D)sweep account

Question 72

A cash budget is a forecast of the firm's cash inflows and outflows over a specific time period.

Question 73

Profit is the difference between a company's total revenue and its total expenses.

Question 74

For a small business,cash planning is relatively simple since cash and profits are the same.

Question 75

The cash management role of "cash conserver," controlling the cash needed to pay bills,and prioritizing and timing those payments,is the entrepreneur's first and foremost responsibility.

Question 76

The lack of cash has driven a number of small businesses,even those with solid profits,into bankruptcy.

Question 77

Sweep account refers to:

A)an account that sweeps cash from checking to personal savings.
B)an account that sweeps zero balance account to an interest bearing account.
C)an account that allows the small business owner to sweep funds between personal and business accounts.
D)All of the above

Question 78

One important characteristic of bartering is that:

A)the value of the products must be identical and the difference can be paid in cash.
B)the value of exchange of products or services could vary.
C)the exchange is in cash only.
D)no cash is being exchanged when bartering.

Question 79

A cash budget is based on the accrual method of accounting.

Question 80

Cash is money that flows through the business and is not tied up in any asset.