Question 1

Which one of the following will decrease a firm's collection time?

Accepted Answer

Encouraging customers to use debit cards rather than cheques will decrease a firm's collection time because transactions with debit cards are processed and cleared more quickly than cheques. This means the firm gains access to the funds faster.

Question 2

The Global Light Company has regional offices located in five provinces and services only three national customers. Each office is responsible for processing its own cheques to cover payroll, purchases, and other costs. The home office controls the investments and loans for the entire firm. All payments from the three customers are submitted directly to the home office, which is conveniently located near the home offices of its customers. Which one of the following options appears best suited for use in this situation?

Accepted Answer

Given the structure of the Global Light Company, where each regional office handles its own expenses but the home office manages investments, loans, and receives all customer payments, option C is the most efficient. It allows for centralized control of funds through the master account while ensuring each office's expenses are covered through their respective zero-balance accounts. This setup streamlines the management of funds and simplifies the accounting process.

Question 3

In an ideal world, all of your bills would come due on exactly the same day you get paid. If this were true, then the level of cash you would need to hold to meet your ___________ needs would be relatively low during the month.

Accepted Answer

Transactions needs refer to the immediate cash required for day-to-day expenses, including paying bills. If bills align with payday, less cash is needed on hand throughout the month.

Question 4

Due to a flood in the Canadian prairies, cheques received by firms in the affected area are not deposited for several days. This represents an increase in the ____________ float for the depositing firm.

Accepted Answer

This scenario represents an increase in the collection float, which is the time between when a cheque is received by a firm and when the funds are available in the firm's account. The delay in depositing cheques due to the flood increases the collection float.

Question 5

The target cash balance can be defined as the point where the:

Accepted Answer

The target cash balance is defined as the point where the opportunity costs of holding cash (the forgone interest or investment income) are equal to the trading costs (the costs associated with converting marketable securities to cash and vice versa). This balance minimizes the total costs associated with managing cash.

Question 6

The CEO of a firm just learned that a small, but highly progressive, competitor is for sale. This is an unexpected opportunity and one that the CEO would like to pursue immediately. The motive behind holding cash for such an event is called the ____ motive.

Accepted Answer

The speculative motive refers to holding cash to take advantage of unexpected opportunities, such as acquisitions or investments, that may arise and require immediate financial resources.

Question 7

_________ are special post office boxes often set up by the firm to expedite the receipt and processing of its accounts receivables payments.

Accepted Answer

Lockboxes are special post office boxes used by firms to speed up the collection and processing of accounts receivable payments. This system allows companies to receive payments directly at the bank, reducing the time it takes for payments to clear.

Question 8

Your company has an available balance of $5,980. A deposit of $1,470 that was made this morning is not yet included in the bank's balance. There are also 2 checks outstanding with a value of $495 each. What is the net float?

Accepted Answer

The net float is calculated by subtracting the total of outstanding checks from the deposits in transit. Here, the deposit in transit is $1,470 and the total of outstanding checks is $990 ($495 x 2). Therefore, the net float is $480 ($1,470 - $990), which is a net collection float because the deposits in transit exceed the outstanding checks.

Question 9

Money market securities are debt securities which have a maturity of _____________.

Accepted Answer

Money market securities are short-term debt instruments that typically have a maturity of one year or less, making them highly liquid and considered a safe investment.

Question 10

The present value of eliminating float is equal to the amount of ______________.

Accepted Answer

The present value of eliminating float is equal to the amount of total float. Total float encompasses all types of float (mail, processing, and availability), representing the total time delay from when a check is written to when the funds are available in the beneficiary's account.

Question 11

A firm has $23,630 in outstanding cheques that have not cleared the bank. The firm also has $31,000 in deposits that have been recorded by the firm but not by the bank. The current available balance is $14,710. What is the status of the net float?

Accepted Answer

The net float is calculated by subtracting the outstanding cheques from the deposits in transit. Therefore, $31,000 (deposits not yet recorded by the bank) - $23,630 (outstanding cheques) = $7,370. This is a net collection float because the deposits in transit exceed the outstanding cheques.

Question 12

It is important for any firm to determine its appropriate target cash balance:

Accepted Answer

The correct answer is B because it highlights the fundamental reason firms need to determine their appropriate target cash balance, which involves balancing the benefits of having enough liquidity to meet obligations and take advantage of opportunities against the costs associated with holding too much cash (which could otherwise be invested to earn a return).

Question 13

The motive behind holding cash for events such as a major storm causing uninsured damage is called the _____ motive.

Accepted Answer

The precautionary motive for holding cash refers to keeping cash on hand to cover unexpected events or emergencies, such as a major storm causing uninsured damage. This ensures that an individual or business can manage unforeseen expenses without having to liquidate assets under unfavorable conditions.

Question 14

Financial slack is a term used by economists to identify the funds available from cash and near-cash holdings, as well as the ability to borrow readily to meet day-to-day obligations and to take advantage of unexpected opportunities. As such, the maintenance of financial slack represents a combination of the ____________ and ____________ motives for holding cash [Keynes].

Accepted Answer

The answer of Financial slack is a term used by...

Question 15

CBA, Inc., a leading retailer of consumer goods, keeps excess cash on hand in October to pay for its increase in inventory prior to the holiday season. CBA is keeping this cash for:

Accepted Answer

CBA, Inc. keeps excess cash on hand to pay for its increase in inventory prior to the holiday season, which is a transaction reason. This is because the cash is intended to cover upcoming, planned expenses related to their business operations.

Question 16

Which of the following is true regarding the opportunity costs of holding cash and the size of the cash balance held by a firm?

Accepted Answer

The higher the cash balance, the higher the opportunity cost because holding cash means forgoing potential returns from investing that cash elsewhere.

Question 17

Your firm has an available balance of $1,380 and a book balance of $1,210. The deposit of $560 that was made today is not yet included in the bank's balance. There are also 5 cheques outstanding with a total value of $730. What is the net float?

Accepted Answer

The answer of Your firm has an available balance of...

Question 18

A firm has $18,020 in outstanding cheques that have not cleared the bank. The firm also has $23,500 in deposits that have been recorded by the firm but not by the bank. The current available balance is $2,640. What is the status of the net float?

Accepted Answer

Net collection float = Deposits in transit - Outstanding cheques = $23,500 - $18,020 = $5,480.

Question 19

According to the BAT model, the optimum cash balance is an increasing function of ______________ and a decreasing function of _______________.

Accepted Answer

The BAT model (Baumol-Tobin model) suggests that the optimum cash balance increases with new cash needs and decreases with the opportunity rate, as higher opportunity costs make holding cash less attractive.

Question 20

The manager of a seasonal products firm keeps excess cash on hand, particularly after the holiday season, to take advantage of retailers looking to sell excess inventory at below cost. The manager is holding cash for _________________.

Accepted Answer

The manager is holding cash for speculative reasons, as they aim to take advantage of potential opportunities to purchase excess inventory at below cost from retailers. This involves speculation on future benefits from such transactions.

Quiz 19: Cash and Liquidity Management